Chapter 17 Solutions

EXERCISE 17-1 (510 minutes)

(a) 1

(b) 2

(c) 1

(d) 2

(e) 3

(f) 2

EXERCISE 17-2 (1015 minutes)

(a)

January 1, 2012

Debt Investments (Held-to-Maturity)

300,000
Cash..
(b)

December 31, 2012

Cash.
Interest Revenue..
(c)

300,000

30,000
30,000

December 31, 2013

Cash.
Interest Revenue..

30,000
30,000

EXERCISE 17-9 (1015 minutes)

(a) The portfolio should be reported at the fair value of $54,500. Since the cost of the portfolio is $53,000,
the unrealized holding gain is $1,500, of which $200 is already recognized. Therefore, the December 31,
2012 adjusting entry should be:
Fair Value Adjustment (Available-for-Sale)..
Unrealized Holding Gain or LossEquity.

1,300
1,300

EXERCISE 17-9 (Continued)

(b) The unrealized holding gain of $1,500 (including the previous balance of $200) should be reported as
an addition to stockholders equity and the Fair Value Adjustment (Available-for-Sale) account balance of
$1,500 should be added to the cost of the securities account.
WENGER, INC.
Balance Sheet
As of December 31, 2012
Current assets:
Equity investments. $54,500
Stockholders equity:
Common stock..

xxx,xxx

Paid-in capital in excess of par

Common stock.
xxx,xxx
Retained earnings
xxx,xxx
Accumulated other comprehensive income..
1,500*
Total stockholders equity..
$xxx,xxx
*Note: The unrealized holding gain could also be disclosed.
(c) Computation of realized gain or loss on sale of stock:
Net proceeds from sale of security A.. $15,300
Cost of security A 17,500
Loss on investments ($ 2,200)
January 20, 2013
Cash.
Loss on Sale of Investments.
2,200
Equity Investments (Available-for-Sale).
17,500

15,300

EXERCISE 17-12 (1520 minutes)

Situation 1: Journal entries by Hatcher Cosmetics:
To record purchase of 20,000 shares of Ramirez Fashion at a cost of $14 per share:
March 18, 2012
Equity Investments (Available-for-Sale)..
280,000
Cash.

280,000

EXERCISE 17-12 (Continued)

To record the dividend revenue from Ramirez Fashion:
June 30, 2012
Cash
Dividend Revenue ($75,000 X 10%).
7,500
To record the investment at fair value:
December 31, 2012
Fair Value Adjustment (Available-for-Sale)..
Unrealized Holding Gain or LossEquity..

20,000
20,000*

*($15 $14) X 20,000 shares = $20,000

Situation 2: Journal entries by Holmes, Inc.:
To record the purchase of 25% of Nadal Corporations common stock:
January 1, 2012

7,500

Equity Investments (Nadal Corp.).

Cash [(30,000 X 25%) X $9].

67,500
67,500

Since Holmes, Inc. obtained significant influence over Nadal Corp., Holmes, Inc. now employs the equity
method of accounting.
To record the receipt of cash dividends from Nadal Corporation:
June 15, 2012
Cash ($36,000 X 25%)
Equity Investments (Nadal Corp.)..

9,000
9,000

To record Holmess share (25%) of Nadal Corporations net income of $85,000:

December 31, 2012
Equity Investments (Nadal Corp.)
Revenue from Investment (25% X $85,000)..

21,250
21,250

EXERCISE 17-16 (1520 minutes)

(a)

December 31, 2012

Equity Investments (Available-for-Sale)..

1,250,000
Cash.

1,250,000

June 30, 2013

Cash
Dividend Revenue..

40,000
40,000

December 31, 2013

Cash
40,000
Dividend Revenue ($50,000 X $.80)..
40,000
Fair Value Adjustment (Available-for-Sale)
100,000
Unrealized Holding Gain or Loss
Equity..
$27 X 50,000 = $1,350,000
$1,350,000 $1,250,000 = $100,000

100,000

EXERCISE 17-16 (Continued)

(b)

December 31, 2012

Equity Investments (Handerson Stock) 1,250,000

Cash..

1,250,000

June 30, 2013

Cash.

40,000

Equity Investments (Handerson Stock).

40,000

December 31, 2013

Cash.
Equity Investments (Handerson Stock).
40,000
Equity Investments (Handerson Stock)
146,000
Revenue from Investment
(20% X $730,000)..
(c)

40,000

146,000

Fair Value Method

Investment amount (balance sheet)
Dividend revenue (income statement)
Revenue from investment
(income statement)

*$1,250,000 + $146,000 $40,000 $40,000

$1,350,000
80,000

Equity Method
*$1,316,000*
0
146,000