Entry to Record Unrealized Loss on Fair Value by yeq18041

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									          Investments




Chapter
 17-1
                                 Investments


          Investments in Debt                           Investments in
               Securities                              Equity Securities


           Held-to-maturity                           Holdings of less than
           securities                                 20%
                                                           Held-to-maturity
           Available-for-sale                              securities
           securities
                                Passive Investments        Available-for-sale
           Trading securities                              securities
                                                           Trading securities
                                                      Holdings between 20%
                                                      and 50%
                                                      Holdings of more than
                                                      50%
Chapter
 17-2
           Investments in Debt Securities

     Accounting for Debt Securities by Category




Chapter
 17-3
                Held-to-Maturity Securities

      Classify a debt security as held-to-maturity only
      if it has both
          (1) the positive intent and
          (2) the ability to hold securities to maturity.

      Accounted for at amortized cost, not fair value.
      Amortize premium or discount using the effective-
      interest method unless the straight-line method—
      yields a similar result.

Chapter
 17-4
             Available-for-Sale Securities

      Companies report available-for-sale securities at
       fair value, with
       unrealized holding gains and losses reported as
          part of comprehensive income (equity).

      Any discount or premium is amortized.




Chapter
 17-5
            Available-for-Sale Securities

      Sale of Available-for-Sale Securities
      If company sells bonds before maturity date:

          Must make entry to remove the,
           Cost in Available-for-Sale Securities and

           Securities Fair Value Adjustment accounts.

          Any realized gain or loss on sale is reported in
          the ―Other expenses and losses‖ section of the
          income statement.
Chapter                LO 2 Understand the procedures for discount and
 17-6
                            premium amortization on bond investments.
                    Trading Securities

      Companies report trading securities at
       fair value, with
       unrealized holding gains and losses reported as
          part of net income.

      Any discount or premium is amortized.




Chapter                 LO 2 Understand the procedures for discount and
 17-7
                             premium amortization on bond investments.
                    Trading Securities
   Pete Sampras Corporation purchased trading investment
   bonds for $40,000 at par. At December 31, Sampras
   received annual interest of $2,000, and the fair value of
   the bonds was $38,400.
   Instructions
     (a) Prepare the journal entry for the purchase of the
          investment.
     (b) Prepare the journal entries for the interest received.
     (c) Prepare the journal entry for the fair value
          adjustment.
Chapter                  LO 2 Understand the procedures for discount and
 17-8
                              premium amortization on bond investments.
                     Trading Securities
   BE17-4 Prepare the journal entries for (a) the purchase of
   the investment, (b) the interest received, and (c) the fair
   value adjustment.

    (a)   Trading securities                 40,000
            Cash                                       40,000

    (b)   Cash                                2,000
            Interest revenue                            2,000

    (c)   Unrealized Holding Loss - Income     1,600
             Trading Securities                         1,600

Chapter
 17-9
           Investments in Equity Securities

     Represent ownership of capital stock.

     Cost includes:
       price of the security, plus
       broker’s commissions and fees related to purchase.

     The degree to which one corporation (investor)
     acquires an interest in the common stock of another
     corporation (investee) generally determines the
     accounting treatment for the investment subsequent
     to acquisition.
Chapter
 17-10
             Investments in Equity Securities
                           Ownership Percentages

     0 --------------20% ------------ 50% -------------- 100%



          No significant     Significant          Control
            influence         influence        usually exists
          usually exists    usually exists

           Investment        Investment        Investment valued on
           valued using      valued using    parent’s books using Cost
            Fair Value          Equity       Method or Equity Method
             Method            Method        (investment eliminated in
                                                   Consolidation)
Chapter
 17-11
                Holdings of Less Than 20%

      Accounting Subsequent to Acquisition

             Market Price                     Market Price
              Available                       Unavailable
          Value and report the            Value and report the
          investment using the            investment using the
           fair value method.                cost method.*


    * Securities are reported at cost. Dividends are recognized when
    received and gains or losses only recognized on sale of securities.

Chapter
 17-12
               Holdings of Less Than 20%

   Accounting and Reporting – Fair Value Method




   Because equity securities have no maturity date, companies cannot
   classify them as held-to-maturity.
Chapter
 17-13
                Holdings of Less Than 20%
    Loxley Company has the following portfolio of securities at
    September 30, 2007, its last reporting date.

