(1)
Journalize the stock investment transactions for Company F.
(1)
Explanation of Solution
Equity investments: Equity investments are stock instruments which claim ownership in the investee company and pay a dividend revenue to the investor company.
Equity method: Equity method is the method used for accounting equity investments which claim a significant influence of above 20% but less than 50% in the outstanding stock of the investee company.
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.
Debit and credit rules:
- ■ Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - ■ Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare journal entry for the purchase of 22,000 shares of Company S, at $18 per share.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
January | 22 | Investments–Company S Stock | 396,000 | ||
Cash | 396,000 | ||||
(To record purchase of shares for cash) |
Table (1)
- ■ Investments–Company S Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Working Notes:
Compute amount of cash paid to purchase Company S’s stock.
Prepare journal entry for the dividend received from Company S for 22,000 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
March | 8 | Cash | 4,840 | ||
Dividend Revenue | 4,840 | ||||
(To record receipt of dividend revenue) |
Table (2)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of dividend received on Company S’s stock.
Prepare journal entry for the dividend received from Company S for 22,000 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
September | 8 | Cash | 5,500 | ||
Dividend Revenue | 5,500 | ||||
(To record receipt of dividend revenue) |
Table (3)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of dividend received on Company S’s stock.
Prepare journal entry for sale of 3,000 shares of Company S, at $16, with a brokerage of $75.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2016 | |||||
October | 17 | Cash | 47,925 | ||
Loss on Sale of Investments | 6,075 | ||||
Investments–Company S Stock | 54,000 | ||||
(To record sale of shares) |
Table (4)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Loss on Sale of Investments is an expense account. Since expenses and losses decrease equity, equity value is decreased, and a decrease in equity is debited.
- ■ Investments–Company S Stock is an asset account. Since stock investments are sold, asset value decreased, and a decrease in asset is credited.
Working Notes:
Calculate the realized gain (loss) on sale of stock.
Step 1: Compute cash received from sale proceeds.
Step 2: Compute cost of stock investment sold.
Step 3: Compute realized gain (loss) on sale of stock.
Note: Refer to Steps 1 and 2 for value and computation of cash received and cost of stock investment sold.
Prepare adjusting entry for valuation of available-for-sale securities transaction.
Figure (1)
- ■ Valuation Allowance for Available-for-Sale Investments is a contra-asset account. The account is debited because the market price was increased (loss) to $475,000 from the cost of $342,000.
- ■ Unrealized Gain (Loss) on Available-for-Sale Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since gain has occurred and gains increase stockholders’ equity value, and an increase in stockholders’ equity value is credited.
Working Notes:
Compute the unrealized gain (loss) as on December 31, 2016.
Details | Amount ($) |
Available-for-sale investments at fair value, December 31, 2016 | $475,000 |
Less: Available-for-sale investments at cost, December 31, 2016 | (342,000) |
Unrealized gain (loss) on available-for-sale investments | $133,000 |
Table (5)
Prepare journal entry for the purchase of 96,000 shares out of the outstanding stock of 300,000 shares of Company I at $720,000.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
January | 10 | Investment in Company I Stock | 720,000 | ||
Cash | 720,000 | ||||
(To record purchase of shares of Company I for cash) |
Table (6)
- ■ Investment in Company I Stock is an asset account. Since stock investments are purchased, asset value increased, and an increase in asset is debited.
- ■ Cash is an asset account. Since cash is paid, asset account decreased, and a decrease in asset is credited.
Prepare journal entry for the dividend received from Company S for 19,000 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
March | 10 | Cash | 5,700 | ||
Dividend Revenue | 5,700 | ||||
(To record receipt of dividend revenue) |
Table (7)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of dividend received on Company S’s stock.
Prepare journal entry for the dividend received from Company S for 19,000 shares.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
September | 12 | Cash | 5,700 | ||
Dividend Revenue | 5,700 | ||||
(To record receipt of dividend revenue) |
Table (8)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Dividend Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of dividend received on Company S’s stock.
