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Chapter 17 Homework Day 1

Chapter 17 Homework Day 1. Exercise 17-1. For the following investments, identify whether they are: TRADING SECURITIES. AVAILABLE FOR SALE HELD TO MATURITY. A bond that will mature in 4 years was bought 1 mo. ago, when the price dropped. As soon as the value increases, which is expected

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Chapter 17 Homework Day 1

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  1. Chapter 17 Homework Day 1

  2. Exercise 17-1

  3. For the following investments, identify whether they are: • TRADING SECURITIES. • AVAILABLE FOR SALE • HELD TO MATURITY • A bond that will mature in 4 years was bought 1 mo. ago, when the • price dropped. As soon as the value increases, which is expected • next month, it will be sold. 1 TRADING

  4. 10% of the outstanding stock of Farm-Co was purchased. The co. • is planning on eventually getting a total of 30% of its outstanding • stock. 2 SECURITY AVAILABLE FOR SALE • 10-year bonds were purchased this year. The bonds mature at • the first of next year. 1 TRADING SECURITIES • Bonds that will mature in 5 years are purchased. The co. would • like to hold them until they mature, but money has been tight • recently, and they may need to be sold. 2 SECURITY AVAILABLE FOR SALE

  5. Preferred stock was purchased for its constant dividend. The co. • is planning to hold the preferred stock for a long time. 2 SECURITY AVAILABLE FOR SALE • A bond that matures in 10 years was purchased. The company • is investing money set aside for an expansion project planned • 10 years from now. 3 HELD TO MATURITY

  6. Exercise 17-3

  7. On January 1, 2006 Hi and Lois Co. purchased 12% bonds, having a MV of $300,000, for $322,744.44. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2006, and mature January 1, 2011, with interest receivable December 31 of each year. Hi and Lois Co. use the effective interest method to allocate unamortized discount or premium. The bonds are classified as HTM. (a) Prepare the journal entry at the date of bond purchase. HTM……………. $322,744.44 Cash…………………….$322,744.44 (b) Prepare a bond amortization table: next page

  8. Date Cash Interest Rev Premium Carrying value 1/1/06 322,744.44 12/31/06 $36,000 $32,274.44 $3,725.56 319,018.88 12/31/07 36,000 31,901.89 4,098.11 314,920.77 12/31/08 36,000 31,492.08 4,507.92 310,412.85 12/31/09 36,000 31.041.29 4,958.71 305,454.14 12/31/10 36,000 30,545.86 5,454.14 300,000.00

  9. c. Prepare the journal entry to record interest for 2006. Cash………… $36,000 HTM………………….$3,725.56 Interest Revenue……. $32,274.44 d. Prepare the journal entry to record interest for 2007. Cash…………….. $36,000 HTM…………………..$4,098.11 Interest Revenue…….. $31,901.89

  10. E 17-4

  11. Assume same info as 17-3, only consider the bonds to be SAS securities. The FMV of bonds at 12/31/year end are: 2006 $320,500 2007 $309,000 2008 $308,000 2009 $310,000 2010 $300,000 1. PURCHASE SAS....... $322,744.44 Cash........$322,744.44

  12. b. Interest received and recognition of FMV for 2006. Cash....... $36,000 SAS.........$3,725.56 Interest Rev.. $32,274.44 FMV $320,500 new FMV - $319,018.88 ---------------- $1,481 UHG-EQ MA-SAS....$1,481.12 UHG-EQ...........$1,481.12

  13. c. FMV for 2007 Adjusted Cost...$314,920.77 (from table) vs FMV............ 309,000 ----------- (5,920.77) LOSS UHG/L 1,481.12 UHL-EQ.... $7,401.89 MA-SAS.........$7,401.89 7,401.89 5,920.77

  14. Exercise 17-5

  15. On January 1, 2006, Phantom Co. acquires $200,000 of Spiderman Products, Inc, 9% bonds at a price of $185,589. The interest is payable each December 31, and the bonds mature December 31, 2008. The investment will provide Phantom Company a 12% yield. The bonds are classified as HELD-TO-MATURITY. Bond is issued at a discount or premium? DISCOUNT • Prepare a 3-year schedule of interest revenue and bond discount amortization, • applying the straight-line method.

  16. Date Cash Interest Revenue Bond Disc Amortz Carrying Amt 1/1/06 ---- ----- ----- $185,589 12/31/06 $18,000 $22,804 $4,804 190,393 12/31/07 18,000 22,804 4,804 195,197 12/31/08 18,000 22,803 4,803 200,000 (b) Prepare a 3-year schedule of interest revenue and bond discount amortization applying the EFFECTIVE INTEREST METHOD.

