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Intermediate Accounting 10th Edition Loren A Nikolai, D. Bazley and Jefferson P. Jones - Solutions

Briefly describe how to determine and record the gain or loss on the sale of an investment in available-for-sale securities.
When are investments in bonds held to maturity purchased at a premium? How does the amortization of a premium under the effective interest method affect interest revenue?
When are investments in bonds held to maturity purchased at a discount? How does the amortization of a discount under the effective interest method affect interest revenue?
Briefly describe the two methods available to determine interest revenue and account for premiums and discounts on investments in bonds held to maturity.
Briefly describe how to record the transfer of an investment in a debt security (a) From the held-to-maturity category to the available-for-sale category, and (b) From the available-for-sale category to the held-to-maturity category.
Show the balance sheet disclosures of an investment in available-for-sale securities that a company classifies as current and has a fair value in excess of cost.
Discuss the rationale behind the use of the equity method for an investment in common stock.
Briefly describe the accounting for an investment in common stock under the equity method.
Identify the facts and circumstances that would preclude an investor from using the equity method, even if it owns more than a 20% investment in an investee.
Discuss the appropriate accounting treatment to use when (a) An investor acquires enough additional common stock during a year to change from using the fair value method to using the equity method, and (b) An investor using the equity method sells enough common stock so that its portion of
Why is the cash surrender value of a life insurance policy on which the company is the beneficiary carried as an investment? How does the company determine the increase in this amount and the amount of insurance expense determined each year?
What is a fund? Distinguish between a fund and an appropriation of retained earnings.
(Multiple Choice)1. On its December 31, 2006 balance sheet, Fay Company appropriately reported a $2,000 credit balance in its Allowance for Change in Value of Investment. There was no change during 2007 in the composition of Fay€™s portfolio of marketable equity securities held as
Midwest Bank invests in trading securities. At the beginning of December 2007, the bank held no trading securities. During December of 2007, it entered into the following trading securities transactions:Dec. 10 Purchased 500 shares of C Company common stock for $76 per shareDec. 21 Purchased 800
Southern Bank invests in trading securities and prepares quarterly financial statements. At the beginning of the fourth quarter of 2007, the bank held as trading securities 200 shares of Company E common stock that had originally cost $5,500. At that time, these securities had a fair value of
On December 31, 2006 Marsh Company held 1,000 shares of X Company common stock in its portfolio of long-term investments in available-for-sale securities. The stock had cost $15 per share and has a current market value of $13 per share. The December 31, 2006 balance sheet showed the
At the beginning of 2007 Ace Company had the following portfolio of investments in available-for-sale securities (common stock):During 2007 the following transactions occurred:May 3 Purchased C securities (common stock) for $13,500July 16 Sold all of the A securities for $25,000Dec. 31 Received
At the end of 2006 Terry Company prepared the following schedule of investments in available-for-sale securities (common stock):During 2007, the following transactions occurred:June 8 Purchased O securities (common stock) for $50,000Oct. 11 Sold all of the M securities for $35,400Dec. 31 Received
On March 31, 2007 the Brodie Corporation acquired bonds with a par value of $400,000 for $425,800. The bonds are due December 31, 2012, carry a 12% annual interest rate, pay interest on June 30 and December 31, and are being held to maturity. The accrued interest is included in the acquisition
On January 1, 2007 the Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of interest, pay interest semiannually on June 30 and December 31, are due December 31, 2010 and are
On November 1, 2006 the Reid Corporation acquired bonds with a face value of $700,000 for $673,618.61. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest semiannually on April 30 and October 31, were purchased to be held to maturity, and are due October 31,
On January 1, 2007 Rodgers Company purchased $200,000 face value, 10%, three-year bonds for $190,165.35, a price that yields a 12% effective annual interest rate. The bonds pay interest semiannually on June 30 and December 31.Required1. Record the purchase of the bonds.2. Prepare an investment
