Accounting Study Set 8

Business

Quiz 15 :

Investments and Fairva Ueaccounting Compete Financialstatements for Momin Joe

Quiz 15 :

Investments and Fairva Ueaccounting Compete Financialstatements for Momin Joe

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Entries for investments in bonds, interest, and sale of bonds Mars Investments acquired $150,000 of Pluto Corp., 8% bonds at their face amount on September 1, 2014. The bonds pay interest on September 1 and March 1. On March 1, 2015, Mars sold $75,000 of Pluto Corp. bonds at 102. Journalize the entries to record the following: a. The initial acquisition of the Pluto Corp. bonds on September 1, 2014. b. The adjusting entry for four months of accrued interest earned on the Pluto Corp. bonds on December 31, 2014. c. The receipt of semiannual interest on March 1, 2015. d. The sale of $75,000 of Pluto Corp. bonds on March 1, 2015, at 102.
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a. M Investment has purchased $150,000 bonds on September 1, 2014 at face value. Thus, there is a debit in the investment account against cash used to purchase it. The entry is as follows.
img b. M Investments has held the bonds for four months as on December 31, 2014 and the interest is not payable until March 1. Thus, the interest is to be accrued for four months at the rate of 8% on December 31, 2014. An entry is made to Interest Receivable account against Interest account. Once, interest is paid out on March 1, cash is to be debited against both the accounts.
The value of accrued interest on December 31 (four months) is,
img The entry is as follows.
img c. On March 1, 2015 semiannual interest is received. This amounts to,
img As explained in the section above, part of this interest has been accrued to Interest Receivable account on December 31, 2014 (for four months). Thus, the cash received as interest is debited against Interest Receivable account and Interest account.
img d. Half of the bonds have been sold on March 1, 2015 at 102% of purchase price or at a gain of 2%. The sales receipt from this sales is,
= 102% of $75,000
= $76,500
The cash is to be debited against investments account. The value of investments sold is $75,000 only. The balance is to be credited as Gain on Sale of Investment account. The entry is as following.
img

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When is the equity method the appropriate accounting for equity investments
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Whenever an investor company purchases substantial amount of shares of the investee company, like anything between 20%-50%, the investor acquires significant control over decisions and operations of the investee. Such investment is assumed to be made for strategic reasons only and hence the equity method is applied.
This method requires the net income of the investee to be reflected in the investment account of the investor in proportion to the share of the investor. Also it requires payment of dividend to be reflected as a decrease in the investment corpus proportionately. Thus, such transactions by the investee are made to reflect in the investment account of the investor since it has a strategic interest in income and payments of investee.

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International fair value accounting International Financial Reporting Standard No. 16 provides companies the option of valuing property, plant, and equipment at either historical cost or fair value. If fair value is selected, then the property, plant, and equipment must be revalued periodically to fair value. Under fair value, if there is an increase in the value of the property, plant, and equipment over the reporting period, then the increase is credited to stockholders' equity. However, if there is a decrease in fair value, then the decrease is reported as an expense for the period. 1. Why do International Financial Reporting Standards influence U.S. GAAP 2. What would be some of the disadvantages of using fair value accounting for property, plant, and equipment 3. How is the international accounting treatment for changes in fair value for property, plant, and equipment similar to investments
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(1) IAS stands for International Accounting Standards. These are the accounting standards set by the International Accounting Standards Committee. The GAAP stands for Generally Accepted Accounting Principles. IAS does not have any legal authority over GAAP. The IASC is merely a very influential group of people who love making accounting rules. Therefore, a lot of people listen to what the IASC have to say. When the IASC sets a new accounting standard, the countries tend to adopt it, or at least interpret it. These standards, as set by the particular country will in turn influence what becomes GAAP for that country.
(2) Fair value is an estimate, which is less reliable. There are certain assets, like shares, which are frequently traded in the market. Therefore the fair value of shares can be reliable. But the other assets don't have reliable fair values. The estimate may not be that accurate. Therefore Auditors generally hate fair value accounting, because of lack of reliability. The other major disadvantage in fair value accounting is that the fair values fluctuate significantly over a short period. Thus the results of the company changes (fluctuates) significantly.
(3) International accounting treatment for changes in the fair value for property, plant and equipment similar to investments as both are valued and reported in the Balance sheet at their fair values. However, the increase in property is credited to shareholder's equity, whereas the increase in investments is credited to operating income of that period.

