You are on page 1of 70

For the following investments, identify whether they are:

1.

TRADING SECURITIES.

2.

AVAILABLE FOR SALE

3.

HELD TO MATURITY

(a) A bond that will mature in 4 years was bought 1 mo. ago, when the
price dropped. As soon as the value increases, which is expected
next month, it will be sold.
1

TRADING

b.

10% of the outstanding stock of Farm-Co was purchased. The co.


is planning on eventually getting a total of 30% of its outstanding
stock.
2

c.

10-year bonds were purchased this year. The bonds mature at


the first of next year.
1

d.

SECURITY AVAILABLE FOR SALE

TRADING SECURITIES

Bonds that will mature in 5 years are purchased. The co. would
like to hold them until they mature, but money has been tight
recently, and they may need to be sold.
2

SECURITY AVAILABLE FOR SALE

e.

Preferred stock was purchased for its constant dividend. The co.
is planning to hold the preferred stock for a long time.
2
f.

SECURITY AVAILABLE FOR SALE

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.

HELD TO MATURITY

Exercise 17-3

On January 1, 2006 Hi and Lois Co. purchased 12% bonds, having a MV


of $300,000, for $322,744.44. The bonds provide the bondholders with a 10%
yield. They are dated January 1, 2006, and mature January 1, 2011, with interest
receivable December 31 of each year. Hi and Lois Co. use the effective interest
method to allocate unamortized discount or premium. The bonds are classified
as HTM.
(a)

Prepare the journal entry at the date of bond purchase.


HTM. $322,744.44
Cash.$322,744.44

(b)

Prepare a bond amortization table:


next page

Date
1/1/06
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10

Cash
$36,000
36,000
36,000
36,000
36,000

Interest Rev
$32,274.44
31,901.89
31,492.08
31.041.29
30,545.86

PremiumCarrying value
$3,725.56
4,098.11
4,507.92
4,958.71
5,454.14

322,744.44
319,018.88
314,920.77
310,412.85
305,454.14
300,000.00

c.

Prepare the journal entry to record interest for 2006.


Cash $36,000
HTM.$3,725.56
Interest Revenue. $32,274.44

d.

Prepare the journal entry to record interest for 2007.


Cash.. $36,000
HTM..$4,098.11
Interest Revenue.. $31,901.89

Assume same info as 17-3, only consider the bonds to be SAS securities.
The FMV of bonds at 12/31/year end are:
2006
2007
2008
2009
2010

1.

$320,500
$309,000
$308,000
$310,000
$300,000

PURCHASE
SAS....... $322,744.44
Cash........$322,744.44

b.

Interest received and recognition of FMV for 2006.


Cash....... $36,000
SAS.........$3,725.56
Interest Rev.. $32,274.44
FMV
$320,500 new FMV
$319,018.88
---------------$1,481 UHG-EQ

MA-SAS....$1,481.12
UHG-EQ...........$1,481.12

c.

FMV for 2007


Adjusted Cost...$314,920.77 (from table)
vs
FMV............
309,000
----------(5,920.77) LOSS
UHG/L

7,401.89

5,920.77

1,481.12

UHL-EQ.... $7,401.89
MA-SAS.........$7,401.89

On January 1, 2006,
Phantom Co. acquires
$200,000 of Spiderman
Products, Inc, 9% bonds
at a price of $185,589.
The interest is payable
each December 31, and the
bonds mature December
31, 2008.
The investment will provide Phantom Company a 12%
yield. The bonds are classified as HELD-TO-MATURITY.
Bond is issued at a discount or premium?

(a)

Prepare a 3-year schedule of interest revenue and bond discount amortization,


applying the straight-line method.

Date
1/1/06

Cash

Interest Revenue

----

12/31/06 $18,000
12/31/07 18,000
12/31/08 18,000

Bond Disc Amortz

----$22,804
22,804
22,803

----$4,804
4,804
4,803

Carrying Amt
$185,589
190,393
195,197
200,000

(b) Prepare a 3-year schedule of interest revenue


and bond discount amortization applying
the EFFECTIVE INTEREST METHOD.

