P16-1A Davison Carecenters Inc
P16-1A Davison Carecenters Inc. provides financing and capital to the health-care industry, with a particular focus on nursing homes for the elderly. The following selected transactions relate to bonds acquired as an investment by Davison, whose fiscal year ends on December 31. 2010 Jan. 1 Purchased at face value $2,000,000 of Hannon Nursing Centers, Inc., 10-year, 8% bonds dated January 1, 2010, directly from Hannon. July 1 Received the semiannual interest on the Hannon bonds. Dec. 31 Accrual of interest at year-end on the Hannon bonds. (Assume that all intervening transactions and adjustments have been properly recorded and that the number of bonds owned has not changed from December 31, 2010, to December 31, 2012.) 2013 Jan. 1 Received the semiannual interest on the Hannon bonds. Jan. 1 Sold $1,000,000 Hannon bonds at 106. The broker deducted $6,000 for commissions and fees on the sale. July 1 Received the semiannual interest on the Hannon bonds. Dec. 31 Accrual of interest at year-end on the Hannon bonds. Hint: Journalize debt investment transactions and show financial statement presentation. (SO 2, 5, 6) Instructions (a) Journalize the listed transactions for the years 2010 and 2013. Gain on sale of debt investment $54,000 (b) Assume that the fair value of the bonds at December 31, 2010, was $2,200,000. These bonds are classified as available-for-sale securities. Prepare the adjusting entry to record these bonds at fair value. (c) Based on your analysis in part (b), show the balance sheet presentation of the bonds and interest receivable at December 31, 2010. Assume the investments are considered long-term. Indicate where any unrealized gain or loss is reported in the financial statements.
P16-2A In January 2010, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities. During the year, the following transactions occurred. Feb. 1 Purchased 600 shares of Hiens common stock for $31,800, plus brokerage fees of $600. Mar. 1 Purchased 800 shares of Pryce common stock for $20,000, plus brokerage fees of $400. Apr. 1 Purchased 50 $1,000, 7% Roy bonds for $50,000, plus $1,000 brokerage fees. Interest is payable semiannually on April 1 and October 1. July 1 Received a cash dividend of $0.60 per share on the Hiens common stock. Aug. 1 Sold 200 shares of Hiens common stock at $58 per share less brokerage fees of $200. Sept. 1 Received a $1 per share cash dividend on the Pryce common stock. Oct. 1 Received the semiannual interest on the Roy bonds. Oct. 1 Sold the Roy bonds for $50,000 less $1,000 brokerage fees. At December 31, the fair value of the Hiens common stock was $55 per share. The fair value of the Pryce common stock was $24 per share. Hint: Journalize investment transactions, prepare adjusting entry, and show statement presentation. (SO 2, 3, 5, 6) Instructions (a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T-account form.) Gain on stock sale $600 (b) Prepare the adjusting entry at December 31, 2010, to report the investment securities at fair value. All securities are considered to be trading securities. (c) Show the balance sheet presentation of investment securities at December 31, 2010. (d) Identify the income statement accounts and give the statement classification of each account.
P16-3A On December 31, 2010, Ramey Associates owned the following securities, held as a long-term investment. The securities are not held for influence or control of the investee. Common Stock Shares Cost Hurst Co. 2,000 $60,000 Pine Co. 5,000 45,000 Scott Co. 1,500 30,000 On December 31, 2010, the total fair value of the securities was equal to its cost. In 2011, the following transactions occurred. July 1 Received $1 per share semiannual cash dividend on Pine Co. common stock. Aug. 1 Received $0.50 per share cash dividend on Hurst Co. common stock. Sept. 1 Sold 1,500 shares of Pine Co. common stock for cash at $8 per share, less brokerage fees of $300. Oct. 1 Sold 800 shares of Hurst Co. common stock for cash at $33 per share, less brokerage fees of $500. Nov. 1 Received $1 per share cash dividend on Scott Co. common stock. Dec. 15 Received $0.50 per share cash dividend on Hurst Co. common stock. 31 Received $1 per share semiannual cash dividend on Pine Co. common stock. At December 31, the fair values per share of the common stocks were: Hurst Co. $32, Pine Co. $8, and Scott Co. $18. Hint: Journalize transactions and adjusting entry for stock investments. (SO 3, 5, 6) Instructions (a) Journalize the 2011 transactions and post to the account Stock Investments. (Use the T-account form.) (b) Prepare the adjusting entry at December 31, 2011, to show the securities at fair value. The stock should be classified as available-for-sale securities. Unrealized loss $4,100 (c) Show the balance sheet presentation of the investments at December 31, 2011. At this date, Ramey Associates has common stock $1,500,000 and retained earnings $1,000,000.
