ACC* - Accounting ACC* M115 Lecture Notes - Lecture 10: Current Asset, Income Statement, Financial Statement

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redminnow421

6 Jun 2020

School

CCC

Department

ACC* - Accounting

Course

ACC* - Accounting ACC* M115

Professor

Murphy

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Document Summary

Valuing & reporting investments debt / equity securities are traded publicly and thus have an objective market value. Gaap: some debt securities + all 20% or less equity securities must be valued at fair- market value. Fair value market price a company would receive if they sold a security: trading securities bought for short-term profits; actively managed. Valued as a portfolio (group) of securities using fair values. A change in fair value = unrealized gain / loss for the pd. Used to allow for a record of the original cost to be kept. Over time, this value is adjusted to reflect the difference between the cost & fair value of the portfolio. Urg recorded on the income statement: afs securities not for trading / strategic / held-to-maturity. Similar to accounting for trading securities, but changes in fv reported as part of stockholder"s equity & not the income statement. Valuation allowance reported in current assets, urg/l in s. e.

Related Questions

Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, its first year of operations. The cost and fair value of this portfolio on December 31, 2016, was as follows:

1	Name	Number of Shares	Total Cost	Total Fair Value
2	Tornado Inc.	830.00	$14,857.00	$16,185.00
3	Tsunami Corp.	1,230.00	31,488.00	34,809.00
4	Typhoon Corp.	2,170.00	44,268.00	43,834.00
5	Total		$90,613.00	$94,828.00

On June 12, 2017, Hurricane purchased 1,400 shares of Rogue Wave Inc. at $50 per share plus a $80 brokerage commission.

Required:

Provide the journal entries to record the following (refer to the Chart of Accounts for exact wording of account titles and be sure to enter the year as part of the date):

1.	The adjustment of the available-for-sale security portfolio to fair value on December 31, 2016.
2.	The June 12, 2017, purchase of Rogue Wave Inc. stock.

How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

Chart of Accounts

CHART OF ACCOUNTS

Hurricane Inc.

General Ledger

	ASSETS
110	Cash
111	Petty Cash
120	Accounts Receivable
121	Allowance for Doubtful Accounts
131	Notes Receivable
132	Interest Receivable
141	Merchandise Inventory
145	Office Supplies
146	Store Supplies
151	Prepaid Insurance
161	Investments-Rogue Wave Inc. Stock
165	Valuation Allowance for Trading Investments
166	Valuation Allowance for Available-for-Sale Investments
181	Land
191	Store Equipment
192	Accumulated Depreciation-Store Equipment
193	Office Equipment
194	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
221	Notes Payable
231	Interest Payable
241	Salaries Payable
251	Sales Tax Payable

	EQUITY
311	Common Stock
312	Paid-In Capital in Excess of Par-Common Stock
321	Preferred Stock
322	Paid-In Capital in Excess of Par-Preferred Stock
331	Treasury Stock
332	Paid-In Capital from Sale of Treasury Stock
340	Retained Earnings
350	Unrealized Gain (Loss) on Available-for-Sale Investments
351	Cash Dividends
352	Stock Dividends
390	Income Summary

	REVENUE
410	Sales
611	Interest Revenue
612	Dividend Revenue
621	Income of Rogue Wave Inc.
631	Gain on Sale of Investments
641	Unrealized Gain on Trading Investments

	EXPENSES
511	Cost of Merchandise Sold
512	Bad Debt Expense
515	Credit Card Expense
516	Cash Short and Over
520	Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Repairs Expense
534	Selling Expenses
535	Rent Expense
536	Insurance Expense
537	Office Supplies Expense
538	Store Supplies Expense
561	Depreciation Expense-Store Equipment
562	Depreciation Expense-Office Equipment
590	Miscellaneous Expense
710	Interest Expense
721	Loss of Rogue Wave Inc.
731	Loss on Sale of Investments
741	Unrealized Loss on Trading Investments

Journal

Shaded cells have feedback.

A. Provide the journal entries. Refer to the Chart of Accounts for exact wording of account titles. Be sure to enter the year as part of the date.

How does grading work?

PAGE 10

JOURNAL

Score: 33/51

	DATE	DESCRIPTION
1	?	?
2		?
3	?	?
4		?

Points:

6.47 / 10

Feedback

Check My Work

1. The gain or loss is the difference between the portfolio cost and its fair value. The offset account for the gain or loss entry is the valuation allowance account.

2. Increase the investment and decrease Cash for the purchase price (Shares x Per share amount) plus brokerage fee.

Final Question

Shaded cells have feedback.

B. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?

Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the Stockholdersâ Equity section. As a result, the changes in fair valueare not reflected on the income statement, as is the case with trading securities. Bypassing the income statement issupported on the grounds that available-for-sale securities will be held for alonger time than trading securities; thus, fluctuations in market prices havea greater opportunity to âcancel outâ over time.

Points:

5 / 5

Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1, 2016. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31:

Record these transactions on page 10:

2016
Jan.	18	Purchased 9,000 shares of Malmo Inc. as an available-for-sale investment at $40 per share, including the brokerage commission.
July	22	A cash dividend of $3.00 per share was received on the Malmo stock.
Oct.	5	Sold 500 shares of Malmo Inc. stock at $58.00 per share, less a brokerage commission of $100.
Dec.	18	Received a regular cash dividend of $3.00 per share on Malmo Inc. stock.
	31	Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $36.00 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment.

Record these transactions on page 11:

2017
Jan.	25	Purchased an influential interest in Helsi Co. for $800,000 by purchasing 75,000 shares directly from the estate of the founder of Helsi. There are 250,000 shares of Helsi Co. stock outstanding.
July	16	Received a cash dividend of $3.00 per share on Malmo Inc. stock.
Dec.	16	Received a cash dividend of $3.00 per share plus an extra dividend of $0.20 per share on Malmo Inc. stock.
	31	Received $38,000 of cash dividends on Helsi Co. stock. Helsi Co. reported net income of $170,000 in 2017. Glacier Products Inc. uses the equity method of accounting for its investment in Helsi Co.
	31	Malmo Inc. is classified as an available-for-sale investment and is adjusted to a fair value of $44 per share. Use the valuation allowance for available-for-sale investments account in making the adjustment for the increase in fair value from $36 to $44 per share.

	Required:
A.	Journalize the entries to record the preceding transactions. Be sure to enter the year as part of the date for the first entry on each page. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.
B.	Prepare the investment-related asset and stockholdersâ equity balance sheet presentation for Glacier Products Inc. on December 31, 2017, assuming the Retained Earnings balance on December 31, 2017, is $700,000. Refer to the Chart of Accounts and Amount Descriptions provided for the exact wording of the answer choices for text entries. âLessâ or âPlusâ will automatically appear if it is required. For those boxes in which you must enter subtractive or negative numbers use a minus sign.

CHART OF ACCOUNTS

Glacier Products Inc.

General Ledger

	ASSETS
110	Cash
111	Petty Cash
120	Accounts Receivable
121	Allowance for Doubtful Accounts
131	Notes Receivable
132	Interest Receivable
141	Merchandise Inventory
145	Office Supplies
146	Store Supplies
151	Prepaid Insurance
161	Investments-Malmo Inc.
163	Investment in Helsi Co. Stock
165	Valuation Allowance for Trading Investments
166	Valuation Allowance for Available-for-Sale Investments
181	Land
191	Store Equipment
192	Accumulated Depreciation-Store Equipment
193	Office Equipment
194	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
221	Notes Payable
231	Interest Payable
241	Salaries Payable
251	Sales Tax Payable

	EQUITY
311	Common Stock
312	Paid-In Capital in Excess of Par-Common Stock
321	Preferred Stock
322	Paid-In Capital in Excess of Par-Preferred Stock
331	Treasury Stock
332	Paid-In Capital from Sale of Treasury Stock
340	Retained Earnings
350	Unrealized Gain (Loss) on Available-for-Sale Investments
351	Cash Dividends
352	Stock Dividends
390	Income Summary

	REVENUE
410	Sales
611	Interest Revenue
612	Dividend Revenue
621	Income of Helsi Co.
631	Gain on Sale of Investments
641	Unrealized Gain on Trading Investments

	EXPENSES
511	Cost of Merchandise Sold
512	Bad Debt Expense
515	Credit Card Expense
516	Cash Short and Over
520	Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Repairs Expense
534	Selling Expenses
535	Rent Expense
536	Insurance Expense
537	Office Supplies Expense
538	Store Supplies Expense
561	Depreciation Expense-Store Equipment
562	Depreciation Expense-Office Equipment
590	Miscellaneous Expense
710	Interest Expense
721	Loss of Helsi Co.
731	Loss on Sale of Investments
741	Unrealized Loss on Trading Investments

Amount Descriptions
Available-for-sale investments (at cost)
Available-for-sale investments (at fair value)
Net income
Net loss
Other comprehensive income (loss)
Other income (loss)
Trading investments (at cost)
Trading investments (at fair value)

Journalize the entries to record these transactions. Be sure to enter the year as part of the date for the first entry on each page. Refer to the information given and the Chart of Accounts provided for the exact wording of the answer choices for text entries.

