PROBLEMS
P17-1 (L01) (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, $100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for $108,660…
Instructions
(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified as held-to-maturity securities.
(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.
(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.
(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as availablefor- sale.
(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.
(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.
P17-2 (L01) (Available-for-Sale Debt Securities) On January 1, 2017, Novotna Company purchased $400,000, 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2022. Novotna Company uses the effective-interest method to amortize discount or premium. On January 1, 2019, Novotna Company sold the bonds for $370,726 after receiving interest to meet its liquidity needs.
Instructions
(a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as availablefor- sale.
(b) Prepare the amortization schedule for the bonds.
(c) Prepare the journal entries to record the semiannual interest on July 1, 2017, and December 31, 2017.
(d) If the fair value of Aguirre bonds is $372,726 on December 31, 2018, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on December 31, 2017, is a debit of $3,375.)
(e) Prepare the journal entry to record the sale of the bonds on January 1, 2019.
P17-3 (L01,2) (Debt and Equity 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...
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified as available-for-sale.
(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the straight-line method.
(c) The fair values of the investments on December 31, 2017, 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?
(d) The U.S. government bonds were sold on July 1, 2018, for $119,200 plus accrued interest. Give the proper entry.
P17-4 (L01) (Debt Investments) Presented below is information taken from a bond investment amortization schedule with related fair values provided. These bonds are classified as available-for-sale.
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Instructions
(a) Indicate whether the bonds were purchased at a discount or at a premium.
(b) Prepare the adjusting entry to record the bonds at fair value at December 31, 2017. The Fair Value Adjustment account has a debit balance of $1,000 prior to adjustment.
(c) Prepare the adjusting entry to record the bonds at fair value at December 31, 2018.
P17-5 (L02) EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common stock which cost $58,500, (2) 10,000 shares of Munter Ltd. common stock which cost $580,000, and (3) 6,000 shares of King Company preferred stock which cost $255,000. The Fair Value Adjustment account shows a credit of $10,100 at the end of 2017.
In 2018, Parnevik completed the following securities transactions.
1. On January 15, sold 3,000 shares of Anderson’s common stock at $22 per share less fees of $2,150.
2. On April 17, purchased 1,000 shares of Castle’s common stock at $33.50 per share plus fees of $1,980.
On December 31, 2018, the market prices per share of these securities were Munter $61, King $40, and Castle $29. In addition, the accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik will not actively trade these securities because the top management intends to hold them for more than one year.
Instructions
(a) Prepare the entry for the security sale on January 15, 2018.
(b) Prepare the journal entry to record the security purchase on April 17, 2018.
(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.
(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?
P17-6 (L02) (Equity Securities Entries) McElroy Company has the following portfolio of investment securities at September 30, 2017, its most recent reporting date.
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Instructions
Prepare the journal entries to record the sale, purchase, and adjusting entries related to the equity securities in the last quarter of 2017.
P17-7 (L01) (Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt securities investments of Wildcat Company.
1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of $300,000 at 100 plus accrued interest.
Interest is payable April 1 and October 1.
2. On April 1, semiannual interest is received.
3. On July 1, 9% bonds of Sampson, Inc. were purchased. These bonds with a par value of $200,000 were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.
4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.
5. On October 1, semiannual interest is received.
6. On December 1, semiannual interest is received.
7. On December 31, the fair value of the bonds purchased February 1 and July 1 are 95 and 93, respectively.
Instructions
(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are available-for-sale securities.
(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).
P17-8 (L02,3) (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 2017 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 equity securities related to Delaney Motors and Patrick Electric. During 2017, Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a fair value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2017 at $20 per share, a purchase that currently has a value of $720,000.
2. Prior to 2017, 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, 2016. Brooks’ 12% ownership of Norton Industries has a current fair value of $22,225,000 on December 2017.
Instructions
(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2017, to reflect the application of the “fair value” rule for the securities described above.
(b) For the securities presented above, describe how the results of the valuation adjustments made in (a) would be reflected in the body of Brooks’ 2017 financial statements.
(c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reported income of $500,000 in 2017 and paid cash dividends of $100,000.
