FA2 TUT 5

Chapter 17
E17.1. (LO1) (Investment Classifications) For the following investments, identify
whether they are:
1. Debt investments—held-for-collection.
2. Debt investments—held-for-collection and selling.
3. Debt investments—trading.
4. Trading equity investments.
5. Non-trading equity investments.
Each case is independent of the other.
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 month, it will be sold.
b. 10% of the outstanding shares of Farm-Co are purchased. The company is planning on
eventually getting a total of 30% of its outstanding shares.
c. 10-year bonds were purchased this year. The bonds mature at the first of next year, and the
company plans to sell the bonds if interest rates fall.
d. Bonds that will mature in 5 years are purchased. The company has a strategy to hold them to
collect interest payments and principal of the bonds at maturity.
e. 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.
f. Ordinary shares in a distributor are purchased to meet a regulatory requirement for doing
business in the distributor's region. The investment will be held indefinitely
E17.5(LO1) (Debt Investments) On January 1, 2019, Morgan Company acquires $300,000 of
Nicklaus, Inc., 9% bonds at a price of $278,384. The interest is payable each December 31, and
the bonds mature December 31, 2021. The investment will provide Morgan Company a 12%
yield. The bonds are classified as held-for-collection.
Instructions
a. Prepare a 3-year schedule of interest revenue and bond discount amortization. (Round to
nearest cent.)
b. Prepare the journal entry for the interest receipt of December 31, 2020, and the discount
amortization.
E17.6(HFCS Debt Securities Entries and Financial Statement
Presentation) At December 31, 2019, the held-for-collection and selling debt
portfolio for Steffi Graf SA is as follows.

On January 20, 2020, Steffi Graf SA sold security A for €15,100. The sale proceeds are net of
brokerage fees.
Instructions
a. Prepare the adjusting entry at December 31, 2019, to report the portfolio at fair value.
b. Show the statement of financial position presentation of the investmentrelated accounts at
December 31, 2019. (Ignore notes presentation.)
c. Prepare the journal entry for the 2020 sale of security A.
E17.8 (Fair Value Option) Presented below is selected information related
to the financial instruments of Dawson Ltd. at December 31, 2019 (amounts in
thousands). This is Dawson Ltd.'s first year of operations.

Instructions
a. Dawson elects to use the fair value option whenever possible. Assuming that Dawson's net
income is ¥100,000 in 2019 before reporting any financial instrument gains or losses, determine
Dawson's net income for 2019.
b. Record the journal entry, if any, necessary at December 31, 2019, to record the fair value
option for the bonds payable.
E17.9 (LO4) (Comprehensive Income Disclosure) Assume the same information as E17.6 and
that Steffi Graf SA reports net income in 2019 of €120,000 and in 2020 of €140,000. Total
holding gains (including any realized holding gain or loss) equal €40,000 in 2020.
Instructions
a. Prepare a statement of comprehensive income for 2019, starting with net income.
b. Prepare a statement of comprehensive income for 2020, starting with net income

CHAPTER 18:
E18.1(Fundamentals of Revenue Recognition) Presented below are five different situations.
Provide an answer to each of these questions.
a. The Kawaski Jeep dealership sells both new and used Jeeps. Some of the Jeeps are used for
demonstration purposes; after 6 months, these Jeeps are then sold as used vehicles. Should
Kawaski Jeep record these sales of used Jeeps as revenue or as a gain?
b. One of the main indicators of whether control has passed to the customer is whether revenue
has been earned. Is this statement correct?
c. One of the five steps in determining whether revenue should be recognized is whether the sale
has been realized. Do you agree?
d. One of the criteria that contracts must meet to apply the revenue standard is that collectibility
of the sales price must be reasonably possible. Is this correct?
e. Many believe the distinction between revenue and gains is important in the financial
statements. Given that both revenues and gains increase net income, why is the distinction
important?

E18.4(Determine Transaction Price) Jupiter Company sells goods to Danone Inc. by accepting
a note receivable on January 2, 2019. The goods have a sales price of $610,000 (cost of
$500,000). The terms are net 30. If Danone pays within 5 days, however, it receives a cash
discount of $10,000. Past history indicates that the cash discount will be taken. On January 28,
2019, Danone makes payment to Jupiter for the full sales price.
Instructions
a. Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter
Company on January 2, 2019, and the payment on January 28, 2019. Assume that Jupiter
Company records the January 2, 2019, transaction using the net method.
b. Prepare the journal entry(ies) to record the sale and related cost of goods sold for Jupiter
Company on January 2, 2019, and the payment on January 28, 2019. Assume that Jupiter
Company records the January 2, 2019, transaction using the gross method
E18.5(Determine Transaction Price) Jeff Heun, president of Concrete Always, agrees to
construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with
Dakota to construct the path for $200,000. In addition, as part of the contract, a performance
bonus of $40,000 will be paid based on the timing of completion. The performance bonus will be
paid fully if completed by the agreed-upon date. The performance bonus decreases by $10,000
per week for every week beyond the agreed-upon completion date. Jeff has been involved in a
number of contracts that had performance bonuses as part of the agreement in the past. As a
result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff
estimates, given the constraints of his schedule related to other jobs , that there is 55%
probability that he will complete the project on time, a 30% probability that he will be 1 week
late, and a 15% probability that he will be 2 weeks late.
Instructions
a. Determine the transaction price that Concrete Always should compute for this agreement.
b. Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to
complete this project on time. Assuming that he now believes that the probability for completing
the project on time is 90% and otherwise it will be finished 1 week late, determine the
transaction price
E18.10(Allocate Transaction Price) Geraths Windows manufactures and sells custom storm
windows for three-season porches. Geraths also provides installation service for the windows.
The installation process does not involve changes in the windows, so this service can be
performed by other vendors. Geraths enters into the following contract on July 1, 2019, with a
local homeowner. The customer purchases windows for a price of $2,400 and chooses Geraths to
do the installation. Geraths charges the same price for the windows irrespective of whether it
does the installation or not. The installation service is estimated to have a standalone selling price
of $600. The customer pays Geraths $2,000 (which equals the standalone selling price of the
windows, which have a cost of $1,100) upon delivery and the remaining balance upon
installation of the windows. The windows are delivered on September 1, 2019, Geraths
completes installation on October 15, 2019, and the customer pays the balance due.
Instructions
Prepare the journal entries for Geraths in 2019. (Round amounts to nearest dollar.)
E18.11(Allocate Transaction Price) Refer to the revenue arrangement in E18.10. Instructions
Repeat the requirements, assuming (a) Geraths estimates the standalone selling price of the
installation based on an estimated cost of $400 plus a margin of 20% on cost, and (b) given
uncertainty of finding skilled labor, Geraths is unable to develop a reliable estimate for the
standalone selling price of the installation. (Round amounts to nearest dollar.)