                  Trading Securities              Cost       Fair Value
    Dan Fogelberg, Inc. common (5,000 shares)   $ 225,000   $ 200,000
    Petra, Inc. preferred (3,500 shares)          133,000       140,000
    Tim Weisberg Corp. common (1,000 shares)      180,000       179,000

    On Oct. 10, 2007, the Fogelberg shares were sold at a price
    of $54 per share. In addition, 3,000 shares of Los Tigres
    common stock were acquired at $59.50 per share on Nov. 2,
    2007. The Dec. 31, 2007, fair values were: Petra $96,000,
    Los Tigres $132,000, and the Weisberg common $193,000.

Chapter
 17-14
                 Holdings of Less Than 20%

      Portfolio at September 30, 2007

                    Trading Securities              Cost        Fair Value
      Dan Fogelberg, Inc. common (5,000 shares)   $ 225,000    $ 200,000
      Petra, Inc. preferred (3,500 shares)          133,000        140,000
      Tim Weisberg Corp. common (1,000 shares)      180,000        179,000
                                                  $ 538,000    $ 519,000




      Securities Fair Value Adjustment - credit        ($19,000)

          Unrealized holding loss - income            19,000
              Trading Securities                                   19,000
Chapter
 17-15
                 Holdings of Less Than 20%
    Prepare the journal entries to record the sale, purchase, and
    adjusting entries related to the trading securities in the last
    quarter of 2007.
    October 10, 2007 (Fogelberg):
          Cash (5,000 x $54)                    270,000
              Trading securities                           200,000
              Gain on sale                                  70,000

     November 2, 2007 (Los Tigres):
          Trading securities (3,000 x $59.50)   178,500
              Cash                                         178,500

Chapter
 17-16
                 Holdings of Less Than 20%
    Portfolio at December 31, 2007
                                                          Unrealized
         Trading Securities        Cost      Fair Value   Gain (Loss)
    Petra, Inc. preferred        $ 140.000   $ 96.000     $ (44.000)
    Tim Weisberg Corp. common      179.000     193.000        14.000
    Los Tigres common              178.500     132.000       (46.500)
                                 $ 497.500   $ 421.000       (76.500)




     December 31, 2007:
          Unrealized holding loss - income        76,500
              Trading Securities                              76,500
Chapter
 17-17
                 Holdings of Less Than 20%
    How would the entries change if the securities were
    classified as available-for-sale?

    The entries would be the same except that the
          Unrealized Holding Gain or Loss—Equity account is
          used instead of Unrealized Holding Gain or Loss—
          Income.
          The unrealized holding loss would be deducted from
          the stockholders’ equity section rather than charged
          to the income statement.

Chapter
 17-18
                Holdings of Less Than 20%
    Loxley Company has the following portfolio of securities at
    September 30, 2007, its last reporting date.

                  Trading Securities              Cost       Fair Value
    Dan Fogelberg, Inc. common (5,000 shares)   $ 225,000   $ 200,000
    Petra, Inc. preferred (3,500 shares)          133,000       140,000
    Tim Weisberg Corp. common (1,000 shares)      180,000       179,000

    On Oct. 10, 2007, the Fogelberg shares were sold at a price
    of $54 per share. In addition, 3,000 shares of Los Tigres
    common stock were acquired at $59.50 per share on Nov. 2,
    2007. The Dec. 31, 2007, fair values were: Petra $96,000,
    Los Tigres $132,000, and the Weisberg common $193,000.

Chapter
 17-19
                 Holdings of Less Than 20%

      Portfolio at September 30, 2007

                    Trading Securities              Cost        Fair Value
      Dan Fogelberg, Inc. common (5,000 shares)   $ 225,000    $ 200,000
      Petra, Inc. preferred (3,500 shares)          133,000        140,000
      Tim Weisberg Corp. common (1,000 shares)      180,000        179,000
                                                  $ 538,000    $ 519,000




      Securities Fair Value Adjustment - credit        ($19,000)

          Unrealized holding loss - equity            19,000
              Available for sale Securities                        19,000
Chapter
 17-20
                 Holdings of Less Than 20%
    Prepare the journal entries to record the sale, purchase, and
    adjusting entries related to the trading securities in the last
    quarter of 2007.
    October 10, 2007 (Fogelberg):
          Cash (5,000 x $54)                      270,000
              Avail. For sale securities                      200,000
              Gain on sale                                     45,000
               Unrealized holding loss – equity                25,000
     November 2, 2007 (Los Tigres):
          Avail. For sale securities(3,000 x $59.50)178,500
              Cash                                            178,500
Chapter
 17-21
                 Holdings of Less Than 20%
    Portfolio at December 31, 2007
                                                          Unrealized
         Trading Securities        Cost      Fair Value   Gain (Loss)
    Petra, Inc. preferred        $ 140.000   $ 96.000     $ (44.000)
    Tim Weisberg Corp. common      179.000     193.000        14.000
    Los Tigres common              178.500     132.000       (46.500)
                                 $ 497.500   $ 421.000       (76.500)




     December 31, 2007:
          Unrealized holding loss - income        76,500
               Avail. For sale securities                     76,500
Chapter
 17-22
          Financial Statement Presentation

      Report trading securities at aggregate fair value
      as current assets.
      Report held-to-maturity and available-for-sale
      securities as current or noncurrent.




