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

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Financial Accounting

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

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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.

Chapter 15, Problem 4PA, OBrien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December , example  1

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

Chapter 15, Problem 4PA, OBrien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December , example  2

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:

Chapter 15, Problem 4PA, OBrien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December , example  3

Chapter 15, Problem 4PA, OBrien Industries Inc. is a book publisher. The comparative unclassified balance sheets for December , example  4

Instructions

Determine 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.

SecurityNumber of Shares (Or Face Amount)×Cost per Share (Or Bond Value)=Cost of Investment
Company C Stock2,250 shares×$17.00=$38,250
Company B Stock1,260 shares×52.00=65,520
Company G Stock3,080 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.

SecurityNumber of Shares (Or Face Amount)×Fair Value per Share (Or Bond Value)=Fair Value of Investment
Company C Stock2,250 shares×$15.40=$34,650
Company B Stock1,260 shares×46.00=57,960
Company G Stock3,080 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.

DetailsAmount ($)
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.

SecurityNumber of Shares (Or Face Amount)×Fair Value per Share (Or Bond Value)=Fair Value of Investment
Company C Stock2,250 shares×$15.40=$34,650
Company B Stock1,260 shares×46.00=57,960
Company G Stock3,080 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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