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Questions and Answers of Accounting

Nature of Liabilities Presented below is the current liabilities section of Micro Corporation. Answer the following questions. (a) What are the essential characteristics that make an item a
Current versus Noncurrent Classification Rodriguez Corporation includes the following items in its liabilities at December 31, 2010.1. Notes payable, $25,000,000, due June 30, 2011.2. Deposits from
Refinancing of Short-Term Debt Dumars Corporation reports in the current liability section of its balance sheet at December 31, 2010 (its year-end), short-term obligations of $15,000,000, which
Refinancing of Short-Term Debt Andretti Inc. issued $10,000,000 of short-term commercial paper during the year 2010 to finance construction of a plant. At December 31, 2010, the corporation’s
Loss Contingencies On February 1, 2011, one of the huge storage tanks of Viking Manufacturing Company exploded. Windows in houses and other buildings within a one-mile radius of the explosion were
Loss Contingency Presented below is a note disclosure for Matsui Corporation. Litigation and Environmental: The Company has been notified, or is a named or a potentially responsible party in a number
Warranties and Loss Contingencies the following two independent situations involve loss contingencies.Part 1Benson Company sells two products, Grey and Yellow. Each carries a one-year warranty.1.
Warranties the Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of $600 per month plus 5% of yearly profits over $500,000. Matt Rich, the owner of the store, directs
Distinguish between a debt security and an equity security.
What purpose does the variety in bond features (types and characteristics) serve?
What is the cost of a long-term investment in bonds?
Identify and explain the three types of classifications for investments in debt securities.
When should a debt security be classified as held-to maturity?
Explain how trading securities are accounted for and reported.
At what amount should trading, available-for-sale, and held-to-maturity securities be reported on the balance sheet
On July 1, 2010, Wheeler Company purchased $4,000,000 of Duggan Company’s 8% bonds, due on July 1, 2017. The bonds, which pay interest semiannually on January 1 and July 1, were purchased for
If the bonds in question 8 are classified as available-for sale and they have a fair value at December 31, 2010, of $3,604,000, prepare the journal entry (if any) at December 31, 2010, to record this
Indicate how unrealized holding gains and losses should be reported for investment securities classified as trading, available-for-sale, and held-to-maturity.
(a) Assuming no Securities Fair Value Adjustment (Available- for-Sale) account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company’s
Identify and explain the different types of classifications for investment in equity securities.
Why are held-to-maturity investments applicable only to debt securities?
Harry Company sold 10,000 shares of Potter Co. common stock for $27.50 per share, incurring $1,770 in brokerage commissions. These securities were classified as trading and originally cost $260,000.
Distinguish between the accounting treatment for available- for-sale equity securities and trading equity securities.
What constitutes “significant influence” when an investor’s financial interest is below the 50% level?
Explain how the investment account is affected by investee activities under the equity method.
When the equity method is applied, what disclosures should be made in the investor’s financial statements?
Hatch Co. uses the equity method to account for investments in common stock. What accounting should be made for dividends received in excess of Hatch’s share of investee’s earnings subsequent to
Elizabeth Corp. has an investment with a carrying value (equity method) on its books of $170,000 representing a 30% interest in Borg Company, which suffered a $620,000 loss this year. How should
Where on the asset side of the balance sheet are trading securities, available-for-sale securities, and held-to maturity securities reported? Explain.
Explain why reclassification adjustments are necessary.
Briefly discuss how a transfer of securities from the available-for-sale category to the trading category affects stockholders’ equity and income.
When is a debt security considered impaired? Explain how to account for the impairment of an available-for sale debt security.
What is the GAAP definition of fair value?
What is the fair value option?
Franklin Corp. has an investment that it has held for several years. When it purchased the investment, Franklin classified and accounted for it as available-for-sale. Can Franklin use the fair value
Where can authoritative iGAAP be found related to investments?
Briefly describe some of the similarities and differences between U.S. GAAP and iGAAP with respect to the accounting for investments.
Ramirez Company has an available-for-sale investment in the 6%, 20-year bonds of Soto Company. The investment was originally purchased for $1,200,000 in 2009. Early in 2010, Ramirez recorded an
What is meant by the term underlying as it relates to derivative financial instruments?
