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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

Teasdale Inc. manufactures and sells commercial and residential security equipment. The comparative unclassified balance sheets for December 31, Year 2 and Year 1 are provided below. Selected missing balances are shown by letters.

Teasdale Inc.

Balance Sheet

December 31, Year 2 and Year 1

  Dec. 31, Year 2 Dec. 31, Year 1
Cash $160,000 $ 156,000
Accounts receivable (net) 11S.OOO 108,000
Available for-sale investments (at cost)—Note 1 $ a. $ 91,200
Plus valuation allowance for available-for-sale investments b. 8,776
Available for-sale investments (fair value) $ c $ 99,976
Interest receivable $ d.
Investment in Wright Co. stock—Note 2 e. $ 69,200
Office equipment (net) 96,000 105,000
Total assets $ f. 5538,176
Accounts payable $ 91,000 $ 72,000
Common stock 80,000 80,000
Excess of issue price over par 250,000 250,000
Retained earnings g 127,400
Unrealized gain (loss) on available for-sale investments h. 8,776
Total liabilities and stockholders' equity S i. 5538,176

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
Alvarez Inc stock 960 $38,00 $36,480 $39,936
Hirsch Inc. stock 1,900 28,80 $4,720 60,040
      $91,200 $99,976

Note 2. The Investment in Wright Co. stack is an equity method investment representing 30% of the outstanding shares of Wright Co.

The following selected investment transactions occurred during Year 2:

Mar. 18. Purchased 800 shares of Richter Inc. at $40, including brokerage commission. Richter is classified as an available-for-sale security.
July 12. Dividends of $12,000 art: received on the Wright Co. investment.
Oct 1. Purchased $24,000 of Toon Co. 4%, 10-year bonds at 100. the bonds are classified as available for sale. The bonds pay interest on October 1 and April 1.
December 31. Wright Co. reported a total net income of $80,000 for Year 2. Teasdale recorder equity earnings for its share of Wright Co. net income.
31. Accrued interest for three months on the Toon Co. bonds purchased on October 1.
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
Alvarez Inc. stock $41,50 per share
Hirsch Inc stock $26,00 per share
Richter Inc. stock $48,00 per share
Toon Co. bonds 101 per $ 100 of face amount

31. Closed the Teasdale Inc. net income of $51,240. Teasdale Int. 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 A Stock 960 shares × $38.00 = $36,480
Company H Stock 1,900 shares × 28.80 = 54,720
Company R Stock 800 shares × 40.00 = 32,000
Company T Bonds $24,000 × 100% = 24,000
Total   $147,200

Table (1)

Therefore, available-for-sale investment, (at cost), for Year 2 is $147,200.

(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 A Stock 960 shares × $41.50 = $39,840
Company H Stock 1,900 shares × 26.00 = 49,400
Company R Stock 800 shares × 48.00 = 38,400
Company T Bonds $24,000 × 101% = 24,240
Total   $151,880

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) $151,880
Less: Available-for-sale investments at cost, December 31, (From Table-1) (147,200)
Valuation allowance for available-for-sale investments $4,680

Table (3)

Therefore, valuation allowance for available-for-sale investment, for Year 2 is $4,680.

(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 A Stock 960 shares × $41.50 = $39,840
Company H Stock 1,900 shares × 26.00 = 49,400
Company R Stock 800 shares × 48.00 = 38,400
Company T Bonds $24,000 × 101% = 24,240
Total   $151,880

Table (4)

Therefore, available-for-sale investment, (at fair value), for Year 2 is $151,880.

(d)

Compute interest receivable for Year 2.

Interest receivable = {Amount of debt investment × Rate of interest×Time period(October 1 to December 31)}= $24,000×4%×312= $240

Therefore, interest receivable for Year 2 is $240

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