81
174) Jackson Company engaged in the following investment transactions during the current year.
Feb. 17
Purchased 500 shares of Medical Company common stock for
$20 per share plus a brokerage commission of $100.
Jackson does not have significant influence over Medical.
April 1
Bought 30,000 of the 100,000 outstanding shares of Olde
Company for $300,000. Goodwill of $80,000 was included in the
price
June 25
Received a $1.20 per share dividend on Medical Company stock.
June 30
Olde Company reported second-quarter profits of $20,000.
Oct. 1
Purchased 2,000 bonds of Alpha Company for $15 per bond plus
a brokerage fee of $400. These bonds are classified as securities
available for sale.
Dec. 31
Medical Co. shares are selling for $25 and Alpha bonds are
selling
for $12.
Required:
Prepare the appropriate journal entries to record the transactions for the year including year-end
adjustments. Show calculations.
175) Eastwood Enterprises owns 300 bonds of the Van Cleef Company (5% of the outstanding
debt of Van Cleef). Eastwood is trying to determine Van Cleef’s fair value. The relevant facts are
as follows:
• Eastwood bought the Van Cleef bonds earlier in the accounting period for $1,000/bond at a
time when the bonds were publicly traded.
• Since Eastwood bought the bonds, Van Cleef has been delisted and there is no longer an
active market in the Van Cleef bonds.
• Eastwood’s internal valuation specialist estimates the Van Cleef bonds to be worth
$800/bond. Eastwood plans to continue holding the bonds, but may someday sell them if their
value increases sufficiently.
Required:
(1) What is the fair value of Eastwood’s investment in Van Cleef? Briefly explain your choice of
fair value, and relate that choice to the requirements of GAAP regarding fair value measurement.
(2) Prepare a journal entry to record any necessary fair value adjustment.
176) On March 17, 2017, Union Corporation purchased 500 bonds of AZQ common as a long-
term investment at $400 per bond. On December 31, 2017, and December 31, 2018, the market
value of the AZQ bonds is $420 and $430, respectively.
Required:
(1.) What is the appropriate reporting category for this investment? Why?
(2.) Prepare the adjusting entry on December 31, 2017.
(3.) Prepare the adjusting entry on December 31, 2018.
Use the following to answer the question(s) below:
In its 2018 annual report to shareholders, Kirby Inc. included the following disclosure regarding
its available for sale investments in securities:
December 31
2018
2017
2016
In thousands
Accumulated other comprehensive income
Unrealized holding gains (losses) on
securities:
Balance at beginning of year
—
(7,533)
(6,862)
Unrealized holding gains (losses) for the
year
1,509
(3,564)
(671)
Unrealized holding losses recognized in NI
—
11,097
—
Balance at end of year
1,509
—
(7,533)
177) Required:
Prepare the journal entry (in thousands) that Kirby made at the end of 2018 to record unrealized
holding gains arising during the year.
178) In 2017, Kirby made two adjustments to its available for sale investments.
Required:
Briefly explain the adjustments and why they occurred.
86
Use the following to answer the question(s) below:
Fragrance International, a large perfume manufacturer, reported the following in its 2018 annual
report to shareholders:
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) (“AOCI“) included in the
accompanying consolidated balance sheets consist of the following:
YEAR ENDED JUNE 30
2018
2017
2016
($ in millions)
Net unrealized holding investment gains,
beginning of year
$ 2.9
$ 13.9
$ 6.1
Unrealized holding investment gains
(losses)
(5.0)
(18.3)
13.0
Provision for deferred income taxes
2.0
7.3
(5.2)
Net unrealized holding investment gains
(losses), end of year
(0.1)
2.9
13.9
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
2018
2017
2016
($ in millions)
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures
(203.2)
(192.2)
(180.9)
Acquisition of businesses, net of
acquired cash
(18.5)
(16.0)
(180.5)
Purchases of long-term investments
—
—
(15.9)
Proceeds from disposition of long-term
investments
4.7
1.9
3.0
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES
(217.0)
(206.3)
(374.3)
Investments sold during 2018 originally cost $3.0 million.
179) What was the after-tax realized gain or loss on the sale of available-for-sale securities in
2018? Assume a 40% tax rate.
180) Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized holding
gain or loss on available-for-sale securities at 7/1/2017?
181) Prepare summary journal entries that Fragrance International recorded at June 30, 2018, to
(1) record the total of any necessary changes to the fair value adjustment for available-for-sale
securities and (2) record the total of any tax effects associated with those changes.
182) Bentz Corporation bought and sold several securities during 2018. Listed below is a
summary of the transactions:
February 17
Purchased $102,000 of U.S. Treasury 6% bonds at par plus
accrued interest of $1,000. The security is to be held for short-
term profits.
April 10
Purchased 500 shares of Gauges Inc. common stock at $140
per
share. This security will be held for an unspecified period of
time.
August 8
Sold 100 shares of Gauges Inc. for $150 per share.
October 5
Sold half of the U.S. Treasury bonds for $51,500 plus accrued
interest of $300.
Required:
Prepare the journal entries for the above transactions. Show calculations.
Feb. 17
Investment in Treasury bonds
Interest receivable
Cash
Apr. 10
Investment in Gauges, Inc.
Cash
183) Krogstad Corporation bought 1,000 shares of Cole Inc. common stock for $90 per share
Three months later, the shares were sold for $110 per share.