Date
1/1/06

Cash
----

12/31/06 $18,000
12/31/07 18,000
12/31/08 18,000

Interest Revenue

Bond Disc Amortz

----$22,270.68
22,783.16
23,357.16

----$4,270.68
4,783.16
5,357.16

Carrying Amt
$185,589
189.859.68
194,642.84
200,000

(c)

Prepare the journal entry for the interest receipt


of December 31, 2007 and the discount amortization
under the SL method.

Cash $18,000
HTM.. 4,804
Interest Revenue.$22,804

(d)

Prepare the journal entry for the interest receipt


of December 31, 2007 and the discount amortization
under the effective interest method.

Cash$18,000
HTM.. 4,783.16
Interest Revenue..$22,783

Following is available for Barkley at 12/31/06 regarding its investments:


Cost
3000 sh of Myers Corp C/S $40,000
1000 sh of Cole Inc. PS
25,000
---------$65,000
a.

FMV
$48,000
22,000
---------$70,000

PREPARE the adjusting entry (if any) for 2006 assuming


the securities are classified as Trading.
MA-TS....$5,000
UHG-IS.......$5,000
b.

Prepare adjustments if they are classified as SAS.


MA-SAS $5000
UHG-EQ $5000

c.

Discuss how amounts reported in f/s are affected by entries in a and b.


DONE.

On 12/21/06 Bucky Katt. provided you with the following info on its
trading securities:
12/31/06
Investments (Trading)
Clemson Corp. Stock
Colorado Co. Stock
Buffaloes Co. Stock
TOTAL

Cost
FMV
$20,000 $19,000
10,000
9,000
20,000 20,600
$50K
$48,600

Unrealized Gain(Loss)
$(1,000)
(1,000)
600
(1,400)

Previous securities
FMV adj

-0-

Securities fv adjustments

$(1400)

During 2007 CO co. stock was sold for $9,400. The FMV of the stock
on 12/31/07 was Clemson Corp stock- $19,100; Buffaloes Corp stock $20,500.

a.

Prepare the adjusting entry needed 12/31/06.


Overall change is -1400.
UHL/G-IS....$1400
MA-TS.........$1400

b.

Prepare the entry to record the sale of CO during 2007.


During 2007 CO co. stock was sold for $9,400.
Cash........ $9400
Loss........ 600
Cost
FMV
TS............$10,000
Colorado Co. Stock

c.

Adjustment on 2007.

MA-TS $1K
UHG-IS $1K

Clemson
Buffaloes
TOTAL
Previous
Adjustment

Cost
$20K
20K
40K

FMV

10,000

9,000

UHG/L

$19,100 (900) clemson


20,500 500 buffalos
39,600 (400)
(1400)
+$1000

At December 31, 2006 the Available-for-Sale


equity portfolio for Steffi Graf, Inc. is as follows.
Security Cost

FMV

Unrealized G or L

$17500

$15000

(2500)

12500

14000

1500

23000

25500

2500

$54,500

+$1,500

Total

$53,000

Previous fair value (market) adjustment


was a $400 DR balance.
This years FV (market) adjustment is an $1,100 DR
On January 20, 2007 Steffi Graf. Inc sold Security A for $15,100. The sale proceeds
are net of brokerage fees.

(a)

Prepare the ADJUSTING ENTRY at 12/31/06 to report the portfolio at FMV.

Market adjustment (SAS).. $1,100


Unrealized Holding Gain-EQ..$1,100

(b)

Show the B/S presentation of the investment related accounts at


12/31/06 ignoring footnotes.

Current Assets
Securities Available for Sale.. $53,000
+ Market Adjustment.. 1,500
------------------------------------------------------$54,500
Stockholders Equity
C/S.xx
APIC.xx
RE..xx
AOCI. $1,500

(c)

Prepare the journal entry for the 2007 sale of Security A.

