Solution for Chapter 16 Investments (13 E)

BE16.1 (Page 16 – 24) – Ownbey Corporation purchased debt investments for $52,000 on
January 1, 2020. On July 1, 2020, Ownbey received cash interest of $2,340.
Journalize the purchase and the receipt of interest. Assume that no interest has been accrued.
Solution –
Date Particulars Dr Cr
Jan 1 Debt Investments 52,000
Cash 52,000
July 1 Cash 2,340
Interest Revenue 2,340

BE16.3 (Page 16 – 24) – Noler Company owns 25% of Lauer Company. For the current year,
Lauer reports net income of $180,000 and declares and pays a $50,000 cash dividend.
Record Noler’s equity in Lauer’s net income and the receipt of dividends from Lauer.
Solution – (∵ Ownership > 20%, so, we will use “Equity Method”)

Date Particulars Dr Cr
Dec 31 Stock Investments 45,000
Revenue from Stock Investments (180,000 × 25%) 45,000
Dec 31 Cash (50,000 × 25%) 12,500
Stock Investments 12,500

BE16.4 (Page 16 – 24) – The cost of the trading debt securities of Munoz Company at December
31, 2020, is $64,000. At December 31, 2020, the fair value of the securities is $59,000.
Prepare the adjusting entry to record the securities at fair value.
Solution –
Date Particulars Dr Cr
Dec 31 Unrealized Gain or Loss – Income 5,000
Fair Value Adjustment – Trading (64,00 – 59,000) 5,000

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BE16.6 (Page 16 – 24) – In its first year of operations, Godfrey Corporation purchased, as a
long-term investment, available-for-sale debt securities costing $72,000. At December 31, 2020,
the fair value of the securities is $68,000.
Prepare the adjusting entry to record the securities at fair value.
Solution –
Date Particulars Dr Cr
Dec 31 Unrealized Gain or Loss – Income 4,000
Fair Value Adjustment – Available-for-Sale 4,000
(72,00 – 68,000)

E16.2 (Page 16 – 26) – Jenek Corporation had the following transactions pertaining to debt
investments.
(1). Purchased 40 Leeds Co. 9% bonds (each with a face value of $1,000) for $40,000 cash.
Interest is payable annually on January 1, 2020.
(2). Accrued interest on Leeds Co. bonds on December 31, 2020.
(3). Received interest on Leeds Co. bonds on January 1, 2021.
(4). Sold 30 Leeds Co. bonds for $33,000 on January 1, 2021.
Instructions
Journalize the transactions.
Solution –
Date Particulars Dr Cr
(1) – Jan 1, 2020 Debt Investments 40,000
Cash 40,000
(2) – Dec 31, 2020 Interest Receivables ($40,000 × 9% × 1 yr) 3,600
Interest Revenue 3,600
(3) – Jan 1, 2021 Cash 3,600
Interest Receivables 3,600
(4) – Jan 1, 2021 Cash 33,000
Debt Investments ($1,000 × 30 bonds) 30,000
Gain on Sale of Debt Investments 3,000
(33,000 – (1,000 × 30))

E16.2 (Page 745) – Floyd Corporation had the following transactions pertaining to debt
investments
Jan. 1 Purchased 50 8%, $1,000 Petal Co. bonds for $50,000 cash plus brokerage fees of

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 $900. Interest is payable semiannually on July 1 and January 1.
July 1 Received semiannual interest on Petal Co. bonds.
July 1 Sold 30 Petal Co. bonds for $34,000 less $500 brokerage fees.

Instructions
(a).Journalize the transactions.
(b).Prepare the adjusting entry for the accrual of interest at December 31.
Solution –
(a) – Date Particulars Dr Cr
(1) – Jan 1 Debt Investments 50,900
Cash (50,000 + 900) 50,900
(2) – July 1 Interest Receivables ($50,000 × 8% × ½ yr) 2,000
Interest Revenue 2,000
(3) – July 1 Cash (34,000 – 500) 33,500
50,900
𝐷𝑒𝑏𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ( × 30) 30,540
50
Gain on Sale of Debt Investments 2,960
(33,500 – 30,540)
(b) – Dec 31 Interest Receivables 800
Interest Revenue ($20,000 × 8% × ½ yr) 800

E16.4 (Page 16 – 26) – Hulse Company had the following transactions pertaining to stock
investments.
Feb. 1 Purchased 600 shares of Wade common stock (2%) for $7,200 cash.
July 1 Received cash dividends of $1 per share on Wade common stock.
Sept. 1 Sold 300 shares of Wade common stock for $4,300.
Dec. 1 Received cash dividends of $1 per share on Wade common stock.

