On January 2,2018,Surfside Co.purchased 12,000 shares of Sand,Inc.for $240,000.The investment represented 12% of Sand's outstanding shares.On December 31,2018 each share of Sand was selling for $19 per share and on December 31,2019 each share of Sand was selling for $23 per share.
-Which of the following correctly presents the entries made by Surfside to its investment account for this investment?
A)January 2,2018,debit $240,000;December 31,2018,credit $12,000;December 31,2019,debit $48,000.
B)January 2,2018,debit $240,000;December 31,2018,credit $12,000;December 31,2019,debit $36,000.
C)January 2,2018,debit $240,000;December 31,2018,debit $12,000;December 31,2019,credit $36,000.
D)January 2,2018,credit $240,000;December 31,2018,debit $12,000;December 31,2019,credit $48,000.

Question

Quizplus · Accepted Answer

On January 2, 2018, Surfside Co. would debit (increase) its investment account by the purchase cost of $240,000. The value per share increased from $20 ($240,000/12,000 shares) to $19 by the end of 2018, which does not necessitate an adjustment in this context as the investment is likely accounted for using the cost method given the ownership percentage. By the end of 2019, the share value increased to $23, representing an unrealized gain, but under the cost method, the investment account remains at historical cost without reflecting this increase directly. The options suggesting adjustments in 2018 and 2019 seem to misunderstand the accounting treatment for such investments, making option A the correct choice despite its inaccuracies in standard accounting practices for such scenarios.