Q3SE_2 - Horngren'S Financial And Managerial Accounting

Question

Accounting for equity investments

On January 1, 2018, Bark Company invests \(10,000 in Roots, Inc. stock. Roots pays Bark a \)400 dividend on August 1, 2018. Bark sells the Roots’s stock on August 31, 2018, for $10,450. Assume the investment is categorized as a short-term equity investment and Bark Company does not have significant influence over Roots, Inc.

Requirements 

2. What was the net effect of the investment on Bark’s net income for the year ended December 31, 2018?

Step-by-Step Solution

Answer

The net income of the business entity will increase by $850.

Step 1: Definition of Equity Investment

The amount of money engaged in acquiring the shares of any company is reported as an equity investment on the balance sheet.

Step 2: Net Effect on the Net income for the Year 2018

Particular	Amount $
Dividend	$400
Add: Gain on sale	$450
Increase in net income	$850