CHAPTER 17 SOLUTIONS TO B EXERCISES E17-1B (10–15 minutes) (a) (b) (c) (d) (e) (f) E17-2B (15–20 minutes) (a) (b) (c) July 1, 2014 Held-to-Maturity Securities Cash 250,000 December 31, 2014 Interest Receivable Interest Revenue 10,000 July 1, 2015 Cash Interest Revenue Interest Receivable December 31, 2015 Interest Receivable Interest Revenue 250,000 10,000 20,000 10,000 10,000 10,000 10,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-1 E17-3B (15–20 minutes) (a) (b) January 1, 2014 Held-to-Maturity Securities Cash 17-2 428,638 Schedule of Interest Revenue and Bond Discount Amortization Effective Interest Method 5% Bonds Sold to Yield 7% Date 1/1/14 6/30/14 12/31/14 6/30/15 12/31/15 6/30/16 12/31/16 (c) 428,938 Cash Received — $12,500 12,500 12,500 12,500 12,500 12,500 Interest Revenue — $15,013 15,101 15,192 15,286 15,383 15,484 Discount Amortized — $2,513 2,601 2,692 2,786 2,883 2,984 Carrying Amount of Bonds $428,938 431,451 434,052 436,744 439,530 442,413 445,397 June 30, 2014 Cash Held-to-Maturity Securities Interest Revenue 12,500 2,513 December 31, 2014 Cash Held-to-Maturity Securities Interest Revenue 12,500 2,601 15,013 15,101 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-4B (10–15 minutes) (a) (b) January 1, 2014 Available-for-Sale Securities Cash 428,938 June 30, 2014 Cash Available-for-Sale Securities Interest Revenue 12,500 2,513 December 31, 2014 Cash Available-for-Sale Securities Interest Revenue 12,500 2,601 Unrealized Holding Gain or Loss— Equity ($430,000 – $434,052) Securities Fair Value Adjustment— Available-for-Sale (c) December 31, 2015 Unrealized Holding Gain or Loss—Equity Securities Fair Value Adjustment— Available-for-Sale Available-for-sale bonds Previous securities fair value adjustment—Cr Securities fair value adjustment—Cr 428,638 15,013 15,101 4,052 4,052 10,478 10,478 Cost Fair Value $439,530 $425,000 Unrealized Holding Gain (Loss) $(14,530) (4,052) $(10,478) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-3 E17-5B (20–30 minutes) (a) Schedule of Interest Revenue and Bond Discount Amortization Straight-Line Method 8% Bond Purchased to Yield 7% Date 1/1/14 12/31/14 12/31/15 12/31/16 Cash Received — $32,000 32,000 32,000 Interest Revenue — $29,881 29,881 29,881 Bond Discount Carrying Amount Amortization of Bonds — $442,376 *$2,119* 440,257 2,119 438,138 2,119 436,019 **($400,000 – $442,376) ÷ 20 = $2,119 (b) Schedule of Interest Revenue and Bond Discount Amortization Effective-Interest Method 8% Bond Purchased to Yield 7% Date 1/1/14 12/31/14 12/31/15 12/31/16 Cash Received — $32,000 32,000 32,000 Interest Revenue — $30,966* 30,894 30,817 Bond Discount Carrying Amount Amortization of Bonds — $442,376 $1,034 441,342 1,106 440,236 1,183 439,053 **$442,376 X 0.07 = $30,966 (c) (d) 17-4 December 31, 2015 Cash Held-to-Maturity Securities Interest Revenue December 31, 2015 Cash Held-to-Maturity Securities Interest Revenue 32,000 2,119 29,881 32,000 1,106 30,894 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-6B (10–15 minutes) (a) Unrealized Holding Gain or Loss— Income Securities Fair Value Adjustment— Trading (b) Unrealized Holding Gain or Loss— Equity Securities Fair Value Adjustment— Available-for-Sale 15,000 15,000 15,000 15,000 (c) The Unrealized Holding Gain or Loss—Income account is reported in the income statement under “Other revenues and gains.” The Unrealized Holding Gain or Loss—Equity account is reported as a part of “Other comprehensive income” and as a component of stockholders’ equity until realized The Securities Fair Value Adjustment account is subtracted from the cost of the Available-for-Sale or Trading Securities account to arrive at fair value E17-7B (10–15 minutes) (a) December 31, 2014: Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income (b) During 2015: Cash Gain on Sale of Securities Trading Securities 8,000 8,000 33,200 2,200 31,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-5 E17-7B (Continued) (c) At December 31, 2015: Securities JAK stock Kibby stock Total of portfolio Previous securities fair value adjustment balance—Dr Securities fair value adjustment—Cr Cost $ 40,000 101,000 $141,000 Fair Value $ 47,600 95,400 $143,000 Unrealized Holding Gain or Loss— Income Securities Fair Value Adjustment (Trading) Unrealized Gain (Loss) ($ 7,600 (5,600) 2,000 ( 8,000 ($(6,000) 6,000 6,000 E17-8B (5–10 minutes) The unrealized gains and losses resulting from changes in the fair value of available-for-sale securities are recorded