Need help with these 4 case problems: Topics include deferred taxes, investments, stockholder's equity, and pensions. This is due Sunday 3/8

Case Assignment #4: FAR Deferred Taxes - DT-3 The following information is provided: Income before taxes: $900,000 Income before taxes included the following: Interest income from municipal bonds=$80,000 Rental income was collected in advance in 2011 and earned in 2012= $20,000 Depreciation per books=$40,000 and per income taxes=$100,000 Warranty expense in 2012 was for $20,000 but for tax purposes only $5,000 was deductible Assume that, at the beginning of 2012, the deferred tax asset is $8,000 due to the rental income Tax rate for 2012 and the foreseeable future is 40% Required: a. Calculate taxable income for the year 2012 b. Make the necessary tax entry for 2012. Be sure to include the amounts for tax expense and deferred taxes Investments - IN-1 The following information pertains to P&P investment in available-for-sale equity securities. Security A B C D Total Cost $10,000,000 $20,000,000 $5,000,000 $20,000,000 $55,000,000 Market Value Dec 31, 2012 $40,000,000 $14,000,000 $15,000,000 $12,000,000 $81,000,000 P&P is concerned about meeting the annual earnings estimate. The CEO has made 2 proposals related to year-end investment activities: 1. Sell securities A and C. Assume that the company will sell the securities at their December 31, 2012 market value 2. Tell the auditors that the company has decided to sell all of the securities in the near term. This decision is the basis for a reclassification of the securities from available-for-sale to trading Required: Determine the monetary effect of each proposal on P&P's income statement. Ignore income tax considerations. Stockholders' Equity - STK-2 During 2012, P&P Products made the following common stock transactions involving class B stock. The common stock has a par value of $10. a. On January 5, P&P Products declared a property dividend of 1,000 shares of their investments in the ABC company stock. The stock has a fair market value of $25 per share. The stock cost P&P Products $20 per share. P&P issued the ABC stock one month later. b. On February 14, P&P Products declared a 10% stock dividend. On that date, the market value of the stock was $14. One month later, they issued the common stock. Assume that P&P had 92,623 shares of $10 par value common stock outstanding prior to the stock dividend c. On August 12, P&P Products declared a cash dividend of $.50 per share of common stock. Assume that P&P had 92,623 shares of $10 par value common stock outstanding plus those issued as a result of the 10% stock dividend in part (b). d. On October 14, P&P Products issued a 2-for-1 stock split. Assume that the number of shares of common stock outstanding equals the number you used in part (c). e. On May 15, P&P Products issued 5,000 shares of cumulative 8% preferred stock with a par value of $100 for $112 per share. f. Ignoring the information above, assume that, at the end of the year, there were 92,623 shares of common stock outstanding and 5,000 shares of noncumulativeon-participating preferred stock outstanding. P&P Products wants to issue cash dividends totaling $77,050. Calculate how much of the dividend would go to preferred stockholders and how much would go to common stockholders Required: Prepare any necessary entries for each of the scenarios above. Pensions - PEN-2 Background Information The following facts pertain to P&P's pension plan for 2012. The expected return on plan assets is 15%, the fair market value of plan assets on 1/1/12 is $100,000, and the fair market value of plan assets on 12/31/12 is $130,000. Contributions to the pension plan were $14,000 and benefits paid to retired employees were $8,000. Problem Refer to the background information provided above. Consider the following information as of the beginning of 2012. The projected benefit obligation (PBO) was $135,000, the accumulated gain or loss in other comprehensive income (OCI) was $20,000 and the average remaining service period of active employees is 20 years. Required: a. Determine the difference between the actual and expected return on plan assets for 2012. b. Determine the amortization of the net gain or loss accumulated in OCI for 2012. c. Determine the gain or loss recognized as a component of pension cost in 2012. d. Determine the accumulated gain or loss in the OCI account that would be carried forward to the year 2013. Multiple Choice The following partial information is taken from the comparative balance sheet of Levi Corporation: MC2. What was the average price (rounded to the nearest dollar) of the additional shares issued by Levi in 2011? A. $5 per share B. $26 per share C. $39 per share D. Cannot be determined from the given information. B When stock is issued it can affect the paid-in-capital account (common stock - CS), and the additional paid-in-capital (APIC) if the