EXERCISE 17.10 (20–25 minutes)
(a) STEFFI GRAF, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2020
_____________________________________________________________
Net income $120,000
(b) STEFFI GRAF, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2021
_____________________________________________________________
Net income $140,000
Other comprehensive income
Holding gains $40,000
Add: Reclassification adjustment for
EXERCISE 17.11 (20–25 minutes)
(a) The total purchase price of these investments is:
Sanchez: (10,000 X $33.50) + $1,980 = $336,980
EXERCISE 17.11 (Continued)
April 1, 2020
Equity Investments ……………………………………….. 263,370
(b) Gross selling price of 4,000 shares at $35 $140,000
Commissions, taxes, and fees (3,850)
(c)
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Sanchez Co.
$202,188*
$180,000(1)
$(22,188)
Vicario Co.
263,370
275,000(2)
(11,630
WTA Co.
190,410
196,000(3)
5,590
Total portfolio value
EXERCISE 17.12 (15–20 minutes)
Situation 1: Journal entries by Conchita Cosmetics:
March 18, 2020
Equity Investments (20,000 x $13) ………………………….. 260,000
Cash ………………………………………………………………. 260,000
To record the dividend revenue from Martinez Fashion:
June 30, 2020
December 31, 2020
Fair Value Adjustment ……………………………………………… 40,000
Situation 2: Journal entries by Monica, Inc.:
To record the purchase of 30% of Seles Corporation’s common stock:
January 1, 2020
Equity Investments (Seles Corp.). ……………………………… 81,000
June 15, 2020
EXERCISE 17.12 (Continued)
To record Monica’s share (30%) of Seles Corporation’s net income of $85,000:
December 31, 2020
Equity Investments (Seles Corp.) ……………………………… 25,500
EXERCISE 17.13 (8–10 minutes)
(a) $110,000, the increase to the Investment account.
EXERCISE 17.14 (8–10 minutes)
1. Equity Investments ………………………………………… 8,000
Cash (200 shares X $40) ……………………….. 8,000
EXERCISE 17.15 (15–20 minutes)
(a) Unrealized Holding Gain or Loss—Income ………….. 7,900
Fair Value Adjustment ($313,500 − $305,600) .. 7,900
(d)
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Wallace Corp., Common
$180,000
$175,000
$ (5,000)
Earnhart Corp., Common
53,800
50,400
(3,400)
Martin Inc., Preferred
Total portfolio
Previous fair value adjustment—Cr.
Fair value adjustment—Cr.
$ (2,500)
EXERCISE 17.16 (15–20 minutes)
(a) December 31, 2020
Equity Investments ……………………………………. 1,200,000
Cash ………………………………………………….. 1,200,000
EXERCISE 17.16 (Continued)
(b) December 31, 2020
Equity Investments (Kulikowski) ……………………… 1,200,000
Cash ……………………………………………………….. 1,200,000
(c)
Fair Value
Method
Equity
Method
Investment amount (balance sheet)
$1,350,000
*$1,261,000*
Dividend revenue (income statement)
EXERCISE 17.17 (10–15 minutes)
Equity Investments (Edwards Co.) …………………… 180,000
Cash ……………………………………………………….. 180,000
EXERCISE 17.18 (15–20 minutes)
(a) Allowance For Doubtful Accounts
($800,000 – $720,000) …………………………………… 80,000
Debt Investments …………………………………….. 80,000
EXERCISE 17.19 (15-20 Minutes)
(a) Unrealized Holding Gain or Loss—Income
EXERCISE 17.19 (Continued)
* Unrealized Holding
Investments Cost Fair Value Gain (Loss)
Lee Corporation stock $250,000 $300,000 $50,000
Wood Inc. stock 180,000 190,000 10,000
EXERCISE 17.20 (15-20 minutes)
(a) Net income before security gains or losses ………… $905,000
Sale of Investment in Woods Inc. stock
EXERCISE 17.21 (15-20 minutes)
(a) Net income before security gains and losses ………. $100,000
Investment in debt securities ($41,000 – $40,000) …. 1,000
EXERCISE 17.22 (20–25 minutes)
(a) December 31, 2021
(b) December 31, 2022
Fair Value Adjustment
(c) December 31,2021
Allowance for Doubtful Accounts
EXERCISE 17.23 (20-25 minutes)
(a) The amount of the credit loss should be $10,000 ($50,000 — $40,000).
The credit loss is limited to the amount that the fair value is less than
amortized cost.
*EXERCISE 17.24 (15–20 minutes)
(a) Call Option ……………………………………………………… 300
Cash ……………………………………………………….. 300
*EXERCISE 17.25 (15–20 minutes)
(a)
6/30/20
(b)
12/31/20
Fixed-rate debt
$100,000
$100,000
Fixed rate (6% ÷ 2)
X 3%
X 3%
Semiannual debt payment
Swap fixed receipt
(3,000)
Net income effect
$ 0
$ 0
Swap variable rate
5.7% X 1/2 X $100,000
$ 2,850
6.7% X 1/2 X $100,000
Net interest expense
$ 2,850
$ 3,350
Note to instructor: An interest rate swap in which a company changes its
interest payments from fixed to variable is a fair value hedge because the
*EXERCISE 17.26 (15–20 minutes)
(a)
12/31/20
(b)
12/31/21
Variable-rate debt
$10,000,000
$10,000,000
Debt payment
$ 580,000
$ 660,000
Swap variable received
(580,000)
Net income effect
$ 0
$ 0
Note to instructor: An interest swap in which a company changes its interest
payments from variable to fixed is a cash flow hedge because interest costs
are always the same.
