SOLUTIONS TO EXERCISES
EXERCISE 17-1 (5–10 minutes)
(a) 1. (b) 2. (c) 1. (d) 2. (e) 2. (f) 3.
EXERCISE 17-2 (10–15 minutes)
(a) January 1, 2013
Debt Investments.................................... 300,000
Cash.................................................. 300,000
(b) December 31, 2013
Cash........................................................ 36,000
Interest Revenue.............................. 36,000
(c) December 31, 2014
Cash........................................................ 36,000
Interest Revenue.............................. 36,000
EXERCISE 17-3 (15–20 minutes)
(a) January 1, 2013
Debt Investments.................................... 322,744.44
Cash.................................................. 322,744.44
(b) Schedule of Interest Revenue and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Cash Interest Premium Carrying
Date Receive Revenue Amortized Amount of
d Bonds
1/1/13 — — — $322,744.4
4
12/31/1 $36,000 $32,274.4 $3,725.56 319,018.88
3 4
12/31/1 36,000 31,901.89 4,098.11 314,920.77
4
12/31/1 36,000 31,492.08 4,507.92 310,412.85
5
12/31/1 36,000 31,041.29 4,958.71 305,454.14
6
12/31/1 36,000 30,545.86 *5,454.14 300,000.00
7 *
*Rounded by 45¢.
EXERCISE 17-3 (Continued)
(c) December 31, 2013
Cash.......................................................... 36,000
Debt Investments............................... 3,725.56
Interest Revenue................................ 32,274.44
(d) December 31, 2014
Cash.......................................................... 36,000
Debt Investments............................... 4,098.11
Interest Revenue................................ 31,901.89
EXERCISE 17-4 (10–15 minutes)
(a) January 1, 2013
Debt Investments (available-for-sale)......322,744.44
Cash.................................................... 322,744.44
(b) December 31, 2013
Cash.......................................................... 36,000
Debt Investments (available-for-sale)
3,725.56
Interest Revenue ($322,744.44 X .10)
32,274.44
Fair Value Adjustment
(available-for-sale)................................ 1,481.12
Unrealized Holding Gain or Loss—Equity
($320,500.00 – $319,018.88).......... 1,481.12
(c) December 31, 2014
Unrealized Holding Gain or Loss—Equity. 7,401.89
Fair Value Adjustment
(available-for-sale).......................... 7,401.89
EXERCISE 17-4 (Continued)
Amortized Unrealized
Fair Value Gain
Cost (Loss)
Available-for-sale bonds $314,920. $309,000. $(5,920.77
77 00 )
Previous fair value
adjustment—Dr. 1,481.1
2
Fair value adjustment—Cr. $(7,401.89
)
EXERCISE 17-5 (20–30 minutes)
(a) Schedule of Interest Revenue and Bond Discount Amortization
Straight-line Method
9% Bond Purchased to Yield 12%
Cash Bond Carrying
Receive Interest Discount Amount of
Date d Revenue Amortization Bonds
1/1/13 — — — $185,589
12/31/13 $18,00 $22,804 *$4,804* 190,393
0
12/31/14 18,000 22,804 4,804 195,197
12/31/15 18,000 22,803** 4,803 200,000
**($200,000 – $185,589) ÷ 3 = $4,804
**Rounded by $1.
(b) Schedule of Interest Revenue and Bond Discount Amortization
Effective-Interest Method
9% Bond Purchased to Yield 12%
Cash Bond Carrying
Receive Interest Discount Amount of
Date d Revenue Amortization Bonds
1/1/13 — — — $185,589.0
0
12/31/13 $18,00 $22,270.6 $4,270.68 189,859.68
0 8*
12/31/14 18,000 22,783.1 4,783.16 194,642.84
6
12/31/15 18,000 23,357.16* 5,357.16 200,000.00
*
**$185,589 X .12 = $22,270.68
**Rounded by $.02.
EXERCISE 17-5 (Continued)
(c) December 31, 2014
Cash..............................................................18,000.00
Debt Investments......................................... 4,804.00
Interest Revenue.................................... 22,804.00
(d) December 31, 2014
Cash..............................................................18,000.00
Debt Investments......................................... 4,783.16
Interest Revenue.................................... 22,783.16
EXERCISE 17-6 (10–15 minutes)
(a) Fair Value Adjustment
(trading).................................................... 5,000
Unrealized Holding Gain or Loss—Income
5,000
(b) Fair Value Adjustment
(available-for-sale).................................... 5,000
Unrealized Holding Gain or Loss—Equity
5,000
(c) The Unrealized Holding Gain or Loss—Income account is reported
in the income statement under Other Revenues and Gains. The
Unrealized Holding Gain or Loss—Equity account is reported as a
part of other comprehensive income and as a component of
stockholders’ equity until realized. The Securities Fair Value
Adjustment account is added to the cost of the Debt Investment
account to arrive at fair value.
