Problem set C

PROBLEM 15-1C

LeClair Company, which began operations in 2008, invests its idle cash in trading securities. The following transactions are from its short-term investments in its trading securities:

2008

Jan.20Purchased 650 shares of Vt. Teddy Bear at $18 per share plus a $75 commission.

Feb. 9Purchased 1,800 shares of Green Mountain Coffee Roasters at $31.25 per share plus a

$280 commission.

Oct.12Purchased 100 shares of Ben & Jerry’s at $8.90 per share plus a $100 commission.

2009

Apr. 15Sold 650 shares of Vt. Teddy Bear at $24 per share less a $210 commission.

July 5Sold 100 shares of Ben & Jerry’s at $11.25 per share less a $85 commission.

22Purchased 3,000 shares of Burlington Corp. at $45 per share plus a $178 commission.

Aug. 19Purchased 1,700 shares of Trey Page Phishing Co. at $4 per share plus a $420

commission.

2010

Feb. 27Purchased 1,500 shares of VT Co. at $55 per share plus a $880 commission.

Mar. 3Sold 3,000 shares of Burlington Corp at $35 per share less a $320 commission.

June 21Sold 1,800 shares of Green Mountain Coffee Roasters at $30 per share less a $130

commission.

30Purchased 1,000 shares of ChamplainCollege at $26.40 per share plus a $160

commission.

Nov. 1Sold 1,700 shares of Trey Page Phishing Co at $14.75 per share less a $420 commission.

Required

1.Prepare journal entries to record these short-term investment activities for the years shown.(Ignore any year-end adjusting entries.)

2.On December 31, 2010, prepare the adjusting entry to record any necessary market adjustment for the portfolio of trading securities when VT Co.’s share price was $56 and ChamplainCollege share price was $17.25. (the Market Adjustment –Trading account has an unadjusted balance of zero.)

PROBLEM 15-2C

Harry Company had no short-term investments prior to year 2008. It had the following transactions involving short-term investments in available for sale securities in 2008.

Jan. 1 Purchased 500 shares of KFC Co. stock at $18.75 per share plus a $125 brokerage fee.

5 Purchased 2,600 shares of Fender Guitars stock at $45.50 per share plus a $460

brokerage fee.

Feb. 1 Paid $20,000 to buy a 90 day Certificate of Deposit dated February 1, 7% interest rate.

Mar.12 Purchased 10,000 shares of Harley-Davidson stock at $56 per share plus a $1,200

brokerage fee.

April 15 Received $.05 per share cash dividend from KFC.

16 Sold all 500 shares of KFC stock at $15 less a $200 brokerage fee.

20 Sold 1,200 shares of Fender Guitars stock at $68.25 per share less a $150 brokerage

fee.

May 5 Received a check for the principal and interest from the Certificate of Deposit that

matured on May 2.

June 3 Received a $2.50 per share cash dividend on the Harley-Davidson stock owned.

8 Received a $1.20 per share cash dividend on the remaining Fender Guitars shares.

Required

1.Prepare journal entries to record these preceding transactions and events.

2.Prepare a table to compare the cost and market values of the Harry’s short-term investments in available-for-sale securities. The year-end market values per share are Fender Guitars, $33.25; and Harley-Davidson, $57.25.

3.Prepare an adjusting entry, if necessary, to record the market adjustment for the portfolio of short-term investments in available-for-sale securities.

Analysis Component

4. Explain the balance sheet presentation of a market adjustment for the portfolio of short-term investmentsin available-for-sale securities.

5. How do these short-term investments affect Harry’s (a) income statement for year 2008 and (b) the equity section of its balance sheet at year-end 2008?

Problem 15-3C

Cam Security, which began operations in 2008, invests in long-term available for sale securities. Following is a series of transactions annd events determining its long-term investment activity.

2008

Feb. 12Purchased 1,000 shares of Goodyear Tire at $55.50 per share plus a $850 commission.

May 5Purchased 500 shares of QuakerState at $23.00 per share plus a $470 commission.

Oct. 27Purchased 2,300 shares of Ford at $82.50 per share plus a $1,080 commission.

Dec. 31Per share market values for stocks in the portfolio are Goodyear Tire, $58.00; QuakerState, $14.50; Ford, $71.75.

2009

Jan. 1 Sold 500 shares of QuakerState at $18.00 per share less a $550 commission.

March 2Purchased 850 shares of Duralube at $46.50 per share plus a $365 commission.

June 23Purchased 3,500 shares of McDonald’s at $66.00 per share plus a $780 commission.

Aug. 12Sold 850 shares of Duralube at $59.00 per share less a $230 commission.

Dec. 31Per share market values for stocks in the portfolio are Goodyear, $57.25; McDonald’s, $65.00; Ford, $75.75

2010

Jan. 6 Purchased 1,800 shares of Hewlett-Packard at $56.00 per share plus a $620 commission.

June 27Sold 1,000 shares of Goodyear Tire at $50.00 per share less an $320 commission.

July 7 Purchased 2,000 shares of Harley-Davidson at $26.50 per share plus a $875 commission.

Aug. 19Sold 2,300 shares of Ford at $62.50 per share less a $850 commission.

Nov. 22Sold 3,500 shares of McDonald’s at $78.50 per share less a $420 commission.

