Question

Accounting for equity investments The beginning balance sheet of Waterfall Source Co. included a $400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions: Mar. 3 Purchased 4,000 shares at $11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence. May 15 Received a cash dividend of $0.61 per share on the Lili investment. Dec. 15 Received a cash dividend of $70,000 from Evan investment. 31 Received Evan's annual report showing $300,000 of net income. 31 Received Lili's annual report showing $120,000 of net income for the year. 31 Evan's stock fair value at year-end was $390,000. 31 Lili's common stock fair value at year-end was $12 per share. Requirements 1. Journalize the transactions for the year of Waterfall Source. 2. Post transactions to T-accounts to determine the December 31, 2018, balances related to the investment and investment income accounts. 3. Prepare Waterfall Source's partial balance sheet at December 31, 2018, from your answers in Requirement 2. 4. Where is the unrealized holding gain or loss associated with the Lili stock reported?

Answer 1

ANSWER

date	Accounts Title	Dr	Cr
3-Mar	Equity Investment	44000
	Cash (4000*11)		44000
15-May	Cash	2440
	Dividend Income (.61*4000)		2440
15-Dec	Cash (70000*20%)	14000
	Investment in Evan		14000
31-Dec	Investment in Evan	60000
	Equity Income (300000*20%)		60000
31-Dec	No entry
31-Dec	No entry
31-Dec	Fair value adjustment	4000
	Unrealized gain on Investment		4000
ans 2
Equity Investment
3-Mar	44000
Investment in Evan
Beg Bal	400000	15-May	14000
31-Dec	60000
End Bal	446000
	Fair value adjustment
31-Dec	Unrealized gain on Investment	4000
	Unrealized gain on Investment
		31-Dec	4000
Dividend Income
		15-May	2440
ans 3
	Partial Balance Sheet
	Assets
	Investments
	Investment in Evan		446000
	Equity Investment	44000
	Add: fair value adjustment	4000	48000
	Net Investments		494000
	Liabilities & Stockholder Equity
	Stockholder Equity
	Unrealized Gain on Investment	4000
ans 4	It is reported under Other comprehensive Income which
	is finally reported in Stockholder Equity

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