Jets Bancorp Inc. purchased a portfolio of trading securities during 2014.

Jets Bancorp Inc. purchased a portfolio of trading securities during 2014. The cost and fair value of this portfolio on December 31, 2014, was as follows:



Name Number of Shares Total Cost Total Fair Value
Dolphins Inc. 1,400 $28,000 $30,800
Marino Company 1,200 30,000 27,600
Namath Company 800 28,000 26,400
Total $86,000 $84,800



On May 10, 2015, Jets Bancorp Inc. purchased 1,000 shares of Giants Inc. at $24 per share plus a $150 brokerage fee.

Provide the journal entries to record the following:

a. The adjustment of the trading security portfolio to fair value on December 31, 2014.

b. The May 10, 2015, purchase of Giants Inc. stock.


Answer:

2014
a. Dec. 31 Unrealized Loss on Trading Investments 1,200
Valuation Allowance for Trading
Investments 1,200
To record decrease in fair value
of trading investments, $84,800 –
$86,000.
2015
b. May 10 Investments—Giants, Inc.* 24,150
Cash 24,150
*(1,000 shares × $24 per share) + $150

The investments of Charger Inc. include a single investment: 14,500 shares of Raiders Inc. common stock

The investments of Charger Inc. include a single investment: 14,500 shares of Raiders Inc. common stock purchased on February 24, 2014, for $38 per share including brokerage commission. These shares were classified as trading securities. As of the December 31, 2014, balance sheet date, the share price had increased to $42 per share.

a. Journalize the entries to acquire the investment on February 24, and record the adjustment to fair value on December 31, 2014.

b. How is the unrealized gain or loss for trading investments reported on the financial statements?


Answer:

a. 2014
Feb. 24 Investments—Raiders, Inc. Stock 551,000
Cash 551,000
14,500 shares × $38 per share.
Dec. 31 Valuation Allowance for Trading
Investments 58,000
Unrealized Gain on Trading
Investments 58,000
To record increase in fair value of
trading investments, 14,500 shares ×
($42 per share – $38 per share).

b. The unrealized gain or unrealized loss for trading investments is disclosed in the income statement as “other income” (or a separate item if significant). Unrealized losses would be deducted in determining net income, while unrealized gains would be added in determining net income.

JED Capital Inc. makes investments in trading securities. Selected income statement items for the years

JED Capital Inc. makes investments in trading securities. Selected income statement items for the years ended December 31, 2014 and 2015, plus selected items from comparative balance sheets, are as follows:

JED Capital Inc.
Selected Income Statement Items
For the Years Ended December 31, 2014 and 2015
2014 2015
Operating income a. e.
Unrealized gain (loss) b. $(11,000)
Net income c. 28,000
JED Capital Inc.
Selected Balance Sheet Items
December 31, 2013, 2014, and 2015
Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015
Trading investments, at cost $144,000 $168,000 $205,000
Valuation allowance for trading investments (12,000) 17,000 g.
Trading investments, at fair value d. f. h.
Retained earnings $210,000 $245,000 i.


There were no dividends.

Determine the missing lettered items.


Answer:
a. $6,000 $35,000 [from (c)] – $29,000 [from (b)]
b. $29,000 $17,000 – (– $12,000)
c. $35,000 $245,000 – $210,000
d. $132,000 $144,000 – $12,000
e. $39,000 $28,000 + $11,000
f. $185,000 $168,000 + $17,000
g. $6,000 $17,000 – $11,000
h. $211,000 $205,000 + $6,000
i. $273,000 $245,000 + $28,000

Hawkeye Company’s balance sheet reported, under the equity method, its long-term investment in Raven Company

Hawkeye Company’s balance sheet reported, under the equity method, its long-term investment in Raven Company for comparative years as follows:


Dec. 31, 2015 Dec. 31, 2014
Investment in Raven Company stock (in millions) $281 $264


In addition, the 2015 Hawkeye Company income statement disclosed equity earnings in the Raven Company investment as $25 million. Hawkeye Company neither purchased nor sold Raven Company stock during 2015. The fair value of the Raven Company stock investment on December 31, 2015, was $310 million.