stock was sold at an amount greater than the par or stated value. You want to look at the changes in these two accounts to determine the total proceeds received for stock issuances. The dollar amount of treasury stock transactions will not affect these two accounts unless it is retired but that is unlikely and not mentioned in the problem. The increase in the CS stock account is $30 million; the increase in the APIC account is $128 million for a total of $158 million. Treasury stock increased by 2 million shares from 2010 to 2011. So the beginning balance of shares outstanding 5 million minus the treasury stock acquired during 2011 of 2 million gives you 3 million shares. The CS outstanding at the end of 2011, 9 million shares minus the 3 million shares gives 6 million shares issued during 2011. $158,000,000/6,000,000 = $26.33 or $26 rounded to the nearest dollar. Or, the difference between 45m and 75m is 30m/5 par=6million shares issued. MC4. What was the amount of net income earned by Levi during 2011? A. $0 B. $40 million C. $62 million D. Cannot be determined from the given information. D To determine the net income for 2011 we must know all of the transactions which affected retained earnings (RE) for the year. There is no information about dividends for the year (this would reduce RE). Without this information the answer cannot be determined. If you assumed that no dividends were declared during the year the correct answer would be C - $40 million, the difference between the beginning and ending balance of RE for the year. However, the better assumption is that the dividend information is missing unless you are told otherwise. As of December 31, 2011, Warner Corporation reported the following: During 2012, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. MC6. What was shareholders' equity as of December 31, 2011? A. $7,020,000. B. $6,440,000. C. $6,420,000. D. $6,400,000. C The information given for 2012 for this problem is irrelevant as they are only asking for 2011. The stockholders equity would be comprised of: PIC - Share Repurchase $ 20,000 Other PIC 4,000,000 RE 3,000,000 Treasury Stock (600,000) $6,420,000 The dividends payable is a liability account (credited). The original entry would have included either a debit to the dividends account or made directly to RE. If the debit was made to the dividends account, it would have been closed to the RE account when the closing entries were made. If it were originally debited to RE, the balance in RE would be net of the dividend. As of December 31, 2011, Warner Corporation reported the following: During 2012, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. MC 8. The 2012 sale of half of the treasury stock would: A. Reduce income before tax by $60,000. B. Reduce retained earnings by $60,000. C. Increase total shareholders' equity by $300,000. D. Decrease retained earnings by $40,000. D The treasury stock was sold at a deficit of $60,000 [($600,000 x ) $240,000]. There is $20,000 in the PIC - Share Repurchase account to absorb $20,000 of the $60,000 deficit. The remaining $40,000 deficit would come from RE. There can never be a \"gain\" or \"loss\" on stock transactions, including treasury stock. It is more commonly referred to as a \"surplus\" or \"deficit.\" Your stock is not an asset that is being sold or a liability that is being extinguished; it is an equity item giving ownership in the entity. Therefore these amounts would not appear on an income statement. MC12. Share issue costs refer to the costs of obtaining the legal, promotional, and accounting services necessary to effect the sale of shares. The costs reduce the net cash proceeds from selling the shares and thus paid-in capital - excess of par, and are: A. not recorded separately. B. recorded as an asset. C. recorded as a liability. D. amortized over time. A These costs are not recorded separately and reduce the overall proceeds and additional paid-in-capital account, if applicable. The 12/31/2011 balance sheet of Despot Inc. included the following: MC14. In February, 2011, Despot declared cash dividends of $12 million to be paid in April of that year. What effect did the April transaction have on Despot's accounts? A. Decreased assets and liabilities. B. Decreased assets and shareholders' equity. C. Increased liabilities and decreased shareholders' equity. D. None of the above is correct. A The entry to record the cash dividend in February is: DR Dividends (or Retained Earnings) CR Dividends Payable In April when the dividends are paid the entry is: DR Dividends Payable CR Cash The April entry reduces both assets and liabilities. MC16. Poodle Corporation was organized on January 3, 2011. