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Chapter 14: Q7E (page 718)

(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information

regarding its equity investments.

December 31, 2017

Investments Cost Fair Value Unrealized Gain (Loss)

Clemson Corp. stock \(20,000 \)19,000 \((1,000)

Colorado Co. stock 10,000 9,000 (1,000)

Buffaloes Co. stock 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 (1,400)

Previous fair value adjustment balance –0–

Fair value adjustment—Cr. \)(1,400)

During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.

stock—\)19,100; Buffaloes Co. stock—$20,500. None of the equity investments result in significant influence.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.

Short Answer

Expert verified

Loss on the sale of the stock is $600. Securities fair value adjustment debited by $1,400 and unrealized holding gain/ loss income credited by $1,400. Cash debited by $9,400, loss on sale debited by $600 and trading security credited by $10,000.

Step by step solution

01

Adjusting entry of the stocks on December 31, 2018

As it is given in the question that the securities fair value adjustment has a credit amount of $1,400 means the company has an unrealized income of $5,000.

Date

Description

Debit

Credit

December 31, 2017

Securities fair value adjustment

$1,400

Unrealized holding gain/loss- Income

$1,400

Being entry of fair value adjustment

02

Entry of the sale of the stock

Date

Description

Debit

Credit

December 31, 2018

Cash

$9,400

Loss on sale

$600

Trading security

$10,000

Being entry of sale of stock

03

Adjusting entry of the year ending December 31, 2018

Date

Description

Debit

Credit

December 31, 2017

Securities fair value adjustment

$1,000

Unrealized holding gain/loss- Income

$1,000

Being entry of fair value adjustment

To calculate the unrealized gain or loss first of all find the difference between fair value and the cost of the remaining stocks the subtract it from the least year adjustment.

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Most popular questions from this chapter

Matt Ryan Corporation is interested in building its own soda can manufacturing plant adjacent to its existing plant in Partyville, Kansas. The objective would be to ensure a steady supply of cans at a stable price and to minimize transportation costs. However, the company has been experiencing some financial problems and has been reluctant to borrow any additional cash to fund the project. The company is not concerned with the cash flow problems of making payments, but rather with the impact of adding additional long-term debt to its balance sheet.

The president of Ryan, Andy Newlin, approached the president of the Aluminum Can Company (ACC), its major supplier, to see if some agreement could be reached. ACC was anxious to work out an arrangement, since it seemed inevitable that Ryan would begin its own can production. The Aluminum Can Company could not afford to lose the account.

After some discussion, a two-part plan was worked out. First, ACC was to construct the plant on Ryan’s land adjacent to the existing plant. Second, Ryan would sign a 20-year purchase agreement. Under the purchase agreement, Ryan would express its intention to buy all of its cans from ACC, paying a unit price which at normal capacity would cover labor and material, an operating management fee, and the debt service requirements on the plant. The expected unit price, if transportation costs are taken into consideration, is lower than current market. If Ryan did not take enough production in any one year and if the excess cans could not be sold at a high enough price on the open market, Ryan agrees to make up any cash shortfall so that ACC could make the payments on its debt. The bank will be willing to make a 20-year loan for the plant, taking the plant and the purchase agreement as collateral. At the end of 20 years, the plant is to become the property of Ryan.

Instructions

  1. What are project financing arrangements using special-purpose entities?
  2. What are take-or-pay contracts?
  3. Should Ryan record the plant as an asset together with the related obligation?
  4. If not, should Ryan record an asset relating to the future commitment?
  5. What is meant by off-balance-sheet financing?

On January 1, Martinez Inc. issued \(3,000,000, 11% bonds for \)3,195,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report bonds payable of:

(a) \(3,185,130. (c) \)3,173,550.

(b) \(3,184,500. (d) \)3,165,000.

Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?

Question: What are the general rules for measuring and recognizing gain or loss by a debt extinguishment with modification?

(b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?
See all solutions

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