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Reporting and Analyzing Investments
H-53
Ex. 186 (Cont.)
Instructions
(a) Prepare the journal entries to record the 2017 stock transactions.
(b) On December 31, 2017, prepare any adjusting entry that might be necessary relative to the
trading portfolio.
(c) Show how the stock investments will appear on Cantor Corporation's balance sheet at
December 31, 2017.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
H-54
Ex. 187
On January 5, 2017, JBC Company purchased the following stock investments:
300 shares Getz Corporation common stock for $4,800.
500 shares Keller Corporation common stock for $10,000.
600 shares R-tel Corporation common stock for $18,000.
Assume that JBC Company cannot exercise significant influence over the activities of the investee
companies and that the cost method is used to account for the investments.
On June 30, 2017, JBC Company received the following cash dividends:
Getz Corporation.......................................... $2.00 per share
Keller Corporation ....................................... $3.00 per share
R-tel Corporation ......................................... $1.50 per share
On November 15, 2017, JBC Company sold 100 shares of R-tel Corporation common stock for
$3,600.
On December 31, 2017, the fair value of the securities held by JBC Company is as follows:
Per Share
Getz Corporation common stock $12
Keller Corporation common stock 16
R-tel Corporation common stock 33
Instructions
Prepare the appropriate journal entries that the JBC Company should make on the following
dates:
January 5, 2017
June 30, 2017
November 15, 2017
December 31, 2017
Reporting and Analyzing Investments
H-55
Ex. 188
Santos Corporation has the following trading portfolio of stock investments as of December 31,
2017.
Security Cost Fair Value
A $17,000 $16,000
B 23,000 25,000
C 32,000 28,000
$72,000 $69,000
On January 22, 2018, Santos Corporation sold security C for $30,000.
Instructions
(a) Prepare the adjusting entry for Santos Corporation on December 31, 2017 to report the
portfolio at fair value.
(b) Indicate the balance sheet and income statement presentation of the fair value data for the
Santos Corporation at December 31, 2017.
(c) Prepare the journal entry for the 2018 sale.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
H-56
Ex. 189
King George Company has these data at December 31, 2017:
Securities Cost Fair Value
Trading $110,000 $119,000
Available-for-sale 100,000 95,000
The available-for-sale securities are held as a long-term investment.
Instructions
(a) Prepare the adjusting entries to report each class of securities at fair value.
(b) Indicate the statement presentation of each class of securities and the related unrealized
gain (loss) accounts.
Reporting and Analyzing Investments
H-57
Solution 189 (Cont.)
COMPLETION STATEMENTS
190. The purchase of a company in the same industry that does the same activity is called a
______________ acquisition.
191. Debt investments are investments in government and _____________ bonds.
192. When an investor owns between 20% and 50% of the common stock of a corporation, it is
generally presumed that the investor has _______________ influence over the investee
and therefore, the appropriate method of accounting for this type of investment is the
_______________ method.
193. Under the cost method, dividends received from an investee company are credited to the
_______________ account, whereas under the equity method, dividends received from an
investee company are credited to the _______________ account.
194. At the beginning of the year, Dynamite Corporation acquired 15% of Tuesday Company
common stock for $600,000. Tuesday Company reported net income for the year of
$60,000 and paid $20,000 cash dividends during the year. The balance of the Stock
Investments account on the books of the Dynamite Corporation at the end of the year
should be $______________.
195. A company that owns more than 50% of the common stock of another company is known
as the ______________ company and _____________ financial statements are usually
prepared.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
H-58
196. _______________ securities are bought and held primarily for sale in the near future.
197. Fair Value Adjustment is a valuation ____________ account, which is _______________
to (from) the cost of the investments.
198. At the end of an accounting period, if the fair value of the trading portfolio is less than its
cost, then the company should recognize an ______________ that is reported on the
_________________.
199. An unrealized loss on trading securities is reported under Other ____________________
in the income statement.
200. An unrealized gain or loss on available-for-sale securities is reported as a separate
component of _________________.
