Investments (Trading) Cost Fair Valueunrealized Gain (Loss)

E17-7 (Trading Securities Entries) On December 21, 2010, Zurich Company provided you with the following information regarding its trading securities.

December 31, 2010

Investments (Trading) Cost Fair ValueUnrealized Gain (Loss)

Stargate Corp. stock $20,000 $19,000 $(1,000)

Carolina Co. stock 10,000 9,000 (1,000)

Vectorman Co. stock 20,000 20,600 600

Total of portfolio $50,000 $48,600 (1,400)

Previous securities fair value adjustment balance –0–

Securities fair value adjustment—Cr. $(1,400)

During 2011, Carolina Company stock was sold for $9,500. The fair value of the stock on December 31,

2011, was: Stargate Corp. stock—$19,300; Vectorman Co. stock—$20,500.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2010.

(b) Prepare the journal entry to record the sale of the Carolina Company stock during 2011.

E17-12 (Journal Entries for Fair Value and Equity Methods) Presented below are two independent situations.

Situation 1

Hatcher Cosmetics acquired 10% of the 200,000 shares of common stock of Ramirez Fashion at a total cost of $14 per share on March 18, 2010. On June 30, Ramirez declared and paid a $75,000 cash dividend. On

December 31, Ramirez reported net income of $122,000 for the year. At December 31, the market price of

Ramirez Fashion was $15 per share. The securities are classified as available-for-sale.

Situation 2

Holmes, Inc. obtained significant influence over Nadal Corporation by buying 25% of Nadal’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2010. On June 15, Nadal declared and paid a cash dividend of $36,000. On December 31, Nadal reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2010 for both situations.

P17-3 (Available-for-Sale Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments, which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2010 Sharapova Company common stock, $100 par, 200 shares $ 37,400

April 1 U.S. government bonds, 11%, due April 1, 2020, interest payable

April 1 and October 1, 110 bonds of $1,000 par each 110,000

July 1 McGrath Company 12% bonds, par $50,000, dated March 1, 2010

purchased at 104 plus accrued interest, interest payable annually on

March 1, due March 1, 2030 54,000

Instructions

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2010 using the straight-line method.

Sharapova Company common stock $ 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2011, for $119,200 plus accrued interest. Give the proper entry.

P17-8 (Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a

70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend

policy, resulted in funds available for outside investment. Over the years, Brooks has had a policy of investingidle cash in equity securities. In particular, Brooks has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2010 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about Brooks’s pertinent accounts.

1. Brooks has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year,

Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a market value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2010 at $20 per share, a purchase that currently has a value of $720,000.

2. Prior to 2010, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,500,000 on December 31, 2009.

Brooks’ 12% ownership of Norton Industries has a current market value of $22,225,000.

Instructions

(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2010, to reflect the application of the “fair value” rule for both classes of securities described above.

(b) For both classes of securities presented above, describe how the results of the valuation adjustments made in (a) would be reflected in the body of and notes to Brooks’ 2010 financial statements.

Norton reported income of $500,000 in 2010 and paid cash dividends of $100,000.

E19-2 (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following information

is available for McKee Corporation for 2010.

1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2011–2014.

2. Deferral, for book purposes, of $25,000 of rent received in advance. The rent will be earned in 2011.

3. Pretax financial income, $350,000.

4. Tax rate for all years, 40%.

Instructions

(a) Compute taxable income for 2010.

(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes

payable for 2010.

payable for 2011, assuming taxable income of $325,000.

E19-9 (Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The pretax financial income (or loss) figures for Synergetics Company are as follows.

2006 $160,000

2007 250,000

2008 90,000

2009 (160,000)

2010 (350,000)

2011 120,000

2012 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2006 and 2007 and a 40% tax rate for the remaining years.

Instructions

Prepare the journal entries for the years 2008 to 2012 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Synergetics Company uses the carryback provision.

All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

P19-1 (Three Differences, No Beginning Deferred Taxes, Multiple Rates) The following information is available for Remmers Corporation for 2010.

1. Depreciation reported on the tax return exceeded depreciation reported on the income statementby $120,000. This difference will reverse in equal amounts of $30,000 over the years 2011–2014.

2. Interest received on municipal bonds was $10,000.

3. Rent collected in advance on January 1, 2010, totaled $60,000 for a 3-year period. Of this amount,

$40,000 was reported as unearned at December 31, for book purposes.

4. The tax rates are 40% for 2010 and 35% for 2011 and subsequent years.

5. Income taxes of $320,000 are due per the tax return for 2010.

6. No deferred taxes existed at the beginning of 2010.

Instructions

(a) Compute taxable income for 2010.

(b) Compute pretax financial income for 2010.

(c) Prepare the journal entries to record income tax expense, deferred income taxes, and income taxes payable for 2010 and 2011. Assume taxable income was $980,000 in 2011.

(d) Prepare the income tax expense section of the income statement for 2010, beginning with “Income before income taxes.”

P19-3 (Second Year of Depreciation Difference, Two Differences, Single Rate, Extraordinary Item)

The following information has been obtained for the Gocker Corporation.

1. Prior to 2010, taxable income and pretax financial income were identical.

2. Pretax financial income is $1,700,000 in 2010 and $1,400,000 in 2011.

3. On January 1, 2010, equipment costing $1,200,000 is purchased. It is to be depreciated on a straightline basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint:

Use the half-year convention for tax purposes, as discussed in Appendix 11A.)