Explain the change in Investment in Raven Company Stock from December 31, 2014, to December 31, 2015.


Answer:

(in millions)
Investment in Raven Company stock, December 31, 2014………………………… $264
Plus equity earnings in Raven Company…………………………………………… 25
Less dividends received*………………………………………………………………… (8)
Investment in Raven Company stock, December 31, 2015……………………… $281
* The Raven Company investment is accounted for under the equity method. Since
there were no purchases or sales of Raven Company stock, a dividend must have
been received. This would explain how the ending balance of the investment
account went from $264 to $281, with $25 million in equity earnings. Since the
investment is accounted for under the equity method, the fair value is not used
for valuation purposes.

On January 6, 2014, Bulldog Co. purchased 34% of the outstanding stock of Gator Co. for $212,000.

On January 6, 2014, Bulldog Co. purchased 34% of the outstanding stock of Gator Co. for $212,000. Gator Co. paid total dividends of $24,000 to all shareholders on June 30. Gator had a net loss of $56,000 for 2014.

a. Journalize Bulldog’s purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock.

b. Compute the balance of Investment in Gator Co. Stock on December 31, 2014.

c. How does valuing an investment under the equity method differ from valuing an investment at fair value?


Answer:

2014
a. Jan. 6 Investment in Gator Co. Stock 212,000
Cash 212,000
June 30 Cash* 8,160
Investment in Gator Co. Stock 8,160
*$24,000 × 34%
Dec. 31 Loss of Gator Co. 19,040
Investment in Gator Co. Stock 19,040
Record 34% share of Gator Co.
net loss, $56,000 × 34%.

b. Initial acquisition cost ................................................................................. $212,000
Equity loss for 2014..................................................................................... (19,040)
Cash dividends received............................................................................. (8,160)
Investment in Gator Co. Stock balance, December 31, 2014................. $184,800




c. Under the equity method, the investor will record their proportionate share of the net increase (or decrease) of the book value of the investee resulting from earnings and dividend distributions. The fair value method uses market price information to value the investment in the investee. These two methods result in different valuations because the equity method is based upon book accounting, while the fair value approach uses market information. The two methods need not be related to each other over time. While changes in book value can influence market prices, many other variables can influence the market price of a stock.

On January 4, 2014, Penman Company purchased 124,000 shares of Hi Energy Company

On January 4, 2014, Penman Company purchased 124,000 shares of Hi Energy Company
directly from one of the founders for a price of $44 per share. Hi Energy has 400,000 shares outstanding, including the Penman shares. On July 2, 2014, Hi Energy paid $440,000 in total dividends to its shareholders. On December 31, 2014, Hi Energy reported a net income of $800,000 for the year. Penman uses the equity method in accounting for its investment in Hi Energy.

a. Provide the Penman Inc. journal entries for the transactions involving its investment in Hi Energy Inc. during 2014.

b. Determine the December 31, 2014, balance of the Investment in Hi Energy Company. Stock account.


Answer:

2014
a. Jan. 4 Investment in Hi Energy Co. Stock* 5,456,000
Cash 5,456,000
*124,000 shares × $44 per share
July 2 Cash* 136,400
Investment in Hi Energy Co. Stock 136,400
*$440,000 × ($124,000 ÷ 400,000 shares)
Dec. 31 Investment in Hi Energy Co. Stock 248,000
Income of Hi Energy Co. 248,000
Record 31% share of Hi Energy
Co. net income, $800,000 ×
(124,000 shares ÷ 400,000 shares).