EXERCISE 17-7 (10–15 minutes)
(a) December 31, 2013
Unrealized Holding Gain or Loss—Income... 1,400
Fair Value Adjustment (trading)............ 1,400
(b) During 2014
Cash.............................................................. 9,400
Loss on Sale of Investments........................ 600
Equity Investments (trading)................. 10,000
EXERCISE 17-7 (Continued)
(c) December 31, 2014
Unrealized
Securities Cost Fair Gain (Loss)
Value
Clemson Corp. stock $20,000 $19,100 ($ (900)
Buffaloes Co. stock 20,000 20,500 ( 500)
Total of portfolio $40,000 $39,600 ( (400)
Previous fair value ( (1,400)
adjustment balance—
Cr.
Fair value adjustment— ($1,000)
Dr.
Fair Value Adjustment (trading)..................... 1,000
Unrealized Holding Gain or Loss—Income
1,000
EXERCISE 17-8 (5–10 minutes)
The unrealized gains and losses resulting from changes in the fair
value of available-for-sale securities are recorded in an unrealized
holding gain or loss account that is reported as other comprehensive
income and as a separate component of stockholders’ equity until
realized. Therefore, the following adjusting entry should be made at
the year-end:
Unrealized Holding Gain or Loss—Equity................ 8,000
Fair Value Adjustment (available-for-sale)....... 8,000
Unrealized Holding Gain or Loss—Equity is reported as other
comprehen-sive income and as a separate component in
stockholders’ equity and not included in net income. The Fair Value
Adjustment (available-for-sale) account is a valuation account to the
related investment account.
EXERCISE 17-9 (10–15 minutes)
(a) The portfolio should be reported at the fair value of $54,500. Since
the cost of the portfolio is $53,000, the unrealized holding gain is
$1,500, of which $400 is already recognized. Therefore, the
December 31, 2013 adjusting entry should be:
Fair Value Adjustment
(available-for-sale)......................................... 1,100
Unrealized Holding Gain or Loss—Equity.. . 1,100
(b) The unrealized holding gain of $1,500 (including the previous
balance of $400) should be reported as an addition to
stockholders’ equity and the Fair Value Adjustment (available-for-
sale) account balance of $1,500 should be added to the cost of the
investment account.
STEFFI GRAF, INC.
Balance Sheet
As of December 31, 2013
_____________________________________________________________________
Current assets:
Equity investments $54,500
Stockholders’ equity:
Common stock xxx,xxx
Additional paid-in capital xxx,xxx
Retained earnings xxx,xxx
xxx,xxx
Add: Accumulated other comprehensive income 1,500*
Total stockholders’ equity $xxx,xxx
*Note: The unrealized holding gain could also be disclosed.
(c) Computation of realized gain or loss on sale of stock:
Net proceeds from sale of security A $15,100
Cost of security A 17,500
Loss on sale of stock ($ 2,400)
January 20, 2014
Cash................................................................ 15,100
Loss on Sale of Investments......................... 2,400
Equity Investments (available-for-sale). . 17,500
EXERCISE 17-10 (20–25 minutes)
(a) STEFFI GRAF, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2013
_____________________________________________________________________
Net income $120,000
Other comprehensive income
Unrealized holding gain 1,100
Comprehensive income $121,100
(b) STEFFI GRAF, INC.
