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ACC423 Week 3 4 Questions

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Question 1

On December 21, 2012, Zurich Company provided you with the following information regarding its trading securities.
December 31, 2012
Investments (Trading)

Cost

Fair Value

Unrealized Gain (Loss)
Stargate Corp. stock

$23,780

$22,780

$(1,000
)
Carolina Co. stock

12,430

11,430

(1,000
)
Vectorman Co. stock

23,780

24,340

560

Total of portfolio

$59,990

$58,550

(1,440
)
Previous fair value adjustment balance





0

Fair value adjustment—Cr.





$(1,440
)

During 2013, Carolina Company stock was sold for $12,010. The fair value of the stock on December 31, 2013, was: Stargate Corp. stock—$23,090; Vectorman Co. stock—$24,140.
(a)

Prepare the adjusting journal entry needed on December 31, 2012.
(b)

Prepare the journal entry to record the sale of the Carolina Company stock during 2013.
(c)

Prepare the adjusting journal entry needed on December 31, 2013.


Question 2

Presented below are two independent situations.

Situation 1
Hatcher Cosmetics acquired 10% of the 217,700 shares of common stock of Ramirez Fashion at a total cost of $15 per share on March 18, 2012. On June 30, Ramirez declared and paid a $83,000 cash dividend. On December 31, Ramirez reported net income of $122,200 for the year. At December 31, the market price of Ramirez Fashion was $17 per share. The securities are classified as available-for-sale.

Situation 2
Holmes, Inc. obtained significant influence over Nadal Corporation by buying 27% of Nadal’s 30,300 outstanding shares of common stock at a total cost of $10 per share on January 1, 2012. On June 15, Nadal declared and paid a cash dividend of $39,900. On December 31, Nadal reported a net income of $93,600 for the year.

Prepare all necessary journal entries in 2012 for both situations. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Question 3

Cardinal Paz Corp. carries an account in its general ledger called Investments, which contained debits for investment purchases, and no credits, with the following descriptions.
Feb. 1, 2012

Sharapova Company common stock, $107 par, 214 shares

$41,500
April 1

U.S. government bonds, 12%, due April 1, 2022, interest payable April 1 and October 1, 115 bonds of $1,000 par each

115,000
July 1

McGrath Company 12% bonds, par $51,200, dated March 1, 2012, purchased at 104 plus accrued interest, interest payable annually on March 1, due March 1, 2032

55,296

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2012, using the straight-line method. (Round answers to 0 decimal places, e.g. $2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(c) The fair values of the investments on December 31, 2012, were:
Sharapova Company common stock

$34,350
U.S. government bonds

148,260
McGrath Company bonds

63,240

What entry or entries, if any, would you recommend be made? 

(d) The U.S. government bonds were sold on July 1, 2013, for $120,130 plus accrued interest. Give the proper entry

Question 4

Brooks Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.

Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2012 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about Brooks’s pertinent accounts.
1.

Brooks has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year, Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a market value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2012 at $20 per share, a purchase that currently has a value of $720,000.
2.

Prior to 2012, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,500,000 on December 31, 2011. Brooks’ 12% ownership of Norton Industries has a current market value of $22,225,000.

For both classes of securities presented above, describe how the results of the valuation adjustments made to reflect the application of the “fair value” rule would be reflected in the body of and notes to Brooks’ 2012 financial statements. (Refer to Problem 17-8.)

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