b. Initial acquisition cost……………………………………………………………… $5,456,000
Equity earnings for 2014………………………………………………………… 248,000
Cash dividends received…………………………………………………………… (136,400)
Investment in Hi Energy Co. Stock balance, December 31, 2014…………… $5,567,600

At a total cost of $2,000,000, Stieg Corporation acquired 160,000 shares of Larson Corp. common stock

At a total cost of $2,000,000, Stieg Corporation acquired 160,000 shares of Larson Corp. common stock as a long-term investment. Stieg Corporation uses the equity method of accounting for this investment. Larson Corp. has 400,000 shares of common stock outstanding, including the shares acquired by Stieg Corporation.

a. Journalize the entries by Stieg Corporation to record the following information:

1. Larson Corp. reports net income of $1,200,000 for the current period.

2. A cash dividend of $2.00 per common share is paid by Larson Corp. during the current period.

b. Why is the equity method appropriate for the Larson Corp. investment?


Answer:

a. 1. Investment in Larson Corp. Stock 480,000
Income of Larson Corp. 480,000
Record 40% share of Larson Corp.
net income, $1,200,000 × (160,000 shares ÷
400,000 shares).
2. Cash* 320,000
Investment in Larson Corp. Stock 320,000
*160,000 shares × $2.00

b. Stieg’s investment in Larson Corp. represents 40% of the outstanding shares
of Larson Corp. An investment amount between 20% and 50% of the outstanding
common stock of the investee is presumed to represent significant influence. The
equity method is appropriate when the investor can exercise significant influence
over the investee.

Seamus Industries Inc. buys and sells investments as part of its ongoing cash management

Seamus Industries Inc. buys and sells investments as part of its ongoing cash management. The following investment transactions were completed during the year:

Feb. 24. Acquired 1,000 shares of Tett Co. stock for $85 per share plus a $150 brokerage commission.

May 16. Acquired 2,500 shares of Issacson Co. stock for $36 per share plus a $100 commission.

July 14. Sold 400 shares of Tett Co. stock for $100 per share less a $75 brokerage commission.

Aug. 12. Sold 750 shares of Issacson Co. stock for $32.50 per share less an $80 brokerage commission.

Oct. 31. Received dividends of $0.40 per share on Tett Co. stock.

Journalize the entries for these transactions.


Answer:

Feb. 24 Investments—Tett Co. Stock* 85,150
Cash 85,150
*(1,000 shares × $85) + $150
May 16 Investments—Issacson Co. Stock* 90,100
Cash 90,100
*(2,500 shares × $36) + $100
July 14 Cash* 39,925
Gain on Sale of Investments 5,865
Investments—Tett Co. Stock** 34,060
*(400 shares × $100) – $75
**400 shares × ($85,150 ÷ 1,000 shares)
Aug. 12 Cash* 24,295
Loss on Sale of Investments 2,735
Investments—Issacson Co. Stock** 27,030
*(750 shares × $32.50) – $80
**750 shares × ($90,100 ÷ 2,500 shares)
Oct. 31 Cash* 240
Dividend Revenue 240
*(1,000 shares – 400 shares) × $0.40

Murray Corp. manufactures surveying equipment. Journalize the entries to record the following selected

Murray Corp. manufactures surveying equipment. Journalize the entries to record the following selected equity investment transactions completed by Murray during 2014: Jan. 16. Purchased for cash 3,000 shares of McDowell Inc. stock for $25 per share plus a $140 brokerage commission.

Mar. 23. Received dividends of $0.46 per share on McDowell Inc. stock.

May 25. Purchased 1,000 shares of McDowell Inc. stock for $35 per share plus a $160 brokerage commission.

July 10. Sold 3,200 shares of McDowell Inc. stock for $40 per share less a $200 brokerage commission. Murray assumes that the first investments purchased are the first investments sold.

Oct. 12. Received dividends of $0.51 per share on McDowell Inc. stock.


