Brief Exercise 17-1
Indigo Company purchased, on January 1, 2017, as a held-to-maturity investment, $81,000 of
the 8%, 5-year bonds of Chester Corporation for $74,859, which provides an 10% return.
Prepare Indigo’s journal entries for (a) the purchase of the investment, and (b) the receipt of
annual interest and discount amortization. Assume effective-interest amortization is used. (Round
answers to 0 decimal places, e.g. 1,225. Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
(a)
Debt Investment
Debit
74,859
Cash
(b)
Credit
74,859
Cash
6,480
Debt Investment
1,006
Interest Revenue
7,486
Cash
= ($81,000 x 0.08) = $6,480
Interest Revenue = ($74,859 x 0.10) = $7,486
Brief Exercise 17-2
Sunland Company purchased, on January 1, 2017, as an available-for-sale security, $81,000 of
the 9%, 5-year bonds of Chester Corporation for $75,012, which provides an 11% return.
Prepare Sunland’s journal entries for (a) the purchase of the investment, (b) the receipt of annual
interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero
balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of
$76,950. (Round answers to 0 decimal places, e.g. 1,225. Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
(a)
Debt Investment
Cash
Debit
Credit
75,012
75,012
(b)
Cash
7,290
Debt Investment
961
Interest Revenue
(c)
Fair Value Adjus
8,251
977
Unrealized Holding Gain or Loss - Equity
977
Cash
= ($81,000 x 0.09)
= $7,290
Interest Revenue
= ($75,012 x 0.11)
= $8,251
Unrealized Holding Gain or Loss—Equity = [($75,012 + $961) – $76,950] = $977
Brief Exercise 17-3
Tamarisk Corporation purchased, as a held-to-maturity investment, $51,000 of the 8%, 5-year
bonds of Harrison, Inc. for $55,351, which provides a 6% return. The bonds pay interest
semiannually.
Prepare Tamarisk’s journal entries for (a) the purchase of the investment, and (b) the receipt of
semiannual interest and premium amortization. Assume effective-interest amortization is
used. (Round answers to 0 decimal places, e.g. 5,125. Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
(a)
Debt Investment
Debit
55,351
Cash
(b)
Cash
Credit
55,351
2,040
Debt Investment
379
Interest Revenue
1,661
Cash
= ($51,000 x 0.08 x 6/12) = $2,040
Interest Revenue = ($55,351 x 0.06 x 6/12) = $1,661
Brief Exercise 17-4
Marin Corporation purchased trading investment bonds for $53,000 at par. At December 31,
Marin received annual interest of $2,120, and the fair value of the bonds was $50,500.
Prepare Marin’s journal entries for (a) the purchase of the investment, (b) the interest received,
and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment
account.) (Credit account titles are automatically indented when amount is entered. Do not indent
manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
No. Account Titles and Explanation
(a)
Debt Investment
Debit
53,000
Cash
(b)
Cash
53,000
2,120
Interest Revenue
Unrealized Holding
(c)Gain or Loss - Income
Credit
2,120
2,500
Fair Value Adjus
2,500
Fair Value Adjustment (Trading) = ($53,000 – $50,500) = $2,500
Brief Exercise 17-5
Sunland Corporation purchased 440 shares of Sherman Inc. common stock for $14,400 (Sunland
does not have significant influence). During the year, Sherman paid a cash dividend of $3.25 per
share. At year-end, Sherman stock was selling for $37.00 per share.
Prepare Sunland’ journal entries to record (a) the purchase of the investment, (b) the dividends
received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment
account.) (Credit account titles are automatically indented when amount is entered. Do not indent
manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
No. Account Titles and Explanation
(a)
Equity Investmen
Debit
14,400
Credit
Cash
(b)
14,400
Cash
1,430
Dividend Revenu
(c)
1,430
Fair Value Adjus
1,880
Unrealized Hold
1,880
Dividend Revenue
= (440 x $3.25)
= $1,430
Unrealized Holding Gain or Loss—Income = [(440 x $37.00) – $14,400] = $1,880
Brief Exercise 17-6
Kingbird Corporation purchased 360 shares of Sherman Inc. common stock for $11,800
(Kingbird does not have significant influence). During the year, Sherman paid a cash dividend of
$3.25 per share. Assume the stock is nonmarketable.
