Various Investments
Response to the following problem:
Houston Company has a portfolio of investments in available-for-sale securities that it classifies as a noncurrent asset. Houston owns less than 5% of the outstanding voting stock of each company's securities in the portfolio. At the beginning of the year, the aggregate market value of the portfolio exceeded its aggregate cost. Houston received cash dividends on these securities during the year. All cash dividends received represent distribution of earnings subsequent to Houston's acquisition of these securities. Houston sold some of the securities in the portfolio during the year. At the end of the year, the aggregate cost of the portfolio exceeded its aggregate market value.
Houston also owns 40% of the outstanding voting stock of Joy Company. The remainder of Joy's outstanding voting stock is widely dispersed among unrelated investors.
Required
1. a. Explain how Houston reports the income statement effects of the cash dividends received during the year on the securities in the available-for-sale portfolio.
b. Explain how Houston reports the income statement effects of the securities sold during the year.
2. Explain how Houston reports the effect of ownership of the portfolio of securities available for sale in its balance sheet as of the end of the year and on its income statement for the year. Do not discuss the cash dividends or the securities sold.
3. Identify the method of accounting that Houston uses for its 40% investment in the outstanding voting stock of Joy. Why is this method appropriate?