SOLUTIONS TO PROBLEMS
PROBLEM 16-1A
(a) 2017
Jan. 1 Debt Investments ……………………………. 2,000,000
Cash ……………………………………….. 2,000,000
Dec. 31 Interest Receivable
($2,000,000 X 8%) ………………………… 160,000
Interest Revenue ……………………… 160,000
Dec. 31 Interest Receivable
($1,000,000 X 8%) ………………………… 80,000
Interest Revenue ……………………… 80,000
(b) 2017
PROBLEM 16-1A (Continued)
(c) Balance Sheet
Current assets
Interest receivable ………………………………………………. $ 160,000
Investments
PROBLEM 16-2A
(a) Feb. 1 Stock Investments ……………………………… 32,400
Cash …………………………………………… 32,400
Mar. 1 Stock Investments ……………………………… 20,000
Cash …………………………………………… 20,000
Apr. 1 Debt Investments ……………………………….. 50,000
Cash …………………………………………… 50,000
Sept. 1 Cash ($1 X 800) ………………………………….. 800
Dividend Revenue ……………………….. 800
Oct. 1 Cash ($50,000 X 7% X 1/2) …………………… 1,750
Interest Revenue …………………………. 1,750
Stock Investments
Debt Investments
Feb. 1 32,400
Mar. 1 20,000
Aug. 1 10,800
Apr. 1 50,000
Oct. 1 50,000
Dec. 31 Bal. 0
PROBLEM 16-2A (Continued)
(b) Dec. 31 Unrealized Loss—Income ……………………. 400
Security
Cost
Fair Value
Muninger common
$21,600
$22,000
(400 X $55)
(c) Current assets
Short-term investments, at fair value…………………………. $41,200
(d)
Income Statement Account
Category
Dividend Revenue
Other revenues and gains
Gain on Sale of Stock Investments
Other revenues and gains
Interest Revenue
Other revenues and gains
Loss on Sale of Debt Investments
Other expenses and losses
Other expenses and losses
PROBLEM 16-3A
(a) 2018
Aug. 1 Cash (2,000 X $.50) …………………………….. 1,000
Dividend Revenue ……………………….. 1,000
Nov. 1 Cash (1,500 X $1) ……………………………….. 1,500
Dividend Revenue ……………………….. 1,500
Stock Investments
2018
Jan. 1 Balance 135,000
2018
Sept. 1 13,500
Oct. 1 24,000
PROBLEM 16-3A (Continued)
(b) Dec. 31 Unrealized Gain or Loss—Equity
($97,500 – $93,400) …………………………….. 4,100
Security
Cost
Fair Value
Gehring Co. common
Wooderson Co. common
$36,000
31,500
$38,400
28,000
(1,200 X $32)
(3,500 X $ 8)
(c) Investments
Investments in stock of less than
20% owned companies, at fair
value ………………………………………….. $ 93,400
Stockholders’ equity
Common stock ………………………………. $1,500,000)
PROBLEM 16-4A
(a) Jan. 1 Stock Investments ………………………….. 800,000
Cash ……………………………………….. 800,000
Mar. 15 Cash ……………………………………………… 9,000
Dividend Revenue
(30,000 X $.30) ……………………… 9,000
(b) Jan. 1 Stock Investments ………………………….. 800,000
Cash ……………………………………….. 800,000
Mar. 15 Cash ……………………………………………… 9,000
Stock Investments …………………… 9,000
PROBLEM 16-4A (Continued)
Dec. 31 Stock Investments …………………………. 64,000
(c)
Cost
Method
Equity
Method
Stock Investment
Dividend revenue
$1,020,000*
36,000
$828,000**
0
PROBLEM 16-5A
(a) Jan. 20 Cash …………………………………………………. 55,000
Stock Investments ………………………. 52,000
Gain on Sale of Stock
Investments …………………………….. 3,000
Feb. 8 Cash …………………………………………………. 480
Dividend Revenue ($.40 X 1,200) ….. 480
18 Cash ($27 X 1,200) ……………………………… 32,400
Loss on Sale of Stock Investments ……… 1,200
Stock Investments ………………………. 33,600
(b)
Stock Investments
1/1 Bal. 169,600
1/20 52,000
1/28 31,200
2/18 33,600
9/6 73,800
12/31 Bal. 189,000
PROBLEM 16-5A (Continued)
(c) Dec. 31 Unrealized Gain or Loss—Equity ……………. 5,800
Fair Value Adjustment—Available-
(d) Investments
Investments in stock of less than 20% owned
companies, at fair value ……………………………………. $183,200
PROBLEM 16-6A
NIETO CORPORATION
Balance Sheet
December 31, 2017
Assets
Current assets
Cash ……………………………………………………….. $ 62,000
Short-term investments, at fair value ………… 180,000
Accounts receivable ………………………………… $140,000
Investments
Investments in stock of less than 20% of
owned companies, at fair value …………….. 286,000*
Property, plant, and equipment
Land …………………………………………… 390,000
Buildings ……………………………………. $950,000
Intangible assets
