Question

On March 1, 2018, Rose Company invests $12,000 in Sprouts, Inc. stock. Sprouts pays Rose a $350 dividend on October 1, 2018. Rose sells the Sprouts's stock on October 31, 2018, for $12,250. Assume the investment is categorized as a short-term equity investment and Rose Company does not have significant influence over Sprouts, Inc.Requirement: 1. Journalize the transactions for Rose's investment in Sprouts' stock. (Record debits first, then credits. Select the exd the requirements planation on the last line of the journal entry table.)2. What was the net effect of the investment on Rose's net income for the year ended December 31, 2018?

Answer 1

1. Journalize the transactions for Rose's investment in Sprouts' stock:

March 1 2018

Dr Trading securities - Sprouts's stock 12,000

Cr Cash 12,000

(to record the purchase of Sprout's stock)

October 1 2018

Dr Cash 350

Cr Dividend Income 350

(to record the dividend receipt from Sprout's stock)

October 31 2018

Dr Cash 12,250

Cr Gain on disposal of short-term investment 250

Cr Trading securities - Sprouts's stock 12,000

(to record disposal of Sprout's stock)

2. Net effect of the investment on Rose's net income for the year ended December 31, 2018: $600.

Step-by-step explanation:

1. As this investment is short-term investment and is held for sell, fair value methodology should be applied to record this transaction. The detailed journal entries are as in answer part.

2. As fair value methodology is applied, the net income of Rose will include: dividend income + gain on disposal of short-term investment = $350 + $250 = $600.