Prepare Kingbird’s journal entries to record (a) the purchase of the investment, (b) the dividends
received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment
account.) (Credit account titles are automatically indented when amount is entered. Do not indent
manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
No.
Account Titles and Explanation
(a)
Debit
Equity Investmen
11,800
Cash
(b)
11,800
Cash
1,170
Dividend Revenu
(c)
1,170
No Entry
0
No Entry
Dividend Revenue =
(360 x $3.25)
Credit
0
=
$1,170
No adjustment to fair value is reported because the equity security is nonmarketable.
Brief Exercise 17-7
Pharoah Corporation purchased for $288,000 a 25% interest in Murphy, Inc. This investment
enables Pharoah to exert significant influence over Murphy. During the year, Murphy earned net
income of $173,000 and paid dividends of $54,000.
Prepare Pharoah’s journal entries related to this investment. (Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
enter an account title to record the purchase
Equity Investmen
288,000
enter an account title to record the purchase
Cash
288,000
(To record the purchase.)
enter an account title to record the net income
Equity Investmen
43,250
enter an account title to record the net income
Investment Incom
43,250
(To record the net income.)
enter an account title to record the dividend
Cash
13,500
enter an account title to record the dividend
Equity Investmen
13,500
(To record the dividend.)
Revenue from Investment = (25% x $173,000) = $43,250
Equity Investments
= (25% x $54,000) = $13,500
Brief Exercise 17-8
Metlock Company has a stock portfolio valued at $4,100. Its cost was $3,500. If the Fair Value
Adjustment account has a debit balance of $130, prepare the journal entry at year-end. (Credit
account titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
Fair Value Adjus
470
Unrealized Hold
470
Fair Value Adjustment
Bal.
130
470
Bal.
600 *
Brief Exercise 17-9
The following information relates to Sheridan Co. for the year ended December 31, 2017: net
income 1,138 million; unrealized holding loss of $11 million related to available-for-sale debt
securities during the year; accumulated other comprehensive income of $61.1 million on
December 31, 2016. Assuming no other changes in accumulated other comprehensive income.
Determine (a) other comprehensive income for 2017, (b) comprehensive income for 2017, and (c)
accumulated other comprehensive income at December 31, 2017. (Enter answers in millions to 1
decimal place, e.g. 25.5. Enter loss using either a negative sign preceding the number e.g. -45.2 or
parentheses e.g. (45.2).)
(a) Other comprehensive income(loss) for 2017
(b) Comprehensive income for 2017
(c) Accumulated other comprehensive income
$
-11
$
1,127.0
$
50.1
million
million
million
(a) Other comprehensive loss for 2017 of $11 million.
(b) Comprehensive income for 2017: $1,127.0 million or ($1,138 - $11)
(c) Accumulated other comprehensive income: $50.1 million or ($61.1 - $11)
Brief Exercise 17-10
Martinez Co. has a held-to-maturity investment in the bonds of Schuyler Corp. with a carrying
value of $76,700. Martinez determined that due to poor economic prospects for Schuyler, the
bonds have decreased in value to $65,000. It is determined that this loss in value is uncollectible.
Prepare the journal entry, if any, to record the reduction in value. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is required,
select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Loss on Impairm
Debit
Credit
11,700
Debt Investment
11,700
In this case, an impairment has occurred and the individual security should be written down.
Brief Exercise 17-11
Teal Company invests $9,000,000 in 5% fixed rate corporate bonds on January 1, 2017. All the
bonds are classified as available-for-sale and are purchased at par. At year-end, market interest
rates have declined, and the fair value of the bonds is now $9,530,000. Interest is paid on January
1.
Prepare journal entries for Teal Company to (a) record the transactions related to these bonds in
2017, assuming Teal does not elect the fair option; and (b) record the transactions related to these
bonds in 2017, assuming that Teal Company elects the fair value option to account for these
bonds. (Credit account titles are automatically indented when amount is entered. Do not indent
manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
No.
