Trading Investments:
Trading investments are the investments in debt or equity securities where the investor holds less than 20% of the voting stock. The investor wishes to sell these investments at a short notice like in a few days, week, or months to generate some profit out of it. They are treated as current assets.
To identify: How the given investment would be classified.
Answer to Problem 1QC
When the investor invests in the debt or equity securities, holding less than 20% of the voting stock of the investee company, in view of selling them in the near future, then such investment is known as a trading investment.
Hence, the correct answer is option b. Trading investment.
Explanation of Solution
Justification for incorrect answers:
Option a. Significant interest investments are the equity securities where an investor holds more than 20%, but less than 50% of the voting stocks. Here, Railway I (investor) will own only 5% of the voting stock of Company P. Hence, option a. is incorrect answer.
Option b. Trading investments are short-term securities where the investor owns less than 20% of the voting stock of the investee company which are bought to sell in the near future to generate profits.
The investment made by Railway I is a trading investment as it represents 5% of voting stocks and investment was made for 3 months.
Option c. Held-to-maturity investment is the investment which is held till their maturity date. Here, Railways I is not planning to hold the investment till maturity, but is planning to hold them for only three months. Hence, option c. is an incorrect answer.
Option d. Controlling interest investments are the equity securities where an investor holds more than 50% of the voting stocks. Here, Railway I will hold only 5% of the voting stock of the investee company. Hence, option d, is an incorrect answer.
Justification for correct answer:
Option b. As the investor company (Railway I) is considering investing in the investee company (Company P) for a short period (three months), and the investment will represent less than 20% of the voting stock (5%) of the investee company, then such investment would be classified as a trading investment.
Hence, option b. is the correct answer.
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Chapter 10 Solutions
Horngren's Financial & Managerial Accounting, The Managerial Chapters (5th Edition)
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