Instructions
(c). Journalize the transactions.
(d). Explain how dividend revenue and the gain (loss) on sale should be reported in the income
statement.
Solution – (∵ Ownership < 20%, so, we use Fair Value Method for Valuation)
(a) –

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 Date Particulars Dr Cr
(1) – Feb. 1 Stock Investment 7,200
Cash 7,200
(2) – July 1 Cash 600
Dividend Revenue (600 × $1) 600
(3) – Sept. 1 Cash 4,300
7,200
𝑆𝑡𝑜𝑐𝑘 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ( 600 × 300) 3,600
Gain on Sale of Stock Investments (4,300 – 3,600) 700
(4) – Dec. 1 Cash 300
Dividend Revenue ((600 – 300) × $1) 300

(b) –
Dividend Revenue and the Gain (Loss) on Sale should be reported in “Other Revenue and
Gains” in the income statement.
E16.4 (Page 745) – Diann Company had the following transactions pertaining to stock
investments.
Feb. 1 Purchased 600 shares of Ronn common stock (2%) for $6,000 cash, plus
brokerage fees of $200.
July 1 Received cash dividends of $1 per share on Ronn common stock.
Sept. 1 Sold 300 shares of Ronn common stock for $4,400, less brokerage fees of $100.
Dec. 1 Received cash dividends of $1 per share on Ronn common stock.

Instructions
(a). Journalize the transactions.
(b). Explain how dividend revenue and the gain (loss) on sale should be reported in the income
statement.
Solution – (∵ Ownership < 20%, so, we use Fair Value Method for Valuation)
(a) –
Date Particulars Dr Cr
(1) – Feb. 1 Stock Investment 6,200
Cash ($6,000 + $200) 6,200
(2) – July 1 Cash 600
Dividend Revenue (600 × $1) 600

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 Date Particulars Dr Cr
(3) – Sept. 1 Cash ($4,400 – $100) 4,300
6,200
𝑆𝑡𝑜𝑐𝑘 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ( 600 × 300) 3,100
Gain on Sale of Stock Investments (4,300 – 3,100) 700
(4) – Dec. 1 Cash 300
Dividend Revenue ((600 – 300) × $1) 300

(b) –
Dividend Revenue and the Gain (Loss) on Sale should be reported in “Other Revenue and
Gains” in the income statement.
E16.7 (Page 16 – 27) – On January 1, Zabel Corporation purchased a 25% equity in Helbert
Corporation for $180,000.
At December 31, Helbert declared and paid a $60,000 cash dividend and reported net income of
$200,000.
Instructions
(a). Journalize the transactions.
(b). Determine the amount to be reported as an investment in Helbert stock at December 31.
Solution –
(a) –
Date Particulars Dr Cr
Jan 1 Stock Investments 180,000
Cash 180,000
Dec 31 Cash ($60,000 × 25%) 15,000
Stock Investments 15,000
31 Stock Investments 50,000
Revenue from Stock Investments ($200,000 × 25%) 50,000

(b) – Investment in Helbert stock at Dec 31:

Investment in Helbert, Jan 1 $180,000
Less: Dividend Revenue (150,000)
Plus: Share of Reported Income 50,000
Investment in Helbert, Dec. 31 215,000

P16.4A (Page 16 – 24) – Heidebrecht Design acquired 20% of the outstanding common stock
of Quayle Company on January 1, 2020, by paying $800,000 for the 30,000 shares. Quayle

