EXERCISE 17-9 (Continued)
(b) The unrealized holding gain of $1,500 (including the previous balance of
$200) should be reported as an addition to stockholders’ equity and the
Fair Value Adjustment (Available-for-Sale) account balance of $1,500
should be added to the cost of the securities account.
WENGER, INC.
Balance Sheet
As of December 31, 2012
____________________________________________________________
Current assets:
Equity investments …………………………………….. $54,500
*Note: The unrealized holding gain could also be disclosed.
(c) Computation of realized gain or loss on sale of stock:
Net proceeds from sale of security A …………… $15,300
Cost of security A ………………………………………. 17,500
Loss on investments ………………………………….. ($ 2,200)
EXERCISE 17-10 (20–25 minutes)
(a) WENGER, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2012
_____________________________________________________________
17–22
EXERCISE 17-10 (Continued)
(b) WENGER, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2013
____________________________________________________________
EXERCISE 17-11 (20–25 minutes)
(a) The total purchase price of these investments is:
Gonzalez: (9,000 X $33.50) + $1,980 = $303,480
Belmont: (5,000 X $52.00) + $3,370 = $263,370
Thep: (7,000 X $26.50) + $4,910 = $190,410
The purchase entries will be:
EXERCISE 17-11 (Continued)
(b) Gross selling price of 3,000 shares at $35 …………… $105,000
Less: Commissions, taxes, and fees …………………. (2,850)
(c)
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Gonzalez Co.
$202,320*
$180,000(1)
$(22,320)
Belmont Co.
263,370
275,000(2)
(11,630
Thep Co.
Total portfolio value
$656,100
EXERCISE 17-12 (15–20 minutes)
Situation 1: Journal entries by Hatcher Cosmetics:
To record purchase of 20,000 shares of Ramirez Fashion at a cost of $14
per share:
17–24
EXERCISE 17-12 (Continued)
To record the dividend revenue from Ramirez Fashion:
June 30, 2012
Cash ………………………………………………………………………. 7,500
Dividend Revenue ($75,000 X 10%) ……………………. 7,500
Situation 2: Journal entries by Holmes, Inc.:
To record the purchase of 25% of Nadal Corporation’s common stock:
January 1, 2012
Equity Investments (Nadal Corp.) …………………………….. 67,500
Cash [(30,000 X 25%) X $9] ………………………………… 67,500
June 15, 2012
Cash ($36,000 X 25%) ………………………………………………. 9,000
Equity Investments (Nadal Corp.) ………………………. 9,000
EXERCISE 17-13 (10–15 minutes)
(a) $130,000, the increase to the Equity Investments account.
EXERCISE 17-14 (10–15 minutes)
1. Equity Investments (Trading) …………………………... 12,000
Cash (300 shares X $40) ……………………….. 12,000
EXERCISE 17-15 (15–20 minutes)
(a) Unrealized Holding Gain or Loss—Income ………….. 5,900
Fair Value Adjustment (Trading) ………………….. 5,900
17–26
EXERCISE 17-15 (Continued)
(d)
Securities
Cost
Fair Value
Beilman Corp., Common
$180,000
$175,000
McDowell Corp., Common
53,800
50,400
EXERCISE 17-16 (15–20 minutes)
(a) December 31, 2012
Equity Investments (Available-for-Sale) ……… 1,250,000
Cash …………………………………………………. 1,250,000
June 30, 2013
Duncan, Inc., Preferred
Total portfolio
$293,800
$283,400
Previous fair value adjustment—Cr.
Fair value adjustment—Cr.
EXERCISE 17-16 (Continued)
(b) December 31, 2012
Equity Investments (Handerson Stock) ……………. 1,250,000
Cash ……………………………………………………….. 1,250,000
June 30, 2013
(c)
Fair Value
Method
Equity Method
Investment amount (balance sheet)
$1,350,000
*$1,316,000*
Dividend revenue (income statement)
80,000
0
Revenue from investment
(income statement)
146,000
EXERCISE 17-17 (10–15 minutes)
Equity Investments (Pirates Co.) ……………………… 200,000
Cash ……………………………………………………….. 200,000
17–28
EXERCISE 17-18 (15–20 minutes)
(a) The entry to record the impairment is as follows:
Loss on Impairment ($800,000 – $740,000) ………. 60,000
Debt Investments (Available-for-Sale) ………. 60,000
It should be noted that the first entry records the impairment. The
second entry is an entry to record fair value for any remaining available–
for-sale securities.
