Solution manual accounting 25th editon warren chapter 15

CHAPTER 15
INVESTMENTS AND FAIR VALUE ACCOUNTING
DISCUSSION QUESTIONS
1.

A company may temporarily have excess cash that is not needed for use in its current
operations. Instead of letting excess cash remain idle in a checking account, most companies
invest their excess cash in temporary investments. The primary objective of investing in
temporary investments is to:
a. earn interest revenue.
b. receive dividends.
c. realize gains from increases in the market price of the securities.

2.

A gain or loss can occur when the selling price of the bond differs from the book value (cost) of
the bond. The price of bond investments can change due to changes in the market rate of interest.
If the proceeds from the sale exceed the book value (cost) of the bonds, then a gain is recorded.

3.

The equity method is used for equity investments representing more than 20% and less than 50%
of the outstanding shares of the investee.

4.

Under the cost method, a dividend received is treated as dividend revenue. Under the equity
method, a dividend received is not treated as dividend revenue, but is treated as a reduction in
the book value of the investment.

5.

An investment greater than 50% of the investee is considered to be an investment that exerts
control. Thus, the financial statements of the investee (subsidiary) are consolidated (combined)
with that of the investor (parent company).

6.

Both portfolios are reported at fair value. However, changes in the fair value of trading securities
during a period are reported as an unrealized gain or loss on the income statement. For available-forsale securities, changes in the fair value of the securities are reported in stockholders’ equity and,
thus, are not recognized as part of net income.

7.

A credit balance in Valuation Allowance for Available-for-Sale Investments is subtracted from
Available-for-Sale Investments (at cost). The net reported amount is the available-for-sale securities
at fair value.

8.

A debit balance in Unrealized Gain (Loss) on Available-for-Sale Investments would be reported as a
reduction in the Stockholders’ Equity section of the balance sheet, after Retained Earnings.

9.

Current GAAP requires fair value accounting for impaired assets. Current GAAP allows financial
assets and liabilities to be reported at fair value. The assets and liabilities reported at fair value are
becoming a more significant portion of many companies’ balance sheets. International Financial
Reporting Standards are also moving more aggressively toward fair value accounting. As a result
of the desire to converge U.S. and international standards, the United States is also moving
toward fair value reporting.

10.

Fair values may not be readily obtainable for some assets or liabilities, which causes financial
statement valuations to become more subjective. In addition, comparability between financial
statements among different companies may be hampered by different methods of determining fair
value. Lastly, using fair value can result in greater fluctuations in reported results, making predictions
of future trends potentially more difficult.

15-1
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CHAPTER 15

Investments and Fair Value Accounting

PRACTICE EXERCISES
PE 15–1A
a.

b.

Investments—Tyler City Bonds
Interest Receivable
Cash
Cash*
Interest Receivable
Interest Revenue

400,000
2,000
402,000
12,000
2,000
10,000

* $400,000 × 6% × 1/2
c.

Cash*
Loss on Sale of Investments
Interest Revenue
Investments—Tyler City Bonds

197,000
4,000
1,000
200,000

* Sales proceeds ($200,000 × 98%)…………………………$196,000
1,000
Accrued interest……………………………………………
Total proceeds from sale……………………………………$197,000

PE 15–1B
a.

b.

Investments—Iceline Inc. Bonds
Interest Receivable
Cash
Cash*
Interest Receivable
Interest Revenue

120,000
1,000
121,000
3,000
1,000
2,000

* $120,000 × 5% × 1/2
c.

Cash*
Interest Revenue
Gain on Sale of Investments
Investments—Iceline Inc. Bonds
* Sales proceeds ($60,000 × 101%)……………………… $60,600
500
Accrued interest……………………………………………
Total proceeds from sale………………………………… $61,100

61,100
500
600
60,000

PE 15–2A
Mar.

20 Investments—Thorlite Company Stock*
Cash

300,250
300,250

*(10,000 shares × $30 per share) + $250

May

30 Cash*
Dividend Revenue

2,500
2,500

*$0.25 per share × 10,000 shares

June

15 Cash*
Gain on Sale of Investments
Investments—Thorlite Company Stock**

179,800

29,675
150,125

*(5,000 shares × $36) – $200
**5,000 shares × ($300,250 ÷ 10,000 shares)

PE 15–2B
Sept.

12 Investments—Aspen Company Stock*
Cash

100,200
100,200

*(2,000 shares × $50 per share) + $200

Oct.

15 Cash*
Dividend Revenue

1,000
1,000

*$0.50 per share × 2,000 shares

Nov.

10 Cash*

Loss on Sale of Investments
Investments—Aspen Company Stock**
*(1,200 shares × $42) – $150
**1,200 shares × ($100,200 ÷ 2,000 shares)

50,250
9,870
60,120


PE 15–3A
Jan.

Dec.

2 Investment in ARO Company Stock
Cash

300,000
300,000

31 Investment in ARO Company Stock
Income of ARO Company
Recorded 30% of ARO Company
income, 30% × $60,000.

18,000

31 Cash*
Investment in ARO Company Stock

4,500

18,000

4,500

*30% × $15,000

PE 15–3B
Jan.

Dec.

2 Investment in Fain Company Stock
Cash

500,000
500,000

31 Investment in Fain Company Stock
Income of Fain Company
Recorded 40% of Fain Company income,
40% × $140,000.

56,000

31 Cash*
Investment in Fain Company Stock

20,000

56,000

20,000

*40% × $50,000

PE 15–4A
2014
Dec.

31 Unrealized Loss on Trading Investments*
Valuation Allowance for Trading Investments
To record decrease in fair value of
trading investments.

* Trading investments at fair value, December 31, 2014…………… $203,600
Trading investments at cost, December 31, 2014………………
Unrealized loss on trading investments……………………………

212,500
$ (8,900)

8,900
8,900


PE 15–4B
2014

Dec.

31 Valuation Allowance for Trading Investments*
Unrealized Gain on Trading Investments
To record increase in fair value of
trading investments.

4,800
4,800

* Trading investments at fair value, December 31, 2014………………………… $46,300
Trading investments at cost, December 31, 2014……………………………
Unrealized gain on trading investments…………………………………………

41,500
$ 4,800

PE 15–5A
2014
Dec.

31 Unrealized Gain (Loss) on Available-for-Sale
Investments*
Valuation Allowance for Available-for-Sale
Investments
To record decrease in fair value of
available-for-sale securities.

5,800
5,800

* Available-for-sale investments at fair value,
December 31, 2014………………………………………………………………
Available-for-sale investments at cost, December 31, 2014…………………
Unrealized gain (loss) on available-for-sale investments……………………

$72,600
78,400
$ (5,800)

PE 15–5B
2014
Dec.

31 Valuation Allowance for Available-for-Sale
Investments*
Unrealized Gain (Loss) on Available-for-Sale
Investments
To record increase in fair value of
available-for-sale securities.

2,090
2,090

* Available-for-sale investments at fair value,
December 31, 2014………………………………………………………………
Available-for-sale investments at cost, December 31, 2014…………………
Unrealized gain (loss) on available-for-sale investments……………………

$26,350

24,260
$ 2,090


PE 15–6A
Dividend Yield =

Dividend Yield =

PE 15–6B
Dividend Yield =

Dividend Yield =

Dividends per Share of Common Stock
Market Price per Share of Common Stock
$4.00
$100

= 0.04, or 4%

Dividends per Share of Common Stock
Market Price per Share of Common Stock
$1.20
$40

= 0.03, or 3%


EXERCISES

Ex. 15–1
a.

b.

c.

2014
Apr.

2014
Oct.

2014
Oct.

1 Investments—Clayton Co. Bonds
Cash

1 Cash
Interest Revenue
$75,000 × 6% × 6/12.

1 Cash*
Loss on Sale of Investments
Investments—Clayton Co. Bonds

75,000
75,000

2,250
2,250

24,500
500
25,000

*$25,000 × 98%

d.

