105. On December 31, 2010, the England Company held 8%, $200,000 bonds of Marshall Corporation that
were purchased at an amount to yield 7%. The bonds were classified as held to maturity and had a carrying
value of $208,640 on December 31, 2010. Interest on the bonds is paid June 30 and December 31. On July 1,
2011, England decided to reclassify the bonds as available for sale. The market price of the bonds at that date
was $204,000.
Required:
Prepare the journal entries required on June 30 and July 1 of 2011 to fully account for the bond investment.
106. Stuart Corp. purchased 100 shares of Dumb Co. for $8 a share. It purchased 200 shares of Silly Inc. for $12
a share. As of December 31, Dumb Co. is selling for $9 a share and Silly Inc. is selling for $13 a share. Dumb
Co. will be held at least 3 years and is classified as available for sale and Silly is classified as trading. Stuart had
net income of $10,000 before reporting the impact of investment transactions.
Required:
a.
Record the December 31 adjusting entries for investments.
b.
What is Stuart Corp.’s net income after adjusting for investments?
c.
What is the appropriate balance sheet classification for each investment?
6/30/2011
Cash ($200,000 ´ .08 ´ 6/12)
8,000.00
Investment in Held-to-Maturity Debt
Securities
697.60
Interest Revenue
($208,640 ´ .07 ´ 6/12)
7,302.40
Loss on Transfer of Securities
3,942.40
Investment in Held-to-Maturity Debt
Securities
207,942.40
107. On January 1, 2010, A Corp. had the following investments:
Market
Maturity
Classification
Investment
Value
Value
Cost
Available for sale
K Inc.
$1,900
$1,800
Available for sale
S Co.
3,100
3,000
Held to maturity
G Inc. bonds (due 12/31/2012)
$10,000
9,700
Entries for Dumb Co. Investment:
Allowance for Change in Value of AFS Investment
Unrealized Increase in Value for Available-for-
Sale Securities (reported as part of comprehensive income)*
*
(Market $9 – Cost $8) ´ 100 shares
Entries for Silly Inc. Investment
Allowance for Change in Value of Trading
Investment
Unrealized Increase in Value of Trading Securities*
*
(Market $13 – Cost $12) ´ 200 shares
Net income before investments
$10,000
Income impact of trading adjustment
200
Net income
$10,200
Dumb Co.: Noncurrent
Silly Inc.: Current
During the year, A Corp. acquired for trading M Co. stock for $1,000. At year-end, the stock has a fair market value of $1,200. The K Inc. investment
was transferred from AFS to trading on December 31 when the fair market value was $2,500. The S Co. investment had a December 31 market value
of $3,500. The G Inc. bonds had a fair market value on December 31 of $9,850.
Required:
What disclosures are required in the December 31, 2010 financial statements for investments?
108. On January 1, 2010, Blocker bought 6% of Dan Company’s common stock for $20,000. During 2010, Dan
earned $6,000 of net income and distributed $4,400 of dividends. On January 1, 2011, Blocker bought an
additional 35% of Dan stock. The fair value of the Dan shares owned by Blocker was $21,000 on December 31,
2010. Assume that the Dan stock had been classified as available for sale during 2010, and the acquisition of the
additional 35% of Dan at the beginning of 2011 gave Blocker significant influence.
Required:
Prepare the appropriate entries for Blocker on January 1, 2011, as a result of the additional acquisition and
change in ownership classification.
109. A-Rod Corp. bought 25% of Jeter Corporation’s stock for $70,000 on January 1, 2010. During 2010, Jeter
earned $25,000 of net income (80% ordinary and 20% extraordinary) and distributed $15,000 of dividends on
December 31, 2010.
Required:
Present all related 2010 entries on A-Rod Corp.’s books, including the January 1 investment.
110. On January 1, 2010, the Z Corporation acquired a 20% interest in C Company by purchasing 4,800 shares
of its 24,000 outstanding shares of common stock. The acquisition price was $30 per share. On the date of
purchase, C Company’s net assets were as follows:
Book Value
Fair Value
Difference
Nondepreciable assets
$ 60,000
$ 74,000
$14,000
Depreciable assets
160,000
196,000
36,000
Total assets
$220,000
$270,000
$50,000
Total liabilities
$ 80,000
$ 80,000
Investment in Stock: Jeter Corp
70,000
Cash
Investment in Stock: Jeter Corp.
6,250
Investment Income: Ordinary (0.25 ´ $20,000)
Investment Income: Extraordinary (0.25 ´ $5,000)
Cash (0.25 ´ $15,000)
3,750
Investment in Stock: Jeter Corp.
During 2010, C Company earned income of $70,000 and paid dividends of $18,000. The depreciable assets have a ten-year remaining life and no
residual value.
Required:
Prepare all of the journal entries on Z Corporation’s books to record the acquisition and subsequent events in 2010 related to the investment in C
Company.
