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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Investment reporting

O'Brien Industries Inc. is a hook publisher. The comparative unclassified balance sheets for December 31, Year 2 and Year 1 follow. Selected missing balances are shown by letters.

ÓBrien Industries Inc.

Balance Sheet

December 31, Year 2 and Year 1

  Dec. 31, Year 2 Dec 31, Year 1
cash $233,000 $220,000
Accounts receivable (net) 136,530 138,000
Available for sale investments (at cost)—Note 1 $ a $103,770
Less valuation allowance for available-for-sale investments b. 2,500
Available for-sale investments (fair value) $ c $101,270
Interest receivable $ d
Investment in Jolly Roger Co. stock—Note 2 e. $ 77,000
Office equipment (net) 115,000 130,000
Total assets $ f. $666,270
Accounts payable $ 69.400 $ 65,000
Common stock 70.000 70,000
Excess of issue price over par 225,000 225,000
Retained earnings g 308,770
Unrealized gain (loss) on available for-sale investments h. (2,500)
Total liabilities and Stockholders’ equity $ i. $666,270

Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, Year 1, are as follows:

  No. of Shares Cost per Share Total Cost Total Fair Value
Bernard Co. stock 2,250 $17 $ 38,250 $ 37,500
Chadwick Co. stock 1,260 52 65,520 63,770
      $103,770 $101,270

Note 2. The investment in Jolly Roger Co. stock is an equity method investment representing 30% of the outstanding .shares of Jolly Roger Co.

The following selected investment transactions occurred during Year 2:

May 5. Purchased 3,080 shares of Gozar Inc. at $30 per share including brokerage commission. Gozar Inc. is classified as an available-for-sale security.
Oct. 1. Purchased $40,000 of Nightline co. 6%, 10-Year bonds at 100. The bonds are classified as available for sale. The bonds pay interest on October 1 and April 1.
9. Dividends of $12,500 are received on the Jolly Roger co. investment.
Dec. 31 Jolly Roger co. reported a total net income of $112,000 for year 2. O'Brien industries Inc. recorded equity earnings for its share of Jolly Roger co. net income.
31. Accrued three months of interest on the Nightline bonds.
31. Adjusted the available-for-sale investment portfolio to fair value, using the following fair value per-share amounts:

Available-for-Sale

Investments

Fair Value
Bernard Co. stock $15,40 per share
Chadwick Co. stock $46,00 per share
Gozar Inc. stock $32,00 per share
Nightline Co. bonds $98 per $ 100 of face amount

Dec. 31. Closed the O’Brien Industries Inc. net income of $146,230. O'Brien Industries Inc. paid no dividends during the year.

Instructions

Determine the missing letters in the unclassified balance sheet. Provide appropriate supporting calculations.

To determine

Available-for-sale securities: These are short-term or long-term investments in debt and equity securities with an intention of holding the investment for some strategic purposes like meeting liquidity needs, or manage interest risk.

To find: The missing amounts (a) to (i)

Explanation

(a)

Compute available-for-sale investment, (at cost), for Year 2.

Security Number of Shares (Or Face Amount) × Cost per Share (Or Bond Value) = Cost of Investment
Company C Stock 2,250 shares × $17.00 = $38,250
Company B Stock 1,260 shares × 52.00 = 65,520
Company G Stock 3,080 shares × 30.00 = 92,400
Company N Bonds $40,000 × 100% = 40,000
Total   $236,170

Table (1)

Therefore, available-for-sale investment, (at cost), for Year 2 is $236,170.

(b)

Compute valuation allowance for available-for-sale investment, for Year 2.

Step 1: Compute available-for-sale investment, (fair value), for Year 2.

Security Number of Shares (Or Face Amount) × Fair Value per Share (Or Bond Value) = Fair Value of Investment
Company C Stock 2,250 shares × $15.40 = $34,650
Company B Stock 1,260 shares × 46.00 = 57,960
Company G Stock 3,080 shares × 32.00 = 98,560
Company N Bonds $40,000 × 98% = 39,200
Total   $230,370

Table (2)

Step 2: Compute valuation allowance for available-for-sale investment, for Year 2.

Details Amount ($)
Available-for-sale investments at fair value, December 31, (From Table-2) $230,370
Less: Available-for-sale investments at cost, December 31, (From Table-1) (236,170)
Valuation allowance for available-for-sale investments $(5,800)

Table (3)

Therefore, valuation allowance for available-for-sale investment, for Year 2 is $(5,800).

(c)

Compute available-for-sale investment, (fair value), for Year 2.

Security Number of Shares (Or Face Amount) × Fair Value per Share (Or Bond Value) = Fair Value of Investment
Company C Stock 2,250 shares × $15.40 = $34,650
Company B Stock 1,260 shares × 46.00 = 57,960
Company G Stock 3,080 shares × 32.00 = 98,560
Company N Bonds $40,000 × 98% = 39,200
Total   $230,370

Table (4)

Therefore, available-for-sale investment, (at fair value), for Year 2 is $230,370.

(d)

Compute interest receivable for Year 2.

Interest receivable = {Amount of debt investment × Rate of interest×Time period(October 1 to December 31)}= $40,000×6%×312= $600

Therefore, interest receivable for Year 2 is $600

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