in an Unrealized Holding Gain or Loss account that is reported as other comprehensive income and as a separate component of stockholders’ equity until realized Therefore, the following adjusting entry should be made at the year-end: Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss—Equity 4,020 4,020 Unrealized Holding Gain or Loss—Equity is reported as other comprehensive income and as a separate component in stockholders’ equity and not included in net income The Securities Fair Value Adjustment (Available-for-Sale) account is a valuation account to the related investment account 17-6 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-9B (10–15 minutes) (a) The portfolio should be reported at the fair value of $273,500 Since the cost of the portfolio is $268,000, the unrealized holding gain is $5,500, of which $5,400 is already recognized Therefore, the December 31, 2014, adjusting entry should be: Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss—Equity 100 100 (b) The unrealized holding gain of $5,500 (including the previous balance of $5,400) should be reported as an addition to stockholders’ equity, and the Securities Fair Value Adjustment (Available-for-Sale) account balance of $5,500 should be added to the cost of the securities account ZORRO FOODS CORP Balance Sheet As of December 31, 2014 Current assets Available-for-sale securities $273,500 Stockholders’ equity Common stock Additional paid-in capital Retained earnings xxx,xxx xxx,xxx xxx,xxx xxx,xxx Add: Accumulated other comprehensive income Total stockholders’ equity 5,500* $xxx,xxx *Note: The unrealized holding gain could also be disclosed (c) Computation of realized gain or loss on sale of stock: Net proceeds from sale of Apple Cost of Apple Loss on sale of stock January 20, 2015 Cash Loss on Sale of Securities $31,100 33,600 $ (2,500) 31,100 2,500 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-7 Available-for-Sale Securities 17-8 33,600 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-10B (20–25 minutes) (a) ZORRO FOODS CORP Statement of Comprehensive Income For the Year Ended December 31, 2014 _ Net income $689,600 Other comprehensive income Unrealized holding gain arising during year 100 Comprehensive net income $689,700 (b) ZORRO FOODS CORP Statement of Comprehensive Income For the Year Ended December 31, 2015 Net income $235,000 Other comprehensive income Unrealized holding gain arising during year $26,600 Add: Reclassification adjustment for loss included in net income 2,500 29,100 Comprehensive net income $264,100 E17-11B (10–15 minutes) (a) The total purchase price of these investments is: Carrot: (25,000 X $21.60) + $3,650 = $543,650 Pepper: (1,000 X $6.50) + $890 = $7,390 Onions: (17,000 X $13.75) + $1,860 = $235,610 The purchase entries will be: March 31, 2014 Trading Securities Cash 543,650 May 10, 2014 Trading Securities Cash 7,390 543,650 7,390 August 25, 2014 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-9 Trading Securities Cash 17-10 235,610 235,610 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-11B (Continued) (b) Gross selling price of 10,000 shares at $26.25 Less: Commissions, taxes, and fees Net proceeds from sale Cost of 10,000 shares ($543,650 X 0.4) Gain on sale of stock August 25, 2014 Cash Trading Securities Gain on Sale of Stock $262,500 (1,550) 260,950 (217,460) $ 43,490 260,950 217,460 43,490 (c) Securities Carrot Pepper Onions Total portfolio value Previous securities fair value adjustment balance Securities fair value adjustment—Cr Cost $326,190* 7,390 235,610 $569,190 Fair Value $450,000 6,100 246,500 $702,600 Unrealized Gain (Loss) $123,810 ((1,290) 10,890 133,410 $133,410 *$543,650 X 0.6 = $326,190 December 31, 2014 Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income 133,410 133,410 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-11 E17-12B (15–20 minutes) Situation 1: Journal entries by People Tables: To record purchase of 750,000 shares of Robot Sofas at a cost of $8.50 per share: April 1, 2014 Available-for-Sale Securities Cash 6,375,000 6,375,000 To record the dividend revenue from Robot Sofas: August 8, 2014 Cash Dividend Revenue ($250,000 X 15%) 37,500 37,500 To record the investment at fair value: December 31, 2014 Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss—Equity 375,000 375,000* *($9.00 – $8.50) X 750,000 shares = $375,000 Situation 2: Journal entries by Mica Company: To record the purchase of 40% of Santos Corporation’s common