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Chapter 12: Q23. (page 610)

Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders’ equity and income.

Short Answer

Expert verified

Stockholders’ income and their equity directly depend on the sale of the securities. Based on the sale, the stockholder’s equity is increased or decreased.

Step by step solution

01

Definition of stockholder’s equity

The amount invested by the company owners in the company is known as the stockholder’s equity.

02

Impact on stockholder’s equity and income

Whenever any security is transferred to another security, this transaction is firstly recorded on the fair value. If there is any unrealized profit and loss in the transfer, it affects the stockholder equity. If there is a transfer of security, then the shareholder equity increases. On the other hand, if there is a loss in the transfer, then shareholder’s equity decreases. The amount of loss and gain on the transfer of the security is known as the income of the company.

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Most popular questions from this chapter

Question: Why are held-to-maturity investments applicable only to debt securities?

Question: As the recently appointed auditor for Bryan Corporation, you have been asked to examine selected accounts before the 6-month financial statements of June 30, 2017, are prepared. The controller for Bryan Corporation mentions that only one account is kept for intangible assets. The account is shown below.

Intangible assets

Debit

Credit

Balance

Jan. 4

Research and development costs

940,000

940,000

Jan. 5

Legal costs to obtain patent

75,000

1,015,000

Jan. 31

Payment of 7 months’ rent on property leased by Bryan

91,000

1,106,000

Feb. 11

Premium on common stock

250,000

856,000

March 31

Unamortized bond discount on bonds due March 31, 2037

84,000

940,000

April 30

Promotional expenses related to start-up of business

207,000

1,147,000

June 30

Operating losses for first 6 months

241,000

1,388,000

Instructions

Prepare the entry or entries necessary to correct this account. Assume that the patent has a useful life of 10 years.

What is meant by the term “underlying” as it relates to derivative financial instruments.

Use the information in IFRS12-6. Assume that at the end of the year following the impairment (after recording amortization expense), the estimated recoverable amount for the patent is \(130,000. Prepare Kenoly’s journal entry, if needed.

Kenoly Corporation owns a patent that has a carrying amount of \)300,000. Kenoly expects future net cash flows from this patent to total \(210,000 over its remaining life of 10 years. The recoverable amount of the patent is \)110,000. Prepare Kenoly’s journal entry, if necessary, to record the loss on impairment.

The following is selected information for Alatorre Company.

1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?

2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?

3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?

4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?

Instructions:

Answer the questions asked about each of the factual situations.
See all solutions

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