Statement of Comprehensive Income
For the Year Ended December 31, 2014
_____________________________________________________________________
Net income $140,000
Other comprehensive income
Holding gains $40,000
Add: Reclassification adjustment for
loss included in net income 2,400 42,400
Comprehensive income $182,400
Accumulated other comprehensive income:
Beginning balance, January 1, 2014 $1,100
Current period other comprehensive
income $40,000
Amount reclassified from accumulated
other comprehensive income 2,400
Unrealized holding gain 42,400
Ending balance, December 31, 2014 $43,400
EXERCISE 17-11 (20–25 minutes)
(a) The total purchase price of these investments is:
Sanchez: (10,000 X $33.50) + $1,980 = $336,980
Vicario: (5,000 X $52.00) + $3,370 = $263,370
WTA: (7,000 X $26.50) + $4,910 = $190,410
The purchase entries will be:
January 15, 2014
Equity Investments (available-for-sale)..... 336,980
Cash..................................................... 336,980
EXERCISE 17-11 (Continued)
April 1, 2014
Equity Investments (available-for-sale)..... 263,370
Cash..................................................... 263,370
September 10, 2014
Equity Investments (available-for-sale)..... 190,410
Cash..................................................... 190,410
(b) Gross selling price of 4,000 shares at $35 $140,000
Less: Commissions, taxes, and fees (3,850)
Net proceeds from sale 136,150
Cost of 4,000 shares ($336,980 X 0.4) (134,792)
Gain on sale of stock $ 1,358
May 20, 2014
Cash............................................................. 136,150
Equity Investments (available-for-sale)
134,792
Gain on Sale of Investments................ 1,358
(c)
Unrealize
Securities Cost Fair d Gain
Value (Loss)
Sanchez Co. $202,188 $180,000 $(22,188
(1)
* )
Vicario Co. 263,370 275,000(2 (11,630
)
WTA Co. 190,41 196,000 5,59
(3)
0 0
Total portfolio value $655,96 $651,00 (4,968)
8 0
Previous fair value
adjustment balance
0
Fair value adjustment— $
Cr. (4,968)
*$336,980 X 0.6 = $202,188.
(1) (2) (3)
(6,000 X $30) (5,000 X $55) (7,000 X $28)
December 31, 2014
Unrealized Holding Gain or Loss—Equity. . . 4,968
Fair Value Adjustment
(available-for-sale)............................ 4,968
EXERCISE 17-12 (15–20 minutes)
Situation 1: Journal entries by Conchita Cosmetics:
To record purchase of 20,000 shares of Martinez Fashion at a cost of
$13 per share:
March 18, 2014
Equity Investments (available-for-sale)............ 260,000
Cash............................................................. 260,000
To record the dividend revenue from Martinez Fashion:
June 30, 2014
Cash...................................................................... 7,500
Dividend Revenue ($75,000 X 10%).............. 7,500
To record the investment at fair value:
December 31, 2014
Fair Value Adjustment
(available-for-sale)............................................ 40,000
Unrealized Holding Gain or Loss—Equity...... 40,000*
*($15 – $13) X 20,000 shares = $40,000
Situation 2: Journal entries by Monica, Inc.:
To record the purchase of 30% of Seles Corporation’s common stock:
January 1, 2014
Equity Investments (Seles Corp.)........................ 81,000
Cash [(30,000 X 30%) X $9]........................... 81,000
Since Monica, Inc. obtained significant influence over Seles
Corp., Monica, Inc. now employs the equity method of accounting.
To record the receipt of cash dividends from Seles Corporation:
June 15, 2014
Cash ($36,000 X 30%).......................................... 10,800
Equity Investments (Seles Corp.).................. 10,800
EXERCISE 17-12 (Continued)
To record Monica’s share (30%) of Seles Corporation’s net income of
$85,000:
December 31, 2014
Equity Investments (Seles Corp.)........................ 25,500
(30% X $85,000)
Investment Income...................................... 25,500
EXERCISE 17-13 (10–15 minutes)
(a) $110,000, the increase to the Investment account.
(b) If the dividend payout ratio is 40%, then 40% of the net income is
their share of dividends = $44,000.
