Solution For Chapter 16 Investments (13 E) [PDF]

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Solution for Chapter 16 Investments (13 E) BE16.1 (Page 16 – 24) – Ownbey Corporation purchased debt investments for $52,000 on January 1, 2020. On July 1, 2020, Ownbey received cash interest of $2,340. Journalize the purchase and the receipt of interest. Assume that no interest has been accrued.



Solution – Date Jan 1



Particulars Debt Investments



Dr



Cr



52,000



Cash July 1



52,000



Cash



2,340 Interest Revenue



2,340



BE16.3 (Page 16 – 24) – Noler Company owns 25% of Lauer Company. For the current year, Lauer reports net income of $180,000 and declares and pays a $50,000 cash dividend. Record Noler’s equity in Lauer’s net income and the receipt of dividends from Lauer.



Solution – (∵ Ownership > 20%, so, we will use “Equity Method”)



Date Dec 31



Particulars Stock Investments



Dr 45,000



Revenue from Stock Investments (180,000 × 25%) Dec 31



Cr



Cash (50,000 × 25%)



45,000 12,500



Stock Investments



12,500



BE16.4 (Page 16 – 24) – The cost of the trading debt securities of Munoz Company at December 31, 2020, is $64,000. At December 31, 2020, the fair value of the securities is $59,000. Prepare the adjusting entry to record the securities at fair value.



Solution – Date



Particulars



Dec 31



Unrealized Gain or Loss – Income Fair Value Adjustment – Trading (64,00 – 59,000)



Dr



Cr



5,000 5,000



1



BE16.6 (Page 16 – 24) – In its first year of operations, Godfrey Corporation purchased, as a long-term investment, available-for-sale debt securities costing $72,000. At December 31, 2020, the fair value of the securities is $68,000. Prepare the adjusting entry to record the securities at fair value.



Solution – Date Dec 31



Particulars



Dr



Unrealized Gain or Loss – Income



Cr



4,000



Fair Value Adjustment – Available-for-Sale



4,000



(72,00 – 68,000)



E16.2 (Page 16 – 26) – Jenek Corporation had the following transactions pertaining to debt investments. (1). Purchased 40 Leeds Co. 9% bonds (each with a face value of $1,000) for $40,000 cash. Interest is payable annually on January 1, 2020. (2). Accrued interest on Leeds Co. bonds on December 31, 2020. (3). Received interest on Leeds Co. bonds on January 1, 2021. (4). Sold 30 Leeds Co. bonds for $33,000 on January 1, 2021.



Instructions Journalize the transactions.



Solution – Date



(1) –



Jan 1, 2020



Particulars Debt Investments



Dr



Cr



40,000



Cash



(2) –



Dec 31, 2020



Interest Receivables ($40,000 × 9% × 1 yr)



40,000 3,600



Interest Revenue



(3) –



Jan 1, 2021



Cash



3,600 3,600



Interest Receivables



(4) –



Jan 1, 2021



Cash



3,600 33,000



Debt Investments ($1,000 × 30 bonds)



30,000



Gain on Sale of Debt Investments



3,000



(33,000 – (1,000 × 30))



E16.2 (Page 745) – Floyd Corporation had the following transactions pertaining to debt investments Jan. 1



Purchased 50 8%, $1,000 Petal Co. bonds for $50,000 cash plus brokerage fees of 2



$900. Interest is payable semiannually on July 1 and January 1. July 1



Received semiannual interest on Petal Co. bonds.



July 1



Sold 30 Petal Co. bonds for $34,000 less $500 brokerage fees.



Instructions (a).Journalize the transactions. (b).Prepare the adjusting entry for the accrual of interest at December 31.



Solution – (a) – (1) –



Date Jan 1



Particulars Debt Investments



Dr 50,900



Cash (50,000 + 900)



(2) –



July 1



50,900



Interest Receivables ($50,000 × 8% × ½ yr)



2,000



Interest Revenue



(3) –



July 1



Cash (34,000 – 500)



Cr



2,000 33,500



50,900 𝐷𝑒𝑏𝑡 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ( × 30) 50 Gain on Sale of Debt Investments



30,540 2,960



(33,500 – 30,540)



(b) –



Dec 31



Interest Receivables Interest Revenue ($20,000 × 8% × ½ yr)



800 800



E16.4 (Page 16 – 26) – Hulse Company had the following transactions pertaining to stock investments. Feb. 1



Purchased 600 shares of Wade common stock (2%) for $7,200 cash.



