SOLUTIONS TO ASSIGNMENTS
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EXERCISE 17-1
(a) Jan. 1 Debt Investments............................................ 60,900
Cash ($60,000 + $900)........................................ 60,900
July 1 Cash ($60,000 X 10% X 1/2).......................... 3,000
Interest Revenue................................................. 3,000
1 Cash ($32,000 – $400).................................... 31,600
Debt Investments................................................ 30,450
($60,900 X 1/2)
Gain on Sale of Debt Invest-
ments ($31,600 – $30,450)............................ 1,150
(b) Dec. 31 Interest Receivable......................................... 1,500
Interest Revenue................................................. 1,500
($30,000 X 10% X 1/2)
EXERCISE 17-2
(a) Feb. 1 Stock Investments.......................................... 7,200
Cash ($7,000 + $200).......................................... 7,200
July 1 Cash (600 X $1)............................................... 600
Dividend Revenue.............................................. 600
Sept. 1 Cash ($4,000 – $100)...................................... 3,900
Stock Investments.............................................. 3,600
($7,200 X 1/2)
Gain on Sale of Stock Invest-
ments ($3,900 – $3,600)................................. 300
Dec. 1 Cash (300 X $1)............................................... 300
Dividend Revenue.............................................. 300
(b) Dividend revenue and the gain on sale of stock investments are reported under other revenues and gains in the income statement.
EXERCISE 17-5
(a) 2002
Mar. 18 Stock Investments...................................... 260,000
Cash (200,000 X 10% X $13)............................ 260,000
June 30 Cash................................................................. 7,500
Dividend Revenue............................................. 7,500
($75,000 X 10%)
Dec. 31 Market Adjustment—Available-for
Sale.............................................................. 20,000
Unrealized Gain—Equity
(Available-for-Sale)........................................ 20,000
($280,000 – $260,000)
(b) Jan. 1 Stock Investments......................................... 81,000
Cash (30,000 X 30% X $9)................................ 81,000
June 15 Cash................................................................. 10,500
Stock Investments............................................. 10,500
($35,000 X 30%)
Dec. 31 Stock Investments......................................... 24,000
Revenue from Investment in
Orlando Corp................................................. 24,000
($80,000 X 30%)
EXERCISE 17-6
(a) Dec. 31 Unrealized Loss—Income
(Trading Securities).................................. 4,000
Market Adjustment—Trading.......................... 4,000
(b) Balance Sheet
Current assets
Short-term investments, at fair value................................... $49,000
Income Statement
Other expenses and losses
Unrealized loss on trading securities.................................. $4,000
EXERCISE 17-7
(a) Dec. 31 Unrealized Loss—Equity
(Available-for-Sale)........................................ 4,000
Market Adjustment—Available-
for-Sale.............................................................. 4,000
(b) Balance Sheet
Investments
Investment in stock of less than 20% owned
companies, at fair value.................................................... $49,000)
Stockholders’ equity
Less: Unrealized loss on available-for-sale
securities................................................................... $(4,000)
(c) Dear Mr. Lieberman:
Investments which are classified as trading (held for sale in the near term) are reported at fair value in the balance sheet, with unrealized gains or losses reported in net income. Investments which are classified as available-for-sale (held longer than trading but not to maturity) are also reported at fair value, but unrealized gains or losses are reported in the stockholders’ equity section.
Fair value is used as a reporting basis because it represents the cash realizable value of the securities. Unrealized gains or losses on trading investments are reported in the income statement because of the likelihood that the securities will be sold at fair value in the near term. Unrealized gains or losses on available-for-sale securities are reported in stockholders’ equity rather than in income because there is significant chance that future changes in fair value will reverse unrealized gains or losses. So as to not distort income with these fluctuations, they are reported directly in stockholders’ equity.
I hope that the preceding discussion clears up any misunderstandings. Please contact me if you have any questions.