Answer:

Jan. 16 Investments—McDowell Inc. Stock* 75,140
Cash 75,140
* (3,000 shares × $25) + $140
Mar. 23 Cash* 1,380
Dividend Revenue 1,380
* 3,000 shares × $0.46
May 25 Investments—McDowell Inc. Stock* 35,160
Cash 35,160
* (1,000 shares × $35) + $160
July 10 Cash* 127,800
Gain on Sale of Investments 45,628
Investments—McDowell Inc. Stock** 82,172
* (3,200 shares × $40) – $200
** 3,000 shares purchased………………………………$75,140
200 shares × ($35,160 ÷ 1,000 shares)…………… 7,032
Total cost……………………………………………… $82,172
Oct. 12 Cash* 408
Dividend Revenue 408
* 800 shares × $0.51

The following equity investment transactions were completed by Reynolds Company in 2014:

The following equity investment transactions were completed by Reynolds Company in 2014:

Feb. 8. Purchased 2,400 shares of Tybee Company for a price of $62 per share plus a brokerage commission of $120.

Apr. 22. Received a quarterly dividend of $0.60 per share on the Tybee Company investment.

May 26. Sold 1,000 shares for a price of $52 per share less a brokerage commission of $60.

Journalize the entries for these transactions.


Answer:

Feb. 8 Investments—Tybee Company Stock* 148,920
Cash 148,920
*(2,400 shares × $62.00) + $120
Apr. 22 Cash* 1,440
Dividend Revenue 1,440
*$0.60 per share × 2,400 shares
May 26 Cash* 51,940
Loss on Sale of Investments 10,110
Investments—Tybee Company Stock** 62,050
*(1,000 shares × $52.00) – $60
**1,000 shares × ($148,920 ÷ 2,400 shares)

On March 10, Fly Corporation acquired 6,000 shares of the 140,000 outstanding shares of Dickson Co.

On March 10, Fly Corporation acquired 6,000 shares of the 140,000 outstanding shares of Dickson Co. common stock at $32 plus commission charges of $240. On July 23, a cash dividend of $1.40 per share was received. On November 22, 2,400 shares were sold at $38, less commission charges of $200.

Using the cost method, journalize the entries for (a) the purchase of stock, (b) the receipt of dividends, and (c) the sale of 2,400 shares.


Answer:

a. Mar. 10 Investments—Dickson Co. Stock* 192,240
Cash 192,240
*(6,000 shares × $32.00) + $240
b. July 23 Cash* 8,400
Dividend Revenue 8,400
*$1.40 × 6,000 shares
c. Nov. 22 Cash* 91,000
Gain on Sale of Investments 14,104
Investments—Dickson Co. Stock** 76,896
*(2,400 shares × $38.00) – $200
**($192,240 ÷ 6,000 shares) × 2,400 shares

On April 1, 2014, Rizzo Company purchased $80,000 of 4.5%, 20-year Energizer Company bonds at their face amount plus

On April 1, 2014, Rizzo Company purchased $80,000 of 4.5%, 20-year Energizer Company bonds at their face amount plus one month’s accrued interest. The bonds pay interest on March 1 and September 1. On November 1, 2014, Rizzo Company sold $30,000 of the Energizer Company bonds acquired on April 1, plus two months’ accrued interest. On December 31, 2014, four months’ interest was accrued for the remaining bonds.

Determine the interest earned by Rizzo Company on Energizer Company bonds for 2014.


Answer:

Interest earned (April 1 to September 1)
1
…………………………………………… $1,500
Interest earned on sold bonds (September 1 to November 1)
2
………………… 225
Interest earned on remaining bonds (September 1 to December 31)
3
………… 750
Total interest earned in 2014…………………………………………………………… $2,475
1 $80,000 × 4.5% × 5/12
2 $30,000 × 4.5% × 2/12
3 $50,000 × 4.5% × 4/12

The following bond investment transactions were completed during 2014 by Starks Company:

The following bond investment transactions were completed during 2014 by Starks
Company: Jan. 31. Purchased 75, $1,000 government bonds at 100 plus 30 days’ accrued interest. The bonds pay 6% annual interest on July 1 and January 1.