P16-4A Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2010, by paying $800,000 for the 45,000 shares. Nickels declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2010. Nickels reported net income of $320,000 for the year. At December 31, 2010, the market price of Nickels common stock was $24 per share. Hint: Prepare entries under the cost and equity methods, and tabulate differences. (SO 3) Instructions (a) Prepare the journal entries for Glaser Services for 2010 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.) Total dividend revenue $54,000 (b) Prepare the journal entries for Glaser Services for 2010, assuming Glaser can exercise significant influence over Nickels. Use the equity method. Revenue from investments $96,000 (c) Indicate the balance sheet and income statement account balances at December 31, 2010, under each method of accounting.
P16-1A)
(a) 2010
Jan. 1 Debt Investments 2,000,000
Cash 2,000,000
July 1 Cash ($2,000,000 X .08 X 1/2) 80,000
Interest Revenue 80,000
Dec. 31 Interest Receivable 80,000
Interest Revenue 80,000
2013
Jan. 1 Cash 80,000
Interest Receivable 80,000
1 Cash [($1,000,000 X 1.06) – $6,000] 1,054,000
Debt Investments 1,000,000
Gain on Sale of Debt
Investments 54,000
July 1 Cash ($1,000,000 X .08 X 1/2) 40,000
Interest Revenue 40,000
Dec. 31 Interest Receivable 40,000
Interest Revenue 40,000
(b) 2010
Dec. 31 Market Adjustment—Available-
for-Sale 200,000
Unrealized Gain or Loss—Equity 200,000
(c) Balance Sheet
Current assets
Interest receivable $ 80,000
Investments
Debt investments, at fair value $2,200,000
The unrealized gain of $200,000 would be reported in the stockholders’ equity section of the balance sheet as an addition to total paid-in capital and retained earnings.
P16-2A)
(a) Feb. 1 Stock Investments 32,400
Cash ($31,800 + $600) 32,400
Mar. 1 Stock Investments 20,400
Cash ($20,000 + $400) 20,400
Apr. 1 Debt Investments 51,000
Cash ($50,000 + $1,000) 51,000
July 1 Cash ($.60 X 600) 360
Dividend Revenue 360
Aug. 1 Cash ($11,600 – $200) 11,400
Stock Investments
[($32,400 ÷ 600) X 200] 10,800
Gain on Sale of Stock
Investments 600
Sept. 1 Cash ($1 X 800) 800
Dividend Revenue 800
Oct. 1 Cash ($50,000 X 7% X 1/2) 1,750
Interest Revenue 1,750
1 Cash ($50,000 – $1,000) 49,000
Loss on Sale of Debt Investments
($51,000 – $49,000) 2,000
Debt Investments 51,000
| |Stock Investments | |Debt Investments |
| |Feb. 1 32,400 | Aug. 1 10,800 | |Apr. 1 51,000 | Oct. 1 51,000 |
| |Mar. 1 20,400 | | | | |
| |Dec. 31 Bal. 42,000 | | |Dec. 31 Bal. 0 | |
(b) Dec. 31 Unrealized Loss—Income 800
Market Adjustment—Trading
($42,000 – $41,200) 800
| |Security | |Cost | |Fair Value | | |
| | | | | | | | |
| |Hiens common | |$21,600 | |$22,000 | |(400 X $55) |
| |Pryce common | |20,400 | |19,200 | |(800 X $24) |
| | | |$42,000 | |$41,200 | | |
(c) Current assets
Short-term investments, at fair value $41,200
