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Example 1. On January 2, 2003, Ronaldo Company purchased bonds of A Company for $18,000. The bonds have maturity value of $20,000, mature in ten years, and pay interest annually on December 31 at 4% annual rate. The market value of the bonds were $18,800 at 12-31-2003 and $19,400 at 12-31-2004. Income before consideration of investment was $40,000 in 2003 and $60,000 in 2004. Required: Part a. Suppose the investment is classified as an available for sale security. 1. Prepare all journal entries related to the investments for 2003 and 2004. 2. Compute net income and comprehensive income for 2003 and 2004. 3. Show the balance sheet presentation of the investments at 12-31-2003 and 2004. Part b. Repeat part a if the investment is classified as a held to maturity security.
Example 2. On January 1, 2001, Gordon Company purchased 30% of the common stock of Ford Company for $450,000. On that date, Fords balance sheet showed assets of $2,000,000, liabilities of $500,000, and equity of $1,500,000.00 Fords net income was $100,000 for 2001 and $150,000 for 2002. Ford paid dividends of $30,000 in 2001 and $50,0 in 2002. Gordons income before consideration of the investment was $200,000 in 2001 and $300,000 in 2002. Required: a. Show the balance sheet presentation of the investment at 12-31-2001 and 2002 on Gordons balance sheet. b. Compute Gordons net income for 2001 and 2002.
y for $18,000. The bonds have a ber 31 at 4% annual rate. The Income before consideration of the
Solution to example 1 Ronaldo Journal Entries Available for sale 1/2/2003 Investment in bonds Cash 12/31/2003 Cash Investment in bonds Interest income (record interest income) 18,000 18,000 800 200 1,000
Discount amortization is a debit to the investment account. Amount = (20,000 - 18,000)/10 12/31/2003 Securities fair value adjustment Unrealized gain (loss) OCI (mark to market) 12/31/2004 Cash Investment in bonds Interest income (record interest income) 800 200 1,000 600 600
12/31/2004 Securities fair value adjustment Unrealized gain (loss) OCI (mark to market)
400 400
Held to Maturity 1/2/2003 Investment in bonds Cash 12/31/2003 Cash Investment in bonds Interest income (record interest income) 18,000 18,000 800 200 1,000
Discount amortization is a debit to the investment account. Amount = (20,000 - 18,000)/10 Note: do not mark to market since investments are HTM. 12/31/2004 Cash Investment in bonds Interest income (record interest income) 800 200 1,000
Income before investments Interest income Unrealized gains/losses trading Realized gains/losses on sale Net income Other comprehensive income Unrealized gains/losses AFS Comprehensive income
41,000
41,000
Balance Sheets 12-31Assets: Investments Equity Acc. Other comp. income Computation of unrealized gains/losses Market value of portfolio year end Cost of portfolio year end Difference = desired ending balance Beginning balance Difference = unrealized gain (loss) 18,800 18,200 600 600 19,400 18,400 1,000 600 400
18,800 600
19,400 1,000
18,200
e 1 Ronaldo
61,000
61,000
18,400
Solution to example 2 Gordon Ford Balance Sheets 12-31Investment in Ford 2001 471,000 Computation of net income 2001 Income before investments 200,000 Equity income 30,000 Net income 230,000 Cash (record purchase of investment) 2001 Investment in Ford Equity income (record equity income) Cash Investment in Ford (record receipt of dividends. .3 x 30,000) Investment in Ford Equity income (record equity income) Cash Investment in Ford (record receipt of dividends. .3 x 50,000) Computation of equity income 30% of Ford's income Investment in Ford Cost Add 01 equity income Less 01 dividends balance 12-31-01 Add 02 equity income Less 02 dividends balance 12-31-02 450,000 30,000 (9,000) 471,000 45,000 (15,000) 501,000 2001 30,000 2002 45,000 2002 300,000 45,000 345,000 70,000 2002 501,000
