Exercise C-16 (15 minutes)
Prescrip Co.
Statement of Comprehensive Income
For Year Ended December 31
Net income ………………………………………………………….. $ 10,000
Change in value of available-for-sale securities .. $(2,000)
Change in foreign currency translation ……………. 1,400
Exercise C-17 (15 minutes)
1. Return on total assets (ROA)
Nike: $3,760 / [($21,396 + $21,597) / 2] = 17.5%
Under Armour: $257 / [($3,644 + $ 2,866) / 2] = 7.9%
2. Profit margin
Nike: $3,760 / $32,376 = 11.6%
Under Armour: $257 / $4,825 = 5.3%
3. Nike.
Explanation: Nike’s return on total assets exceeds Under Armour’s
return in the current year. Also, Nike’s total asset turnover of 1.51
exceeds Under Armour’s 1.48, but it is only slightly better.
PROBLEM SET A
Problem C-1A (40 minutes)
Part 1
Aug. 2
Debt Investments—Trading …………………………..
10,000
Cash ……………………………………………………….
10,000
Purchased
Verizon
bonds at $10,000.
Debt Investments—Trading …………………………..
35,000
35,000
Purchased
Apple
Debt Investments—Trading …………………………..
Purchased
Mastercard
Oct. 21
Cash …………………………………………………………………….
2,100
Gain on Sale of Debt Investments ……………………
100
Debt Investments—Trading …………………………..
2,000
Record sale of
Verizon
trading securities with a
$2,000 cost in return for $2,100 cash.
23
Cash …………………………………………………………………….
15,400
Gain on Sale of Debt Investments ……………………
400
Debt Investments—Trading …………………………..
15,000
Record sale of
Apple
trading securities with a
$15,000 cost in return for $15,400 cash.
Debt Investments—Trading …………………………..
40,000
40,000
Purchased
Walmart
Cash ……………………………………………………………….
18,000
2,000
Debt Investments—Trading ………………………..
20,000
Record sale of
Mastercard
Problem C-1A (Continued)
Part 2
Unrealized
Portfolio of Trading Securities Cost Fair Value Gain (Loss)
Verizon bonds ($10,000 – $2,000) ………………….. $ 8,000 $ 8,500
Apple bonds ($35,000 – $15,000) …………………… 20,000 22,000
Walmart bonds ……………………………………………. 40,000 39,000
$68,000 $69,500 $1,500
Problem C-2A (60 minutes)
Part 1
Year 1
Jan. 20
20,500
20,500
Feb. 9
Debt Investments—AFS …………………………………
55,440
Cash ………………………………………………………..
55,440
Purchased
Debt Investments—AFS …………………………………
40,500
Cash ………………………………………………………..
40,500
Purchased
Dec. 31
3,910
3,910
*
Cost
Fair Value
J & J ………………
$ 20,500
$ 21,500
Sony ………………
55,440
52,500
Mattel …………….
40,500
46,350
Total ………………
$116,440
$120,350
FVA: $120,350 – $116,440 = $3,910
Problem C-2A (Continued)
Year 2
Apr. 15
Cash ………………………………………………………………………………
23,500
Gain on Sale of Debt Investments …………………………..
3,000
Debt Investments—AFS …………………………………………….
20,500
Sold
Johnson & Johnson
bonds.
Cash ………………………………………………………………………………
35,850
Debt Investments—AFS …………………………………………….
40,500
Sold
July 22
Debt Investments—AFS ………………………………………………….
13,500
Cash …………………………………………………………………………
13,500
Purchased
Sara Lee
notes.
Aug. 19
Debt Investments—AFS ………………………………………………….
15,300
Cash …………………………………………………………………………
15,300
Dec. 31
Unrealized Gain—Equity ……………………………………………
1,175
*
Cost
Fair Value
Kodak ……………….
$15,300
$17,325
Sara Lee ……………
13,500
12,000
Sony …………………
55,440
60,000
Total …………………
$84,240
$89,325
$89,325 – $84,240 = $5,085
Fair Value Adjustment account:
Required balance…… $5,085 Dr.
Unadjusted balance.. 3,910 Dr.
Required change…… $1,175 Dr.
We can also use a T-account to determine the needed adjustment to fair value:
Adj.
End.
Problem C-2A (Continued)
Year 3
Feb. 27
Debt Investments—AFS ………………………………………………….
160,800
Cash …………………………………………………………………………
160,800
Purchased
Microsoft
bonds.
Cash ………………………………………………………………………………
57,600
Gain on Sale of Debt Investments …………………………..
2,160
Debt Investments—AFS …………………………………………….
55,440
Sold
Sony
Debt Investments—AFS ………………………………………………….
50,400
Purchased
Aug. 3
Cash ………………………………………………………………………………
9,750
Loss on Sale of Debt Investments …………………………..
3,750
Debt Investments—AFS …………………………………………….
13,500
Sold
Sara Lee
notes.
Nov. 1
Cash ………………………………………………………………………………
20,475
Gain on Sale of Debt Investments …………………………..
5,175
Debt Investments—AFS …………………………………………….
15,300
Sold
Kodak
bonds.
