O’Brien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December 31, Year 2 and Year 1 follow. Selected missing balances are shown by letters. Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, Year 1, are as follows: 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: Instructions Determine the missing letters in the unclassified balance sheet. Provide appropriate supporting calculations.

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

Chapter
Section

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 15, Problem 4PA
Textbook Problem
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O’Brien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December 31, Year 2 and Year 1 follow. Selected missing balances are shown by letters.Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, Year 1, are as follows: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:InstructionsDetermine the missing letters in the unclassified balance sheet. Provide appropriate supporting calculations.

To determine

Find the missing amounts (a) to (i).

Explanation of Solution

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.

(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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