CHAPTER 17
SOLUTIONS TO B EXERCISES
E17-1B (10–15 minutes)
(a) 2 (b) 1 (c) 3 (d) 1 (e) 2 (f) 2
E17-2B (15–20 minutes)
(a) July 1, 2014
Held-to-Maturity Securities ……………………………….. 250,000
Cash …………………………………………………………. 250,000
(b) December 31, 2014
E17-3B (15–20 minutes)
(a) January 1, 2014
Held-to-Maturity Securities ………………………. 428,938
(b) Schedule of Interest Revenue and Bond Discount Amortization
Effective Interest Method
5% Bonds Sold to Yield 7%
Date
Cash
Received
Interest
Revenue
Discount
Amortized
Carrying Amount
of Bonds
1/1/14
—
—
—
$428,938
6/30/14
$12,500
$15,013
$2,513
431,451
6/30/15
436,744
12/31/15
439,530
12/31/16
445,397
(c) June 30, 2014
Cash ……………………………………………………….. 12,500
Held-to-Maturity Securities ………………………. 2,513
E17-4B (10–15 minutes)
(a) January 1, 2014
Available-for-Sale Securities …………………….. 428,938
Cash …………………………………………………. 428,638
(b) June 30, 2014
Cash ……………………………………………………….. 12,500
Available-for-Sale Securities …………………….. 2,513
Interest Revenue ……………………………….. 15,013
December 31, 2014
(c) December 31, 2015
Unrealized Holding Gain or Loss—Equity ….. 10,478
Securities Fair Value Adjustment—
Available-for-Sale ………………………….. 10,478
Cost
Fair Value
Unrealized
Holding
Gain (Loss)
E17-5B (20–30 minutes)
(a) Schedule of Interest Revenue and Bond Discount Amortization
Straight-Line Method
8% Bond Purchased to Yield 7%
Date
Cash
Received
Interest
Revenue
Bond Discount
Amortization
Carrying Amount
of Bonds
1/1/14
—
—
—
$442,376
12/31/15
**($400,000 – $442,376) ÷ 20 = $2,119
(b) Schedule of Interest Revenue and Bond Discount Amortization
Effective-Interest Method
8% Bond Purchased to Yield 7%
Date
Cash
Received
Interest
Revenue
Bond Discount
Amortization
Carrying Amount
of Bonds
1/1/14
—
—
—
$442,376
$30,966*
12/31/16
(c) December 31, 2015
Cash ……………………………………………………………… 32,000
Held-to-Maturity Securities ………………………. 2,119
Interest Revenue …………………………………….. 29,881
(d) December 31, 2015
E17-6B (10–15 minutes)
(a) Unrealized Holding Gain or Loss—
Income …………………………………………………………. 15,000
Securities Fair Value Adjustment—
Trading …………………………………………………. 15,000
E17-7B (10–15 minutes)
(a) December 31, 2014:
Securities Fair Value Adjustment (Trading) ……….. 8,000
Unrealized Holding Gain or Loss—Income ……. 8,000
E17-7B (Continued)
(c) At December 31, 2015:
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
JAK stock
$ 40,000
$ 47,600
($ 7,600
Kibby stock
101,000
95,400
(5,600)
Total of portfolio
$141,000
$143,000
2,000
adjustment balance—Dr.
adjustment—Cr.
($(6,000)
E17-8B (5–10 minutes)
The unrealized gains and losses resulting from changes in the fair value of
available-for-sale securities are recorded in an Unrealized Holding Gain or
Loss account that is reported as other comprehensive income and as
E17-9B (10–15 minutes)
(a) The portfolio should be reported at the fair value of $273,500. Since the
cost of the portfolio is $268,000, the unrealized holding gain is $5,500, of
Unrealized Holding Gain or Loss—Equity …………… 100
(b) The unrealized holding gain of $5,500 (including the previous balance of
$5,400) should be reported as an addition to stockholders’ equity, and the
ZORRO FOODS CORP.
Balance Sheet
As of December 31, 2014
____________________________________________________________
Current assets
Available-for-sale securities ………………………… $273,500
*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 Apple ……………………………. $31,100
E17-10B (20–25 minutes)
(a) ZORRO FOODS CORP.
Statement of Comprehensive Income
For the Year Ended December 31, 2014
_____________________________________________________________
Net income …………………………………………………………………… $689,600
Comprehensive net income …………………………………………… $689,700
(b) ZORRO FOODS CORP.
Statement of Comprehensive Income
For the Year Ended December 31, 2015
_____________________________________________________________
Net income …………………………………………………….. $235,000
Other comprehensive income
E17-11B (10–15 minutes)
(a) The total purchase price of these investments is:
The purchase entries will be:
March 31, 2014
Trading Securities ……………………………………………. 543,650
Cash ………………………………………………………… 543,650
E17-11B (Continued)
(b) Gross selling price of 10,000 shares at $26.25……………….. $262,500
Less: Commissions, taxes, and fees ……………………………. (1,550)
(c)
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Carrot
$326,190*
$450,000
$123,810
Pepper
7,390
6,100
((1,290)
Onions
235,610
246,500
10,890
Total portfolio value
$569,190
$702,600
adjustment balance
adjustment—Cr.
