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Chapter 17 - Class Problems

Example 1. On January 2, 2003, Ronaldo Company purchased bonds of A Company for $18,000. The bonds have maturity value of $20,000, mature in ten years, and pay interest annually on December 31 at 4% annual rate. The market value of the bonds were $18,800 at 12-31-2003 and $19,400 at 12-31-2004. Income before consideration of investment was $40,000 in 2003 and $60,000 in 2004. Required: Part a. Suppose the investment is classified as an available for sale security. 1. Prepare all journal entries related to the investments for 2003 and 2004. 2. Compute net income and comprehensive income for 2003 and 2004. 3. Show the balance sheet presentation of the investments at 12-31-2003 and 2004. Part b. Repeat part a if the investment is classified as a held to maturity security.

Example 2. On January 1, 2001, Gordon Company purchased 30% of the common stock of Ford Company for $450,000. On that date, Fords balance sheet showed assets of $2,000,000, liabilities of $500,000, and equity of $1,500,000.00 Fords net income was $100,000 for 2001 and $150,000 for 2002. Ford paid dividends of $30,000 in 2001 and $50,0 in 2002. Gordons income before consideration of the investment was $200,000 in 2001 and $300,000 in 2002. Required: a. Show the balance sheet presentation of the investment at 12-31-2001 and 2002 on Gordons balance sheet. b. Compute Gordons net income for 2001 and 2002.

y for $18,000. The bonds have a ber 31 at 4% annual rate. The Income before consideration of the

stock of Ford Company for s of $500,000, and equity of

ds of $30,000 in 2001 and $50,000 001 and $300,000 in 2002.

on Gordons balance sheet.

Solution to example 1 Ronaldo Journal Entries Available for sale 1/2/2003 Investment in bonds Cash 12/31/2003 Cash Investment in bonds Interest income (record interest income) 18,000 18,000 800 200 1,000

Discount amortization is a debit to the investment account. Amount = (20,000 - 18,000)/10 12/31/2003 Securities fair value adjustment Unrealized gain (loss) OCI (mark to market) 12/31/2004 Cash Investment in bonds Interest income (record interest income) 800 200 1,000 600 600

12/31/2004 Securities fair value adjustment Unrealized gain (loss) OCI (mark to market)

400 400

Held to Maturity 1/2/2003 Investment in bonds Cash 12/31/2003 Cash Investment in bonds Interest income (record interest income) 18,000 18,000 800 200 1,000

Discount amortization is a debit to the investment account. Amount = (20,000 - 18,000)/10 Note: do not mark to market since investments are HTM. 12/31/2004 Cash Investment in bonds Interest income (record interest income) 800 200 1,000

Worksheet for Investments in Bonds Example 1 Ronaldo


Available for sale securities Year Year 2003 2004 40,000 60,000 1,000 1,000 Held to maturity securities Year 2003 40,000 1,000

Income before investments Interest income Unrealized gains/losses trading Realized gains/losses on sale Net income Other comprehensive income Unrealized gains/losses AFS Comprehensive income

41,000 600 41,600

61,000 400 61,400

41,000

41,000

Balance Sheets 12-31Assets: Investments Equity Acc. Other comp. income Computation of unrealized gains/losses Market value of portfolio year end Cost of portfolio year end Difference = desired ending balance Beginning balance Difference = unrealized gain (loss) 18,800 18,200 600 600 19,400 18,400 1,000 600 400

18,800 600

19,400 1,000

18,200

e 1 Ronaldo

Held to maturity securities Year 2004 60,000 1,000

61,000

61,000

18,400

Solution to example 2 Gordon Ford Balance Sheets 12-31Investment in Ford 2001 471,000 Computation of net income 2001 Income before investments 200,000 Equity income 30,000 Net income 230,000 Cash (record purchase of investment) 2001 Investment in Ford Equity income (record equity income) Cash Investment in Ford (record receipt of dividends. .3 x 30,000) Investment in Ford Equity income (record equity income) Cash Investment in Ford (record receipt of dividends. .3 x 50,000) Computation of equity income 30% of Ford's income Investment in Ford Cost Add 01 equity income Less 01 dividends balance 12-31-01 Add 02 equity income Less 02 dividends balance 12-31-02 450,000 30,000 (9,000) 471,000 45,000 (15,000) 501,000 2001 30,000 2002 45,000 2002 300,000 45,000 345,000 70,000 2002 501,000

30,000 30,000

2001

9,000 9,000

2002

45,000 45,000

2002

15,000 15,000

Chapter 16 1b

Net Income to Common (980,000-45,000) Wt. ave shares O/S Basic EPS Basic Diluted: Preferred Bonds Diluted EPS