2014
Dec.

31 Interest Receivable
Interest Revenue
Accrued interest.

750
750

Ex. 15–2
a.

b.

c.

2014
Sept.

2014
Dec.

2015
Mar.

1 Investments—Pluto Corp. Bonds
Cash

31 Interest Receivable
Interest Revenue
Accrued interest, $150,000 × 8%
× 4/12.
1 Cash
Interest Receivable
Interest Revenue*

150,000
150,000

4,000
4,000

6,000
4,000
2,000

*$150,000 × 8% × 2/12

d.

2015
Mar.

1 Cash*
Gain on Sale of Investments
Investments—Pluto Corp. Bonds
*$75,000 × 102%

76,500
1,500
75,000


Ex. 15–3
a.

2014
June

20 Investments—Thomas County Bonds
Interest Receivable*
Cash

60,000
500
60,500

* $60,000 × 6% × 50/360

b.

Nov.

1 Cash*
Interest Receivable
Interest Revenue

1,800
500
1,300

* $60,000 × 6% × 1/2
c.

Dec.

1 Cash*
Loss on Sale of Investments
Interest Revenue
Investments—Thomas County Bonds

14,475
600
75
15,000

* Bond sale ($15,000 × 0.97)………………………………… $14,550
Accrued interest……………………………………………
75

(150)
Less brokerage commission……………………………
Total proceeds……………………………………………… $14,475

d.

Dec.

31 Interest Receivable
Interest Revenue

450
450


Ex. 15–4
2014
Jan.

a.

31 Investments—Government Bonds
Interest Receivable*
Cash

75,000
375
75,375

* $75,000 × 6% × 30/360

July

1 Cash*
Interest Receivable
Interest Revenue

2,250
375
1,875

* $75,000 × 6% × 1/2
Aug.

29 Cash*
Loss on Sale of Investments
Interest Revenue
Investments—Government Bonds

34,650
700
350
35,000

* Bond sale ($35,000 × 98%)………………………………… $34,300
350
Accrued interest……………………………………………
Total proceeds from sale…………………………………… $34,650

2014
Dec.

b.

31 Interest Receivable
Interest Revenue
Accrued interest, $40,000 ×
6% × 1/2.

1,200
1,200

Ex. 15–5
1

Interest earned (April 1 to September 1) ……………………………………………
2
Interest earned on sold bonds (September 1 to November 1) …………………
3
Interest earned on remaining bonds (September 1 to December 31) …………

$1,500

Total interest earned in 2014……………………………………………………………

$2,475

1
2
3

$80,000 × 4.5% × 5/12
$30,000 × 4.5% × 2/12
$50,000 × 4.5% × 4/12

225
750


Ex. 15–6
a.

Mar.

10 Investments—Dickson Co. Stock*
Cash

192,240
192,240

*(6,000 shares × $32.00) + $240

b.

July

23 Cash*
Dividend Revenue

8,400
8,400

*$1.40 × 6,000 shares

c.

Nov.

22 Cash*
Gain on Sale of Investments
Investments—Dickson Co. Stock**

91,000
14,104
76,896

*(2,400 shares × $38.00) – $200
**($192,240 ÷ 6,000 shares) × 2,400 shares

Ex. 15–7
Feb.

8 Investments—Tybee Company Stock*
Cash

148,920
148,920

*(2,400 shares × $62.00) + $120

Apr.

22 Cash*
Dividend Revenue

1,440
1,440

*$0.60 per share × 2,400 shares

May

26 Cash*
Loss on Sale of Investments
Investments—Tybee Company Stock**
*(1,000 shares × $52.00) – $60
**1,000 shares × ($148,920 ÷ 2,400 shares)

51,940
10,110
62,050


Ex. 15–8
Jan.

16 Investments—McDowell Inc. Stock*
Cash

75,140
75,140

* (3,000 shares × $25) + $140
Mar.