Chapter
 17-23
          Holdings Between 20% and 50%

    An investment (direct or indirect) of 20 percent or
    more of the voting stock of an investee should lead
    to a presumption that in the absence of evidence to
    the contrary, an investor has the ability to exercise
    significant influence over an investee.

    In instances of ―significant influence,‖ the investor
    must account for the investment using the equity
    method.


Chapter
 17-24
              Holdings Between 20% and 50%

      Equity Method
      Record the investment at cost and subsequently
      adjust the amount each period for
           the investor’s proportionate share of the
            earnings (losses) and
           dividends received by the investor.

    If investor’s share of investee’s losses exceeds the carrying
    amount of the investment, the investor ordinarily should
    discontinue applying the equity method.
Chapter
 17-25
          Holdings Between 20% and 50%

   On January 1, 2007, Pennington Corporation purchased
   30% of the common shares of Edwards Company for
   $180,000. During the year, Edwards earned net income
   of $80,000 and paid dividends of $20,000.
   Instructions
   Prepare the entries for Pennington to record the
   purchase and any additional entries related to this
   investment in Edwards Company in 2007.



Chapter
 17-26
             Holdings Between 20% and 50%

   Prepare the entries for Pennington to record the
   purchase and any additional entries related to this
   investment in Edwards Company in 2007.

          Investment in Associates            180,000
            Cash                                           180,000

          Investment in Associates             24,000
            Investment Revenue   ($80,000 x 30%)           24,000

          Cash                                     6,000
            Investment in Associates   ($20,000 x 30%)      6,000
Chapter
 17-27
                Holdings of More Than 50%

      Controlling Interest - When one corporation
      acquires a voting interest of more than 50 percent
      in another corporation
           Investor is referred to as the parent.
           Investee is referred to as the subsidiary.
           Investment in the subsidiary is reported on
            the parent’s books as a long-term investment.
           Parent generally prepares consolidated
            financial statements along with its solo
Chapter
 17-28
            financial statements.
    Investments at the Date of Acquisition

    Recording Investments at Cost (Parent’s Books)
      Stock investment is recorded at cost as measured by
      fair value of the consideration given or consideration
      received, whichever is more clearly evident.

          Consideration given may include cash, other assets,
          debt securities, stock of the acquiring company.




Chapter
 17-29
    Investments at the Date of Acquisition

    Exercise: On January 1, 2008, Polo Company purchased
    100% of the common stock of Save Company by issuing
    40,000 shares of its (Polo’s) $10 par value common stock
    with a market price of $17.50 per share. The
    stockholders’ equity section of the two company’s balance
    sheets on December 31, 2007, were:

                                           Polo     Save
    Common stock, $10 par value          $350,000 $320,000
    Other contributed capital             590,000 175,000
    Retained earnings                     380,000 205,000


Chapter
 17-30
    Investments at the Date of Acquisition

    Exercise: Prepare the journal entry on the books of Polo
    Company to record the purchase of the common stock of
    Save Company and related expenses.

     Investment in Save (40,000 x $17.50)   700,000
          Common Stock                                400,000
          Other Contributed Capital                   300,000




Chapter
 17-31
 Consolidated Balance Sheets: Use of Workpapers

      Assets and liabilities are summed, regardless of
      whether the parent owns 100% or a smaller controlling
      interest.

          Minority interests are reflected as a component of
          owners’ equity.
          Eliminations must be made to cancel the effects of
          transactions among the parent and its subsidiaries.
          A work-paper is frequently used to summarize the
          effects of various additions and eliminations.