(a)
Date
Jan. 1, 2017
Account Titles and Explanation
Debt Investment
Debit
9,000,000
Cash
Dec. 31, 2017
Interest Receivab
Credit
9,000,000
450,000
Interest Revenue
450,000
(To record interest revenue)
Fair Value Adjus
530,000
Unrealized Holding Gain or Loss - Equity
530,000
(To record fair value adjustment)
No.
(b)
Date
Jan. 1, 2017
Account Titles and Explanation
Debt Investment
Cash
Debit
Credit
9,000,000
9,000,000
Dec. 31, 2017
Interest Receivab
450,000
Interest Revenue
450,000
(To record interest revenue)
Debt Investment
530,000
Unrealized Holding Gain or Loss - Income
530,000
(To record fair value adjustment)
(a) Interest Receivable
= ($9,000,000 x 0.05)
= 450,000
Fair Value Adjustment = ($9,530,000 - $9,000,000) = 530,000
(b) Interest Receivable
Debt Investment
= ($9,000,000 x 0.05)
= 450,000
= ($9,530,000 - $9,000,000) = 530,000
Note: One difference here relates to the third entry. Under the fair value option, the specific
investment is adjusted (under general available-for-sale guidance, fair value adjustments are
recorded on a portfolio basis – an allowance account, Fair Value Adjustment, is used). In addition,
under the fair value option, unrealized gains and losses are recorded in income.
Brief Exercise 17-12
Windsor Company loans Sarasota Company $1,810,000 at 6% for 3 years on January 1, 2017.
Windsor intends to hold this loan to maturity. The fair value of the loan at the end of each
reporting period is as follows.
December 31, 2017 $1,858,000
December 31, 2018
1,829,000
December 31, 2019
1,810,000
Prepare the journal entry(ies) at December 31, 2017, and December 31, 2019, for Windsor
related to these bonds, assuming (a) it does not use the fair value option, and (b) it uses the fair
value option. Interest is paid on January 1. (Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
No.
(a)
Date
Dec. 31, 2017
Account Titles and Explanation
Interest Receivab
Debit
108,600
Credit
Interest Revenue
Dec. 31, 2019
108,600
Interest Receivab
108,600
Interest Revenue
No.
(b)
Date
Dec. 31, 2017
108,600
Account Titles and Explanation
Interest Receivab
Debit
Credit
108,600
Interest Revenue
108,600
(To record interest revenue)
Debt Investment
48,000
Unrealized Holding Gain or Loss - Income
48,000
(To record fair value adjustment)
Dec. 31, 2019
Interest Receivab
108,600
Interest Revenue
108,600
(To record interest revenue)
Unrealized Holding Gain or Loss - Income
19,000
Debt Investment
19,000
(To record fair value adjustment)
(a) Interest Receivable = ($1,810,000 x 0.06)
= 108,600
(b) Interest Receivable = ($1,810,000 x 0.06)
= 108,600
Debt Investments
= ($1,858,000 − $1,810,000) = 48,000
Debt Investments
= ($1,829,000 − $1,810,000) = 19,000
Note: The Debt Investment account is adjusted because the company is using the fair value option.
Brief Exercise 17-13
Presented below are two independent cases related to available-for-sale debt investments.
Case 1
Amortized cost
Fair value
Case 2
$43,870 $96,400
33,770 107,100
Expected credit losses
28,370
88,430
For each case, determine the amount of impairment loss, if any. (If no loss, please enter 0. Do not
leave any fields blank.)
Case 1
Impairment Loss
$
10,100
Case 2
Impairment Loss
$
0
Case 1 - The impairment loss is $10,100 ($43,870 - $33,770). The loss is limited by the lower of
amortized cost or fair value.
Case 2 - No impairment results, because the fair value is greater than amortized cost.
Exercise 17-19
Presented below is information related to the purchases of common stock by Marigold Company
during 2017.
Cost
(at purchase date)
Fair Value
(at December 31)
Investment in Arroyo Company stock
$107,000
$88,000
Investment in Lee Corporation stock
230,000
278,000
Investment in Woods Inc. stock
190,000
200,000
$527,000
$566,000
Total
(Assume a zero balance for any Fair Value Adjustment account.)
(a) What entry would Marigold make at December 31, 2017, to record the investment in Arroyo
Company stock if it chooses to report this security using the fair value option?