*EXERCISE 17.27 (15–20 minutes)
(c) Swap Contract ………………………………………………….. 48,000
Unrealized Holding Gain or Loss—Income ….. 48,000
*EXERCISE 17.28 (20–25 minutes)
(a) August 15, 2019
Call Option ……………………………………………………………. 360
Cash ……………………………………………………………… 360
(b) September 30, 2019
(c) December 31, 2019
Unrealized Holding Gain or Loss—Income ……………… 800
*EXERCISE 17.28 (Continued)
(d) January 15, 2020
Unrealized Holding Gain or Loss—Income ……………… 35
Call Option ($65 – $30) ……………………………………. 35
**Computation of Gain: $370 (400 shares X $1) – $30
**Value of Call Option at settlement:
Call Option
*EXERCISE 17.29 (25–30 minutes)
(a) May 1, 2020
Memorandum entry to indicate entering into the futures contract.
(b) June 30, 2020
*EXERCISE 17.29 (Continued)
(d) October 5, 2020
Inventory ………………………………………………………. 105,000
Cash ($525 X 200 ounces) ……………………….. 105,000
(e) December 15, 2020
Cash ……………………………………………………………… 250,000
(f) HART GOLF CO.
Partial Income Statement
For the Quarter Ended December 31, 2020
Sales revenue $250,000
TIME AND PURPOSE OF PROBLEMS
Problem 17.1 (Time 20–30 minutes)
Purpose—the student is required to prepare journal entries and adjusting entries covering a three-year
Problem 17.2 (Time 30–40 minutes)
Purpose—The student is required to prepare journal entries and adjusting entries for available-for-sale
Problem 17.3 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the differentiation in accounting treatments
Problem 17.4 (Time 25–35 minutes)
Problem 17.5 (Time 25–35 minutes)
Purpose—the student is required to prepare journal entries for the sale and purchase of equity
Problem 17.6 (Time 25–35 minutes)
Problem 17.7 (Time 25–35 minutes)
maturity.
Problem 17.8 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the fair value and equity methods. The
Problem 17.9 (Time 20–30 minutes)
Time and Purpose of Problems (Continued)
Problem 17.10 (Time 30–40 minutes)
Problem 17.11 (Time 20–30 minutes)
financial statements are then required.
*Problem 17.12 (Time 20–25 minutes)
Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration
*Problem 17.13 (Time 20–25 minutes)
*Problem 17.14 (Time 20–25 minutes)
Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration
*Problem 17.15 (Time 30–40 minutes)
Purpose—the student is provided with an opportunity to prepare the entries for a fair value hedge in the
*Problem 17.16 (Time 25–35 minutes)
Purpose—the student is provided with an opportunity to prepare the entries for a cash flow hedge in the
*Problem 17.17 (Time 25–35 minutes)
Purpose—the student is provided with an opportunity to prepare the entries for a fair value hedge in the
SOLUTIONS TO PROBLEMS
PROBLEM 17.1
(a) December 31, 2018
Debt Investments …………………………………… 108,660
Cash …………………………..…………………. 108,660
(d) December 31, 2018
Debt Investments …………………………………… 108,660
Cash …………………………..…………………. 108,660
(e) December 31, 2019
PROBLEM 17.1 (Continued)
(f) December 31, 2021
Amortized
Cost
Fair
Value
Unrealized
Gain (Loss)
Spangler Company, 7% bonds
$103,719
$105,650
$1,931
Previous fair value
PROBLEM 17.2
(a) January 1, 2020 purchase entry:
(b) The amortization schedule is as follows:
Schedule of Interest Revenue and Bond Discount
Amortization—Effective-Interest Method
8% Bonds Purchased to Yield 10%
Date
Cash Received
Interest
Revenue
Bond
Discount
Amortization
Carrying
Amount of
Bonds
1/1/20
$369,114
7/1/20
1/1/21
7/1/21
1/1/22
7/1/22
(c) Interest entries:
July 1, 2020
Cash ………………………………………………………………. 16,000
PROBLEM 17.2 (Continued)
December 31, 2020
Interest Receivable …………………………………………. 16,000
(d) December 31, 2021 adjusting entry:
Securities
Available-for-Sale
Portfolio Cost
Fair Value
Unrealized
Gain (Loss)
Previous fair value
Aguirre (total portfolio
*
December 31, 2021
Unrealized Holding Gain or Loss—Equity ……….. 10,348
Fair Value Adjustment …………………………….. 10,348
(e) January 1, 2022 sale entry: