ACCT 4050 Lecture Notes - Lecture 2: The Home Depot, Equity Method, Income Statement
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Amalgamated General Corporation is a consulting firm that alsooffers financial services through its credit division. From time totime the company buys and sells securities intending to earnprofits on short-term differences in price. The following selectedtransactions relate to Amalgamated's investment activities duringthe last quarter of 2016 and the first month of 2017. The onlysecurities held by Amalgamated at October 1 were $45 million of 10%bonds of Kansas Abstractors, Inc., purchased on May 1 at facevalue. The company's fiscal year ends on December 31.
2016
Oct. 18 Purchased 2 million preferred shares of MillworkVentures Company for $72 million as a speculative investment to besold under suitable circumstances.
Oct. 31 Received semiannual interest of $2.7 million from theKansas Abstractors bonds.
Nov. 1 Purchased 10% bonds of Holistic Entertainment Enterprisesat their $66 million face value, to be held until they mature in2018. Semiannual interest is payable April 30 and October 31.
Nov. 1 Sold the Kansas Abstractors bonds for $41 million becauserising interest rates are expected to cause their fair value tocontinue to fall.
Dec. 1 Purchased 12% bonds of Household Plastics Corporation attheir $70 million face value, to be held until they mature in 2028.Semiannual interest is payable May 31 and November 30.
Dec. 20 Purchased U. S. Treasury bonds for $6.6 million astrading securities, hoping to earn profits on short-termdifferences in prices.
Dec 21. Purchased 4 million common shares of NXS Corporation for$64 million as trading securities, hoping to earn profits onshort-term differences in prices.
Dec. 23 Sold the Treasury bonds for $6.9 million.
Dec. 29 Received cash dividends of $3 million from the MillworkVentures Company preferred shares.
Dec. 31 Recorded any necessary adjusting entry(s) and closingentries relating to the investments. The market price of theMillwork Ventures Company preferred stock was $34.50 per share and$17.50 per share for the NXS Corporation common. The fair values ofthe bond investments were $63.7 million for Household PlasticsCorporation and $17.7 million for Holistic EntertainmentEnterprises.
2017
Jan. 7 Sold the NXS Corporation common shares for $60million.
| Required: |
Prepare the appropriate journal entry for each transaction orevent. (If no entry is required for a transaction/event,select "No journal entry required" in the first account field.Enter your answers in millions rounded to 1 decimal place, (i.e.,5,500,000 should be entered as 5.5).) |
You are working for The Wellington Company on temporary assignment while one of the accountants is on family leave. You have been asked to review the companyâs investment
The balance sheet caption used to report long-term investments in stocks not intended as a source of cash in the normal operations of the business.
journal entries and provide necessary information to the accountant preparing the financial statements.
PAGE 8
JOURNAL
| DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | |
|---|---|---|---|---|---|
| 1 | Jan. 17 | Investment-Red Rock Co. Stock | 37,400.00 | ||
| 2 | Cash | 37,400.00 | |||
| 3 | Feb. 5 | Investment-Sunset Village Bonds | 34,000.00 | ||
| 4 | Interest Receivable | 290.00 | |||
| 5 | Cash | 34,290.00 | |||
| 6 | 23 | Investment-Mays and Co. Stock | 25,500.00 | ||
| 7 | Cash | 25,500.00 | |||
| 8 | Mar. 31 | Cash | 340.00 | ||
| 9 | Interest Receivable | 290.00 | |||
| 10 | Interest Revenue | 50.00 | |||
| 11 | Apr. 6 | Investment in Minions Corp. Stock | 170,000.00 | ||
| 12 | Cash | 170,000.00 | |||
| 13 | 30 | Cash | 750.00 | ||
| 14 | Dividend Revenue | 750.00 | |||
| 15 | Jul. 1 | Cash | 18,162.00 | ||
| 16 | Loss on Sale of Investments | 2,448.00 | |||
| 17 | Interest Revenue | 210.00 | |||
| 18 | Investment-Sunset Village Bonds | 20,400.00 | |||
| 19 | Aug. 14 | Cash | 41,300.00 | ||
| 20 | Gain on Sale of Investments | 1,800.00 | |||
| 21 | Investment-Harding Construction Stock | 39,500.00 | |||
| 22 | 27 | Cash | 3,400.00 | ||
| 23 | Investment in Minions Corp. Stock | 3,400.00 | |||
| 24 | Sep. 22 | Cash | 29,000.00 | ||
| 25 | Gain on Sale of Investments | 3,500.00 | |||
| 26 | Investment-Mays and Co. Stock | 25,500.00 | |||
| 27 | 30 | Cash | 130.00 | ||
| 28 | Interest Revenue | 130.00 | |||
| 29 | Nov. 1 | Investment in Minions Corp. Stock | 15,300.00 | ||
| 30 | Income of Minions Corp. | 15,300.00 | |||
| 31 | Dec. 31 | Unrealized Loss on Available-For-Sale Investments | 3,275.00 | ||
| 32 | Valuation Allowance for Available-For-Sale Investments | 3,275.00 | |||
| 33 | 31 | Valuation Allowance for Trading Investments | 2,150.00 | ||
| 34 | Unrealized Gain on Trading Investments | 2,150.00 |
The accountant preparing the financial statements has asked you to provide the fair value as of the end of the year for the investments. Present the information as it would be shown on the financial statements. Last year, The Wellington Company reported costs of $68,000 in trading investments and $82,000 in available-for-sale investments. Refer to the journal entries shown on The Wellington Company panel. Assume that all investments sold during this year were trading investments and that purchases during the year were new investments.
| Trading Securities | |
| Trading investments at cost | ? |
| Plus valuation allowance for trading investments | 2150 |
| Trading investments at fair value | ? |
| Available-For-Sale Securities | |
| Available-for-sale investments at cost | ? |
| Less valuation allowance for available-for-sale investments | 3275 |
| Available-for-sale investments at fair value | ? |
posting for sec times any incomplete work will bereported answer all 2 parts investment 1 to 7 and finacial statmentand valution 1 to 6
You are working for The Wellington Company on temporaryassignment while one of the accountants is on family leave. Youhave been asked to review the companyâs investment journal entriesand provide necessary information to the accountant preparing thefinancial statements.
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JOURNAL
ACCOUNTING EQUATION
| DATE | DESCRIPTION | POST.REF. | DEBIT | CREDIT | ASSETS | LIABILITIES | EQUITY | |
|---|---|---|---|---|---|---|---|---|
1 | Jan. 17 | Investments-Red Rock Co. Stock | 38,500.00 | ? | ||||
2 | Cash | 38,500.00 | ? | |||||
3 | Feb. 5 | Investments-Sunset Village Bonds | 35,000.00 | ? | ||||
4 | Interest Receivable | 300.00 | ? | |||||
5 | Cash | 35,300.00 | ? | |||||
6 | 23 | Investments-Mays and Co. Stock | 26,250.00 | ? | ||||
7 | Cash | 26,250.00 | ? | |||||
8 | Mar. 31 | Cash | 350.00 | ? | ||||
9 | Interest Receivable | 300.00 | ? | |||||
10 | Interest Revenue | 50.00 | ? | |||||
11 | Apr. 6 | Investment in Minions Corp. Stock | 175,000.00 | ? | ||||
12 | Cash | 175,000.00 | ? | |||||
13 | 30 | Cash | 750.00 | ? | ||||
14 | Dividend Revenue | 750.00 | ? | |||||
15 | Jul. 1 | Cash | 18,690.00 | ? | ||||
16 | Loss on Sale of Investment | 2,520.00 | ? | |||||
17 | Interest Revenue | 210.00 | ? | |||||
18 | Investments-Sunset Village Bonds | 21,000.00 | ? | |||||
19 | Aug. 14 | Cash | 41,300.00 | ? | ||||
20 | Gain on Sale of Investments | 1,800.00 | ? | |||||
21 | Investments-Harding Construction Stock | 39,500.00 | ? | |||||
22 | 27 | Cash | 3,500.00 | ? | ||||
23 | Investment in Minions Corp. Stock | 3,500.00 | ? | |||||
24 | Sep. 22 | Cash | 29,750.00 | ? | ||||
25 | Gain on Sale of Investments | 3,500.00 | ? | |||||
26 | Investments-Mays and Co. Stock | 26,250.00 | ? | |||||
27 | 30 | Cash | 140.00 | ? | ||||
28 | Interest Revenue | 140.00 | ? | |||||
29 | Nov. 1 | Investment in Minions Corp. Stock | 15,750.00 | ? | ||||
30 | Income of Minions Corp. | 15,750.00 | ? | |||||
31 | Dec. 31 | Unrealized Loss on Available-For-Sale Investments | 3,275.00 | ? | ||||
32 | Valuation Allowance for Available-For-Sale Investments | 3,275.00 | ? | |||||
33 | 31 | Valuation Allowance for Trading Investments | 2,150.00 | ? | ||||
34 | Unrealized Gain on Trading Investments | 2,150.00 | ? |
Investments
Review the journal entries on The Wellington Company panel thenanswer the following questions.
| 1. | Which item is likely to be atrading security? Mays and Co. Why? |
| 2. | How are brokerage commission feestreated on stock sales vs. stock purchases? |
| 3. | Based on these journal entries,what is the companyâs investment in Sunset Village bonds at the endof the year? |
| 4. | The journal entry on Aug. 27 mostlikely shows |
| 5. | As an investment, bonds are alwayscategorized as |
| 6. | What is the companyâs investment inMinions Corp. at the end of the year? |
7. Which of the following investments are likely to beavailable-for-sale securities? Check all that apply.
Harding Construction stock
Mays and Co. stock
Cannot be determined
Red Rock Co. stock
Sunset Village bonds
Minions Corp. stock
Financial Statements and Valuation
The accountant preparing the financial statements has asked youto provide the fair value as of the end of the year for theinvestments. Present the information as it would be shown on thefinancial statements. Last year, The Wellington Company reportedcosts of $68,000 in trading investments and $82,000 inavailable-for-sale investments. Refer to the journal entries shownon The Wellington Company panel. Assume that all investments soldduring this year were trading investments and that purchases duringthe year were new investments.
1. Select the correct label for each line and fill in theamount. In classifying the investments, choose a categorizationwhich seems most likely, given the pattern of transactions in thejournal entries. Enter all amounts as positive numbers. If anamount box does not require an entry, leave it blank.
| Trading Securities | |
| Available-For-Sale Securities | |
| 2. Where on the balance sheet dotrading securities appear? | |
| 3. Where is the gain or loss fromthe change in value of available-for-sale securities reported inthe financial statements? | |
| 4. Where are held-to-maturitysecurities reported? Based on the journal entries for this year,does the company have any held-to-maturity securities? | |
| 5. Where are securities held forstrategic reasons reported in the financial statements when usingthe equity method? Based on the journal entries for this year, doesThe Wellington Company have any equity securities? |
6. Which of the following items does not affect net income?Check all that apply.
only unrealized gains or losses for all investments
realized loss on available-for-sale securities
realized gain on trading securities
none of these answers is correct
both gains and losses of any sort for all investments
unrealized loss on trading securities
unrealized gain on available-for-sale securities