Goodwill …………………………………………………. 200,000
Total assets …………………………………………………… $2,811,000
PROBLEM 16-6A (Continued)
NIETO CORPORATION
Balance Sheet (Continued)
December 31, 2017
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ………………………………………….. $ 70,000
Accounts payable …………………………………….. 260,000
Long-term liabilities
Bonds payable, 10%, due 2025 ………………….. $ 500,000
Stockholders’ equity
Paid-in capital
Common stock, $10 par value,
500,000 shares authorized,
Total paid-in capital and retained
earnings ………………………………………… 1,733,000
COMPREHENSIVE PROBLEM: CHAPTERS 12 TO 16
Part I
(a) To: Debby Kauffman, Jamie Hiatt, and Ella Rincon
From: Joe Student
Date: 5/26/2016
Re: Analysis of Partnership vs. Corporate Form of Business
Organization
I have examined your situation regarding the establishment of your business.
Before discussing my recommendations, I would like to briefly review
the advantages and disadvantages of partnerships and corporations.
The primary advantages of a partnership over a corporation are:
1. Partnerships are more easily formed than corporations. Partnerships
can be formed simply by the voluntary agreement of two or more
individuals. Forming a corporation requires preparing and filing docu–
ments with governmental agencies, paying incorporation fees, etc.
2. Income from a partnership is subject to less tax than income from
a corporation. Even though partnerships are required to file information
3. Partnerships have more flexibility in decision making. The decision-
making process used in a partnership is determined by the partners,
whereas some decisions required in corporations must follow formal
procedures described in the bylaws of the corporation.
COMPREHENSIVE PROBLEM (Continued)
The primary advantages of a corporation over a partnership are:
1. Mutual agency does not exist in a corporation. This means that the
owners of a corporation (stockholders) do not have the power to bind
the corporation beyond their authority. For example, a stockholder
2. The owners of a corporation have limited liability. When the
corporation’s assets are not sufficient to pay creditors’ claims, the
personal assets of the stockholders are protected from the
corporation’s creditors. In a partnership, once the assets of the
3. The life of a corporation is unlimited. When ownership changes occur
(e.g., stockholders buy or sell stock), the corporation continues to
exist as a legal entity. When ownership changes occur in a partner-
After examining your situation, I believe that you would be wise to
choose the corporate form of business organization. There are two
reasons for this recommendation. The first reason is that the venture
you are about to undertake will require significant capital and, generally,
COMPREHENSIVE PROBLEM (Continued)
Part II
(b)
Equity financing option:
Positives
Negatives
No fixed interest payments
required
Control of the corporation is lost
Difficulty of finding an interested
investor
Earnings per share are lower
Debt financing option:
Positives
Negatives
Equity Financing
Debt Financing
Income before interest and taxes
$300,000
$300,000
Interest expense
—
126,000
Income before taxes
300,000
174,000
Tax expense
96,000
55,680
$204,000
$118,320
Shares outstanding after financing
Earnings per share
Part III
(c) (1) 6/12/16 Cash ……………………………………… 100,000
COMPREHENSIVE PROBLEM (Continued)
7/21/16 Cash……………………………………….. 900,000
7/27/17 Stock Dividends
(150,000 X .10 X $3) ………………. 45,000
7/31/17 No entry
8/15/17 Common Stock Dividends
Distributable ………………………… 30,000
Common Stock …………………. 30,000
(2) Shares Issued and Outstanding
Date
Event
Number of
Shares Issued
Total Shares
Issued and
Outstanding
6/12/16
Issuance to Incorporators
60,000
60,000
Part IV
(d) (1) 1/1/18 Cash……………………………………… 548,000