$133,410
E17-12B (15–20 minutes)
Situation 1: Journal entries by People Tables:
To record purchase of 750,000 shares of Robot Sofas at a cost of $8.50 per
share:
April 1, 2014
To record the dividend revenue from Robot Sofas:
August 8, 2014
*($9.00 – $8.50) X 750,000 shares = $375,000
Situation 2: Journal entries by Mica Company:
To record the purchase of 40% of Santos Corporation’s common stock:
January 1, 2014
E17-12B (Continued)
To record the receipt of cash dividends from Santos Corp.:
October 25, 2014
E17-13B (20–25 minutes)
(a) $360,000, the increase to the Investment account.
E17-14B (10–15 minutes)
1. Trading Securities (1,000 shares X $22) ……………… 22,000
Cash …………………………………………………….. 22,000
E17-15B (15–20 minutes)
(a) Securities Fair Value Adjustment (Trading) …………. 18,500
Unrealized Holding Gain or Loss—Income …… 18,500
(d)
Securities
Cost
Fair Value
Unrealized
Holding Gain
(Loss)
Dora Corp., Common
$268,500
$272,000
$ 3,500
Boots and Boots, Preferred
100,000
103,900
3,900
Total portfolio
$368,500
$375,900
Securities fair value adjustment—Cr.
$(11,100)
E17-16B (15–20 minutes)
(a) June 18, 2015
Cash ……………………………………………………………… 150,000
Dividend Revenue …………………………………… 150,000
E17-16B (Continued)
December 31, 2015
Unrealized Holding Gain or Loss—
Equity ……………………………………………………….. 225,000
(b) June 18, 2015
Cash …………………………………………………………….. 150,000
Investment in Overload Inc. ……………………. 150,000
(25% X $1,200,000) ………………………………. 300,000
(c)
Fair Value
Method
Equity
Method
Investment amount (balance sheet)
$3,375,000
*$3,600,000*
Dividend revenue (income statement)
Revenue from investment (income statement)
E17-17B (10–15 minutes)
Investment in UnderTech Stock ………………………… 280,000
Cash ………………………………………………………… 280,000
E17-18B (15–20 minutes)
(a) Securities Fair Value Adjustment
(Available-for-Sale) ………………………………………… 75,000
Available-for-Sale Securities ……………………….. 75,000
(b) The new cost basis is $425,000. GAAP indicates that the difference
between the carrying amount and the maturity value should not be
E17-19B (15–20 Minutes)
(a) Investment in Azul Company Stock ………………….. 21,000
Unrealized Holding Gain or Loss
($221,000 – $200,000) …………………………….. 21,000
E17-20B (15–20 minutes)
(a) Net income before security gains or losses ………. $1,200,000
Sale of Investment in Tiger Inc. stock
($278,000 – $260,000) ……………………………………. 18,000
E17-21B (15–20 minutes)
(a) Net income before security gains and losses ………. $360,000
Investment in debt securities ($59,000 – $60,000) … (1,000)
Investment in Olive Company stock
($430,000 – $400,000) …………………………..………….. 30,000
*E17-22B (15–20 minutes)
(a) Put Option ………………………………………………………… 800
Cash ………………………………………………………….. 800
(c) Unrealized holding gain: $4,750 ($5,000 – $250)
*E17-23B (20–25 minutes)
(a)
6/30/12
(b)
12/31/12
Fixed-rate debt ………………………………..
$500,000
$500,000
Fixed rate (8% ÷ 2) …………………………..
4%
4%
Semiannual debt payment ……………….
Net income effect ……………………..
Swap variable rate
5.6% X 1/2 X $500,000 …………………..
6.2% X 1/2 X $500,000 …………………..
0
Net interest expense ……………………….
$ 14,000
$ 15,500
Note: An interest rate swap in which a company changes its interest
payments from fixed to variable is a fair value hedge because the changes in
fair value of both the derivative and the hedged liability offset one another.
*E17-24B (20–25 minutes)
(a) and (b)
12/31/12
12/31/12
Variable-rate debt …………………………………..
$1,000,000
($1,000,000
Variable rate …………………………………………..
6.2%
6.9%
Debt payment …………………………………………
($ 62,000
$ 69,000
Debt payment …………………………………………
Swap variable received …………………………..
Net income effect …………………………...
Swap payable—fixed ………………………………
Net interest expense ……………………………….
($ 70,000
($ 70,000
*E17-25B (15–20 minutes)
(a) Interest Expense ……………………………………………… 150,000
Cash (6.0% X $5,000,000 X 1/2) …………………… 150,000
*E17-26B (20–25 minutes)
(a) July 10, 2014
(b) September 30, 2014
Call Option ………………………………………………………. 700
(c) December 31, 2014
Call Option ($3 X 700) ………………………………………. 2,100
Unrealized Holding Gain or Loss—Income …. 2,100
(d) January 31, 2015
Unrealized Holding Gain or Loss—Income ………… 700
Call Option ($1 X 700) ……………………………….. 700
*Value of Call Option at settlement:
Call Option
700
290
700
360
700
*E17-27B (25–30 minutes)
(a) June 1, 2014
Memorandum entry to indicate entering into the futures contract.
(d) November 1, 2014
Gold Inventory …………………………………………………. 82,500
Cash ($825 X 100 ounces) ………………………….. 82,500
(e) December 15, 2014
Cash ……………………………………………………………….. 710,000
Sales Revenue ………………………………………….. 710,000
*E17-27B (Continued)
(f) LOCKET JEWELRY CO.
Partial Income Statement
For the Quarter Ended December 31, 2014
Sales revenue ………………………………………………………… $710,000
Cost of goods sold ………………………………………………… 305,500*