On January 20, 2007 Steffi Graf. Inc sold Security A for $15,100. The sale proceeds
are net of brokerage fees.
At December 31, 2006 the Available-for-Sale
equity portfolio for Steffi Graf, Inc. is as follows.
Security

Cost

FMV

Unrealized G or L

$17500

$15000

(2500)

12500

14000

1500

23000

25500

2500

$54,500

$1,500

Total

$53,000

Cash.. $15,100
Loss. 2,400
SAS$17,500

Presented below are two independent situations:


1.

Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of


Martinez Fashion at a total cost of $13/share on March 18, 2007. On June 30,
Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez
reported NI of $122,000 for the year. At December 31, the market price of
Martinez Fashion was $15/sh. The securities are classified as Available-For-Sale.
INSTRUCTIONS:
Prepare all necessary journal entries in 2007 for both situations.

1.

Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of


Martinez Fashion at a total cost of $13/share on March 18, 2007.
SAS $260,000
CASH $260,000

On June 30, Martinez declared and paid a $75,000 cash dividend.


Cash $7,500
Dividend Revenue.. $7,500

On December 31, Martinez reported NI of $122,000 for the year.


No Entry
At December 31, the market price of Martinez Fashion was
$15/sh.
($15-$13) * 20,000sh = $40,000
Market Adjustment (MA) SAS. $40,000
Unrealized Holding Gain (UHG/L) EQUITY $40,000

2.

Monica, Inc. obtained significant influence over Seles Corporation by


buying 30% of Seles 30,000 outstanding shares of common stock at
a total cost of $9/sh on January 1, 2007. On June 15, Seles declared
and paid a cash dividend of $36,000. On December 31, Seles reported
a net income of $85,000 for the year.

buying 30% of Seles 30,000 outstanding shares of common stock at


a total cost of $9/sh on January 1, 2007
.30 (30,000) x $9/sh = $81,000

Investment in Seles $81,000


Cash$81,000

On June 15, Seles declared and paid a cash dividend of


$36,000
$36,000 x .30 = $10,800
Cash.. $10,800
Investment in Seles $10,800
On December 31, Seles reported a net income of $85,000 for the year.
$85,000 x .30 = $25,500
Investment in Seles.. $25,500
Revenue from investment. $25,500

Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding
stock. At the time of the purchase, Sub Co. had a book value of
$3,200,000. Sub Co. pays out 40% of net income in dividends each
year.
INSTRUCTIONS:
Use the information in the following T-account for the investment
in Sub to answer the following quesitons.
Investment in Sub
1,000,000
110,000

44,000

(a)

How much was Parent Cos share of


Subs Cos NI for the year?

$110,000
THE DR. INCREASE

Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding
stock. At the time of the purchase, Sub Co. had a book value of
$3,200,000. Sub Co. pays out 40% of net income in dividends each
year.
INSTRUCTIONS:
Use the information in the following T-account for the investment
in Sub to answer the following quesitons.
Investment in Sub
1,000,000
110,000

44,000

(b)

How much was Parent Cos share of Sub


Cos dividends for the year?

$44,000
THE CR DECREASE

Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding
stock. At the time of the purchase, Sub Co. had a book value of
$3,200,000. Sub Co. pays out 40% of net income in dividends each
year.
INSTRUCTIONS:
Use the information in the following T-account for the investment
in Sub to answer the following quesitons.
Investment in Sub
1,000,000
110,000

44,000

(c)

What was Subs TOTAL NET INCOME


for the year?

$110,000 = TOTAL x .25


Total = $440,000

Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding
stock. At the time of the purchase, Sub Co. had a book value of
$3,200,000. Sub Co. pays out 40% of net income in dividends each
year.
INSTRUCTIONS:
Use the information in the following T-account for the investment
in Sub to answer the following questions.
Investment in Sub
1,000,000
110,000

44,000

(d)

What was Sub Cos TOTAL DIVIDENDS


for the year.

$44,000 = Total x .25


Total = $176,000 represents
the total DIVIDENDS PAID
OUT.

