Q.10.25CP_2
Question
Question: P10-25 Accounting for debt and equity investments
This problem continues the Canyon Canoe Company situation from Chapter 9. Amber and Zack Wilson are pleased with the growth of their business and have decided to invest its temporary excess cash in a brokerage account. The company had the following securities transactions in 2019.
Jul. 1 Purchased 8,000 shares in Adobe Outdoor Adventure Company for \(3 per share. Canyon Canoe does not have significant influence over Adobe.
7 Purchased 35% of the stock of Bison Backpacks consisting of 43,750 shares of stock (out of a total of 125,000 shares) for \)5 per share. Canyon Canoe does have significant influence over Bison.
10 Purchased a bond from Camelot Canoes with a face value of \(80,000. Canyon Canoe intends to hold the bond to maturity. The bond pays interest semiannually on June 30 and December 31.
Sep. 30 Received dividends of \)0.15 per share from Adobe.
Nov. 1 Received dividends of \(0.30 per share from Bison.
Dec. 31 Received an interest payment of \)3,200 from Camelot Canoes.
31 Bison Backpacks reported net income of \(30,000 for the year.
31 Adjusted the Adobe stock for a market value of \)2.98 per share.
Requirements
Determine the effect on Canyon Canoe Company’s net income for the year for each of the three investments.
Step-by-Step Solution
VerifiedAnswer
Investment | Effect on net income |
Adobe equity | Increase in net income. |
Bison equity | Increase in net income. |
Camelot Bond | Increase in net income. |
The account maintained by the investors for the purpose of buying and selling the securities, either debt or equity, is known as a brokerage account.
Adobe Equity:
Particular | Amount $ |
Dividend income | $1,200 |
Unrealized loss | (160) |
Increase in net income | $1,040 |
Bison equity will increase the net income by $10,500. The increase is equal to 35% of the net income reported by Bison during the year.
Camelot bonds will increase the net income by $3,200, which is equal to the interest received from the bonds.