Appendix D – Investments
DATE MODIFIED:
7/22/2017 5:16 PM
cost of trading securities portfolio was $64,200, and the fair value was $67,000.
Cash
45,700
(c)
Cash
600
Dividend Revenue
600
(d)
Cash
7,000
Investments—Ramon Co. Stock
7,000
(e)
Cash
2,100
Investments—Dankin Corp. Stock
($5,100/6)
850
Gain on Sale of Investments
1,250
(f)
Investments—Ramon Co. Stock
17,500
Income of Ramon Co.
($50,000 × 35%)
17,500
POINTS:
1
DIFFICULTY:
Moderate
Bloom’s: Applying
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
DATE MODIFIED:
7/22/2017 5:16 PM
128. Discuss the appropriate financial treatment when an investor has a greater than 50% ownership in another company.
ANSWER:
If an investor purchases more than 50% of another company, the investor is considered
to have control over the investee. The purchase is deemed a business
combination. The corporation that owns the majority interest is called the parent
company; the controlled company is called the subsidiary.
Parent and subsidiary corporations may continue to maintain separate accounting
records throughout the year and prepare their own financial statements. If that is the
case, at the end of the year, the financial statements of the parent and subsidiary(ies)
are combined into consolidated financial statements.
POINTS:
1
DIFFICULTY:
Moderate
Bloom’s: Understanding
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
Appendix D – Investments
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Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments.
ANSWER:
Dec. 31
Valuation Allowance for Trading Investments
2,800
Unrealized Gain on Trading
Investments
2,800
POINTS:
1
DIFFICULTY:
Easy
Bloom’s: Applying
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.07 – Adjusting Entries
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
DATE MODIFIED:
10/9/2017 5:47 PM
130. Skyline, Inc. purchased a portfolio of trading securities during the current fiscal year. The cost and fair value of this
portfolio on December 31 was as follows:
Name
Number of Shares
Total Cost
Total Fair Value
Alcon, Inc.
1,200
$16,000
$15,000
Easton Company
700
23,000
21,500
Panther Company
300
9,000
9,200
Total
$48,000
$45,700
(a) Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31.
(b) Where will the information from the journal entry be reported on the financial statements?
ANSWER:
(a) Unrealized Loss on Trading Investments
2,300
Valuation Allowance for Trading Investments
2,300
$45,700 – $48,000
(b) The unrealized loss will be reported on the income statement as part of other
expenses. The valuation allowance will reduce the value of the portfolio in the assets
section of the balance sheet.
POINTS:
1
DIFFICULTY:
Moderate
Bloom’s: Applying
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.07 – Adjusting Entries
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
DATE MODIFIED:
10/9/2017 4:41 PM
131. Skyline, Inc. purchased a portfolio of trading securities during the current fiscal year. The cost and fair value of this
portfolio on December 31 was as follows:
Appendix D – Investments
Bloom’s: Applying
Name
Number of Shares
Total Cost
Total Fair Value
Blackstone, Inc.
400
$ 4,000
$ 5,200
Flagler Company
200
3,000
2,700
Patterson Corporation
600
7,500
9,800
Total
$14,500
$17,700
(a) Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31.
(b) Where will the information from the journal entry be reported on the financial statements?
ANSWER:
(a) Valuation Allowance for Trading Investments
3,200
Unrealized Gain (Loss) on Trading Investments
3,200
$17,700 – $14,500
(b) The unrealized gain will be reported on the income statement as “Other
Revenue.” The valuation allowance will increase the value of the portfolio in the assets
section on the balance sheet.
POINTS:
1
DIFFICULTY:
Moderate
Bloom’s: Applying
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.07 – Adjusting Entries
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
DATE MODIFIED:
10/9/2017 4:44 PM
132. The income statement for Hudson Company reported net income of $345,000 for the year ended December 31 before
considering the following:
• During the year the company purchased trading securities.
• At year end, the fair value of the investment portfolio was $23,000 less than cost.
• The balance of Retained Earnings was $823,000 on January 1.
• Hudson Company paid $43,000 in cash dividends during the year.
Calculate the balance of Retained Earnings on December 31.
ANSWER:
Retained earnings, January 1
$ 823,000
Net income*
$322,000
Dividends
(43,000)
Change in retained earnings
279,000
Retained earnings, December 31
$1,102,000
*Because these are trading securities, the decrease in fair value is part of the net
income calculation. ($345,000 – $23,000)
POINTS:
1
Appendix D – Investments
(a)
Prepare the current assets section of the balance sheet presentation for the trading securities as
of December 31.
(b)
Explain how the gain or loss would be reported on the income statement.
ANSWER:
(a)
Makala Company
Balance Sheet (selected items)
December 31
Assets
Current assets:
Trading investments (at cost)
$70,000
Valuation allowance for trading
investments
2,300*
Trading investments (at fair value)
$72,300
*Computation:
Market:
Oceanna Company: 700 shares × $49
$34,300
Rockledge, Inc.: 1,900 shares × $20
38,000
Subtotal
$72,300
Cost ($29,000 + $41,000)
70,000
Unrealized gain
$ 2,300
(b) The gain would be reported as “Other revenue” on the income statement.
POINTS:
1
DIFFICULTY:
Moderate
Bloom’s: Applying
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
DATE MODIFIED:
10/9/2017 5:13 PM
Appendix D – Investments
Laurie, Inc.
Scott Corp.
800
Stephanie Company
700
Timmer Company
900
(a) Complete the table above to find the total cost and fair value for the company’s trading securities portfolio.
(b) Calculate and record the required December 31 adjustment.
(c) Explain how the adjustment from step (b) is reported on Lindy’s financial statements.
ANSWER:
(a)
Name
Number
of
Shares
Cost
per
Share
Fair
Value
per
Share
Total
Cost
Total
Fair
Value
Laurie, Inc.
1,200
$10.50
$11.05
$12,600
$13,260
Scott Corp.
600
9.00
9.85
5,400
5,910
Stephanie Company
900
4.10
4.00
3,690
3,600
Timmer Company
1,400
7.35
6.82
10,290
9,548
Total
$31,980
$32,318
(b)
Valuation Allowance for Trading Investments
338
Unrealized Gain on Trading Investments
338
$32,318 – $31,980 = $338 unrealized gain
(c) The unrealized gain will be reported on the income statement as other revenue.
The valuation allowance will be added to the cost of investments and be reported
under current assets on the balance sheet.
POINTS:
1
DIFFICULTY:
Moderate
Bloom’s: Applying
QUESTION TYPE:
Subjective Short Answer
HAS VARIABLES:
False
ACCREDITING STANDARDS:
ACCT.ACBSP.APC.21 – Corporate Investments Accounting
ACCT.AICPA.FN.03 – Measurement
BUSPROG: Analytic
DATE CREATED:
7/22/2017 5:16 PM
DATE MODIFIED:
10/9/2017 5:48 PM
138. Following are data for the trading securities held by Lindy Company as of December 31:
Number of
Cost
Fair Value
Total