July 1



Received cash dividends of $1 per share on Wade common stock.



Sept. 1



Sold 300 shares of Wade common stock for $4,300.



Dec. 1



Received cash dividends of $1 per share on Wade common stock.



Instructions (c). Journalize the transactions. (d). Explain how dividend revenue and the gain (loss) on sale should be reported in the income statement.



Solution – (∵ Ownership < 20%, so, we use Fair Value Method for Valuation) (a) –



3



Date



(1) –



Feb. 1



Particulars Stock Investment



Dr 7,200



Cash



(2) –



July 1



Cr 7,200



Cash



600 Dividend Revenue (600 × $1)



(3) –



Sept. 1



Cash



600 4,300



7,200



𝑆𝑡𝑜𝑐𝑘 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ( 600 × 300)



3,600



Gain on Sale of Stock Investments (4,300 – 3,600)



(4) –



Dec. 1



Cash



700 300



Dividend Revenue ((600 – 300) × $1)



300



(b) – Dividend Revenue and the Gain (Loss) on Sale should be reported in “Other Revenue and Gains” in the income statement.



E16.4 (Page 745) – Diann Company had the following transactions pertaining to stock investments. Feb. 1



Purchased 600 shares of Ronn common stock (2%) for $6,000 cash, plus brokerage fees of $200.



July 1 Sept. 1 Dec. 1



Received cash dividends of $1 per share on Ronn common stock. Sold 300 shares of Ronn common stock for $4,400, less brokerage fees of $100. Received cash dividends of $1 per share on Ronn common stock.



Instructions (a). Journalize the transactions. (b). Explain how dividend revenue and the gain (loss) on sale should be reported in the income statement.



Solution – (∵ Ownership < 20%, so, we use Fair Value Method for Valuation) (a) – Date



(1) –



Feb. 1



Particulars Stock Investment



Dr 6,200



Cash ($6,000 + $200)



(2) –



July 1



Cash



Cr 6,200



600 Dividend Revenue (600 × $1)



600



4



Date



(3) –



Sept. 1



Particulars



Dr



Cash ($4,400 – $100)



Cr



4,300 6,200



𝑆𝑡𝑜𝑐𝑘 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡𝑠 ( 600 × 300)



3,100



Gain on Sale of Stock Investments (4,300 – 3,100)



(4) –



Dec. 1



700



Cash



300 Dividend Revenue ((600 – 300) × $1)



300



(b) – Dividend Revenue and the Gain (Loss) on Sale should be reported in “Other Revenue and Gains” in the income statement.



E16.7 (Page 16 – 27) – On January 1, Zabel Corporation purchased a 25% equity in Helbert Corporation for $180,000. At December 31, Helbert declared and paid a $60,000 cash dividend and reported net income of $200,000.



Instructions (a). Journalize the transactions. (b). Determine the amount to be reported as an investment in Helbert stock at December 31.



Solution – (a) – Date Jan 1



Particulars Stock Investments



Dr 180,000



Cash Dec 31



180,000



Cash ($60,000 × 25%)



15,000



Stock Investments 31



Cr



15,000



Stock Investments



50,000



Revenue from Stock Investments ($200,000 × 25%)



50,000



(b) – Investment in Helbert stock at Dec 31: Investment in Helbert, Jan 1 Less: Dividend Revenue Plus: Share of Reported Income Investment in Helbert, Dec. 31



$180,000 (150,000) 50,000 215,000



P16.4A (Page 16 – 24) – Heidebrecht Design acquired 20% of the outstanding common stock of Quayle Company on January 1, 2020, by paying $800,000 for the 30,000 shares. Quayle



5



declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2020. Quayle reported net income of $320,000 for the year. At December 31, 2020, the market price of Quayle common stock was $34 per share.



