Securities held-to-maturity; bond investment; effective interest
Exercises E12-1, E12-5, E12-7, and E12-14
E 12–1: Securities held-to-maturity; bond investment; effective interest
Tanner-UNF Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2013. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 8% for bonds of similar risk and maturity. Tanner-UNF paid $200 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2013 was $210 million.
1. Prepare the journal entry to record Tanner-UNF’s investment in the bonds on July 1, 2013.
2. Prepare the journal entry by Tanner-UNF to record interest on December 31, 2013, at the effective (market) rate.
3. At what amount will Tanner-UNF report its investment in the December 31, 2013, balance sheet? Why?
4. Suppose Moody’s bond rating agency downgraded the risk rating of the bonds motivating Tanner-UNF to sell the investment on January 2, 2014, for $190 million. Prepare the journal entry to record the sale.
12–5: Various transactions relating to trading securities
Rantzow-Lear Company buys and sells securities expecting to earn profits on short-term differences in price. The company’s fiscal year ends on December 31. The following selected transactions relating to Rantzow-Lear’s TRADING ACCOUNT occurred during December 2013 and the first week of 2014.
Dec. 17 Purchased 100,000 Grocers’ Supply Corporation preferred shares for $350,000.
28 Received cash dividends of $2,000 from the Grocers’ Supply Corporation preferred shares.
31 Recorded any necessary adjusting entry relating to the Grocers’ Supply Corporation preferred shares. The market price of the stock was $4 per share.
Jan.5 Sold the Grocers’ Supply Corporation preferred shares for $395,000.
1. Prepare the appropriate journal entry for each transaction.
2. Indicate any amounts that Rantzow-Lear Company would report in its 2013 balance sheet and income statement as a result of this investment.
E 12–7: Securities available-for-sale; adjusting entries
Loreal-American Corporation purchased several marketable securities during 2013. At December 31, 2013, the company had the investments in common stock listed below. None was held at the last reporting date, December 31, 2012, and all are considered securities available-for-sale.
1. Prepare the appropriate adjusting entry at December 31, 2013.
2. What amounts would be reported in the income statement at December 31, 2013, as a result of the adjusting entry?
E 12–14: Investment securities and equity method investments compared
LO12–3, LO12–4, LO12–5
As a long-term investment, Painters’ Equipment Company purchased 20% of AMC Supplies Inc.’s 400,000 shares for $480,000 at the beginning of the fiscal year of both companies. On the purchase date, the fair value and book value of AMC’s net assets were equal. During the year, AMC earned net income of $250,000 and distributed cash dividends of 25 cents per share. At year-end, the fair value of the shares is $505,000.
1. Assume no significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.
2. Assume significant influence was acquired. Prepare the appropriate journal entries from the purchase through the end of the year.
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