On January 1, 2007 Lynch Company acquired 13% bonds with a face value of $50,000. The bonds pay interest on June 30 and December 31 and mature on December 31, 2009. Lynch Company paid $51,229.35, a price that yields a 12% effective annual interest rate.Required1. Record the purchase of the
The Glover Corporation purchased bonds with a face value of $300,000 for $307,493.34 on January 1, 2007. The bonds carry a face rate of interest of 12%, pay interest semiannually on June 30 and December 31, were purchased to be held to maturity, are due December 31, 2009, and were purchased to
On December 31, 2006 the Leslie Company held an investment in bonds of Kaufmann Company which it categorized as being held to maturity. At that time, the 8%, $100,000 face value bonds had a carrying value of $107,023.56 and were being amortized using the effective interest method based on a yield
The Miller Corporation acquired 30% of the outstanding common stock of the Crowell Corporation for $160,000 on January 1, 2007 and obtained significant influence. The purchase price of the shares was equal to their book value. During 2007, the following information is available for Crowell:Mar. 31
On January 1, 2007 the Field Company acquired 40% of the North Company by purchasing 8,000 shares for $144,000 and obtained significant influence. On the date of acquisition, Field calculated that its share of the excess of the fair value over the book value of North’s depreciable assets was
On January 1, 2007 Jones acquires a 30% interest in Fink Company by purchasing 3,000 of its 10,000 common shares for $16 per share and obtains significant influence. On the date of acquisition, the net assets of Fink Company were as shown here:During 2007 Fink Company earned income of $22,000 and
On January 1, 2006 the Taylor Corporation purchased $20,000 of the Kalanda Corporation’s 12% convertible bonds for $19,760. The bonds pay interest semiannually each December 31 and June 30 and are due December 31, 2010. Each $1,000 bond is convertible into 15 shares of the Kalanda Corporation’s
On March 2, 2007 the Dawson Corporation acquired 5,000 common shares, representing a 1% interest in the Foreman Corporation, for $60,000. On May 1, 2007 Foreman issued a 20% stock dividend, and on December 31, 2007 the market value was $10 per share. On February 1, 2008 Dawson sold 1,500 shares for
The Westford Corporation purchases life insurance policies on its officers, and these policies all carry a cash surrender value clause. At the beginning of 2007, Westford paid $13,300 in life insurance premiums for one year. During 2007 the cash surrender value of the policies increased from
The following information is available concerning the Nunan Corporation’s sinking fund:Jan. 1, 2007 Established a sinking fund to retire an outstanding bond issue by contributing $425,000Feb. 3, 2007 Purchased securities for $400,000July 30, 2007 Sold securities originally costing $48,000 for
Anglar Company has a $3 million 7% bank loan from Castle Rock Bank. On January 1, 2007, when the $3 million loan has three years remaining, Anglar contracts with Susan Investment Bank to enter into a three-year interest-rate swap with a $3 million notional amount. Anglar agrees to receive from
The investment manager of 4th National Bank invests some of the bank’s financial resources in trading securities. During the last quarter of 2007 the following transactions occurred in regard to these trading securities:Nov. 5 Purchased 200 shares of M Company common stock at $86 per shareNov. 19
The 8th State Bank prepares interim financial statements and follows an investment strategy of investing in trading securities. At the beginning of the third quarter of 2007, the bank held the following portfolio of trading securities:During the third quarter of 2007, the bank entered into the
Holly Company invests its excess cash in marketable securities. At the beginning of 2007 it had the following portfolio of investments in available-for-sale securities:During 2007, the following transactions occurred:Mar. 31 Purchased U Company 8% bonds with a face value of $10,000 for $10,000
The Noonan Corporation prepares quarterly financial statements and invests its excess funds in marketable securities. At the end of 2006 Noonan's portfolio of investments available for sale consisted of the following equity securities:During the first half of 2007, Noonan engaged in the following
Manson Incorporated reported the following current asset on its December 31, 2006 balance sheet:Temporary investment in available-for-sale securities (at cost) ...... $63,475Less: Allowance for change in value of investment .......... (2,980)Temporary investment in available-for-sale securities (at
The following information relates to the Starr Company’s Investment in Available-for-Sale Bonds account for 2007:Jan. 1 Purchased $30,000 face value of Bradford Company 8% bonds at 97 to yield 10%; interest on the bonds is payable each June 30 and December 31Jan. 1 Purchased $40,000 face value