(c) Their share is 25%, so, Total Net Income X 25% = $110,000
Total Net Income = $110,000 ÷ 25% = $440,000
(d) $44,000 ÷ 25% = $176,000 or $440,000 X 40% = $176,000
EXERCISE 17-14 (10–15 minutes)
1. Equity Investments (trading)
(200 shares X $40)................................. 8,000
Cash................................................... 8,000
2. Cash (100 shares X $45).............................. 4,500
Gain on Sale of Investments............. 500
Equity Investments (trading)
(100 X $40).................................... 4,000
3. Unrealized Holding Gain or Loss—Income. . 500
Fair Value Adjustment
(trading) ($40–$35) X 100............. 500
EXERCISE 17-15 (15–20 minutes)
(a) Unrealized Holding Gain or Loss—Income.... 7,900
Fair Value Adjustment (trading)............. 7,900
(b) Cash [(1,500 X $45) – $1,200]........................ 66,300
Loss on Sale of Investments......................... 7,200
Equity Investments (trading).................. 73,500
(c) Equity Investments (trading)
[(700 X $75) + $1,300]............................... 53,800
Cash......................................................... 53,800
(d) Unrealized
Securities Cost Fair Value Gain (Loss)
Wallace Corp., Common $180,00 $175,000 $
0 (5,000)
Earnhart Corp., Common 53,800 50,400 (3,400)
Martin Inc., Preferred 60,00 58,000 (2,000
0 )
Total portfolio $293,80 $283,400 (10,400)
0
Previous fair value adjustment— (7,900
Cr. )
Fair value adjustment—Cr. $
(2,500)
Unrealized Holding Gain or Loss—Income 2,500
Fair Value Adjustment (trading)...... 2,500
EXERCISE 17-16 (15–20 minutes)
(a) December 31, 2013
Equity Investments (available-for-sale). 1,200,000
Cash................................................. 1,200,000
June 30, 2014
Cash........................................................ 42,500
Dividend Revenue............................ 42,500
December 31, 2014
Cash........................................................ 42,500
Dividend Revenue............................ 42,500
EXERCISE 17-16 (Continued)
Fair Value Adjustment (available-for-sale) 150,000
Unrealized Holding Gain or Loss—
Equity........................................... 150,000
$27 X 50,000 = $1,350,000
$1,350,000 – $1,200,000 = $150,000
(b) December 31, 2013
Equity Investments (Kulikowski)................1,200,000
Cash....................................................... 1,200,000
June 30, 2014
Cash............................................................. 42,500
Equity Investments (Kulikowski Inc.)... 42,500
December 31, 2014
Cash............................................................. 42,500
Equity Investments (Kulikowski Inc.)... 42,500
Equity Investment (Kulikowski Inc.)........... 146,000
Investment Income............................... 146,000
(20% X $730,000)
(c) Fair Value
Method Equity
Method
Investment amount (balance $1,350,000 *$1,261,000
sheet) *
Dividend revenue (income 85,000 0
statement)
Investment income (income 146,000
statement)
*$1,200,000 + $146,000 – $42,500 – $42,500
EXERCISE 17-17 (10–15 minutes)
Equity Investments (Edwards Co.)............. 180,000
Cash....................................................... 180,000
Cash ($20,000 X .30)................................... 6,000
Equity Investments (Edwards Co.)....... 6,000
Equity Investments (Edwards Co.)............. 24,000
Investment Income............................... 24,000
(.30 X $80,000)
EXERCISE 17-18 (15–20 minutes)
(a) Loss on Impairment ($800,000 – $720,000) 80,000
Debt Investments (available-for-sale). . 80,000
(b) The new cost basis is $720,000. GAAP indicates that the
difference between the carrying amount and the maturity value
should not be recorded. If the bonds are impaired, it is
inappropriate to increase the asset back up to its original
maturity value.
(c) Fair Value Adjustment
(available-for-sale)................................... 40,000
Unrealized Holding Gain or Loss—Equity
($760,000 – $720,000) ...................... 40,000
EXERCISE 17-19 (15-20 Minutes)
(a) Unrealized Holding Gain or Loss—Income
($100,000 – $80,000)................................ 20,000
Equity Investments (Arroyo Company). 20,000
(b) Fair Value Adjustment (available-for-sale). 50,000
Unrealized Holding Gain or Loss—Equity
($300,000 – $250,000)........................ 50,000
(c) Fair Value Adjustment (trading).................. 10,000
Unrealized Holding Gain or Loss—Income
($190,0000 – $180,000)...................... 10,000
EXERCISE 17-20 (15-20 minutes)
(a) Net income before security gains or losses. . $905,000
Sale of Investment in Woods Inc. stock
($195,000 – $180,000).................................. 15,000
Investment in Arroyo Company stock
($140,000 – $80,000).................................... 60,000
Net income...................................................... $980,000
(b) Equity Investments (Arroyo Company)
($140,000 – $80,000).................................... 60,000
Unrealized Holding Gain or Loss—Income
60,000
EXERCISE 17-21 (15-20 minutes)
(a) Net income before security gains and losses
$100,000
Investment in debt securities ($41,000 – $40,000)
1,000
Investment in Chen Company stock
($910,000 – $800,000).................................. 110,000
Bonds payable ($220,000 – $195,000)............ 25,000
Net income...................................................... $236,000
(b) Bonds Payable................................................ 25,000
Unrealized Holding Gain or Loss—Income
($220,000 – $195,000)........................... 25,000
*EXERCISE 17-22 (15–20 minutes)
(a) Call Option................................................... 300
Cash....................................................... 300
(b) Unrealized Holding Gain or Loss—Income.. 100
Call Option ($300 – $200)...................... 100
Call Option................................................... 3,000
Unrealized Holding Gain or Loss—Income
(1,000 X $3)....................................... 3,000
(c) Unrealized Holding Gain: $2,900 ($3,000 – $100)
*EXERCISE 17-23 (20–25 minutes)
(a) 6/30/14 (b) 12/31/14
Fixed-rate debt $100,00 $100,00
0 0
Fixed rate (6% ÷ 2) 3% 3%
Semiannual debt payment 3,000 3,000
Swap fixed receipt 3,00 3,00
0 0
Net income effect $ $
0 0
Swap variable rate
5.7% X 1/2 X $100,000 $
2,850
6.7% X 1/2 X $100,000 $
0 3,350
Net interest expense $ $
2,850 3,350
Note to instructor: An interest rate swap in which a company
changes its interest payments from fixed to variable is a fair value
hedge because the changes in fair value of both the derivative and
the hedged liability offset one another.
