Chapter 12: Q22. (page 610)
Explain why reclassification adjustments are necessary.
Reclassification adjustments are necessary because they help in the treatment of realized profit and gain.
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On January 1, 2017, Dagwood Company purchased at par 6%
bonds having a maturity value of $300,000. They are dated January 1, 2017, and mature January 1, 2022, with interest received
on January 1 of each year. The bonds are classified in the held-to-maturity category.
Instructions
(a) Prepare the journal entry at the date of the bond purchase.
(b) Prepare the journal entry to record the interest revenue on December 31, 2017.
(c) Prepare the journal entry to record the interest received on January 1, 2018.
The following is selected information for Alatorre Company.
1. Alatorre purchased a patent from Vania Co. for \(1,000,000 on January 1, 2015. The patent is being amortized over its remaining legal life of 10 years, expiring on January 1, 2025. During 2017, Alatorre determined that the economic benefits of the patent would not last longer than 6 years from the date of acquisition. What amount should be reported in the balance sheet for the patent, net of accumulated amortization, at December 31, 2017?
2. Alatorre bought a franchise from Alexander Co. on January 1, 2016, for \)400,000. The carrying amount of the franchise on Alexander’s books on January 1, 2016, was \(500,000. The franchise agreement had an estimated useful life of 30 years. Because Alatorre must enter a competitive bidding at the end of 2018, it is unlikely that the franchise will be retained beyond 2025. What amount should be amortized for the year ended December 31, 2017?
3. On January 1, 2017, Alatorre incurred organization costs of \)275,000. What amount of organization expense should be reported in 2017?
4. Alatorre purchased the license for distribution of a popular consumer product on January 1, 2017, for $150,000. It is expected that this product will generate cash flows for an indefinite period of time. The license has an initial term of 5 years but by paying a nominal fee, Alatorre can renew the license indefinitely for successive 5-year terms. What amount should be amortized for the year ended December 31, 2017?
Instructions:
Answer the questions asked about each of the factual situations.
(Investment Classifications)For the following investments, identify whether they are:
1. Trading debt securities.
2. Available-for-sale debt securities.
3. Held-to-maturity debt securities.
4. None of the above.
Each case is independent of the other.
(a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases,
which is expected next month, it will be sold.
(b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30%
of its outstanding stock.
(c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.
(d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money
has been tight recently and they may need to be sold.
(e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.
(f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project
planned 10 years from now.
Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders’ equity and income.
Question: (Goodwill, Impairment) On July 31, 2017, Mexico Company paid \(3,000,000 to acquire all of the common stock of Conchita Incorporated, which became a division of Mexico. Conchita reported the following balance sheet at the time of the acquisition.
Current assets | \) 800,000 | Current liabilities | \( 600,000 |
Noncurrent assets | 2,700,000 | Long-term liabilities | 500,000 |
Total assets | \)3,500,000 | Stockholders’ equity | 2,400,000 |
Total liabilities and stockholders’ equity | \(3,500,000 |
It was determined at the date of the purchase that the fair value of the identifiable net assets of Conchita was \)2,750,000. Over the next 6 months of operations, the newly purchased division experienced operating losses. In addition, it now appears that it will generate substantial losses for the foreseeable future. At December 31, 2017, Conchita reports the following balance sheet information.
Current assets | \( 450,000 |
Noncurrent assets (including goodwill recognized in purchase) | 2,400,000 |
Current liabilities | (700,000) |
Long-term liabilities | (500,000) |
Net assets | \)1,650,000 |
It is determined that the fair value of the Conchita Division is \(1,850,000. The recorded amount for Conchita’s net assets (excluding goodwill) is the same as fair value, except for property, plant, and equipment, which has a fair value \)150,000 above the carrying value.
Instructions
Prepare the journal entry to record the impairment loss, if any, and indicate where the loss would be reported in the income statement.
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