Concept introduction:
Classification of Investments:
The investments are classified on the basis of the two factors to be considered –
1. Intent of the company
2. Length of time for which it will be held.
The three categories for investments are –
i. Trading investments
The debt and equity securities investments will be classified as trading securities if they are purchased with an intention to be sold in a short time of their purchase. Suppose, 3 months or 4 months i.e. held with an intention to be sold in a short period.
ii. Available-for-sale investments
The debt and equity securities investments will be classified as available-for-sale investments if they are purchased with an intention to be sold in a longer time period say, more than a year. By default all the investments are classified as available-for-sale investments.
iii. Held-to-Maturity
Held-to-maturity investments are the investments that are purchased with an intention to be held till maturity. When a purchase is made with an intent that it will be held till maturity, it will be classified as held-to-maturity investment.
How the investment will be classified.
Explanation of Solution
The correct answer to the question will be –
b. No significant influence equity investment
This can be explained as, it is given in the question that the investment represents 5 % of the voting stock and it will be held for three months, thus it is satisfying the conditions for trading investments. The trading investments do not have significant influence equity investment as it represents 5 % of the voting stock,
Thus, No significant influence equity investment or trading investment is the correct option for the given situation.
The other options can be discussed as under –
Option a, significant influence equity investment –
Significant influence investments are the investment when the voting stock purchased is more than 20%. But in the given situation only 5 % of the voting stock has been purchased.
Option c, held-to-maturity investments –
As discussed above, held-to-maturity investments are the investments that are purchased with an intention to be held till maturity. When a purchase is made with an intent that it will be held till maturity, it will be classified as held-to-maturity investment
In the given situation the investment is purchased with be sold within a period of 3 months. Thus, this is also an incorrect option.
Option d, controlling interest equity investment
When the voting stock purchased is more than 50 %, it will be treated as controlling interest equity investment. It is given in the question that the investment represents 5 % of the voting stock, thus, this option will also be treated as incorrect choice.
Thus, from the above discussion it can be concluded that, the correct option will be b. No significant equity investment or trading investment as it will sold within a period of three months.
Want to see more full solutions like this?
Chapter 15 Solutions
Horngren's Accounting, The Financial Chapters, Student Value Edition Plus MyLab Accounting with Pearson eText -- Access Card Package (11th Edition)
- Perreth Drycleaners has capacity to clean up to 5,000 garments per month. Requirements 1. Complete the schedule below for the three volumes shown. 2. Why does the average cost per garment change? 3. Suppose the owner, Dale Perreth, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 2,000 garments. Would he overestimate or underestimate his total costs? By how much? Requirement 1. Complete the following schedule for the three volumes shown. (Round all unit costs to the nearest cent and all total costs to the nearest whole dollar.) Total variable costs Total fixed costs Total operating costs Variable cost per garment Fixed cost per garment 2,000 Garments 3,500 Garments 5,000 Garments $ 2,800 2.00 Average cost per garment Requirement 2. Why does the average cost per garment change? The average cost per garment changes as volume changes, due to the component of the dry cleaner's costs. The cost per unit decreases as volume , while the variable…arrow_forwardI need answer of this general accounting questionarrow_forwardCalculate the day's sales in receivables for this accounting questionarrow_forward
- Need help with this accounting questionarrow_forwardWhat is the number of shares outstanding for this accounting question?arrow_forwardQuestion 2Anti-Pandemic Pharma Co. Ltd. reports the following information inits income statement:Sales = $5,250,000;Costs = $2, 173,000;Other expenses = $187,400;Depreciation expense = $79,000;Interest expense= $53,555;Taxes = $76,000;Dividends = $69,000.$136,700 worth of new shares were also issued during the year andlong-term debt worth $65,300 was redeemed.a) Compute the cash flow from assetsb) Compute the net change in working capitalarrow_forward
AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,
Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSON
Intermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill Education
Financial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education