2d

3b

Treasury Stock Method: 40,000 sh x $15 = $600,000 Proceeds $600,000/$20 = 30,000 sh 40,000 sh - 30,000 sh = 10,000 sh outstanding Shares 300,000 12 months 50,000 6 months 10,000 Options Months o/s 12/12 = 6/12 = 12/12 =

4c 5b 6c

Treasury stock method Convertible securities are assumed converted only if they Shares Months o/s 400,000 9/12 = 100,000 Issued Oct. 1 500,000 3/12 =

$2,144,000/ 425,000 sh 7c Net income - preferred dividends = NI to common 800,000 - 110,000 = $690,000/600,000 sh 8b Basic Diluted: Preferred Diluted EPS same as Basic

NI to common = $750,000 - 300,000 = $450,000 9c Shares 2,500,000 500,000 3,000,000 250,000 3,250,000 Basic Dilutive: Bonds 5000 bonds x 40 sh x 3/12 Dilutive Months o/s 3/12 = 3/12 = 6/12 =

Assume bonds are dilutive. Chapter 17 1a

Unrealized holding gains/losses for trading securities are r income statement. Aggregate cost Aggregate market Unrealized holding loss-income

2d

Unrealized holding gains/losses for available for sale are r comprehensive income and not used to determine net inc Cost 150,000 150,000

3a Dec. 31, 2001 Increase 2002 Dec. 31, 2002 4d

Company B: Sales price less brokerage fee Cost Realized loss - income

5b

Realized gains and interest income are used to determine Unrealized holding gains/losses are not recognized for he

6d 7b Purchased price of bonds and interest on April 1, 2002: Accrued interest - 200,000 x 9% x 3/12 Purchased price of bonds on April 1, 2002: Amort. Discount for 7 months Carrying value of bonds on Oct. 31, 2002 Discount 200,000 - 194,000 Life of bonds to maturity Amort. Discount per month

8d

Wray - use the equity method to account for dividends King - reduce investment account for liquidating dividend Bow - 2% x 200,000 Total dividend income

9b

Saxe should carry equity securities on the books at cost u but report them at market value at the balance sheet date account Cost

10 d

A liquidating dividend reduces the investment account und fair value methods.

11 c

Under trading (fair value method), dividend income is reco on the investment account.

Under the equity method, the investment account is reduc 12 d 13 d

Stock dividends received are not considered dividend inco The additional shares are used to reduce the cost basis fo

The realized gain on sale of Nolan stock in 2002 is compu Cost of investment 4000 x $16.50 Shares held (4,000 + 400*) Cost per share Sales price of stock Cost of shares sold: 400 x $15 Realized gain on sale - not dividend income

*Stock dividend - 10% x 4000 shares = 400 additional sha

on (980,000-45,000)

935000/ 90,000 sh $ 10.39 935,000 Shares 90,000 $ 10.39

Amounts

45,000 980,000 60,000 1,040,000

30,000 120,000 20,000 140,000

8.17 7.43

00,000 Proceeds

h = 10,000 sh outstanding Months o/s Wt. Ave. 300,000 25,000 10,000 335,000

are assumed converted only if they are dilutive Months o/s Wt. Ave 300,000 125,000 425,000 $ 5.04

0/ 425,000 sh

d dividends = NI to common $ 1.15

$690,000/600,000 sh Amounts 450,000

Shares 200,000 $

2.25

300,000

100,000 $

3.00 Antidilutivel 2.25

0,000 - 300,000 = $450,000 Months o/s Wt. Ave 625,000 750,000 1,625,000 3,000,000 50,000 3,050,000

ds x 40 sh x 3/12

ains/losses for trading securities are reported in the $ 360,000.00 -320,000.00 40,000.00

ains/losses for available for sale are reported as part of me and not used to determine net income. Market Unrealized holding gain/loss 20,000 Loss 30,000 increase gain-stockholders' equity 160,000 10,000 Gain 130,000

15,000-1,500

13,500 17,000 3,500

nterest income are used to determine net income. ains/losses are not recognized for held-to-maturity securities.

onds and interest on April 1, 2002: 0,000 x 9% x 3/12 onds on April 1, 2002: 7 x 400 ds on Oct. 31, 2002 200,000 - 194,000

198,500 -4,500 194,000 2,800 196,800 6,000 15 months $ 400.00

Dividend Income method to account for dividends 0 0 4,000 4,000

ment account for liquidating dividend

uity securities on the books at cost under the fair value method arket value at the balance sheet date, using a market adjustment 150,000 reduces the investment account under both the equity and

lue method), dividend income is recorded and there is no effect

hod, the investment account is reduced for dividends received.

ved are not considered dividend income by the investor. are used to reduce the cost basis for each share held.

sale of Nolan stock in 2002 is computed as follows: 66,000 4,400 15.00 10,600.00 6,000.00 4,600.00

$ $

- not dividend income

% x 4000 shares = 400 additional shares