Login Registrieren

Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 13: Q20E (page 658)

(Fair Value Measurement Issues) Assume the same information as in E17-19 for Lilly Company. In addition,
assume that the investment in the Woods Inc. stock was sold during 2018 for \(195,000. On December 31, 2018, the following
information relates to its two remaining investments of common stock.
Cost Fair Value
(at purchase date) (at December 31)
Investment in Arroyo Company stock \)100,000 \(140,000
Investment in Lee Corporation stock 250,000 310,000
Total \)350,000 \(450,000
Net income before any security gains and losses for 2018 was \)905,000.
Instructions
(a) Compute the amount of net income or net loss that Lilly should report for 2018, taking into consideration Lilly’s securitytransactions for 2018.
(b) Prepare the journal entry to record unrealized gain or loss related to the investment in Arroyo Company stock atDecember 31, 2018.

Short Answer

Expert verified

a.Net income is $920,000

b.Fair value adjustment debited by $40,000 and unrealized holding gain or loss credited by $40,000.

Step by step solution

01

Computation of net income

Net income for 2018: $905,000

Profit on the sale of wood stock is $15,000.

Amount of net income report for 2018:

$\begin{matrix} Net Income= Income before gain or loss+ gain on sale of stock \\ = $ 905, 000 + $ 15, 000 \\ = $ 920, 000 \end{matrix}$

02

Journal entry related to unrealized gain or loss

Date	Particulars	Debit	Credit
December 31, 2018	Fair value adjustment	$40,000
	Unrealized holding Gain or loss		$40,000
	(Gain on the fair value adjustment)

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

(Debt Investments) Presented below is information from a bond investment amortization schedule with

related fair values provided. These bonds are classified as available-for-sale.

12/31/17 12/31/18 12/31/19

Amortized cost \(491,150 \)519,442 \(550,000

Fair value 497,000 509,000 550,000

Instructions

(a) Indicate whether the bonds were purchased at a discount or a premium.

(b) Prepare the adjusting entry to record the bonds at fair value on December 31, 2017. The Fair Value Adjustment account

has a debit balance of \)1,000 before adjustment.

(c) Prepare the adjusting entry to record the bonds at fair value on December 31, 2018.

Question: In accounting for short-term debt expected to be refinanced to long-term debt:

GAAP uses the authorization date to determine classification of short-term debt to be refinanced.
IFRS uses the authorization date to determine classification of short-term debt to be refinanced.
IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.
GAAP uses the date of issue, but only for secured debt, to determine classification of short-term debt to be refinanced.

Fairbanks Corporation purchased 400 ordinary shares of Sherman Inc. as a trading investment for \(13,200. During the year, Sherman paid a cash dividend of \)3.25 per share. At year-end, Sherman shares were selling for $34.50 per share. Prepare Fairbanks’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment

Should a liability be recorded for risk of loss due to lack of insurance coverage? Discuss.

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

See all solutions

Recommended explanations on Business Studies Textbooks

Startups

Read Explanation

Intermediate Accounting

Read Explanation

Operational Management

Read Explanation

Accounting

Read Explanation

Organizational Communication

Read Explanation

Sales in Business

Read Explanation

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free