Sincerely,
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PROBLEM 17-1A |
(a) 2002
Jan. 1 Debt Investments.................................. 5,000,000
Cash.................................................................. 5,000,000
July 1 Cash ($5,000,000 X .10 X 1/2)............. 250,000
Interest Revenue............................................ 250,000
Dec. 31 Interest Receivable............................... 250,000
Interest Revenue............................................ 250,000
2005
Jan. 1 Cash........................................................ 250,000
Interest Receivable........................................ 250,000
1 Cash........................................................ 2,640,000
Debt Investments........................................... 2,500,000
Gain on Sale of Debt
Investments................................................ 140,000
July 1 Cash ($2,500,000 X .10 X 1/2)............. 125,000
Interest Revenue............................................ 125,000
Dec. 31 Interest Receivable............................... 125,000
Interest Revenue............................................ 125,000
(b) 2002
Dec. 31 Market Adjustment—Available-
for-Sale............................................... 500,000
Unrealized Gain—Equity
(Available-for-Sale).................................... 500,000
PROBLEM 17-1A (Continued)
(c) Balance Sheet
Current assets
Interest receivable.............................................................. $250,000
Investments
Debt investments, at fair value........................................ $5,500,000
The unrealized gain of $500,000 would be reported in the stockholders’ equity section of the balance sheet as an addition to total paid-in capital and retained earnings.
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PROBLEM 17-2A |
(a) Feb. 1 Stock Investments.......................................... 22,400
Cash ($21,800 + $600)........................................ 22,400
Mar. 1 Stock Investments.......................................... 20,400
Cash ($20,000 + $400)........................................ 20,400
Apr. 1 Debt Investments............................................ 41,000
Cash ($40,000 + $1,000)..................................... 41,000
July 1 Cash ($.60 X 400)............................................ 240
Dividend Revenue.............................................. 240
Aug. 1 Cash ($11,600 – $200).................................... 11,400
Stock Investments.............................................. 11,200
[($22,400 ÷ 400) X 200]
Gain on Sale of Stock
Investments..................................................... 200
Sept. 1 Cash ($1 X 800)............................................... 800
Dividend Revenue.............................................. 800
Oct. 1 Cash ($40,000 X 12% X 1/2).......................... 2,400
Interest Revenue................................................. 2,400
1 Cash ($41,000 – $1,000)................................. 40,000
Loss on Sale of Debt Investments.............. 1,000
($41,000 – $40,000)
Debt Investments................................................ 41,000
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Stock
Investments |
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Debt
Investments |
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Feb. 1 22,400 Mar. 1 20,400 |
Aug. 1
11,200 |
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Apr. 1 41,000 |
Oct. 1
41,000 |
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Dec. 31 Bal.
31,600 |
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Dec. 31 Bal.
0 |
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PROBLEM 17-2A (Continued)
(b) Dec. 31 Unrealized Loss—Income
(Trading Securities)................................... 2,200
Market Adjustment—Trading........................... 2,200
($31,600 – $29,400)
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Security |
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Cost |
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Fair Value |
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Alpha common Omega common |
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$11,200 20,400 $31,600 |
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$11,000 18,400 $29,400 |
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(200 X $55) (800 X $23) |
(c) Current assets
Short-term investment, at fair value..................................... $29,400
(d) Other
revenues and gains: Dividend Revenue, Interest Revenue, and Gain on Sale
of Stock Investments. Other expenses and losses: Loss
on Sale of Debt Investments, and Unrealized Loss on Trading Securities.
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PROBLEM 17-3A |
(a) 2003
July 1 Cash (5,000 X $1)............................................ 5,000
Dividend Revenue.............................................. 5,000
Aug. 1 Cash (6,000 X $.50)......................................... 3,000
Dividend Revenue.............................................. 3,000
Sept. 1 Cash [(1,000 X $8) – $200]............................. 7,800
Loss on Sale of Stock Investments............ 1,200
($9,000 – $7,800)
Stock Investments (1,000 X $9)........................ 9,000
Oct. 1 Cash [(800 X $17) – $500].............................. 13,100
Stock Investments (800 X $15)......................... 12,000
Gain on Sale of Stock Invest-
ments ($13,100 – $12,000)............................ 1,100
Nov. 1 Cash (1,500 X $1)............................................ 1,500
Dividend Revenue.............................................. 1,500
Dec. 15 Cash (5,200 X $.50)......................................... 2,600
Dividend Revenue.............................................. 2,600
31 Cash (4,000 X $1)............................................ 4,000
Dividend Revenue.............................................. 4,000
