Instar Company has several investments in other companies. The following information regarding these investments is available at December 31, 2010.
1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of $320,000 (which is par value) and their fair value at December 31, 2010, is $400,000. Instar plans to hold the bonds to collect contractual cash flows until they mature on December 31, 2020. The bonds pay interest at 10%, payable annually on December 31.
2. Instar has invested idle cash in the equity investments of several publicly traded companies. Instar intends to sell these investments during the first quarter of 2011, when it will need the cash to acquire seasonal inventory. These equity investments have a cost basis of $800,000 and a fair value of $920,000 at December 31, 2010.
3. Instar has an ownership stake in one of the companies that supplies Instar with various components that Instar uses in its products. Instar owns 6% of the ordinary shares of the supplier, does not have any representation on the supplier’s board of directors, does not exchange any personnel with the supplier, and does not consult with the supplier on any of the supplier’s operating, financial, or strategic decisions. The cost basis of the investment in the supplier is $1,200,000, and the fair value of the investment at December 31, 2010, is $1,550,000. Instar may sell the investment if it needs cash. The supplier reported net income of $80,000 for 2010 and paid no dividends.
4. Instar owns some Forter Corp. ordinary shares. The cost basis of the investment in Forter is $200,000, and the fair value at December 31, 2010, is $187,000. Instar does not intend to trade the investment because it helps it meet regulatory requirements to sell its products in Forter’s market area.
5. Instar purchased 25% of the shares of Slobbaer Co. for $900,000. Instar has significant influence over the operating activities of Slobbaer Co. During 2010, Slobbaer Co. reported net income of $300,000 and paid a dividend of $100,000.
Accounting
(a) Determine whether each of the investments described above should be classified as held-for-collection, trading, or non-trading equity.
(b) Prepare any December 31, 2010, journal entries needed for Instar relating to Instar’s various investments in other companies. Assume 2010 is Instar’s first year of operations.
Analysis
What is the effect on Instar’s 2010 net income (as reported on Instar’s income statement) of its investments in other companies?
Principles
Briefly explain the different rationales for the different accounting and reporting rules for different types of investments in other companies.