Chapter
 17-32
 Consolidated Balance Sheets: Use of Workpapers
                  Intercompany Accounts to Be Eliminated
          Parent’s Accounts                      Subsidiary’s Accounts
      Investment in subsidiary         Against   Equity accounts

      Intercompany receivable                    Intercompany payable
                                       Against
      (payable)                                  (receivable)
      Advances to subsidiary                     Advances from parent
                                       Against
      (from subsidiary)                          (to parent)
      Interest revenue                           Interest expense
                                       Against
      (interest expense)                         (interest revenue)
      Dividend revenue                           Dividends declared
                                       Against
      (dividends declared)                       (dividend revenue)
      Management fee received from               Management fee paid to
                                       Against
      subsidiary                                 parent
      Sales to subsidiary (purchases             Purchases of inventory from
                                       Against
      of inventory from subsidiary)              parent (sales to parent)
Chapter
 17-33
 Consolidated Balance Sheets: Use of Workpapers

     Illustration: Assume that on January 1, 2007, P Company
     acquired all the outstanding stock (10,000 shares) of S
     Company for cash of $160,000. What journal entry would P
     Company make to record the shares of S Company acquired?
                                                             Fair value = Book
   Balance Sheet                P Company S Company        value=Purchase Price
   Cash                         $ 40,000 $ 40,000
   Other current assets            280,000   100,000
   Plant and equipment             240,000    80,000    Price paid     $160,000
   Land                             80,000    40,000
   Investment in Sill              160,000              % acquired          100%
      Total assets              $ 800,000 $ 260,000
                                                        Fair value      160,000
   Liabilities                  $ 120,000   $ 100,000
   Common stock                   400,000     100,000   Book value      160,000
   Other Contributed capital       80,000      20,000
   Retained earnings
       Total Liab. and Equity
                                  200,000
                                $ 800,000
                                               40,000
                                            $ 260,000
                                                        Difference            $0

Chapter
 17-34
    Consolidated Balance Sheets: Use of Workpapers
                                                       Eliminations       Consolidated
Balance Sheet                P Company S Company     Debit       Credit     Balances
Cash                         $ 40,000 $ 40,000                            $     80,000
Other current assets            280,000   100,000                              380,000
Plant and equipment             240,000    80,000                              320,000
Land                             80,000    40,000                              120,000
Investment in Sill              160,000                                        160,000
   Total assets              $ 800,000 $ 260,000                          $ 1,060,000

Liabilities                  $ 120,000   $ 100,000                        $     220,000
Common stock                   400,000     100,000                              500,000
Other Contributed capital       80,000      20,000                              100,000
Retained earnings              200,000      40,000                              240,000
    Total Liab. and Equity   $ 800,000   $ 260,000                        $   1,060,000



      Adjusting and eliminating entries are made on the workpaper for the
      preparation of consolidated statements.



Chapter
 17-35
 Consolidated Balance Sheets: Use of Workpapers



                                                          Eliminations        Consolidated
 Balance Sheet                P Company S Company       Debit       Credit      Balances
 Cash                         $ 40,000 $ 40,000                               $     80,000
 Other current assets            280,000   100,000                                 380,000
 Plant and equipment             240,000    80,000                                 320,000
 Land                             80,000    40,000                                 120,000
 Investment in Sill              160,000                            160,000            -
    Total assets              $ 800,000 $ 260,000                             $    900,000

 Liabilities                  $ 120,000   $ 100,000                           $   220,000
 Common stock                   400,000     100,000     100,000                   400,000
 Other Contributed capital       80,000      20,000      20,000                    80,000
 Retained earnings              200,000      40,000      40,000                   200,000
     Total Liab. and Equity   $ 800,000   $ 260,000   $ 160,000   $ 160,000   $   900,000




Chapter
 17-36
 Consolidated Balance Sheets: Use of Workpapers



          1. The investment account and related subsidiary’s
             stockholders’ equity have been eliminated and the
             subsidiary’s net assets substituted for the investment
             account.
          2. Consolidated assets and liabilities consist of the sum
             of the parent and subsidiary assets and liabilities in
             each classification.
          3. Consolidated stockholders’ equity is the same as the
             parent company’s equity.

Chapter
 17-37
 Consolidated Balance Sheets: Use of Workpapers

    Purchase Cost Exceeds Fair Value of Subsidiary Company’s
    Equity—Partial Ownership.

    Illustration: Assume that on January 1, 2007, P Company
    acquired 80% (8,000 shares) of the stock of S Company for
    $148,000. What journal entry would P Company make to
    record the shares of S Company acquired?

