Doran Chan
Spring I '06
E17-1
AMA202.0035
Prof. Angela Wu
For the following investments indentify whether they are:
1. Trading Securities
2. Available-for-Sale Securities
3. Held-to-Maturity Securities
Each case is independent of the other.
1 (a) A bond that will mature in 4 years was bought 1 month ago when the price dropped.
As soon as the value increases, which is expected next, noth it will be sold.
2 (b) 10% of the outstanding stock of Farm-Co was purchased. The company is plannin
on eventually getting a total of 30% of its outstanding stock.
1 (c) 10-year bonds were purchased this year. The bonds mature at the first of next year.
2 (d) Bond that will mature in 5 years are purched. The company would like to hold them
until they mature, but money has been tight recently and they may need to be sold.
2 (e) Preferred stock was purchased for its constant dividend. They company is planning
to hold the preferred stock for a long time.
3 (f) 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.
1 of 1
6/6/2006
Doran Chan
Spring I '06
AMA202.0035
Prof. Angela Wu
E17-6
1 of 2
6/6/2006
The information on the following page is aailable for Barkley Compnay at December 31,
2003, regarding its investments.
3,000 shares of Myers Corporation Common Stock
1,000 shares of Cole Incorporated Preferred Stock
Cost
40,000
25,000
65,000
Fair Value
48,000
22,000
70,000
Instructions
(a) Prepare the adjesting entry (if any) for 2003, assuming the securities are classified as trading.
(b) Prepare the adjusting entry (if any) for 2003, assuming the securiteis are classified as available.
(c) Discuss how the amounts reported in the financial statements are affected by the entries in (a)
and (b).
Journal Entry
Date
12/31/06 Securities Fair Value Adjustment Trading
Unrealized Holding Gain or Loss Income
(a)
(b)
(c)
12/31 Securities Fair Value Adjustment Available for Sale
Unrealized Holding Gain or Loss Equity
-
Debit
5,000
Credit
5,000
5,000
5,000
Securities Fair Value Adjustment Trading - account use for investment transaction.
Unrealized Holding Gain or Loss Income - reported in I.S. under Other Revenues and Gains
Securities Fair Value Adjustment Available for Sale - account use for investment transaction
Unrealized Holding Gain or Loss Equity - increase in equity statement.
Doran Chan
Spring I '06
AMA202.0035
Prof. Angela Wu
s.
n.
2 of 2
6/6/2006
Doran Chan
Spring I '06
AMA202.0035
Prof. Angela Wu
E17-7
1 of 1
6/6/2006
On December 21, 2003, Tiger Company provided you with the following information
regarding its trading securities.
Investments
Clemson Corp. stock
Colorado Co. stock
Buffaloes Co. stock
Total of portfolio
Previous securites fair value adjustment balance
Securities fair value adjustment - Cr.
Cost
Fair Value Unrealized Gain/Loss
20,000
19,000
-1,000
10,000
9,000
-1,000
20,000
20,600
600
50,000
48,600
-1,400
0
-1,400
During 2004, Colorado Company stock was sold for $9,400. The fair value of the stock on December
31, 2004 was: Clemson Corp stock - $19,100; Buffaloes Co. stock - $20,500.
Instructions
(a) Prepare the adjusting journal entry needed on December 31, 2003.
(b) Prepare the journal entry to record the sale of the Colorado Company stock during 2004.
(c) Prepare the adjusting journal entry needed on December 31, 2004.
(a)
(b)
(c)
Date
Journal Entry
12/31/03 Unrealized Holding Gain or Loss - Income
Securiteis Fair Value Adjustment
xx/xx/04 Cash
Loss on Sale of Securities
Trading Securities
Investments
Clemson Corp. stock
Buffaloes Co. stock
Total of portfolio
Previous securites fair value adjustment balance
Securities fair value adjustment - Dr.
Debit
1,400
Credit
1,400
9,400
600
10,000
Cost
Fair Value Unrealized Gain/Loss
20,000
19,100
-900
20,000
20,500
500
40,000
39,600
-400
-1,400
1,000
Date
Journal Entry
12/31/04 Securiteis Fair Value Adjustment
Unrealized Holding Gain or Loss - Income
Debit
1,000
Credit
1,000
Doran Chan
Spring I '06
E17-13
AMA202.0035
Prof. Angela Wu
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 anser the following
question.
