E17-7 (Trading Securities Entries) On December21, 2010, Zurich Company provided you with the followinginformation regarding its trading securities.
December 31, 2010
Investments(Trading) Cost Fair Value Unrealized Gain (Loss)
Stargate Corp. stock $20,000 $19,000 $(1,000)
Carolina Co. stock 10,000 9,000 (1,000)
Vectorman Co. stock 20,000 20,600 600
Total Portfolio $50,000 $48,600 (1,400)
Previous securities fair value adjustment balance -0-
Securities fair value adjustment—Cr. $(1,400)
During 2011, Carolina Company stock was sold for $9,500. The fairvalue of the stock on December 31, 2011, was: Stargate Corp.stock-$19,300; Vectorman Co. stock-$20,500.
(a) Prepare the adjusting journal entry needed on December 31,2010.
(b) Prepare the journal entry to record the sale of the CarolinaCompany stock during 2011. (List multiple debit/credit entries fromlargest to smallest amount, e.g. 10, 5, 2.)
(c) Prepare the adjusting journal entry needed on December 31,2011.
E17-12 (Journal Entries for Fair Value and EquityMethods) Presented below are two independentsituations.
Situation 1
Hatcher Cosmetics acquired 10% of the 200,000 shares of commonstock of Ramirez Fashion at a total cost of $14 per share on March18, 2010. On June 30, Ramirez declared and paid a $75,000 cashdividend. On December 31, Ramirez reported net income of $122,000for the year. At December 31, the market price of Ramirez Fashionwas $15 per share. The securities are classified asavailable-for-sale.
Situation 2
Holmes, Inc. obtained significant influence over Nadal Corporationby buying 25% of Nadal’s 30,000 outstanding shares of common stockat a total cost of $9 per share on January 1, 2010. On June 15,Nadal declared and paid a cash dividend of $36,000. On December 31,Nadal reported a net income of $85,000 for the year
P17-3 (Available-for-Sale Investments)
Cardinal Paz Corp. carries an account in its general ledger calledInvestments, which contained debits for investment purchases, andno credits, with the following descriptions.
Feb. 1, 2010 Sharapova Company common stock, $100 par, 200 shares$37,400
April 1 U.S. government bonds, 11%, due April 1, 2020, interestpayable April 1 and October 1, 110 bonds of $1,000 par each110,000
July 1 McGrath Company 12% bonds, par $50,000, dated March 1, 2010purchased at 104 plus accrued interest, interest payable annuallyon March 1, due March 1, 2030 54,000
Prepare entries necessary to classify the amounts into properaccounts, assuming that all the securities are classified asavailable-for-sale. (List multiple debit/credit entries fromlargest to smallest amount, e.g. 10, 5, 2.)
Prepare the entry to record the accrued interest and theamortization of premium on December 31, 2010, using thestraight-line method. (List multiple debit/credit entries fromlargest to smallest amount, e.g. 10, 5, 2. Round computations to 3decimal places, e.g. 12.252 and the final answers to zero decimalplaces, e.g. 12,510.)
The fair values of the securities on December 31, 2010, were:
Sharapova Company common stock $31,800
U.S. government bonds 124,700
McGrath Company bonds 58,600
What entry or entries, if any, would you recommend be made?
The U.S. government bonds were sold on July 1,2011, for $119,200plus accrued interest. Give the proper entry. (List multipledebit/credit entries from largest to smallest amount, e.g. 10, 5,2.)
P17-8 (Fair Value and Equity Methods)
Brooks Corp. is a medium-sized corporation specializing inquarrying stone for building construction. The company has longdominated the market, at one time achieving a 70% marketpenetration. During prosperous years, the company’s profits,coupled with a conservative dividend policy, resulted in fundsavailable for outside investment. Over the years, Brooks has had apolicy of investing idle cash in equity securities. In particular,Brooks has made periodic investments in the company’s principalsupplier, Norton Industries. Although the firm currently owns 12%of the outstanding common stock of Norton Industries, Brooks doesnot have significant influence over the operations of NortonIndustries.
Cheryl Thomas has recently joined Brooks as assistant controller,and her first assignment is to prepare the 2010 year-end adjustingentries for the accounts that are valued by the “fair value” rulefor financial reporting purposes. Thomas has gathered the followinginformation about Brooks’ pertinent accounts.
1. Brooks has trading securities related to Delaney Motors andPatrick Electric. During this fiscal year, Brooks purchased 100,000shares of Delaney Motors for $1,400,000; these shares currentlyhave a market value of $1,600,000. Brooks’ investment in PatrickElectric has not been profitable; the company acquired 50,000shares of Patrick in April 2010 at $20 per share, a purchase thatcurrently has a value of $720,000.
2. Prior to 2010, Brooks invested $22,500,000 in Norton Industriesand has not changed its holdings this year. This investment inNorton Industries was valued at $21,500,000 on December 31, 2009.Brooks’ 12% ownership of Norton Industries has a current marketvalue of $22,225,000.
Prepare the appropriate adjusting entries for Brooks as of December31, 2010, to reflect the application of the “fair value” rule forboth classes of securities described above.
Prepare the entries for the Norton investment, assuming that Brooksowns 25% of Norton’s shares. Norton reported income of $500,000 in2010 and paid cash dividends of $100,000.
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