17 Investments EXERCISES 17.1
EXERCISES
E17-1 (L01,2) (Investment Classifications) For the following investments, identify whether they are:
1. Trading debt securities.
2. Available-for-sale debt securities.
3. Held-to-maturity debt securities.
4. None of the above.
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) Bonds were purchased in December of this year. The bonds are expected to be sold in January 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) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.
(f) 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.
E17-2 (L01) EXCEL (Entries for Held-to-Maturity Securities) On January 1, 2017, Dagwood Company purchased at par 6% bonds having a maturity value of $300,000. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 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 revenue on December 31, 2017.
(c) Prepare the journal entry to record the interest received on January 1, 2018.
E17-3 (L01) (Entries for Held-to-Maturity Securities) On January 1, 2017, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Hi and Lois Company uses the effectiveinterest method to allocate unamortized discount or premium. 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 a bond amortization schedule.
(c) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2017.
(d) Prepare the journal entry to record the interest revenue and the amortization at December 31, 2018.
E17-4 (L01) (Entries for Available-for-Sale Securities) Assume the same information as in E17-3 except that the securities are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows.
2017 $320,500 2020 $310,000
2018 $309,000 2021 $300,000
2019 $308,000
Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017.
(c) Prepare the journal entry to record the recognition of fair value for 2018.
E17-5 (L01) EXCEL (Effective-Interest versus Straight-Line Bond Amortization) On January 1, 2017, Phantom Company acquires $200,000 of Spiderman Products, Inc., 9% bonds at a price of $185,589. Interest is received on January 1 of each year, and the bonds mature on January 1, 2020. The investment will provide Phantom Company a 12% yield. The bonds are classified as held-to-maturity.
Instructions
(a) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the straight-line method.
(b) Prepare a 3-year schedule of interest revenue and bond discount amortization, applying the effective-interest method.
(c) Prepare the journal entry for the interest revenue and discount amortization under the straight-line method at December 31, 2018.
(d) Prepare the journal entry for the interest revenue and discount amortization under the effective-interest method at December 31, 2018.
E17-6 (L02) (Entries for Equity Securities) The following information is available for Barkley Company at December 31, 2017, regarding its investments...
Instructions
(a) Prepare the adjusting entry (if any) for 2017, assuming no balance in the Fair Value Adjustment account at January 1, 2017. Neither of Barkley’s investments result in significant influence.
(b) Discuss how the amounts reported in the financial statements are affected by the entries in (a).
E17-7 (L02) (Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information regarding its equity investments...
Instructions
(a) Prepare the adjusting journal entry needed on December 31, 2017.
(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.
(c) Prepare the adjusting journal entry needed on December 31, 2018.
E17-8 (L02) (Equity Securities Entries and Reporting) Satchel Corporation purchases equity securities costing $73,000. At December 31, the fair value of the portfolio is $65,000.
Instructions
Prepare the adjusting entry to report the securities properly, assuming that the investments purchased represent less than a 5% interest in the other companies. Indicate the statement presentation of the accounts in your entry.
E17-9 (L01) (Available-for-Sale Debt Securities Entries and Financial Statement Presentation) At December 31, 2017, the available-for-sale debt portfolio for SteffiGraf, Inc. is as follows...
Instructions
(a) Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value.
(b) Show the balance sheet presentation of the investment-related accounts at December 31, 2017. (Ignore notes presentation.)
(c) Prepare the journal entry for the 2018 sale of security A.
E17-10 (L04) (Comprehensive Income Disclosure) Assume the same information as E17-9 and that SteffiGraf, Inc. reports net income in 2017 of $120,000 and in 2018 of $140,000. Total holding gains (including any realized holding gain or loss) equal $40,000 in 2018.
Instructions
(a) Prepare a statement of comprehensive income for 2017, starting with net income.
(b) Prepare a statement of comprehensive income for 2018, starting with net income.
E17-11 (L02) (Equity Securities Entries) Aranda Corporation made the following cash purchases of securities during 2017, which is the first year in which Arantxa invested in securities.
