Chapter 17

Question 1

On August 1, 2007, Witten Co. acquired 200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2007, and mature on April 30, 2013, with interest paid each October 31 and April 30. The bonds will be added to Witten’s available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2007 is

Answer 1

Dr. Available-for-Sale Securities: 200 × $1,000 × .97 = $194,000
Dr. Interest Revenue: $200,000 × .045 × 3/6 = $4,500
Cr. Cash: $194,000 + $4,500 = $198,500

Question 2

Barr Company purchased bonds with a face amount of $400,000 between interest payment dates. Barr purchased the bonds at 102, paid brokerage costs of $6,000, and paid accrued interest for three months of $10,000. The amount to record as the cost of this long-term investment in bonds is

Answer 2

($400,000 × 1.02) + $6,000 = $414,000

Question 3

Oliver Company purchased $400,000 of 10% bonds of McGee Co. on January 1, 2008, paying $376,100. The bonds mature January 1, 2018; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Oliver Company uses the effective-interest method and plans to hold these bonds to maturity.
On July 1, 2008, Oliver Company should increase its Held-to-Maturity Debt Securities account for the McGee Co. bonds by

Answer 3

($376,100 × .055) – ($400,000 × .05) = $686

Question 4

Oliver Company purchased $400,000 of 10% bonds of McGee Co. on January 1, 2008, paying $376,100. The bonds mature January 1, 2018; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Oliver Company uses the effective-interest method and plans to hold these bonds to maturity.
Held-to-Maturity Debt Securities is $686
For the year ended December 31, 2008, Oliver Company should report interest revenue from the McGee Co. bonds of:

Answer 4

376,100 × .055 = $20,686
($376,100 + $686) × .055 = $20,723
$20,686 + $20,723 = $41,409

Question 5

Marten Co. purchased $500,000 of 8%, 5-year bonds from Duggan, Inc. on January 1, 2008, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Marten Co. decreased the Available-for-Sale Debt Securities account for the Duggan, Inc. bonds on July 1, 2008 and December 31, 2008 by the amortized premiums of $1,770 and $1,830, respectively.
At December 31, 2008, the fair value of the Duggan, Inc. bonds was $530,000. What should Marten Co. report as other comprehensive income and as a separate component of stockholders’ equity?

Answer 5

530,000 – ($520,790 – $1,770 – $1,830) = $12,810

Question 6

Marten Co. purchased $500,000 of 8%, 5-year bonds from Duggan, Inc. on January 1, 2008, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Marten Co. decreased the Available-for-Sale Debt Securities account for the Duggan, Inc. bonds on July 1, 2008 and December 31, 2008 by the amortized premiums of $1,770 and $1,830, respectively.
At April 1, 2009, Marten Co. sold the Duggan bonds for $515,000. After accruing for interest, the carrying value of the Duggan bonds on April 1, 2009 was $516,875. Assuming Marten Co. has a portfolio of Available-for-Sale Debt Securities, what should Marten Co. report as a gain or loss on the bonds?

Answer 6

516,875 – $515,000 = $1,875

Question 7

On August 1, 2007, Bettis Company acquired $200,000 face value 10% bonds of Hanson Corporation at 104 plus accrued interest. The bonds were dated May 1, 2007, and mature on April 30, 2012, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Bettis make to record the purchase of the bonds on August 1, 2007?

Answer 7

Dr. Held-to-Maturity Securities: $200,000 × 1.04 = $208,000
Dr. Interest Revenue: $200,000 × .05 × 3/6 = $5,000
Cr. Cash: $208,000 + $5,000 = $213,000.

Question 8

On October 1, 2007, Porter Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2016, pay interest semiannually on February 1 and August 1. Porter uses the straight-line method of amortization. The bonds should be reported in the December 31, 2007 balance sheet at a carrying value of

Answer 8

975,000 + ($25,000 × 3/100) = $975,750

Question 9

On November 1, 2007, Little Company purchased 600 of the $1,000 face value, 9% bonds of Player, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2012, pay interest semiannually on March 1 and September 1. Assuming that Little uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Little’s December 31, 2007, balance sheet at

Answer 9

632,000 – $9,000 = $623,000
623,000 – ((600,000-632,000)× 2/50) = $622,080

Question 10

On November 1, 2007, Morton Co. purchased Gomez, Inc., 10-year, 9%, bonds with a face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2014. Morton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Morton’s 2007 income statement as a result of Morton’s available-for-sale investment in Gomez was

Answer 10

($250,000 × .045) + ($25,000 × 2/80) – $7,500 = $4,375

Question 11

On October 1, 2007, Lyman Co. purchased to hold to maturity, 200, $1,000, 9% bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2011. Lyman uses straight-line amortization. Ignoring income taxes, the amount reported in Lyman’s 2007 income statement from this investment should be