Jaycie Phelps acquired 20% of the outstanding common stock of Theresa Kulikowski Inc.
on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski
Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007.
Kulikowski reported NI of $730,000 for 2007. The FMV of Kulikowskis stock was $27 per
share at December 31, 2007.

Kulikowski
PHELPS

Jaycie Phelps acquired 20% of the outstanding common stock of Theresa Kulikowski Inc.
on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski
Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007.
Kulikowski reported NI of $730,000 for 2007. The FMV of Kulikowskis stock was $27 per
share at December 31, 2007.
(a)

Prepare the journal entries for Jaycie Phelps Inc. for 2006 & 07, assuming that Phelps
cannot exercise significant influence over Kulikowski. The securities should be classified
as available-for-sale.

PURCHASE 12/31/06?

June 30 dividend paid 2007.

Available-for-Sale (SAS)..$1,200,000
Cash..$1,200,000

Cash.$42,500
Dividend Revenue..$42,500

FMV adjustment:
Cost =$1,200,000
vs
FMV = $27 x 50,000 = $1,350,000
-------------------------------------------FMV increase $150,000
PHELPS

$0.85 x 50,000sh = $42,500

Kulikowski

December 31 another dividend paid and EOY


Cash.$42,500
Dividend Revenue..$42,500
MA-SAS.$150,000
UHG-EQ$150,000

Jaycie Phelps acquired 20% of the outstanding common stock of Theresa Kulikowski Inc.
on December 31, 2006. The purchase price was $1,200,000 for 50,000 shares. Kulikowski
Inc. declared and paid an $0.85 per share cash dividend on June 30 and on December 31, 2007.
Kulikowski reported NI of $730,000 for 2007. The FMV of Kulikowskis stock was $27 per
share at December 31, 2007.
(b)

Prepare the journal entries for Jaycie Phelps Inc. for 2006 & 07, assuming that Phelps
CAN exercise significant influence over Kulikowski.

PURCHASE 2006?

June 30 dividend paid 2007.

Investment in K. Stock..$1,200,000
Cash..$1,200,000

Cash.$42,500
Investment in K...$42,500

NI adjustment:
Kulikowskis NI = $730,000
x .20
---------$146,000

PHELPS

$0.85 x 50,000sh = $42,500

December 31 another dividend paid and EOY


Cash.$42,500
Investment in K..$42,500

Kulikowski

Investment in K$146,000
Revenue from Investment..$146,000

(c)

At what amount is the investment in securities reported on the balance sheet


under each of the methods at December 31, 2007. What is the total NI reported
in 2007 under each of these methods?
SAS

Balance
Sheet

SAS$1,200,000
+
MA 150,000
-----------------------$ 1,350,000

Dividend Revenue $85,000


Income
Statement

EQUITY METHOD
Investment in K$1,261,000

Revenue from
investment $146,000

Presented below is an amortization schedule related to Kathy Baker Companys 5-year,


$100,000 bond with a 7% interest rate and a 5% yield, purchased on December 31, 2004
for $108,660.
Date

Cash

12/31/04
12/31/05 $7,000
12/31/06 7,000
12/31/07 7,000
12/31/08 7,000
12/31/09 7,000

Interest Revenue
$5,433
5,354
5,272
5,186
5,095

Bond Prem Amtz

Carrying

$1,567
1,646
1,728
1,814
1,905

$108,660
107,093
105,447
103,719
101,905
100,000

The following schedule presents a comparison of the amortized cost and the FMV of the
bonds at year-end.

12/31/05 12/31/06 12/31/07 12/31/08 12/31/09


amortized cost

$107,093 $105,447 $103,719 $101,905 $100,000

FMV

$106,500 $107,500 $105,650 $103,000 $100,000

(a)

Prepare the entry to record the purchase of these bonds on December 31, 2004
assuming that the bonds are classified as HTM. Paid $108,660.

HTM.$108,660
Cash.$108,660

(b)

Prepare the journal entry(ies) related to the HTM bonds for 2005.

(next slide)

(b)

Prepare the journal entry(ies) related to the HTM bonds for 2005.