23 Cash*
Dividend Revenue

1,380
1,380

* 3,000 shares × $0.46
May

25 Investments—McDowell Inc. Stock*
Cash

35,160
35,160

* (1,000 shares × $35) + $160
July

10 Cash*
Gain on Sale of Investments
Investments—McDowell Inc. Stock**

127,800
45,628
82,172

* (3,200 shares × $40) – $200
** 3,000 shares purchased……………………………… $75,140
7,032
200 shares × ($35,160 ÷ 1,000 shares)……………
Total cost……………………………………………… $82,172

Oct.

12 Cash*
Dividend Revenue

* 800 shares × $0.51

408
408


Ex. 15–9
Feb.

24 Investments—Tett Co. Stock*
Cash

85,150
85,150

*(1,000 shares × $85) + $150

May

16 Investments—Issacson Co. Stock*
Cash

90,100
90,100

*(2,500 shares × $36) + $100

July

14 Cash*
Gain on Sale of Investments
Investments—Tett Co. Stock**

39,925
5,865
34,060

*(400 shares × $100) – $75
**400 shares × ($85,150 ÷ 1,000 shares)

Aug.

12 Cash*
Loss on Sale of Investments
Investments—Issacson Co. Stock**

24,295
2,735
27,030

*(750 shares × $32.50) – $80
**750 shares × ($90,100 ÷ 2,500 shares)

Oct.

31 Cash*
Dividend Revenue

240
240

*(1,000 shares – 400 shares) × $0.40

Ex. 15–10
a.

2.

1.

Investment in Larson Corp. Stock
Income of Larson Corp.
Record 40% share of Larson Corp.
net income, $1,200,000 × (160,000 shares ÷
400,000 shares).

480,000

Cash*

Investment in Larson Corp. Stock

320,000

480,000

320,000

*160,000 shares × $2.00

b.

Stieg’s investment in Larson Corp. represents 40% of the outstanding shares
of Larson Corp. An investment amount between 20% and 50% of the outstanding
common stock of the investee is presumed to represent significant influence. The
equity method is appropriate when the investor can exercise significant influence
over the investee.


Ex. 15–11
a.

2014
Jan.

4 Investment in Hi Energy Co. Stock*
Cash

5,456,000
5,456,000

*124,000 shares × $44 per share

July

2 Cash*
Investment in Hi Energy Co. Stock

136,400
136,400

*$440,000 × ($124,000 ÷ 400,000 shares)

Dec.

b.

31 Investment in Hi Energy Co. Stock
Income of Hi Energy Co.
Record 31% share of Hi Energy
Co. net income, $800,000 ×
(124,000 shares ÷ 400,000 shares).

248,000
248,000

Initial acquisition cost……………………………………………………………… $5,456,000
Equity earnings for 2014…………………………………………………………
248,000
(136,400)

Cash dividends received……………………………………………………………
Investment in Hi Energy Co. Stock balance, December 31, 2014…………… $5,567,600

Ex. 15–12
a.

2014
Jan.

June

6 Investment in Gator Co. Stock
Cash
30 Cash*
Investment in Gator Co. Stock

212,000
212,000
8,160
8,160

*$24,000 × 34%

Dec.

b.

31 Loss of Gator Co.
Investment in Gator Co. Stock
Record 34% share of Gator Co.

net loss, $56,000 × 34%.

19,040
19,040

Initial acquisition cost..............................................................................
Equity loss for 2014..................................................................................

$212,000
(19,040)

Cash dividends received..........................................................................

(8,160)

Investment in Gator Co. Stock balance, December 31, 2014.................

$184,800


Ex. 15–12 (Concluded)
c.

Under the equity method, the investor will record their proportionate share of the
net increase (or decrease) of the book value of the investee resulting from
earnings and dividend distributions. The fair value method uses market price
information to value the investment in the investee. These two methods result
in different valuations because the equity method is based upon book
accounting, while the fair value approach uses market information. The two
methods need not be related to each other over time. While changes in book

value can influence market prices, many other variables can influence the
market price of a stock.

