Chapter 17

Instrument Corp. has the following investments which were held throughout 2010-2011: Market Value Cost 12/31/10 12/31/11 Trading $300,000 $400,000 $380,000 Available-for-sale 300,000 320,000 360,000 What amount of gain or loss would Instrument Corp. report in its income statement for the year ended December 31, 2011 related to its investments? a. $20,000 gain. b. $20,000 loss. c. $140,000 gain. d. $80,000 gain.

B. $20,000 loss $400,000 - $380,000 = $20,000 loss

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2010, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2010 and December 31, 2010 by the amortized premiums of $1,062 and $1,098, respectively. At February 1, 2011, Richman Co. sold the Carlin bonds for $309,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2011 was $310,125. Assuming Richman Co. has a portfolio of Available-for-Sale Debt Securities, what should Richman Co. report as a gain (or loss) on the bonds? a. $0. b. ($1,125). c. ($6,561). d. ($8,811).

B. (1,125) $310,125 - $309,000 = $1,125.

On October 1, 2010, Menke Co. purchased to hold to maturity, 200, $1,000, 9% bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2014. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2010 income statement from this investment should be a. $4,500. b. $4,020. c. $4,980. d. $5,460.

B. 4,020 ($200,000 × .09 × 3/12) - ($8,000 × 3/50) = $4,020.

During 2008, Hauke Co. purchased 2,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2010 was $1,960,000. The bonds mature on March 1, 2015, and pay interest on March 1 and September 1. Hauke sells 1,000 bonds on September 1, 2012, for $988,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is a. $0. b. $4,800. c. $8,000. d. $11,200.

B. 4,800 Discount amortization: $40,000 × 8/50 = $6,400 ($1,960,000 + $6,400) ÷ 2 = $983,200; $988,000 - $983,200 = $4,800 gain.

Kern Company purchased bonds with a face amount of $400,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $6,000, and paid accrued interest for three months of $10,000. The amount to record as the cost of this long-term investment in bonds is a. $424,000. b. $414,000. c. $408,000. d. $400,000.

B. 414,000 ($400,000 × 1.02) + $6,000 = $414,000.

At December 31, 2011, Atlanta Co. has a stock portfolio valued at $40,000. Its cost was $33,000. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit balance of $2,000, which of the following journal entries is required at December 31, 2011? a. Securities Fair Value Adjustment 7,000 (Available-for-Sale) Unrealized Holding Gain or Loss-Equity 7,000 b. Securities Fair Value Adjustment 5,000 (Available-for-Sale) Unrealized Holding Gain or Loss-Equity 5,000 c. Unrealized Holding Gain or Loss-Equity 7,000 Securities Fair Value Adjustment 7,000 (Available-for-Sale) d. Unrealized Holding Gain or Loss-Equity 5,000 Securities Fair Value Adjustment 5,000 (Available-for-Sale)

B. Securities Fair Value Adjustment 5,000 (Available-for-Sale) Unrealized Holding Gain or Loss-Equity 5,000 ($40,000 - $33,000) - $2,000 = $5,000 unrealized gain.

Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows: December 31, 2010 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. $250,000 $200,000 $(50,000) Lyman, Inc. 245,000 265,000 20,000 $495,000 $465,000 $(30,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2010 income statement if 2010 is Kramer's first year of operation? a. $0. b. $20,000. c. $30,000. d. $50,000.

C. $30,000 $30,000 (unrealized loss).

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively. At April 1, 2012, Landis Co. sold the Ritter bonds for $515,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2012 was $516,875. Assuming Landis Co. has a portfolio of Available-for-Sale Debt Securities, what should Landis Co. report as a gain or loss on the bonds? a. ($14,685). b. ($10,935). c. ($1,875). d. $ 0.

C. (1875) $516,875 - $515,000 = $1,875.

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively. At December 31, 2011, the fair value of the Ritter, Inc. bonds was $530,000. What should Landis Co. report as other comprehensive income and as a separate component of stockholders' equity? a. $12,810. b. $9,210. c. $3,600. d. No entry should be made.

