Question

On January ​1, 2018​, Bryant​, Inc. decides to invest in 3,750 shares of Farrier stock when the stock is selling for $ 16 per share. On August ​1, 2018​, Farrier paid a $ 0.70 per share cash dividend to stockholders. On December​ 31, 2018​, Farrier reports net income of $ 50.000 for 2018. Assume Farrier has 15,000 shares of voting stock outstanding during 2018 and Bryant has significant influence over Farrier.

Requirements:
1. Identify what type of investment the Farrier stock is for Bryant.
2. Journalize the transactions related to Bryant’s investment in the Farrier stock during 2018.
3. In what category and at what value would Bryant’s report the investment on the December 31, 2018, balance sheet?

Answer 1

1. Identify what type of investment the Farrier stock is for Bryant.

• Equity investment with significant influence. Significant influence means that the company acquires 20% or more of another company, so it must use the equity method to report the investment.

2. Journalize the transactions related to Bryant’s investment in the Farrier stock during 2018.

• January 1, 2018, 3,750 shares purchased from Farrier Corp.
• Dr Investment in Farrier Corp. 60,000
• Cr Cash 60,000

• August 1, 2018, dividends were distributed
• Dr Cash 2,625
• Cr Investment in Farrier Corp. 2,625

• December 31, 2018, Farrier reports its net income for the year
• Dr Investment in Farrier Corp. 12,500
• Cr Revenue from investing activities in Farrier Corp. 12,500

3. In what category and at what value would Bryant’s report the investment on the December 31, 2018, balance sheet?

• The investment in Farrier Corp. must be included as an asset account (Investment in Farrier Corp.) and its year end balance is $69,875. Dividends are not recognized as revenue since they decrease the account balance. Only net profits reported by Farrier Corp. are recognized as revenue (25% of them).