Columbia College

ACCT 383

1)Anthers Inc. bought the following portfolio of trading securities near the end of 2006.

What amount will be reported on the balance sheet for this portfolio at December 31, 2006, and how will it be classified?

Amount         Classification

1. 1. $162,000          Investment
   2. $162,000          Current Asset
   3. $160,000          Investment
   4. $160,000          Current Asset

2. Jeremiah Corporation purchased securities during 2006 and classified them as securities available for sale:

All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation on the December 31, 2006, income statement relative to the portfolio?

A) $0.

B)   $16,000.

C)   $20,000.

D) None of the above is correct.

3. On January 1, 2006, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2003, White reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2006?

A) $295,000.

B)   $300,000.

C)   $315,000.

D) $320,000.

4. Hope Company bought 30% of Faith Corporation in 2006. During 2006, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of

$500,000. Hope mistakenly accounted for the investment using the cost method instead of the equity method. What effect would this error have on the investment account and net income, respectively, for 2006?

1. 1. Overstated by $1,050,000; understated by $1,050,000.
   2. Understated by $1,050,000; understated by $1,050,000.
   3. Overstated by $1,200,000; overstated by $1,200,000.
   4. Understated by $1,200,000; overstated by $1,050,000.

5. Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on Jan 1, 2006. On November 1, 2006, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2006 relative to its investment in Hack?

A) $1,100,000.

B) $2,400,000.

C) $1,500,000.

D) $1,600,000.

6. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2006. Jack can significantly influence Jill. On December 10, 2006, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report on its income statement for 2006 relative to its investment in Jill?

A) $1 000,000.

B) $1,200,000.

C) $1,400,000.

D) $1,500,000.

7. Hawk Corporation purchased ten thousand shares of Diamond Corporation stock in 2003 for

$50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2004, and $65 on December 31, 2005. During 2006, Hawk sold all of its Diamond stock at $70 per share. In its 2006 income statement, Hawk would report:

1. 1. A gain of $100,000.
   2. A gain of $150,000.
   3. A gain of $200,000
   4. A gain of $300,000.

8. Dim Corporation purchased one thousand shares of Witt Corporation stock in 2003 for $800 per share and classified the investment as securities available for sale. Witt's market value was

$400 per share on December 31, 2004, and $300 on December 31, 2005. During 2006, Dim sold all of its Witt stock at $350 per share. For 2006, Dim would report:

1. 1. A realized gain of $50,000.
   2. A recognition of unrealized losses of $400,000.
   3. A loss on the sale of investments of $450,000.
   4. A trading gain of $50,000 and an unrealized loss of $500,000.

9. Dicker Furriers purchased one thousand shares of Loose Corporation stock on January 10, 2005, for $800 per share and classified the investment as securities available for sale. Loose's market value was $400 per share on December 31, 2005. As of December 31, 2006, Dicker still owned the Loose stock whose market value has declined to $100 per share. The decline is due to a reason that's judged to be other than temporary. Dicker's December 31, 2006, balance sheet and the 2006 income statement would show the following:

10. In 2004, Osgood Corporation purchased $4 million in ten-year municipal bonds at face value. On December 31, 2006, the bonds had a market value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2006, balance sheet and the 2006 income statement would show the following:

Use the following to answer questions 11-12:

At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair market value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends.

11. The amount of purchased goodwill is:
    1. $18 million.
    2. $30 million.
    3. $60 million.
    4. None of the above is correct.

                                                               $ 18

12. The total amount of additional depreciation to be recognized over the remaining life of the assets is:
    1. $4.5 million.
    2. $15 million.
    3. $27 million.
    4. None of the above is correct.

Problems

13. Bentz Corporation bought and sold several securities during 2006. Listed below is a summary of the transactions:

February 17        Purchased $100,000 of U.S. Treasury 6% bonds, paying 102 plus accrued interest of $1,000. The security is to be held for short- term profits.

