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Reclassification of securites and accounting treatment

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Some questions I am confused on. Please explain? I have some notes underneath some.

1) On January 1, 2011, Nana Company paid $100,000 for 8,600 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $56,000 for the year ended December 31, 2011. The fair value of the Papa stock on that date was $53 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2011?


2) Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $192,000 on May 5, 2010, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2010. Goofy reclassified this investment as trading securities in December of 2011 when the market value had risen to $160,000. What effect on 2011 income should be reported by Goofy for the Crazy Co. shares?

$42,000 net gain.
$32,000 net loss.
$74,000 net loss.

** I believe it is a $32K net loss but I'm not sure when the loss is realized if at all when the re-class happens. My book does not answer this question.

3) Zwick Company bought 29,000 shares of the voting common stock of Handy Corporation in January 2011. In December, Handy announced $209,200 net income for 2011 and declared and paid a cash dividend of $6 per share on the 203,500 shares of outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2011 would be:

$ 0.
None of these is correct.

4) On September 1, 2011, Hiker Shoes issued a $114,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 10%. Hiker's effective interest rate on this loan is (Do not round intermediate calculations. Round your final answer to two decimal places, e.g., .1234 as 12.34%.):


I get 10.05% so I guess 10% ??

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Solution Summary

-classified as trading security what amount is shown in Balance sheet
-available for sale securities classified as trading securities
-treatment of dividend received from associated company
-effective interest rate on non-interest bearing note

See Also This Related BrainMass Solution

Qtip Corp owns stock in Maxey Corp. The investment represents a 10% interest and Qtip is unable to exercise significant influence over Maxey.
The Maxey stock was purchased by Qtip on January 1, 2002 for $23,000. The stock consistently pays an annual dividend to Qtip of $2,000. Qtip classifies the stock as available for sale. Its fair value at December 31, 2009 was $21,600. The amount was properly reported as an asset in the balance sheet. Due to the development of a new Maxey product line, the market value of Qtip's investment rose to $27,000 at December 31, 2010.
The Qtip management team is aware of the provisions of SFAS No. 115. The possibility of changing the classification from available for sale to trading is discussed. This change is justified, the managers say, because they intend to sell the security at some point in 2011 so that they can realize the gain.
a. Discuss the role that managerial intention playing in the accounting treatment of equity securities that have a readily determinable fair value under SFAS no. 115.
b. What income statement effect if any would the change in classification have for Qtip?
c. Are there any ethical considerations that need to be considered?
d. Opponents of SFAS No. 115 contend that allowing a change in classification masks effects of unrealized losses and results in improper matching of market value changes with accounting periods. Describe how the accounting treatment and proposed change in classification would result in this sort of mismatching.

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