homework

Chapter 17

E17.2 (LO 1) Excel (Entries for Held-to-Maturity Securities) On January 1, 2020, Dagwood Company purchased at par 6% bonds having a maturity value of $300,000. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. The bonds are classi- fied in the held-to-maturity category.

Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare the journal entry to record the interest revenue on December 31, 2020. c. Prepare the journal entry to record the interest received on January 1, 2021.

E17.3 (LO 1) (Entries for Held-to-Maturity Securities) On January 1, 2020, Hi and Lois Company purchased 12% bonds having a maturity value of $300,000 for $322,744.44. The bonds provide the bond- holders with a 10% yield. They are dated January 1, 2020, and mature January 1, 2025, with interest received on January 1 of each year. Hi and Lois Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare a bond amortization schedule.

c. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2020. d. Prepare the journal entry to record the interest revenue and the amortization at December 31, 2021.

E17.4 (LO 1) (Entries for Available-for-Sale Securities) Assume the same information as in E17.3 except that the securities are classified as available-for-sale. The fair value of the bonds at December 31 of each year-end is as follows.

· 2020 $320,500 2023 $310,000

· 2021 $309,000 2024 $300,000

· 2022 $308,000

Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare the journal entries to record the interest revenue and recognition of fair value for 2020. c. Prepare the journal entry to record the recognition of fair value for 2021.

E17.7 (LO 2) (Equity Securities Entries) On December 21, 2020, Bucky Katt Company provided

you with the following information regarding its equity investments.

Investments Clemson Corp. stock

Colorado Co. stock Buffaloes Co. stock

Total of portfolio

Previous fair value adjustment balance

Fair value adjustment—Cr.

Cost $20,000 10,000 20,000

$50,000

Fair Value $19,000

9,000 20,600

$48,600

Unrealized Gain (Loss) $(1,000)

(1,000) 600

(1,400) –0–

$(1,400)

December 31, 2020

E17.9 (LO 1) (Available-for-Sale Debt Securities Entries and Financial Statement Presenta- tion) At December 31, 2020, the available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.

Security A

B

C Total

Cost $17,500 12,500 23,000 $53,000

Fair Value $15,000 14,000 25,500 $54,500

Unrealized Gain (Loss) ($2,500)

1,500 2,500 1,500

400 $1,100

the stock on December 31, 2021,

Previous fair value adjustment balance—Dr. Fair value adjustment—Dr.

On January 20, 2021, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees.

Instructions

· Prepare the adjusting entry at December 31, 2020, to report the portfolio at fair value.

· Showthebalancesheetpresentationoftheinvestment-relatedaccountsatDecember31,2020.(Ignore notes presentation.)

· Prepare the journal entry for the 2021 sale of security A.

During 2021, Colorado Co. stock was sold for $9,400. The fair value of

was Clemson Corp. stock—$19,100; Buffaloes Co. stock—$20,500. None of the equity investments result in significant influence.

Instructions

a. Prepare the adjusting journal entry needed on December 31, 2020.

b. Prepare the journal entry to record the sale of the Colorado Co. stock during 2021. c. Prepare the adjusting journal entry needed on December 31, 2021.

E17.11 (LO 2) (Equity Securities Entries) Aranda Corporation made the following cash purchases of securities during 2020, which is the first year in which Aranda invested in securities.

1. On January 15, purchased 10,000 shares of Sanchez Company’s common stock at $33.50 per share plus commission $1,980.

2. On April 1, purchased 5,000 shares of Vicario Co.’s common stock at $52.00 per share plus commis- sion $3,370.

3. On September 10, purchased 7,000 shares of WTA Co.’s preferred stock at $26.50 per share plus commission $4,910.

On May 20, 2020, Aranda sold 4,000 shares of Sanchez Company’s common stock at a market price of $35 per share less brokerage commissions, taxes, and fees of $3,850. The year-end fair values per share were Sanchez $30, Vicario $55, and WTA $28. In addition, the chief accountant of Aranda told you that the corporation plans to hold these securities for the long-term but may sell them in order to earn profits from appreciation in prices. The equity method of accounting is not appropriate for these stock purchases.

Instructions

· Prepare the journal entries to record the above three security purchases.

· Prepare the journal entry for the security sale on May 20.

· ComputetheunrealizedgainsorlossesandpreparetheadjustingentriesforArandaonDecember31, 2020.

E17.15 (LO 2) (Equity Investments) Kenseth Company has the following securities in its portfolio on December 31, 2020. None of these investments are accounted for under the equity method.