Instructions (a). Prepare the journal entries for Heidebrecht Design for 2020 assuming Heidebrecht Design cannot exercise significant influence over Quayle. (Fair Value Method) (b). Prepare the journal entries for Heidebrecht Design for 2020, assuming Heidebrecht Design can exercise significant influence over Quayle. Use the equity method. (c). Indicate the balance sheet and income statement account balances at December 31, 2020, under each method of accounting.



Solution – (a) – Company can’t exercise significant influence (Fair Value/Cost Method Date Jan 1



Particulars Stock Investments



Dr 800,000



Cash Mar 15



Cr 800,000



Cash



9,000 Dividend Revenue (30,000 × $0.30)



June 15



Cash



9,000 9,000



Dividend Revenue (30,000 × $0.30) Sept 15



Cash



9,000 9,000



Dividend Revenue (30,000 × $0.30) Dec 15



Cash



9,000 9,000



Dividend Revenue (30,000 × $0.30) 31 Fair Value Adjustments – Stock



9,000 220,000



Unrealized Gain or Loss – Income



220,000



(($34 × 30,000 shares) – $800,000)



(b) – Company can exercise significant influence (Equity Method): Date Jan 1



Particulars Stock Investments



Dr 800,000



Cash Mar 15



Cash



Cr 800,000



9,000 Stock Investments (30,000 × $0.30)



9,000



6



Date June 15



Particulars



Dr



Cash



Cr



9,000 Stock Investments (30,000 × $0.30)



Sept 15



9,000



Cash



9,000 Stock Investments (30,000 × $0.30)



Dec 15



9,000



Cash



9,000 Stock Investments (30,000 × $0.30)



9,000



31 Stock Investments



64,000



Revenue from Stock Investments



64,000



($320,000 × 20%)



(c) – Fair Value/Cost Method Stock Investments Dividend Revenue Unrealized Gain or Loss – Income Revenue from Stock Investments



Equity Method



1,020,000 (800,000 + 220,000) 36,000 (9,000 × 4) 220,000



828,000 ((800,000 + 64,000 – (9,000 × 4)) 0



0



64,000



0



P16-4B – Wooden’s Concrete acquired 20% of the outstanding common stock of Hoag, Inc. on January 1, 2017, by paying $1,100,000 for 40,000 shares. Hoag declared and paid a $0.50 per share cash dividend on June 30 and again on December 31, 2017. Hoag reported net income of $600,000 for the year. At December 31, 2017, the market price of Hoag’s common stock was $30 per share. Instructions (a). Prepare the journal entries for Wooden’s Concrete for 2017, assuming Wooden’s can not exercise significant influence over Hoag. Use the cost method and assume Hoag common stock should be classified as available-for-sale. (b). Prepare the journal entries for Wooden’s Concrete for 2017, assuming Wooden’s can exercise significant influence over Hoag. Use the equity method. (c). Indicate the balance sheet and income statement account balances at December 31, 2017, under each method of accounting.



Solution – (a) –



7



Date Jan. 1



Particulars



Dr



Stock Investments



1,100,000



Cash June 30



1,100,000



Cash



20,000



Dividend Revenue (40,000 × $ 0.50) Dec. 31



Cr



20,000



Cash



20,000



Dividend Revenue (40,000 × $ 0.50)



20,000



31 Fair Value Adjustment – Available-for-Sale



100,000



Unrealized Gain or Loss – Equity



100,000



[$1,100,000 – ($30 × 40,000)]



(b) – Date Jan. 1



Particulars



Dr



Stock Investments



1,100,000



Cash June 30



1,100,000



Cash



20,000



Stock Investments Dec. 31



Cr



20,000



Cash



20,000



Stock Investments



20,000



31 Stock Investments



120,000



Revenue from Stock Investments



120,000



($600,000 × 20%)



(c) – Cost Method Stock Investment Unrealized Gain or Loss – Equity Dividend revenue Revenue from stock investments



Equity Method



$1,200,000



$1,180,000



($30 × 40,000 shares) 100,000 40,000 (20,000 × 2) 0



($1,100,000 + $120,000 – $40,000) 0 0 120,000



8