  17. Date Cash Interest Revenue Bond Disc Amortz Carrying Amt 1/1/06 ---- ----- ----- $185,589 12/31/06 $18,000 $22,270.68 $4,270.68 189.859.68 12/31/07 18,000 22,783.16 4,783.16 194,642.84 12/31/08 18,000 23,357.16 5,357.16 200,000

  18. Prepare the journal entry for the interest receipt • of December 31, 2007 and the discount amortization • under the SL method. Cash…………… $18,000 HTM………….. 4,804 Interest Revenue……….$22,804 (d) Prepare the journal entry for the interest receipt of December 31, 2007 and the discount amortization under the effective interest method. Cash…………$18,000 HTM………….. 4,783.16 Interest Revenue……..$22,783

  19. Exercise 17-6

  20. Following is available for Barkley at 12/31/06 regarding its investments: • CostFMV • 3000 sh of Myers Corp C/S $40,000 $48,000 • 1000 sh of Cole Inc. PS 25,000 22,000 • ---------- ---------- • $65,000 $70,000 • PREPARE the adjusting entry (if any) for 2006 assuming • the securities are classified as Trading. MA-TS....$5,000 UHG-IS.......$5,000 b. Prepare adjustments if they are classified as SAS. MA-SAS $5000 UHG-EQ $5000

  21. Discuss how amounts reported in f/s are affected by entries in a and b. • DONE.

  22. Exercise 17-7

  23. On 12/21/06 Bucky Katt. provided you with the following info on its trading securities: 12/31/06 Investments (Trading) Cost FMV Unrealized Gain(Loss) Clemson Corp. Stock $20,000 $19,000 $(1,000) Colorado Co. Stock 10,000 9,000 (1,000) Buffaloes Co. Stock 20,000 20,600 600 TOTAL $50K $48,600 (1,400) Previous securities FMV adj -0- Securities fv adjustments $(1400) During 2007 CO co. stock was sold for $9,400. The FMV of the stock on 12/31/07 was Clemson Corp stock- $19,100; Buffaloes Corp stock $20,500.

  24. Prepare the adjusting entry needed 12/31/06. • Overall change is -1400. UHL/G-IS....$1400 MA-TS.........$1400 b. Prepare the entry to record the sale of CO during 2007. During 2007 CO co. stock was sold for $9,400. Cash........ $9400 Loss........ 600 TS............$10,000 CostFMV Colorado Co. Stock 10,000 9,000 c. Adjustment on 2007. Cost FMV UHG/L Clemson $20K $19,100 (900) clemson Buffaloes 20K 20,500 500 buffalos TOTAL 40K 39,600 (400) Previous (1400) Adjustment +$1000 MA-TS $1K UHG-IS $1K

  25. Exercise 17-9

  26. At December 31, 2006 the Available-for-Sale equity portfolio for Steffi Graf, Inc. is as follows. SecurityCostFMVUnrealized G or L A $17500 $15000 (2500) B 12500 14000 1500 C 23000 25500 2500 Total $53,000 $54,500 +$1,500 Previous fair value (market) adjustment was a $400 DR balance. This year’s FV (market) adjustment is an $1,100 DR On January 20, 2007 Steffi Graf. Inc sold Security A for $15,100. The sale proceeds are net of brokerage fees.

  27. (a) Prepare the ADJUSTING ENTRY at 12/31/06 to report the portfolio at FMV. Market adjustment (SAS)…….. $1,100 Unrealized Holding Gain-EQ…………..$1,100 • Show the B/S presentation of the investment related accounts at • 12/31/06 ignoring footnotes. Current Assets Securities Available for Sale…….. $53,000 + Market Adjustment…………….. 1,500 ------------------------------------------------------- $54,500 Stockholder’s Equity C/S……………….xx APIC…………….xx RE………………..xx AOCI……………. $1,500

  28. (c) Prepare the journal entry for the 2007 sale of Security A. On January 20, 2007 Steffi Graf. Inc sold Security A for $15,100. The sale proceeds are net of brokerage fees. At December 31, 2006 the Available-for-Sale equity portfolio for Steffi Graf, Inc. is as follows. SecurityCostFMVUnrealized G or L A $17500 $15000 (2500) B 12500 14000 1500 C 23000 25500 2500 Total $53,000 $54,500 $1,500 Cash….. $15,100 Loss……. 2,400 SAS………$17,500