July 1. Received semiannual interest on bond investment.
Aug. 29. Sold 35, $1,000 bonds at 98 plus $350 accrued interest.

a. Journalize the entries for these transactions.
b. Provide the December 31, 2014, adjusting journal entry for semiannual interest earned on the bonds.


Answer:

2014
a.
 Jan. 31 Investments—Government Bonds 75,000
Interest Receivable* 375
Cash 75,375
* $75,000 × 6% × 30/360
July 1 Cash* 2,250
Interest Receivable 375
Interest Revenue 1,875
* $75,000 × 6% × 1/2
Aug. 29 Cash* 34,650
Loss on Sale of Investments 700
Interest Revenue 350
Investments—Government Bonds 35,000
* Bond sale ($35,000 × 98%)………………………………… $34,300
Accrued interest…………………………………………… 350
Total proceeds from sale……………………………………$34,650
2014
b. Dec. 31 Interest Receivable 1,200
Interest Revenue 1,200
Accrued interest, $40,000 ×
6% × 1/2.

Crabtree Co. purchased $60,000 of 6%, 15-year Thomas County bonds on June 20, 2014, directly from the county

Crabtree Co. purchased $60,000 of 6%, 15-year Thomas County bonds on June 20, 2014, directly from the county, at their face amount plus accrued interest. The bonds pay semiannual interest on May 1 and November 1. On December 1, 2014, Crabtree Co. sold $15,000 of the Thomas County bonds at 97 plus $75 accrued interest, less a $150 brokerage commission.

Provide journal entries for the following:
a. The purchase of the bonds on June 20, plus 50 days of accrued interest.
b. Semiannual interest on November 1.
c. Sale of the bonds on December 1.
d. Adjusting entry for accrued interest of $450 on December 31, 2014.


Answer:

2014
a. June 20 Investments—Thomas County Bonds 60,000
Interest Receivable* 500
Cash 60,500
* $60,000 × 6% × 50/360
b.
 Nov. 1 Cash* 1,800
Interest Receivable 500
Interest Revenue 1,300
* $60,000 × 6% × 1/2
c. Dec. 1 Cash* 14,475
Loss on Sale of Investments 600
Interest Revenue 75
Investments—Thomas County Bonds 15,000
* Bond sale ($15,000 × 0.97)………………………………… $14,550
Accrued interest…………………………………………… 75
Less brokerage commission…………………………… (150)
Total proceeds……………………………………………… $14,475
d. Dec. 31 Interest Receivable 450
Interest Revenue 450

Mars Investments acquired $150,000 of Pluto Corp., 8% bonds at their face amount on September 1, 2014

Mars Investments acquired $150,000 of Pluto Corp., 8% bonds at their face amount on September 1, 2014. The bonds pay interest on September 1 and March 1. On March 1, 2015, Mars sold $75,000 of Pluto Corp. bonds at 102.

Journalize the entries to record the following:
a. The initial acquisition of the Pluto Corp. bonds on September 1, 2014.
b. The adjusting entry for four months of accrued interest earned on the Pluto Corp. bonds on December 31, 2014.
c. The receipt of semiannual interest on March 1, 2015.
d. The sale of $75,000 of Pluto Corp. bonds on March 1, 2015, at 102.