Cash. $7,000
Interest Revenue.$5,433
HTM.$1,567

12/31/05 12/31/06 12/31/07 12/31/08 12/31/09

Date

Cash

12/31/04
12/31/05 $7,000
12/31/06 7,000
12/31/07 7,000
12/31/08 7,000
12/31/09 7,000

amortized cost

$107,093 $105,447 $103,719 $101,905 $100,000

FMV

$106,500 $107,500 $105,650 $103,000 $100,000

Interest Revenue
$5,433
5,354
5,272
5,186
5,095

Bond Prem Amtz

Carrying

$1,567
1,646
1,728
1,814
1,905

$108,660
107,093
105,447
103,719
101,905
100,000

(c)

Prepare the journal entry(ies) related to the HTM bonds for 2007.

Cash. $7,000
Interest Revenue.$5,272
HTM.$1,728

12/31/05 12/31/06 12/31/07 12/31/08 12/31/09

Date

Cash

12/31/04
12/31/05 $7,000
12/31/06 7,000
12/31/07 7,000
12/31/08 7,000
12/31/09 7,000

amortized cost

$107,093 $105,447 $103,719 $101,905 $100,000

FMV

$106,500 $107,500 $105,650 $103,000 $100,000

Interest Revenue
$5,433
5,354
5,272
5,186
5,095

Bond Prem Amtz

Carrying

$1,567
1,646
1,728
1,814
1,905

$108,660
107,093
105,447
103,719
101,905
100,000

(d)

Prepare the entry to record the purchase of these bonds, assuming they are
classified as available-for sale

Available-for-sale.$108,660
Cash$108,660

(e)

Prepare the journal entry(ies) related to the available for sale bonds for 2005.

Cash. $7,000
Interest Revenue.$5,433
SAS...$1,567
AND

UHL-EQ..$593
MA-SAS..$593

(107,093-106,500) = (593)

12/31/05 12/31/06 12/31/07 12/31/08 12/31/09

Date

Cash

12/31/04
12/31/05 $7,000
12/31/06 7,000
12/31/07 7,000
12/31/08 7,000
12/31/09 7,000

amortized cost

$107,093 $105,447 $103,719 $101,905 $100,000

FMV

$106,500 $107,500 $105,650 $103,000 $100,000

Interest Revenue
$5,433
5,354
5,272
5,186
5,095

Bond Prem Amtz

Carrying

$1,567
1,646
1,728
1,814
1,905

$108,660
107,093
105,447
103,719
101,905
100,000

(f)

Prepare the journal entry(ies) related to the SAS bonds for 2007.
+1,931 needed now

Cash. $7,000
Interest Revenue.$5,272
SAS...$1,728

$2,053 - $1,931 = $122


UHL-EQ $122
MA-SAS.$122
UHG of
$2053 carry
forward from
last year
12/31/05 12/31/06 12/31/07 12/31/08 12/31/09

Date

Cash

12/31/04
12/31/05 $7,000
12/31/06 7,000
12/31/07 7,000
12/31/08 7,000
12/31/09 7,000

amortized cost

$107,093 $105,447 $103,719 $101,905 $100,000

FMV

$106,500 $107,500 $105,650 $103,000 $100,000

Interest Revenue
$5,433
5,354
5,272
5,186
5,095

Bond Prem Amtz

Carrying

$1,567
1,646
1,728
1,814
1,905

$108,660
107,093
105,447
103,719
101,905
100,000

Presented below is information taken from a bond investment amortization schedule with
related FMVs provided. These bonds are classified as SAS.
12/31/06

12/31/07

12/31/08

Amortized Cost

$491,150

$519,442

$550,000

FMV

$499,000

$506,000

$550,000

(a)

Indicate whether the bonds were purchased at a DISCOUNT or PREMIUM.

Presented below is information taken from a bond investment amortization schedule with
related FMVs provided. These bonds are classified as SAS.
12/31/06

12/31/07

12/31/08

Amortized Cost

$491,150

$519,442

$550,000

FMV

$499,000

$506,000

$550,000

$7,850 +
(b)

Prepare the adjustment entry to record the bonds at FMV at 12/31/06.