P17-9 (L02,4) (Gain on Sale of Investments and Comprehensive Income) On January 1, 2017, Acker Inc. had the following balance sheet.
The accumulated other comprehensive income related to unrealized holding gains on available-for-sale debt securities. The fair value of Acker Inc.’s available-for-sale debt securities at December 31, 2017, was $190,000; its cost was $140,000. No securities were purchased during the year. Acker Inc.’s income statement for 2017 was as follows. (Ignore income taxes.)
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Instructions
(Assume all transactions during the year were for cash.)
(a) Prepare the journal entry to record the sale of the available-for-sale debt securities in 2017.
(b) Prepare the journal entry to record the Unrealized Holding Gain or Loss for 2017.
(c) Prepare a statement of comprehensive income for 2017.
(d) Prepare a balance sheet as of December 31, 2017.
P17-10 (L02) EXCEL (Equity Investments) Castleman Holdings, Inc. had the following equity investment portfolio at January 1, 2017...
Instructions
(a) Prepare journal entries for each of the above transactions.
(b) Prepare a partial balance sheet showing the investment-related amounts to be reported at December 31, 2017 and 2018.
P17-11 (L02,4) (Equity Securities—Statement Presentation) Fernandez Corp. invested its excess cash in securities during 2017. As of December 31, 2017, the securities portfolio consisted of the following common stocks…
Instructions
(a) What should be reported on Fernandez’s December 31, 2017, balance sheet relative to these securities? What should be reported on Fernandez’s 2017 income statement?
On December 31, 2018, Fernandez’s securities portfolio consisted of the following common stocks…
(b) What should be reported on Fernandez’s December 31, 2018, balance sheet? What should be reported on Fernandez’s 2018 income statement?
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(c) What should be reported on the face of Fernandez’s December 31, 2019, balance sheet? What should be reported on Fernandez’s 2019 income statement?
*P17-12 (L05) EXCEL (Derivative Financial Instrument) The treasurer of Miller Co. has read on the Internet that the stock price of Wade Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on Wade common shares on July 7, 2017, for $240. The call option is for 200 shares (notional value), and the strike price is $70. (The market price of a share of Wade stock on that date is $70.) The option expires on January 31, 2018. The following data are available with respect to the call option...
Instructions
Prepare the journal entries for Miller Co. for the following dates.
(a) July 7, 2017—Investment in call option on Wade shares.
(b) September 30, 2017—Miller prepares financial statements.
(c) December 31, 2017—Miller prepares financial statements.
(d) January 4, 2018—Miller settles the call option on the Wade shares.
*P17-13 (L05) (Derivative Financial Instrument) Johnstone Co. purchased a put option on Ewing common shares on July 7, 2017, for $240. The put option is for 200 shares, and the strike price is $70. (The market price of a share of Ewing stock on that date is $70.) The option expires on January 31, 2018. The following data are available with respect to the put option...
Instructions
Prepare the journal entries for Johnstone Co. for the following dates.
(a) July 7, 2017—Investment in put option on Ewing shares.
(b) September 30, 2017—Johnstone prepares financial statements.
(c) December 31, 2017—Johnstone prepares financial statements.
(d) January 31, 2018—Put option expires.
*P17-14 (L05) (Free-Standing Derivative) Warren Co. purchased a put option on Echo common shares on January 7, 2017, for $360. The put option is for 400 shares, and the strike price is $85 (which equals the price of an Echo share on the purchase date). The option expires on July 31, 2017. The following data are available with respect to the put option…
Instructions
Prepare the journal entries for Warren Co. for the following dates.
(a) January 7, 2017—Investment in put option on Echo shares.
(b) March 31, 2017—Warren prepares financial statements.
(c) June 30, 2017—Warren prepares financial statements.
(d) July 6, 2017—Warren settles the put option on the Echo shares.
*P17-15 (L06) EXCEL (Fair Value Hedge Interest Rate Swap) On December 31, 2017, Mercantile Corp. had a $10,000,000, 8% fixed-rate note outstanding, payable in 2 years. It decides to enter into a 2-year swap with Chicago First Bank to convert the fixed-rate debt to variable-rate debt. The terms of the swap indicate that Mercantile will receive interest at a fixed rate of 8% and will pay a variable rate equal to the 6-month LIBOR rate, based on the $10,000,000 amount. The LIBOR rate on December 31, 2017, is 7%. The LIBOR rate will be reset every 6 months and will be used to determine the variable rate to be paid for the following 6-month period.
