Finance Appendix E the individual items appearing on the separate

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FOR INSTRUCTOR USE ONLY

E-52

Solution 186 (15-20 min.)

Ex. 187

On January 5, 2012, 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, 2014, 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, 2014, JBC Company sold 100 shares of R-tel Corporation common stock for

$3,600.

Reporting and Analyzing Investments

FOR INSTRUCTOR USE ONLY

E-53

Ex. 187 (Cont.)

On December 31, 2014, 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, 2014

June 30, 2014

November 15, 2014

December 31, 2014

Ans: N/A, LO: 3, 5,, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

PC: Problem Solving, IMA: FSA

Solution 187 (20-25 min.)

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FOR INSTRUCTOR USE ONLY

E-54

Ex. 188

Santos Corporation has the following trading portfolio of stock investments as of December 31,

2013.

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, 2014, Santos Corporation sold security C for $30,000.

Instructions

(a) Prepare the adjusting entry for Santos Corporation on December 31, 2013 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, 2013.

(c) Prepare the journal entry for the 2014 sale.

Ans: N/A, LO: 3, 5,, Bloom: AP, Difficulty: Medium, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

PC: Problem Solving, IMA: FSA

Solution 188 (12-17 min.)

Ex. 189

King George Company has these data at December 31, 2014:

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.

Reporting and Analyzing Investments

E-55

Ex. 189 (Cont.)

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.

Ans: N/A, LO: 5, 6, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA

PC: Problem Solving, IMA: FSA

Solution 189 (5 min.)

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.

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

E-56

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.

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.

Reporting and Analyzing Investments

FOR INSTRUCTOR USE ONLY

E-57

Answers to Completion Statements

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. Vertical acquisition

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. Purchase of a company in the same industry but involved in a different activity.

____ 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 Accounting: Tools for Business Decision Making, Fifth Edition

FOR INSTRUCTOR USE ONLY

E-58

SHORT-ANSWER ESSAY QUESTIONS

S-A E 203

1. What are the reasons that corporations invest in securities?

Ans: N/A, LO: 1, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis, AICPA

PC: Communications, IMA: Investment Decisions

Solution 203

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?

Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

Solution 204

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?

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

Solution 205

S-A E 206

Distinguish between the cost and equity methods of accounting for investments in stocks.

Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Investment Decisions

Reporting and Analyzing Investments

FOR INSTRUCTOR USE ONLY

E-59

Solution 206

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.

Ans: N/A, LO: 4, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

Solution 207

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.

Ans: N/A, LO: 5, Bloom: K, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

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?

Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

Solution 209

Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition

FOR INSTRUCTOR USE ONLY

E-60

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?

Ans: N/A, LO: 5, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

Solution 210

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.

Ans: N/A, LO: 5, Bloom: E, Difficulty: Easy, Min: 3, AACSB: Ethics, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:

Communications, IMA: Reporting

Solution 211

Reporting and Analyzing Investments

E-61

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.