During 2007 the Dana Company decided to begin investing its idle cash in marketable securities. The information contained below relates to Dana’s 2007 marketable security transactions:Feb. 3 Purchased 3,000 shares of Blair Company common stock for $12 per shareApr. 1 Purchased $20,000 face value
During the first quarter of 2007 the Payne Corporation entered into the following transactions:Jan. 1 Acquired 150 shares of Block Corporation common stock for $20 per share, 200 shares of Bridle Corporation common stock for $30 per share, and 100 shares of Alpha Corporation common stock for $25
Premium Amortization on Bond Investment and Partial Sale of the Investment Using the Effective Interest Method On January 1, 2007 the Hyde Corporation purchased bonds with a face value of $300,000 for $308,373.53. The bonds are due June 30, 2010, carry a 13% stated interest rate, and were
The Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2007. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were issued to yield 12%, and are due January 1, 2010.Required1. Prepare an investment interest revenue
On October 1, 2006 the Jenkins Corporation bought bonds with a face value of $200,000 for $199,175, which included accrued interest. The bonds are due December 31, 2008 and carry a face rate of interest of 10.5%. Interest on the bonds is payable semiannually on June 30 and December 31. The company
The Mercer Corporation acquired $400,000 of the Park Company’s bonds on June 30, 2006 for $409,991.12. The bonds carry a 12% stated interest rate, pay interest semiannually on June 30 and December 31, were issued to yield 11%, and are due June 30, 2009.Required1. Prepare an investment interest
On January 1, 2007 the Mark Corporation purchased bonds with a face value of $500,000 for $475,413.60. The bonds are due December 31, 2009, carry a 10% stated rate, and were purchased to yield 12%. Interest is payable semiannually on June 30 and December 31. On January 1, 2009, in contemplation of
On January 1, 2006 Snow Corporation purchased 20% of the 200,000 outstanding shares of common stock of Garvey Company for $4.00 per share as a long-term investment. The purchase price of the shares was equal to their book value. The following information is available about Garvey Company for 2006
On January 1, 2007 Doe Company purchased 3,000 of the 10,000 common shares outstanding of the Ray Company for $15 per share and obtained significant influence. Doe amortizes its patents over 10 years. The December 31, 2006 condensed balance sheet of the Ray Company is shown here:Doe Company was
The Harper Corporation acquired 80,000 of the 200,000 outstanding shares of the Moore Corporation on April 1, 2007 for $400,000 and obtained significant influence. The following information concerning the Moore Corporation is available on the date of acquisition:Subsequently, Moore Corporation paid
On January 1, 2007 the Easton Corporation acquired 30% of the outstanding common shares of Feeley Corporation for $140,000, and 25% of the outstanding common shares of Holmes Company for $82,500 and obtained significant influence in both situations. On this date the financial statements of Feeley
On January 1, 2007 Lion Company paid $600,000 for 10,000 shares of Wolf Company’s voting common stock, which was a 10% interest in Wolf. Lion does not have the ability to exercise significant influence over the operating and financial policies of Wolf. Lion received dividends of $1.00 per share
On January 1, 2006 Kehoe Corporation insured the lives of its president, vice president, controller, and treasurer for $100,000 each. The annual premium on each policy is $4,200, payable on January 1 of each year, and the cash surrender values for the policies increase by 4% of the annual premiums
Danburg Company has a $5 million 9% bank loan outstanding with its local bank. On January 1, 2007, when the loan has four years remaining, Danburg contracts with Bradford Investment Bank to enter into a four-year interest-rate swap with a $5 million notional amount. Danburg agrees to receive from
FASB Statement No. 115 changed accounting principles with respect to certain marketable securities. An important part of this Statement is the distinction between investments categorizedas trading, available for sale, or held to maturity. Required1. What types of securities are covered by this
Cane Company has two portfolios of investments in marketable equity securities. It classifies one as trading securities and the other as available-for-sale securities. Cane does not have the ability to exercise significant influence over any of the companies in either portfolio. It sold some
FASB Statement No. 115 was issued to change accounting methods and procedures with respect to investments in debt and equity securities. An important part of the Statement concerns the distinction between trading securities, available for-sale securities, and held-to-maturity securities.Required1.