Mercantile Corp. designates the swap as a fair value hedge. Assume that the hedging relationship meets all the conditions necessary for hedge accounting. The 6-month LIBOR rate and the swap and debt fair values are as follows...
Instructions
(a) Present the journal entries to record the following transactions.
(1) The entry, if any, to record the swap on December 31, 2017.
(2) The entry to record the semiannual debt interest payment on June 30, 2018.
(3) The entry to record the settlement of the semiannual swap amount receivables at 8%, less amount payable at LIBOR, 7%.
(4) The entry to record the change in the fair value of the debt on June 30, 2018.
(5) The entry to record the change in the fair value of the swap at June 30, 2018.
(b) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2017.
(c) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on June 30, 2018.
(d) Indicate the amount(s) reported on the balance sheet and income statement related to the debt and swap on December 31, 2018.
*P17-16 (L06) (Cash Flow Hedge) LEW Jewelry Co. uses gold in the manufacture of its products. LEW anticipates that it will need to purchase 500 ounces of gold in October 2017, for jewelry that will be shipped for the holiday shopping season. However, if the price of gold increases, LEW’s cost to produce its jewelry will increase, which would reduce its profit margins.
To hedge the risk of increased gold prices, on April 1, 2017, LEW enters into a gold futures contract and designates this futures contract as a cash flow hedge of the anticipated gold purchase. The notional amount of the contract is 500 ounces, and the terms of the contract give LEW the right and the obligation to purchase gold at a price of $300 per ounce. The price will be good until the contract expires on October 31, 2017.
Assume the following data with respect to the price of the futures contract and the gold inventory purchase:
Date Spot Price for October Delivery
April 1, 2017 $300 per ounce
June 30, 2017 310 per ounce
September 30, 2017 315 per ounce
Instructions
Prepare the journal entries for the following transactions.
(a) April 1, 2017—Inception of the futures contract, no premium paid.
(b) June 30, 2017—LEW Co. prepares financial statements.
(c) September 30, 2017—LEW Co. prepares financial statements.
(d) October 10, 2017—LEW Co. purchases 500 ounces of gold at $315 per ounce and settles the futures contract.
(e) December 20, 2017—LEW sells jewelry containing gold purchased in October 2017 for $350,000. The cost of the finished goods inventory is $200,000.
(f) Indicate the amount(s) reported on the balance sheet and income statement related to the futures contract on June 30, 2017.
(g) Indicate the amount(s) reported in the income statement related to the futures contract and the inventory transactions on December 31, 2017.
*P17-17 (L06) (Fair Value Hedge) On October 15, 2017, Oil Products Co. purchased 4,000 barrels of fuel oil with a cost of $240,000 ($60 per barrel). Oil Products is holding this inventory in anticipation of the winter 2018 heating season. Oil Products accounts for its inventory at the lower-of-FIFO-cost-or-net realizable value. To hedge against potential declines in the value of the inventory, Oil Products also purchased a put option on the fuel oil. Oil Products paid an option premium of $300 for the put option, which gives Oil Products the option to sell 4,000 barrels of fuel oil at a strike price of $60 per gallon. The option expires on March 1, 2018. The following data are available with respect to the values of the fuel of inventory and the put option.
Date Market Price of Fuel Oil Time Value of Put Option
October 31, 2017 $58 per gallon $175
November 30, 2017 57 per gallon 105
December 31, 2017 54 per gallon 40
Instructions
(a) Prepare the journal entries of Oil Products for the following dates.
(1) October 15, 2017—Oil Products purchases fuel oil and the put option on fuel oil.
(2) October 31, 2017—Oil Products prepares financial statements.
(3) November 30, 2017—Oil Products prepares financial statements.
(4) December 31, 2017—Oil Products prepares financial statements.
(b) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil inventory and the put option on November 30, 2017.
(c) Indicate the amount(s) reported on the balance sheet and income statement related to the fuel oil and the put option on December 31, 2017.
