Question

Savanna Co. - Investments

Company	Shares owned by Savanna	Total outstanding shares	Price per share 12/31/16	Price per share 12/31/17	Dividends per share 12/31/16	Dividends per share 12/31/17
Kate Co.	100	1,000	20.00	15.00	1.50	2.00
Kali Co.	100	2,000	20.00	30.00	2.00	2.00
Peyton Co.	100	600	35.00	40.00	1.00	1.00

1. Assuming all three investments are considered Trading Securities, compute the balance sheet value for Savanna's investment on 12/31/2017 2017.

2. Assuming all three investments are considered Trading Securities, compute the income statement effect for Savanna's investment in 2017.

3. Would your answer in 1) or 2) have been different if all three investments were considered available for sale securities in 2017? If so, what would Savanna have reported differently?

4. If Peyton Co. had repurchased 200 shares of its own stock (but none from Savanna) 0n 01/01/2017, would Savanna have accounted for this investment differently than it would have had Peyton not made the repurchases? If so, what additional information would Savanna need to account for this investment?

Answer 1

Answer 1:

Balance sheet value for Savanna's investment on 12/31/2017 = 8,500

Workings:

Since all three investments are considered Trading Securities, these are to be reported at Fair value:

Answer 2:

Assuming all three investments are considered Trading Securities, the income statement effect for Savanna's investment in 2017:

Income would increase by:

Unrealized Gain = 1,000

Dividend Income = 500

Workings:

Answer 3:

Answer would have been different in answer 2 above if all three investments were considered available for sale securities in 2017. The Unrealized Gain would have been reported as Other Comprehensive Income rather than in Income Statement.

Answer 4:

If Peyton Co. had repurchased 200 shares of its own stock (but none from Savanna) 0n 01/01/2017, Savanna would have accounted for this investment differently.

On such repurchase, Peyton Co.'s outstanding share would be (600- 200=) 400 shares and Savanna's % holding would have been (100/400 =) 25%.

An investor is deemed to have significant influence over an investee if the investor owns between 20% to 50% of the investee’s shares or voting rights. The equity method is the type of accounting used for such investments. Savanna would need Financial statements of Peyton Co. to account for this investment. Savanna would need to account for 'Equity In Income' based on holding % and net Income of Peyton Co.