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.
When the investor has ownership between 20% to 50%, the equity method is used for accounting purposes. Declaration of dividends will decrease the investment while net income increases the investment value.
After adjusting all the sacrifices made, the benefits calculated for the business entity are known as net income. It includes adjustment of tax expenses as well.
The investor has significant influence over the business entity and has ownership of 20% to 50%; therefore,the equity method will be used for accounting for such investment.
Under Equity accounting:
Question: P10-23B Accounting for equity investments
The beginning balance sheet of Text Source Co. included a $700,000 investment in Taylor stock (20% ownership).
During the year, Text Source completed the following investment transactions:
Mar. 3 Purchased 5,000 shares at $13 per share of Josh Software common stock as a long-term equity investment, representing 3% ownership, no significant influence.
May 15 Received a cash dividend of $0.69 per share on the Josh investment.
Dec. 15 Received a cash dividend of $100,000 from Taylor investment.
31 Received Taylor’s annual report showing $100,000 of net income.
31 Received Josh’s annual report showing $620,000 of net income for the year.
31 Taylor’s stock fair value at year-end was $620,000.
31 Josh’s common stock fair value at year-end was $14 per share.
Journalize the transactions for the year of Text Source.
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.
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.
2. What was the net effect of the investment on Bark’s net income for the year ended December 31, 2018?
Accounting for equity investments
Money Man Investments completed the following transactions during 2018:
Jan. 14 Purchased 400 shares of Technomite stock, paying $56 per share. The investment represents 25% ownership in Technomite’s voting stock and Money Man has significant influence over Technomite. Money Man intends to hold the investment for the indefinite future.
Aug. 22 Received a cash dividend of $0.27 per share on the Technomite stock.
Dec. 31 Technomite’s current market value is $51 per share.
31 Technomite reported net income of $180,000 for the year ended 2018.
Classify and prepare partial financial statements for Money Man’s 25% Technomite investment for the year ended December 31, 2018.
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