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Chapter 12: Q23. (page 610)

Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders鈥� equity and income.

Short Answer

Expert verified

Stockholders鈥� income and their equity directly depend on the sale of the securities. Based on the sale, the stockholder鈥檚 equity is increased or decreased.

Step by step solution

01

Definition of stockholder’s equity

The amount invested by the company owners in the company is known as the stockholder鈥檚 equity.

02

Impact on stockholder’s equity and income

Whenever any security is transferred to another security, this transaction is firstly recorded on the fair value. If there is any unrealized profit and loss in the transfer, it affects the stockholder equity. If there is a transfer of security, then the shareholder equity increases. On the other hand, if there is a loss in the transfer, then shareholder鈥檚 equity decreases. The amount of loss and gain on the transfer of the security is known as the income of the company.

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Most popular questions from this chapter

Use the information from BE17-1 but assume the bonds are purchased as an available-for-sale security. Prepare Garfield鈥檚 journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500.

Margaret Avery Company from time to time embarks on a research program when a special project seems to offer possibilities. In 2015, the company expends \(325,000 on a research project, but by the end of 2015, it is impossible to determine whether any benefit will be derived from it.

  1. What account should be charged for the \)325,000, and how should it be shown in the financial statements?
  2. The project is completed in 2016, and a successful patent is obtained. The R&D costs to complete the project are \(130,000 (\)36,000 of these costs were incurred after achieving economic viability). The administrative and legal expenses incurred in obtaining patent number 472-1001-84 in 2016 total \(24,000. The patent has an expected useful life of 5 years. Record these costs in the journal entry form. Also, record patent amortization (full year) in 2016.
  3. In 2017, the company successfully defends the patent in extended litigation at a cost of \)47,200, thereby extending the patent life to December 31, 2024. What is the proper way to account for this cost? Also, record patent amortization (full year) in 2017.
  4. Additional engineering and consulting costs incurred in 2017 required to advance the design of a new version of the product to the manufacturing stage total $60,000. These costs enhance the design of the product considerably, but it is highly uncertain if there will be a market for the new version of the product. Discuss the proper accounting treatment for this cost.

Taylor Swift Corporation purchases a patent from Salmon Company on January 1, 2017, for $54,000. The patent has a remaining legal life of 16 years. Taylor Swift feels the patent will be useful for 10 years. Prepare Taylor Swift鈥檚 journal entries to record the purchase of the patent and 2017 amortization.

What is the purpose of a cash flow hedge?

King Company is contemplating the purchase of a smaller company, which is a distributor of King鈥檚 products. Top management of King is convinced that the acquisition will result in significant synergies in its selling and distribution functions. The financial management group (of which you are a part) has been asked to analyze the effects of the acquisition on the combined company鈥檚 financial statements. This is the first acquisition for King, and some of the senior staff insist that based on their recollection of goodwill accounting, any goodwill recorded on the acquisition will result in a 鈥渄rag鈥� on future earnings for goodwill amortization. Other younger members on the staff argue that goodwill accounting has changed. Your supervisor asks you to research this issue.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)

  1. Identify the accounting literature that addresses goodwill and other intangible assets.
  2. Define goodwill.
  3. Is goodwill subject to amortization? Explain.
  4. When goodwill is recognized by a subsidiary, should it be tested for impairment at the consolidated level or the subsidiary level? Discuss.
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