4. Interest of $60,000 was earned on tax-exempt municipal obligations in 2011.

5. Included in 2011 pretax financial income is an extraordinary gain of $200,000, which is fully taxable.

6. The tax rate is 35% for all periods.

7. Taxable income is expected in all future years.

Instructions

(a) Compute taxable income and income tax payable for 2011.

(b) Prepare the journal entry to record 2011 income tax expense, income tax payable, and deferred taxes.

(c) Prepare the bottom portion of Gocker’s 2011 income statement, beginning with “Income beforeincome taxes and extraordinary item.”

(d) Indicate how deferred income taxes should be presented on the December 31, 2011, balance sheet.

E20-7 (Basic Pension Worksheet) The following defined pension data of Rydell Corp. apply to the year 2010.

Projected benefit obligation, 1/1/10 (before amendment) $560,000

Plan assets, 1/1/10 546,200

Pension liability 13,800

On January 1, 2010, Rydell Corp., through plan amendment,

grants prior service benefits having a present value of 120,000

Settlement rate 9%

Service cost 58,000

Contributions (funding) 65,000

Actual (expected) return on plan assets 52,280

Benefits paid to retirees 40,000

Prior service cost amortization for 2010 17,000

Instructions

For 2010, prepare a pension worksheet for Rydell Corp. that shows the journal entry for pension expense and the year-end balances in the related pension accounts.

P20-4 (Pension Expense, Journal Entries for 2 Years) Gordon Company sponsors a defined benefitpension plan. The following information related to the pension plan is available for 2010 and 2011.

2010 2011

Plan assets (fair value), December 31 $699,000 $849,000

Projected benefit obligation, January 1 700,000 800,000

Pension asset/liability, January 1 140,000 Cr. ?

Prior service cost, January 1 250,000 240,000

Service cost 60,000 90,000

Actual and expected return on plan assets 24,000 30,000

Amortization of prior service cost 10,000 12,000

Contributions (funding) 115,000 120,000

Accumulated benefit obligation, December 31 500,000 550,000

Interest/settlement rate 9% 9%

Instructions

(a) Compute pension expense for 2010 and 2011.

(b) Prepare the journal entries to record the pension expense and the company’s funding of the pension plan for both years.

E22-19 (Error Analysis and Correcting Entries) A partial trial balance of Dickinson Corporation is as follows on December 31, 2010.

Dr. Cr.

Supplies on hand $ 2,500

Accrued salaries and wages $ 1,500

Interest receivable 5,100

Prepaid insurance 90,000

Unearned rent –0–

Accrued interest payable 15,000

Additional adjusting data:

1. A physical count of supplies on hand on December 31, 2010, totaled $1,100.

2. Through oversight, the Accrued Salaries and Wages account was not changed during 2010. Accrued salaries and wages on December 31, 2010, amounted to $4,400.

3. The Interest Receivable account was also left unchanged during 2010. Accrued interest on investments amounts to $4,350 on December 31, 2010.

4. The unexpired portions of the insurance policies totaled $65,000 as of December 31, 2010.

5. $24,000 was received on January 1, 2010 for the rent of a building for both 2010 and 2011. The entire amount was credited to rental income.

6. Depreciation for the year was erroneously recorded as $5,000 rather than the correct figure of $50,000.

7. A further review of depreciation calculations of prior years revealed that depreciation of $7,200 was not recorded. It was decided that this oversight should be corrected by a prior period adjustment.

Instructions

(a) Assuming that the books have not been closed, what are the adjusting entries necessary at

December 31, 2010? (Ignore income tax considerations.)

(b) Assuming that the books have been closed, what are the adjusting entries necessary at December 31, 2010? (Ignore income tax considerations.)

P22-6 (Accounting Change and Error Analysis) On December 31, 2010, before the books were closed,

the management and accountants of Madrasa Inc. made the following determinations about three depreciable assets.

1. Depreciable asset A was purchased January 2, 2007. It originally cost $540,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 10 years and have a zero salvage value. In 2010, the decision was made to change the depreciation method from straight-line to sum-of-the-years’-digits, and the estimates relating to useful life and salvage value remained unchanged.

2. Depreciable asset B was purchased January 3, 2006. It originally cost $180,000 and, for depreciation purposes, the straight-line method was chosen. The asset was originally expected to be useful for

15 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of this asset to 9 years and to estimate the salvage value at $3,000.

3. Depreciable asset C was purchased January 5, 2006. The asset’s original cost was $160,000, and this amount was entirely expensed in 2006. This particular asset has a 10-year useful life and no salvage value. The straight-line method was chosen for depreciation purposes.

Additional data:

1. Income in 2010 before depreciation expense amounted to $400,000.

2. Depreciation expense on assets other than A, B, and C totaled $55,000 in 2010.

3. Income in 2009 was reported at $370,000.

4. Ignore all income tax effects.

5. 100,000 shares of common stock were outstanding in 2009 and 2010.

Instructions

(a) Prepare all necessary entries in 2010 to record these determinations.

(b) Prepare comparative retained earnings statements for Madrasa Inc. for 2009 and 2010. The company had retained earnings of $200,000 at December 31, 2008.