C-21
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 …………………………
20,000
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
Debt Investments—Trading …………………………
40,000
40,000
Purchased
Walmart
Cash …………………………………………………………..
18,000
2,000
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
Part 3
Dec. 31
Fair Value Adjustment—Trading ………………..
1,500
1,500
C-23
Problem C-2A (60 minutes)
Part 1
Year 1
Jan. 20
20,500
20,500
Feb. 9
55,440
55,440
June 12
40,500
40,500
Dec. 31
3,910
3,910
*
Cost
Fair Value
J & J ………….
$ 20,500
$ 21,500
Mattel ………..
40,500
We can also use a T-account to determine the needed adjustment to fair value:
12/31/Year 1—F.V. Adj—AFS (LT)
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 ……….
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
C-25
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 …………………….
Total …………………………...
$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
Total realized gain (loss) ………………………
$ 5,085
C-27
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* ………………………….
4,860
Unrealized Gain—Equity …………………………..
4,860
Adjustment to fair value for AFS securities.
Ending year available-for-sale securities portfolio at Dec 31:
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:
Beg.: $1,357,630 – $1,357,430 = $ 200 Dr. balance at beginning of year
Problem C-3A (concluded)
Part 2
Disclosure
The portfolio of available-for-sale securities is reported on the December 31
Part 3
Realized: Only realized gains and/or realized losses on the sale of available-
for-sale securities appear on the income statement.
C-29
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
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).
Cash* ………………………………………………………….
60,000
Stock Investments** ………………………………..
48,000
Gain on Sale of Stock Investments …………
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).
Cash …………………………………………………………..
3,000
Dividend Revenue ………………………………….
3,000
Received dividends on
PepsiCo
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
Part 4
Current Assets
Stock investments (as cost) ………………………….. $150,000
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
C-31
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
Sold Kildaire shares. 3% x $1,740,000*
* Investment carrying value at Jan. 2, Year 3
Original cost ………………………………….
$1,560,000
Less Year 1 dividends ……………………
Less Year 2 dividends ……………………
Plus Year 2 earnings ……………………..
Carrying value at date of sale …………
$1,740,000
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 …………………………..…..
Received cash dividend (60,000 sh x $3.20).
Dec. 31
240,000
Unrealized Gain—Income …………………….
$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
*60,000 sh x $32.00 = $1,920,000
$360,000 Dr. – $240,000 Dr. = $120,000 Dr.
Year 3
Jan. 2
Cash ………………………………………………………..
54,200
Stock Investments* …………………………..…
46,800
Gain on Sale of Stock Investments ………
Sold Kildaire shares. *3% x $1,560,000
C-33
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
Debt Investments—Trading …………………………
Cash …………………………………………………………..
54,000
6,000
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
Part 3
Dec. 31
Fair Value Adjustment—Trading ………………..
4,500
4,500
C-35
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
Ford ………….
Polaroid …….
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)
Unadj.
0
Adj.
End.
Problem C-2B (Continued)
Year 2
Apr. 26
Cash ………………………………………………………..
51,250
Loss on Sale of Debt Investments …………….
5,000
Debt Investments—AFS ……………………….
56,250
Sold
Ford
notes.
Debt Investments—AFS …………………………….
34,650
Cash …………………………………………………..
34,650
Purchased
Debt Investments—AFS …………………………….
Cash ………………………………………………….
Purchased
Nov. 27
Cash ……………………………………………………….
Gain on Sale of Debt Investments ………..
2,400
28,200
Sold
Polaroid
Dec. 31
Unrealized Gain—Equity …………………………….
1,400
Fair Value Adjustment—AFS* ……………….
1,400
Adjustment to fair value of LT AFS portfolio.
*
Cost _
Fair Value
Apple ……..
$30,600
$31,000
Duracell ….
34,650
32,400
Sears ……..
We can also use a T-account to help determine the needed adjustment to fair value:
12/31/Year 2—F.V. Adj—AFS (LT)
Unadj.
1,950
End.