Intermediate Accounting w/ Annual Report; Connect Access Card
Intermediate Accounting w/ Annual Report; Connect Access Card
8th Edition
ISBN: 9781259546860
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 12, Problem 12.5P

a)

To determine

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Available-for-sale (AFS) securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs or manage interest risk.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets, expenses.

To Prepare: The journal entries needed to enable the investment to be reported at this amount.

a)

Expert Solution
Check Mark

Explanation of Solution

Journalize the stock transactions occurred during 2016.

Transaction on February 21, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
02.21.16 Investment in Corporation DT Shares   400,000
           Cash   400,000
(To record purchase of investment in shares)

Table (1)

Transaction on March 18, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
03.18.16 Cash   8,000
         Investment Revenue   8,000
(To record receipt of dividends)

Table (2)

Transaction on September 1, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
09.01.16 Investment in AT Bonds   900,000
       Cash   900,000
(To record purchase of investment)

Table (3)

Transaction on October 20, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
10.20.16 Cash   425,000
        Investment in Corporation DT Shares   400,000
        Gain on Sale of Investments     25,000
(To record sale of Corporation DT shares)

Table (4)

Working Notes:

Compute the gain (loss) on sale of shares.

Particulars Amount ($)
Cash proceeds from sale $425,000
Less: Cost of investment (400,000)
Gain (loss) on sale of shares $25,000

Table (5)

Transaction on November 1, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
11.01.16 Investment in Corporation M Shares   1,400,000
           Cash   1,400,000
(To record purchase of investment in shares)

Table (6)

Interest accrued on AT bonds on December 31, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
12.31.16 Investment Revenue Receivable (1)   30,000
           Investment Revenue   30,000
(To record accrued interest revenue)

Table (7)

Working Notes:

Calculate interest to be received on December 31, 2016.

Interest to be received =(Face amount of bonds×Stated interest rate×Time period(September 1 to December 31))= $900,000 × 10100 ×412= $30,000 (1)

Adjusting entry on December 31, 2016:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
12.31.16 Fair Value Adjustment   10,000
 

    Net Unrealized Holding Gains and

    Losses–Other Comprehensive Income

    10,000
(To record adjustment of available-for-sale securities to fair market value)

Table (8)

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2016.

Security Fair Value Amortized Cost = Fair Value Adjustment
Corporation MD Shares $1,460,000 $1,400,000 = $60,000
AT Bonds 850,000 900,000 = (50,000)
Total 2,300,000 2,310,000 = 10,000
Existing balance in fair value adjustment (0)
Increase (decrease) needed in fair value adjustment $10,000

Table (9)

b)

To determine

To Prepare: The income statement and balance sheet.

b)

Expert Solution
Check Mark

Explanation of Solution

Reporting on income statement:

Income Statement
Particulars Amount
Other income (expenses):  
     Interest and dividend income $38,000
     Realized net gain on sale of investments $25,000
Tax expense  
Net income  

Table (10)

Notes:

  • Refer to requirement 1 for values of interest and dividend income, and gain on sale of investments.
  • Net unrealized holding gains and losses are reported in other comprehensive income.

Reporting on statement of comprehensive income:

Statement of Comprehensive Income
Particulars Amount
Other comprehensive income (loss) items (OCI):  
     Net unrealized holding gains and losses on investments $10,000

Table (11)

Note: Refer to requirement 1 for values and computation of net unrealized holding gains and losses.

Reporting on balance sheet:

Balance Sheet
Particulars Amount Amount
Current assets:    
Investment revenue receivable   $30,000
Securities available-for-sale $2,300,000  
Add: Fair value adjustment 10,000 2,310,000
Shareholders’ equity:    
Accumulated other comprehensive income    
       Net unrealized holding gains and losses   10,000

Table (12)

Note: Refer to requirement 1 for values of interest income, and net unrealized holding gains and losses amounts.

c)

To determine

To Prepare: The journal entries needed to enable the investment to be reported at this amount.

c)

Expert Solution
Check Mark

Explanation of Solution

Journalize the stock transactions occurred during 2017.

Transaction on January 20, 2017:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
01.20.17 Cash   1,485,000
 

      Investment in Corporation M

      Shares

  1,400,000
        Gain on Sale of Investments     85,000
(To record sale of Corporation M shares)

Table (13)

Working Notes:

Compute the gain (loss) on sale of shares.