Ex. 15–13

(in millions)

Investment in Raven Company stock, December 31, 2014…………………………
Plus equity earnings in Raven Company……………………………………………
Less dividends received*…………………………………………………………………
Investment in Raven Company stock, December 31, 2015………………………
* The Raven Company investment is accounted for under the equity method. Since
there were no purchases or sales of Raven Company stock, a dividend must have
been received. This would explain how the ending balance of the investment
account went from $264 to $281, with $25 million in equity earnings. Since the
investment is accounted for under the equity method, the fair value is not used
for valuation purposes.

Ex. 15–14
a.
b.
c.
d.
e.
f.
g.
h.
i.

$6,000

$29,000
$35,000
$132,000
$39,000
$185,000
$6,000
$211,000
$273,000

$35,000 [from (c)] – $29,000 [from (b)]
$17,000 – (– $12,000)
$245,000 – $210,000
$144,000 – $12,000
$28,000 + $11,000
$168,000 + $17,000
$17,000 – $11,000
$205,000 + $6,000
$245,000 + $28,000

$264
25
(8)
$281


Ex. 15–15
a.

2014
Feb.

Dec.

b.

24 Investments—Raiders, Inc. Stock
Cash
14,500 shares × $38 per share.
31 Valuation Allowance for Trading
Investments
Unrealized Gain on Trading
Investments
To record increase in fair value of
trading investments, 14,500 shares ×
($42 per share – $38 per share).

551,000
551,000

58,000
58,000

The unrealized gain or unrealized loss for trading investments is disclosed
in the income statement as “other income” (or a separate item if significant).
Unrealized losses would be deducted in determining net income, while
unrealized gains would be added in determining net income.

Ex. 15–16
a.

b.

2014
Dec.

2015
May

31 Unrealized Loss on Trading Investments
Valuation Allowance for Trading
Investments
To record decrease in fair value
of trading investments, $84,800 –
$86,000.

10 Investments—Giants, Inc.*
Cash
*(1,000 shares × $24 per share) + $150

1,200
1,200

24,150
24,150


Ex. 15–17
a.

2014

Dec.

31 Valuation Allowance for Trading
Investments*
Unrealized Gain on Trading Investments

17,500
17,500

* $337,500 – $320,000, as determined from the following schedule:
Cost

1

Arden Enterprises, Inc. …………………………………………………………

$150,000

$170,000

French Broad Industries, Inc. …………………………………………………

66,000

71,500

Pisgah Construction, Inc. ………………………………………………………
Total…………………………………………………………………………..

104,000

96,000

$320,000

$337,500

1
2
3

b.

Fair Value
(Dec. 31, 2014)
2
3

5,000 shares × $34 per share
2,750 shares × $26 per share
1,600 shares × $60 per share

There would be no adjusting entry for December 31, 2015, if the market prices
remained unchanged from December 31, 2014. This is because the unrealized
gain from the difference between the cost and market has already been
recognized on December 31, 2014. Only changes in market prices would be
recognized subsequent to December 31, 2014.

Ex. 15–18
a.

Retained earnings, December 31, 2013………………………………………… $ 825,000
245,000
Plus net income………………………………………………………………………
$1,070,000
65,000
Less dividends………………………………………………………………………
Retained earnings, December 31, 2014………………………………………… $1,005,000

b.

Trading investments (at cost)*……………………………………………………
Less valuation allowance for trading investments……………………………
Trading investments (at fair value)………………………………………………
* $346,000 – $66,000

$ 280,000
72,500
$ 207,500


Ex. 15–19
a.
b.
c.
d.
e.
f.
g.
h.

i.
j.

$37,100
$44,600
$102,000
$12,000
$75,000
($11,000)
($9,000)
($16,400)
$85,600
$199,000

$44,600 – $7,500
$220,000 – $175,400
$90,000 + $12,000
Same as valuation allowance for available-for-sale investments
$86,000 – $11,000
Same as valuation allowance for available-for-sale investments
($21,000) + $12,000
Same as unrealized gain (loss) from available-for-sale investments
$102,000 – $16,400
$220,000 – $21,000

Ex. 15–20
a.
2014
Sept.

Dec.

b.