Dec. 31Per share market values for stocks in the portfolio are Harley-Davidson, $28.75; Hewlett-Packard, $61.50.

Required

1.Prepare journal entries to record these transactions and events and any year-end adjustments needed to record the market values of the long-term investments.

2.Prepare a table that summarizes the (a) total cost, (b) total market adjustment, and (c) total market value of the portfolio of long-term investments at each year-end.

3.For each year, prepare a table that shows the (a) realized gains and losses and (b) the total unrealized gains or losses at each year-end.

PROBLEM 15-4C

Dayton Inc.’s long-term investment portfolio at December 31, 2007, consists of the following:

Available-for-Sale Securities Cost Market Value

35,000 shares of REM common stock $437,500 $421,750

52,000 shares of STP common stock $549,000 $633,650

SVC Inc. enters into the following long-term investment transactions during year 2008.

Feb. 28 Purchased 10,000 shares of XTC common stock for $225,000 plus a brokerage fee of $625.

April 1Sold 12,000 shares of REM common stock for $199,350 less a brokerage fee of $1,040.

July 18Sold 52,000 shares of STP common stock for $471,000 less a brokerage fee of $1,900.

Nov. 30Purchased 26,500 shares of INXS common stock for $351,000 plus a brokerage fee of $800.

The market values of Dayton’s investments at December 31, 2008, are: REM, $299,400; XTC, $162,500; INXS, $352,650.

Required

1.Determine what amount Dayton should report on its December 31, 2008, balance sheet for its long-term investments in available-for-sale equity securities.

2.Prepare any necessary December 31, 2008, adjusting entry to record the market value adjustment for the long-term investments in available-for-sale equity securities.

3.What amount of gains or losses on transactions relating to long-term investments in available-for-sale equity securities should Dayton report on its December 31, 2008, income statement?

PROBLEM 15-5C

Shea Cement Co., which began operating on January 4, 2008, had the folowing subsequent transactions and events in its long-term investments.

2008

Feb. 14Shea purchased 100,000 shares (25%) of Capital Hill’s common stock for $2,125,000.

July 4 Capital Hill declared and paid a cash dividend of $0.50 per share.

Dec. 31Capital Hill’s net income for 2008 is $105,000, and the market value of its stock is $20.00 per share.

2009

July 4 Capital Hill declared and paid a cash dividend of $0.75 per share.

Dec. 31Capital Hill’s net loss for 2009 is $44,000, and the market value of its stock is $18.00 per share.

2010

Jan.2Shea sold all of its investment in Capital Hill for $1,500,000 cash.

Part 1

Assume that Shea has a significant influence over Capital Hill with its 25% share.

Required

1.Prepare entries to record these transactions and events for Shea.

2.Compute the carrying (book) value per share of Shea’s investment in Capital Hill common stock as reflected in the investment account on January 1, 2010.

3.Compute the net increase or decrease in Shea’s equity from February 14, 2008, through January 2, 2010, resulting from its investment in Capital Hill.

Part 2

Assume that although Shea owns 25% of Capital Hill’s outstanding stock, circumstances indicate that it does not have a significant influence over the investee.

Required

1.Prepare entries to record the preceding transactions and events for Shea. Also, prepare an entry dated January 2, 2010, to remove any balance related to the market adjustment.

2.Compute the cost per share of Shea’s investment in Capital Hill common stock as reflected in the investment account on January 1, 2010.

3.Compute the change in Shea’s equity from February 14, 2008, through January 2, 2010, resulting from its investment in Capital Hill.

PROBLEM 15-6C

Allegheny Co., a U.S. corporation with customers in several foreign countries, had the following selected transactions for 2008 and 2009.

2008

Oct. 5 Sold merchandise to Olympic of Canada for $125,000 cash. The exchange rate for Canadian dollars is $0.645 on this day.

Oct. 15 Sold merchandise on credit to Caliendo and Sons of Mexico City. The price of 2,600,000 pesos is to be paid 60 days from the date of the sale. The exchange rate for pesos is $0.00875 on this day.

Nov. 4 Sold merchandise for 500,000 pounds to Wembly Ltd. of London, payment in full is to be received in 60 days. The exchange rate for pounds is $1.887 on this day.

Dec. 15Received Caliendo’s payment in pesos for its October 15 purchase and immediately exchanged the pesos for dollars. The exchange rate for pesos is $0.00775 on this day.

Dec. 20 Sold merchandise for 1,500,000 yen to Sumito Company, payment in full to be received in 30 days. The exchange rate for yen is $0.0092 on this day.

Dec.31Recorded adjusting entries to recognize exchange gains or losses on Allegheny’s annual financial statements. Rates for exchanging foreign currencies on this day follow:

Pounds (Britain) $2.014

Yen (Japan) 0.0087

Dollars (Canada) 0.625

Pesos (Mexico) 0.00795

2009

Jan. 4 Received payment from Wembly Ltd. The exchange rate for pounds was $2.055.

Jan. 19Received payment from Sumito Company and immediately exchanged the yen for dollars. The exchange rate for yen is $0.0090 on this day.

Required

1.Prepare journal entries for Allegheny transactions and adjusting entries (round amounts to the dollar).

2.Compute the foreign exchange gain or loss to be reported on Allegheny’s 2008 income statement.

Analysis Component

3.What actions might Allegheny consider to reduce its risk of foreign exchange gains or losses?