The securities FV adjustment has a debit balance of $1,000 prior to adjustment.

+$7,850 UHG needed


vs
1,000 UHG exists (MA is DR balance)
--------------------------------------------------+$6,850 adjustment

MA-SAS.. $6,850
UHG-EQ$6,850

Presented below is information taken from a bond investment amortization schedule with
related FMVs provided. These bonds are classified as SAS.
12/31/06

12/31/07

12/31/08

Amortized Cost

$491,150

$519,442

$550,000

FMV

$499,000

$506,000

$550,000

- 13,442
(c)

Prepare the adjusting entry to record the bonds at FMV at 12/31/07.

+$7,850 UHG exists


vs
-13,442 needed (519,442 506,000)
--------------------------------------------------- $21,292 adjustment

UHL-EQ.. $21,292
MA-SAS$21,292

Woolford Co. has the following portfolio of SAS securities at 12/31/06.


Per Share

Security
Favre Inc.
Brady Corp.
McNabb Co.

Unrealized HoldingPercent
Loss-EQ $48,000
Quantity Market Adjustment
Interest EQ $48,000
Cost
2,000 sh.
8%
$11
5,000 sh.
14%
23
4,000 sh.
2%
31

Market
$16
17
24

INSTRUCTIONS:
(a).

What should be reported on Woolfords 12/31/06 BS relative to these


long-term SAS securities?

FV analysis
Favre Inc.
Brady Corp.
McNabb Co.

Cost

FV

2,000 x 11 = $22,000
5,000 x 23 = $115,000
4,000 x 31 = $124,000
$261,000

$32,000
$85,000

UHG(L)
+$10,000 UHG
-$30,000 UHL

$96,000

-$28,000 UHL

$213,000

-$48,000 UHL

lance Sheet as of December 31, 200


Long-term investments
Available for Sale Securities, at cost

$261,000

Less: Securities fair value adjustment

48,000

Available for sale securities, at fair value

$213,000

Stockholders Equity
Common stock

$ xx

APIC

xx

RE

xx

Accumulated other comprehensive income


Total Stockholders Equity.

(48,000)
$

xx

On December 31, 2007 Woolfords portfolio of SAS securities consisted of


the following common stocks: At the end of year 2007 Woolford changed its
intent relative
to itsLoss-EQ
investment
in Favre Inc and reclassified the shares
Unrealized
Holding
$1,000
to trading
securities
status when the shares
Market
Adjustment-SAS..
$1,000were selling for $9 per share.
Per Share
Percent
Security
Interest
Cost
MarketQuantity
Adjustment-SAS.
$48,000
Brady Corp.
5,000
sh.
14%Loss-EQ $48,000
23
Unrealized
Holding
McNabb Co.
4,000 sh.
2%
31
McNabb Co.
2,000 sh.
1%
25

Market
30
23
23

(b). What should be reported on the face of Woolfords 12/31/07 BS relative


to available for sale securities investments?
UHG/L-EQ
FV analysis
$48,000
$48,000
Brady Corp.
$1,000
McNabb Co.
$1,000

Cost

FV

$115,000
$174,000
$289,000

$150,000

UHG(L)
+$35,000 UHG

$138,000

-$36,000 UHL

$288,000

-$1,000

REMOVE PREVIOUS UHL of $48,000

lance Sheet as of December 31, 200


Long-term investments
Available for Sale Securities, at cost

$289,000

Less: Securities fair value adjustment

1,000

Available for sale securities, at fair value

$288,000

Stockholders Equity
Common stock

$ xx

APIC

xx

RE

xx

Accumulated other comprehensive income


Total Stockholders Equity.
FOOTNOTE: on next page about Favre.

