Invest Up Hardware Operates a Chain of Hardware Stores

question 70

Essay

Invest Up Hardware operates a chain of hardware stores. Recent operations have been stable and profitable, resulting in a significant amount of cash inflows. During the past fiscal year ended December 31, the company made a number of investments, as described below.
a. Invest Up bought 30,000 shares of Machine Mart, a supplier of equipment for construction and renovations. With in-depth knowledge of the hardware retailing business, Invest Up's management believes that Machine Mart's shares are undervalued and that the company could make a quick profit selling the shares within the next 12 months. Invest Up purchased the shares at $18 each, and received $0.30 per share dividends during the year. The shares traded at $29 at the fiscal year-end.
b. The company purchased 12,000 units of a mutual fund which cost $28 each. Management had no specific trading intentions for this investment; rather, it was a means of parking excess cash. At the end of the year, the units had a quoted market value of $24.
c. At the beginning of the year, Invest Up bought 25% of the common shares in Builder Bee, one of its smaller suppliers, for $6 million. These shares had a fair value of $6.6 million at the end of the year. During the year, Builder Bee reported net income of $1,500,000 and paid total dividends of $10,000
Required:
Determine how Invest Up should report the above investments in its financial statements. Include both the effects on the balance sheet and the statement of comprehensive income.

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Definitions:

Future Value

The value of an investment at a specified future date, based on an assumed rate of growth over time.

Rate of Interest

The percentage at which interest is charged on a loan or earned on an investment over a specific period of time.

Mortgage Payment

A regular payment made to a lender that typically includes both interest and principal repayment on a mortgage loan.

Mortgage Rate

The interest rate charged on a mortgage loan, determining the cost of borrowing for the purchase of real estate.