  29. Exercise 17-12

  30. Presented below are two independent situations: • Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of • Martinez Fashion at a total cost of $13/share on March 18, 2007. On June 30, • Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez • reported NI of $122,000 for the year. At December 31, the market price of • Martinez Fashion was $15/sh. The securities are classified as Available-For-Sale. INSTRUCTIONS: Prepare all necessary journal entries in 2007 for both situations. • Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of • Martinez Fashion at a total cost of $13/share on March 18, 2007. SAS…………… $260,000 CASH………… $260,000

  31. On June 30, Martinez declared and paid a $75,000 cash dividend. Cash……… $7,500 Dividend Revenue……….. $7,500 On December 31, Martinez reported NI of $122,000 for the year. No Entry At December 31, the market price of Martinez Fashion was $15/sh. ($15-$13) * 20,000sh = $40,000 Market Adjustment (MA) – SAS……. $40,000 Unrealized Holding Gain (UHG/L) EQUITY $40,000

  32. Monica, Inc. obtained significant influence over Seles Corporation by • buying 30% of Sele’s 30,000 outstanding shares of common stock at • a total cost of $9/sh on January 1, 2007. On June 15, Seles declared • and paid a cash dividend of $36,000. On December 31, Seles reported • a net income of $85,000 for the year. buying 30% of Sele’s 30,000 outstanding shares of common stock at a total cost of $9/sh on January 1, 2007 .30 (30,000) x $9/sh = $81,000 Investment in Seles………… $81,000 Cash…………………………$81,000

  33. On June 15, Seles declared and paid a cash dividend of $36,000 $36,000 x .30 = $10,800 Cash…….. $10,800 Investment in Seles……… $10,800 On December 31, Seles reported a net income of $85,000 for the year. $85,000 x .30 = $25,500 Investment in Seles….. $25,500 Revenue from investment…….…… $25,500 No Fair Value Adjustment

  34. Exercise 17-13

  35. Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. At the time of the purchase, Sub Co. had a book value of $3,200,000. Sub Co. pays out 40% of net income in dividends each year. INSTRUCTIONS: Use the information in the following T-account for the investment in Sub to answer the following quesitons. Investment in Sub • How much was Parent Co’s share of • Sub’s Co’s NI for the year? 1,000,000 110,000 44,000 $110,000 THE DR. INCREASE

  36. Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. At the time of the purchase, Sub Co. had a book value of $3,200,000. Sub Co. pays out 40% of net income in dividends each year. INSTRUCTIONS: Use the information in the following T-account for the investment in Sub to answer the following quesitons. Investment in Sub • How much was Parent Co’s share of Sub • Co’s dividends for the year? 1,000,000 110,000 44,000 $44,000 THE CR DECREASE

  37. Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. At the time of the purchase, Sub Co. had a book value of $3,200,000. Sub Co. pays out 40% of net income in dividends each year. INSTRUCTIONS: Use the information in the following T-account for the investment in Sub to answer the following quesitons. Investment in Sub • What was Sub’s TOTAL NET INCOME • for the year? 1,000,000 110,000 44,000 $110,000 = TOTAL x .25 Total = $440,000

  38. Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. At the time of the purchase, Sub Co. had a book value of $3,200,000. Sub Co. pays out 40% of net income in dividends each year. INSTRUCTIONS: Use the information in the following T-account for the investment in Sub to answer the following questions. Investment in Sub • What was Sub Co’s TOTAL DIVIDENDS • for the year. 1,000,000 110,000 44,000 $44,000 = Total x .25 Total = $176,000 represents the total DIVIDENDS PAID OUT.

  39. Exercise 17-16

  40. Jaycie Phelps acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007. Kulikowski reported NI of $730,000 for 2007. The FMV of Kulikowski’s stock was $27 per share at December 31, 2007. Kulikowski PHELPS

  41. Jaycie Phelps acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007. Kulikowski reported NI of $730,000 for 2007. The FMV of Kulikowski’s stock was $27 per share at December 31, 2007. • Prepare the journal entries for Jaycie Phelps Inc. for 2006 & 07, assuming that Phelps • cannot exercise significant influence over Kulikowski. The securities should be classified • as available-for-sale. PURCHASE 12/31/06? June 30 dividend paid 2007. Available-for-Sale (SAS)……..$1,200,000 Cash………………………..$1,200,000 $0.85 x 50,000sh = $42,500 Cash…….$42,500 Dividend Revenue…..$42,500 FMV adjustment: Cost =$1,200,000 vs FMV = $27 x 50,000 = $1,350,000 -------------------------------------------- FMV increase $150,000 December 31 another dividend paid and EOY Cash…….$42,500 Dividend Revenue…..$42,500 MA-SAS…….$150,000 UHG-EQ………$150,000 PHELPS Kulikowski

