Exercises
Exercise 12-1
Various transactions related to securities available for sale
LO 3
Parnell Industries buys securities to be available for sale when circumstances warrant, not to profit from short-term differences in price and not necessarily to hold debt securities to maturity. The following selected transactions relate to investment activities of Parnell Industries whose fiscal year ends on December 31. No investments were held by Parnell at the beginning of the year.
2013
March 1Purchased 2 million Platinum Gems, Inc. common shares for $124 million, including brokerage fees and commissions.
April 13Purchased $200 million of 10% bonds at face value from Oracle Wholesale Corporation.
July 20Received cash dividends of $3 million on the investment in Platinum Gems, Inc. common shares.
October 13Received semiannual interest of $10 million on the investment in Oracle bonds.
October 14Sold the Oracle bonds for $205 million.
November 1Purchased 500,000 SPI International preferred shares for $40 million, including brokerage fees and commissions.
December 31Recorded the necessary adjusting entry(s) relating to the investments. The market prices of the investments are $64 per share for Platinum Gems, Inc. and $74 per share for SPI International preferred shares.
2014
January 25Sold half the Platinum Gems, Inc. shares for $65 per share.
March 1Sold the SPI International preferred shares for $78 per share.
December 31Recorded the necessary adjusting entry(s) relating to the investments. The market price of the investments is $65 per share for Platinum Gems, Inc.
Required:
1.Prepare the appropriate journal entry for each transaction or event.
2.Show the amounts that would be reported on the company’s 2013 income statement relative to these investments.
Exercise 12-2
Various investment securities
LO 1-3
At December 31, 2013, McKnight Brothers Corp. had the following investments that were purchased during 2000, its first year of operations:
Cost Fair Value
Trading Securities:
SecurityA $ 700,000 $ 725,000
B 210,000 200,000
Totals $ 910,000 $ 925,000
Securities Available for Sale:
Security C $ 500,000 $ 560,000
D 850,000 865,000
Totals $1,350,000 $1,425,000
Securities to Be Held to Maturity:
Security E $ 970,000 $ 980,000
F 412,000 409,000
Totals $1,382,000 $1,389,000
No investments were sold during 2013. All securities except Security D and Security F are considered short-term investments. None of the market changes is considered permanent.
Required:
Determine the following amounts at December 31, 2013:
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 other comprehensive income.
Exercise 12-3
Equity method; purchase; investee income; dividends
LO 5
As a long-term investment at the beginning of the fiscal year, Paper Products International purchased 35% of Reed’s Restaurant Supplies, Inc.’s 12 million shares for $73 million. The fair value and book value of the shares were the same at that time. During the year, Reed’s Restaurant Supplies earned net income of $20 million and distributed cash dividends of $1.10 per share. At the end of the year, the fair value of the shares is $59 million.
Required:
Prepare the appropriate journal entries from the purchase through the end of the year.
Exercise 12-4
Equity method; adjustments for depreciation
LO 6
J & W Leasing paid $76 million on January 4, 2013, for 5 million shares of Conley Trucks common stock. The investment represents a 25% interest in the net assets of Conley and gave J & W the ability to exercise significant influence over Conley’s operations. J & W received dividends of $1.20 per share on December 27, 2013, and Conley reported net income of $60 million for the year ended December 31, 2013. The market value of Conley’s common stock at December 31, 2013, was $22.25 per share.
•The book value of Conley’s net assets was $212 million.
•The fair market value of Conley’s depreciable assets exceeded their book value by $40 million. These assets had an average remaining useful life of 5 years.
•The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
Prepare all appropriate journal entries related to the investment during 2013.
Exercise 12–5
Accounting for debt investments under the proposed ASU
Fred purchased $10,000 of 8% Blakely bonds at par on July 1, 2013. The bonds pay interest semiannually. Fred intends to hold the Blakely bonds for the life of the bonds. During the second half of 2013, an decrease in interest rates increased the fair value of the bonds to $12,000. Fred reports investments under the proposed ASU.
Required:
- Prepare a journal entry to record Fred’s receipt of six months of interest revenue.
- Prepare a journal entry (if any is required) to record any unrealized gains or losses on the Blakely bonds during 2013.
Exercise 12–6
Accounting for debt investments under the proposed ASU
Assume the same facts as in E12-6, but that Fred intends to sell half of the Blakely bonds immediately and to hold the other half of the bonds to sell once the price of the bonds appreciates sufficiently.Fred reports investments under the proposed ASU.
Required:
- Prepare a journal entry to record Fred’s receipt of six months of interest revenue.
- Prepare a journal entry (if any is required) to record any unrealized gains or losses on the Blakely bonds during 2013.
Problems
Problem 12-1
Investment securities and equity method investments compared
LO 3, 4, 5
On January 4, 2013, RTN Industries paid $648,000 for 20,000 shares of Austin Cattle Company common stock. The investment represents a 30% interest in the net assets of Austin and gave RTN the ability to exercise significant influence over Austin’s operations. RTN received dividends of $3.00 per share on December 6, 2013, and Austin reported net income of $320,000 for the year ended December 31, 2013. The market value of Austin’s common stock at December 31, 2013, was $32 per share. The book value of Austin’s net assets was $1,600,000 and:
a.The fair market value of Austin’s depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $160,000.
b.The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1.Prepare all appropriate journal entries related to the investment during 2013, assuming RTN accounts for this investment by the equity method.
2.Prepare the journal entries required by RTN, assuming that the 20,000 shares represent a 10% interest in the net assets of Austin rather than a 30% interest, and that RTN anticipates holding their investment in Austin for the foreseeable future.
Problem 12-2
Equity method
LO 4, 5
Southeast Pulp and Paper, a paper and allied products manufacturer, was seeking to gain a foothold in Mexico. Toward that end, the company bought 40% of the outstanding common shares of Monterrey Milling, Inc. on January 3, 2013, for $80 million.
At the date of purchase, the book value of Monterrey’s net assets was $155 million. The book values and fair values for all balance sheet items were the same except for inventory and plant facilities. The fair value exceeded book value by $1 million for the inventory and by $4 million for the plant facilities.
The estimated useful life of the plant facilities is 8 years. All inventory acquired was sold during 2013.
Monterrey reported net income of $28 million for the year ended December 31, 2013. Monterrey paid a cash dividend of $6 million.
Required:
1.Prepare all appropriate journal entries related to the investment during 2013.
2.What amount should Southeast report as its income from its investment in Monterrey for the year ended December 31, 2013?
3.What amount should Southeast report on its balance sheet as its investment in Monterrey?
4.What should Southeast report on its statement of cash flows regarding its investment in Monterrey?
© The McGraw-Hill Companies, Inc., 2013
Alternate Exercises and Problems12-1 13-1