Investments

1,500 shares of Gordon, Inc., common 5,000 shares of Wallace Corp., common 400 shares of Martin, Inc., preferred

Cost

$ 73,500 180,000 60,000

$313,500

Fair Value

$ 69,000 175,000 61,600

$305,600

Exercises 17-55

17-56 CHAPTER 17

Investments

All of the securities were purchased in 2020.

In 2021, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., common, @ $45 less fees of $1,200. April 1 Bought 700 shares of Earnhart Corp., common, @ $75 plus fees of $1,300.

Kenseth’s portfolio of equity securities appeared as follows on December 31, 2021.

Investments

5,000 shares of Wallace Corp., common 700 shares of Earnhart Corp., common

400 shares of Martin, Inc., preferred

Prepare the general journal entries for Kenseth Company for: a. The 2020 adjusting entry.

b. The sale of the Gordon stock.

c. The purchase of the Earnhart stock.

d. The 2021 adjusting entry for the portfolio.

Cost $180,000

53,800

60,000 $293,800

Fair Value $175,000 50,400 58,000 $283,400

Instructions

E17.16 (LO 2, 3) (Fair Value and Equity Method Compared) Jaycie Phelps Inc. acquired 20% of the outstanding common stock of Theresa Kulikowski Inc. on December 31, 2020. 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, 2021. Kulikowski reported net income of $730,000 for 2021. The fair value of Kulikowski’s stock was $27 per share at December 31, 2021.

Instructions

· Prepare the journal entries for Jaycie Phelps Inc. for 2020 and 2021, assuming that Phelps cannot exercise significant influence over Kulikowski.

· Prepare the journal entries for Jaycie Phelps Inc. for 2020 and 2021, assuming that Phelps can exer- cise significant influence over Kulikowski.

· Atwhatamountistheinvestmentinsecuritiesreportedonthebalancesheetundereachofthesemethods at December 31, 2021? What is the total net income reported in 2021 under each of these methods?

E17.17 (LO 3) (Equity Method) On January 1, 2020, Pennington Corporation purchased 30% of the common shares of Edwards Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000.

Instructions

Prepare the entries for Pennington to record the purchase and any additional entries related to this invest- ment in Edwards Company in 2020.

E17.19 (LO 2, 4) (Fair Value Measurement) of common stock by Lilly Company during 2020.

Investment in Arroyo Company stock Investment in Lee Corporation stock Investment in Woods Inc. stock

Presented below is information related to the purchases

Total

Cost

(at purchase date)

$100,000 250,000 180,000

$530,000

Fair Value

(at December 31)

$ 80,000 300,000 190,000

$570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

· What entry would Lilly make at December 31, 2020, to record the investment in Arroyo Company stock if it chooses to report this security using the fair value option?

· What entry(ies) would Lilly make at December 31, 2020, to record the investments in the Lee and Woods corporations, assuming that Lilly did not select the fair value option for these investments?

E17.21 (LO 1, 2, 4) (Fair Value Option) Presented below is selected information related to the financial instruments of Dawson Company at December 31, 2020. This is Dawson Company’s first year of operations.

Investmentindebtsecurities(intentistoholdtomaturity) Investment in Chen Company stock

Bonds payable

Instructions

Carrying Amount

$ 40,000 800,000 220,000

Fair Value

(at December 31)

$ 41,000 910,000 195,000

· Dawson elects to use the fair value option for these investments. Assuming that Dawson’s net income is $100,000 in 2020 before reporting any securities gains or losses, determine Dawson’s net income for 2020. Assume that the difference between the carrying value and fair value is due to credit deterioration.

· Record the journal entry, if any, necessary at December 31, 2020, to record the fair value option for the bonds payable.

*E17.24 (LO 5) (Derivative Transaction) On January 2, 2020, Jones Company purchases a call op- tion for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2020 (the intrinsic value is therefore $0). On March 31, 2020, the market price for Merchant stock is $53 per share, and the time value of the option is $200.

Instructions

· Prepare the journal entry to record the purchase of the call option on January 2, 2020.

· Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March 31, 2020.

· What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2020?

*E17.28 (LO 5) (Call Option) On August 15, 2019, Outkast Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $360. The notional value of the call option is 400 shares, and the option price is $40. The option expires on January 31, 2020. The following data are avail- able with respect to the call option.

Date

September 30, 2019 December 31, 2019 January 15, 2020

Instructions

Market Price of Counting Crows Shares

$48 per share 46 per share 47 per share

Time Value of Call Option

$180 65 30

Prepare the journal entries for Outkast for the following dates.

a. Investment in call option on Counting Crows shares on August 15, 2019.

b. September 30, 2019—Outkast prepares financial statements.

c. December 31, 2019—Outkast prepares financial statements.

d. January 15, 2020—Outkast settles the call option on the Counting Crows shares.