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ACC423 Final Part 2

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Question 11
Capriati Corporation made the following cash purchases of securities
during 2012, which is the first year in which Capriati invested in securities.
1. On January 15, purchased 9,000 shares of Gonzalez Company’s common stock at $33.50 per share
plus commission $1,980.
2. On April 1, purchased 5,000 shares of Belmont Co.’s common stock at $52.00 per share plus commission $3,370.
3. On September 10, purchased 7,000 shares of Thep Co.’s preferred stock at $26.50 per share plus
commission $4,910.
On May 20, 2012, Capriati sold 3,000 shares of Gonzalez Company’s common stock at a market price of $35 per share less brokerage commissions, taxes, and fees of $2,850. The year-end fair values per share were: Gonzalez $30, Belmont $55, and Thep $28. In addition, the chief accountant of Capriati told you that Capriati Corporation plans to hold these securities for the long term but may sell them in order to earn profits from appreciation in prices.

Instructions
(a) Prepare the journal entries to record the above three security purchases.
(b) Prepare the journal entry for the security sale on May 20.
(c) Compute the unrealized gains or losses and prepare the adjusting entries for Capriati on December
31, 2012.

Question 12
Presented below are two independent situations.

Situation 1
Hatcher Cosmetics acquired 10% of the 200,000 shares of common stock of Ramirez Fashion at a total cost of $14 per share on March 18, 2012. On June 30, Ramirez declared and paid a $75,000 cash dividend. On December 31, Ramirez reported net income of $122,000 for the year. At December 31, the market price of Ramirez Fashion was $15 per share. The securities are classified as available-for-sale.

Situation 2
Holmes, Inc. obtained significant influence over Nadal Corporation by buying 25% of Nadal’s 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2012. On June 15, Nadal declared and paid a cash dividend of $36,000. On December 31, Nadal reported a net income of $85,000 for the year.

Instructions
Prepare all necessary journal entries in 2012 for both situations.

Question 13
Gator Co. invested $1,000,000 in Demo Co. for 25% of its outstanding stock.
Demo Co. pays out 40% of net income in dividends each year.

Instructions
Use the information in the following T-account for the investment in Demo to answer the following
questions.

Equity investments (Demo Co)
1,000,000
130,000 52,000
(a) How much was Gator Co.’s share of Demo Co.’s net income for the year?
(b) How much was Gator Co.’s share of Demo Co.’s dividends for the year?
(c) What was Demo Co.’s total net income for the year?
(d) What was Demo Co.’s total dividends for the year?

Question 14
Gregory Inc. acquired 20% of the outstanding common
stock of Handerson Inc. on December 31, 2012. The purchase price was $1,250,000 for 50,000 shares.
Handerson Inc. declared and paid an $0.80 per share cash dividend on June 30 and on December 31, 2013. Handerson reported net income of $730,000 for 2013. The fair value of Handerson’s stock was $27 per share at December 31, 2013.

Instructions
(a) Prepare the journal entries for Gregory Inc. for 2012, and 2013, assuming that Gregory cannot exercise significant influence over Handerson. The securities should be classified as available-for-sale.
(b) Prepare the journal entries for Gregory Inc. for 2012 and 2013, assuming that Gregory can exercise
significant influence over Handerson.
(c) At what amount is the investment in securities reported on the balance sheet under each of these
methods at December 31, 2013? What is the total net income reported in 2013 under each of these
methods?

Question 15
On January 2, 2012, Jones Company purchases a call option for $300 on
Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2012 (the intrinsic value is therefore $0). On March 31, 2012, the market price for Merchant stock is $53 per share, and the time value of the option is $200.
Instructions
(a) Prepare the journal entry to record the purchase of the call option on January 2, 2012.
(b) Prepare the journal entry(ies) to recognize the change in the fair value of the call option as of March
31, 2012.
(c) What was the effect on net income of entering into the derivative transaction for the period January
2 to March 31, 2012?

Question 16
In 2012, Amirante Corporation had pretax financial income of $168,000 and taxable income of
$120,000. The difference is due to the use of different depreciation methods for tax and accounting
purposes. The effective tax rate is 40%. Compute the amount to be reported as income taxes payable at
December 31, 2012.

Question 17
At December 31, 2012, Fell Corporation had a deferred tax liability of $680,000, resulting from
future taxable amounts of $2,000,000 and an enacted tax rate of 34%. In May 2013, a new income tax act is signed into law that raises the tax rate to 40% for 2013 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

Question 18
AMR Corporation (parent company of American Airlines) reported the following for 2009 (in
millions).

 Service cost   333
 Interest on PBO   712
 Return on plan assets   566
 Amortization of prior service cost   13
 Amortization of net loss   145
Compute AMR Corporation’s 2009 pension expense

Question 19
For Warren Corporation, year-end plan assets were $2,000,000. At the beginning of the year, plan
assets were $1,780,000. During the year, contributions to the pension fund were $120,000, and benefits paid were $200,000. Compute Warren’s actual return on plan assets.

Question 20
For 2010, Campbell Soup Company had pension expense of $68 million and contributed $284 million
to the pension fund. Prepare Campbell Soup Company’s journal entry to record pension expense and
funding.

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