Prepare journal entry for dividends received from Company I.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
December | 31 | Cash | 57,600 | ||
Investment in Company I Stock | 57,600 | ||||
(To record dividends received from Company I) |
Table (9)
- ■ Cash is an asset account. Since cash is received, asset account increased, and an increase in asset is debited.
- ■ Investment in Company I Stock is an asset account. Since stock investments are reduced as an effect of receipt of dividends, asset value decreased, and a decrease in asset is credited.
Prepare journal entry for share of income received from Company I.
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
December | 31 | Investment in Company I Stock | 144,000 | ||
Income of Company I | 144,000 | ||||
(To record income realized from Company I) |
Table (10)
- ■ Investment in Company I Stock is an asset account. Since income of the investee is reported as the increase in the investment, asset value increased, and an increase in asset is debited.
- ■ Income of Company I is a revenue account. Revenues increase stockholders’ equity value, and an increase in stockholders’ equity is credited.
Working Notes:
Compute amount of income received from Company I.
Prepare adjusting entry for valuation of available-for-sale securities transaction.
Figure (2)
- ■ Unrealized Gain (Loss) on Available-for-Sale Investments is an adjustment account used to report gain or loss on adjusting cost of investment at fair market value. Since loss has occurred and losses reduce stockholders’ equity value, and a decrease in stockholders’ equity value is debited.
- ■ Valuation Allowance for Available-for-Sale Investments is a contra-asset account. The account is credited because the market price was decreased (loss) to $364,100 from the cost of $430,300.
Working Notes:
Compute the unrealized gain (loss) as on December 31, 2017.
Details | Amount ($) |
Available-for-sale investments at fair value, December 31, 2017 | $418,000 |
Less: Available-for-sale investments at cost, December 31, 2017 | (475,000) |
Unrealized gain (loss) on available-for-sale investments | $(57,000) |
Table (11)
(2)
Indicate the presentation of available-for-sale investments, equity method investments, and stockholders’ equity on the balance sheet as on December 31, 2017.
(2)
Explanation of Solution
Balance sheet presentation:
Company F | ||
Balance Sheet (Partial) | ||
December 31, 2017 | ||
Assets | ||
Current assets: | ||
Available-for-sale investments (at cost) | $342,000 | |
Add valuation allowance for available-for-sale investments | 76,000 | |
Available-for-sale investments (at fair value) | $418,000 | |
Investments: | ||
Investment in Company I Stock | 806,400 | |
Stockholders’ equity: | ||
| 389,000 | |
Unrealized gain (loss) on available-for-sale investments | 76,000 |
Table (12)
Working Notes:
Compute the cost of available-for-sale investments.
Compute valuation allowance balance as on December 31, 2017.
Details | Amount ($) |
Valuation allowance debit balance, December 31, 2016 | $133,000 |
Valuation allowance credit balance, December 31, 2017 | (57,000) |
Valuation allowance balance | $76,000 |
Table (13)
Prepare Investment in Company I Stock account to find the stock investment balance as on December 31, 2017.