Investment in Sub Co.
1,000,000
110,000
44,000
(a)
(b)
(c)
(d)
How much was Parent Co.'s share of Sub Co.'s net income for the year?
How much was Parent Co.'s share of Sub Co.'s dividends for the year?
What was Sub Co.'s total net income for the year?
What was Sub Co.'s total dividends for the year?
(a)
(b)
(c)
(d)
$110,000 increase in the investment for the year.
$44,000 share of dividends for the year.
$110,000 ÷ 25% = 440,000 is the total net income for the year.
$440,000 x 40% = 176,000 is the total dividends for the year.
1 of 1
6/6/2006
Doran Chan
Spring I '06
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
E13-2
The following are selected 2004 transactions of Sean Astin Corporation.
Sept. 1
Purchased inventory from Encino Company on account for $50,000. Astin records
purchases gross and uses periodic inventory system.
Issued a $50,000, 12-month, 12% note to Encino in payment of account.
Borrowed $50,000 from the Shore Bank by signing a 12-month, noninterest-bearing
$56,000 note.
Oct. 1
Oct. 1
Instructions
(a) Prepare journal entries for the selected transactions above.
(b) Prepare adjusting entries at December 31.
(c) Compute the total net liability to be reported on the December 31 balance sheet for:
(1) the interest-bearing note.
(2) the non-interest-bearing note.
(a)
Date
Sept. 1
Oct. 1
Oct. 1
(b) Dec. 31
Dec. 31
Debit
50,000
Journal Entry
Purchases
Accounts Payable
50,000
Accounts Payable
Notes Payable
50,000
Cash
Discont on Notes Payable
Notes Payable
50,000
6,000
50,000
56,000
Interest Expense
Interest Payable
1,500
Interest Expense
Discont on Notes Payable
1,200
(c) Notes Payable
Interest Payable
(1)
50,000
1,500
51,500
Credit
1,500 << 50,000 x 12% x
1/4
1,200 << 6,000 x 1/4
(2)
1,500 Interest Payable
6,000 Discont on Notes Payable
-4,500
56,000 Notes Payable
51,500
Doran Chan
Spring I '06
E13-11
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
Sheryl Crow Equipment Company sold 500 Rollomatics during 2004 at $6,000 each.
During 2004, Crow spent $20,000 servicing the 2-year warranties that accompany the
Rollomatic. All applicable transactions are on a cash basis.
Instructions
(a) Prepare 2004 entries for Crow using expense warranty approach. Assume that Crow estimates
the total cost of servicing the warranties will be $120,000 for 2 years.
(b) Prepare 2004 entries for Crow assuming that the warranties are not an integral part of the sale.
Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates
the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues earned on
the basis of costs incurred and estimated costs.
(a)
Date
xx-xx
Journal Entry
Cash
Debit
3,000,000
Sales
xx-xx
xx-xx
(b)
xx-xx
Warranty Expense
Cash
Warranty Expense
Estimated Liability Warranties
Cash
3,000,000 << 500 x 6,000
20,000
20,000
100,000
100,000 << 120,000 - 20,000
3,000,000
Sales
Unearned Warranty Revenue
xx-xx
xx-xx
Credit
2,850,000
150,000
Warranty Expense
Cash
20,000
Unearned Warranty Revenue
Warranty Revenue
25,000
20,000
25,000 << (20,000 ÷ 120,000)
x 150,000
Doran Chan
Spring I '06
E13-12
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
Yanni Campany includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2004, Yanni Company
purchased 8,800 premiums at 80 cents each and sold 110,000 boxes of soap powder at
$3.30 per box; 44,000 coupons were presented for redemption in 2004. It is estimated
that 60% of the coupons will eventually be presented for redemption.
Instruction
Prepare all the entries that would be made relative to sales of soap powder and to the premium plan
in 2004.