Required:
(1.) Prepare the appropriate journal entry to record the purchase of the stock.
(2.) Prepare the appropriate journal entry to record the sale of the stock.
184) During 2018, Largent Enterprises purchased bonds as follows:
May 17, Purchased 100 Nugent bonds for $800 per bond.
July 12, Purchased 40 Alfredo bonds at $600 per bond, plus a $600 brokerage commission.
Largent accounts for these investments as securities available for sale. At December 31, 2018,
the market values of the securities were as follows:
Security
Market Value per Bond
Nugent
$720
Alfredo
$640
Required:
(1.) Prepare the journal entries to record the acquisition of the two investments.
(2.) Prepare any necessary adjusting entries assuming the bonds are both classified as available
for sale securities.
(1.)
May 17
Investment in Nugent
Cash
Jul. 12
Investment in Alfredo
Cash
(2.)
Dec. 31
Net unrealized holding gain/loss–OCI
Fair value adjustment in Nugent
Dec. 31
Fair value adjustment in Alfredo
Net unrealized holding gain/loss–OCI
Dec. 31
Net unrealized holding gain/loss–OCI
Fair value adjustment — AFS
7,000
93
Use the following to answer the question(s) below:
Cold Cat Inc., a snowmobile manufacturer, reported the following in its 20X5 annual report to
shareholders:
NOTE B – SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of municipal and corporate
bonds and are classified as follows at March 31:
20X5
20X4
Trading securities
$64,433,000
$55,282,000
Available-for-sale debt securities
3,196,000
7,113,000
$67,629,000
$62,395,000
Trading securities consist of $54,608,000 and $41,707,000 invested in various corporate bonds at
March 31, 20X5 and 20X4, respectively, while the remainder of trading securities and available-
for-sale securities consist primarily of A-rated or higher municipal bond investments. The
amortized cost and fair value of debt securities classified as available-for-sale was $3,105,000 and
$3,196,000, at March 31, 20X5. The unrealized holding gain on available-for-sale debt securities
is reported, net of tax, as a separate component of shareholders’ equity.
Cold Cat Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended March 31,
Accumulated Other Comprehensive Income changed by the following amounts:
20X4:
Unrealized holding loss on
securities
available-for-sale, net of tax
$(154,000)
20X5:
Unrealized holding loss on
securities
available-for-sale, net of tax
(140,000)
20X5
20X4
Cash flows from
investing activities:
Sale and maturity of
available-for-sale securities
3,703,000
1,729,000
In its 20X4 annual report, Cold Cat disclosed, “The contractual maturities of available-for-sale
debt securities at March 31, 20X4, are $3,573,000 within one year and $3,340,000 from one year
through five years.”
185) Assume Cold Cat did not purchase any trading securities during 20X5. Prepare a journal
entry to record any unrealized holding gains or losses on trading securities during 20X5.
186) How much did Cold Cat actually receive from the sale of available-for-sale securities
during 20X5?
187) What gain or loss would be realized if the available for sale securities on Cold Cat’s
3/31/X5 balance sheet were sold immediately for their fair value? Prepare any reclassification
entry and an entry that would record the sale (ignore taxes).
188) Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2018. Sonny
recognized a total of $400,000 net income during 2018, paid $30,000 of dividends to Fredo
during 2018, and at December 31, 2018, the market value of the Sonny investment increased to
$1,040,000.
Required: Prepare the journal entries necessary to account for the Sonny investment, assuming
that Fredo (1) lacks significant influence or (2) has significant influence over the operating and
financial policies of the investee.
189) On January 2, 2018, MBH Inc. acquired 30% of the voting common stock of Construction
Corporation as a long-term investment. Data from Construction Corporation’s financial
statements for the year ended December 31, 2018, include the following:
Net income $150,000
Dividends paid $75,000
Required:
Prepare any necessary journal entries for MBH at December 31, 2018, under the equity method
of accounting for investments.
190) On January 1, 2018, American Corporation purchased 25% of the outstanding voting shares
of Short Supplies common stock for $210,000 cash. On that date, Short’s book value and fair
value were both $840,000. The equity method is deemed appropriate for this investment. Short’s
net income reported on December 31, 2018, was $80,000. During 2018, Short also paid cash
dividends in the amount of $24,000.
Required:
Compute the amount that would be reported for the investment on American Corporation’s
financial statements at December 31, 2018.
191) On January 1, 2018, American Corporation purchased 25% of the outstanding voting shares
of Short Supplies common stock for $210,000 cash. On that date, Short’s book value and fair
value were both $840,000. The equity method is deemed appropriate for this investment. Short’s
net income reported on December 31, 2018, was $80,000. During 2018, Short also paid cash
dividends in the amount of $24,000.
Required:
Prepare the journal entries necessary to record the above information on American Corporation’s
books during 2018.
192) On July 1, 2018, Silverwood Company purchased for cash 35% of the voting common
stock of Yellowstone Corporation. Both companies have a December 31 fiscal year-end.
Yellowstone Corporation, which is publicly traded on an organized stock exchange, reported its
net income for the year to Silverwood and paid a dividend to Silverwood during the year.
Required:
How should Silverwood report the above information in its year-end income statement and
balance sheet? Discuss the rationale for your answer.