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declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and
December 15, 2020. Quayle reported net income of $320,000 for the year. At December 31, 2020,
the market price of Quayle common stock was $34 per share.
Instructions
(a). Prepare the journal entries for Heidebrecht Design for 2020 assuming Heidebrecht Design
cannot exercise significant influence over Quayle. (Fair Value Method)
(b). Prepare the journal entries for Heidebrecht Design for 2020, assuming Heidebrecht
Design can exercise significant influence over Quayle. Use the equity method.
(c). Indicate the balance sheet and income statement account balances at December 31, 2020,
under each method of accounting.
Solution –
(a) – Company can’t exercise significant influence (Fair Value/Cost Method
Date Particulars Dr Cr
Jan 1 Stock Investments 800,000
Cash 800,000
Mar 15 Cash 9,000
Dividend Revenue (30,000 × $0.30) 9,000
June 15 Cash 9,000
Dividend Revenue (30,000 × $0.30) 9,000
Sept 15 Cash 9,000
Dividend Revenue (30,000 × $0.30) 9,000
Dec 15 Cash 9,000
Dividend Revenue (30,000 × $0.30) 9,000
31 Fair Value Adjustments – Stock 220,000
Unrealized Gain or Loss – Income 220,000
(($34 × 30,000 shares) – $800,000)

(b) – Company can exercise significant influence (Equity Method):

Date Particulars Dr Cr
Jan 1 Stock Investments 800,000
Cash 800,000
Mar 15 Cash 9,000
Stock Investments (30,000 × $0.30) 9,000

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 Date Particulars Dr Cr
June 15 Cash 9,000
Stock Investments (30,000 × $0.30) 9,000
Sept 15 Cash 9,000
Stock Investments (30,000 × $0.30) 9,000
Dec 15 Cash 9,000
Stock Investments (30,000 × $0.30) 9,000
31 Stock Investments 64,000
Revenue from Stock Investments 64,000
($320,000 × 20%)

(c) –
Fair Value/Cost Method Equity Method
Stock Investments 1,020,000 828,000
(800,000 + 220,000) ((800,000 + 64,000 – (9,000 × 4))
Dividend Revenue 36,000 0
(9,000 × 4)
Unrealized Gain or Loss – Income 220,000 0
Revenue from Stock Investments 0 64,000

P16-4B – Wooden’s Concrete acquired 20% of the outstanding common stock of Hoag, Inc. on
January 1, 2017, by paying $1,100,000 for 40,000 shares. Hoag declared and paid a $0.50 per
share cash dividend on June 30 and again on December 31, 2017. Hoag reported net income of
$600,000 for the year. At December 31, 2017, the market price of Hoag’s common stock was $30
per share.
Instructions
(a). Prepare the journal entries for Wooden’s Concrete for 2017, assuming Wooden’s can not
exercise significant influence over Hoag. Use the cost method and assume Hoag common
stock should be classified as available-for-sale.
(b). Prepare the journal entries for Wooden’s Concrete for 2017, assuming Wooden’s can
exercise significant influence over Hoag. Use the equity method.
(c). Indicate the balance sheet and income statement account balances at December 31, 2017,
under each method of accounting.
Solution –
(a) –

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 Date Particulars Dr Cr
Jan. 1 Stock Investments 1,100,000
Cash 1,100,000
June 30 Cash 20,000
Dividend Revenue (40,000 × $ 0.50) 20,000
Dec. 31 Cash 20,000
Dividend Revenue (40,000 × $ 0.50) 20,000
31 Fair Value Adjustment – Available-for-Sale 100,000
Unrealized Gain or Loss – Equity 100,000
[$1,100,000 – ($30 × 40,000)]

(b) –
Date Particulars Dr Cr
Jan. 1 Stock Investments 1,100,000
Cash 1,100,000
June 30 Cash 20,000
Stock Investments 20,000
Dec. 31 Cash 20,000
Stock Investments 20,000
31 Stock Investments 120,000
Revenue from Stock Investments 120,000
($600,000 × 20%)

(c) –
Cost Method Equity Method
Stock Investment $1,200,000 $1,180,000
($30 × 40,000 shares) ($1,100,000 + $120,000 – $40,000)
Unrealized Gain or Loss – Equity 100,000 0
Dividend revenue 40,000 0
(20,000 × 2)
Revenue from stock investments 0 120,000