201. Short-term investments are securities that are _____________ and ______________ to be
converted into cash within the next year.
Answers to Completion Statements
Reporting and Analyzing Investments
FOR INSTRUCTOR USE ONLY
H-59
MATCHING
202. Match the items below by entering the appropriate code letter in the space provided.
A. Available-for-sale securities F. Consolidated financial statements
B. Subsidiary company G. Controlling interest
C. Equity method H. Fair Value Adjustment
D. Unrealized Gain or Loss—Equity I. Debt investments
E. Fair value J. Long-term investments
____ 1. Valuation allowance account.
____ 2. Amount for which a security could be sold.
____ 3. Ownership of more than 50% of another company's common stock.
____ 4. Securities that may be sold in the future.
____ 5. Investments that are not readily marketable.
____ 6. Financial statements that present the assets and liabilities controlled by the parent and
the aggregate profitability of the affiliated companies.
____ 7. The Stock Investments account is adjusted for net income and dividends received.
____ 8. Investments in government and corporation bonds.
____ 9. Entity whose stock is owned by the parent company.
____ 10. An account that is reported in the stockholders' equity section.
Answers to Matching
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
H-60
SHORT-ANSWER ESSAY QUESTIONS
S-A E 203
1. What are the reasons that corporations invest in securities?
S-A E 204
(a) When should a long-term investment in common stock be accounted for by the equity
method?
(b) When is revenue recognized under the equity method?
S-A E 205
If a company has a stock investment that is properly accounted for by the equity method, what will
be the effect on the financial statements when they receive a dividend from its investee?
S-A E 206
Distinguish between the cost and equity methods of accounting for investments in stocks.
Reporting and Analyzing Investments
FOR INSTRUCTOR USE ONLY
H-61
S-A E 207
A consolidated balance sheet reports the financial position of two or more legal entities just as if
they were one reporting unit. Explain why all the individual items appearing on the separate
balance sheets of each of the affiliated companies cannot be added together to arrive at a
consolidated total for each item.
S-A E 208
The Fair Value Adjustment account is a balance sheet account. Identify the asset account it is
related to. Explain how this account is increased and describe the procedure followed when its
related asset account is disposed of.
S-A E 209
When a year-end adjustment is made to reduce the trading securities portfolio to market, what
effect, if any, will the adjustment have on the balance sheet and the income statement?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
H-62
S-A E 210
When a year-end adjustment is made to reduce the available-for-sale securities portfolio to
market, what effect, if any, will the adjustment have on the balance sheet and the income
statement?
S-A E 211 (Ethics)
High Country Stables, Inc., operates several dog-racing tracks throughout the United States.
Since most facilities are outdoor tracks only, most of the cash receipts for High Country are
received from April through October. These funds are usually invested in temporary, very liquid
investments, such as stocks and bonds. Among the stocks purchased last year, was Vendable,
Inc. a company specializing in automatic vending equipment.
The company decided not to sell its Vendable stock at the end of last year, and has purchased
more of the stock this year. The company intends to continue to purchase stock until it holds
enough to make a takeover bid for the company. The accountants have been instructed to
continue to classify the investment as temporary until the takeover is accomplished, so that less
attention will be directed to it. (Presently, High Country has no long-term investment in stock at
all.)
Required:
1. Is it ethical for High Country to attempt to take over another company? Explain.
2. Is it ethical for High Country to leave its investment in the temporary investment category?
Explain.
Reporting and Analyzing Investments
FOR INSTRUCTOR USE ONLY
H-63
S-A E 212 (Communication)
Kalyn Gise is the daughter of Mark Gise, the founder and president of Carolina Blue Sky
Enterprises. She has been working in various departments during school vacations throughout
high school. She burst into the accounting department excitedly one morning. She said that the
stock price of several of the firm's temporary investments are up, and that her father said that the
company had made over $10,000 because of this jump in stock prices. She asks to see how the
increase is recorded. It is a very busy time in the accounting department, and so her question is
deferred.
Required:
Prepare a brief note to answer Kalyn question.
