Question

P15-22B Classifying and accounting for debt and equity investments (2. Sep 16 Gain on Disposal)
Captain Transfer Corporation generated excess cash and invested in securities as CR $2,940
follows:
2018
Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at $13.00 per
share. Captain Transfer plans to sell the stock within three months,
when the company will need the cash for normal operations. Captain
Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of $0.40 per share on the Nardon stock
investment.

Sep. 16 Sold the Naradon stock for $13.70 per share.

Oct. 1 Purchased a Purple bond for $40,000 at face value. Captain Transfer
classifies the investment as trading and short-term.

Dec. 31 Received a $600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of $44,000.
Requirements
1. Classify each of the investments made during 2018. (Assume the equity
investments represent less than 20% of ownership of outstanding voting stock.)
2. Journalize the 2018 transactions. Explanations are not required.
3. Prepare T-accounts for the investment assets, and show how to report the
investments on Captain Transfer's balance sheet at December 31, 2018.
4. Where is the unrealized holding gain or loss associated with the trading debt
investment reported?

Answer 1

1	Both the investments are trading investments and short term.
2	Date	Accounts and Explanation	Debit	Credit
	Jul 2	Equity Investments ($13 per share x 4,200 shares)	$        54,600
		Cash		$        54,600
	Aug 21	Cash	$          1,680
		Dividend Revenue ($0.40 per share x 4,200 shares)		$          1,680
	Sep 16	Cash ($13.70 x 4,200 shares)	$        57,540
		Equity Investments		$        54,600
		Gain on Disposal		$          2,940
	Oct 1	Debt investments	$        40,000
				$        40,000
	Dec 31	Cash	$              600
		Interest Revenue		$              600
	Dec 31	Fair Value Adjustment —Trading	$          4,000
		Unrealized Holding Gain—Trading		$          4,000
		($44000 FV less $40000 cost)
3
	Trading Equity Investments
	Jul 2	54600	$        54,600	Sep 16
	Trading Debt Investments
	Oct 1	40000
	Bal.	40000
	Fair Value Adjustment—Trading
	Dec 31	4000
		CAPTAIN TRANSFER CORPORATION
		Balance Sheet (Partial)
		December 31, 2018
		Current Assets:
		Trading Debt Investments (at fair value; cost $40,000)	$        44,000
4		CAPTAIN TRANSFER CORPORATION
		Income Statement (Partial)
		For the Year Ended December 31, 2018
		Other Income and (Expenses):
		Unrealized Holding Gain—Trading	$          4,000