April 10                 Purchased 500 shares of Gauges Inc. common stock at $140 per share. This security will be held for an unspecified period of time.

August 8              Sold 100 shares of Gauges Inc. for $150 per share.

October 5            Sold half of the U.S. Treasury bonds for 103 plus accrued interest of $300.

Required:

Prepare the journal entries for the above transactions. Show calculations.

14. Krogstad Corporation bought 1,000 shares of Cole Inc. for $90 per share plus a brokerage fee of $1,800. Three months later, the shares were sold for $110 per share. The brokerage fee on the sale was $2,200.

Required:

(1.) Prepare the appropriate journal entry to record the purchase of the stock. (2.) Prepare the appropriate journal entry to record the sale of the stock.

15. On March 17, 2006, Union Corporation purchased 5,000 shares of AZQ common stock as a long-term investment at $40 per share. On December 31, 2006, and December 31, 2007, the market value of the AZQ stock is $42 and $43, respectively.

Required:

(1.) What is the appropriate reporting category for this stock? Why? (2.) Prepare the adjusting entry on December 31, 2006.

(3.) Prepare the adjusting entry on December 31, 2007.

16. During 2006, Largent Enterprises purchased stock as follows:

May 17, Purchased 1,000 shares of Nugent common stock for $80 per share.

July 12, Purchased 400 shares of Alfredo common stock at $60 per share, plus a $600 brokerage commission.

At December 31, 2006, the market values of the securities were as follows: Security      Market Value per Share

Nugent                            $72

Alfredo                            $64

Required:

(1.) Prepare the journal entries to record the acquisition of the two investments.

(2.) Prepare any necessary adjusting entries assuming the stocks are both classified as available for sale securities.

17. FKG Inc. carries the following investments on its books at December 31, 2006, and December 31, 2007. All securities were purchased during 2006.

Trading Securities:

Available for Sale Securities:

Required:

(1.) Prepare the necessary journal entries for FKG on December 31, 2006, and December 31, 2007.

(2.) What net effect would the valuation of these stock investments have on 2006 net income?

On 2007 net income?

18. On February 2, 2006, MBH Inc. acquired 30% of the voting common stock of Construction Corporation as a long-term investment. Data from Construction Corporation's financial statements for the year ended December 31, 2006, include the following:

Net income      $150,000 Dividends paid $75,000

Required:

Prepare any necessary journal entries for MBH at December 31, 2006, under the equity method of accounting for investments.

19. On January 1, 2006, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $420,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2006, was $80,000. During 2006, Short also paid cash dividends in the amount of $24,000.

Required:

Compute the amount that would be reported for the investment on American Corporation's financial statements at December 31, 2006.

20. On January 1, 2006, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $420,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2006, was $80,000. During 2006, Short also paid cash dividends in the amount of $24,000.

Required:

Prepare the journal entries necessary to record the above information on American Corporation's books during 2006.

21. On July 1, 2006, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. Assume the book value and fair value of net assets is $650,000. Both companies have a January through December fiscal year. The following data pertain to Mountain Corporation during 2006:

Net Income, January 1 -June 30                                $14,000

Net Income, July 1 - December 31                           $18,000 Dividends declared and paid, Jan. 1 –June 30 $12,000 Dividends declared and paid, Jul. 1 Dec. 31       $12,000

Required:

(1.) Prepare the entry to record the original investment in Mountain. (2.) Compute the goodwill (if any) on the acquisition.

(3.) Prepare the necessary entries (other than acquisition) for 2006 under the equity method.

22. On July 1, 2006, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. The book value and fair value of net assets is $650,000. Both companies have a January through December fiscal year. The following data pertain to Mountain Corporation during 2006:

Net income, January 1 - June 30                                     $14,000

Net income, July 1 – December 31                                 $18,000 Dividends declared and paid, Jan. 1 - Jun .30             $12,000 Dividends declared and paid, Jul. 1 - Dec. 31              $12,000

Required:

(1.) Prepare the necessary entries for 2006 under the equity method (other than for the purchase).