          Investment in S Company       $148,000
             Cash                                   $148,000




Chapter
 17-38
 Consolidated Balance Sheets: Use of Workpapers

    The balance sheets of both companies immediately after the
    acquisition of shares is as follows:

   Balance Sheet                P Company S Company
   Cash                         $ 52.000 $ 40.000
   Other current assets            280.000   100.000
   Plant and equipment             240.000    80.000
   Land                             80.000    40.000
   Investment in Sill              148.000

      Total assets              $ 800.000   $ 260.000

   Liabilities                  $ 120.000   $ 100.000
   Common stock                   400.000     100.000
   Other Contributed capital       80.000      20.000
   Retained earnings              200.000      40.000
   Noncontrolling interest
       Total Liab. and Equity   $ 800.000   $ 260.000

Chapter
 17-39
 Consolidated Balance Sheets: Use of Workpapers

    The work-paper to consolidate the balance sheets for P and S on
    Jan. 1, 2007, date of acquisition, is presented below:
                                                          Eliminations         Consolidated
Balance Sheet                P Company S Company        Debit      Credit        Balances
Cash                         $    52.000 $ 40.000                              $     92.000
Other current assets             280.000   100.000                                  380.000
Plant and equipment              240.000    80.000                                  320.000
Land                              80.000    40.000                                  120.000
Investment in Sill               148.000                            148.000             -
Goodwill                                                 20.000                      20.000
   Total assets              $   800.000   $ 260.000                           $    932.000

Liabilities                  $   120.000   $ 100.000                           $   220.000
Common stock                     400.000     100.000    100.000                    400.000
Other Contributed capital         80.000      20.000     20.000                     80.000
Retained earnings                200.000      40.000     40.000                    200.000
Minority interest                                                     32.000        32.000
    Total Liab. and Equity   $   800.000   $ 260.000   $ 180.000   $ 180.000   $   932.000

Chapter
 17-40
    Consolidated Statements After Acquisition

      Year of Acquisition
      On January 1, 2007, Parker Company purchased 95% of the
      outstanding common stock of Sid Company for $160,000. At that
      time, Sid’s stockholders’ equity consisted of common stock,
      $120,000; other contributed capital, $10,000; and retained
      earnings, $23,000.
      Required:
      A. Prepare a consolidated statements workpaper on Dec. 31, 2007.




Chapter
 17-41                                            LO 3 Use of workpapers.
    Consolidated Statements After Acquisition

                                                         Parker        Sid
On December 31, 2007,      Cash                        $ 62,000     $ 30,000
                           Accounts receivable             32,000      29,000
the two companies’ trial   Inventory                       30,000      16,000
balances were as follows   Investment in Sid
                           Plant and equipment
                                                          160,000
                                                          105,000
                                                                           -
                                                                       82,000
at right:                  Land                            29,000      34,000
                           Dividends declared              20,000      20,000
Required A. Prepare a      Cost of goods sold             130,000      40,000
consolidated statements    Operating expenses
                              Total debits
                                                           20,000
                                                       $ 588,000
                                                                       14,000
                                                                    $ 265,000
workpaper on December
31, 2007.                  Accounts payable
                           Other liabilities
                                                       $  19,000
                                                          10,000
                                                                    $  12,000
                                                                       20,000
                           Common stock                  180,000      120,000
                           Other contributed capital      60,000       10,000
                           Retained earnings              40,000       23,000
                           Sales                         260,000       80,000
                           Dividend income                19,000          -
                              Total credits            $ 588,000    $ 265,000
Chapter
 17-42                                  LO 5 Workpapers eliminating entries.
    Consolidated Statements After Acquisition


                                  Parker       Sid    Elimination Consolidated
          Sales                  260.000     80.000                 340.000
          COGS                 - 130.000   - 40.000               - 170.000
          Operating Expenses   - 20.000    - 14.000               - 34.000
          Dividend Income         19.000         -    - 19.000           -
          Minority Interest           -          -    - 1.300     -   1.300
          Net Income             129.000     26.000   - 20.300      134.700




Chapter
 17-43
    Consolidated Statements After Acquisition
                                   Parker   Sid        Elimination Consolidated
          Cash                     62.000     30.000                  92.000
          Accounts Receivable      32.000     29.000                  61.000
          Inventory                30.000     16.000                  46.000
          Investments             160.000        -     - 160.000          -
          PP&E                    134.000    116.000                 250.000
          Goodwill                     -         -        14.650      14.650
          Total Assets            418.000   191.000    -145.350      463.650

          Accounts Payable         19.000    12.000                  31.000
          Other Liabilities        10.000    20.000                  30.000
          Share Capital           180.000   120.000    - 120.000    180.000
          Other Capital            60.000    10.000    - 10.000      60.000
          Retained Earnings        20.000     3.000    - 3.000       20.000
          Net Income              129.000    26.000    - 20.300     134.700
          Minority Interest            -         -         7.950      7.950
          Total Liab. &SHEquity   418.000   191.000    -145.350     463.650




Chapter
 17-44

								
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