stock: January 1, 2014 Investment in Santos Corp Stock Cash 2,600,000 2,600,000 Since Mica obtained significant influence over Santos Corp., Mica now employs the equity method of accounting 17-12 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-12B (Continued) To record the receipt of cash dividends from Santos Corp.: October 25, 2014 Cash (200,000 X $0.40) Investment in Santos Corp Stock 80,000 80,000 To record Mica’s share (40%) of Santos Corp.’s net income of $860,000: December 31, 2014 Investment in Santos Corp Stock (40% X $860,000) Revenue from Investment 344,000 344,000 E17-13B (20–25 minutes) (a) (b) (c) (d) $360,000, the increase to the Investment account If the payout ratio is 75%, then 75% of the net income is Parent Co.’s share of dividends = $270,000 Parent Co.’s share is 30%, so, Total net income X 30% = $360,000 Total net income = $360,000 ÷ 30% = $1,200,000 $270,000 ÷ 30% = $900,000, or $1,200,000 X 75% = $900,000 E17-14B (10–15 minutes) Trading Securities (1,000 shares X $22) Cash 22,000 Cash (300 shares X $25) Gain on Sale of Stock Trading Securities (300 X $22) 7,500 Securities Fair Value Adjustment (Trading Securities) ($26 – $22) X 700 Unrealized Holding Gain or Loss—Income 22,000 900 6,600 2,800 2,800 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-13 E17-15B (15–20 minutes) (a) Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income 18,500 (b) Cash ($500 X $230 less $2,650) Loss on Sale of Securities Trading Securities ($199,600 X 500/800) 112,350 12,400 (c) Cash ($300 X $220 less $3,230) Loss on Sale of Securities Trading Securities ($199,600 less $124,750) 62,770 12,080 18,500 124,750 74,850 (d) Securities Dora Corp., Common Boots and Boots, Preferred Total portfolio Previous securities fair value adjustment—Dr Securities fair value adjustment—Cr Cost Fair Value Unrealized Holding Gain (Loss) $268,500 100,000 $368,500 $272,000 103,900 $375,900 $ 3,500 3,900 7,400 Unrealized Holding Gain or Loss—Income Securities Fair Value Adjustment (Trading) 18,500 $(11,100) 11,100 11,100 E17-16B (15–20 minutes) (a) 17-14 June 18, 2015 Cash Dividend Revenue 150,000 November 29, 2015 Cash Dividend Revenue 150,000 150,000 150,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-16B (Continued) December 31, 2015 Unrealized Holding Gain or Loss— Equity Securities Fair Value Adjustment (Available-for-Sale) $27 X 125,000 = $3,375,000 $3,375,000 – $3,600,000 = $225,000 (b) 225,000 June 18, 2015 Cash Investment in Overload Inc 150,000 November 29, 2015 Cash Investment in Overload Inc 150,000 December 31, 2015 Investment in Overload Inc Revenue from Investment (25% X $1,200,000) (c) 225,000 150,000 150,000 300,000 Fair Value Method Investment amount (balance sheet) $3,375,000 Dividend revenue (income statement) 300,000 Revenue from investment (income statement) 300,000 Equity Method *$3,600,000* 300,000 *$3,600,000 + $300,000 – $150,000 – $150,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-15 E17-17B (10–15 minutes) Investment in UnderTech Stock Cash 280,000 Cash ($36,000 X 40%) Investment in UnderTech Stock 14,400 Investment in UnderTech Stock Revenue from Investment (40% X $120,000) 48,000 280,000 14,400 48,000 E17-18B (15–20 minutes) (a) Securities Fair Value Adjustment (Available-for-Sale) Available-for-Sale Securities Loss on Impairment ($500,000 – $425,000) Unrealized Holding Gain or Loss— Equity 75,000 75,000 75,000 75,000 (b) The new cost basis is $425,000 GAAP indicates that the difference between the carrying amount and the maturity value should not be recorded If the bonds are impaired, it is inappropriate to increase the asset back up to its original maturity value (c) Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss— Equity ($450,000 – $425,000) 17-16 25,000 25,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-19B (15–20 Minutes) (a) Investment in Azul Company Stock Unrealized Holding Gain or Loss ($221,000 – $200,000) (b) Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss—Equity ($285,000 – $271,000) (c) Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income ($260,0000 – $185,000) 21,000 21,000 14,000 14,000 75,000 75,000 E17-20B (15–20 minutes) (a) Net income before security gains or losses Sale of Investment in Tiger Inc stock ($278,000 – $260,000) Investment in Azul Company stock ($195,000 – $221,000) Net income (b) Unrealized Holding Gain or Loss Investment in Azul Stock ($195,000 – $221,000) $1,200,000 18,000 (26,000) $1,192,000 26,000 26,000 E17-21B (15–20 minutes) (a) Net income before security gains and losses Investment in debt securities ($59,000 – $60,000) Investment in Olive Company stock ($430,000 – $400,000) Bonds payable ($500,000 – $490,000) Net income (b) Bonds Payable Unrealized Holding Gain or Loss ($500,000 – $490,000) $360,000 (1,000) 30,000 10,000 $399,000 10,000 10,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-17 *E17-22B (15–20 minutes) (a) Put Option Cash 800 (b) Unrealized Holding Gain or Loss—Income Put Option ($800 – $550) 250 Put Option Unrealized Holding Gain or Loss— Income (5,000 X $1) 5,000 800 250 5,000 (c) Unrealized holding gain: $4,750 ($5,000 – $250) *E17-23B (20–25 minutes) (a) Fixed-rate debt Fixed rate (8% ÷ 2) Semiannual debt payment Swap fixed receipt Net income effect 6/30/12 $500,000 4% 20,000 20,000 $ Swap variable rate 5.6% X 1/2 X $500,000 6.2% X 1/2 X $500,000 Net interest expense $ 14,000 $ 14,000 (b) 12/31/12 $500,000 4% 20,000 20,000 $ $ 15,500 $ 15,500 Note: An interest rate swap in which a company changes its interest payments from fixed to variable is a fair value hedge because the changes in fair value of both the derivative and the hedged liability offset one another 17-18 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E17-24B (20–25 minutes) (a) and (b) Variable-rate debt Variable rate Debt payment 12/31/12 $1,000,000 6.2% ($ 62,000 12/31/12 ($1,000,000 6.9% $ 69,000 Debt payment Swap variable received Net income effect Swap payable—fixed Net interest expense ($ ($ ($ 62,000 (62,000) 70,000 70,000 ($ 69,000 (69,000) 70,000 70,000 Note: An interest swap in which a company changes its interest payments from variable to fixed is a cash flow hedge because interest costs are always the same *E17-25B (15–20 minutes) (a) Interest Expense Cash (6.0% X $5,000,000 X 1/2) 150,000 (b) Interest Expense Cash 37,500 (c) Unrealized Holding Gain or Loss— Income Swap Contract (d) Note Payable Unrealized Holding Gain or Loss—Income 150,000 37,500 122,000 122,000 122,000 122,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-19 *E17-26B (20–25 minutes) (a) (b) July 10, 2014 Call Option Cash September 30, 2014 Call Option Unrealized Holding Gain or Loss—Income ($1 X 700) Unrealized Holding Gain or Loss—Income Call Option ($700 – $410) (c) December 31, 2014 Call Option ($3 X 700) Unrealized Holding Gain or Loss—Income Unrealized Holding Gain or Loss—Income Call Option ($410 – $50) (d) January 31, 2015 Unrealized Holding Gain or Loss—Income Call Option ($1 X 700) 700 700 700 700 290 290 2,100 2,100 360 360 700 700 Unrealized Holding Gain or Loss—Income Call Option ($50 – $20) 30 Cash (700 X $3) Loss on Settlement of Call Option Call Option* 2,100 20 30 2,120 *Value of Call Option at settlement: Call Option 700 700 2,100 290 360 700 30 2,120 17-20 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) *E17-27B (25–30 minutes) (a) June 1, 2014 Memorandum entry to indicate entering into the futures contract (b) June 30, 2014 Futures Contract Unrealized Holding Gain or Loss— Equity [($750 – $700) X 100 ounces] (c) (d) September 30, 2014 Futures Contract Unrealized Holding Gain or Loss— Equity [($825 – $750) X 100 ounces] November 1, 2014 Gold Inventory Cash ($825 X 100 ounces) Cash Futures Contract [($825 – $700) X 100 ounces] 5,000 5,000 7,500 7,500 82,500 82,500 12,500 12,500 Note to instructor: In practice, futures contracts are settled on a daily basis; for our purposes, we show only one settlement for the entire amount (e) December 15, 2014 Cash Sales Revenue 710,000 710,000 Cost of Goods Sold Gold Inventory 318,000 Unrealized Holding Gain or Loss—Equity Cost of Goods Sold ($5,000 + $7,500) 12,500 318,000 12,500 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-21 *E17-27B (Continued) (f) 17-22 LOCKET JEWELRY CO Partial Income Statement For the Quarter Ended December 31, 2014 Sales revenue Cost of goods sold Gross profit $710,000 305,500* $404,500 *Cost of inventory Less: Futures contract adjustment Cost of goods sold $318,000 (12,500) $305,500 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) ... Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 17-7 Available-for-Sale Securities 17-8 33,600 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate. .. Corp., Mica now employs the equity method of accounting 17-12 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-12B... 29,881 32,000 1,106 30,894 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) E17-6B (10–15 minutes) (a) Unrealized