Answer 11

($200,000 × .09 × 3/12) – ($8,000 × 3/50) = $4,020

Question 12

During 2005, Plano Co. purchased 2,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2007 was $1,960,000. The bonds mature on March 1, 2012, and pay interest on March 1 and September 1. Plano sells 1,000 bonds on September 1, 2008, for $988,000, after the interest has been received. Plano uses straight-line amortization. The gain on the sale is

Answer 12

Discount amortization: 40,000 × 8/50 = 6,400
(1,960,000 + 6,400) ÷ 2 = 983,200
988,000 – 983,200 = 4,800 gain

Question 13

Redman Company’s trading securities portfolio which is appropriately included in current assets is as follows:
Company – Cost – FV – Unrealized Gain/Loss
Arlington Corp – 250,000 – 200,000 – (50,000)
Downs, Inc. – 245,000 – 265,000 – 20,000
=495,000 – =465,000 – =(30,000)
Ignoring income taxes, what amount should be reported as a charge against income in Redman’s 2007 income statement if 2007 is Redman’s first year of operation?

Answer 13

30,000 (unrealized loss)

Question 14

On its December 31, 2006, balance sheet, Quinn Co. reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2007, the fair value of the securities was $585,000. What should Quinn report on its 2007 income statement as a result of the increase in fair value of the investments in 2007?

Answer 14

0 (available-for-sale securities)

Question 15

During 2007, Ellis Company purchased 20,000 shares of Hiller Corp. common stock for $315,000 as an available-for-sale investment. The fair value of these shares was $300,000 at December 31, 2007. Ellis sold all of the Hiller stock for $17 per share on December 3, 2008, incurring $14,000 in brokerage commissions. Ellis Company should report a realized gain on the sale of stock in 2008 of

Answer 15

[(20,000 × $17) – $14,000] – $315,000 = $11,000

Question 16

On its December 31, 2007 balance sheet, Klugman Company appropriately reported a $10,000 debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. There was no change during 2008 in the composition of Klugman’s portfolio of marketable equity securities held as available-for-sale securities. The following information pertains to that portfolio:
Security – Cost – FV on 12/31/08
X – 125,000 – 160,000
Y – 100,000 – 95,000
Z – 175,000 – 125,000 =400,000 – =380,000
What amount of unrealized loss on these securities should be included in Klugman’s stockholders’ equity section of the balance sheet at December 31, 2008?

Answer 16

($400,000 – $380,000) = $20,000

Question 17

On its December 31, 2007 balance sheet, Klugman Company appropriately reported a $10,000 debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. There was no change during 2008 in the composition of Klugman’s portfolio of marketable equity securities held as available-for-sale securities. The following information pertains to that portfolio:
Security – Cost – FV on 12/31/08
X – 125,000 – 160,000
Y – 100,000 – 95,000
Z – 175,000 – 125,000 =400,000 – =380,000
The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2008 is

Answer 17

10,000 + $20,000 = $30,000

Question 18

Kennett Corporation purchased 25,000 shares of common stock of the Swenson Corporation for $40 per share on January 2, 2008. Swenson Corporation had 100,000 shares of common stock outstanding during 2008, paid cash dividends of $60,000 during 2008, and reported net income of $200,000 for 2008. Kennett Corporation should report revenue from investment for 2008 in the amount of

Answer 18

200,000 × (25,000 ÷ 100,000) = $50,000

Question 19

Garrison Co. owns 20,000 of the 50,000 outstanding shares of Steele, Inc. common stock. During 2008, Steele earns $800,000 and pays cash dividends of $640,000. If the beginning balance in the investment account was $500,000, the balance at December 31, 2008 should be

Answer 19

500,000 + [($800,000 – $640,000) × (20,000 ÷ 50,000)] = $564,000

Question 20

Garrison Co. owns 20,000 of the 50,000 outstanding shares of Steele, Inc. common stock. During 2008, Steele earns $800,000 and pays cash dividends of $640,000. Garrison should report investment revenue for 2008 of

Answer 20

800,000 × (20,000 ÷ 50,000) = $320,000

Question 21

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2007 are as follows:
Elston Company Balance Sheet December 31, 2007 Assets: 1,200,000
Liabilities: 150,000
Capital stock: 600,000
Retained earnings: 450,000
Total equities: 1,200,000

Alley Company Balance Sheet December 31, 2007
Assets: 900,000
Liabilities: 225,000
Capital stock: 555,000
Retained earnings: 120,000
Total equities: 900,000
If Elston Company acquired a 20% interest in Alley Company on December 31, 2007 for $195,000 and the fair value method of accounting for the investment were used, the amount of the debit to Investment in Alley Company Stock would have been

Answer 21

195,000, acquisition cost.

