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Chapter 12: 1E (page 610)

(Investment Classifications)For the following investments, identify whether they are:

1. Trading debt securities.

2. Available-for-sale debt securities.

3. Held-to-maturity debt securities.

4. None of the above.

Each case is independent of the other.

(a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases,

which is expected next month, it will be sold.

(b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30%

of its outstanding stock.

(c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.

(d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money

has been tight recently and they may need to be sold.

(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

(f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project

planned 10 years from now.

Short Answer

Expert verified
  1. Trading Debt Securities
  2. None of these
  3. Available-for-Sale Debt Securities
  4. Available-for-Sale Debt Securities
  5. Held-to-maturity Debt Securities
  6. Held-to-maturity Debt Securities

Step by step solution

01

Step-by-Step Solution:Step 1: Definition of Investment

When a person invests their money to earn a return on it, this is known as the investment.

02

Classification of the part a

a) In this, the type of investment is trading debt securities because this is purchased when the price is dropped and sold when the price increases.

03

Step 3:Classification of part b

b) In this option, none of these is chosen because there is no detail about the sale of the investment.

04

Step 4:Classification of part c

c) This type of investment is an available-for-sale investment because the investment will be available for sale in the next month.

05

Step 5:Classification of part d

d) This type of investment is a held-to-maturity investment because the investment will hold for the long term.

06

Step 6:Classification of part e

e) This type of investment is a held-to-maturity investment because the investment will hold till the maturity of the investment.

07

Step 7:Classification of part f

f) This type of investment is a held-to-maturity investment because the investment will hold for a longer period or till maturity.

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Most popular questions from this chapter

Question: (Accounting for Research and Development Costs) Czeslaw Corporation’s research and development department has an idea for a project it believes will culminate in a new product that would be very profitable for the company. Because the project will be very expensive, the department requests approval from the company’s controller, Jeff Reid.

Reid recognizes that corporate profits have been down lately and is hesitant to approve a project that will incur significant expenses that cannot be capitalized due to the requirements of the authoritative literature. He knows that if they hire an outside firm that does the work and obtains a patent for the process, Czeslaw Corporation can purchase the patent from the outside firm and record the expenditure as an asset. Reid knows that the company’s own R&D department is first-rate, and he is confident they can do the work well.

Instructions

Answer the following questions.

  1. Who are the stakeholders in this situation?
  2. What are the ethical issues involved?
  3. What should Reid do?

Explain how to account for the impairment of held-to-maturity debt security.

Use the information provided in BE12-1. Assume that at January 1, 2019, the carrying amount of the patent on Taylor Swift’s books is \(43,200. In January, Taylor Swift spends \)24,000 successfully defending a patent suit. Taylor Swift still feels the patent will be useful until the end of 2026. Prepare the journal entries to record the $24,000 expenditure and 2019 amortization.

Use the information from BE17-5 but assume the stock is nonmarketable. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment, if any.

Merck and Johnson & Johnson

Question: Merck & Co., Inc. and Johnson & Johnson are two leading producers of healthcare products. Each has considerable assets, and each expends considerable funds each year toward the development of new products. The development of a new healthcare product is often very expensive, and risky. New products frequently must undergo considerable testing before approval for distribution to the public. For example, it took Johnson & Johnson 4 years and \(200 million to develop its 1-DAY ACUVUE contact lenses. Below are some basic data compiled from the financial statements of these two companies.

(all dollars in millions)

Johnson & Johnson

Merck

Total assets

\)53,317

\(42,573

Total revenue

47,348

22,939

Net income

8,509

5,813

Research and development expense

5,203

4,010

Intangible assets

11,842

2,765

Instructions

  1. What kinds of intangible assets might a healthcare products company have? Does the composition of these intangibles matter to investors—that is, would it be perceived differently if all of Merck’s intangibles were goodwill than if all of its intangibles were patents?
  2. Suppose the president of Merck has come to you for advice. He has noted that by eliminating research and development expenditures the company could have reported \)4 billion more in net income. He is frustrated because much of the research never results in a product, or the products take years to develop. He says shareholders are eager for higher returns, so he is considering eliminating research and development expenditures for at least a couple of years. What would you advise?
  3. The notes to Merck’s financial statements note that Merck has goodwill of $1.1 billion. Where does recorded goodwill come from? Is it necessarily a good thing to have a lot of goodwill on a company’s books?
See all solutions

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