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2011, Poodle had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is total Paid-in capital at the end of 2011? A. $420,000. B. $370,000. C. $470,000. D. $320,000. B (30,000 x $7) + (20,000 x $8) = $370,000 The amounts for net income and dividends affect retained earnings, not paid-in-capital. MC18. In 2009, Winn, Inc. issued $1 par value common stock for $35 per share. No other common stock transactions occurred until July 31, 2011, when Winn acquired some of the issued shares for $30 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement? A. 2011 net income is decreased. B. Additional paid-in capital is decreased. C. 2011 net income is increased. D. Retained earnings is increased. B Assume that one share is issued and subsequently purchased and retired. When the share was issued APIC was increased by $34 ($35 - $1). When the share is repurchased and retired the APIC is simultaneously reduced by the $34 from the original transaction, and increased by $5 from the repurchase and retirement ($35 cash received at time of issuance minus $30 paid at time of repurchase). So APIC decreased by a net of $29 ($34 - $5). These transactions do not appear on the income statement and retained earnings is not affected. MC 20. When treasury shares are sold at a price above cost: A. A gain account is credited. B. A loss is reported. C. A revenue account is credited. D. Paid-in capital is increased. D The amounts from treasury stock sales do not appear on the income statement. MC22. Boxer Company owned 20,000 shares of King Company that were purchased in 2009 for $500,000. On May 1, 2011, Boxer declared a property dividend of 1 share of King for every 10 shares of Boxer stock. On that date, there were 50,000 shares of Boxer stock outstanding. The market value of the King stock was $30 per share on the date of declaration and $32 per share on the date of distribution. By how much is retained earnings reduced by the property dividend? A. $0. B. $150,000. C. $160,000. D. $300,000. B 50,000 shares of Boxer outstanding/10 shares for on share of King = 5,000 shares of King stock to be distributed as a property dividend. The property dividend is recorded at the fair market value of the property given on the date of declaration: 5,000 x $30 = $150,000 MC 24. On June 1, 2011, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red, Inc., an unrelated party. The carrying amount on Blue's books of Red's $1 par common stock was $2 per share. Immediately after the declaration, the market price of Red's stock was $2.50 per share. In its income statement for the year ended June 30, 2011, what amount should Blue report as gain before income taxes on disposal of the stock? A. $0. B. $100,000. C. $400,000. D. $500,000. B A gain/loss has to be recognized on the property being distributed as a dividend. The gain/loss is calculated on the difference between the cost of the property and its fair market value. [$2.50 (fair market value) - $2.00 (cost)] x 200,000 shares = $100,000 gain. MC 26. On January 1, 2011, the board of directors of Goby Inc. declared a $540,000 dividend. The following data are from the balance sheet of Goby on that date: How much is the liquidating dividend? A. $140,000 B. $240,000 C. $290,000 D. None of the above is correct. A When the amount of the dividend exceeds the amount in retained earnings, the difference is a liquidating dividend, a return of capital. $540,000 - $400,000 (balance in retained earnings) = $140,000 EPS Multiple Choice Start Here Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2011, options were granted for sixty thousand $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2014, and expire December 31, 2015. Each option has a fair value of $1 based on an option pricing model. MC 2. What is the total compensation cost for this plan? A. $0. B. $60,000. C. $240,000. D. $300,000. B The amount of compensation cost recognized is the fair value of the plan based on the option pricing model. 60,000 options x $1 = $60,000 MC 4. Basic earnings per share ignores: A. All potential common shares. B. Some potential common shares, but not others. C. Dividends declared on noncumulative preferred stock. D. Stock splits. A Basic earnings per share is calculated using the weighted average number of common shares of stock outstanding. It does not consider the potential dilution of issuing more shares of common stock; that is only considered when computing diluted earnings per share. MC6. ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend: A. Will be added to the numerator of the earnings per share fraction for the current year. B. Will be added to the denominator of the earnings per share fraction for the current year. C. Will be subtracted from the numerator of the earnings per share fraction for the current year. D. Has no effect on the earnings per share for the coming year. D Cash dividends, regardless of being declared or paid, do not affect the calculation of earnings per share. Only preferred stock dividends will impact the calculation of earnings per share by being subtracted from net income. Earnings per share is only calculated for common stock, not preferred stock. During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011. On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares. Angel's net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%. MC 8. What will Angel report as diluted earnings per share for 2011, rounded to the nearest cent? A. $6.43 B. $6.25 C. $6.22 D. None of these is correct. D Diluted EPS is calculated by: Net Income - Pfd. Div. + After-tax Interest Savings Weighted Average Number of Common Shares Outstanding + Potentially Dilutive Securities $6,000,000 - $150,000 + $80,000* 900,000 + 10,000 = $6.52 *($2,000,000 x .05) = $100,000 interest saved before tax effects; [$100,000 x (1.00 - .20)] = $80,000 after tax savings NOTE: The Basic EPS is $6.50 and the Diluted EPS is $6.52, therefore the convertible bonds are anti-dilutive (increases EPS or decreases Loss Per Share) this year. Diluted EPS will not be presented, only the Basic EPS will be presented this year. MC10. On December 31, 2010, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2011, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2011 was $700,000. During 2011, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2011 basic earnings per share (rounded)? A. $2.16. B. $3.50. C. $3.10. D. $2.80. A $700,000 - $80,000 250,000 + (50,000 x 9/12) = $2.16 Multiplying the 50,000 shares by 9/12 is for the period of time that they were outstanding for the year (March 31, 2011 - December 31, 2011). MC12. If a stock split occurred, when calculating the current year's EPS, the shares are treated as issued: A. At the end of the year. B. On the first day of the next fiscal year. C. At the beginning of the year. D. On the date of distribution. C Stock splits are applied retroactively as if they occurred on the first day of the business year. Managements will not be influenced on the date to announce the stock split because it will not affect the earnings per share calculation. MC14. All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market? A. Decrease. B. No effect if the shares are held as treasury shares. C. Increase only if the shares are considered to be retired. D. Increase. D Acquiring its own stock will decrease the numerator, thus increasing the quotient, the earnings per share number. MC16. A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be: A. Deducted from earnings for the year. B. Deducted, net of tax effect, from earnings for the year. C. Added to earnings for the year. D. Ignored. A When preferred stock is cumulative and the dividends are not declared, the amount must still be deducted from net income to arrive at earnings per share. These dividends are referred to as \"dividends in arrears.\" Dividends in arrears must be paid prior to the payment of any common stock dividends. The amount is accumulated and disclosed, but no journal entry is made as they have not been declared. 43 Equity/EPS Problems 43 44 2. The following information pertains to Great Inc. for the year ended December 31, 2006: January 1, 2006 10,000 stock options outstanding. 60,000 shares of common stock outstanding. 5,000 preferred stock,$10 par, 8 percent dividend. par March 31, 2006 July 1, 2006 100 convertible 10 percent bonds issued at a value of $1,000. Sold 2,400 additional common shares. A 50 percent stock dividend was distributed. Each share of preferred stock is convertible into one share of common stock, and each bond is convertible into 25 shares of 44 45 Cont. Great Inc. reported net income of $250,000 and has a 30 percent income tax rate. The option price was $20, and the stock prices at various dates were: Preferred January 1 $18 Common $ 20 Average 25 22 Year-end 30 24 Required: 45 46 Solution2 1. Weighted-average shares: January 1-March 31 60,000 3/12 1.5= 22,500 March 31-December 31 62,400 9/12 1.5= 70,200 92,700 . Basic EPS = $250,000 - (5,000 $10 0.08) = $2.654 or $2.65 per share 92,700 shares 2. Diluted EPS= $250,000 = 92,700 + 5,000 + 10,000 _ $200,000 $25 = shares $250,000 = $2.508 or $2.51 per share (97,700 + 2,000) shares 46 47 3. of $45,000 for the year ended Dog Inc. reported net income December 31, 2006. Throughout 2006, 15,000 shares of common stock and 5,000 shares of $10 par value 9 percent preferred stock were outstanding. No preferred stock dividends were paid during 2006. Required: Compute the EPS disclosure needed assuming the preferred stock is (situations a through d are independent of each other) A. Not convertible and noncumulative. B. Not convertible and cumulative. C. Convertible 1 for 1 and cumulative. D. Convertible 1 for 1 and cumulative, but in 2008 one share of preferred will be convertible into two shares of common stock. 