Horngren's Financial & Managerial Accounting, Student Value Edition (5th Edition)
5th Edition
ISBN: 9780133851267
Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 10, Problem 1QC
To determine
Trading Investments:
Trading investments are the investments in debt or equity securities where the investor holds less than 20% of the voting stock. The investor wishes to sell these investments at a short notice like in a few days, week, or months to generate some profit out of it. They are treated as current assets.
To identify: How the given investment would be classified.
Expert Solution & Answer
Answer to Problem 1QC
When the investor invests in the debt or equity securities, holding less than 20% of the voting stock of the investee company, in view of selling them in the near future, then such investment is known as a trading investment.
Hence, the correct answer is option b. Trading investment.
Explanation of Solution
Justification for incorrect answers:
Option a. Significant interest investments are the equity securities where an investor holds more than 20%, but less than 50% of the voting stocks. Here, Railway I (investor) will own only 5% of the voting stock of Company P. Hence, option a. is incorrect answer.
Option b. Trading investments are short-term securities where the investor owns less than 20% of the voting stock of the investee company which are bought to sell in the near future to generate profits.
The investment made by Railway I is a trading investment as it represents 5% of voting stocks and investment was made for 3 months.
Option c. Held-to-maturity investment is the investment which is held till their maturity date. Here, Railways I is not planning to hold the investment till maturity, but is planning to hold them for only three months. Hence, option c. is an incorrect answer.
Option d. Controlling interest investments are the equity securities where an investor holds more than 50% of the voting stocks. Here, Railway I will hold only 5% of the voting stock of the investee company. Hence, option d, is an incorrect answer.
Justification for correct answer:
Option b. As the investor company (Railway I) is considering investing in the investee company (Company P) for a short period (three months), and the investment will represent less than 20% of the voting stock (5%) of the investee company, then such investment would be classified as a trading investment.
Conclusion
Hence, option b. is the correct answer.
Want to see more full solutions like this?
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Assume Intervale Railway is considering investing in Pale Co. stock for three months. The investment will represent 5% of the voting stock of Pale Co. How would the investment be classified?
a. Significant influence equity investment
b. No significant influence equity investment
c. Held-to-maturity debt investment
d. Controlling interest equity investment
Assume Intervale Railway is considering investing in Pale Co. stock for three months. The investment will represent 5% of the voting stock of Pale Co. How would the investment be classified?
Significant influence equity investment
No significant influence on equity investment
Held-to-maturity debt investment
Controlling interest equity investment
The market value of the stock of shine corporation at the beginning of year one is 120 per share at the beginning of your two is 130 pesos it declares dividends of 24 share what is the holding period return from the said investment
Chapter 10 Solutions
Horngren's Financial & Managerial Accounting, Student Value Edition (5th Edition)
Ch. 10 - Prob. 1QCCh. 10 - Which of the following investments is most likely...Ch. 10 - If Intervale Railway invests 100,000 in 5% bonds...Ch. 10 - Prob. 4QCCh. 10 - Prob. 5QCCh. 10 - Prob. 6QCCh. 10 - Prob. 7QCCh. 10 - Harvard Co. purchased a trading investment on...Ch. 10 - Prob. 9QCCh. 10 - Prob. 10QC
Ch. 10 - What is a debt security?Ch. 10 - Prob. 2RQCh. 10 - Prob. 3RQCh. 10 - Briefly describe the five specific types of debt...Ch. 10 - How is the purchase of a held-to-maturity debt...Ch. 10 - Prob. 6RQCh. 10 - What method is used for investments in equity...Ch. 10 - What method is used for investments in equity...Ch. 10 - What adjustment must be made at the end of the...Ch. 10 - Where on the financial statements is an unrealized...Ch. 10 - Prob. 11RQCh. 10 - Prob. 12RQCh. 10 - Prob. 13RQCh. 10 - What does the rate of return on total assets...Ch. 10 - Identifying why companies invest and classifying...Ch. 10 - Prob. 10.2SECh. 10 - Prob. 10.3SECh. 10 - Accounting for equity method On January 1, 2016,...Ch. 10 - Accounting for trading investments On February 1,...Ch. 10 - Prob. 10.6SECh. 10 - Computing rate of return on total assets Kabra's...Ch. 10 - Prob. 10.8ECh. 10 - Prob. 10.9ECh. 10 - Accounting for bond investments Otter Creek Co....Ch. 10 - Accounting for stock investments Dollar Bill...Ch. 10 - Prob. 10.12ECh. 10 - Prob. 10.13ECh. 10 - Accounting for stock investments Suppose that on...Ch. 10 - Prob. 10.15ECh. 10 - Prob. 10.16ECh. 10 - A Accounting for bond investments Suppose Jenner...Ch. 10 - Prob. 10.18APCh. 10 - Accounting for stock investments The beginning...Ch. 10 - Accounting for bond investments Suppose Ritter...Ch. 10 - Classifying and accounting for stock investments...Ch. 10 - Accounting for stock investments The beginning...Ch. 10 - Prob. 10.23CPCh. 10 - Prob. 10.1CTEICh. 10 - Wild Adventure conducts tours of wildlife reserves...Ch. 10 - Prob. 10.1CTFSCCh. 10 - Prob. 10.1CTTPCh. 10 - In 150 words or fewer, explain the difference...
