Brief Exercise 17-8

Cleveland Company has a stock portfolio valued at \$7,490 (available-for-sale). Its cost was \$6,960. If the Fair Value Adjustment account has a debit balance of \$214, prepare the journal entry at year-end.

 Account Title and Explanation Debit Credit Fair value adjustment (Available-for-sale) Unrealized holding gain or loss-equity \$316 \$316

Exercise 17-13

Parent Co. invested \$1,100,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40% of net income in dividends each year.

Use the information in the following T-account for the investment in Sub to answer the following questions.

 Investment in Sub Co. 1,100,000 141,600 56,640

(a) How much was Parent Co.’s share of Sub Co.’s net income for the year?

Net income \$141,600

(b) How much was Parent Co.’s share of Sub Co.’s dividends for the year?

Dividends \$56,640

(c) What was Sub Co.’s total net income for the year?

100/25 ×\$141,600

Total net income \$566,400

(d) What was Sub Co.’s total dividend for the year?

100/25 × \$56,640

Total Dividends \$226,560

Problem 17-3

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, 2014 Sharapova Company common stock, \$111 par, 222 shares \$44,600 April 1 U.S. government bonds, 12%, due April 1, 2024, interest payable April 1 and October 1, 113 bonds of \$1,000 par each 113,000 July 1 McGrath Company 12% bonds, par \$54,200, dated March 1, 2014, purchased at 104 plus accrued interest, interest payable annually on March 1, due March 1, 2034 58,536

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

 Account Title and Explanation Debit Credit Debt investment (Available for sale) Equity investment (Available for sale) Interest revenue (\$54,200 × 0.12 × 4/12) Investment \$169,368 \$44,600 \$2,168 \$216,136

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2014, using the straight-line method.

 Date Account Title and Explanation Debit Credit Dec. 31, 2014 Interest Received Interest Revenue Debt Investment \$8,810 \$55 \$8,755

Accrued interest

\$54,200 × 0.12 × 10/12 = \$5,420

6/236 × 2,168 = (\$55)

Accrued interest

\$113,000 × 0.12 × 3/12 = \$3,390

Total = \$8,755

(c) The fair values of the investments on December 31, 2014, were:

 Sharapova Company common stock \$33,180 U.S. government bonds 146,730 McGrath Company bonds 64,740

 December 31, 2014 Available-for-Sale Portfolio Securities                                    Cost                        Fair Value                  Unrealized Gain (Loss) Sharapova Company stock          \$44,600                  \$33,180                         \$(11,420) U.S. government bonds                113,000                   146,730                          33,730 McGrath Company bonds             56,313*                     64,740                            8,427 Total                                           \$213,913                  \$244,650                      \$30,737

(\$54,200 × 1.04) -\$55 = \$56,313*

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

 Date Account Title and Explanation Debit Credit Dec. 31, 2014 Fair value adjustment (Available for sale) Unrealized holding gains or loss-equity \$30,737 \$30,737

(d) The U.S. government bonds were sold on July 1, 2015, for \$121,190 plus accrued interest. Give the proper entry.

 Date Account Title and Explanation Debit Credit Jul. 1, 2015 Cash (\$121,190 + \$3,390) Available-for-sale securities Gains on sale securities Interest revenue \$124,580 \$113,000 \$8,190 \$3,390

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