What are the main distinctions between a traditional financial instrument and a derivative financial instrument?
What is the purpose of a fair value hedge?
In what situation will the unrealized holding gain or loss on an available-for-sale security be reported in income?
Why might a company become involved in an interest rate swap contract to receive fixed interest payments and pay variable?
What is the purpose of a cash flow hedge?
Where are gains and losses related to cash flow hedges involving anticipated transactions reported?
What are hybrid securities? Give an example of a hybrid security.
Explain the difference between the voting-interest model and the risk-and-reward model used for consolidation.
What is a variable-interest entity?
Garfield Company purchased, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield’s journal entries
Use the information from BE17-1, but assume the bonds are purchased as an available-for-sale security. Prepare Garfield’s journal entries for(a) The purchase of the investment,(b) The receipt of
Carow Corporation purchased, as a held-to-maturity investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,118, which provides a 6% return. The bonds pay interest semiannually. Prepare
Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare
Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock as an available-for sale investment for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At yearend,
Use the information from BE17-5 but assume the stock was purchased as a trading security. PrepareFairbanks’s journal entries to record(a) The purchase of the investment,(b) The dividends received,
Zoop Corporation purchased for $300,000 a 30% interest in Murphy, Inc. This investment enables Zoop to exert significant influence over Murphy. During the year Murphy earned net income of $180,000
Cleveland Company has a stock portfolio valued at $4,000. Its cost was $3,300. If the Securities Fair Value Adjustment (Available-for-Sale) account has a debit balance of $200, prepare the journal
The following information relates to Starbucks for 2007: net income $672.638 million; unrealized holding loss of $20.380 million related to available-for-sale securities during the year; accumulated
Hillsborough Co. has an available-for-sale investment in the bonds of Schuyler Corp. with a carrying (and fair) value of $70,000. Hillsborough determined that due to poor economic prospects for
Investment Classifications For the following investments identify whether they are:1. Trading Securities2. Available-for-Sale Securities3. Held-to-Maturity SecuritiesEach case is independent of the
Entries for Held-to-Maturity Securities on January 1, 2010, Jennings Company purchased at par 10% bonds having a maturity value of $300,000. They are dated January 1, 2010, and mature January 1,
Entries for Held-to-Maturity Securities on January 1, 2009, Roosevelt Company purchased 12% bonds, having a maturity value of $500,000, for $537,907.40. The bonds provide the bondholders with a 10%
Entries for Available-for-Sale Securities assume the same information as in E17-3 except that the securities are classified as available-for-sale. The fair value of the bonds at December 31 of each
Effective-Interest versus Straight-Line Bond Amortization on January 1, 2010, Morgan Company acquires $300,000 of Nicklaus, Inc., 9% bonds at a price of $278,384. The interest is payable each
Entries for Available-for-Sale and Trading Securities the following information is available for Kinney Company at December 31, 2010, regarding its investments. (a) Prepare the adjusting entry (if
Trading Securities Entries on December 21, 2010, Zurich Company provided you with the following information regarding its trading securities. During 2011, Carolina Company stock was sold for $9,500.