111. Zinger Company acquired 40% of the outstanding stock of the Tiger Company for $270,000 on January 1,
2010. The purchase price equaled 40% of the book value of Tiger Company. During 2010, the following
information is available for Tiger:
April 7
Declared and paid a cash dividend, $190,000.
Dec. 31
Reported annual earnings for 2010, $300,000.
To record the acquisition:
Cash
144,000
To record 20% share of reported net income:
Investment Income
14,000
To record the receipt of dividends:
Cash (0.20 ´ 18,000)
3,600
Investment Income [($36,000 ´ 0.20)/10]
*
Purchase price
$144,000
Book value ($140,000 ´ 0.20)
28,000
Excess
$116,000
Adjustments:
Depreciable assets ($36,000 ´ 0.20)
$7,200
Nondepreciable assets ($14,000 ´ 0.20)
2,800
Goodwill
$106,000
Required:
Prepare the journal entries necessary by Zinger to reflect the preceding information.
112. On January 1, 2010, Bleach Company acquires a 30% interest in White Company by purchasing 6,000
shares of its 20,000 common stock for $16 per share. On January 1, 2010, the net assets of White Company
were as follows:
Book Value
Fair Value
Nondepreciable assets
$ 60,000
$ 60,000
Depreciable assets (5-year remaining life)
200,000
240,000
$260,000
$300,000
Liabilities
$ 20,000
$ 20,000
During 2010, White reported net income of $200,000 and paid cash dividends of $80,000. Bleach Company amortizes intangibles over a 20-year life.
Required:
Prepare all journal entries on Bleach’s books to record the acquisition, dividends, and income from the investment in White Company.
Cash
Dec. 31
Cash ($80,000 ´ .30)
24,000
Investment in Stock: White Company
Investment Income ($200,000 ´ .3)
Investment Income*
2,400
Investment in Stock: White Company
*
Depreciable assets = [($40,000 ´ 30%) / 5 yrs = $2,400
Jan. 1
Investment in Stock: Tiger Company
270,000
Cash
270,000
Apr. 7
Cash ($190,000 ´ .4)
76,000
Investment in Stock: Tiger Company
76,000
Dec. 31
Investment in Stock: Tiger Company
120,000
Investment Income ($300,000 ´ .4)
120,000
113. Cromer Corp. insured its president on January 1, 2010, with a $2,000,000 life insurance policy. The annual
premium was $60,000 payable on January 1 of each year. Cash surrender values increased each year by 5% of
the premium paid. Dividends received in the first year (2010) amounted to $2,000 and increased by 10% each
year, accruable at year-end only.
Required:
a.
Compute insurance expense for 2011.
b.
Prepare journal entries for July 1, 2012, when the president died.
b.
Cash Surrender Value of Life Insurance
1,500
Insurance Expense ($30,000 – $3,000 ´ 6/12)
28,500
Prepaid Insurance
Cash
2,030,000
Prepaid Insurance
Cash Surrender Value of Life Insurance
Gain on Life Insurance Policy
114. Ansel Company has a $4,000,000, 8% bank loan from Adams Bank. On January 1, 2010, the bank loan has
three years to maturity. Ansel enters into a three-year interest rate swap with Black and White Investments with
a $4 million notional. The agreement calls for Ansel to receive a fixed interest rate of 8% and pay a variable rate
based on LIBOR at the beginning of the year. Payments are to be made for the net amount at each year-end. At
the beginning of 2010, the LIBOR rate is 7.5%. The three-year fixed rate at the end of 2010 is 9%.
Required:
Prepare the journal entries for Ansel relating to the bank loan and derivative for 2010.
115. Discuss the three categories of investments described in the FASB’s current standard for investments in
marketable securities.
116. Under current GAAP for marketable securities, trading securities and available-for-sale securities are
reported at their fair value, but held-to-maturity securities are reported at their amortized cost.
Required:
Explain why there is a difference in the reporting requirements for these three classifications of marketable
securities.
117. A marketable security is initially classified as a trading security, an available-for-sale security, or a
held-to-maturity debt security. Subsequently, a security can be transferred among categories.
Required:
Explain the accounting for a related unrealized holding gain or loss when a transfer to another category occurs.
118. The accounting for investments in marketable securities has changed significantly over the years. For
approximately twenty years, companies were required to report marketable equity securities at the lower of cost
or market. Then in 1993, the FASB issued a new standard, which requires companies to use fair values for
trading and available-for-sale securities.
Required:
Discuss (a) criticisms of the lower of cost or market method and (b) major controversies or criticisms of current
GAAP.
119. ABC Company has been purchasing stock of XYZ Company for a few years. ABC has classified the XYZ
Company stock as available for sale. ABC has just purchased an additional 10% of XYZ’s stock so it now owns
25% and is the largest stockholder. How does this last purchase affect ABC’s accounting for this stock?
120. Compare and contrast the IFRS versus GAAP marketable securities guidance.