Chapter Review
15-7fExercises
Entries for Equity Investments: Less than 20% Ownership
OBJ. 2
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On February 22, Triangle Corporation acquired 34,000 shares of the 500,000 outstanding common stock of Jupiter Co. at $25 plus commission charges of $680. On June 1, a cash dividend of $1.70 per share was received. On November 12, 7,000 shares were sold at $31 less commission charges of $100. At the end of the accounting period on December 31, the fair value of the remaining 27,000 shares of Jupiter Company’s stock was $25.52 per share.
Journalize the entries for (a) the purchase of stock, (b) the receipt of dividends, (c) the sale of 7,000 shares, and (d) the change in fair value.
AnswerCheck Figure: c. Gain on sale of investments, $41,760
Entries for Equity Investments: Less than 20% Ownership
OBJ. 2
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The following equity investment transactions were completed by Vintage Company during a recent year:
Apr. 10. Purchased 11,000 shares of Delew Company’s common stock for a price of $60 per share plus a brokerage commission of $220. Delew Company has 250,000 shares of common stock outstanding. July 8. Received a quarterly dividend of $0.85 per share on the Delew Company investment. Sept. 10. Sold 3,000 shares for a price of $54 per share less a brokerage commission of $90. Dec. 31. At the end of the accounting period, the fair value of the remaining 8,000 shares of Delew Company’s stock was $59.90 per share. Journalize the entries for these transactions.
AnswerCheck Figure: Sept. 10, Loss on sale of investments, $18,150
Entries for Equity Investments: Less than 20% Ownership
OBJ. 2
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Quan Corp. manufactures construction equipment. Journalize the entries to record the following selected equity investment transactions completed by Quan during a recent year using the fair value method.
Feb. 2. Purchased for cash 3,100 shares of Celeste Inc.’s common stock for $32 per share plus a $124 brokerage commission. Celeste Inc. has 80,000 shares of common stock outstanding. Mar. 6. Received dividends of $0.45 per share on Celeste Inc. stock. June 7. Purchased 1,400 shares of Celeste Inc. stock for $38 per share plus a $56 brokerage commission. July 26. Sold 4,000 shares of Celeste Inc. stock for $41 per share less a $100 brokerage commission. Quan assumes that the first investments purchased are the first investments sold. Sept. 25. Received dividends of $0.62 per share on Celeste Inc. stock. Dec. 31. At the end of the accounting period, the fair value of the remaining 500 shares of Celeste Inc. stock was $20,720. AnswerCheck Figure: Sept. 25, Dividend revenue, $310
Entries for Equity Investments: Less than 20% Ownership
OBJ. 2
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Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The following investment transactions were completed during the year:
Feb. 24. Acquired 1,000 shares of Tett Co.’s common stock for $85 per share plus a $150 brokerage commission. May 16. Acquired 2,500 shares of Issacson Co.’s common stock for $36 per share plus a $100 commission. July 14. Sold 400 shares of Tett Co. stock for $100 per share less a $75 brokerage commission. Aug. 12. Sold 750 shares of Issacson Co. stock for $32.50 per share less an $80 brokerage commission. Oct. 31. Received dividends of $0.40 per share on Tett Co. stock. Dec. 31. At the end of the accounting period, the fair value of the remaining 600 shares of Tett Co.’s stock was equal to its cost of $85.35 per share. The fair value of the remaining 1,750 shares of Isaacson Co.’s stock was $36.04 per share. Journalize the entries for these transactions.
Entries for Equity Investments: 20%–50% Ownership
OBJ. 2
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At a total cost of $5,600,000, Herrera Corporation acquired 280,000 shares of Tran Corp. common stock as a long-term investment. Tran Corp. has 800,000 shares of common stock outstanding, including the shares acquired by Herrera Corporation.
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Journalize the entries by Herrera Corporation to record the following information:
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Tran Corp. reports net income of $600,000 for the current period.
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A cash dividend of $0.50 per common share is paid by Tran Corp. during the current period.
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Why is the equity method appropriate for the Tran Corp. investment?
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Entries for Equity Investments: 20%–50% Ownership
OBJ. 2
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On January 4, 20Y4, Ferguson Company purchased 480,000 shares of Silva Company’s common stock directly from one of the founders for a price of $30 per share. Silva has 1,200,000 shares outstanding, including the Daniels shares. On July 2, 20Y4, Silva paid $750,000 in total dividends to its shareholders. On December 31, 20Y4, Silva reported a net income of $2,000,000 for the year.
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Journalize the Ferguson Company entries for the transactions involving its investment in Silva Company during 20Y4.
