EXERCISE 17-7 (Continued)
(c) December 31, 2014
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Clemson Corp. stock
$20,000
$19,100
($ (900)
Buffaloes Co. stock
( 500)
EXERCISE 17-8 (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
EXERCISE 17-9 (10–15 minutes)
(a) The portfolio should be reported at the fair value of $54,500. Since the
cost of the portfolio is $53,000, the unrealized holding gain is $1,500, of
(b) The unrealized holding gain of $1,500 (including the previous balance of
$400) 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 investment account.
STEFFI GRAF, INC.
Balance Sheet
As of December 31, 2013
____________________________________________________________
Current assets:
Equity investments $54,500
(c) Computation of realized gain or loss on sale of stock:
Net proceeds from sale of security A $15,100
Cost of security A 17,500
Loss on sale of stock ($ 2,400)
EXERCISE 17-10 (20–25 minutes)
(a) STEFFI GRAF, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2013
_____________________________________________________________
Net income $120,000
(b) STEFFI GRAF, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2014
_____________________________________________________________
Net income $140,000
Other comprehensive income
Holding gains $40,000
Accumulated other comprehensive income:
Beginning balance, January 1, 2014 $1,100
EXERCISE 17-11 (20–25 minutes)
(a) The total purchase price of these investments is:
Sanchez: (10,000 X $33.50) + $1,980 = $336,980
EXERCISE 17-11 (Continued)
April 1, 2014
Equity Investments (available-for-sale) …………… 263,370
Cash ……………………………………………………… 263,370
September 10, 2014
Equity Investments (available-for-sale) …………… 190,410
Cash ……………………………………………………… 190,410
(b) Gross selling price of 4,000 shares at $35 $140,000
May 20, 2014
Cash ……………………………………………………………… 136,150
(c)
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Sanchez Co.
$202,188*
$180,000(1)
$(22,188)
Vicario Co.
263,370
275,000(2)
(11,630
WTA Co.
190,410
196,000(3)
5,590
Total portfolio value
*$336,980 X 0.6 = $202,188.
(1)(6,000 X $30) (2)(5,000 X $55) (3)(7,000 X $28)
December 31, 2014
EXERCISE 17-12 (15–20 minutes)
Situation 1: Journal entries by Conchita Cosmetics:
To record purchase of 20,000 shares of Martinez Fashion at a cost of $13
per share:
March 18, 2014
December 31, 2014
Fair Value Adjustment
(available-for-sale) ………………………………………………… 40,000
Unrealized Holding Gain or Loss—Equity …………… 40,000*
January 1, 2014
Equity Investments (Seles Corp.). ……………………………… 81,000
Cash [(30,000 X 30%) X $9] ………………………………… 81,000
EXERCISE 17-12 (Continued)
To record Monica’s share (30%) of Seles Corporation’s net income of $85,000:
December 31, 2014
EXERCISE 17-13 (10–15 minutes)
(a) $110,000, the increase to the Investment account.
EXERCISE 17-14 (10–15 minutes)
1. Equity Investments (trading)
2. Cash (100 shares X $45) ………………………………….. 4,500
3. Unrealized Holding Gain or Loss—Income ……….. 500
EXERCISE 17-15 (15–20 minutes)
(a) Unrealized Holding Gain or Loss—Income ………….. 7,900
Fair Value Adjustment (trading) …………………… 7,900
(d)
Cost
Fair Value
Unrealized
Gain (Loss)
$180,000
$175,000
$ (5,000)
53,800
50,400
(3,400)
EXERCISE 17-16 (15–20 minutes)
(a) December 31, 2013
Equity Investments (available-for-sale) ……….. 1,200,000
Cash ………………………………………………….. 1,200,000
EXERCISE 17-16 (Continued)
Fair Value Adjustment (available-for-sale) ….. 150,000
(b) December 31, 2013
Equity Investments (Kulikowski) ……………………… 1,200,000
Cash ……………………………………………………….. 1,200,000
(c)
Fair Value
Method
Equity Method
Investment amount (balance sheet)
$1,350,000
*$1,261,000*
Dividend revenue (income statement)
EXERCISE 17-17 (10–15 minutes)
Equity Investments (Edwards Co.) …………………… 180,000
EXERCISE 17-18 (15–20 minutes)
(a) Loss on Impairment ($800,000 – $720,000) ……….. 80,000
Debt Investments (available-for-sale) ………… 80,000
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
EXERCISE 17-20 (15-20 minutes)
(a) Net income before security gains or losses ………… $905,000
Sale of Investment in Woods Inc. stock
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
*EXERCISE 17-23 (20–25 minutes)
(a)
6/30/14
(b)
12/31/14
Fixed-rate debt
$100,000
$100,000
Fixed rate (6% ÷ 2)
3%
3%
Semiannual debt payment
Swap fixed receipt
3,000
3,000
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
Net interest expense
$ 2,850
$ 3,350
Note to instructor: An interest rate swap in which a company changes its
*EXERCISE 17-24 (20–25 minutes)
(a)
12/31/14
(b)
12/31/13
Variable-rate debt
$10,000,000
$10,000,000
Variable rate
X5.8%
X6.6%
Debt payment
$ 580,000
Debt payment
580,000
Swap variable received
(580,000)
Net income effect
$ 0
600,000
Net interest expense
$ 600,000
$ 600,000
Note to instructor: An interest swap in which a company changes its interest
payments from variable to fixed is a cash flow hedge because interest costs
are always the same.