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Stock Investments |
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2003 Jan. 1 Balance 165,000 |
2003 Sept. 1 9,000 Oct. 1 12,000 |
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2003 Dec. 31 Balance 144,000 |
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PROBLEM 17-3A (Continued)
(b) Dec. 31 Unrealized Loss—Equity
(Available-for-Sale)......................................... 1,800
($144,000 – $142,200)
Market Adjustment—Available-
for-Sale................................................................ 1,800
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Security |
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Cost |
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Fair Value |
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Carson Co. common Pirie Co. common Scott Co. common |
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$ 78,000 36,000 30,000 $144,000 |
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$ 83,200 32,000 27,000 $142,200 |
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(5,200 X $16) (4,000 X $8) (1,500 X $18) |
(c) Investments
Investment in stock of less than
20% owned companies, at fair
value............................................................................ $ 142,200
Stockholders’ equity
Common stock......................................... $1,500,000)
Retained earnings.................................... 1,000,000)
Total paid-in capital and
retained earnings........................ 2,500,000)
Less: Unrealized loss on available-
for-sale securities.................... (1,800)
Total stockholders’ equity.................................. $2,498,200
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PROBLEM 17-4A |
(a) Jan. 1 Stock Investments..................................... 800,000
Cash.................................................................... 800,000
Mar. 15 Cash............................................................. 20,000
Dividend Revenue............................................ 20,000
(40,000 X $.50)
June 15 Cash............................................................. 20,000
Dividend Revenue............................................ 20,000
Sept. 15 Cash............................................................. 20,000
Dividend Revenue............................................ 20,000
Dec. 15 Cash............................................................. 20,000
Dividend Revenue............................................ 20,000
31 Market Adjustment—Trading.................. 320,000
Unrealized Gain—Income
(Trading Securities).................................... 320,000
[$800,000 – ($28 X 40,000)]
(b) Jan. 1 Stock Investments..................................... 800,000
Cash.................................................................... 800,000
Mar. 15 Cash............................................................. 20,000
Stock Investments........................................... 20,000
June 15 Cash............................................................. 20,000
Stock Investments........................................... 20,000
Sept. 15 Cash............................................................. 20,000
Stock Investments........................................... 20,000
Dec. 15 Cash............................................................. 20,000
Stock Investments........................................... 20,000
PROBLEM 17-4A (Continued)
Dec. 31 Stock Investments..................................... 90,000
Revenue from Investment in
Quarles Company....................................... 90,000
($360,000 X 25%)
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(c) |
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Fair Value |
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Equity Method |
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Stock Investments Common stock Unrealized Gain—Trading Securities Dividend revenue Revenue from investment in Quarles Company **$28 X 40,000 shares **$800,000 + $90,000 – $80,000 |
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$1,120,000 320,000 80,000 0 |
* |
$810,000 0 90,000 |
** |
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PROBLEM 17-6A |
SCHEER CORPORATION
Balance Sheet
December 31, 2002
Assets
Current assets
Cash $ 72,000
Short-term stock investment,
at fair value 180,000
Accounts receivable $140,000
Less: Allowance for doubtful
accounts 6,000 134,000
Merchandise inventory 170,000
Prepaid insurance 16,000
Total current assets 572,000
Investments
Bond sinking fund 150,000
Investment in Lotto common
stock (10% ownership),
at fair value 286,000
Investment in Portico common
stock (30% ownership),
at equity 230,000
Total investments 666,000
Property, plant, and equipment
Land 500,000
Buildings $950,000
Less accumulated depreciation 180,000 770,000
Equipment 275,000
Less accumulated depreciation 52,000 223,000
Total property, plant,
and equipment 1,493,000
Intangible assets
Goodwill 200,000
Total assets $2,931,000
SCHEER CORPORATION
Balance Sheet (Continued)
December 31, 2002
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable $ 70,000
Accounts payable 250,000
Dividends payable 80,000
Income taxes payable 120,000
Total current liabilities 520,000
Long-term liabilities
Bonds payable, 10%, due 2013 $ 500,000
Plus: Premium on bonds payable 40,000
Total long-term liabilities 540,000
Total liabilities 1,060,000
Stockholders’ equity
Paid-in capital
Common stock, $10 par value,
500,000 shares authorized,
150,000 shares issued and
outstanding 1,500,000
Paid-in capital in excess of par value 200,000
Total paid-in capital 1,700,000
Retained earnings 163,000
Total paid-in capital and retained
earnings 1,863,000
Add: Unrealized gain on available-for-
sale securities 8,000
Total stockholders’ equity 1,871,000
Total liabilities and stockholders’
equity $2,931,000