|(d) |Income Statement Account | |Category |
| |Dividend Revenue | |Other revenues and gains |
| |Gain on Sale of Stock Investments | |Other revenues and gains |
| |Interest Revenue | |Other revenues and gains |
| |Loss on Sale of Debt Investments | |Other expenses and losses |
| |Unrealized Loss—Income | |Other expenses and losses |
P16-3A)
(a) 2011
July 1 Cash (5,000 X $1) 5,000
Dividend Revenue 5,000
Aug. 1 Cash (2,000 X $.50) 1,000
Dividend Revenue 1,000
Sept. 1 Cash [(1,500 X $8) – $300] 11,700
Loss on Sale of Stock Investments
($13,500 – $11,700) 1,800
Stock Investments (1,500 X $9) 13,500
Oct. 1 Cash [(800 X $33) – $500] 25,900
Stock Investments (800 X $30) 24,000
Gain on Sale of Stock Investments
($25,900 – $24,000) 1,900
Nov. 1 Cash (1,500 X $1) 1,500
Dividend Revenue 1,500
Dec. 15 Cash (1,200 X $.50) 600
Dividend Revenue 600
31 Cash (3,500 X $1) 3,500
Dividend Revenue 3,500
|Stock Investments |
|2011 | 2011 |
|Jan. 1 Balance 135,000 | Sept. 1 13,500 |
| | Oct. 1 24,000 |
|2011 | |
|Dec. 31 Balance 97,500 | |
(b) Dec. 31 Unrealized Gain or Loss—Equity
($97,500 – $93,400) 4,100
Market Adjustment—Available-
for-Sale 4,100
| |Security | |Cost | |Fair Value | | |
| | | | | | | | |
| |Hurst Co. common | |$36,000 | |$38,400 | |(1,200 X $32) |
| |Pine Co. common | |31,500 | | 28,000 | |(3,500 X $ 8) |
| |Scott Co. common | |30,000 | |27,000 | |(1,500 X $18) |
| | | |$97,500 | |$93,400 | | |
(c) Investments
Investment in stock of less than
20% owned companies, at fair
value $ 93,400
Stockholders’ equity
Common stock $1,500,000)
Retained earnings 1,000,000)
Total paid-in capital and
retained earnings 2,500,000)
Less: Unrealized loss on available-
for-sale securities 4,100
Total stockholders’ equity $2,495,900
P16-4A)
(a) Jan. 1 Stock Investments 800,000
Cash 800,000
Mar. 15 Cash 13,500
Dividend Revenue
(45,000 X $.30) 13,500
June 15 Cash 13,500
Dividend Revenue 13,500
Sept. 15 Cash 13,500
Dividend Revenue 13,500
Dec. 15 Cash 13,500
Dividend Revenue 13,500
31 Market Adjustment—Trading 280,000
Unrealized Gain—Income
[$800,000 – ($24 X 45,000)] 280,000
(b) Jan. 1 Stock Investments 800,000
Cash 800,000
Mar. 15 Cash 13,500
Stock Investments 13,500
June 15 Cash 13,500
Stock Investments 13,500
Sept. 15 Cash 13,500
Stock Investments 13,500
Dec. 15 Cash 13,500
Stock Investments 13,500
Dec. 31 Stock Investments 96,000
Revenue from Investment in
Nickels Company
($320,000 X 30%) 96,000
|(c) | | |Cost Method | |Equity | |
| | | | | |Method | |
| | | | | | | |
| |Stock Investments | | | | | |
| |Common stock | |$1,080,000 |* |$842,000 |** |
| |Unrealized Gain—Income | | 280,000 | | | |
| |Dividend revenue | | 54,000 | | 0 | |
| |Revenue from investment in Nickels | | | | | |
| | Company | | 0 | | 96,000 | |
| | | | | | | |
| |**$24 X 45,000 shares | | | | | |
| |**$800,000 + $96,000 – $54,000 | | | | | |
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