The most common method of accounting for unconsolidated subsidiaries is the equity method.RequiredAnswer the following questions with respect to the equity method.1. Under what circumstances does a company apply the equity method?2. At what amount does a company record the initial investment and
Walker Company has an investment portfolio of equity securities available for sale. Walker does not own more than 5% of the outstanding voting stock for any of the securities in the portfolio. At the beginning of the year, the aggregate market value of the portfolio exceeded its cost. It received
Houston Company has a portfolio of investments in available-for-sale securities that it classifies as a noncurrent asset. Houston owns less than 5% of the outstanding voting stock of each company’s securities in the portfolio. At the beginning of the year, the aggregate market value of the
The following are four unrelated situations involving investments in available-for-sale securities:Situation IA portfolio of available-for-sale securities with an aggregate fair value in excess of cost includes one particular security whose fair value has declined to less than one-half of the
For the past five years, Herbert has maintained an investment (properly accounted for and reported upon) in Broome amounting to a 10% interest in the voting common stock of Broome. The purchase price was $700,000 and the underlying net equity in Broome at the date of purchase was $620,000. On
Victoria Company has investments in equity securities classified as trading and available for sale. At the beginning of the year, the aggregate market value of each portfolio exceeded its cost. During the year, Victoria sold some securities from each portfolio. At the end of the year, the aggregate
Refer to the financial statements and related notes of The Coca-Cola Company in Appendix A of this book.Required1. Was the fair value of the company’s available-for-sale securities higher or lower than the cost at the end of 2004? By how much?2. Is the fair value of the company’s
You are an accountant for the Davanzo Company. The president of the company calls you into her office and says, “I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better investment. We could sell the shares of
Briefly explain the meaning of the four factors that are involved in the computation of a company’s periodic charge for depreciation.
What is the depreciation base?
What is the objective of accounting for depreciation?
Explain how recording depreciation affects a company’s (a) Income statement, (b) Balance sheet, and (c) Statement of cash flows.
Does recording depreciation generate funds for the replacement of the asset? Explain.
Under what circumstances is depreciation a fixed cost or a variable cost?
What are the primary causes of depreciation? For each cause, indicate which depreciation method may be most appropriate. Would it be desirable to require all companies to use the same method?
Under what circumstances are accelerated methods of depreciation most appropriate?
Compare the group and composite methods of depreciation.
Under what circumstances is an asset’s depreciation amount not included in total in a company’s current income statement?
In a year in which the cost of replacing an asset rises, should a company record depreciation for that asset? Why?
A company should use an accelerated depreciation method because of the large decline in the value of an asset early in its life. Evaluate this statement.
The manager of a utility stated that since its transmission lines are kept in good condition by regular repairs and maintenance and their efficiency remains constant, the lines do not depreciate. Do you agree with this statement?
What disclosures of depreciation are required in a company’s financial statements and the accompanying notes?
Why might depreciation on a company’s financial statements be different from depreciation the company computed for income tax purposes?
How does a company’s depletion for income tax purposes vary from its depletion for financial reporting purposes?
(Multiple Choice)1. A method that excludes residual value from the base for the depreciation calculation isa. Straight-lineb. Sum-of-the-years€™-digitsc. Double-declining-balanced. Productive-outputItems 2 through 4 are based on the following information:Vorst Corporation€™s
The Gruman Company purchased a machine for $220,000 on January 2, 2004. It made the following estimates:Service life ...... 5 years or 10,000 hoursProduction ...... 200,000 unitsResidual value .... $20,000In 2007, the company uses the machine for 1,800 hours and produces 44,000
The Sorter Company purchased equipment for $200,000 on January 2, 2007. The equipment has an estimated service life of eight years and an estimated residual value of $20,000.RequiredCompute the depreciation for 2007 under each of the following methods:1. Straight-line2. Sum-of-the-years’-digits3.
