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Chapter 13: Q3CA (page 658)

(Financial Statement Effect of Securities) Presented below are three unrelated situations involving equity securities.

Situation 1: A debt security, whose fair value is currently less than cost, is classified as available-for-sale but is to be reclassifiedas trading.

Situation 2: A noncurrent held-to-maturity portfolio with an aggregate fair value in excess of cost includes one particular debtsecurity whose fair value has declined to less than one-half of the original cost. The decline in value is considered to be permanent.

Situation 3: The portfolio of trading debt securities has a cost in excess of fair value of \(13,500. The available-for-sale debt portfoliohas a fair value in excess of cost of \)28,600.

Instructions

What is the effect upon carrying value and earnings for each of the situations above?

Short Answer

Expert verified

Trading securities decrease the company鈥檚 net income, and available for sale securities increase the company鈥檚 net income.

Step by step solution

01

Step 1:Reclassification of securities

Situation 1 does not affect the company鈥檚 carrying value and earnings because these are already recognised in available-for-securities.

02

Effect of held-to-maturity securities

Situation 2 does not affect the company鈥檚 carrying value and earnings because the given security is held-to-maturity security. In these types of securities, the amount is considered only at the time of the security鈥檚 maturity.

03

Adjustment of unrealized holding gain or loss

Situation 3 affect the carrying value and the earnings. Trading securities鈥� fair value is less than the cost value representing the unrealised loss that decreases the company's net income. Available-for-securities fair value is more than the cost representing unrealised gain that increases the company鈥檚 net income.

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Most popular questions from this chapter

BE13-2 (L01) Upland Company borrowed \(40,000 on November 1, 2017, by signing a \)40,000, 9%, 3-month note. Prepare Upland鈥檚 November 1, 2017, entry; the December 31, 2017, annual adjusting entry; and the February 1, 2018, entry.

(Multiple-Step and Single-Step Statements) Two accountants for the firm of Elwes and Wright are arguing about the merits of presenting an income statement in a multiple-step versus a single-step format. The discussion involves the following 2017 information related to P. Bride Company (\(000 omitted).

Administrative expense

Officers鈥� salaries \)4,900

Depreciation of office furniture and equipment \(3,960

Cost of goods sold \)60,570

Rent revenue \(17,230

Selling expense

Delivery expense \)2,690

Sales commissions \(7,980

Depreciation of sales equipment \)6,480

Sales revenue \(96,500

Income tax \)9,070

Interest expense $1,860

Instructions

  1. Prepare an income statement for the year 2017 using the multiple-step form. Common shares outstanding for 2017 total 40,550 (000 omitted).
  2. Prepare an income statement for the year 2017 using the single-step form.
  3. Which one do you prefer? Discuss.

Explain the accounting for a service-type warranty.

Question: When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?

  1. Acquisition of goods by purchase on credit.
  2. Officers鈥� salaries.
  3. Special bonus to employees.
  4. Dividends.
  5. Purchase commitments.

(Debt and Equity Investments) 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, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

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

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.
See all solutions

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