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Equity method On January 2, Leonberger Company acquired 30% of the outstanding stock of ARO Company for $300,000. For the year ended December 31, ARO Company earned income of $60,000 and paid dividends of $15,000. Prepare the entries for Leonberger Company for the purchase of the stock, the share of ARO income, and the dividends received from ARO Company. On January 2, Yorkshire Company acquired 40% of the outstanding stock of Fain Company for $500,000. For the year ended December 31, Fain Company earned income of $140,000 and paid dividends of $50,000. Prepare the entries for Yorkshire Company for the purchase of the stock, the share of Fain income, and the dividends received from Fain Company.
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Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2014, were as follows: a. Issued 15,000 shares of $20 par common stock at $30, receiving cash. b. Issued 4,000 shares of $80 par preferred 5% stock at $100, receiving cash. c. Issued $500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of $0.50 per share on common stock and $1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at $40 per share, plus a $150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at $33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for $24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a $1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received $27,500 dividend from Pinkberry Co. investment in (h). l. Purchased $90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of $375. The bonds are classified as a heldto- maturity long-term investment. m. Sold, at $38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of $0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at $45, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method. q. Accrued interest for three months on the Dream Inc. bonds purchased in (l). r. Pinkberry Co. recorded total earnings of $240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was $39.02 per share on December 31, 2014. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 2014, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data below and on the following page were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2014, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were $100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2014. c. Prepare a balance sheet in report form as of December 31, 2014. img img img
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Stock investment transactions, trading securities Zeus Investments Inc. is a regional investment company that began operations on January 1, 2014. The following transactions relate to trading securities acquired by Zeus Investments Inc.. which has a fiscal year ending on December 31: img Instructions 1. Journalize the entries to record these transactions. 2. Prepare the investment-related current asset balance sheet presentation for Zeus Investments Inc. on December 31, 2015. 3. How are unrealized gains or losses on trading investments presented in the financial statements of Zeus Investments Inc.
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Bond investment transactions Journalize the entries to record the following selected bond investment transactions for Supper Club Trust: a. Purchased for cash $400,000 of Tyler City 6% bonds at 100 plus accrued interest of $2,000. b. Received first semiannual interest payment. c. Sold $200,000 of the bonds at 98 plus accrued interest of $1,000. Journalize the entries to record the following selected bond investment transactions for Starks Products: a. Purchased for cash $120,000 of Iceline, Inc. 5% bonds at 100 plus accrued interest of $1,000. b. Received first semiannual interest payment. c. Sold $60,000 of the bonds at 101 plus accrued interest of $500.
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Warren Buffett and look-through earnings Berkshire Hathaway , the investment holding company of Warren Buffett, reports its "less than 20% ownership" investments according to generally accepted accounting principles. However, it also provides additional disclosures that it terms "look-through" earnings. Warren Buffett states, Many of these companies (in the less than 20%-owned category) pay out relatively small proportions of their earnings in dividends. This means that only a small proportion of their earning power is recorded in our own current operating earnings. But, while our reported operating earnings reflect only the dividends received from such companies, our economic well-being is determined by their earnings, not their dividends. The value to Berkshire Hathaway of retained earnings (of our investees) is not determined by whether we own 100%, 50%, 20%, or 1% of the businesses in which they reside…. Our perspective on such "forgotten-but-not-gone" earnings is simple: the way they are accounted for is of no importance, but their ownership and subsequent utilization is all-important. We care not whether the auditors hear a tree fall in the forest; we do care who owns the tree and what's next done with it. I believe the best way to think about our earnings is in terms of look-through results, calculated as follows: Take $250 million, which is roughly our share of the operating earnings retained by our investees ( 20% ownership holdings); subtract… incremental taxes we would have owed had that $250 million been paid to us in dividends; then add the remainder, $220 million, to our reported earnings of $371 million. Thus, our "look-through" earnings were about $590 million. Source: Warren Buffett, The Essays of Warren Buffett: Lessons for Corporate America , edited by Lawrence A. Cunningham, pp. 180-183 (excerpted). 1. What are look-through earnings 2. Why does Warren Buffett favor look-through earnings
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Why might a business invest cash in temporary investments