Question 22

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2007 are as follows:
Elston Company Balance Sheet December 31, 2007 Assets: 1,200,000
Liabilities: 150,000
Capital stock: 600,000
Retained earnings: 450,000
Total equities: 1,200,000

Alley Company Balance Sheet December 31, 2007
Assets: 900,000
Liabilities: 225,000
Capital stock: 555,000
Retained earnings: 120,000
Total equities: 900,000
If Elston Company acquired a 30% interest in Alley Company on December 31, 2007 for $225,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Alley Company Stock would have been

Answer 22

225,000, acquisition cost

Question 23

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2007 are as follows:
Elston Company Balance Sheet December 31, 2007 Assets: 1,200,000
Liabilities: 150,000
Capital stock: 600,000
Retained earnings: 450,000
Total equities: 1,200,000

Alley Company Balance Sheet December 31, 2007
Assets: 900,000
Liabilities: 225,000
Capital stock: 555,000
Retained earnings: 120,000
Total equities: 900,000
If Elston Company acquired a 20% interest in Alley Company on December 31, 2006 for $135,000 and during 2008 Alley Company had net income of $75,000 and paid a cash dividend of $30,000, applying the fair value method would give a debit balance in the Investment in Alley Company Stock account at the end of 2008 of

Answer 23

135,000, acquisition cost

Question 24

The summarized balance sheets of Elston Company and Alley Company as of December 31, 2007 are as follows:
Elston Company Balance Sheet December 31, 2007 Assets: 1,200,000
Liabilities: 150,000
Capital stock: 600,000
Retained earnings: 450,000
Total equities: 1,200,000

Alley Company Balance Sheet December 31, 2007
Assets: 900,000
Liabilities: 225,000
Capital stock: 555,000
Retained earnings: 120,000
Total equities: 900,000
If Elston Company acquired a 30% interest in Alley Company on December 31, 2007 for $202,500 and during 2008 Alley Company had net income of $75,000 and paid a cash dividend of $30,000, applying the equity method would give a debit balance in the Investment in Alley Company Stock account at the end of 2008 of

Answer 24

202,500 + ($75,000 × .3) – ($30,000 × .3) = $216,000

Question 25

Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company’s common stock for $300,000 on January 2, 2007. During 2007, Flynn Company declared dividends of $50,000 and reported earnings for the year of $200,000.
If Karter Company used the fair value method of accounting for its investment in Flynn Company, its Investment in Flynn Company account on December 31, 2007 should be

Answer 25

300,000, acquisition cost

Question 26

Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company’s common stock for $300,000 on January 2, 2007. During 2007, Flynn Company declared dividends of $50,000 and reported earnings for the year of $200,000.
If Karter Company uses the equity method of accounting for its investment in Flynn Company, its Investment in Flynn Company account at December 31, 2007 should be

Answer 26

300,000 + ($200,000 × .2) – ($50,000 × .2) = $330,000

Question 27

Barry Corporation earns $240,000 and pays cash dividends of $80,000 during 2007. Glenon Corporation owns 3,000 of the 10,000 outstanding shares of Barry.
What amount should Glenon show in the investment account at December 31, 2007 if the beginning of the year balance in the account was $320,000?

Answer 27

320,000 + ($240,000 × .3) – ($80,000 × .3) = $368,000

Question 28

Barry Corporation earns $240,000 and pays cash dividends of $80,000 during 2007. Glenon Corporation owns 3,000 of the 10,000 outstanding shares of Barry.
How much investment income should Glenon report in 2007?

Answer 28

240,000 × .3 = $72,000

Question 29

Young Co. acquired a 60% interest in Tomlin Corp. on December 31, 2006 for $945,000. During 2007, Tomlin had net income of $600,000 and paid cash dividends of $150,000. At December 31, 2007, the balance in the investment account should be

Answer 29

945,000 + ($600,000 × .6) – ($150,000 × .6) = $1,215,000.

Question 30

Stone Co. owns 4,000 of the 10,000 outstanding shares of Maye Corp. common stock. During 2007, Maye earns $120,000 and pays cash dividends of $40,000.
If the beginning balance in the investment account was $240,000, the balance at December 31, 2007 should be

Answer 30

240,000 + ($120,000 × .4) – ($40,000 × .4) = $272,000

Question 31

Stone Co. owns 4,000 of the 10,000 outstanding shares of Maye Corp. common stock. During 2007, Maye earns $120,000 and pays cash dividends of $40,000.
Stone should report investment revenue for 2007 of

Answer 31

120,000 × .4 = $48,000

Question 32

The following information relates to Vernon Company for 2007:
Realized gain on sale of available-for-sale securities: $15,000
Unrealized holding gains arising during the period on available-for-sale securities: 35,000
Reclassification adjustment for gains included in net income: 10,000
Vernon’s 2007 other comprehensive income is

Answer 32

15,000 + $35,000 – $10,000 = $40,000