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Determine the December 31, 20Y4, balance of the investment in Silva Company stock account.
AnswerCheck Figure: $14,900,000
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Entries for Equity Investments: 20%–50% Ownership
OBJ. 2
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On January 6, 20Y8, Bulldog Co. purchased 34% of the outstanding common stock of Gator Co. for $212,000. Gator Co. paid total dividends of $24,000 to all shareholders on June 30, 20Y8. Gator had a net loss of $56,000 for 20Y8.
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Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock.
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Compute the balance of Investment in Gator Co. Stock on December 31, 20Y8.
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How does valuing an investment under the equity method differ from valuing an investment at fair value?
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Entries for Equity Investments: 20%–50% Ownership
OBJ. 2
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Hawkeye Company’s balance sheet reported, under the equity method, its long-term investment in Raven Company for comparative years as follows:
Dec. 31, 20Y6 Dec. 31, 20Y5 Investment in Raven Company stock (in millions) $281 $264 In addition, the 20Y6 Hawkeye Company income statement disclosed equity earnings in the Raven Company investment as $25 million. Hawkeye Company neither purchased nor sold Raven Company stock during 20Y6. The fair value of the Raven Company stock investment on December 31, 20Y6, was $310 million.
Explain the change in Investment in Raven Company Stock from December 31, 20Y5, to December 31, 20Y6.
Entries for Bond (Held-to-Maturity) Investments
OBJ. 3
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Demopoulos Company acquired $150,000 of Marimar Co., 6% bonds on May 1 at their face amount. Interest is paid semiannually on May 1 and November 1. On November 1, Demopoulos Company sold $55,000 of the bonds for 98.
Journalize the entries to record the following:
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The initial acquisition of the bonds on May 1.
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The semiannual interest received on November 1.
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The sale of the bonds on November 1.
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The accrual of $950 interest on December 31.
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Entries for Bond (Held-to-Maturity) Investments
OBJ. 3
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Bula Investments acquired $240,000 of Effenstein Corp., 8% bonds at their face amount on October 1, 20Y1. The bonds pay interest on October 1 and April 1. On April 1, 20Y2, Bula sold $90,000 of Effenstein Corp. bonds at 102.
Journalize the entries to record the following selected transactions:
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The initial acquisition of the Effenstein Corp. bonds on October 1, 20Y1.
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The adjusting entry for 3 months of accrued interest earned on the Effenstein Corp. bonds on December 31, 20Y1.
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The receipt of semiannual interest on April 1, 20Y2.
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The sale of $90,000 of Effenstein Corp. bonds on April 1, 20Y2, at 102.
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The receipt of the face value of the remaining bonds at their maturity on October 1, 20Y8.
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Entries for Bond (Held-to-Maturity) Investments
OBJ. 3
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Gillooly Co. purchased $360,000 of 6%, 20-year Lumpkin County bonds on May 11, Year 1, directly from the county, at their face amount plus accrued interest. The bonds pay semiannual interest on April 1 and October 1. On October 31, Year 1, Gillooly Co. sold $90,000 of the Lumpkin County bonds at 98 plus $450 accrued interest less a $200 brokerage commission.
Journalize the entries to record the following:
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The purchase of the bonds on May 11 plus 40 days of accrued interest.
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Semiannual interest on October 1.
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Sale of the bonds on October 31.
AnswerCheck Figure: Oct. 31, Loss on sale of investments, $2,000
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Adjusting entry for accrued interest on December 31, Year 1.
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The receipt of the face value of the remaining bonds at their maturity on April 1, Year 20.
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Entries for Bond (Held-to-Maturity) Investments
OBJ. 3
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The following bond investment transactions were completed by Starks Company:
Jan. 31. Purchased 75, $1,000 government bonds at 100 plus accrued interest of $375 (1 month). The bonds pay 6% annual interest on July 1 and January 1. July 1. Received semiannual interest on bond investment. Aug. 30. Sold 35, $1,000 bonds at 98 plus $350 accrued interest (2 months). -
Journalize the entries for the preceding transactions.
AnswerCheck Figure: Aug. 30, Loss on sale of investments, $700
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Journalize the December 31 adjusting entry for semiannual interest earned on the bonds.
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Journalize the receipt of $40,000 at the bonds, maturity on July 1.
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Interest for Bond (Held-to-Maturity) Investments
OBJ. 3
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On February 1, Hansen Company purchased $120,000 of 5%, 20-year Knight Company bonds at their face amount plus 1 month’s accrued interest. The bonds pay interest on January 1 and July 1. On October 1, Hansen Company sold $40,000 of the Knight Company bonds acquired on February 1, plus 3 months’ accrued interest. On December 31, 3 months’ interest was accrued for the remaining bonds.
