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Chapter 13: Q2CA (page 658)

(Equity Securities) Lexington Co. has the following securities outstanding on December 31, 2017 (its first year of operations).

Cost Fair Value

Greenspan Corp. stock \(20,000 \)19,000

Summerset Company stock 9,500 8,800

Tinkers Company stock 20,000 20,600

\(49,500 \)48,400

During 2018, Summerset Company stock was sold for \(9,200, the difference between the \)9,200 and the “fair value” of \(8,800being recorded as a “Gain on Sale of Investments.” The market price of the stock on December 31, 2018, was Greenspan Corp.stock \)19,900; Tinkers Company stock $20,500.

Instructions

(a) What justification is there for valuing equity securities at fair value and reporting the unrealized gain or loss as part ofnet income?

(b) How should Lexington Co. report this information in its financial statements on December 31, 2017? Explain.

(c) Did Lexington Co. properly account for the sale of the Summerset Company stock? Explain.

(d) Are there any additional entries necessary for Lexington Co. on December 31, 2018, to reflect the facts on the financialstatements in accordance with generally accepted accounting principles? Explain

Short Answer

Expert verified

All the entries are passed according to the generally accepted principles.

Step by step solution

01

Valuing equity securities at fair value

Available-for-securities are known as the “non-strategic “investment because the sale period is not fixed in these types of securities. It is sold according to the value of the securities. Hence, these securities are valued at fair value.

02

Step 2:Preparation of financial statements

Theunrealisedloss will be deducted from the company’s net income as other comprehensive losses in the income statement.

Income Statement
Lexington Co.
December 31, 2017

Net Income:

Other Comprehensive Loss

($1,100)

03

Entry for the sale of investment

No, the entry of the sale of stock is not correctly made. Because there is a loss on the sale of the store rather than gain on the sale of an investment. To calculate the amount of loss or gain, we compare the selling price with the cost price of the stock, not with the fair value of the stock.

04

Step 4:Necessary entries

There is no need to pass additional entries because all the necessary entries are given in the question according to the accepted accounting principles.

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Most popular questions from this chapter

Where can authoritative IFRS be found related to investments?

Presented below are two independent cases related to available-for-sale debt investments.

Case 1 Case 2

Amortized cost \(40,000 \)100,000

Fair value 30,000 110,000

Expected credit losses 25,000 92,000

For each case, determine the amount of impairment loss, if any

Question: The presentation of current and non-current liabilities in the statement of financial position (balance sheet):

  1. is shown only on GAAP financial statements.
  2. is shown on both a GAAP and an IFRS statement of financial position.
  3. is always shown with current liabilities reported first in an IFRS statement of financial position.

(d)includes contingent liabilities under IFRS.

Journal Entries for Fair Value and Equity Methods) The following are two independent situations.

Situation 1: Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of \(13 per

share on March 18, 2017. On June 30, Martinez declared and paid \)75,000 cash dividends to all stockholders. On December 31,

Martinez reported net income of \(122,000 for the year. At December 31, the market price of Martinez Fashion was \)15 per share.

Situation 2: Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares

of common stock at a total cost of \(9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of \)36,000

to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.

Instructions

Prepare all necessary journal entries in 2017 for both situations.

Question: E13-1 (L01) (Balance Sheet Classification of Various Liabilities) How would each of the following items be reported on the balance sheet? (a) Accrued vacation pay. (j) Premium offers outstanding. (b) Estimated taxes payable. (k) Discount on notes payable. (c) Service warranties on appliance sales. (l) Personal injury claim pending. (d) Bank overdraft. (m) Current maturities of long-term debts to be paid (e) Employee payroll deductions unremitted. from current assets. (f) Unpaid bonus to officers. (n) Cash dividends declared but unpaid. (g) Deposit received from customer to guarantee (o) Dividends in arrears on preferred stock. performance of a contract. (p) Loans from officers. (h) Sales taxes payable. (i) Gift certificates sold to customers but not yet redeemed.
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