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Chapter 13: Q18Q (page 658)
Question: Under what conditions should a contingent liability be recorded?
Answer
Contingent liability is recorded when:
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(Equity Investment) Oregon Co. had purchased 200 shares of Washington Co. for \(40 each this year (Oregon
Co. does not have significant influence). Oregon Co. sold 100 shares of Washington Co. stock for \)45 each. At year-end, the price
per share of the Washington Co. the stock had dropped to $35.
Instructions
Prepare the journal entries for these transactions and any year-end adjustments.
(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly
Company during 2017.
Cost Fair Value
(at purchase date) (at December 31)
Investment in Arroyo Company stock \(100,000 \) 80,000
Investment in Lee Corporation stock 250,000 300,000
Investment in Woods Inc. stock 180,000 190,000
Total \(530,000 \)570,000
Instructions
(Assume a zero balance for any Fair Value Adjustment account.)
(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to
report this security using the fair value option?
(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,
assuming that Lilly did not select the fair value option for these investments?
On January 1, 2017, Roosevelt Company purchased 12% bonds, having a maturity value of \(500,000, for \)537,907.40.
The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest
received January 1 of each year. Roosevelt’s business model is to hold these bonds to collect contractual cash flows.
Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare a bond amortization schedule.
(c) Prepare the journal entry to record the interest revenue and the amortization for 2017.
(d) Prepare the journal entry to record the interest revenue and the amortization for 2018
Question: Explain how trading debt securities are accounted for and reported?
Why is the liabilities section of the balance sheet of primary significance to bankers?
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