Investments

Match the key term to the scenario.

On January 1, 2018, the College Corporation decides to invest in Small Town bonds. The bonds mature on December 31, 2022, and pay interest of 4% on June 30 and December 31. The market rate of interest was 4% on January 1, 2018, so the $20,000 maturity-value bonds sold for face value. College Corporation intends to hold the bonds until maturity. Journalize the transactions related to College Corporation’s investment in Small Town bonds during 2018.

On May 15, 2018, Mayer Co. invests \(8,000 in John, Inc. stock. John pays Mayer a \)200 dividend on November 15, 2018. Mayer sells the John stock on December 10, 2018, for $7,500. Assume the Mayer Co. does not have significant influence over John, Inc. Journalize the 2018 transactions related to Mayer’s investment in John stock.

On August 20, 2018, Mraz, Co. decides to invest excess cash of \(2,500 by purchasing Virginia, Inc. bonds. At year-end, December 31, 2018, the market price of the bonds was \)2,000. The investment is categorized as available-for-sale debt. Journalize the adjusting entry needed at December 31, 2018.

Lee Co. reported the following items on its 2018 financial statements:

Determine Lee’s rate of return on total assets for 2018.

What is a debt security?

What is equity security?

Why would a company invest in debt or equity securities?

Briefly describe the specific types of debt and equity securities.

How is the purchase of a held-to-maturity debt security at face value recorded?

When disposing of an available-for-sale debt investment, where is the gain or loss on disposal reported in the financial statements?

What method is used for investments in equity securities when the investor has significant influence and typically 20% to 50% ownership? Briefly describe how dividends declared and received and share of net income are reported.

Question: What method is used for investments in equity securities with more than 50% ownership? Briefly describe this method.

What adjustment must be made at the end of the period for trading debt investments and available-for-sale debt investments?

Question: Where on the financial statements is an unrealized holding gain or loss on trading debt investments reported?

S10-1 Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements 

1. What are some reasons why Garden Haven may choose to invest in debt or equity securities?

 Identifying why companies invest and classifying investments

Garden Haven has excess cash of $15,000 at the end of the harvesting season. Garden Haven will need this cash in four months for normal operations.

Requirements  

What type of classification would Garden Haven’s investment fall within—short-term or long-term? Why?

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December 31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements 

1. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December 31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements  

In what category would Chaucer’s report the investment on the December 31, 2018, balance sheet?

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 

1. Journalize the transactions for Bark’s investment in Roots’s stock.

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?

Question: S10-4 Accounting for equity investments 

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements 

Identify what type of investment the Farrier stock is for Bryant.

Question: S10-4 Accounting for equity investments 

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements 

Journalize the transactions related to Bryant’s investment in the Farrier stock during 2018.

Question: S10-4 Accounting for equity investments 

On January 1, 2018, Bryant, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for \(16 per share. On August 1, 2018, Farrier paid a \)0.70 per share cash dividend to stockholders. On December 31, 2018, Farrier reports net income of $50,000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements 

3. In what category and value would Bryant report the investment on the December 31, 2018, balance sheet?

Where on the financial statements is an unrealized holding gain or loss on available-for-sale debt investments reported?

What is comprehensive income, and what does it include?

How are held-to-maturity debt investments reported on the financial statements?

What does the rate of return on total assets measure, and how is it calculated?

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements 

1. Journalize the transactions for Bell’s investment in Grant, Inc. for 2018. 

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements 

2. In what category and at what value would Bell report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Grant’s bond be reported, if at all?

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements 

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

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term. 

Requirements 

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

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term. 

Requirements 

Journalize the transactions for Josh’s investment in Jackrabbit, Inc. for 2018. 

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh’s Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit’s bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term. 

Requirements 

In what category and at what value would Josh report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Jackrabbit’s stock be reported, if at all?

Question: S10-7 Computing rate of return on total assets 

Barot’s 2018 financial statements reported the following items—with 2017 figures given for comparison:

Net income for 2018 was \(3,910, and interest expense was \)240. Compute Barot’s rate of return on total assets for 2018. (Round to the nearest percent.)

