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Chapter 13: Q21E (page 658)

(Fair Value Option) Presented below is selected information related to the financial instruments of

Dawson Company at December 31, 2017. This is Dawson Company鈥檚 first year of operations.

Carrying Fair Value

Amount (at December 31)

Investment in debt securities (intent is to hold to maturity) \( 40,000 \) 41,000

Investment in Chen Company stock 800,000 910,000

Bonds payable 220,000 195,000

Instructions

(a) Dawson elects to use the fair value option for these investments. Assuming that Dawson鈥檚 net income is $100,000 in2017 before reporting any securities gains or losses determine Dawson鈥檚 net income for 2017. Assume that the differencebetween the carrying value and fair value is due to credit deterioration.

(b) Record the journal entry, if any, necessary at December 31, 2017, to record the fair value option for the bonds payable

Short Answer

Expert verified

a.Net income is $186,000

b.Unrealized holding gains or loss is debited by $25,000 and fair value adjustment is credited by $25,000.

Step by step solution

01

Calculation of net income

Net Income before gain or loss: $100,000

Gain on debt securities: $1,000

Gain on Chen Company stock: $110,000

Loss on bond payable: $25,000

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Hence, the net income is $86,000

02

Fair value adjustment

Date

Particulars

Debit

Credit

December 31, 2017

Unrealized holding Gain or loss

$25,000

Fair value adjustment

$25,000

(Loss on the fair value adjustment)

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Most popular questions from this chapter

Southeast Airlines Inc. awards members of its Flightline program a second ticket at half price, valid for 2 years anywhere on its flight system, when a full-price ticket is purchased. How would you account for the full-fare and half-fare tickets?

(Warranties) Brooks Corporation sells computers under a 2-year warranty contract that requires the corporation to replace defective parts and to provide the necessary repair labor. During 2017, the corporation sells for cash 400 computers at a unit price of \(2,500. On the basis of past experience, the 2-year warranty costs are estimated to be \)155 for parts and \(185 for labor per unit. (For simplicity, assume that all sales occurred on December 31, 2017.) The warranty is not sold separately from the computer.

Instructions

(a) Record any necessary journal entries in 2017.

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The payroll of Yellowcard Company for September 2016 is as follows. Total payroll was \(480,000, of which \)110,000 is exempt from Social Security tax because it represented amounts paid in excess of \(118,500 to certain employees. The amount paid to employees in excess of \)7,000 was \(400,000. Income taxes in the amount of \)80,000 were withheld, as was \(9,000 in union dues. The state unemployment tax is 3.5%, but Yellowcard Company is allowed a credit of 2.3% by the state for its unemployment experience. Also, assume that the current FICA tax is 7.65% on an employee鈥檚 wages to \)118,500 and 1.45% in excess of \(118,500. No employee for Yellowcard makes more than \)125,000. The federal unemployment tax rate is 0.8% after state credit.

Instructions

Prepare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are recorded separately.
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