47 48 A. Solution 3 preferred stock is not Basic EPS only is disclosed, since the convertible. The numerator is not adjusted, since the preferred stock is noncumulative. Basic EPS= B. $45,000 = $3.00 per share 15,000 shares The numerator is adjusted for the dividend, since the preferred stock is cumulative. Basic EPS = $45,000 (5,000 $10 0.09) = $2.70 per share 15,000 shares 48 49 C. Basic and diluted EPS are disclosed, since the preferred stock is convertible. The denominator is adjusted using the if-converted method for diluted EPS. Basic EPS = $2.70 per share Diluted EPS = $45,000 share (15,000 + 5,000) shares D. = $2.25 per Basic EPS = $2.70 per share Diluted EPS = $45,000 = $1.80 per share (15,000 + 10,000) shares 49 50 4. World Inc. incurred the following transactions involving its common stock: January 1 Beginning balance 100,000 shares March 1 Issued for cash 8,000 shares June 1 Purchased as treasury stock 1,200 shares October 31 Issued for cash 8,000 shares Additional information about World Inc. includes the following: 50 Net income for 2006 before extraordinary items $ 51 Solution 4 January 1-March 1 16,667 100,000 2/12 = March 1-June 1 27,000 108,000 3/12 = June 1-October 31 44,500 106,800 5/12 = October 31-December 31 19,133 114,800 2/12 = 51 EPS Problem Solution-Part I Income before extraordinary item Less preferred dividends Available to common before extraordinary item Add extraordinary gain (net of tax) Income available to common Weighted average shares outstanding: January 1 3/4 40,000 1/4 16,000 $210,000 (48,000) 162,000 70,000 $232,000 74,000 30,000 (4,000) 100,000 Solution Basic EPS Basic earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net income Calculations: $162,000 (a) 100,000 (b) $1.62 .70 $2.32 $70,000 100,000 (c) (a) (b) (c) $232,000 100,000 Solution Diluted EPS Diluted earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net Income $ .1.08 .46 $1.55 (a) (b) (c) Calculations: (a) $162,000 100,000 + 50,000 (b) $70,000 150,000 (c) $232,000 100,000 + 50,000 EPS Problem Solution-Part I Income before extraordinary item Less preferred dividends Available to common before extraordinary item Add extraordinary gain (net of tax) Income available to common Weighted average shares outstanding: January 1 3/4 40,000 1/4 16,000 $210,000 (48,000) 162,000 70,000 $232,000 74,000 30,000 (4,000) 100,000 Solution Basic EPS Basic earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net income Calculations: $162,000 (a) 100,000 (b) $1.62 .70 $2.32 $70,000 100,000 (c) (a) (b) (c) $232,000 100,000 Solution Diluted EPS Diluted earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net Income $ .1.08 .46 $1.55 (a) (b) (c) Calculations: (a) $162,000 100,000 + 50,000 (b) $70,000 150,000 (c) $232,000 100,000 + 50,000 Problem EPS Colson Corp. had $600,000 net income in 2013. On January 1, 2013 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2013. The tax rate is 40%. During 2013, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock. Colson issued $2,000,000 of 8% convertible bonds at face value during 2012. Each $1,000 bond is convertible into 30 shares of common stock. Instructions Compute diluted earnings per share for 2013. Complete the schedule and show all computations. Security Net Income Adjustment Adjusted Net Income Shares Adjustment Adjusted Shares EPS Solutions Security Net Income Adjustment Com. Stock $600,000 Adjusted Net Income Shares $(140,000) $460,000 200,000 460,000 205,000 556,000 211,000 696,000 271,000 Options Bonds 460,000 Preferred 556,000 a 20,000 3/4 = 30,000 1/3 = 96,000c 140,000 15,000 (10,000) 5,000 SA Adjustment Adjusted Shares EPS 5,000a 205,000 $2.24 6,000b 211,000 2.18 60,000 271,000 2.05 120,000 391,000 1.78 b 30,000 $1,200,000 $50 = (24,000) 6,000 SA (or) [(50 - 40) 50] 30,000 = 6,000 SA c $96,000 = $1.60 60,000 $2,000,000 .08 .6 = $96,000 $140,000 = $1.17 120,000 Deferred Taxes Problem 1 Meg Corp. reported the following pretax accounting income and taxable income for its first three years of operations: Meg's tax rate is 40% for all years. As of December 31, 2011, Meg was certain that it would recover the full tax benefit of the NOL that remained after the operating loss carryback. What would Meg report as net income for 2012? Problem 1 Problem 2 Meg Corp. reported the following pretax accounting income and taxable income for its first three years of operations: Meg's tax rate is 40% for all years. Assuming that Meg elected a loss carryback, what would be the net loss in 2011 reported in Meg's income statement? Problem 2 Problem 3 Before considering a net operating loss carryforward of $80 million, Lois Corporation reported $200 million of pretax accounting and taxable income in the current year. The income tax rate for all previous years was 40%. On January 1 of the current year a new tax law was enacted, reducing the rate to 30% effective immediately. Lois's income tax payable for the current year would be: Problem 3 Problem 4 Several years ago, Quahog Corp. purchased equipment for $20,000,000. Quahog uses straight-line depreciation for financial reporting and MACRS for tax purposes. At December 31, 2010, the carrying value of the