A. 12,810 $530,000 - ($520,790 - $1,770 - $1,830) = $12,810.

On November 1, 2010, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2017. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2010 income statement as a result of Horton's available-for-sale investment in Lopez wa

A. 4,375 ($250,000 × .045) + ($25,000 × 2/80) - $7,500 = $4,375.

On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Co. uses the straight-line method, what is the amount of premium amortization that would be recognized in 2012 related to these bonds? *a. $642 b. $422 c. $460 d. $502

A. 642 ($106,418 - $100,000) ÷ 10 = $642.

On August 1, 2010, Fowler Company acquired $200,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2010, and mature on April 30, 2015, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2010? a. Held-to-Maturity Securities 208,000 Interest Revenue 5,000 Cash 213,000 b. Held-to-Maturity Securities 213,000 Cash 213,000 c. Held-to-Maturity Securities 213,000 Interest Revenue 5,000 Cash 208,000 d. Held-to-Maturity Securities 200,000 Premium on Bonds 13,000 Cash 213,000

A. Held-to-Maturity Securities 208,000 Interest Revenue 5,000 Cash 213,000 Dr. Held-to-Maturity Securities: $200,000 × 1.04 = $208,000 Dr. Interest Revenue: $200,000 × .05 × 3/6 = $5,000 Cr. Cash: $208,000 + $5,000 = $213,000.

Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2011, paying $376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2011, Patton Company should report interest revenue from the Scott Co. bonds of: a. $42,392. b. $41,409. c. $41,368. d. $40,000.

B. 41,409 $376,100 × .055 = $20,686 ($376,100 + $686) × .055 - $20,723; $20,686 + $20,723 = $41,409.

On October 1, 2010, Renfro Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2019, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2010 balance sheet at a carrying value of a. $975,000. b. $975,750. c. $990,000. d. $990,250

B. 975,750 $975,000 + ($25,000 × 3/100) = $975,750.

Instrument Corp. has the following investments which were held throughout 2010-2011: Market Value Cost 12/31/10 12/31/11 Trading $300,000 $400,000 $380,000 Available-for-sale 300,000 320,000 360,000 What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.'s balance sheet at December 31, 2010? a. $40,000 gain. b. $60,000 gain. c. $20,000 gain. d. $120,000 gain.

C. $20,000 gain $320,000 - $300,000 = $20,000 gain

On November 1, 2010, Howell Company purchased 600 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2015, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2010, balance sheet at a. $600,000. b. $623,000. c. $622,080. d. $632,000.

C. 622,080 $632,000 - $9,000 = $623,000 $623,000 - ($23,000 × 2/50) = $622,080.

On August 1, 2010, Dambro Co. acquired 200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2010, and mature on April 30, 2016, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2010 is a. Available-for-Sale Securities 198,500 Cash 198,500 b. Available-for-Sale Securities 194,000 Interest Receivable 4,500 Cash 198,500 c. Available-for-Sale Securities 194,000 Interest Revenue 4,500 Cash 198,500 d. Available-for-Sale Securities 200,000 Interest Revenue 4,500 Discount on Debt Securities 6,000 Cash 198,500

C. Available-for-Sale Securities 194,000 Interest Revenue 4,500 Cash 198,500 Dr. Available-for-Sale Securities: 200 × $1,000 × .97 = $194,000 Dr. Interest Revenue: $200,000 × .045 × 3/6 = $4,500 Cr. Cash: $194,000 + $4,500 = $198,500.

During 2010 Logic Company purchased 4,000 shares of Midi, Inc. for $30 per share. The investment was classified as a trading security. During the year Logic Company sold 1,000 shares of Midi, Inc. for $35 per share. At December 31, 2010 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2010 related to its investment in Midi, Inc. stock? a. ($8,000) b. $5,000 c. ($3,000) d. ($1,000)

D. ($1,000) [($35 - $30) × 1,000] - [($30 - $28) × 3,000] = ($1,000).

Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2011, paying $376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2011, Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. bonds by a. $2,392. b. $1,371. c. $1,196. d. $686.

D. 686 ($376,100 × .055) - ($400,000 × .05) = $686.

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2010, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2010 and December 31, 2010 by the amortized premiums of $1,062 and $1,098, respectively. At December 31, 2010, the fair value of the Carlin, Inc. bonds was $318,000. What should Richman Co. report as other comprehensive income and as a separate component of stockholders' equity?

D. 7,686 $318,000 - ($312,474 - $1,062 - $1,098) = $7,686

On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Co. uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2011 related to these bonds? a. $10,000 b. $10,642 c. $9,578 *d. $9,540

D. 9,540 ($106,418 × .09) - ($100,000 × .10) = ($422) ($106,418 - $422) × .09 = $9,540.