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Chapter 13: Q9E (page 658)

(Available-for-Sale Debt Securities Entries and Financial Statement Presentation) At December 31, 2017, the

available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.

Security Cost Fair Value Unrealized Gain (Loss)

A \(17,500 \)15,000 (\(2,500)

B 12,500 14,000 1,500

C 23,000 25,500 2,500

Total \)53,000 \(54,500 1,500

Previous fair value adjustment balance鈥擠r. 400

Fair value adjustment鈥擠r. \)1,100

On January 20, 2018, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees.

Instructions

(a) Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value.

(b) Show the balance sheet presentation of the investment-related accounts at December 31, 2017. (Ignore notes presentation.)

(c) Prepare the journal entry for the 2018 sale of security A

Short Answer

Expert verified

Unrealized holding loss is $1,100. Loss on the sale of security A is $2,400. Securities fair value adjustment debited by $1,100 and unrealised holding gain / loss income credited by $1,100.

Step by step solution

01

Fair value adjustment entry

Date

Description

Debit

Credit

December 31, 2017

Securities fair value adjustment

$1,100

Unrealized holding gain/loss- Income

$1,100

Being entry of fair value adjustment

02

Balance sheet representation

Assets

Current Assets

Available for sale securities

$54,500

Liabilities and Stockholder鈥檚 Equity

Accumulated other comprehensive incomes

$1,500

03

Entry of the sale of the securities

Date

Description

Debit

Credit

2018

Cash

$15,100

Loss on sale

$2,400

Available for sale securities

$17,500

Being entry of the sale of security A

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Most popular questions from this chapter

You are the independent auditor engaged to audit Millay Corporation鈥檚 December 31, 2017, financial statements. Millay manufactures household appliances. During the course of your audit, you discovered the following contingent liabilities.

  1. Millay began production of a new dishwasher in June 2017 and, by December 31, 2017, sold 120,000 to various retailers for \(500 each. Each dishwasher is under a 1-year warranty. The company estimates that its warranty expense per dishwasher will amount to \)25. At year-end, the company had already paid out \(1,000,000 in warranty expenses. Millay鈥檚 income statement shows warranty expenses of \)1,000,000 for 2017. Millay accounts for warranty costs on the accrual basis.
  2. In response to your attorney鈥檚 letter, Morgan Sondgeroth, Esq., has informed you that Millay has been cited for dumping toxic waste into the Kishwaukee River. Clean-up costs and fines amount to \(2,750,000. Although the case is still being contested, Sondgeroth is certain that Millay will most probably have to pay the fine and clean-up costs. No disclosure of this situation was found in the financial statements.
  3. Millay is the defendant in a patent infringement lawsuit by Megan Drabek over Millay鈥檚 use of a hydraulic compressor in several of its products. Sondgeroth claims that, if the suit goes against Millay, the loss may be as much as \)5,000,000. However, Sondgeroth believes the loss of this suit to be only reasonably possible. Again, no mention of this suit is made in the financial statements.

As presented, these contingencies are not reported in accordance with GAAP, which may create problems in issuing a favorable audit report. You feel the need to note these problems in the work papers.

Instructions

Heading each page with the name of the company, balance sheet date, and a brief description of the problem, write a brief narrative for each of the above issues in the form of a memorandum to be incorporated in the audit work papers. Explain what led to the discovery of each problem, what the problem really is, and what you advised your client to do (along with any appropriate journal entries) in order to bring these contingencies in accordance with GAAP.

P13-8 (L03) (Premium Entries) To stimulate the sales of its Alladin breakfast cereal, Loptien Company places 1 coupon in each box. Five coupons are redeemable for a premium consisting of a children's hand puppet. In 2018, the company purchases 40,000 puppets at \(1.50 each and sells 480,000 boxes of Alladin at \) 3.75 a box. From Its experience with other similar premium offers, the company estimates that 40% of the coupons issued will be mailed back for redemption. During 2018, 115,000 coupons are presented for redemption.

InstructionsPrepare the journal entries that should be recorded in 2018 relative to the premium plan.

(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.

Greco Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.

GRECO RESORT

TRIAL BALANCE

AUGUST 31, 2017

Debit

Credit

Cash

\( 19,600

Prepaid Insurance

4,500

Supplies

2,600

Land

20,000

Buildings

120,000

Equipment

16,000

Accounts Payable

\) 4,500

Unearned Rent Revenue

4,600

Mortgage Payable

60,000

Common Stock

91,000

Retained Earnings

9,000

Dividends

5,000

Rent Revenue

76,200

Salaries and Wages Expense

44,800

Utilities Expenses

9,200

Maintenance and Repairs Expense

3,600

\(245,300

\)245,300

Other data:

  1. The balance in prepaid insurance is a one-year premium paid on June 1, 2017.
  2. An inventory count on August 31 shows \(450 of supplies on hand.
  3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost.
  4. Unearned Rent Revenue of \)3,800 was earned prior to August 31.
  5. Salaries of \(375 were unpaid at August 31.
  6. Rentals of \)800 were due from tenants at August 31.
  7. The mortgage interest rate is 8% per year.

Instructions

(a) Journalize the adjusting entries on August 31 for the 3-month period June 1鈥揂ugust 31. (Omit explanations.)

(b) Prepare an adjusted trial balance on August 31.

(Ratio Computations and Effect of Transactions) Presented below is information related to Carver Inc.

CARVER INC. BALANCE SHEET DECEMBER 31, 2017

Amount \(

Amount \)

Amount \(

Cash

\)45,000

Note payable (short-term)

\(50,000

Receivables

\)110,000

Account payable

32,000

Less: Allowance

15,000

95,000

Accrued liabilities

5,000

Inventory

170,000

Common stock (par \(5)

260,000

Prepaid insurance

8,000

Retained earnings

141,000

Land

20,000

Equipment net

150,000

\)488,000

\(488,000

CARVER INC.

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Sales revenue

\)1,400,000

Cost of goods sold

Inventory Jan 1, 2017

\(200,000

Purchases

790,000

Cost of goods available for sale

990,000

Inventory Dec 31, 2017

(170,000)

Cost of goods sold

(820,000)

Gross profit on sales

580,000

Operating expenses

(170,000)

Net income

\)410,000

Instructions

(a) Compute the following ratios or relationships of Carver Inc. Assume that the ending account balances are representative unless the information provided indicates differently.

(1) Current ratio.

(2) Inventory turnover.

(3) Accounts receivable turnover.

(4) Earnings per share.

(5) Profit margin on sales.

(6) Return on assets on December 31, 2017.

(b) Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31, 2017.

(1) Write off an uncollectible account receivable, \(2,200.

(2) Purchase additional capital stock for cash.

(3) Pay \)40,000 on notes payable (short-term).

(4) Collect $23,000 on accounts receivable.

(5) Buy equipment on account.

(6) Give an existing creditor a short-term note in settlement of account.
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