Investment in Company I Stock account
Investment in Company I Stock | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
Cash | 720,000 | Cash(dividends) | 57,600 | |||
Income | 144,000 | |||||
Total | 864,000 | Total | 57,600 | |||
Balance | $806,400 |
Table (14)
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Chapter 15 Solutions
Financial Accounting
- Tama Companys capital structure consists of common stock and convertible bonds. At the beginning of 2019, Tama had 15,000 shares of common stock outstanding; an additional 4,500 shares were issued on May 4. The 7% convertible bonds have a face value of 80,000 and were issued in 2016 at par. Each 1,000 bond is convertible into 25 shares of common stock; to date, none of the bonds have been converted. During 2019, the company earned net income of 79,200 and was subject to an income tax rate of 30%. Required: Compute the 2019 diluted earnings per share.arrow_forwardParilo Company acquired 170,000 of Makofske Co., 5% bonds on May 1, 2016, at their face amount. Interest is paid semiannually on May 1 and November 1. On November 1, 2016, Parilo Company sold 50,000 of the bonds for 96. Journalize entries to record the following: a. The initial acquisition of the bonds on May 1. b. The semiannual interest received on November 1. c. The sale of the bonds on November 1. d. The accrual of 1,000 interest on December 31, 2016.arrow_forwardSelected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4,000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a heldtomaturity long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method. q. Accrued interest for three months on the Dream Inc. bonds purchased in (l). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016.arrow_forward
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Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a held- to-maturitv long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 545, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method, q. Accrued interest for three months on the Dream Inc. bonds purchased in (1). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions Journalize the selected transactions. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016. Income statement data: Advertising expense 150,000 Cost of merchandise sold 3,700,000 Delivery expense 30,000 Depreciation expense -office buildings and equipment 30,000 Depreciation expensestore buildings and equipment 100,000 Dividend revenue 4,500 Gain on sale of investment 4,980 Income from Pinkberry Co. investment 76,800 Income tax expense 140,500 Interest expense 21,000 Interest revenue 2,720 Miscellaneous administrative expense 7.500 Miscellaneous selling expense 14,000 Office rent expense 50,000 Office salaries expense 170,000 Office supplies expense 10,000 Sales 5,254,000 Sales commissions 185,000 Sales salaries expense 385,000 Store supplies expense 21,000 Retained earnings and balance sheet data: Accounts payable 194,300 Accounts receivable 545,000 Accumulated depreciationoffice buildings and equipment 1,580,000 Accumulated depreciationstore buildings and equipment 4,126,000 Allowance for doubtful accounts 8,450 Available for sale investments (at cost) 260,130 Bonds payable. 5%. due 2024 500,000 Cash 246,000 Common stock, 20 par (400,000 shares authorized; 100,000 shares issued. 94,600 outstanding) 2,000,000 Dividends: Cash dividends for common stock 155,120 Cash dividends for preferred stock 100,000 Goodwill 500,000 Income tax payable 44,000 Interest receivable 1,125 Investment in Pinkberry Co. stock (equity method) 1,009,300 Investment in Dream Inc. bonds (long term) 90,000 Merchandise inventory [December 31, 2016). at lower of cost (FIFO) or market 778,000 Office buildings and equipment 4.320,000 Paid-in capital from sale of treasury stock 13,000 Excess of issue price over parcommon stock 886,800 Excess of issue price over parpreferred stock 150,000 Preferred 5% stock. 80 par (30,000 shares authorized; 20,000 shares issued] 1,600,000 Premium on bonds payable 19,000 Prepaid expenses 27,400 Retained earnings, January 1, 2016 9,319,725 Store buildings and equipment 12,560,000 Treasury stock (5,400 shares of common stock at cost of 33 per share) 178,200 Unrealized gain (loss) on available for sale investments (6,500) Valuation allowance for available for sale investments (6,500)arrow_forwardDuring 2021, Anthony Company purchased debt securities as a long-term investment and classified them as trading. 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On December 31, 2019, land with a fair market value of 150,000 was purchased through the issuance of a long-term note in the amount of 150,000. The note bears interest at the rate of 15% and is due on December 31, 2021. g. Deferred taxes payable represent temporary differences relating to the use of accelerated depreciation methods for income tax reporting and the straight-line method for financial statement reporting. Required: 1. Prepare a spreadsheet to support a statement of cash flows for Farrell for the year ended December 31, 2019, based on the preceding information. 2. Prepare the statement of cash flows. (Appendix 21.1) Spreadsheet and Statement Refer to the information for Farrell Corporation in P21-13. Required: 1. Using the direct method for operating cash flows, prepare a spreadsheet to support a 2019 statement of cash flows. (Hint: Combine the income statement and December 31, 2019, balance sheet items for the adjusted trial balance. Use a retained earnings balance of 291,000 in this adjusted trial balance.) 2. Prepare the statement of cash flows. (A separate schedule reconciling net income to cash provided by operating activities is not necessary.)arrow_forward
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