Answer:

2014
a. Sept. 1 Investments—Pluto Corp. Bonds 150,000
Cash 150,000
2014
b.
 Dec. 31 Interest Receivable 4,000
Interest Revenue 4,000
Accrued interest, $150,000 × 8%
× 4/12.
2015
c.
 Mar. 1 Cash 6,000
Interest Receivable 4,000
Interest Revenue* 2,000
*$150,000 × 8% × 2/12
2015
d.
 Mar. 1 Cash* 76,500
Gain on Sale of Investments 1,500
Investments—Pluto Corp. Bonds 75,000
*$75,000 × 102%

Sorrey Company acquired $75,000 of Clayton Co., 6% bonds on April 1, 2014, at their face amount. Interest

Sorrey Company acquired $75,000 of Clayton Co., 6% bonds on April 1, 2014, at their face amount. Interest is paid semiannually on April 1 and October 1. On October 1, 2014, Sorrey Company sold $25,000 of the bonds for 98.

Journalize entries to record the following:
a. The initial acquisition of the bonds on April 1.
b. The semiannual interest received on October 1.
c. The sale of the bonds on October 1.
d. The accrual of $750 interest on December 31, 2014.


Answer:

2014
a.
 Apr. 1 Investments—Clayton Co. Bonds 75,000
Cash 75,000
2014
b.
 Oct. 1 Cash 2,250
Interest Revenue 2,250
$75,000 × 6% × 6/12.
2014
c. Oct. 1 Cash* 24,500
Loss on Sale of Investments 500
Investments—Clayton Co. Bonds 25,000
*$25,000 × 98%
2014
d. Dec. 31 Interest Receivable 750
Interest Revenue 750
Accrued interest.

On October 23, 2014, Wilkerson Company had a market price of $40 per share of common stock

On October 23, 2014, Wilkerson Company had a market price of $40 per share of common stock. For the previous year, Wilkerson paid an annual dividend of $1.20. Compute the dividend yield for Wilkerson Company.


Answer:

Dividend Yield = Dividends per Share of Common Stock
Market Price per Share of Common Stock
Dividend Yield = $1.20
$40 = 0.03, or 3%

On June 30, 2014, Setzer Corporation had a market price of $100 per share of common stock

On June 30, 2014, Setzer Corporation had a market price of $100 per share of common stock. For the previous year, Setzer paid an annual dividend of $4.00. Compute the dividend yield for Setzer Corporation.


Answer:

Dividend Yield = Dividends per Share of Common Stock
Market Price per Share of Common Stock
Dividend Yield = $4.00
$100
= 0.04, or 4%

On January 1, 2014, Valuation Allowance for Available-for-Sale Investments had a zero balance

On January 1, 2014, Valuation Allowance for Available-for-Sale Investments had a zero balance. On December 31, 2014, the cost of the available-for-sale securities was $24,260, and the fair value was $26,350. Prepare the adjusting entry to record the unrealized gain or loss on available-for-sale investments on December 31, 2014.


Answer:

2014
Dec. 31 Valuation Allowance for Available-for-Sale
Investments* 2,090
Unrealized Gain (Loss) on Available-for-Sale
Investments 2,090
To record increase in fair value of
available-for-sale securities.
* Available-for-sale investments at fair value,
December 31, 2014……………………………………………………………… $26,350
Available-for-sale investments at cost, December 31, 2014………………… 24,260
Unrealized gain (loss) on available-for-sale investments…………………… $ 2,090

On January 1, 2014, Valuation Allowance for Available-for-Sale Investments had a zero balance

On January 1, 2014, Valuation Allowance for Available-for-Sale Investments had a zero balance. On December 31, 2014, the cost of the available-for-sale securities was $78,400, and the fair value was $72,600. Prepare the adjusting entry to record the unrealized gain or loss on available-for-sale investments on December 31, 2014.


Answer:

2014
Dec. 31 Unrealized Gain (Loss) on Available-for-Sale
Investments* 5,800
Valuation Allowance for Available-for-Sale
Investments 5,800
To record decrease in fair value of
available-for-sale securities.
* Available-for-sale investments at fair value,
December 31, 2014……………………………………………………………… $72,600
Available-for-sale investments at cost, December 31, 2014………………… 78,400
Unrealized gain (loss) on available-for-sale investments…………………… $ (5,800)