Instar Company has several investments in the securities of other companies. The following information regarding these investments is available at December 31, 2012.
1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of $320,000 and their fair value at December 31, 2012, is $400,000. Instar intends to hold the bonds until they mature on December 31, 2020.
2. Instar has invested idle cash in the equity securities of several publicly traded companies. Instar intends to sell these securities during the first quarter of 2013, when it will need the cash to acquire seasonal inventory. These equity securities have a cost basis of $800,000 and a fair value of $920,000 at December 31, 2012.
3. Instar has a significant ownership stake in one of the companies that supplies Instar with various components Instar uses in its products. Instar owns 6% of the common stock 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, 2012, is $1,550,000. Instar does not intend to sell the investment in the foreseeable future. The supplier reported net income of $80,000 for 2012 and paid no dividends.
4. Instar owns some common stock of Forter Corp. The cost basis of the investment in Forter is $200,000 and the fair value at December 31, 2012, is $50,000. Instar believes the decline in the value of its investment in Forter is other than temporary, but Instar does not intend to sell its investment in Forter in the foreseeable future.
5. Instar purchased 25% of the stock of Slobbaer Co. for $900,000. Instar has significant influence over the operating activities of Slobbaer Co. During 2012, 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 available- for-sale, held-to-maturity, trading, or equity method.
(b) Prepare any December 31, 2012, journal entries needed for Instar relating to Instar’s various investments in other companies. Assume 2012 is Instar’s first year of operations.
Analysis
What is the effect on Instar’s 2012 net income (as reported on Instar’s income statement) of Instar’s investments in other companies?
Principles
Briefly explain the different rationales for the different accounting and reporting rules for different types of investments in the securities of other companies.