(b) What entry would Marigold make at December 31, 2017, to record the investments in the
Lee and Woods corporations, assuming that Marigold did not select the fair value option for
these investments?
(Credit account titles are automatically indented when amount is entered. Do not indent manually.
If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
(a)
Unrealized Hold
Debit
19,000
Equity Investmen
(b)
Credit
19,000
Fair Value Adjus
58,000
Unrealized Hold
58,000
(a) Unrealized Holding Gain or Loss—Income = ($107,000 – $88,000) = $19,000
(b)
Cost
Fair Value
Unrealized Holding
Gain (Loss)
$230,000
$278,000
$48,000
Wood Inc. stock
190,000
200,000
10,000
Total of portfolio
$420,000
$478,000
$58,000
Investments
Lee Corporation stock
Previous fair value adjustment
Fair value adjustment
0
$58,000
Note: For both part (a) and (b) the change in fair value is reported as Unrealized Holding Gain or
Loss—Income. However in part (a) Lilly does not use the Fair Value Adjustment account because
the accounting for the fair value option is on an investment by investment basis rather than a
portfolio basis.
Exercise 17-28
Nash Co. uses titanium in the production of its specialty drivers. Nash anticipates that it will need
to purchase 310 ounces of titanium in November 2017, for clubs that will be sold in advance of the
spring and summer of 2018. However, if the price of titanium increases, this will increase the cost
to produce the clubs, which will result in lower profit margins.
To hedge the risk of increased titanium prices, on May 1, 2017, Nash enters into a titanium futures
contract and designates this futures contract as a cash flow hedge of the anticipated titanium
purchase. The notional amount of the contract is 310 ounces, and the terms of the contract give
Nash the option to purchase titanium at a price of $775 per ounce. The price will be good until the
contract expires on November 30, 2017.
Assume the following data with respect to the price of the call options and the titanium inventory
purchase.
Date
Spot Price for
November Delivery
May 1, 2017
$775 per ounce
June 30, 2017
806 per ounce
September 30, 2017
814 per ounce
Present the journal entries for the following dates/transactions.
(a)
(b)
(c)
(d)
May 1, 2017—Inception of futures contract, no premium paid.
June 30, 2017—Nash prepares financial statements.
September 30, 2017—Nash prepares financial statements.
October 5, 2017—Nash purchases 310 ounces of titanium at $814 per ounce and settles the
futures contract.
(e) December 15, 2017—Nash sells clubs containing titanium purchased in October 2017 for
$272,000. The cost of the finished goods inventory is $135,000.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.
If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No.
(a)
Date
May 1, 2017
Account Titles and Explanation
No Entry
Debit
0
No Entry
(b)
June 30, 2017
Futures Contrac
0
9,610
Unrealized Hold
(c)
Sep. 30, 2017
Futures Contrac
9,610
2,480
Unrealized Hold
(d)
Oct. 5, 2017
Inventory
Cash
(To record purchase.)
Credit
2,480
252,340
252,340
Cash
12,090
Futures Contrac
12,090
(To record settlement of futures
contract.)
(e)
Dec. 15, 2017
Cash
272,000
Sales Revenue
272,000
(To record sales.)
Cost of Goods S
135,000
Inventory
135,000
(To record cost of goods sold.)
Unrealized Hold
12,090
Cost of Goods S
12,090
(To record change in earnings.)
(f) Indicate the amount(s) reported in the income statement related to the futures contract and the
inventory transactions on December 31, 2017.
NASH CO.
Partial Income Statement
For the Quarter Ended December 31, 2017
Sales revenue
Cost of goods sold
Gross profit
$
272,000
122,910
$
149,090
(b) Unrealized Holding Gain or Loss—Equity = [($806 – $775) x 310 ounces] = $9,610
(c) Unrealized Holding Gain or Loss—Equity = [($814 – $806) x 310 ounces] = $2,480
(d) Cash
Futures Contract
= ($814 x 310 ounces)
= $252,340
= [($814 – $775) x 310 ounces] = $12,090
(e) Cost of Goods Sold
= ($9,610 + $2,480)
(f) Cost of inventory
$135,000
Less: Futures contract adjustment
12,090
Cost of goods sold
$122,910
= $12,090