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Benefits of fair value On July 16, 1996, Wyatt Corp. purchased 40 acres of land for $350,000. The land has been held for a future plant site until the current date, December 31, 2014. On December 18, 2014, TexoPete Inc. purchased 40 acres of land for $2,000,000 to be used for a distribution center. The TexoPete land is located next to the Wyatt Corp. land. Thus, both Wyatt Corp. and TexoPete Inc. own nearly identical pieces of land. 1. What are the valuations of land on the balance sheets of Wyatt Corp. and TexoPete, Inc., using generally accepted accounting principles 2. How might fair value accounting aid comparability when evaluating these two companies
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Stock investment transactions, trading securities Scofield Financial Co. is a regional insurance company that began operations on January 1, 2014. The following transactions relate to trading securities acquired by Scofield Financial Co., which has a fiscal year ending on December 31: img img Instructions 1. Journalize the entries to record these transactions. 2. Prepare the investment-related current asset balance sheet presentation for Scofield Financial Co. on December 31, 2015. 3. How are unrealized gains or losses on trading investments presented in the financial statements of Scofield Financial Co.
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Entries for investment in bonds, interest, and sale of bonds Sorrey Company acquired $75,000 of Clayton Co., 6% bonds on April 1, 2014, at their face amount. Interest is paid semiannually on April 1 and October 1. On October 1, 2014, Sorrey Company sold $25,000 of the bonds for 98. Journalize entries to record the following: a. The initial acquisition of the bonds on April 1. b. The semiannual interest received on October 1. c. The sale of the bonds on October 1. d. The accrual of $750 interest on December 31, 2014.
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Debt investment transactions, available-for-sale valuation Baldwin Inc. is an athletic footware company that began operations on January 1, 2014. The following transactions relate to debt investments acquired by Baldwin Inc., which has a fiscal year ending on December 31: img Instructions 1. Journalize the entries to record these transactions. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure
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What causes a gain or loss on the sale of a bond investment
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Stock investment transactions, equity method and available-for-sale securities Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1, 2014. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31: img img Instructions 1. Journalize the entries to record the preceding transactions. 2. Prepare the investment-related asset and stockholders' equity balance sheet presentation for Glacier Products Inc. on December 31, 2015, assuming the Retained Earnings balance on December 31, 2015, is $700,000.
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Stock investment transactions On March 20, 10,000 shares of Thorlite Company are acquired at a price of $30 per share plus a $250 brokerage fee. On May 30, a $0.25-per-share dividend was received on the Thorlite Company stock. On June 15, 5,000 shares of the Thorlite Company stock were sold for $36 per share less a $200 brokerage fee. Prepare the journal entries for the original purchase, the dividend, and the sale under the cost method. On September 12, 2,000 shares of Aspen Company are acquired at a price of $50 per share plus a $200 brokerage fee. On October 15, a $0.50-per-share dividend was received on the Aspen Company stock. On November 10, 1,200 shares of the Aspen Company stock were sold for $42 per share less a $150 brokerage fee. Prepare the journal entries for the original purchase, the dividend, and the sale under the cost method.
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Stock investment transactions, equity method and available-for-sale securities Daffitar Inc. produces and sells theater set designs and costumes. The company began operations on January 1, 2014. The following transactions relate to securities acquired by Daffitar Inc., which has a fiscal year ending on December 31: img img Instructions 1. Journalize the entries to record these transactions. 2. Prepare the investment-related asset and stockholders' equity balance sheet presentation for Daffitar Inc. on December 31, 2015, assuming the Retained Earnings balance on December 31, 2015, is $465,000.
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Ethics and fair value measurement Financial assets include stocks and bonds. These are fairly simple securities that can often be valued using quoted market prices. However, there are more complex financial instruments that do not have quoted market prices. These complex securities must still be valued on the balance sheet at fair value. Generally accepted accounting principles require that the reporting entity use assumptions in valuing investments when market prices or critical valuation inputs are unobservable. What are the ethical considerations in making subjective valuations of these complex financial instruments
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Debt investment transactions, available-for-sale valuation Rekya Mart Inc. is a general merchandise retail company that began operations on January 1, 2014. The following transactions relate to debt investments acquired by Rekya Mart Inc., which has a fiscal year ending on December 31: img Instructions 1. Journalize the entries to record these transactions. 2. If the bond portfolio is classified as available for sale, what impact would this have on financial statement disclosure
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Entries for investment in bonds, interest, and sale of bonds Crabtree Co. purchased $60,000 of 6%, 15-year Thomas County bonds on June 20, 2014, directly from the county, at their face amount plus accrued interest. The bonds pay semiannual interest on May 1 and November 1. On December 1, 2014, Crabtree Co. sold $15,000 of the Thomas County bonds at 97 plus $75 accrued interest, less a $150 brokerage commission. Provide journal entries for the following: a. The purchase of the bonds on June 20, plus 50 days of accrued interest. b. Semiannual interest on November 1. c. Sale of the bonds on December 1. d. Adjusting entry for accrued interest of $450 on December 31, 2014.
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