PAGE 10PAGE 11

JOURNAL

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6
7
8
9
10
11

Prepare the investment-related asset and stockholdersâ equity balance sheet presentation for Glacier Products Inc. on December 31, 2017, assuming the Retained Earnings balance on December 31, 2017, is $700,000. Refer to the Chart of Accounts and Amount Descriptions provided for the exact wording of the answer choices for text entries. âLessâ or âPlusâ will automatically appear if it is required. For those boxes in which you must enter subtractive or negative numbers use a minus sign.

GLACIER PRODUCTS, INC.

Balance Sheet (selected items)

December 31, 2017

1	Current assets:
2
3
4
5
6	Investments:
7
8
9	Stockholdersâ equity:
10
11

greenseal56

13. At the end of the first year of operations, the total costof the trading securities portfolio is $245,000. Total fair valueis $250,000. The financial statements should show

A. an addition to an asset of$5,000 in the current assets section and a realized gain of $5,000in "Other revenues and gains."

B. an addition to an asset of$5,000 and an unrealized gain of $5,000 in the stockholders' equitysection.

C. an addition to an asset of$5,000 in the current assets section and an unrealized gain of$5,000 in "Other revenues and gains."

D. an addition to an asset of$5,000 and a realized gain of $5,000.

14. Comanic Corp. has commonstock of $5,400,000, retained earnings of $2,000,000, unrealizedgains on trading securities of $100,000 and unrealized losses onavailable-for-sale securities of $200,000. What is the total amountof its stockholders' equity?

A. $7,400,000

B. $7,200,000

C. $7,500,000

D. $7,300,000

17. Stockholders of a company maybe reluctant to finance expansion through issuing more equitybecause

A. their earnings per share maydecrease.

B. the price of the stock willautomatically decrease.

C. dividends must be paid on aperiodic basis.

D. leveraging with debt is alwaysa better idea.

18. Which of the following is notan advantage of issuing bonds instead of common stock?

A. Income to common shareholdersmay increase.

B. Tax savings result.

C. Stockholder control is notaffected.

D. Earnings per share on commonstock may be lower.

19. A major disadvantageresulting from the use of bonds is that

A. earnings per share may belowered.

B. bondholders have votingrights.

C. interest must be paid on aperiodic basis.

D. taxes may increase.

21. If the market interest rateis 5%, a $10,000, 6%, 10-year bond, that pays interest semiannuallywould sell at an amount

A. less than facevalue.

B. equal to facevalue.

C. greater than facevalue.

D. that cannot bedetermined.

23. If bonds are issued at adiscount, it means that thE

A. bondholder will receiveeffectively less interest than the contractual interestrate.

B. market interest rate is higherthan the contractual interest rate.

C. market interest rate is lowerthan the contractual interest rate.

D. financial strength of theissuer is suspect.

24. In the balance sheet, theaccount, Premium on Bonds Payable, is

A. deducted from bondspayable.

B. classified as a revenueaccount.

C. added to bondspayable.

D. classified as a stockholders'equity account.

25. Bond interest paidis

A. higher when bonds sell at adiscount and lower when bonds sell at a premium.

B. the same whether bonds sell ata discount or a premium.

C. higher when bonds sell at adiscount.

D.lower when bonds sell at apremium.

27. Lowe Company has $1,500,000of bonds outstanding. The unamortized premium is $19,600. If thecompany redeemed the bonds at 101, what would be the gain or losson the redemption?

A. $15,000 loss

B. $4,600 loss

C. $15,000 gain

D. $4,600 gain

28. Robin Corporation retires its$800,000 face value bonds at 104 on January 1, following thepayment of annual interest. The carrying value of the bonds at theredemption date is $829,960. The entry to record the redemptionwill include a

A. debit of $2,040 to Loss onBond Redemption.

B. credit of $32,040 to Premiumon Bonds Payable.

C. credit of $2,040 to Loss onBond Redemption.

D. debit of $32,000 to Premium onBonds Payable.

29. If there is a loss on bondsredeemed early, the

A. loss is debited directly toRetained Earnings.

B. loss is debited to InterestExpense, as a cost of financing.

C. bonds' carrying value was lessthan the redemption price.

D. bonds' carrying value wasgreater than the redemption price.

30. Over the term of the bonds,the balance in the Discount on Bonds Payable accountwill

A. fluctuate up and down if themarket is volatile.

B. increase.

C. decrease.

D. be unaffected until the bondsmature.

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ACC* - Accounting ACC* M115 Lecture Notes - Lecture 10: Current Asset, Income Statement, Financial Statement

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