Dec. 31
Unrealized Gain—Equity …………………………………………………
3,085
Fair Value Adjustment—AFS* …………………………..
3,085
We can also use a T-account to determine the needed adjustment to fair value:
12/31/Year 3—F.V. Adj—AFS (LT)
Unadj.
5,085
Adj.
3,085
End.
2,000
Problem C-2A (Concluded)
Part 2
Debt Investments
12/31/Yr. 1
12/31/Yr. 2
12/31/Yr. 3
Long-Term AFS Securities (cost)……………….
$116,440
$84,240
$211,200
Part 3
Year 1
Year 2
Year 3
Realized gains (losses)
Sale of Johnson & Johnson ………………..
$ 3,000
Sale of Mattel ……………………………………..
(4,650)
Sale of Sony ……………………………………….
$ 2,160
Total realized gain (loss) ………………………
Unrealized gains (losses) at year–end*…..
$ 3,910
$ 5,085
$ 2,000
*The unrealized gains (losses) at year-end are reported in the Fair Value
Adjustment—AFS account balance (see the matching row in part 2).
Problem C-3A (40 minutes)
Part 1
Jan. 29
Cash ………………………………………………………………
79,200
Loss on Sale of Debt Investments …………………..
490
Debt Investments—AFS* …………………………..
79,690
Sold
B
notes. *$159,380 x 1/2
Debt Investments—AFS ………………………………….
Cash …………………………………………………………
Purchased
Cash …………………………………………………………
267,900
Purchased
Dec. 9
Cash ………………………………………………………………
515,000
Loss on Sale of Debt Investments …………………..
20,300
Debt Investments—AFS* …………………………..
535,300
Sold
A
bonds. *Amount from beg. yr. portfolio
Dec. 31
Fair Value Adjustment—AFS* …………………………
22,550
Unrealized Loss—Equity ………………………….
22,550
Adjustment to fair value for AFS securities.
Security
Company B notes …..
Company C bonds ….
Company X bonds ….
Company Z notes ……
Fair Value Adjustment—AFS account:
$1,357,430 – $1,284,940 = $ 72,490 Cr. balance at beginning of year
$1,136,940 – $1,087,000 = 49,940 Cr. balance required at Dec. 31 yr-end
$ 22,550 Dr. to adjust cost to fair value
Problem C-3A (concluded)
Part 2
Disclosure
The portfolio of available-for-sale securities is reported on the December 31
balance sheet at its fair value of $1,087,000.
Part 3
Realized gains (losses) for the year
Securities Sold
Cost
Sale
Gain (Loss)
Company B notes …………………………………
$ 79,690
$ 79,200
$ (490)
Company A bonds ………………………………..
535,300
515,000
(20,300)
Realized gain (loss) ………………………………
$(20,790)
Problem C-4A (40 minutes)
Part 1
Apr. 16
Stock Investments ………………………………………………..
84,000
Cash ……………………………………………………….
84,000
Purchased shares of
Gem
(3,500 sh x $24).
July 7
Stock Investments ………………………………………………..
98,000
Cash ……………………………………………………….
98,000
Purchased shares of
PepsiCo
(2,000 sh x $49).
20
Stock Investments ………………………………………………..
16,000
Cash ……………………………………………………….
16,000
Purchased shares of
Xerox
(1,000 sh x $16).
Cash …………………………………………………………………….
3,500
Dividend Revenue …………………………………………..
3,500
Received dividends on
Gem
(3,500 sh x $1.00).
28
Cash* …………………………………………………………………..
60,000
Stock Investments** ………………………………………….
48,000
Gain on Sale of Stock Investments ………………….
Oct. 1
Cash ……………………………………………………………….
5,000
Dividend Revenue ……………………………………..
5,000
Received dividends on
PepsiCo
(2,000 sh x $2.50).
Dec. 15
Cash ……………………………………………………………….
1,500
Dividend Revenue ……………………………………..
1,500
Received dividends on
Gem
(1,500 sh x $1.00).
31
Cash ……………………………………………………………….
3,000
Dividend Revenue ……………………………………..
3,000
Problem C-4A (Continued)
Part 2
Comparison of Cost and Fair Values for Stock Investments Portfolio at Year-End
Unrealized
Cost Fair Value Gain (Loss)
Gem Co. 1,500 x $24 ………………………… $ 36,000
1,500 x $26 ………………………… $ 39,000
Part 3
Dec. 31
Unrealized Loss⎯Income ………………………………….
6,000
Fair Value Adjustment—Stock ……………………..
6,000
Record unrealized loss in fair value of ST portfolio.
Part 4
The balance sheet would report the cost of these short-term stock
investments at $150,000 and show a subtraction of $6,000 for the fair value
adjustment. This yields $144,000 as the fair value for these securities
reported in the current assets section.
Current Assets
Part 5
(a) Income statement
(i) Dividend Revenue, $13,000 [$3,500 + $5,000 + $1,500 + $3,000]
(ii) Gain on Sale of Stock Investments, $12,000
(iii) Unrealized Loss—Income, $6,000
(iv) Net effect on income is $19,000 [$13,000 + $12,000 – $6,000]
Problem C-5A (30 minutes)
Journal entries—Assuming significant influence
Year 1
Jan. 5
Equity Method Investments …………………………………………….