EXERCISE 17-19 (15-20 Minutes)
(a) Unrealized Holding Gain or Loss—Income
($100,000 – $80,000) …………………………………….. 20,000
Equity Investments (Arroyo Company) …….. 20,000
17–29
EXERCISE 17-20 (15-20 minutes)
(a) Net income before security gains or losses …………. $905,000
Sale of Investment in Woods Inc. stock
($195,000 – $180,000) ………………………………………. 15,000
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
Investment in Chen Company stock
*EXERCISE 17-22 (15–20 minutes)
(a) Call Option ………………………………………………………… 300
Cash …………………………………………………………… 300
17–30
*EXERCISE 17-23 (20–25 minutes)
(a)
6/30/12
(b)
12/31/12
Fixed-rate debt
$100,000
$100,000
Fixed rate (6% ÷ 2)
X3%
X3%
Semiannual debt payment
$ 3,000
$ 3,000
Swap fixed receipt
3,000
3,000
*EXERCISE 17-24 (20–25 minutes)
(a)
12/31/12
(b)
12/31/13
Variable-rate debt
$10,000,000
$10,000,000
Variable rate
X5.8%
X6.6%
Debt payment
$ 580,000
$ 660,000
Debt payment
580,000
660,000
Swap variable received
(580,000)
(660,000)
Net income effect
$ 0
$ 0
600,000
600,000
Net interest expense
$ 600,000
$ 600,000
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
0
Net interest expense
$ 2,850
$ 3,350
17–31
*EXERCISE 17-25 (15–20 minutes)
(a) Interest Expense ……………………………………………… 75,000
Cash (7.5% X 1,000,000) …………………………….. 75,000
*EXERCISE 17-26 (20–25 minutes)
(a) August 15, 2012
Call Option ……………………………………………………… 360
Cash ………………………………………………………… 360
17–32
*EXERCISE 17-26 (Continued)
(d) January 15, 2013
Call Option ($1 X 400) ………………………………………. 400
Unrealized Holding Gain or Loss—Income …. 400
*Value of Call Option at settlement:
Call Option
360
180
3,200
800
400
115
35
2,830
*EXERCISE 17-27 (25–30 minutes)
17–33
*EXERCISE 17-27 (Continued)
(d) October 5, 2012
Inventory ………………………………………………………… 105,000
Cash ($525 X 200 ounces) …………………………. 105,000
Note to instructor: In practice, futures contracts are settled on a daily basis;
for our purposes, we show only one settlement for the entire amount.
(e) December 15, 2012
Cash ……………………………………………………………….. 250,000
Sales Revenue ………………………………………….. 250,000
(f) HART GOLF CO.
Partial Income Statement
For the Quarter Ended December 31, 2012
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
period for debt securities first classified as held-to-maturity and then classified as available-for-sale.
Bond premium amortization is also involved.
Problem 17-2 (Time 30–40 minutes)
Purpose—The student is required to prepare journal entries and adjusting entries for available-for-sale
debt securities, along with an amortization schedule and a discussion of financial statement presentation.
Problem 17-3 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the differentiation in accounting treatments
for debt and equity security investments. The student is required to prepare the necessary journal
entries to properly reflect transactions relating to available-for-sale debt and equity securities.
Problem 17-4 (Time 25–35 minutes)
Purpose—the student is required to distinguish between the existence of a bond premium or discount
and the use of the effective-interest method and the straight-line method. The student is also required
to prepare the adjusting entries at two year-ends for available-for-sale debt securities.
Problem 17-5 (Time 25–35 minutes)
Purpose—the student is required to prepare journal entries for the sale and purchase of available-for-
sale equity securities along with the year-end adjusting entry for unrealized holding gains or losses and
to discuss the financial statement presentation.
Problem 17-6 (Time 25–35 minutes)
Purpose—the student is required to prepare during-the-year and year-end entries for trading equity
securities and to explain how the entries would differ if the securities were classified as available-for-sale.
Problem 17-7 (Time 25–35 minutes)
Purpose—the student is required to prepare during-the-year and year-end entries for available-for-sale
debt securities and to explain how the entries would differ if the securities were classified as held–to–
maturity.
Problem 17-8 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the accounting for trading and available-for-
sale equity securities. The student is required to apply the fair value method to both classes of securities
and describe how they would be reflected in the body and notes to the financial statements.
Problem 17-9 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the proper accounting treatment with respect
to available-for-sale equity securities and the resulting effect of a reclassification from available-for-sale
to trading status. The student is required to discuss the descriptions and amounts which would be
reported on the face of the balance sheet with regard to these investments, plus prepare any necessary
note disclosures.