Available-for-Sale Securities Entries and Reporting Player Corporation purchases equity securities costing $73,000 and classifies them as available-for-sale securities. At December 31, the fair value
Available-for-Sale Securities Entries and Financial Statement Presentation at December 31, 2010, the available-for-sale equity portfolio for Wenger, Inc. is as follows. On January 20, 2011, Wenger,
Comprehensive Income Disclosure assume the same information as E17-9 and that Wenger, Inc. reports net income in 2010 of $120,000 and in 2011 of $140,000. Total holding gains (including any realized
Equity Securities Entries Capriati Corporation made the following cash purchases of securities during 2010, which is the first year in which Capriati invested in securities.1. On January 15,
Journal Entries for Fair Value and Equity Methods Presented below are two independent situations.Situation 1Hatcher Cosmetics acquired 10% of the 200,000 shares of common stock of Ramirez Fashion at
Equity Investments?Trading Swanson Company has the following securities in its trading portfolio of securities on December 31, 2010. (a) How much was Gator Co.?s share of Demo Co.?s net income for
Equity Investment—Trading Feiner Co. had purchased 300 shares of Guttman Co. for $40 each this year and classified the investment as a trading security. Feiner Co. sold 100 shares of the stock for
Equity Investments?Trading Swanson Company has the following securities in its trading portfolio of securities on December 31, 2010. All of the securities were purchased in 2010. In 2011, Swanson
Fair Value and Equity Method Compared) Gregory Inc. acquired 20% of the outstanding common stock of Henderson Inc. on December 31, 2010. The purchase price was $1,250,000 for 50,000 shares. Henderson
Equity Method On January 1, 2010, Meredith Corporation purchased 25% of the common shares of Pirates Company for $200,000. During the year, Pirates earned net income of $80,000 and paid dividends of
Impairment of Debt Securities Cairo Corporation has municipal bonds classified as available for-sale at December 31, 2010. These bonds have a par value of $800,000, an amortized cost of $800,000,
Fair Value Measurement Presented below is information related to the purchases of common stock by Lilly Company during 2010. (a) What entry would Lilly make at December 31, 2010, to record the
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 2011 for $195,000. At
Fair Value Option Presented below is selected information related to the financial instruments of Dawson Company at December 31, 2010. This is Dawson Company's first year of operations. (a) Dawson
Derivative Transaction On January 2, 2010, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike
Fair Value Hedge) On January 2, 2010, Mac Cloud Co. issued a 4-year, $100,000 note at 6% fixed interest, interest payable semiannually. Mac Cloud now wants to change the note to a variable-rate note.
Cash Flow Hedge on January 2, 2010, Parton Company issues a 5-year, $10,000,000 note at LIBOR, with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the
Fair Value Hedge Sarazan Company issues a 4-year, 7.5% fixed-rate interest only, non-prepayable $1,000,000 note payable on December 31, 2010. It decides to change the interest rate from a fixed rate
Call Option on August 15, 2010. Outkast Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $360. The notional value of the call option is 400 shares, and the
Cash Flow Hedge Hart Golf Co. uses titanium in the production of its specialty drivers. Hart anticipates that it will need to purchase 200 ounces of titanium in October 2010, for clubs that will be
Issues raised about Investment Securities you have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems. Jane Hens haw, controller for
Equity Securities Lexington Co. has the following available-for-sale securities outstanding on December 31, 2010 (its first year of operations). During 2011 Summerset Company stock was sold for
Financial Statement Effect of Equity Securities Presented below are three unrelated situations involving equity securities.Situation 1An equity security, whose market value is currently less than
Equity Securities the Financial Accounting Standards Board issued accounting guidance to clarify accounting methods and procedures with respect to certain debt and all equity securities. An important
Investment Accounted for under the Equity Method on July 1, 2011, Fontaine Company purchased for cash 40% of the outstanding capital stock of Knoblett Company. Both Fontaine Company and Knoblett
Equity Investment on July 1, 2010, Selig Company purchased for cash 40% of the outstanding capital stock of Spoor Corporation. Both Selig and Spoor have a December 31 year-end. Spoor Corporation,
Fair Value Addison Manufacturing holds a large portfolio of debt and equity securities as an investment. The fair value of the portfolio is greater than its original cost, even though some securities
What are the major advantages of notes to the financial statements? What types of items are usually reported in notes?
What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years?
The FASB requires a reconciliation between the effective tax rate and the federal government’s statutory rate. Of what benefit is such a disclosure requirement?
What type of disclosure or accounting do you believe is necessary for the following items?(a) Because of a general increase in the number of labor disputes and strikes, both within and outside the
The following information was described in a note of Canon Packing Co. “During August, Holland Products Corporation purchased 311,003 shares of the Company’s common stock which constitutes
What are the major types of subsequent events? Indicate how each of the following “subsequent events” would be reported.(a) Collection of a note written off in a prior period.(b) Issuance of a
What are diversified companies? What accounting problems are related to diversified companies?
What quantitative materiality test is applied to determine whether a segment is significant enough to warrant separate disclosure?

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