Intermediate accounting - TOL Company - Securities reporting

Consider each of the following investments of the TOL Company in other companies:

A. An investment in the preferred stock of a financial services company. The company is sound financially and the TOL Company invested for the dividend income. TOL Company has no plans to sell the stock anytime in the foreseeable future.

B. An investment in the bonds of a consulting company. The bonds were purchased this year and they mature January 1 of next year.

C. An investment in the bonds of a telecommunications company. The bonds were purchased this year and they mature in 7 years. They were purchased because TOL Company felt the bonds were undervalued in the market and TOL Company intends to sell them when their value increases.

D. An investment in the bonds of a hotel company. The bonds were purchased as savings for the construction of a new factory that TOL Company intends to build when the bonds mature in 5 years.

E. An investment in the common stock of a telecommunications company. TOL Company has purchased 46,000 shares of the 422,000 shares currently issued and outstanding. TOL Company intends to acquire a total of approximately 123,000 shares over the next several years and then maintain a significant, long-term ownership in the air line company.

F. An investment in bonds of a consulting company. The bonds have an excellent yield-to-maturity and TOL Company would like to hold them until they mature in 6 years. However, recent developments in TOL Company's business indicate that they bonds may have to be sold earlier in order to maintain TOL Company's cash flow requirements.

Instructions:

For each investment indicate if the security should be classified as trading securities (TS), available-for-sale securities (AFS), or held-to-maturity securities (HTM).

 Problem 2:

On January 1, 2011 the XOR Company acquired 266 bonds of another company with the following characteristics:

Face value per bond: $1,000
Issue date: January 1, 2011
Maturity date: January 1, 2018
Bond Interest rate: 11%
Bond yield: 9%
Interest paid: Annually on December 31

XOR Company paid a total of $292,775.31 to acquire the bonds and they have properly classified the bonds as held-to-maturity securities. XOR Company uses the effective-interest method to allocate unamortized discount or premium.

Instructions:

Assume that the interest payment is received on the same day that it is paid.

1. Prepare the necessary journal entry for the XOR Company on January 1, 2011.

2. Prepare the necessary journal entry for the XOR Company on December 31, 2011.

3. Prepare the necessary journal entry for the XOR Company on December 31, 2012.

 
Problem 3:

The following table includes investments of the ZTE Company, all acquired in 2011:

Trading Securities

Investment Cost Fair Value 12/31/2011 Fair Value 12/31/2012
TWE Company $27,000 $25,600 $25,700
YDC Company 27,000 25,600 31,000
UHZ Company 10,000 10,500 10,300

ZTE Company had no investments on January 1, 2011.

ZTE Company closes its accounting year on December 31.

The investment in YDC Company was sold on April 1, 2012 for $26,300.

Instructions:

1. Prepare any necessary adjusting journal entry on December 31, 2011.

2. Prepare the necessary journal entry to record the sale of the YDC Company stock.

3. Prepare any necessary adjusting journal entry on December 31, 2012.

 
Problem 4:

The SFL Company holds the following investments in common stock:

Investment in the common stock of the TOL Company:

Shares owned by SFL Company: 63,690
Price paid per share: $23
Date Shares Acquired: May 1, 2014
Shares of TOL Company issued and outstanding: 579,000
Market price per share 12/31/2014: $26

Investment in the common stock of the XOR Company:

Shares owned by SFL Company: 75,500
Price paid per share: $18
Date Shares Acquired: July 1, 2014
Shares of XOR Company issued and outstanding: 302,000
Market price per share 12/31/2014: $20

SFL Company has no intention of selling the shares of either company anytime in the foreseeable future.

The following additional activity occurred during 2014 concerning these investments:

On September 15, TOL Company paid a cash dividend of $1.40 per share.

On October 15, XOR Company paid a cash dividend of $1.12 per share.

On December 31, TOL Company reported net income for the year of $1,806,480; and XOR Company reported net income for the year of $845,600.

SFL Company ends its accounting year on December 31.

Instructions:

Prepare all necessary journal entries by SFL Company to record the transactions for these two investments in 2014.

Assume that SFL Company had no investments at the beginning of the year.