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Chapter 13: Q9P (page 658)

(Gain on Sale of Investments and Comprehensive Income) On January 1, 2017, Acker Inc. had the followingbalance sheet.

The accumulated other comprehensive income related to unrealized holding gains on available-for-sale debt securities. The fairvalue of Acker Inc.鈥檚 available-for-sale debt securities at December 31, 2017, was \(190,000; its cost was \)140,000. No securities

were purchased during the year. Acker Inc.鈥檚 income statement for 2017 was as follows. (Ignore income taxes.)

ACKER INC.

BALANCE SHEET

AS OF JANUARY 1, 2017

Assets Equity

Cash \( 50,000 Common stock \)260,000

Debt investments (available-for-sale) 240,000 Accumulated other comprehensive income 30,000

Total \(290,000 Total \)290,000

ACKER INC.

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Dividend revenue \( 5,000

Gain on sale of investments 30,000

Net income \)35,000

Instructions

(Assume all transactions during the year were for cash.)

(a) Prepare the journal entry to record the sale of the available-for-sale debt securities in 2017.

(b) Prepare the journal entry to record the Unrealized Holding Gain or Loss for 2017.

(c) Prepare a statement of comprehensive income for 2017.

(d) Prepare a balance sheet as of December 31, 2017.

Short Answer

Expert verified

Cash debited by $170,000, gain on sale of investment credited by $30,000 and debt investment credited by $140,000. Fair value adjustmentdebited by $50,000 and unrealized holding gain credited by $50,000. Gain on sale of investment is $30,000

Step by step solution

01

Entry for the sale of investment

Date

Particulars

Debit

Credit

December 2017

Cash

$170,000

Gain on sale of investment

$30,000

Debt Investment

$140,000

(Entry for the sale of debt investment)

02

Entry for fair value adjustment

Date

Particulars

Debit

Credit

December 2017

Fair value adjustment

$50,000

Unrealized holding gain

$50,000

(Being entry for the fair value adjustment)

03

Statement of comprehensive income

Statement of comprehensive income
Year ending December 31, 2017

Particulars

Amount

Net Income

$35,000

Add:

Other comprehensive income

$50,000

Comprehensive income

$85,000

04

Balance sheet for the year ending

Assets

Amount

Equity

Amount

Cash

$220,000

Common Stock

$260,000

Investment

$100,000

Accumulated Comprehensive gain

$60,000

$320,000

$320,000

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Most popular questions from this chapter

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

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?

Leppard Corporation Sells DVD players. The corporation also offers its customers a 4-year warranty contract. During 2017, Leppard sold 20,000 warranty contracts at \(99 each. The corporation spent \)180,000 servicing warranties during 2017. Prepare Leppard鈥檚 journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.

Question: What evidence is necessary to demonstrate the ability to defer settlement of short-term debt?

Komissarov Company has a debt investments in the bonds issued by Keune Inc. The bonds were purchased at par

for \(400,000 and, at the end of 2017, have a remaining life of 3 years with annual interest payments at 10%, paid at the end of each year. This debt investment is classified as held-for-collection. Keune is facing a tough economical environment and informs all of its investors that it will be unable to make all payments according to the contractul terms. The controller of Komissarov has prepared the following revised expected cash flow forecast for this bond investment.

December 31, Expected cash flows

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Total cash flows $455,000

Instructions

(a) Determine the impairement loss for Komissarov at December31, 2017.

(b) Prepare the entry to record the impairement loss for Komissarov at Decembber 31, 2017.

(c) On January 15, 2018, Keune receives a major capiatl infusion from a private equity investor. It informs Komissarov that the bonds now will be paid according to the contractual terms. Briefly describe how the Komissarov would account for the bond investment in light of this new information.

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