ADMS 3585 Study Guide - Discounted Cash Flow, Impaired Asset, Ias 39

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grayjellyfish452

30 Sep 2014

School

York University

Department

Administrative Studies

Course

ADMS 3585

Professor

Lykke Dela Cour

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Document Summary

Fv-ni investments . (,200 ,830. 19) - ,000. Assuming no change in the credit rating of the company that issued the bond, it appears that market rates increased rather than decreased. Market prices of bonds fall when interest rates rise, and prices of bonds rise when interest rates fall. However, part of the decrease in fair value of this bond is due to the reduction in time to maturity. Note: each investment could also be adjusted separately. (b) (c) The holding gain on the investments accounted for using the fair value through net income (fv-ni) model is reported as part of investment income/loss in the income statement under other. Revenues and gains, and this account is subsequently closed out to retained earnings at the end of the period. Oci and fv-ni securities are reported at fair value on the balance sheet. The accounting for fv-ni investments and fv-oci investments under.

Related Questions

posting for sec times any incomplete work will bereported answer all 2 parts investment 1 to 7 and finacial statmentand valution 1 to 6

You are working for The Wellington Company on temporaryassignment while one of the accountants is on family leave. Youhave been asked to review the companyâs investment journal entriesand provide necessary information to the accountant preparing thefinancial statements.

PAGE 8

JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	DEBIT	CREDIT	ASSETS	EQUITY
1	Jan. 17	Investments-Red Rock Co. Stock	38,500.00		?
2		Cash		38,500.00	?
3	Feb. 5	Investments-Sunset Village Bonds	35,000.00		?
4		Interest Receivable	300.00		?
5		Cash		35,300.00	?
6	23	Investments-Mays and Co. Stock	26,250.00		?
7		Cash		26,250.00	?
8	Mar. 31	Cash	350.00		?
9		Interest Receivable		300.00	?
10		Interest Revenue		50.00		?
11	Apr. 6	Investment in Minions Corp. Stock	175,000.00		?
12		Cash		175,000.00	?
13	30	Cash	750.00		?
14		Dividend Revenue		750.00		?
15	Jul. 1	Cash	18,690.00		?
16		Loss on Sale of Investment	2,520.00			?
17		Interest Revenue		210.00		?
18		Investments-Sunset Village Bonds		21,000.00	?
19	Aug. 14	Cash	41,300.00		?
20		Gain on Sale of Investments		1,800.00		?
21		Investments-Harding Construction Stock		39,500.00	?
22	27	Cash	3,500.00		?
23		Investment in Minions Corp. Stock		3,500.00	?
24	Sep. 22	Cash	29,750.00		?
25		Gain on Sale of Investments		3,500.00		?
26		Investments-Mays and Co. Stock		26,250.00	?
27	30	Cash	140.00		?
28		Interest Revenue		140.00		?
29	Nov. 1	Investment in Minions Corp. Stock	15,750.00		?
30		Income of Minions Corp.		15,750.00		?
31	Dec. 31	Unrealized Loss on Available-For-Sale Investments	3,275.00			?
32		Valuation Allowance for Available-For-Sale Investments		3,275.00	?
33	31	Valuation Allowance for Trading Investments	2,150.00		?
34		Unrealized Gain on Trading Investments		2,150.00		?

Investments

Review the journal entries on The Wellington Company panel thenanswer the following questions.

1.	Which item is likely to be atrading security? Mays and Co. Why?
2.	How are brokerage commission feestreated on stock sales vs. stock purchases?
3.	Based on these journal entries,what is the companyâs investment in Sunset Village bonds at the endof the year?
4.	The journal entry on Aug. 27 mostlikely shows
5.	As an investment, bonds are alwayscategorized as
6.	What is the companyâs investment inMinions Corp. at the end of the year?

7. Which of the following investments are likely to beavailable-for-sale securities? Check all that apply.

Harding Construction stock

Mays and Co. stock

Cannot be determined

Red Rock Co. stock

Sunset Village bonds

Minions Corp. stock

Financial Statements and Valuation

The accountant preparing the financial statements has asked youto provide the fair value as of the end of the year for theinvestments. Present the information as it would be shown on thefinancial statements. Last year, The Wellington Company reportedcosts of $68,000 in trading investments and $82,000 inavailable-for-sale investments. Refer to the journal entries shownon The Wellington Company panel. Assume that all investments soldduring this year were trading investments and that purchases duringthe year were new investments.

1. Select the correct label for each line and fill in theamount. In classifying the investments, choose a categorizationwhich seems most likely, given the pattern of transactions in thejournal entries. Enter all amounts as positive numbers. If anamount box does not require an entry, leave it blank.

Trading Securities

Available-For-Sale Securities

	2. Where on the balance sheet dotrading securities appear?
	3. Where is the gain or loss fromthe change in value of available-for-sale securities reported inthe financial statements?
	4. Where are held-to-maturitysecurities reported? Based on the journal entries for this year,does the company have any held-to-maturity securities?
	5. Where are securities held forstrategic reasons reported in the financial statements when usingthe equity method? Based on the journal entries for this year, doesThe Wellington Company have any equity securities?

6. Which of the following items does not affect net income?Check all that apply.

only unrealized gains or losses for all investments

realized loss on available-for-sale securities

realized gain on trading securities

none of these answers is correct

both gains and losses of any sort for all investments

unrealized loss on trading securities

unrealized gain on available-for-sale securities

The Fed controls interest rates to either tighten or loosen theeconomy. When the Feds are needing to tighten the economy, theywill raise the interest rates. When interest rates are changed, itsends a ripple effect through the entire financial market. Wheninterest rates rise, cost of capital and borrowing increase.Consumers will borrow and spend less. This will lead to a slowereconomy and help to hedge inflation. However, the change ininterest rates can affect the market values of different assetswhich can affect the return for investors and the overall profitfor companies. A rise in interest rates will also cause assetprices to fall. When prices fall, yield will be affected. This iswhat interest rate risk is. When rates increase, bond prices fall.When rates decrease, prices will rise. When prices fall, the yieldto maturity will increase. According to the SEC (2019), bondmaturity and coupon rates will affect how price changes due to achange in interest rates (p. 3). So, the higher the coupon rate,the lower the interest rate risk. The opposite is true when thecoupon rates are lower. The lower the coupon rates, the more themarket value will be affected. It will likely decrease more forbond with lower coupon rates. Market values will always varythroughout the life of the bond, depending on what happens to therates. According to Mike Patton in an article written in Forbesmagazine in 2013, when rates fall, bonds are sold at a discount.They are worth less than their face values. Investors should holdonto their bonds when rates rise to keep from selling bonds at adiscount. Assets with shorter maturities will be less affected by achange in interest rates and same with their market values. Do youagree or disagree with this statement?

beigecattle555

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

ADMS 3585 Study Guide - Discounted Cash Flow, Impaired Asset, Ias 39

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