Knowledge Booster
Similar questions
- Stockholders' Equity Terminology A list of terms and a list of definitions or examples are presented below. Make a list of the numbers 1 through 12 and match the letter of the most directly related definition or example with each number Definitions and Examples Capitalizes retained earnings. Shares issued minus treasury shares. Emerson Electric will pay a dividend to all persons holding shares of its common stock on December 15, 2019, even if they just bought the shares and sell them a few days later. The accumulated earnings over the entire life of the corporation that have not been paid out in dividends. Common Stock account balance divided by the number of shares issued. The state of Louisiana set an upper limit of 1,000,000 on the number of shares that Gumps Catch Inc. can issue. Shares that never earn dividends. Any changes to stockholders equity from transactions with no owners. A right to purchase stock at a specified future time and specified price. j. A stock issue that requires no journal entry. k. Shares that may earn guaranteed dividends. 1. On October 15, 2019, General Electric announced its intention to pay a dividend on common stock.arrow_forwardAlert Companys shareholders equity prior to any of the following events is as follows: The company is considering the following alternative items: 1. An 8% stock dividend on the common stock when it is selling for 30 per share. 2. A 30% stock dividend on the common stock when it is selling for 32 per share. 3. A special stock dividend to common shareholders consisting of 1 share of preferred stock for every 100 shares of common stock. The preferred stock and common stock are selling for 123 and 31 per share, respectively. 4. A 2-for-1 stock split on the common stock, reducing the par value to 5 per share (assume the same date for declaration and issuance). The market price is 30 per share on the common stock. 5. A property dividend to common shareholders consisting of 100 bonds issued by West Company. These bonds are carried on the Alert Company books as an available-for sale investment at a fair value of 48,000 (which is also its cost); it has a current value of 54,000. 6. A cash dividend, consisting of a normal dividend and a liquidating dividend, on both the preferred and the common stock. The 10% preferred dividend includes a 2% liquidating dividend, and the 2.30 per share common dividend includes a 0.30 per share liquidating dividend (separate liquidating dividend contra accounts should be used). Required: For each of the preceding alternative items: 1. Record (a) the journal entry at the date of declaration and (b) the journal entry at the date of issuance. 2. Compute the balances in the shareholders equity accounts immediately after the issuance (any gains or losses are to be reflected in the retained earnings balance; ignore income taxes).arrow_forwardAn investor is thinking about buying some shares of Health Diagnostics, Inc., at $75 a share. She expects the price of the stock to rise to $115 a share over the next three years. During that time, she also expects to receive annual dividends of $4 per share. Assuming that the investor’s expectations (about the future price of the stock and the dividends that it pays) hold up, what rate of return can the investor expect to earn on this investment? (Hint: Use either the approximate yield formula or a financial calculator to solve this problem.)arrow_forward
- Assume that EBV invested in Newco at the terms in Exercise 10.2, and it is now one year later. Talltree is considering a $10M Series B investment in Newco. Talltree proposes to structure the investment as 8M shares of convertible preferred stock. The employees of Newco have claims on 10M shares of common stock, and the previous venture investors (EBV) hold 6M shares of Series A convertible preferred. Thus, following the Series B investment, Newco will have 10M common shares outstanding, and would have 24M shares outstanding on conversion of the CP. Talltree estimates a 40 percent probability for a successful exit, with an expected exit time in 4 years and an exit valuation of $500M. The $250M Talltree fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits. 10.2  EBV invested in Newco Initial Investment by EBV                      5.00 Expected Value of EBV's Stake                    46.88 Annual Return 56.46%arrow_forwardUse the comission schedule from Company B shown in the table to find the annual rate of interest earned on the investment. (Note: commisions are rounded to the nearest cent.) An investor purchases 100 shares at $36.08 a share, holds the stock for 304 days, and then sells the stock for $49.31 a share. Assume a 360-day year. The annual rate of interest is   %? (Round to three decimals)arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning