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 Value Unrealized 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 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.
(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. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
(c) Prepare the adjusting journal entry needed on December 31, 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
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
Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2010, using the straight-line method. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2. Round computations to 3 decimal places, e.g. 12.252 and the final answers to zero decimal places, e.g. 12,510.)
The fair values of the securities on December 31, 2010, were:
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?
The U.S. government bonds were sold on July 1,2011, for $119,200 plus accrued interest. Give the proper entry. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
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 investing idle 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' 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.
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.
Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton's shares. Norton reported income of $500,000 in 2010 and paid cash dividends of $100,000.
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