Particulars Amount ($)
Cash proceeds from sale $1,485,000
Less: Cost of investment (1,400,000)
Gain (loss) on sale of shares $85,000

Table (14)

Transaction on March 1, 2017:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
03.01.17 Cash   45,000
        Investment Revenue Receivable   30,000
        Investment Revenue  (2)     15,000
(To record interest received)

Table (15)

Working Notes:

Calculate the value of interest revenue.

Interest revenue =(Face amount of bonds×Stated interest rate×Time period(December 31 to March 1))= $900,000 × 10100 ×212= $15,000 (2)

Transaction on August 12, 2017:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
08.12.17 Investment in V Communication Shares   650,000
           Cash   650,000
(To record purchase of investment in shares)

Table (16)

Transaction on September 1, 2017:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
09.01.17 Cash   45,000
        Investment Revenue (3)     45,000
(To record interest received)

Table (17)

Working Notes:

Calculate the value of investment revenue.

Intvestment revenue =(Face amount of bonds×Stated interest rate×Time period(March 1 to September 1))= $900,000 × 10100 ×612= $45,000 (3)

Interest accrued on AT bonds on December 31, 2017:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
12.21.17 Investment Revenue Receivable   30,000
           Investment Revenue (4)   30,000
(To record accrued interest revenue)

Table (18)

Working Notes:

Calculate interest to be received on December 31, 2017.

Interest to be received =(Face amount of bonds×Stated interest rate×Time period(September 1 to December 31))= $900,000 × 10100 ×412= $30,000 (4)

Adjusting entry on December 31, 2017:

Date Account Titles and Explanation Post Ref. Debit ($) Credit ($)
31.12.17 Net Unrealized Holding Gains and Losses–Other Comprehensive Income   60,000
         Fair Value Adjustment     60,000
(To record adjustment of available-for-sale securities to fair market value)

Table (19)

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2017.

Security Fair Value Amortized Cost = Fair Value Adjustment
V Communication Shares $670,000 $650,000 = $20,000
AT Bonds 830,000 900,000 = (70,000)
Total 1,500,000 1,550,000 = (50,000)
Existing balance in fair value adjustment 10,000
Increase (decrease) needed in fair value adjustment $(60,000)

Table (20)

Note: With a positive balance of $10,000 in 2016, and to maintain a negative balance of $50,000 in 2017, a negative of $60,000 is assumed as decrease needed in fair value adjustment.

d)

To determine

To Prepare: The income statement and balance sheet.

d)

Expert Solution
Check Mark

Explanation of Solution

Reporting on income statement:

Income Statement
Particulars Amount ($)
Other income (expenses):  
     Interest and dividend income $90,000
     Realized net gain on sale of investments 85,000
Tax expense  
Net income  

Table (21)

Notes:

  • Refer to requirement 3 for values of interest and dividend income, and gain on sale of investments.
  • Net unrealized holding gains and losses are reported in other comprehensive income.

Reporting on statement of comprehensive income:

Statement of Comprehensive Income
Particulars Amount ($)
Other comprehensive income (loss) items (OCI):  
     Net unrealized holding gains and losses on investments (60,000)

Table (22)

Note: Refer to requirement 3 for values and computation of net unrealized holding gains and losses.

Reporting on balance sheet:

Balance Sheet
Particulars Amount ($) Amount ($)
Current assets:    
Investment revenue receivable   $30,000
Securities available-for-sale $1,550,000  
Add: Fair value adjustment (50,000) 1,500,000
Shareholders’ equity:    
Accumulated other comprehensive income    
       Net unrealized holding gains and losses   (50,000)

Table (23)

Note: Refer to requirement 3 for values of interest income, and net unrealized holding gains and losses amounts