12 Investments—Bengals Inc. Stock
Cash
33,100 shares × $13 per share.
31 Unrealized Gain (Loss) on Available-forSale Investments
Valuation Allowance for Available-for-Sale
Investments
33,100 shares × ($11 per share – $13 per
share).

430,300
430,300

66,200
66,200

Unrealized Gain (Loss) on Available-for-Sale Investments is reported in the Stockholde
Equity section of the balance sheet, separately from the retained earnings or paid-in
capital accounts. On December 31, 2014, the account would show a debit balance of
$66,200, which would be subtracted from stockholders’ equity.


Ex. 15–21
a. 1.
2014
Dec.

31 Valuation Allowance for Available-forSale Investments
Unrealized Gain (Loss) on Availablefor-Sale Investments
$93,400 – $89,120.

4,280
4,280

2.
2015
June

12 Investments—Rogue Wave Inc.*
Cash

65,350
65,350

*(1,450 shares × $45 per share) + $100

b.

Unrealized gains and losses for available-for-sale securities are accumulated over
time and reported as a credit (positive) or debit (negative) balance in the Stockholders’
Equity section. As a result, the changes in fair value are not reflected on the income
statement, as is the case with trading securities. Bypassing the income statement
is supported on the grounds that available-for-sale securities will be held for a longer
time than trading securities; thus, fluctuations in market prices have a greater
opportunity to “cancel out” over time.

Ex. 15–22
a.

2014
Dec.

31 Unrealized Gain (Loss) on Available-forSale Investments
Valuation Allowance for Available-forSale Investments*

4,250
4,250

* $259,450 – $263,700, as determined from the following schedule:

Dust Devil, Inc. ……………………………………………………………………
Gale Co. ………………………………………………………………………….
Whirlwind Co. ……………………………………………………………………
Total…………………………………………………………………………..
1
2
3

b.

Cost

Fair Value
(Dec. 31, 2014)

$ 81,700

68,000
114,000

$ 76,000
63,750 2
119,700 3

$263,700

$259,450

1

1,900 shares × $40 per share
850 shares × $75 per share
2,850 shares × $42 per share

There is no income statement impact from the December 31, 2014, adjusting
entry. Unrealized Gain (Loss) on Available-for-Sale Investments is reported in
the Stockholders’ Equity section of the balance sheet. On December 31,
2014, Unrealized Gain or Loss on Available-for-Sale Investments would be
disclosed as follows:
Unrealized gain (loss) on available-for-sale investments…………………… $(4,250)


Ex. 15–23
GALILEO COMPANY

a.

Balance Sheet (selected items)
December 31, 2014
Assets

Current assets:
Available-for-sale investments, at cost
Plus valuation allowance for available-for-sale
investments*

$82,000
5,720

$87,720

* Computation:
Market:
Hawking Inc.: 900 shares × $50……………………………………………
Pavlov Co.: 1,780 shares × $24……………………………………………
Cost ($44,000 + $38,000)…………………………………………………………
Unrealized gain……………………………………………………………………

$45,000
42,720
$87,720
82,000
$ 5,720

GALILEO COMPANY

b.

Balance Sheet (selected items)
December 31, 2014
Stockholders’ Equity
Retained earnings
Unrealized gain (loss) on available-for-sale
investments

$300,000
5,720

Ex. 15–24
COPERNICUS CORPORATION
Balance Sheet (selected Stockholders’ Equity items)
December 31, 2014
Common stock
Paid-in capital in excess of par
Retained earnings*
Unrealized gain (loss) on available-for-sale investments**
Total
* $340,000 + $180,000
** $40,000 + ($160,000 – $225,000), or $160,000 – $185,000

$ 50,000
250,000
520,000
(25,000)
$795,000

Ex. 15–25
Dividend Yield =

Dividend Yield =

Cash Dividends per Share of Common Stock
Market Price per Share of Common Stock
$2.44
$93.49

=

2.6%

Ex. 15–26
a.

Year 1: Dividend Yield = $0.52 ÷ $30.48 = 1.71%
Year 2: Dividend Yield = $0.52 ÷ $27.91 = 1.86%

b.