Reveille, Inc. purchased Machine #204 on April 1, 2007 and placed the machine into production on April 3, 2007. The following information is relevant to Machine #204: Price ................... $60,000Freight-in costs ............... 2,500Preparation and installation costs ......... 3,900Labor costs
The Nickle Company purchased an asset for $17,000 on January 2, 2007. The asset has an expected residual value of $1,000. The depreciation expense for 2007 and 2008 is shown next for three alternative depreciation methods:Required1. Which depreciation method is the company using in each example?2.
The Burrell Company purchased a machine for $20,000 on January 2, 2007. The machine has an estimated service life of five years and a zero estimated residual value. The asset earns income before depreciation and income taxes of $10,000 each year. The tax rate is 30%.RequiredCompute the rate of
On January 1, 2006, the Emming Corporation purchased some machinery. The machinery has an estimated life of 10 years and an estimated residual value of $5,000. The depreciation on this machinery was $20,000 in 2008.RequiredCompute the acquisition cost of the equipment under the following
The Loban Company purchased four cars for $9,000 each, and expects that they would be sold in three years for $1,500 each. The company uses group depreciation on a straight-line basis.Required1. Prepare journal entries to record the acquisition and the first year’s depreciation.2. If one of the
The Wilcox Company acquires four machines that have the following characteristics:Required1. Prepare journal entries to record the acquisition and the first year's depreciation, assuming that the composite method is used on a straight-line basis.2. If the company sells machine B after four years
On January 2, 2007, Lapar Corporation purchased a machine for $50,000. Lapar paid shipping expenses of $500, as well as installation costs of $1,200. The company estimated that the machine would have a useful life of 10 years and a salvage value of $3,000. In January 2008, the company made
On May 10, 2007, the Horan Company purchased equipment for $25,000. The equipment has an estimated service life of five years and zero residual value. Assume that straight-line depreciation is used.RequiredCompute the depreciation for 2007 for each of the following four alternatives:1. The company
On January 1, 2003, the Vallahara Company purchased machinery for $650,000 which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a residual value of $50,000. Late in 2007, because of increasing competition in the industry, the company
The Dinkle Company purchased equipment for $50,000. The equipment has an estimated residual value of $5,000 and an expected useful life of 10 years. The company uses straight-line depreciation for its financial statements.RequiredWhat is the difference between the company’s income before taxes
The Bailand Company purchased a building for $210,000 that had an estimated residual value of $10,000 and an estimated service life of 10 years. The company purchased the building four years ago, and has used straight-line depreciation. At the beginning of the fifth year (before it records
The Feller Company purchased a site for a limestone quarry for $100,000 on January 2, 2007. It estimates that the quarry will yield 400,000 tons of limestone. It estimates that its retirement obligation has a fair value of $20,000, after which the land could be sold for $10,000. In 2007, 80,000
The Lorton Company acquired land containing coal. Lorton will restore the land to a condition suitable for recreational use after it has extracted the coal. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons and that the land will have a value of $1 million after
The Winsey Company purchased equipment on January 2, 2007 for $700,000. The equipment has the following characteristics:Estimated service life ... 20 years ... Estimated residual value ... $50,000100,000 hours950,000 units of outputDuring 2007 and 2008, the company used the machine for 4,500 and
The Lord Company purchased a machine on January 2, 2007 for $70,000. The machine had an expected residual value of $10,000, an expected life of eight years or 24,000 hours, and a capacity to produce 100,000 units. During 2007, the company produced 12,000 units in 2,500 hours. In 2008, the company
The Sayers Company purchased a building for $250,000 on January 2, 2007. The building has an expected residual value of $20,000 at the end of its expected life of 20 years.RequiredPrepare a schedule showing the depreciation for 2007 and 2008 and the book value on December 31, 2007 and December 31,
The Tubbs Company purchased a machine for $8,000 that has an estimated residual value of $1,000 and a life of three years.Required1. Compute the depreciation rate under the fixed-percentage-of-the-declining-balance method.2. Compute the depreciation for each year of the asset’s life.

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