(2.) Prepare any necessary entries for 2006 (other than for the purchase) that would be required under the cost method.

                                                                                                              2,400

23. Jackson Company engaged in the following investment transactions during the current year.

Feb 17       Purchased 500 shares of Medical Company common for $20 per share plus a brokerage commission of $100.

These are trading securities.

April 1        Bought 30,000 of the 100,000 outstanding shares of Olde Company for $300,000. Goodwill of $80,000 was included in the price.

June 25     Received a $1.20 per share dividend on Medical Company stock. June 30                Olde Company reported second quarter profits of $20,000.

Oct 1          Purchased 2,000 shares of Alpha Company for $15 per share plus a brokerage fee of $400. These shares are classified as available for sale.

Dec 31       Medical Co. shares are selling for $25 and Alpha stock is selling for $12.

Required:

Prepare the appropriate journal entries to record the transactions for the year including year- end adjustments. Show calculations.

24. On March 1, 2006, Navy Corporation used excess cash to purchase $100,000 of U.S. Treasury bonds that were selling for 103 plus accrued interest. The appropriate interest rate is 6%. Interest on these bonds is payable on January 1 and July 1 of each year.

Required:

(1.) Prepare the appropriate journal entries to record the transactions for the year, including any year-end adjustments. Show calculations, rounded to the nearest dollar.

(2.) Assuming that these Treasury bonds were acquired as trading securities, explain whether any premium or discount should be amortized.

25. On January 1, 2006, Wildcat Company purchased $93,000 of 10% bonds at face value. The bonds are to be held to maturity. The bonds pay interest semiannually on January 1, and July 1.

Required:

(1.) Prepare the appropriate journal entry to record the acquisition of the bonds. (2.) Record the first two interest payments (ignore year-end accruals).

26. On January 1, 2006, Hoosier Company purchased $930,000 of 10% bonds at face value. The bond market value was $980,000 on December 31, 2006.

Required:

Prepare the appropriate journal entry on December 31, 2006, to properly value the bonds assuming the bonds are classified as (ignore premium or discount amortization):

(1.) Trading securities.

(2.) Securities available for sale. (3.) Held-to-maturity securities.

27. On January 1, 2006, Bactin Corporation acquired 10% of Oakton Company for $100,000. On that date, the book value and fair value of Oakton's net assets was $900,000. Any difference between cost and book value is attributable to goodwill. In 2006, Oakton reported net income of $60,000 and paid dividends of $30,000. On January 1, 2007, Bactin Corporation bought another 10% of Oakton for $100,000. The value of net assets was $900,000. In 2007, Oakton reported net income of $80,000 and paid dividends of $40,000.

Required:

Prepare all journal entries for Bactin for 2006 and 2007, assuming no change in market value of the Oakton stock during that time period.

28. The following transactions occurred during the year for XYZ Corporation: (a.) During the year, trading securities were purchased for $250,000.

(b.) During the year, securities available for sale were purchased for $80,000.

(c.) During the year, trading securities that cost $100,000 at the beginning of the year were sold for $125,000 cash.

(d.) At the end of the year, the trading securities portfolio has an aggregate market value of

$142,000 and an aggregate cost of $150,000.

Required:

Indicate how each of these transactions would affect the statement of cash flows for a corporation. Assume the statement of cash flows is prepared using the indirect method. Each transaction is assumed to be independent of the other transactions.

3 Use the following to answer questions 29-30:

In its 2005 annual report to shareholders, Kraut Inc. included the following disclosure regarding its available for sale investments in securities:

                           December 31                         

29. Prepare the journal entry (in thousands) that Kraut made at the end of 2005 to record the information disclosed above.

30. In 2004, Kraut made two adjustments to its available for sale investments.

Required:

Briefly explain the adjustments and why they occurred.

