Accounting Exercise 17-12

     

 

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Exercise 17-12 Presented below are two independent situations. Situation 1 Hatcher Cosmetics acquired 10% of the 215,000 shares of common stock of Ramirez Fashion at a total cost of $16 per share on March 18, 2012. On June 30, Ramirez declared and paid a $77,400 cash dividend. On December 31, Ramirez reported net income of $130,400 for the year. At December 31, the market price of Ramirez Fashion was $18 per share. The securities are classified as available-for-sale. Situation 2 Holmes, Inc. obtained significant influence over Nadal Corporation by buying 27% of Nadal’s 31,300 outstanding shares of common stock at a total cost of $10 per share on January 1, 2012. On June 15, Nadal declared and paid a cash dividend of $36,300. On December 31, Nadal reported a net income of $89,600 for the year. Prepare all necessary journal entries in 2012 for both situations. (Credit account titles are automatically indented when amount is entered. Do not indent manually.

Problem 17-3 Cardinal Paz Corp. carries an account in its general ledger called Investments, which contained debits for investment purchases, and no credits, with the following descriptions.Feb. 1, 2012 Sharapova Company common stock, $100 par, 200 shares $41,500April 1 U.S. government bonds, 10%, due April 1, 2022, interest payable April 1 and October 1, 112 bonds of $1,000 par each 112,000July 1 McGrath Company 12% bonds, par $53,600, dated March 1, 2012, purchased at 104 plus accrued interest, interest payable annually on March 1, due March 1, 2032 57,888 (a) Prepare entries necessary to classify the amounts into proper accounts, assuming that all the securities are classified as available-for-sale. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)   (b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2012, using the straight-line method. (Round answers to 0 decimal places, e.g. $2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually.)             (c) The fair values of the investments on December 31, 2012, were:Sharapova Company common stock $33,070U.S. government bonds 147,900McGrath Company bonds 58,620 What entry or entries, if any, would you recommend be made? (Round answers to 0 decimal places, e.g. $2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually.)         (d) The U.S. government bonds were sold on July 1, 2013, for $120,650 plus accrued interest. Give the proper entry. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

    

Brooks Corp. is a medium-sized corporation specializing in quarrying stone for building construction. The company has long dominated the market, at one time achieving a 70% market penetration. During prosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodic investments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstanding common stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries. Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2012 year-end adjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gathered the following information about Brooks’s pertinent accounts.

 

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Brooks has trading securities related to Delaney Motors and Patrick Electric. During this fiscal year, Brooks purchased 100,000 shares of Delaney Motors for $1,400,000; these shares currently have a market value of $1,600,000. Brooks’ investment in Patrick Electric has not been profitable; the company acquired 50,000 shares of Patrick in April 2012 at $20 per share, a purchase that currently has a value of $720,000.

Prior to 2012, Brooks invested $22,500,000 in Norton Industries and has not changed its holdings this year. This investment in Norton Industries was valued at $21,500,000 on December 31, 2011. Brooks’ 12% ownership of Norton Industries has a current market value of $22,225,000.

 

For both classes of securities presented above, describe how the results of the valuation adjustments made to reflect the application of the “fair value” rule would be reflected in the body of and notes to Brooks’ 2012 financial statements. (Refer to Problem 17-8.)