Journal Entries and Fair Value of Stocks and Bonds

ACTG 493 Professor Siyi Li

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ACTG 493, SPRING 2014

INDIVIDUAL ASSIGNMENT #8

DUE: THURSDAY APRIL 24

Financial Instruments Exercises Complete the following two exercises. You do not need to use the memo format.

Problem 1 (15 Points)

Paulson & Co., Inc. is an investment management company. The company's fiscal year ends on December 31. Paulson

has the following transactions related to its investment activities during 2009 and 2010.

2009

July 1: Purchased $100 million, 7%, 10-year bonds issued by Bank of America for a price of $107,438,737 and classified

the bonds as held-to-maturity securities. Interest is paid semi-annually on Dec. 31 and Jun. 30. The market interest

rate for the bonds was 6%.

November 1: Purchased 5,000,000 shares of AngloGold common stock at $40 per share and classified the stock as trading

securities.

December 15: Received cash dividends of $0.30 per share from the AngloGold common stock.

December 31: Received interest payment of $3.5 million on the Bank of America bonds.

December 31: Recorded any necessary adjusting entries related to the investments. The market interest rate for the Bank of

America bonds was 7% . The stock price for AngloGold was $42.

2010

February 28: Sold the 5,000,000 shares of AngloGold stock at $44.5 per share.

June 30: Received interest payment of $3.5 million on the Bank of America bonds.

July 1: Sold the Bank of America bonds for $105 million.

December 31: Recorded any necessary adjusting entries related to the Bank of America and AngloGold investments.

Required:

1. Prepare the appropriate journal entry for each transaction. 2. What are the carrying amounts of these investments on Paulson & Co's 2009 balance sheet? 3. Without considering taxes, what are the effects of these investments on Paulson & Co.'s income statements of

2009 and 2010, respectively?

Problem 2 (15 Points)

On January 4, 2010, Newcrest Gold Co. Ltd. paid $66 million for 3 million shares of Austin Mining Company common

stock. The investment represents a 30% interest in the net assets of Austin and gave Newcrest the ability to exercise

significant influence over Austin’s operations. Newcrest uses the equity method to record the investment.

Newcrest received dividends of $1.60 per share on December 6, 2010, and Austin reported net income of $32 million for

the year ended December 31, 2010. The market value of Austin’s common stock at December 31, 2010, was $23 per

share. The book value of Austin’s net assets was $160 million and:

a) The fair market value of Austin’s depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $16 million.

b) The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

Required:

1. Prepare all appropriate journal entries related to the investment during 2010. 2. What is the carrying amount of this investment on Newcrest's balance sheet as of December 31, 2010? 3. What's the effect of this investment on Newcrest's 2010 income before taxes?