(1,000)
$

xx

Favre securities are transferred to the trading category at FAIR VALUE,


which becomes the NEW COST BASIS of the security. The unrealized
holding loss of $4,000 ($11-$9) is recognized in earnings at the date of the
transfer. Any UHG/L-EQ attached to this security would have been removed
when the $48,000 was backed out.
TS.$18,000 (2000sh x 9)
UHL-IS$ 4,000
SAS..$22,000 (2000 x 11)

(c). Assuming that comparative financial statements for 2006 and 2007 are presented,
draft the footnote necessary for full disclosure of Woolfords transactions
and position in equity securities.
Note: Investments.
The FV and UHG/L of equity securities were as follows:
December 31, 2006
SAS
Equity Sec.

Gross Unrealized
Cost
Gains
$289,000
$35,000

Losses
$(36,000)

FV
$288,000

Losses
$(58,000)

FV
$213,000

December 31, 2007


SAS
Equity Sec

Gross Unrealized
Cost
Gains
$261,000
$10,000

Big Brother Holdings Inc. had the following available-for-sale investment portfolio at
January 1, 2006:
Earl Company.. 1000 sh @ $15 each..
$15,000
Josie Company.
900 sh @ $20 each
18,000
David Company..
500 sh @ $9 each
4,500
----------------------------------------------------------------------------------------------------------Available for Sale securities at cost..
$37,500
FV adjustment (SAS)
(7,500)
----------------------------------------------------------------------------NET at FMV
$30,000
=======
INSTRUCTIONS:
(a)

Prepare journal entries for each of the


transactions discussed below.

During 2006 the following transactions took place:


1.

On March 1, Josie Company paid a $2 per share dividend.

900 sh x $2 = $1800
Cash. $1,800
Dividend Revenue.$1,800
2.

On April 30, Big Brother Holdings Inc. sold 300 shares of David Company
for $10 per share.
COST = $9 vs FMV = $10; $1 x 300 = $300 gain
Cash$3,000
SAS $2,700 (cost)
GAIN. $300

3.

On May 15 Big Brother Holdings Inc. purchased 50 more shares of


Earl Co. stock at $16 per share.
50 x $16 = $800
SAS..$ 800
Cash..$800

4.

At December 31, 2006, the stocks had the


following price per share
MA-SAS$8,450
values: Earl $17, Josie $19, and David $8.
UHG-EQ..$8,450
Earl

$15,000 + $800 = $15,800 cost vs $17,850 fmv = +2,050

Josie

$18,000

David

$1,800 (left)
vs $1600 fmv = (200)
-----------------------------------------------------------------------------$35,600
$36,550
$+950
vs
PREVIOUS
-7,500
-------------------------------------------------------------------------------ADJUSTMENT
+$8,450

vs $17,100 fmv = (900)

During 2007 the following transactions took place:


5.

On February 1, Big Brother Holdings sold the remaining David shares for $7 a share.

200 shares left x 7fmv = $1400


vs
200 shares left x 9 (cost) = $1800
-----------------------------------------$400 LOSS
6.

Cash..$1400
LOSS. 400
SAS$1800

On March 1, Josie Company paid a $2 per share dividend.


900 shares x $2 = $1800
Cash..$1800
Dividend Revenue$1800

7.

On December 21, Earl Company declared a cash dividend of $3 per share to be


paid in the next month.
1,050 shares x $3 = $3,150
Dividend Receivable$3,150
Dividend Revenue$3,150
8.

At December 31, 2007, the stocks had the following price per share values:
Earl $19, Josie $21.
Earl

$15,800 cost vs $19,950 fmv = +4,150

Josie

$18,000 cost vs $18,900 fmv = + 900


--------------------------------------------------$33,800
$38,850
$5,050
vs
Previous adjustment
+950
--------------------------------------------------ADJUSTMENT
$4100

MA-SAS..$4100
UHG-EQ$4100

(b)

Prepare a partial balance sheet showing the Investments account at


December 31, 2006 and 2007.
2006

2007
Dividend Receivable. $3,150

SAS. $35,600
+
MA.. 950
----------------------------------------at FMV
$36,550

Accumulated OCI $950

SAS. $33,800
+
MA.. 5,050
-----------------------------at FMV $38,850

Accumulated OCI.. $5,050