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements 

1. Journalize any required 2018 entries for the bond investment.

Accounting for debt investments

Griffin purchased a bond on January 1, 2018, for \(140,000. The bond has a face value of \)140,000 and matures in 20 years. The bond pays interest on June 30 and December 31 at a 3% annual rate. Griffin plans on holding the investment until maturity.

Requirements 

1. Journalize the 2018 transactions related to Griffin’s bond investment. Explanations are not required.

Accounting for debt investments

Griffin purchased a bond on January 1, 2018, for \(140,000. The bond has a face value of \)140,000 and matures in 20 years. The bond pays interest on June 30 and December 31 at a 3% annual rate. Griffin plans on holding the investment until maturity.

Requirements 

2. Journalize the transaction related to Griffin’s disposition of the bond at maturity on December 31, 2037. (Assume the last interest payment has already been recorded.) Explanations are not required.

Question: E10-9 Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements  

3. How much interest revenue will Advance report during 2018 on this bond investment?

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements 

1. Journalize any required 2018 entries for the bond investment.

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements 

How much cash interest will Advance receive each year from FermaCo?

9 Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements  

3. How much interest revenue will Advance report during 2018 on this bond investment?

 Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements 

1. How would the bond investment be classified on League Up’s December 31, 2018, balance sheet?

 Accounting for debt investments

League Up & Co. owns vast amounts of corporate bonds. Suppose League Up buys $900,000 of CocoCorp bonds at face value on January 2, 2018. The CocoCorp bonds pay interest at the annual rate of 8% on June 30 and December 31 and mature on December 31, 2022. League Up intends to hold the investment until maturity.

Requirements 

2. Journalize the following on League Up’s books: 

a. Receipt of final interest payment on December 31, 2022. 

b. Disposition of the investment at maturity on December 31, 2022

Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018 

    Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years. 

   Jun. 30 Received an interest payment from Vedder. 

   Dec. 31 Received an interest payment from Vedder. 

        31 Adjusted the investment to its current market value of \)396,000

Requirements 

Prepare a comprehensive income statement for Peyton Investments for year ended December 31, 2018. Assume net income was $200,000.

Question: E10-11 Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018 

    Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years. 

   Jun. 30 Received an interest payment from Vedder. 

   Dec. 31 Received an interest payment from Vedder. 

        31 Adjusted the investment to its current market value of \)396,000

Requirements 

Journalize Peyton’s investment transactions. Explanations are not required.

Question: E10-11 Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018 

    Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years. 

   Jun. 30 Received an interest payment from Vedder. 

   Dec. 31 Received an interest payment from Vedder. 

        31 Adjusted the investment to its current market value of \)396,000

Requirements 

2. Prepare a partial balance sheet for Peyton’s Vedder investment as of December 31, 2018.

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock. 

Dec. 31 Adjusted the investment to its current market value of \(45 per share. 

        31 Phyflexon reported net income of \)330,000 for the year ended 2018.

Requirements 

1. Journalize Strategic’s investment transactions. Explanations are not required.

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock. 

Dec. 31 Adjusted the investment to its current market value of \(45 per share. 

        31 Phyflexon reported net income of \)330,000 for the year ended 2018.

Requirements 

2. Classify and prepare a partial balance sheet for Strategic’s Phyflexon investment as of December 31, 2018.

Accounting for equity investments

Strategic Investments completed the following investment transactions during 2018:

Jan. 14 Purchased 800 shares of Phyflexon stock, paying \(50 per share. The investment represents 4% ownership in Phyflexon’s voting stock. Strategic does not have significant influence over Phyflexon. Strategic intends to hold the investment for the indefinite future. 

Aug. 22 Received a cash dividend of \)0.24 per share on the Phyflexon stock. 

Dec. 31 Adjusted the investment to its current market value of \(45 per share. 

        31 Phyflexon reported net income of \)330,000 for the year ended 2018.

Requirements 

Prepare a partial income statement for Strategic Investments for year ended December 31, 2018.