Date
Journal Entry
Inventory Premiums
Cash
Debit
7,040
Cash
363,000
Credit
7,040 << 8,800 x .80
Sales
363,000 << 110,000 x 3.30
Premium Expense
Inventory Premiums
3,520
Premium Expense
Estimated Liability Premiums
1,760
3,520 << (44,000 ÷ 10) X $.80
1,760 << ((110,000 X 60) – 44,000) ÷ 10 X .80
Doran Chan
Spring I '06
AMA202.0035
Prof. Angela Wu
E13-13
Presented below are three independent situations. Answer the question at the end of
each situation.
1.
During 2004, Salt‐n‐Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa’s attorneys have indicated that they believe it is probable that Salt-n-Pepa will lose this
dispute. They also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and
$1,400,000. After the 2004 financial statements were issued, the case settled with the IRS for
$1,200,000. What amount, if any, should be reported as a liability for this contingency as of
December 31, 2004?
2.
On October 1, 2004, Alan Jackson Chemical was identified as a potentially responsible party by the Environmental Protection Agency. Jackson’s management along with its
counsel have concluded that it is probable that Jackson will be responsible for damages, and a
reasonable estimate of these damages is $5,000,000. Jackson’s insurance policy of $9,000,000
has a deductible clause of $500,000. How should Alan Jackson Chemical report this information in
its financial statements at December 31, 2004?
3.
Melissa Etheridge Inc. had a manufacturing plant in Bosnia, which was destroyed in the civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge
has been assured by governmental officials that it will receive a definite amount for this plant. The
amount of the compensation will be less than the fair value of the plant, but more than its book
value. How should the contingency be reported in the financial statements of Etheridge Inc.?
1. The company should report $900,000 as liability.
2. $500,000 should be accrued because the insurance company cover that amount.
3. Gain contingencies are not recorded.
1 of 1
6/6/2006
Doran Chan
Spring I '06
E13-20
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
Jud Buechler, president of the Supporting Cast Company, has a bonus arrangement with
the company under which he receives 15% of the net income (after deducting taxes and
bonuses) each year. For the current year, the net income before deducting either the
provision for income taxes or the bonus is $299,750. The bonus is deductible for tax
purposes, and the effective tax rate may be assumed to be 40%.
Intructions
(a) Compute the amount of Jud Buechler’s bonus.
(b) Compute the appropriate provision for federal income taxes for the year.
(c) Prepare the December 31 journal entry to record the bonus (which will not be paid until next
year).
(a)
(b)
Bonus
Tax
Bonus
Bonus
Bonus
Bonus
1.09 Bonus
Bonus
=
=
=
=
=
=
=
.15 ($299,750 – Bonus – Tax)
.40 ($299,750 – Bonus)
.15 [$299,750 – Bonus – .4 ($299,750 – Bonus)]
.15 ($299,750 – Bonus – $119,900 + .4 Bonus)
.15 ($179,850 – .6 Bonus)
26,977.50 – .09 Bonus
$26,977.50
$24,750
Tax
Tax
Tax
Taxes
=
=
=
=
.40 ($299,750 – Bonus)
.40 ($299,750 – $24,750)
.40 ($275,000)
$110,000
Date
(c)
=
Journal Entry
Bonus Expense
Bonus Payable
Debit
24,750
Credit
24,750
Doran Chan
Spring I '06
E14-3
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
Presented below are two independent situations.
1. On January 1, 2004, Paul Simon Company issued $200,000 of 9%, 10-year bonds at par.
Interest is payable quarterly on April 1, July 1, and January 1.
2. On June 1, 2004, Graceland Company issued $100,000 of 12%, 10-year bonds dated January
1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1.
Instruction
For each of these two independent situations, prepare journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest on July 1.
(c) The accrual of interest on December 31.
Date
1/1/04 Cash
Paul Simon Company
Journal Entry
Debit
200,000
Bond
7/1/04 Bond Interest Expense
Cash
12/31/04 Bond Interest Expense
Interest Payable
Date
6/1/04 Cash
Graceland Company
Journal Entry
200,000
4,500
4,500 << 200,000 x .09 x 1/4
4,500
4,500
Debit
105,000
Bond
Bond Interest Expense
7/1/04 Bond Interest Expense
Cash
12/31/04 Bond Interest Expense
Interest Payable
Credit
Credit
100,000
5,000 << 100,000 x .12 x 5/12
6,000
6,000 << 100,000 x .12 x 1/2
6,000
6,000
Doran Chan
Spring I '06
E14-4
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2005, at
102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the
straight-line method of amortization for bond premium or discount.