1. On January 15, purchased 10,000 shares of Sanchez Company’s common stock at $33.50 per share plus commission $1,980.
2. On April 1, purchased 5,000 shares of Vicario Co.’s common stock at $52.00 per share plus commission $3,370.
3. On September 10, purchased 7,000 shares of WTA Co.’s preferred stock at $26.50 per share plus commission $4,910.
On May 20, 2017, Aranda sold 4,000 shares of Sanchez Company’s common stock at a market price of $35 per share less brokerage commissions, taxes, and fees of $3,850. The year-end fair values per share were Sanchez $30, Vicario $55, and WTA $28. In addition, the chief accountant of Aranda told you that the corporation plans to hold these securities for the long-term but may sell them in order to earn profits from appreciation in prices. The equity method of accounting is not appropriate for these stock purchases.
Instructions
(a) Prepare the journal entries to record the above three security purchases.
(b) Prepare the journal entry for the security sale on May 20.
(c) Compute the unrealized gains or losses and prepare the adjusting entries for Aranda on December 31, 2017.
E17-12 (L02,3) (Journal Entries for Fair Value and Equity Methods) The following are two independent situations.
Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2017. On June 30, Martinez declared and paid $75,000 cash dividends to all stockholders. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share.
Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of $36,000 to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.
Instructions
Prepare all necessary journal entries in 2017 for both situations.
E17-13 (L03) (Equity Method) Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out
40% of net income in dividends each year.
Instructions
Use the information in the following T-account for the investment in Sub to answer the following questions...
(a) How much was Parent Co.’s share of Sub Co.’s net income for the year?
(b) What was Sub Co.’s total net income for the year?
(c) What was Sub Co.’s total dividends for the year?
(d) How much was Parent Co.’s share of Sub Co.’s dividends for the year?
E17-14 (L02) (Equity Investment) Oregon Co. had purchased 200 shares of Washington Co. for $40 each this year (Oregon Co. does not have significant influence). Oregon Co. sold 100 shares of Washington Co. stock for $45 each. At year-end, the price per share of the Washington Co. stock had dropped to $35.
Instructions
Prepare the journal entries for these transactions and any year-end adjustments.
E17-15 (L02) (Equity Investments) Kenseth Company has the following securities in its portfolio on December 31, 2017. None of these investments are accounted for under the equity method.
…
Instructions
Prepare the general journal entries for Kenseth Company for:
(a) The 2017 adjusting entry.
(b) The sale of the Gordon stock.
(c) The purchase of the Earnhart stock.
(d) The 2018 adjusting entry for the portfolio.
E17-16 (L02,3) (Fair Value and Equity Method Compared) Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2017. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2018. Kulikowski reported net income of $730,000 for 2018. The fair value of Kulikowski’s stock was $27 per share at December 31, 2018.
Instructions
(a) Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps cannot exercise significant influence over Kulikowski.
(b) Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps can exercise significant influence over Kulikowski.
(c) At what amount is the investment in securities reported on the balance sheet under each of these methods at December 31, 2018? What is the total net income reported in 2018 under each of these methods?
E17-17 (L03) (Equity Method) On January 1, 2017, Pennington Corporation purchased 30% of the common shares of Edwards
Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000.
Instructions
Prepare the entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2017.
E17-18 (L04) (Impairment of Debt Securities) Hagar Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $800,000, an amortized cost of $800,000, and a fair value of $720,000. The company believes that impairment accounting is now appropriate for these bonds.
Instructions
(a) Prepare the journal entry to recognize the impairment.
(b) What is the new cost basis of the municipal bonds? Given that the maturity value of the bonds is $800,000, should Hagar
Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?
(c) At December 31, 2018, the fair value of the municipal bonds is $760,000. Prepare the entry (if any) to record this information.
E17-19 (L02,4) (Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly Company during 2017...
Instructions
(Assume a zero balance for any Fair Value Adjustment account.)
(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to report this security using the fair value option?
(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations, assuming that Lilly did not select the fair value option for these investments?
E17-20 (L02,4) (Fair Value Measurement Issues) Assume the same information as in E17-19 for Lilly Company. In addition, assume that the investment in the Woods Inc. stock was sold during 2018 for $195,000. At December 31, 2018, the following information relates to its two remaining investments of common stock…
Instructions
(a) Compute the amount of net income or net loss that Lilly should report for 2018, taking into consideration Lilly’s security transactions for 2018.
(b) Prepare the journal entry to record unrealized gain or loss related to the investment in Arroyo Company stock at December 31, 2018.