*EXERCISE 17-24 (20–25 minutes)
(a) 12/31/14 (b) 12/31/13
Variable-rate debt $10,000,00 $10,000,00
0 0
Variable rate
X5.8% X6.6%
Debt payment $ $
580,000 660,000
Debt payment
580,000 660,000
Swap variable received
(580,000) (660,000)
Net income effect $ $
0 0
Swap payable—fixed ($10,000 X 60 60
6%) 0,000 0,000
Net interest expense $ 600 $ 600,
,000 000
Note to instructor: An interest swap in which a company changes its
interest payments from variable to fixed is a cash flow hedge because
interest costs are always the same.
*EXERCISE 17-25 (15–20 minutes)
(a) Interest Expense............................................ 75,000
Cash (7.5% X $1,000,000)....................... 75,000
(b) Cash................................................................ 13,000
Interest Expense..................................... 13,000
(c) Swap Contract............................................... 48,000
Unrealized Holding Gain or Loss—Income
48,000
(d) Unrealized Holding Gain or Loss—Income.... 48,000
Notes Payable.......................................... 48,000
*EXERCISE 17-26 (20–25 minutes)
(a) August 15, 2013
Call Option......................................................... 360
Cash............................................................. 360
(b) September 30, 2013
Call Option......................................................... 3,200
Unrealized Holding Gain or Loss—Income. 3,200
($8 X 400)
Unrealized Holding Gain or Loss—Income........ 180
Call Option ($360 – $180)............................ 180
(c) December 31, 2013
Unrealized Holding Gain or Loss—Income........ 800
Call Option ($2 X 400)................................. 800
Unrealized Holding Gain or Loss—Income........ 115
Call Option ($180 – $65).............................. 115
*EXERCISE 17-26 (Continued)
(d) January 15, 2014
Unrealized Holding Gain or Loss—Income........ 35
Call Option ($65 – $30)................................ 35
Cash (400 X $7).................................................. 2,800
Gain on Settlement of Call Option*............ 370
Call Option**................................................ 2,430
**Computation of Gain: $370 (400 shares X $1) – $30
**Value of Call Option at settlement:
Call Option
360 180
3,200 800
115
35
2,430
*EXERCISE 17-27 (25–30 minutes)
(a) May 1, 2014
Memorandum entry to indicate entering into the futures contract.
(b) June 30, 2014
Futures Contract......................................... 4,000
Unrealized Holding Gain or Loss—Equity
[($520 – $500) X 200 ounces]........... 4,000
(c) September 30, 2014
Futures Contract......................................... 1,000
Unrealized Holding Gain or Loss—Equity
[($525 – $520) X 200 ounces]........... 1,000
*EXERCISE 17-27 (Continued)
(d) October 5, 2014
Inventory...................................................... 105,000
Cash ($525 X 200 ounces).................... 105,000
Cash............................................................. 5,000
Futures Contract................................... 5,000
[($525 – $500) X 200 ounces]
Note to instructor: In practice, futures contracts are settled on a
daily basis; for our purposes, we show only one settlement for the
entire amount.
(e) December 15, 2014
Cash............................................................. 250,000
Sales Revenue...................................... 250,000
Cost of Goods Sold...................................... 140,000
Inventory (Finished goods)................... 140,000
Unrealized Holding Gain or Loss—Equity.. . 5,000
Cost of Goods Sold ($4,000 + $1,000). . 5,000
(f) HART GOLF CO.
Partial Income Statement
For the Quarter Ended December 31, 2014
Sales revenue $250,000
Cost of goods sold 135,000*
Gross profit $115,000
*Cost of inventory $140,000
Less: Futures contract adjustment (5,000)
Cost of goods sold $135,000