Problem 17-10 (Time 20–30 minutes)
Purpose—to provide the student with an opportunity to prepare entries for available-for-sale transactions
and to report the results in a comprehensive income statement and a balance sheet.
Problem 17-11 (Time 30–40 minutes)
Purpose—to provide the student with an understanding of the reporting problems associated with
available-for-sale equity securities. Description and amounts that should be reported on a company’s
comparative financial statements are then required.
17–35
Time and Purpose of Problems (Continued)
Problem 17-12 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the reporting problems associated with
available-for-sale equity securities. Description and amounts that should be reported on a company’s
comparative financial statements are then required.
*Problem 17–13 (Time 20–25 minutes)
Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration
for a stand-alone derivative (call option).
*Problem 17-14 (Time 20–25 minutes)
Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration
for a stand-alone derivative (put option).
*Problem 17-15 (Time 20–25 minutes)
Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration
for a stand-alone derivative (put option).
*Problem 17-16 (Time 30–40 minutes)
Purpose—the student is provided with an opportunity to prepare the entries for a fair value hedge in the
context of an interest rate swap, including how the effects of the swap will be reported in the financial
statements.
*Problem 17-17 (Time 25–35 minutes)
Purpose—the student is provided with an opportunity to prepare the entries for a cash flow hedge in the
context of an option contract on the purchase of inventory, including how the effects of the hedge will
be reported in the financial statements.
*Problem 17-18 (Time 25–35 minutes)
Purpose—the student is provided with an opportunity to prepare the entries for a fair value hedge in the
context of the use of a put option to hedge an available-for-sale security, including how the effects for
the hedging instrument and hedged item will be reported in the financial statements.
SOLUTIONS TO PROBLEMS
PROBLEM 17-1
(a) December 31, 2010
Debt Investments (Held-to-Maturity) ……. 108,660
Cash …………………………………………. 108,660
(c) December 31, 2013
Cash …………………………..…………………….. 7,000
Debt Investments
(Held-to-Maturity) …………………….. 1,728
Interest Revenue ……………………….. 5,272
(e) December 31, 2011
Cash …………………………..…………………….. 7,000
Debt Investments
(Available-for-Sale) ………………….. 1,567
Interest Revenue ……………………….. 5,433
17–37
PROBLEM 17-1 (Continued)
(f) December 31, 2013
Cash …………………………………………………. 7,000
Debt Investments
(Available-for-Sale) ………………….. 1,728
Interest Revenue ……………………….. 5,272
Debt Investments (Available-for-Sale)
PROBLEM 17-2
(a) January 1, 2012 purchase entry:
Debt Investments (Available-for-Sale) ……………… 369,114
Cash ………………………………………………………. 369,114
(b) The amortization schedule is as follows:
Schedule of Interest Revenue and Bond Discount
Amortization—Effective-Interest Method
8% Bonds Purchased to Yield 10%
1/1/12
7/1/12
16,000
$ 2,456
371,570
12/31/12
16,000
18,579
2,579
374,149
7/1/13
16,000
18,707
2,707
376,856
12/31/13
16,000
18,843
2,843
379,699
Interest
Receivable
Or
Interest
Bond
Discount
Carrying
Amount of
7/1/14
16,000
18,985
2,985
382,684
12/31/14
16,000
19,134
3,134
385,818
7/1/15
16,000
19,291
3,291
389,109
12/31/15
16,000
19,455
3,455
392,564
7/1/16
16,000
19,628
3,628
396,192
12/31/16
3,808
400,000
Total
$30,886
(c) Interest entries:
July 1, 2012
Cash …………………………..………………………………….. 16,000
Debt Investments (Available-for-Sale) ………………. 2,456
Interest Revenue …………………………..…………. 18,456
17–39
PROBLEM 17-2 (Continued)
(d) December 31, 2013 adjusting entry:
Securities
Available-for-Sale
Portfolio Cost
Fair Value
Unrealized
Gain (Loss)
Aguirre (total portfolio
*
December 31, 2013
Unrealized Holding Gain or Loss—Equity ……….. 10,348
Fair Value Adjustment
(Available-for-Sale) ………………………………. 10,348
Previous fair value
PROBLEM 17-3
(a) Debt Investments (Available-for-Sale) ……………… 162,000*
Equity Investments (Available-for-Sale) …………… 37,400
Interest Revenue ($50,000 X .12 X 4/12) …………… 2,000
Investments ……………………………………………. 201,400
*[$110,000 + ($50,000 X 1.04)]
(c) December 31, 2012
Available-for-Sale Portfolio
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Sharapova Company stock
$ 37,400
$ 31,800
$ (5,600)
U.S. government bonds
110,000
124,700
14,700