Instructions
Prepare the journal entries to record the following.
(a) The issuance of the bonds.
(b) The payment of interest and the related amortization on July 1, 2005.
(c) The accrual of interest and the related amortization on December 31, 2005.
Date
1/1/05 Cash
Journal Entry
Debit
612,000
Bonds Payable
Premium on Bonds Payable
7/1/05 Premium on Bonds Payable
Bond Interest Expense
Cash
12/31/05 Premium on Bonds Payable
Bond Interest Expense
Bonds Interest Payable
Credit
600,000
12,000 << 600,000 x 1.2
29,700
300
<< 12,000 ÷ 40
30,000 << 600,000 x .1 x 1/2
29,700
300
30,000
Doran Chan
Spring I '06
E14-10
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
On January 1, 2004, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the
bondholders with a 10% yield. The bonds are dated January 1, 2009, and mature January 1, 2009, with interest payable
December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective interest
basis.
Instructions
(a) Prepare the journal entry at the date of the bond issuance.
(b) Prepare a schedule of interest expense and bond amortization for 2004-2006.
(c) Prepare the journal entry to record the interest payment and the amortization for 2004.
(d) Prepare the journal entry to record the interest payment and the amortization for 2006.
(b)
Date
1/1/04
12/31/04
12/31/05
12/31/06
(a)
Bond Amortization Table
12% Bonds Sold to Yield 10%
Interest
Bond
Cash
Expense
Premium
60,000.00
60,000.00
60,000.00
Date
1-Jan-04 Cash
53,790.74
53,169.81
52,486.79
6,209.26
6,830.19
7,513.21
Journal Entry
Carrying
Value
537907.37
531698.11
524867.92
517354.71
Debit
537,907.37
Premium Bonds Payable
Bonds Payable
(c)
(d)
Credit
37,907.37
500,000
31-Dec-04 Bonds Interest Expense
Premium Bonds Payable
Cash
53,790.74
6,209.26
31-Dec-06 Bonds Interest Expense
Premium Bonds Payable
Cash
52,486.79
7,513.21
60,000
60,000
Doran Chan
Spring I '06
E14-12
AMA202.0035
Prof. Angela Wu
1 of 1
6/6/2006
On January 2, 1999, Banno Corporation issued $1,500,000 of 10% bonds at 97 due
December 31, 2008. Legal and other costs of $24,000 were incurred in connection with
the issue. Interest on the bonds is payable annually each December 31. The $24,000
issue costs are being deferred and amortized on a straight-line basis over the 10-year
term of the bonds. The discount on the bonds is also being amortized on a straight-line
basis over the 10 years. (Straight-line is not materially different in effect from the
preferable “interest method”.)
The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2004,
Banno called $900,000 of the bonds and retired them.
Instructions
Ignoring income taxes, compute the amount of loss, if any, to be recognized by Banno as a result
of retiring the $900,000 of bonds in 2004 and prepare the journal entry to record the retirement.
Reacquisition price
Net carrying amount of bonds redeemed:
Par value
Unamortized discount
Unamortized bond issue costs
Loss on redemption
909,000 << 900,000 x 1.01
900,000
-13,500
-7,200
879,300
29,700
Unamortized discount
Original amount of discount: 900,000 x .03 = 27,000 ÷ 10 = 2,700 amortization per year
Amount of discount unamortized: 2,700 x 5 = 13,500
Unamortized issue costs
Original amount of costs: 24,000 x 900,000 ÷ 1,500,000 = 14,400 ÷ 10 = 1,440 amortization per yr
Amount of costs unamortized: 1,440 x 5 = 7,200
Date
Journal Entry
2-Jan-04 Bonds Payable
Loss on Redemption of Bonds
Unamortized Bond Issue Cost
Discount on Bonds Payable
Cash
Debit
900,000
29,700
Credit
7,200
13,500
909,000