For each security investment calculate: How much income or loss should X company report for each investment on its current year
income statement? What amounts should X company report on the balance sheet for its investments? discussing the proper accounting treatment (ignore any tax effects and disclosure requirements). Assume the X company has not recorded any entries for these investments since the original purchase dates and record the necessary journal entries to update the clients records.
1. On January 1, 2016, Orange purchased a 35% interest in Canary, Inc. for $800,000.
Canarys net income for the year was $2,000,000, and it paid Orange a dividend of
$60,000 on December 28. At year end, Oranges Canary stock was valued at
$1,000,000. Canary is not publicly traded.
2. On July 1, 2016, Orange purchased 5%, 10-year bonds of ABC, Inc. for the face
value of $200,000. Orange received its first semiannual interest payment on
December 31. The fair market value of the bonds on December 31 was $204,800.
Similar to its previous bond investments, Orange intends to hold the ABC, Inc. bonds
for the entire 10-year term.
3. On October 2, 2016, Orange purchased 500 shares of Brown Corporation, a publicly
traded company, for $160,000. On December 31, there were 1 billion shares
outstanding. Browns net income for the year was $10 billion, and it paid Orange a
dividend of $2,000 on December 28. At year end, Oranges Brown stock was valued
at $200,000. Orange does not plan to sell the stock for a short-term profit.
4. On December 27, 2016, Orange purchased 200 shares of XYZ, Inc., a publicly traded
company, for $240,000. On December 31, there were 500 million shares outstanding.
XYZs net income for the year was $200 million, and it paid Orange a dividend of
$3,000 on December 31. The fair market value of Oranges XYZ, Inc. stock on
December 31 was $232,000. Orange purchased XYZ stock with the intent of selling
it for a short-term profit.