Determine the interest earned by Hansen Company on Knight Company bonds for the year.
Trading Invesments: Missing Financial Statement Items
OBJ. 4
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JED Capital Inc. makes investments in trading securities. Selected income statement and balance sheet items for the years ended December 31, Year 2 and Year 3, are as follows:
Determine the missing lettered items assuming JED Capital Inc. paid no dividends.
AnswerCheck Figure: g. $6,000
Journal Entries for Trading Investments
OBJ. 2, 4
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The investments of Charger Inc. include an investment of trading securities of Raiders Inc. purchased on February 24, 20Y7, for $551,000. The fair value of the securities on December 31, 20Y7, is $609,000.
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Journalize the entries for the February 24 purchase and the adjustment to fair value on December 31, 20Y7.
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How is a unrealized gain or loss for trading investments reported on the financial statements?
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If the Raiders Inc. securities had been classified as available-for-sale securities, how would the investment be reported on the financial statements?
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Journal Entries for Trading Investments
OBJ. 2, 4
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Gruden Bancorp Inc. purchased a portfolio of trading securities during 20Y3, its first year of operations. The cost and fair value of this portfolio on December 31, 20Y3, are as follows:
On May 10, 20Y4, Gruden Bancorp Inc. purchased trading securities of Carroll Inc. for $34,900.
Journalize the entries to record the following:
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The adjusting entry for the portfolio of trading securities on December 31, 20Y3.
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The May 10, 20Y4, purchase of Carroll Inc. securities.
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The adjusting entry for the portfolio of trading securities on December 31, 20Y4. Assume that except for the purchase of Carroll Inc. securities there were no other transactions involving trading securities in 20Y4. In addition, assume that the fair value of the portfolio of trading securities on December 31, 20Y4, is $175,000.
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What amount should be reported for trading investments on the December 31, 20Y4, balance sheet?
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Journal Entries for Available-for-Sale Securities.
OBJ. 2, 4
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M. Jones Inc. purchased the following available-for-sale securities during 20Y5, its first year of operations:
The fair value of the various available-for-sale securities on December 31, 20Y5, was as follows:
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Journalize the adjusting entry for the fair value of the portfolio of securities on December 31, 20Y5.
AnswerCheck Figure: Dec. 31, 20Y5, Unrealized gain (loss) on available-for-sale investments, $17,500
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If the fair value of the portfolio of securities were the same on December 31, 20Y6, what would be the journal entry to adjust the portfolio to fair value?
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If the fair value of the portfolio of securities was $340,000 on December 31, 20Y6, what would be the journal entry to adjust the portfolio to fair value?
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If the fair value of the portfolio of securities was $330,000 on December 31, 20Y6, what would be the journal entry to adjust the portfolio to fair value?
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Dividend Yield
OBJ. 5
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At the market close of a recent year, McDonald’s Corporation had a closing stock price of $198.01. In addition, McDonald’s Corporation had a dividend per share of $4.19 during the previous year.
Determine McDonald’s Corporation’s dividend yield. Round to one decimal place.
Dividend Yield
OBJ. 5
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The market price for Microsoft Corporation closed at $101.57 and $85.95 on December 31, current year, and previous year, respectively. The dividends per share were $1.68 for current year and $1.56 for previous year.
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Determine the dividend yield for Microsoft on December 31, current year, and previous year. Round percentages to two decimal places.
AnswerCheck Figure: Dec. 31, current year, 1.65%
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Interpret these measures.
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Dividend Yield
OBJ. 5
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Booking Holdings Inc. is a leading provider of online travel and related services, provided to consumers and local partners through six primary brands: Booking.com, KAYAK, priceline.com, agoda.com, Rentalcars.com, and OpenTable. In a recent annual report, Booking Holdings Inc. published the following dividend policy:
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We have not declared or paid any cash dividends on our capital stock since our inception and do not expect to pay any cash dividends for the foreseeable future.
Given Booking Holdings’ dividend policy, why would investors be attracted to its stock?
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Comprehensive Income
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On December 31, 20Y7, Valur Co. had the following available-for-sale investment disclosure within the Current Assets section of the balance sheet:
There were no purchases or sales of available-for-sale investments during 20Y8. On December 31, 20Y8, the fair value of the available-for-sale investment portfolio was $200,000. The net income of Valur Co. was $210,000 for 20Y8.
Compute the comprehensive income for Valur Co. for the year ended December 31, 20Y8.