  42. Jaycie Phelps acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007. Kulikowski reported NI of $730,000 for 2007. The FMV of Kulikowski’s stock was $27 per share at December 31, 2007. (b) Prepare the journal entries for Jaycie Phelps Inc. for 2006 & 07, assuming that Phelps CAN exercise significant influence over Kulikowski. PURCHASE 2006? June 30 dividend paid 2007. Investment in K. Stock……..$1,200,000 Cash………………………..$1,200,000 $0.85 x 50,000sh = $42,500 Cash…….$42,500 Investment in K….…..$42,500 NI adjustment: Kulikowski’s NI = $730,000 x .20 ---------- $146,000 December 31 another dividend paid and EOY Cash…….$42,500 Investment in K………..$42,500 Investment in K……$146,000 Revenue from Investment…..$146,000 PHELPS Kulikowski

  43. At what amount is the investment in securities reported on the balance sheet • under each of the methods at December 31, 2007. What is the total NI reported • in 2007 under each of these methods? EQUITY METHOD SAS Balance Sheet SAS…$1,200,000 + MA…… 150,000 ------------------------ $ 1,350,000 Investment in K…$1,261,000 Dividend Revenue $85,000 Revenue from investment……… $146,000 Income Statement

  44. Problem 17-1

  45. Presented below is an amortization schedule related to Kathy Baker Company’s 5-year, $100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004 for $108,660. Date Cash Interest Revenue Bond Prem Amtz Carrying 12/31/04 $108,660 12/31/05 $7,000 $5,433 $1,567 107,093 12/31/06 7,000 5,354 1,646 105,447 12/31/07 7,000 5,272 1,728 103,719 12/31/08 7,000 5,186 1,814 101,905 12/31/09 7,000 5,095 1,905 100,000

  46. The following schedule presents a comparison of the amortized cost and the FMV of the bonds at year-end. 12/31/0512/31/0612/31/0712/31/0812/31/09 amortized cost $107,093 $105,447 $103,719 $101,905 $100,000 FMV $106,500 $107,500 $105,650 $103,000 $100,000

  47. Prepare the entry to record the purchase of these bonds on December 31, 2004 • assuming that the bonds are classified as HTM. Paid $108,660. HTM……….$108,660 Cash………….$108,660 (b) Prepare the journal entry(ies) related to the HTM bonds for 2005. (next slide)

  48. (b) Prepare the journal entry(ies) related to the HTM bonds for 2005. Cash………. $7,000 Interest Revenue….$5,433 HTM……………….$1,567 12/31/0512/31/0612/31/0712/31/0812/31/09 amortized cost $107,093 $105,447 $103,719 $101,905 $100,000 FMV $106,500 $107,500 $105,650 $103,000 $100,000 Date Cash Interest Revenue Bond Prem Amtz Carrying 12/31/04 $108,660 12/31/05 $7,000 $5,433 $1,567 107,093 12/31/06 7,000 5,354 1,646 105,447 12/31/07 7,000 5,272 1,728 103,719 12/31/08 7,000 5,186 1,814 101,905 12/31/09 7,000 5,095 1,905 100,000

  49. (c) Prepare the journal entry(ies) related to the HTM bonds for 2007. Cash………. $7,000 Interest Revenue….$5,272 HTM……………….$1,728 12/31/0512/31/0612/31/0712/31/0812/31/09 amortized cost $107,093 $105,447 $103,719 $101,905 $100,000 FMV $106,500 $107,500 $105,650 $103,000 $100,000 Date Cash Interest Revenue Bond Prem Amtz Carrying 12/31/04 $108,660 12/31/05 $7,000 $5,433 $1,567 107,093 12/31/06 7,000 5,354 1,646 105,447 12/31/07 7,000 5,272 1,728 103,719 12/31/08 7,000 5,186 1,814 101,905 12/31/09 7,000 5,095 1,905 100,000

  50. Prepare the entry to record the purchase of these bonds, assuming they are • classified as available-for sale Available-for-sale……….$108,660 Cash………………………$108,660

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