Dividends per share remained constant from Year 1 to Year 2. In addition,
the dividend yield increased from 1.71% in Year 1 to 1.86% in Year 2. The
increase in the dividend yield is a result of a slight decrease in the stock
price. Microsoft provides a small return to the shareholder in terms of a
dividend yield and an additional return in terms of price appreciation of the
stock.

Ex. 15–27

The investor would receive a return on the investment through share price
appreciation as internally generated funds are used to fund growth and earnings
opportunities. Thus, investors in eBay would likely approve of this policy,
because the company is able to earn superior returns with internally generated
earnings beyond what investors could likely earn on their own by investing
dividend distributions.


Appendix Ex. 15–28
CHEWCO CO.
For the Year Ended December 31, 2014
Net income
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments*
Comprehensive income

$50,000
24,000
$74,000

* 2,000 shares × ($124 per share – $112 per share)

Appendix Ex. 15–29
VALUR CO.
For the Year Ended December 31, 2014
Net income
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments*
Comprehensive income
* $200,000 – $185,000

$210,000
15,000
$225,000


PROBLEMS
Prob. 15–1A
1.

2014
Mar.

1 Investments—Buncombe Co. Bonds
Interest Receivable
Cash
16 Investments—French Broad Bonds
Interest Receivable
Cash

Aug.

1 Cash*
Interest Receivable
Interest Revenue

50,000
250
50,250
84,000

175
84,175
1,500
250
1,250

*$50,000 × 6% × 1/2

31 Cash*
Loss on Sale of Investment
Interest Revenue
Investments—Buncombe Co. Bonds

19,900
200
100
20,000

*($20,000 × 0.99) + $100

Sept.

1 Cash*
Interest Receivable
Interest Revenue

2,100
175
1,925

*$84,000 × 5% × 1/2

Dec.

31 Interest Receivable
Interest Revenue

750

31 Interest Receivable
Interest Revenue

1,400

750

1,400


Prob. 15–1A (Concluded)
2015
Feb.

1 Cash*
Interest Receivable
Interest Revenue

900
750
150

*$30,000 × 6% × 1/2

Mar.

1 Cash*
Interest Receivable
Interest Revenue

2,100
1,400
700

*$84,000 × 5% × 1/2

2.

If the bonds are classified as available-for-sale securities, then the portfolio
of bonds would need to be adjusted to fair value. This would be accomplished
by using a valuation allowance account and an unrealized gain (loss) account as
part of stockholders’ equity. If the fair value were greater than the cost of the
bond portfolio, the two accounts would be positive, and thus added to investments
and stockholders’ equity, respectively. If the fair value were less than the cost of the
bond portfolio, the two accounts would be negative, and thus subtracted from
investments and stockholders’ equity, respectively.


Prob. 15–2A
1.
2014

Mar.

14 Investments—Wilkomm Inc.*
Cash

200,500
200,500

*(5,000 shares × $40 per share) + $500

Apr.

24 Investments—McMarsh Inc.*
Cash

90,198
90,198

*(1,800 shares × $50 per share) + $198

June

1 Cash*
Loss on Sale of Investments
Investments—Wilkomm Inc.**

98,700
5,560
104,260

*(2,600 shares × $38.00 per share) – $100
**2,600 shares × ($200,500 ÷ 5,000 shares)

30 Cash*
Dividend Revenue

840
840

*(5,000 shares – 2,600 shares) × $0.35

Dec.

31 Unrealized Loss on Trading Investments
Valuation Allowance for Trading
Investments*

7,038
7,038

* $179,400 – $186,438, in table below

Wilkomm Inc. …………………
McMarsh Inc. …………………

Number
of
Shares

Cost

per
Share

2,400
1,800

$40.10
2
$50.11

Total…………………………

1
2

$200,500 ÷ 5,000 shares = $40.10 per share
$90,198 ÷ 1,800 shares = $50.11 per share

1

Fair Value
per Share

Cost

Fair
Value

$38
$49

$ 96,240
90,198

$ 91,200
88,200

$186,438

$179,400