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Chapter 12 Solutions

Intermediate Accounting w/ Annual Report; Connect Access Card

Ch. 12 - Prob. 12.11QCh. 12 - Prob. 12.12QCh. 12 - Do U.S. GAAP and IFRS differ in the amount of...Ch. 12 - Under what circumstances is the equity method used...Ch. 12 - The equity method has been referred to as a...Ch. 12 - In the application of the equity method, how...Ch. 12 - Prob. 12.17QCh. 12 - Prob. 12.18QCh. 12 - Prob. 12.19QCh. 12 - How does IFRS differ from U.S. GAAP with respect...Ch. 12 - What is the effect of a company electing the fair...Ch. 12 - Define a financial instrument. Provide three...Ch. 12 - Some financial instruments are called derivatives....Ch. 12 - Prob. 12.24QCh. 12 - Prob. 12.25QCh. 12 - Prob. 12.26QCh. 12 - (Based on Appendix 12B) Reporting an investment at...Ch. 12 - Prob. 12.28QCh. 12 - Explain how the CECL model (introduced in ASU No....Ch. 12 - Prob. 12.1BECh. 12 - Prob. 12.2BECh. 12 - Available -for-sale securities LO12-4 SL...Ch. 12 - Prob. 12.4BECh. 12 - Prob. 12.5BECh. 12 - Prob. 12.6BECh. 12 - Prob. 12.7BECh. 12 - Prob. 12.8BECh. 12 - Prob. 12.9BECh. 12 - Prob. 12.10BECh. 12 - Prob. 12.11BECh. 12 - Prob. 12.12BECh. 12 - Prob. 12.13BECh. 12 - Prob. 12.14BECh. 12 - Prob. 12.15BECh. 12 - Prob. 12.16BECh. 12 - Prob. 12.17BECh. 12 - Prob. 12.18BECh. 12 - Prob. 12.1ECh. 12 - Prob. 12.2ECh. 12 - Prob. 12.3ECh. 12 - Prob. 12.4ECh. 12 - Prob. 12.5ECh. 12 - Prob. 12.6ECh. 12 - Prob. 12.7ECh. 12 - Prob. 12.8ECh. 12 - Prob. 12.9ECh. 12 - Prob. 12.10ECh. 12 - Prob. 12.11ECh. 12 - Prob. 12.12ECh. 12 - Prob. 12.13ECh. 12 - Prob. 12.14ECh. 12 - Prob. 12.15ECh. 12 - Prob. 12.16ECh. 12 - Prob. 12.17ECh. 12 - Prob. 12.18ECh. 12 - Prob. 12.19ECh. 12 - Prob. 12.20ECh. 12 - Prob. 12.21ECh. 12 - Prob. 12.22ECh. 12 - Prob. 12.23ECh. 12 - Prob. 12.24ECh. 12 - Prob. 12.25ECh. 12 - Prob. 12.26ECh. 12 - Prob. 12.27ECh. 12 - Prob. 12.28ECh. 12 - Prob. 12.29ECh. 12 - Prob. 12.30ECh. 12 - Prob. 12.31ECh. 12 - Prob. 1CPACh. 12 - Prob. 2CPACh. 12 - Prob. 3CPACh. 12 - Prob. 4CPACh. 12 - Prob. 5CPACh. 12 - Prob. 6CPACh. 12 - Prob. 7CPACh. 12 - Prob. 8CPACh. 12 - Prob. 9CPACh. 12 - Prob. 10CPACh. 12 - Prob. 11CPACh. 12 - Prob. 12CPACh. 12 - Prob. 13CPACh. 12 - Prob. 1CMACh. 12 - Prob. 2CMACh. 12 - Prob. 3CMACh. 12 - Prob. 12.1PCh. 12 - Prob. 12.2PCh. 12 - Prob. 12.3PCh. 12 - Prob. 12.4PCh. 12 - Prob. 12.5PCh. 12 - Prob. 12.6PCh. 12 - Prob. 12.7PCh. 12 - Prob. 12.8PCh. 12 - Prob. 12.9PCh. 12 - Prob. 12.10PCh. 12 - Prob. 12.11PCh. 12 - Prob. 12.12PCh. 12 - Prob. 12.13PCh. 12 - P 12–14 Classifying investments LO12–1 through...Ch. 12 - Prob. 12.15PCh. 12 - Prob. 12.16PCh. 12 - Prob. 12.17PCh. 12 - Prob. 12.18PCh. 12 - Prob. 12.1BYPCh. 12 - Prob. 12.2BYPCh. 12 - Case 12–4 Accounting for debt and equity...Ch. 12 - Prob. 12.6BYPCh. 12 - Prob. 12.7BYP
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