Individual Assignments 2 [PDF]

Citation preview

(3) E17-7 (Trading Securities Entries) On December 21, 2010, Zurich Company provided you with the following information regarding its trading securities. December 31, 2010 Investments (Trading)



Cost



Fair Value



Unrealized Gain (Loss)



Stargate Corp. stock



$20,000



$19,000



$(1,000)



Carolina Co. stock



10,000



9,000



(1,000)



Vectorman Co. stock



20,000



20,600



600



Total of portfolio



$50,000



$48,600



(1,400)



Previous securities fair value adjustment balance



–0–



Securities fair value adjustment—Cr.



$(1,400)



During 2011, Carolina Company stock was sold for $9,500. The fair value of the stock on December 31, 2011, was: Stargate Corp. stock—$19,300; Vectorman Co. stock—$20,500. Instructions (a) Prepare the adjusting journal entry needed on December 31, 2010. December 31, 2010 Unrealized Holding Gain or Loss- Income



1,400



Securities Fair Value Adjustment (Trading)



1,400



(b) Prepare the journal entry to record the sale of the Carolina Company stock during 2011. 2011 Cash



9,500



Loss on Sale of Securities



500



Available-for-sale Securities



10,000



(c) Prepare the adjusting journal entry needed on December 31, 2011. Investments (Trading)



Cost



Fair Value



Unrealized Gain (Loss)



Stargate Corp. stock



$20,000



$19,300



$(700)



Vectorman Co. stock



20,000



20,500



500



Total of portfolio



$50,000



$48,600



(200)



Previous securities fair value adjustment balance



(1,400)



Securities fair value adjustment—Cr.



1,200



Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss



1,200 1,200



(3)(4) E17-12 (Journal Entries for Fair Value and Equity Methods) Presented below are two independent situations. Situation 1 Hatcher Cosmetics acquired 10% of the 200,000 shares of common stock of Ramirez Fashion at a total cost of $14 per share on March 18, 2010. On June 30, Ramirez declared and paid a $75,000 cash dividend. On December 31, Ramirez reported net income of $122,000 for the year. At December 31, the market price of Ramirez Fashion was $15 per share. The securities are classified as available-for-sale. To record the dividend revenue from Ramirez Fashion: June 30, 2010 Cash



7,500 Dividend Revenue ($75,000 x 10%)



7,500



To record the investment at fair value: December 31, 2010 Securities Fair Value Adjustment (Available-for-sale)



20,000



Unrealized Holding Gain or Loss-Equity



20,000



($15-$14)x20,000 shares= $20,000 Situation 2 Holmes, Inc. obtained significant influence over Nadal Corporation by buying 25% of Nadal’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2010. On June 15, Nadal declared and paid a cash dividend of $36,000. On December 31, Nadal reported a net income of $85,000 for the year. To record the purchase of 25% of Nadal Corporation’s common stock: January 1, 2010 Investment in Nadal Corp. Stock Cash (30,000 x 30%) x$9



67,500 67,500



Since Holmes, Inc. obtained significant influence over Nadal Corp. , Holmes, Inc. now employs the equity method of accounting



To record the receipt of cash dividends from Nadal Corp. June 15, 2010 Cash ($36,000 x 25%)



9,000



Investment in Nadal Corp. Stock



9,000



To record Holmes’s share (25%) of Nadal Corporation’s net income of $85,000: December 31, 2010 Investment in Nadal Corp. Stock (25% x $85,000) Revenue from Investment



21,250 21,250



(3)(4) P17-3 (Available-for-Sale Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments, which contained debits for investment purchases, and no credits, with the following descriptions. Feb. 1, 2010



Sharapova Company common stock, $100 par, 200 shares



$ 37,400



April 1



U.S. government bonds, 11%, due April 1, 2020, interest payable April 1 and October 1, 110 bonds of $1,000 par each



July 1



110,000



McGrath Company 12% bonds, par $50,000, dated March 1, 2010 Purchased at 104 plus accrued interest, interest payable Annually on March 1, due March 1, 2030



54,000



Instructions (Round all computations to the nearest dollar.) (a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale. Available-for-Sale Securities



199,400



Interest Revenue ($50,000 x .12 x 4/12)



2,000



Investments



201,400



*($37,400 + 110,000 +( 50,000 x 1.04) (b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2010 using the straight-line method. December 31, 2010 Interest Receivable



8,025



Available-for-Sale Securities



51



Interest Revenue



7,974



(Accrued interest $50,000 x .12 x 10/12 Premium amortization 6/236(20x12-4=236) x $2,000 Accrued Interest $110,000 x .11 x 3/12 (Oct-Dec)



$5,000 (51) 3,025 $7,974



(c) The fair values of the securities on December 31, 2010, were: Sharapova Company common stock



$ 31,800



U.S. government bonds



124,700



McGrath Company bonds



58,600



What entry or entries, if any, would you recommend be made? December 31, 2010 Available-for-Sale Portfolio Securities



Cost



Fair Value



Unrealized Gain (Loss)



Sharapova Company stock



$ 37,400



$ 31,800



$ (5,600)



U.S. government bonds



110,000



124,700



14,700



McGrath Company bonds



51,949*



58,600



6,651



Total



$199,349



$215,100



15,751



Previous securities fair value adjustment balance Securities fair value adjustment—Dr.



0 $15,751



($50,000 X 1.04) – $51 Securities Fair Value Adjustment (Available-for-Sale) .................. 15,751 Unrealized Holding Gain or Loss—Equity ...................................................... 15,751



(d) The U.S. government bonds were sold on July 1, 2011, for $119,200 plus accrued interest. Give the proper entry. July 1, 2011 Cash ($119,200 + $3,025) .................................. 122,225 Available-for-Sale Securities ............................................................... 110,000 Interest Revenue ($110,000 X .11 X 3/12) .............................................. 3,025 Gain on Sale of Securities ........................................................................ 9,200



(3)(4)(5) P17-8 (Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2010 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about Brooks’ pertinent accounts. 1.



Brooks has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year, Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a market value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2010 at $20 per share, a purchase that currently has a value of $720,000.



2.



Prior to 2010, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,500,000 on December 31, 2009. Brooks’ 12% ownership of Norton Industries has a current market value of $22,225,000.



Instructions (a)



Prepare the appropriate adjusting entries for Brooks as of December 31, 2010, to reflect the application of the “fair value” rule for both classes of securities described above. 1. Investment in Trading Securities: Unrealized Holding Gain or Loss- Income



80,000



Securities Fair Value Adjustment (Trading)



80,000



2. Investment in available-for-sale securities: Securities Fair Value Adjustment (Available-for-Sale)



725,000



Unrealized Holding Gain or Loss-Equity (c)



725,000



Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reported income of $500,000 in 2010 and paid cash dividends of $100,000. Investment in Norton Industries ($500,000 x .25)



125,000



Investment Revenue Cash ($100,000 x .25) Investment in Norton Industries



125,000 25,000 25,000