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

Answer:

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.

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.