Accounting Chapter 10 Homework Evan stock 20 Ownership Waterfall Has Significant Influence

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Problems (Group A)

P10-18A Accounting for debt investments

Learning Objective 2

1. Dec. 31 Int. Rev. CR $15,00

Suppose Solomon Brothers purchases $500,000 of 6% annual bonds of Morin Corporation at

face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each

year. They mature on December 31, 2022. Solomon intends to hold the Morin bond

investment until maturity.

Requirements

1. Journalize Solomon Brothers’s transactions related to the bonds for 2018.

2. Journalize the entry required on the Morin bonds maturity date. (Assume the last interest

payment has already been recorded.)

SOLUTION

Requirement 1

P10-18A, cont.

Requirement 2

P10-19A Classifying and accounting for debt and equity investments

Learning Objectives 1, 2, 3, 4

2. Sep. 16 Gain on Disposal CR $5,880

Jetway Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at $12.00 per share.

Jetway plans to sell the stock within three months, when the company will

need the cash for normal operations. Jetway does not have significant

influence over Pogo.

Aug. 21 Received a cash dividend of $0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for $13.40 per share.

Oct. 1 Purchased a Violet bond for $20,000 at face value. Jetway classifies the

investment as trading and short-term.

Dec. 31 Received a $100 interest payment from Violet.

31 Adjusted the Violet bond to its market value of $22,000.

Requirements

1. Classify each of the investments made during 2018. (Assume the equity investments represent

less than 20% of ownership of outstanding voting stock.)

2. Journalize the 2018 transactions. Explanations are not required.

3. Prepare T-accounts for the investment assets, and show how to report the investments on

Jetway’s balance sheet at December 31, 2018.

4. Where is the unrealized holding gain or loss associated with the trading debt investment

reported?

P10-19A, cont.

SOLUTION

Requirement 1

P10-19A, cont.

Requirement 2, cont.

P10-19A, cont.

Requirement 3

Requirement 4

P10-20A Accounting for equity investments

Learning Objectives 3, 4

1. Dec. 31 Fair Value Adjustment—Equity Investments DR $4,000

The beginning balance sheet of Waterfall Source Co. included a $400,000 investment in Evan

stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall

Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at $11 per share of Lili Software common stock as

a long-term equity investment, representing 7% ownership, no significant

influence.

May 15 Received a cash dividend of $0.61 per share on the Lili investment.

Dec. 15 Received a cash dividend of $70,000 from Evan investment.

31 Received Evan’s annual report showing $300,000 of net income.

31 Received Lili’s annual report showing $120,000 of net income for the year.

31 Evan’s stock fair value at year-end was $390,000.

31 Lili’s common stock fair value at year-end was $12 per share.

Requirements

1. Journalize the transactions for the year of Waterfall Source.

2. Post transactions to T-accounts to determine the December 31, 2018, balances related to the

investment and investment income accounts.

3. Prepare Waterfall Source’s partial balance sheet at December 31, 2018, from your answers in

Requirement 2.

4. Where is the unrealized holding gain or loss associated with the Lili stock reported?

P10-20A, cont

SOLUTION

Requirement 1

P10-20A, cont.

Requirement 1, cont.

Requirement 2

P10-20A, cont.

Requirement 3

Problems (Group B)

P10-21B Accounting for debt investments

Learning Objective 2

1. Dec. 31 Int. Rev. CR $14,000

Suppose Hale and Sons purchases $800,000 of 3.5% annual bonds of Tyson Way Corporation at

face value on January 1, 2018. These bonds pay interest on June 30 and December 31 each year.

They mature on December 31, 2022. Hale and Sons intends to hold the Tyson Way bond

investment until maturity.

Requirements

1. Journalize Hale and Sons’s transactions related to the bonds for 2018.

2. Journalize the entry required on the Tyson Way bonds maturity date. (Assume the last interest

payment has already been recorded.)

SOLUTION

Requirement 1

P10-21B, cont.

Requirement 2