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)
Exercise C-17 (15 minutes)
1. Return on total assets (ROA)
2. Profit margin
Nike: $3,760 / $32,376 = 11.6%
3. Nike.
B-22
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
Cash …………………………………………………………………….
Gain on Sale of Debt Investments ……………………
100
Debt Investments—Trading …………………………..
Record sale of
Verizon
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.
Nov. 1
Debt Investments—Trading …………………………..
40,000
40,000
Purchased
Walmart
Cash ……………………………………………………………….
18,000
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
$68,000 $69,500 $1,500
Part 3
Dec. 31
Fair Value Adjustment—Trading ……………………
1,500
1,500
B-24
Problem C-2A (60 minutes)
Part 1
Year 1
Jan. 20
20,500
20,500
Feb. 9
55,440
55,440
40,500
40,500
Dec. 31
3,910
3,910
*
Cost
Fair Value
J & J ………………
$ 20,500
$ 21,500
Mattel …………….
40,500
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
Loss on Sale of Debt Investments …………………………..
4,650
Debt Investments—AFS …………………………………………….
40,500
Sold
July 22
Debt Investments—AFS …………………………..……………………..
13,500
Cash …………………………………………………………………………
13,500
Purchased
Aug. 19
Debt Investments—AFS ………………………………………………….
15,300
Cash …………………………………………………………………………
15,300
Purchased Kodak bonds.
Dec. 31
Fair Value Adjustment—AFS* …………………………………………
1,175
Unrealized Gain—Equity ……………………………………………
1,175
Adjustment to fair value of LT AFS portfolio.
*
Cost
Fair Value
Kodak ……………….
$15,300
$17,325
Sara Lee ……………
13,500
12,000
Sony …………………
Total …………………
$84,240
We can also use a T-account to determine the needed adjustment to fair value:
12/31/Year 2—F.V. Adj—AFS (LT)
Unadj.
3,910
Adj.
1,175
End.
5,085
B-26
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
Cash …………………………………………………………………………
50,400
Purchased
Aug. 3
Cash ………………………………………………………………………………
9,750
Loss on Sale of Debt Investments …………………………..
3,750
Debt Investments—AFS …………………………………………….
13,500
Sold
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
Adjustment to fair value of LT AFS portfolio.
*
Cost
Fair Value
Black & Decker ……………..
$ 50,400
$ 54,600
Microsoft ………………………
$213,200 – $211,200 = $2,000 (fair value exceeds cost)
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
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 ……………………………………….
Sale of Kodak ……………………………………..
Total realized gain (loss) ………………………
$ 5,085
B-28
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
Nov. 13
Debt Investments—AFS ………………………………….
Cash …………………………………………………………
Purchased
Dec. 9
Cash ………………………………………………………………
Loss on Sale of Debt Investments …………………..
20,300
Debt Investments—AFS* …………………………..
Dec. 31
Fair Value Adjustment—AFS* …………………………
22,550
Unrealized Loss—Equity ………………………….
22,550
Adjustment to fair value for AFS securities.
Available-for-sale securities portfolio at December 31 year end:
Security
Cost
Fair Value
Company B notes …..
$ 79,690
$ 81,000
Company C bonds ….
Company X bonds ….
Company Z notes ……
Fair Value Adjustment—AFS account:
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
Only realized gains or realized losses on the sale of available-for–sale
Realized gains (losses) for the year
Securities Sold
Cost
Sale
Gain (Loss)
Company B notes …………………………………
Company A bonds ………………………………..
B-30
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).
Stock Investments ………………………………………………..
98,000
Cash ……………………………………………………….
98,000
Purchased shares of
PepsiCo
20
Stock Investments ………………………………………………..
16,000
Cash ……………………………………………………….
16,000
Purchased shares of
Xerox
Aug. 15
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 ………………….
12,000
Sold 2,000 shares of
Gem
.
*2,000 sh x $30 **$84,000 x (2,000 sh / 3,500 sh)
or 2000 sh x $24
Cash ……………………………………………………………….
5,000
Dividend Revenue ……………………………………..
5,000
Received dividends on
PepsiCo
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
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
Part 5
(a) Income statement
B-32
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
Equity Method Investments …………………………………………….
232,800
Earnings from Equity Method Investments …………………
232,800
($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).
Equity Method Investments …………………………………………….
295,200
Earnings from Equity Method Investments …………………
295,200
($1,476,000 x 20%).
Year 3
Jan. 2
Cash ………………………………………………………………………………
54,200
Gain on Sale of Stock Investments …………………………..
2,000
Equity Method Investments* …………………………..
52,200
Problem C-6A (30 minutes)
Journal entries—Assuming NO significant influence
Year 1
Jan. 5
Stock Investments ……………………………………………………….
1,560,000
Cash ……………………………………………………….
1,560,000
Oct. 23
Cash ………………………………………………………………………………
192,000
Dividend Revenue …………………………………………………….
Received cash dividend (60,000 sh x $3.20).
Dec. 31
240,000
Unrealized Gain—Income …………………………..
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
Year 3
Jan. 2
Cash ………………………………………………………………………………
54,200
Gain on Sale of Stock Investments …………………………..
Sold Kildaire shares. *3% x $1,560,000
B-34
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 …………………………..
105,000
Cash ……………………………………………………….
105,000
Purchased
Kroger
Debt Investments—Trading …………………………..
60,000
Cash ……………………………………………………….
60,000
Purchased
Ford
Cash …………………………………………………………………….
Gain on Sale of Debt Investments ……………………
Debt Investments—Trading …………………………..
Record sale of
Target
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.
Oct. 12
Debt Investments—Trading …………………………..
120,000
Cash ……………………………………………………….
120,000
Purchased
Marshall
bonds at $120,000.
Cash ……………………………………………………………….
54,000
Debt Investments—Trading ………………………..
60,000
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
B-36
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 …………………
Ford …………………..
Polaroid ……………..
Adj.
End.