Question

On FebruaryFebruary ​1, 20162016​, GrayGray Co. decides to invest excess cash of $ 18 comma 000$18,000...

On

FebruaryFebruary

​1,

20162016​,

GrayGray

Co. decides to invest excess cash of

$ 18 comma 000$18,000

by purchasing

900900

shares of

PaynePayne​,

Inc. stock at

$ 20$20

per share. At​ year-end, December​ 31,

20162016​,

PaynePayne​'s

market price was

$ 21$21

per share. The investment is categorized as a trading investment.

Requirements

1.

Journalize the transactions for

GrayGray​'s

investment in

PaynePayne​,

Inc. for

20162016.

2.

In what category and at what value would

GrayGray

report the asset on the December​ 31,

20162016​,

balance​ sheet? In what account would the market price change in

PaynePayne​'s

stock be​ reported, if at​ all?

3.

What was the net effect of the investment on

GrayGray​'s

net income for the year ended December​ 31,

2016​?

0 0
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Answer #1

Solution 1:

Journal Entries - Gray Co.
Date Particulars Debit Credit
1-Feb-16 Investment in Payne Dr $18,000.00
      To Cash $18,000.00
(To record investment in Payne)

Solution 2:

Investment to be reported as short term investment in asset side of balance sheet.

Investment will be reported at fair value in balance sheet i.e. = 900*$21 = $18,900

Account in which market price change in stock to be reported = Fair value adjustment

Solution 3:

Net effect of investment on gray net income for year ended Dec 31, 2016 = $18,900 - $18,000 = $900 increase in income.

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