1,560,000
Cash …………………………………………………………………………
1,560,000
Purchased
Kildaire
shares.
Oct. 23
Cash ………………………………………………………………………………
192,000
Equity Method Investments …………………………..
192,000
Received cash dividend on
Kildaire
shares
(60,000 sh x $3.20).
Dec. 31
Equity Method Investments …………………………………………….
232,800
Earnings from Equity Method Investments …………………
232,800
Record equity in investee
Kildaire
earnings
($1,164,000 x 20%).
Year 2
Oct. 15
Cash ………………………………………………………………………………
156,000
Equity Method Investments …………………………..
156,000
Record cash dividend (60,000 sh x $2.60).
Dec. 31
Equity Method Investments …………………………………………….
295,200
Earnings from Equity Method Investments …………………
295,200
Record equity in investee
Kildaire
earnings
($1,476,000 x 20%).
Year 3
Jan. 2
Cash ………………………………………………………………………………
Gain on Sale of Stock Investments …………………………..
Equity Method Investments* …………………………..
Problem C-6A (30 minutes)
Journal entries—Assuming NO significant influence
Year 1
Jan. 5
Stock Investments ……………………………………………………….
1,560,000
Cash ……………………………………………………….
1,560,000
Purchased
Kildaire
shares.
Oct. 23
Cash ………………………………………………………………………………
192,000
Dividend Revenue …………………………………………………….
192,000
Received cash dividend (60,000 sh x $3.20).
Dec. 31
Fair Value Adjustment—Stock* …………………………..
240,000
Unrealized Gain—Income …………………………..
240,000
Record fair value adjustment to LT stock
portfolio.
*60,000 sh x $30.00 = $1,800,000
$1,800,000 – $1,560,000 = $240,000
Year 2
Oct. 15
Cash ………………………………………………………………………………
156,000
Dividend Revenue …………………………………………………….
156,000
Received cash dividends (60,000 sh x $2.60).
Dec. 31
120,000
Unrealized Gain—Income …………………………..
120,000
Record fair value adjustment to LT stock
portfolio.
*60,000 sh x $32.00 = $1,920,000
$1,920,000 – $1,560,000 = $360,000 Dr.
$360,000 Dr. – $240,000 Dr. = $120,000 Dr.
Jan. 2
Cash ………………………………………………………………………………
Stock Investments* …………………………………………………..
Gain on Sale of Stock Investments …………………………..
Sold Kildaire shares. *3% x $1,560,000
PROBLEM SET B
Problem C-1B (40 minutes)
Part 1
July 28
Debt Investments—Trading …………………………..
30,000
Cash ……………………………………………………….
30,000
Purchased
Target
bonds at $30,000.
Debt Investments—Trading …………………………..
Purchased
Kroger
Debt Investments—Trading …………………………..
60,000
60,000
Sep. 5
Cash …………………………………………………………………….
6,300
Gain on Sale of Debt Investments ……………………
300
Debt Investments—Trading …………………………..
6,000
Record sale of
Target
trading securities with a
$6,000 cost in return for $6,300 cash.
8
Cash …………………………………………………………………….
46,200
Gain on Sale of Debt Investments ……………………
1,200
Debt Investments—Trading …………………………..
45,000
Record sale of
Kroger
trading securities with a
$45,000 cost in return for $46,200 cash.
Debt Investments—Trading …………………………..
Cash ……………………………………………………………….
54,000
6,000
Problem C-1B (Continued)
Part 2
Unrealized
Portfolio of Trading Securities Cost Fair Value Gain (Loss)
Target bonds ($30,000 – $6,000) ……………………. $ 24,000 $ 25,500
Kroger bonds ($105,000 – $45,000) ……………….. 60,000 66,000
Marshall bonds ……………………………………………. 120,000 117,000
$204,000 $208,500 $4,500
Problem C-2B (60 minutes)
Part 1
Year 1
Mar. 10
Debt Investments—AFS …………………………………………………..
30,600
Cash …………………………………………………………………………
30,600
Purchased
Apple
bonds.
Debt Investments—AFS …………………………………………………..
56,250
Cash …………………………………………………………………………
56,250
Purchased
Ford
Debt Investments—AFS …………………………………………………..
28,200
Cash …………………………………………………………………………
28,200
Purchased
Polaroid
Dec. 31
Fair Value Adjustment—AFS* …………………………..
1,950
Unrealized Gain—Equity ……………………………………………
1,950
Adjustment to fair value of LT AFS portfolio.
*
Cost _
Fair Value
Apple …………………
$ 30,600
$ 33,000
Ford …………………..
56,250
54,600
Polaroid ……………..
28,200
29,400
Total…………………..
$115,050
$117,000
FVA: $117,000 – $115,050 = $1,950 Dr.
We can also use a T-account to help determine the needed adjustment to fair value:
12/31/Year 1—F.V. Adj—AFS (LT)
Adj.
End.