equipment was $18,000,000 and its tax basis was $15,000,000. At December 31, 2011, the carrying value of the equipment was $16,000,000 and the tax basis was Problem 4 Problem 5 Swanson Corporation began operations in January 2010, and purchased a machine for $20,000. Swanson uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2010, 30% in 2011, and 20% in 2012. Pretax accounting income for 2010 was $150,000, which includes interest revenue of $20,000 from municipal bonds. The Problem 5 Problem 8 CPA, Inc., reports bad debt expense using the allowance method. For tax purposes the direct write-off method is used. At the end of the current year, CPA has accounts receivable and an allowance for uncollectible accounts of $5,000,000 and $200,000, respectively, and taxable income of $20,000,000. At the end of the previous year, CPA reported a deferred tax asset of $80,000 related to the difference Problem 8 Investments Problem 1 On January 1, 2006, Grade Company paid $300,000 for 20,000 shares of Medium Company's common stock which represents a 15% investment in Medium. Grade does not have the ability to exercise significant influence over Medium. Medium declared and paid a dividend of $1 a share to its stockholders during 2006. Medium reported net income of $260,000 for the year ended December 31, 2006, Problem 1 Per SFAS 115, Grade Company will account for this investment using the fair value method. This method is used because Grade owns less than 20% of Medium and cannot exercise significant influence over the company. Answer then is $300,000 Problem 2 At year-end, Rim Co. held several investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000, and equity securities purchased for $35,000. At yearend, the bonds were selling on the open market for $105,000 and the equity securities had a market value of $50,000. What amount should Rim report as trading Problem 2 Both securities are trading securities and both should be valued at market value, or $155,000 ($105,000 + $50,000). Problem 3 On January 2, 2006, Troquel Corporation bought 15% of Zafacon Corporation's capital stock for $30,000. Troquel accounts for this investment by the cost adjusted for fair value method and carries the securities in an available-for-sale portfolio. Zafacon's net income for the years ended December 31, 2006, and December 31, 2007, was $10,000 and $50,000, respectively. During 2007, Problem 3 Under the cost adjusted for fair value method, the investor records the investment at cost, adjusts the carrying amount for subsequent changes in fair value, and records dividends received as income. However, dividends received in excess of the investor's share of investee's earnings since acquisition are recorded as a reduction in the investment account. Such Problem 4 In 2006, Wallace Corporation purchased marketable securities, and at 12/31/06, had the following marketable equity securities: Cost In trading portfolio: Security X Y Totals In available-for-sale portfolio: Security Q R Totals Market Unrealized gain (loss) $80,000 15,000 $95,000 $50,000 20,000 $70,000 $(30,000) 5,000 $(25,000) $60,000 90,000 $150,000 $70,000 45,000 $115,000 $10,000 (45,000) $(35,000) At December 31, 2006, what amounts should be charged to Net Income and Other Comprehensive Income. Problem 4 Per SFAS 115, the carrying amount of both trading and availableforsale securities portfolios is market value. An increase (decrease) in the market value of a trading portfolio is included in net income of the period when such change occurs. An increase (decrease) in the market value of an availableforsale Problem 5 On January 10, 2006, Wayne, Inc., purchased 5,000 shares of Jason Corporation's common stock at $60 per share. The purchase is a long-term investment and is less than 20% of Jason's outstanding shares. This investment is appropriately reflected in Wayne's balance sheet in an available-for-sale securities portfolio at December 31, 2006. The market value of Wayne's investment in Jason's common stock was as follows: Date December 15, 2006 December 31, 2006 Market value Per share Total $47 $235,000 46 230,000 On December 15, 2006, Wayne determined that there had been an other than temporary decline in the market value. What amount should Wayne record as a loss in its income statement for the year ended December 31, 2006? Problem 5 Per SFAS 115, the loss realized from an other than temporary decline in the market value of available-for sale securities is measured as the difference between their cost and market value on the balance sheet date. 1/10/06 Carrying value 5,000 shares x $60 = $300,000 12/31/06 Market value 5,000 shares x $46 = 230,000 A. Accounting Income Before Taxes Tax Free Income Rental income taken in 2011 Depreciation adjustment Warranty Expense Taxable income Tax Taxable 900000 -80000 820000 328000 900000 -80000 -20000 -60000 15000 755000 302000 Tax rate for 2012 and the foreseeable future is 40%