*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, 2013
Call Option ……………………………………………………………. 360
Cash ……………………………………………………………… 360
(b) September 30, 2013
Call Option ……………………………………………………………. 3,200
(c) December 31, 2013
Unrealized Holding Gain or Loss—Income ……………… 800
Call Option ($2 X 400) …………………………………….. 800
*EXERCISE 17-26 (Continued)
(d) January 15, 2014
Unrealized Holding Gain or Loss—Income ……………… 35
Call Option ($65 – $30) …………………………..……….. 35
**Computation of Gain: $370 (400 shares X $1) – $30
**Value of Call Option at settlement:
Call Option
360
180
800
115
(a) May 1, 2014
Memorandum entry to indicate entering into the futures contract.
(b) June 30, 2014
Futures Contract …………………………………………….. 4,000
*EXERCISE 17-27 (Continued)
(d) October 5, 2014
Inventory ………………………………………………………. 105,000
Cash ($525 X 200 ounces) ……………………….. 105,000
(e) December 15, 2014
Cash ……………………………………………………………… 250,000
Sales Revenue ………………………………………… 250,000
(f) HART GOLF CO.
Partial Income Statement
For the Quarter Ended December 31, 2014
Sales revenue $250,000
TIME AND PURPOSE OF PROBLEMS
Problem 17-1 (Time 20–30 minutes)
Problem 17-2 (Time 30–40 minutes)
Purpose—The student is required to prepare journal entries and adjusting entries for available-for-sale
debt investments, along with an amortization schedule and a discussion of financial statement
presentation.
Problem 17-3 (Time 25–30 minutes)
Problem 17-4 (Time 25–35 minutes)
Problem 17-5 (Time 25–35 minutes)
Problem 17-6 (Time 25–35 minutes)
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 investments 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-
Problem 17-9 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the proper accounting treatment with respect
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.
Time and Purpose of Problems (Continued)
Problem 17-11 (Time 30–40 minutes)
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 investments. 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 17-16 (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
*Problem 17-18 (Time 25–35 minutes)
PROBLEM 17-1
(a) December 31, 2012
Debt Investments …………………………………… 108,660
Cash ……………………………………………… 108,660
(b) December 31, 2013
(d) December 31, 2012
Debt Investments (available-for-sale) ………. 108,660
Cash ……………………………………………… 108,660
(e) December 31, 2013
Cash ……………………………………………………… 7,000
PROBLEM 17-1 (Continued)
(f) December 31, 2015
Cash ……………………………………………………….. 7,000
Debt Investments (available-for-sale)
Amortized
Cost
Fair
Value
Unrealized
Gain (Loss)
Spangler Company, 7% bonds
$103,719
$105,650
$1,931
PROBLEM 17-2
(a) January 1, 2014 purchase entry:
(b) The amortization schedule is as follows:
Schedule of Interest Revenue and Bond Discount
Amortization—Effective-Interest Method
8% Bonds Purchased to Yield 10%
Date
Interest
Receivable
Or
Cash Received
Interest
Revenue
Bond
Discount
Amortization
Carrying
Amount of
Bonds
1/1/14
$369,114
7/1/14
16,000
$ 18,456
$ 2,456
371,570
12/31/14
16,000
18,579
374,149
7/1/15
16,000
18,707
376,856
12/31/15
16,000
18,843
379,699
7/1/16
16,000
18,985
382,684
7/1/17
16,000
19,291
389,109
12/31/17
16,000
19,455
392,564
7/1/18
16,000
19,628
396,192
12/31/18
19,808*
3,808
400,000
$190,886
$30,886
(c) Interest entries:
July 1, 2014
Cash ………………………………………………………………. 16,000
Debt Investments (available-for-sale)……………….. 2,456
Interest Revenue ……………………………………… 18,456
December 31, 2014
PROBLEM 17-2 (Continued)
(d) December 31, 2015 adjusting entry:
Securities
Available-for-Sale
Portfolio Cost
Fair Value
Unrealized
Gain (Loss)
Previous fair value
Aguirre (total portfolio
*
*This is the amortized cost of the bonds on December 31, 2015. See (b)
schedule.
December 31, 2015
(e) January 1, 2016 sale entry:
Selling price of bonds ……………………………………. $370,726
January 1, 2016
Cash ……………………………………………………………… 370,726
Loss on Sale of Investments …………………………... 8,973
Debt Investments (available-for-sale) ……….. 379,699