Use the following to answer questions 131-133:

Arctic Cat Inc., the snowmobile manufacturer, reported the following in its 2005 annual report to shareholders:

NOTE B - SHORT-TERM INVESTMENTS

Short-term investments consist primarily of a diversified portfolio of municipal bonds and money market funds and are classified as follows at March 31:

Trading securities consists of $54,608,000 and $41,707,000 invested in various money market funds at March 31, 2005 and 2004, respectively, while the remainder of trading securities and available-for- sale securities consists primarily of A-rated or higher municipal bond investments. The amortized cost and fair value of debt securities classified as available-for-sale was $3,105,000 and $3,196,000, at March 31, 2005. The unrealized gain on available-for-sale debt securities is reported, net of tax, as a separate component of shareholders' equity.

Arctic Cat Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years Ended March 31,

Accumulated Other Comprehensive Income: 2004:

Unrealized loss on securities available-

for-sale, net of tax                                 $(154,000)

2005:

Unrealized loss on securities available-

for-sale, net of tax                                     (140,000)

2005                     2004

Cash flows from investing activities:

Sale and maturity of

available-for-sale securities              3,703,000           1,729,000

In its 2004 annual report, Arctic Cat disclosed that "The contractual maturities of available-for-sale debt securities at March 31, 2004, are $3,573,000 within one year and $3,340,000 from one year through five years."

31. Required:

How much did Arctic Cat actually receive from the sale of available-for-sale securities during 2005?

Required:

Based on the data provided above, what gain or loss did Arctic actually realize from selling available-for-sale securities during 2005? Assume a 30% tax rate.

32. Required:

Assuming Arctic's effective tax rate is 30%, what gain or loss would be realized if the available for sale securities on Arctic Cat's 3/31/05 balance sheet were sold immediately for their fair value? Show the journal entry for such a sale.

Use the following to answer questions 34-35:

Fragrance International, a large perfume manufacturer, reported the following in its 2005 annual report to shareholders:

ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income (loss) ("OCI") included in the accompanying consolidated balance sheets consist of the following:

           YEAR ENDED JUNE 30                  2005  2004            2003

(IN MILLIONS)

Net unrealized investment gains, beginning

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED JUNE 30

2005                 2004                 2003 (IN MILLIONS)

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures .

...............................................................................

(203.2)            (192.2)             (180.9)

Acquisition of businesses, net of

acquired cash ....................................................  (18.5)               (16.0)             (180.5)

Purchases of long-term investments ..................     --                         --                     (15.9)

Proceeds from disposition of long-term

investments . .....................................................                         4.7                      1.9                                                                                                        3.0 NET CASH FLOWS USED FOR

INVESTING ACTIVITIES .........................             (217.0)           (206.3 )            (374.3)

Investments sold during 2005 originally cost $3.0 million and were unchanged in value from the date of purchase to the date of sale.

33. Required:

What was the realized gain or loss on the sale of available-for-sale securities in 2005? Assume a 40% tax rate.

34. Required:

Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized gain or loss on available-for-sale securities at 7/1/04?

35. Required:

What was the adjusting journal entry that Fragrance International recorded at 6/30/05 to bring the available-for-sale securities held to fair value?

36. On July 1, 2006, Silverwood Company purchased for cash 35% of the voting common stock of Yellowstone Corporation. Both companies have a December 31 fiscal year-end. Yellowstone Corporation, which is publicly traded on an organized stock exchange, reported its net income for the year to Silverwood and paid a dividend to Silverwood during the year.

Required:

How should Silverwood report the above information in its year-end income statement and balance sheet? Discuss the rationale for your answer.

37. LaBelle Corporation owns a $6 million whole life insurance policy on the life of its CEO, naming LaBelle as beneficiary. The annual premiums are $95,000 and are payable at the beginning of each year. The cash surrender value of the policy was $56,000 at the beginning of 2006.

