Unrealized Gain/Loss Component of Income in Shareholders' Equity
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1.
At December 31, 2011, Hull-Meyers Corp. had the following investments that were purchased during 2011, its first year of operations:
Cost Fair Value
Trading Securities:
Security A $ 897,000 $ 913,000
Security B 104,000 101,000
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Totals $ 1,001,000 $ 1,014,000
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
Securities Available-for-Sale:
Security C $ 705,000 $ 783,000
Security D 902,000 916,000
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Totals $ 1,607,000 $ 1,699,000
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
Securities to Be Held-to-Maturity:
Security E $ 495,000 $ 505,000
Security F 616,000 610,000
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Totals $ 1,111,000 $ 1,115,000
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
________________________________________
No investments were sold during 2011. All securities except Security D and Security F are considered short-term investments. None of the fair value changes is considered permanent.
Required:
Determine the following amounts at December 31, 2011. (Omit the "$" sign in your response.)
1. Investments reported as current assets. $
2. Investments reported as noncurrent assets. $
3. Unrealized gain (or loss) component of income before taxes. $
4. Unrealized gain (or loss) component of accumulated other comprehensive income in shareholders' equity. $
________________________________________
2.
Tanner-UNF Corporation acquired as a long-term investment $245 million of 7% bonds, dated July 1, on July 1, 2011. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 11% for bonds of similar risk and maturity. Tanner-UNF paid $204 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2011, was $212 million.
Required:
(1) Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2011. (Enter your answers in millions. Omit the "$" sign in your response.)
General Journal Debit Credit
________________________________________
(2) Prepare the journal entries by Tanner-UNF to record interest on December 31, 2011, at the effective (market) rate. (Enter your answers in millions of dollar rounded to 1 decimal place. Omit the "$" sign in your response.)
General Journal Debit Credit
________________________________________
(3) At what amount will Tanner-UNF report its investment in the December 31, 2011, balance sheet? (Enter your answer in millions of dollar rounded to 1 decimal place. Omit the "$" sign in your response.)
Investment $
(4) Suppose Moody's bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2012, for $191 million. Prepare the journal entry to record the sale. (Enter your answers in millions of dollar rounded to 1 decimal place. Omit the "$" sign in your response.)
General Journal Debit Credit
3.
Rantzow-Lear Company buys and sells securities expecting to earn profits on short-term differences in price. The company's fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear's trading account occurred during December 2011 and the first week of 2012.
2011
Dec. 17 Purchased 101,000 Grocers' Supply Corporation preferred shares for $355,000.
28 Received cash dividends of $2,200 from the Grocers' Supply Corporation preferred shares.
31 Recorded any necessary adjusting entry relating to the Grocers' Supply Corporation preferred shares. The market price of the stock was $5.90 per share.
2012
Jan. 5 Sold the Grocers' Supply Corporation preferred shares for $412,000.
Required:
(1) Prepare the appropriate journal entry for each transaction. (Omit the "$" sign in your response.)
Date General Journal Debit Credit
2011
Dec. 17
Dec. 28
Dec. 31
2012
Jan. 5
Dec. 31
(2) Indicate any amounts that Rantzow-Lear Company would report in its 2011 balance sheet and income statement as a result of this investment. (Omit the "$" sign in your response.)
Balance Sheet (short-term investment):
$
Income Statement:
$
4.
On January 1, 2011, Cameron Inc. bought 24% of the outstanding common stock of Lake Construction Company for $304 million cash. At the date of acquisition of the stock, Lake's net assets had a fair value of $907 million. Their book value was $801 million. The difference was attributable to the fair value of Lake's buildings and its land exceeding book value, each accounting for one-half of the difference. Lake's net income for the year ended December 31, 2011, was $159 million. During 2011, Lake declared and paid cash dividends of $38 million. The buildings have a remaining life of 12 years.
Required:
(1) Prepare all appropriate journal entries related to the investment during 2011, assuming Cameron accounts for this investment by the equity method. (Round your answers to the nearest whole million.Omit the "$" sign in your response.)
General Journal Debit Credit
Purchase
Net income
Dividends
Adjustment for depreciation
____________________
(2) Determine the amounts to be reported by Cameron (Round intermediate and final answers to the nearest whole million. Input all amounts as positive values. Omit the "$" sign in your response):
($ in millions)
a. Investment in Cameron's 2011 balance sheet $
b. Investment revenue in the income statement $
c. Among investing activities in the statement of cash flows $
________________________________________
5.
As a long-term investment at the beginning of the fiscal year, Florists International purchased 30% of Nursery Supplies Inc.'s 8 million shares for $57.5 million. The fair value and book value of the shares were the same at that time. The company realizes that this investment typically would be accounted for under the equity method, but instead chooses the fair value option. During the year, Nursery Supplies earned net income of $40.8 million and distributed cash dividends of $1.45 per share. At the end of the year, the fair value of the shares is $51.8 million.
Required:
(1) How would this investment be classified on Sanborn's balance sheet?
(2) Prepare all appropriate journal entries related to the investment during 2011. (Enter your answers in millions of dollar rounded to 1 decimal place. In cases where no entry is required, please select the option "No journal entry required" for your answers to grade correctly. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)
General Journal Debit Credit
Purchase
Net income
Dividends
Adjusting entry.
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Solution Summary
The solution discusses the unrealized gain or loss component of income in shareholder's equity and others.
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