ACCT516 21-Feb-13 WEEK 7

E17-1 (Investment Classifications) For the following investments, identify whether they are: 1. Trading 2. Available-for-Sale 3. Held-to-Maturity Each case is independent of the other. (a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold. (b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock. (c) 10-year bonds were purchased this year. The bonds mature at the first of next year. (d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold. (e) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now. (f) Preferred stock was purchased for its constant dividend. The company is planning to QUESTION ANSWER hold the preferred stock for a long time.
A B C D E F 1 2 1 2 3 2

E17-2 (Entries for Held-to-Maturity Securities) On January 1, 2012, Jennings Company purchased at par 10% bonds having a maturity value of $300,000. They are dated January 1, 2012, and mature January 1, 2017, with interest receivable December 31 of each year. The bonds are classified in the held-to-maturity category. Instructions (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entry to record the interest received for 2012. (c) Prepare the journal entry to record the interest received for 2013.

Journal Entries assignment A 1-Jan-12 Debit (Dr.) Debt Investments (held to maturity Value) Cash B. Cash Interest Revenue 31-Dec-13 C. Cash Interest Revenue $ 30,000.00 $ 30,000.00 31-Dec-12 $ 30,000.00 $ 30,000.00 Credit (Cr.)

####### #######

E17-9 (Available-for-Sale Securities Entries and Financial Statement Presentation) At December 31, 2012, the available-for-sale equity portfolio for Wenger, Inc. is as follows. On January 20, 2013, Wenger, Inc. sold security A for $15,300. The sale proceeds are net of brokerage fees. Instructions (a) Prepare the adjusting entry at December 31, 2012, to report the portfolio at fair value. (b) Show the balance sheet presentation of the investment related accounts at December 31, 2012. (Ignore notes presentation.) (c) Prepare the journal entry for the 2013 sale of security A.

Security A B C Total

Cost $17,500 $12,500 $23,000 $53,000

Fair Unrealized Value gain/loss $15,000 ($2,500) $14,000 $1,500 $25,500 $2,500 $54,500 $1,500

There was a previous balance of $200(debit) in the Secutities fair value adjustment account This means that investment were adjusted for unrealized gains earlier for the $200 (net) So as of Dec. 31, 2010, there is an unrealized gain of $1,500 for these availablefor-sales securities. Since there is already a debit balance of $200, this account needs to be adjusted only for the balance of $1,300 (1500 unrealized gain - 200 debit balance). A. Fair value Adjustment (avaiable for sale) Unrealized Holding Gain or LossEquity 31-Dec-12

$ 1,300.00

$ 1,300.00

B.

Show the balance sheet presentation of the investment related accounts

at December 31, 2012. (Ignore notes presentation.) Current Assets side: InvestmentsAvailable for Sale Securities $53,000 Add:Securities fair value adjustment Total Investment Liabilities side: Stockholders equity section

$1,500 $54,500

Common stock Additional paid-in capital

xxx xxx

Retained earnings xxx Add: Unrealized Gains in Available for sale securities $1,500 Total Stockholders Equity then is xxx+xxx+xxx+1,500
C.

Prepare the journal entry for the 2013 sale of security A (On January 20, 2013, Wenger, Inc. sold security A for $15,300. The sale proceeds are
net of brokerage fees.) Net Proceeds from sale of Security Cost of Security Loss on Sale of Investments 20-Jan-13 Cash Loss on Sale of Investments Equity Investments for Available for Sale Dr. ####### $ 2,200.00 CR. ####### ####### $(2,200.00)

#######

$200 (net)

proceeds are

E17-12 (Journal Entries for Fair Value and Equity Methods) Presented on page 1032 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, 2012. *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-forsale. Situation 2 Holmes, Inc. obtained significant influence over Nadal Corporation by buying 25% of Nadals 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2012. *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. Instructions Prepare all necessary journal entries in 2012 for both situations.

Situation 1: Journal entries by Hatcher Cosmetics

To record purchase of 20,000 shares of Ramirez Fashion at a cost of $14 per share: 18-Mar-12 Equity Investments (AFS) Cash ####### #######

To record the dividend revenue from Ramirez Fashion:

30-Jun-12 Cash Dividend Revenue $ 7,500.00 $ 7,500.00

To record the investment at fair value

31-Dec-12 Fair Value Adjustment Unrealized Holding Gain or Loss-Equity $ 20,000.00

$ 20,000.00

*Change from $14 to $15 per share hence the adjustment

Situation 2: Journal entries by Holmes, Inc.:

To record the purchase of 25% of Nadal Corp common stock: 1-Jan-12 Equity Investments $ 67,500.00 Cash

$ 67,500.00

Since Holmes, Inc obtained signigcant influence over Nadal Corp.,Holmes, Inc. now employs the equity method of accounting (I think).

To record the receipt of cash dividends from Nadal Corp.: 15-Jun-12 Cash $ 9,000.00 Equity Investments (Nadal Corp.)

$ 9,000.00

To record Holmes share (25%) of Nadal Corp net income of $85,000 31-Dec-12 Equity Investments (Nadal Inc.) Revenue from Investment

$ 21,250.00 $ 21,250.00

E17-16 (Fair Value and Equity Method Compared) Gregory Inc. acquired 20% of the outstanding common stock of Handerson Inc. on December 31, 2012. The purchase price was $1,250,000 for 50,000 shares. Handerson Inc. declared and paid an $0.80 per share cash dividend on June 30 and on December 31, 2013. Handerson reported net income of $730,000 for 2013. The fair value of Handersons stock was $27 per share at December 31, 2013. Instructions (a) Prepare the journal entries for Gregory Inc. for 2012, and 2013, assuming that Gregory cannot exercise significant influence over Handerson. The securities should be classified as available-for-sale. (b) Prepare the journal entries for Gregory Inc. for 2012 and 2013, assuming that Gregory can exercise significant influence over Handerson. (c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2013? What is the total net income reported in 2013 under each of these methods?

A.

Journal Entry Debit 31-Dec-12 Equity Investments (AFS) Cash 30-Jun-13 Cash Dividend Revenue 31-Dec-13 Cash Dividend Revenue Fair Value Adjustment (AFS) Unrealized Holding Gain or Loss in Equity $ 40,000.00 $ 40,000.00 $ 40,000.00 $ 40,000.00 ######## ######## Credit

1350000

$ 100,000.00

$ 100,000.00 31-Dec-12

B. Equity Investment (Handerson) Cash

######## ######## 30-Jun-13

Cash Equity Investments (Handerson) 31-Dec-13 Cash Equity Investments (Handerson) Equity Investments (Handerson) Revenue from Investment

40,000.00 $ 40,000.00

40,000.00 $ 40,000.00

$ 146,000.00 $ 146,000.00

C. Fair Value Method Investment Amount (balance Sheet) Dvidend Revenue (Income Statement) Revenue from investment (Income Statement) Equity Method

########

########

80,000.00

$ 146,000.00