30,000 30,000
2001
9,000 9,000
2002
45,000 45,000
2002
15,000 15,000
Chapter 16 1b
Net Income to Common (980,000-45,000) Wt. ave shares O/S Basic EPS Basic Diluted: Preferred Bonds Diluted EPS
2d
3b
Treasury Stock Method: 40,000 sh x $15 = $600,000 Proceeds $600,000/$20 = 30,000 sh 40,000 sh - 30,000 sh = 10,000 sh outstanding Shares 300,000 12 months 50,000 6 months 10,000 Options Months o/s 12/12 = 6/12 = 12/12 =
4c 5b 6c
Treasury stock method Convertible securities are assumed converted only if they Shares Months o/s 400,000 9/12 = 100,000 Issued Oct. 1 500,000 3/12 =
$2,144,000/ 425,000 sh 7c Net income - preferred dividends = NI to common 800,000 - 110,000 = $690,000/600,000 sh 8b Basic Diluted: Preferred Diluted EPS same as Basic
NI to common = $750,000 - 300,000 = $450,000 9c Shares 2,500,000 500,000 3,000,000 250,000 3,250,000 Basic Dilutive: Bonds 5000 bonds x 40 sh x 3/12 Dilutive Months o/s 3/12 = 3/12 = 6/12 =
Unrealized holding gains/losses for trading securities are r income statement. Aggregate cost Aggregate market Unrealized holding loss-income
2d
Unrealized holding gains/losses for available for sale are r comprehensive income and not used to determine net inc Cost 150,000 150,000
Company B: Sales price less brokerage fee Cost Realized loss - income
5b
Realized gains and interest income are used to determine Unrealized holding gains/losses are not recognized for he
6d 7b Purchased price of bonds and interest on April 1, 2002: Accrued interest - 200,000 x 9% x 3/12 Purchased price of bonds on April 1, 2002: Amort. Discount for 7 months Carrying value of bonds on Oct. 31, 2002 Discount 200,000 - 194,000 Life of bonds to maturity Amort. Discount per month
8d
Wray - use the equity method to account for dividends King - reduce investment account for liquidating dividend Bow - 2% x 200,000 Total dividend income
9b
Saxe should carry equity securities on the books at cost u but report them at market value at the balance sheet date account Cost
10 d
A liquidating dividend reduces the investment account und fair value methods.
11 c
Under trading (fair value method), dividend income is reco on the investment account.
Stock dividends received are not considered dividend inco The additional shares are used to reduce the cost basis fo
The realized gain on sale of Nolan stock in 2002 is compu Cost of investment 4000 x $16.50 Shares held (4,000 + 400*) Cost per share Sales price of stock Cost of shares sold: 400 x $15 Realized gain on sale - not dividend income
on (980,000-45,000)
Amounts
8.17 7.43
00,000 Proceeds
h = 10,000 sh outstanding Months o/s Wt. Ave. 300,000 25,000 10,000 335,000
are assumed converted only if they are dilutive Months o/s Wt. Ave 300,000 125,000 425,000 $ 5.04
0/ 425,000 sh
Shares 200,000 $
2.25
300,000
100,000 $
0,000 - 300,000 = $450,000 Months o/s Wt. Ave 625,000 750,000 1,625,000 3,000,000 50,000 3,050,000
ds x 40 sh x 3/12
ains/losses for trading securities are reported in the $ 360,000.00 -320,000.00 40,000.00
ains/losses for available for sale are reported as part of me and not used to determine net income. Market Unrealized holding gain/loss 20,000 Loss 30,000 increase gain-stockholders' equity 160,000 10,000 Gain 130,000
15,000-1,500
nterest income are used to determine net income. ains/losses are not recognized for held-to-maturity securities.
onds and interest on April 1, 2002: 0,000 x 9% x 3/12 onds on April 1, 2002: 7 x 400 ds on Oct. 31, 2002 200,000 - 194,000
uity securities on the books at cost under the fair value method arket value at the balance sheet date, using a market adjustment 150,000 reduces the investment account under both the equity and
ved are not considered dividend income by the investor. are used to reduce the cost basis for each share held.
sale of Nolan stock in 2002 is computed as follows: 66,000 4,400 15.00 10,600.00 6,000.00 4,600.00
$ $