Problem 5.3

All securities purchases made by Mechanical Engineers, Inc. described in this problem represent less than a 20% interest in the investee companies.

Part I: Mechanical Engineers, Inc. made the following purchases of equity securities during 20X7, the first year any investments were made:

Investee Company		Cost per per share during 20X7*		Number of shares purchased		Total Cost		Market value per share on Dec. 31, 20X7		Total Market Value on Dec. 31, 20X7
W Co.**		$11.00		500		$5,500		$14.00		$7,000
X Co.***		$18.00		1,000		$18,000		$17.00		$17,000
						$23,500				$24,000

* Costs per share include brokers fees and commissions. ** Received $50 dividend during 20X7 from W Co. *** Received $200 dividend during 20X7 from X Co.

Mechanical Engineers, Inc. intends to sell the W Co. and X Co. investments in the short term in an open market. Mechanical Engineers, Inc. adjusts its allowance account for securities valuation annually at the end of its fiscal year on December 31 each year.

a) How should the 20X7 investments in W Co. and X Co. be classified?

b) Prepare journal entries for 20X7 regarding all investment activities of Mechanical Engineers, Inc.

c) Describe the effects of the 20X7 securities transactions on the income statement for the year ended December 31, 20X7, and on the statement of financial position as of December 31, 20X7.

Part II: Suppose the following information is available for 20X8 equity securities transactions of Mechanical Engineers, Inc.:

• During 20X8 sold 500 shares of W Co. stock for $15.00 per share.
• During 20X8 sold 1,000 shares of X Co. stock for $17.50 per share.
• Received a $25 dividend from W Co. and a $70 dividend from X Co. during 20X8.

Additionally, the following information on purchases of new equity securities during 20X8 is available:

Investee Company		Cost per per share during 20X8*		Number of shares purchased		Total Cost		Market value per share on Dec. 31, 20X8		Total Market Value on Dec. 31, 20X8
Y Co.**		$12.00		1,000		$12,000		$11.00		$11,000
Z Co.***		$15.00		1,000		$15,000		$14.00		$14,000
						$27,000				$25,000

* Costs per share include brokers fees and commissions. ** Received $65 dividend during 20X8 from Y Co. *** Received $80 dividend during 20X8 from Z Co.

Mechanical Engineers, Inc. intends to sell the Y Co. and Z Co. investments in the short term in an open market.

d) How should the 20X8 investments in Y Co. and Z Co. be classified?

e) Prepare journal entries for 20X8 regarding all investment activities of Mechanical Engineers, Inc.

f) Describe the effects of the 20X8 securities transactions on the income statement for the year ended December 31, 20X8, and on the statement of financial position as of December 31, 20X8.