Required:

1.) Prepare the appropriate 2006 journal entry to record insurance expense and the increase in the investment, assuming the cash surrender value of the policy increased according to the contract to $70,000.

2.) The CEO died at the end of 2006. Prepare the appropriate journal entry.

38. Guido Properties owes First State Bank $60 million under a 7% note with two years remaining to maturity. Due to financial difficulties of Guido, the previous year's interest ($4.2 million) was not received. The bank agrees to settle the note receivable and accrued interest receivable in exchange for land having a fair market value of $44 million.

Required: Compute the loss on troubled debt restructuring that the bank would record.

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

39. Previously, marketable equity securities were reported using a technique referred to as "lower of cost or market." The current accounting standard requires fair value reporting for trading securities and securities available for sale. Some accountants believe that the FASB was inconsistent when Statement No. 115 was released requiring changes in the value of trading securities to be reported on the income statement and balance sheet, while changes in the value of securities available for sale are reported only on the balance sheet.

Required:

Evaluate the rationale for these two diverse reporting requirements for equity securities. What arguments could be made to support each treatment?

40. Jaycom Enterprises has invested its excess cash in the stock of several different companies and desires to maximize income over the short-run. Jaycom is unsure about the appropriate investment policy and thus reporting practice to follow.

Required:

What classification procedure and subsequent classification could Jaycom follow in order to meet its objective? How will Jaycom justify its choice to their auditors?

41. Newjohn Company owns stock in several affiliated companies. Investments in of these affiliates are accounted for using the cost method while some are accounted for using the equity method.

Required:

What factors determine which method should be used? What events are recorded when the equity method is used? What events are recorded when the cost method is used?

42. From time to time, debt and equity securities must be reclassified when conditions and circumstances surrounding the investment change.

Required:

Describe the general accounting procedures for reclassifying securities from one category to another- held to maturity, available for sale, or trading.

43. Discuss the following questions.

Required:

What securities must be classified within one of the three categories of held to maturity, available for sale, and trading? (Do not describe how to determine how securities are classified among these three categories.) Identify the four primary recording activities related to investments in securities.

44. When an investor owns 20% to 50% of the voting stock of an investee company, the investor is presumed to exercise significant influence over the investee unless there is evidence to the contrary.

Required:

What factors could be evidence of significant influence?

What factors could be evidence of lack of significant influence?

45. Many corporations own more than 50% of the voting stock in other corporations. Sometimes these affiliated companies operate within the same industry, and many times the companies are in unrelated industries.

Required:

What is the significance of owning more than 50% of the voting common stock of another company?

46. In its 2001 annual report to shareholders, Maytag Corporation included the following disclosures in its income statement and related footnotes:

CONSOLIDATED STATEMENTS OF INCOME

     Year Ended December 31      2001                     2000            1999

(In thousands) Loss on securities..................                     (7,230)      (17,600)          ---

Special Charges and Loss on Securities

During the fourth quarter of 2001, the Company recorded special charges and loss on securities totaling $17.0 million, or $13.5 million after-tax. Special charges of $9.8 million, or

$6.2 million after-tax, were associated with a salaried workforce reduction of approximately 250 employees. Cash expenditures for 2001 related to this charge were $3.7 million. Loss on securities of $7.2 million resulted from the write-down of the remaining investment in a privately held Internet-related company.

During the fourth quarter of 2000, the Company recorded special charges and loss on securities totaling $57.5 million, or $36.5 million after-tax. Special charges of $39.9 million, or $25.3 million after-tax, were associated with terminated product initiatives, asset write- downs and executive severance costs related to management changes. Loss on securities of

$17.6 million, or $11.2 million after-tax, resulted from a lower market valuation of securities of TurboChef Technologies, Inc. and investments in privately held Internet-related Companies

….. The loss on securities charge of $17.6 million was non-cash.

Required:

Discuss the possible rationale behind the losses on securities reported by Maytag in 2000 and 2001.