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Chapter 13: Q9E (page 658)

(Available-for-Sale Debt Securities Entries and Financial Statement Presentation) At December 31, 2017, the

available-for-sale debt portfolio for Steffi Graf, Inc. is as follows.

Security Cost Fair Value Unrealized Gain (Loss)

A \(17,500 \)15,000 (\(2,500)

B 12,500 14,000 1,500

C 23,000 25,500 2,500

Total \)53,000 \(54,500 1,500

Previous fair value adjustment balance—Dr. 400

Fair value adjustment—Dr. \)1,100

On January 20, 2018, Steffi Graf, Inc. sold security A for $15,100. The sale proceeds are net of brokerage fees.

Instructions

(a) Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value.

(b) Show the balance sheet presentation of the investment-related accounts at December 31, 2017. (Ignore notes presentation.)

(c) Prepare the journal entry for the 2018 sale of security A

Short Answer

Expert verified

Unrealized holding loss is $1,100. Loss on the sale of security A is $2,400. Securities fair value adjustment debited by $1,100 and unrealised holding gain / loss income credited by $1,100.

Step by step solution

01

Fair value adjustment entry

Date

Description

Debit

Credit

December 31, 2017

Securities fair value adjustment

$1,100

Unrealized holding gain/loss- Income

$1,100

Being entry of fair value adjustment

02

Balance sheet representation

Assets

Current Assets

Available for sale securities

$54,500

Liabilities and Stockholder’s Equity

Accumulated other comprehensive incomes

$1,500

03

Entry of the sale of the securities

Date

Description

Debit

Credit

2018

Cash

$15,100

Loss on sale

$2,400

Available for sale securities

$17,500

Being entry of the sale of security A

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Most popular questions from this chapter

Southeast Airlines Inc. awards members of its Flightline program a second ticket at half price, valid for 2 years anywhere on its flight system, when a full-price ticket is purchased. How would you account for the full-fare and half-fare tickets?

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

Question: (Lessee-Lessor Entries, Operating Lease) Cleveland Inc. leased a new crane to Abriendo Construction under a 5-year noncancelable contract starting January 1, 2017. Terms of the lease require payments of \(33,000 each January 1, starting January 1, 2017. Cleveland will pay insurance, taxes, and maintenance charges on the crane, which has an estimated life of 12 years, a fair value of \)240,000, and a cost to Cleveland of \(240,000. The estimated fair value of the crane is expected to be \)45,000 at the end of the lease term. No bargain-purchase or -renewal options are included in the contract. Both Cleveland and Abriendo adjust and close books annually at December 31. Collectibility of the lease payments is reasonably certain, and no uncertainties exist relative to unreimbursable lessor costs. Abriendo’s incremental borrowing rate is 10%, and Cleveland’s implicit interest rate of 9% is known to Abriendo.

Instructions

  1. Identify the type of lease involved and give reasons for your classification. Discuss the accounting treatment that should be applied by both the lessee and the lessor.

Carow Corporation purchased, as a held-for-collection investment, \(60,000 of the 8%, 5-year bonds of Harrison, Inc.

for \)65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow’s journal entries for (a) the purchase

of the investment, and (b) the receipt of semiannual interest and premium amortization
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