CHAPTER 12 HOMEWORK #1
QUESTIONS (use notebook paper):
1. Why do corporations typically invest in the common stock (less than 20% of the outstanding shares) and preferred stock of other corporations? 2. Investments in common stock (less than 20% of the outstanding shares), and preferred stock are categorized as either trading securities or available for sale securities. Define these two categories. 3. Trading securities and available for sale securities are required to be reported on the financial statements at their fair market value. Why is this departure from the cost principle made? 4. What is the difference between a realized gain and an unrealized gain? 5. For trading securities, the unrealized gain or loss on valuation is reported on the income statement. For available for sale securities any unrealized gain or loss on valuation is reported on the balance sheet as a component of stockholders’ equity. Why the difference in reporting? EXERCISES
1.
Hulse Company had the following transactions pertaining to stock investments:
Feb 1
Purchased 600 shares of Wade common stock for $6,600 cash plus
brokerage fees of $600. (Hint: what is the total cost of the shares and
what is the PER SHARE cost?)
July 1 Received cash dividends of $1 per share on the Wade common stock.
Sep 1
Sold 200 shares of Wade common stock for $2,950 less broker’s fees of
$100.
Dec 1 Received cash dividends of $1 per share on the Wade common stock.
Dec 31 The fair market value of the Wade shares is $14 per share.
Instructions
(a) Journalize the transactions assuming the investment in the Wade stock was
purchased as trading securities.
(b) Indicate the financial statement presentation of the investment related
accounts at the end of the year.
(c) If the investment in the Wade stock had been purchased as available for sale
securities, indicate the financial statement presentation of the investment
related accounts at the end of the year. 2. Noster Inc. had the following transactions pertaining to stock investments:
Jan 1 Purchased 2,500 shares of Escalante Corporation common stock for
$140,000 cash plus brokerage fees of $12,000. (Hint: what is the total cost
of the shares and what is the PER SHARE cost?)
July 1 Received a cash dividend of $3 per share on the Escalante stock.
Dec 1 Sold 500 shares of Escalante Corporation common stock for $32,400 cash,
less broker’s fees of $800.
Dec 31 Received a cash dividend of $3 per share on the Escalante stock.
Dec 31 The fair market value of the Escalante stock is $58 per share.
Instructions
(a) Journalize the transactions assuming the investment in the Escalante stock was
purchased as trading securities.
(b) Indicate the financial statement presentation of the investment related accounts
at the end of the year.
(c) If the investment in the Escalante stock had been purchased as available for
sale securities, indicate the financial statement presentation of the investment
related accounts at the end of the year. 3. During 2017, Turnball Associates had the following investment related
transactions:
1. Purchased 2,000 shares of Gehring common stock for $29 per share cash plus
$2,000 of broker’s fees.
2. Purchased 5,000 shares of Wooderson common stock for $9 per share cash.
3. Received a $.50 per share cash dividend on the Gehring common stock.
4. Sold 1,500 shares of Wooderson common stock for $8 per share cash less $200
broker’s fees.
5. Sold 800 shares of Gehring common stock for $33 per share cash less $500
broker’s fees.
6. Purchased 1,500 shares of Kitselton common stock for $20 per share cash.
7. Received a $.50 per share cash dividend on the Gehring common stock.
8. Received a $1 per share cash dividend on the Wooderson common stock.
9. On December 31, the fair market values of the stocks were: Gehring $32 per
share, Wooderson $8 per share and Kitselton $18 per share.
Instructions
(a) Journalize the transactions assuming the investment in the Escalante stock was
purchased as trading securities.
(b) Indicate the financial statement presentation of the investment related accounts
at the end of the year.
(c) If the investment in the Escalante stock had been purchased as available for
sale securities, indicate the financial statement presentation of the investment
related accounts at the end of the year. EXERCISE #1 Date (b) On the Income Statement: On the Balance Sheet: (c) On the Income Statement: On the Balance Sheet: Account Titles Debit Credit EXERCISE #2 Date (b) On the Income Statement: On the Balance Sheet: (c) On the Income Statement: On the Balance Sheet: Account Titles Debit Credit EXERCISE #3 Date Account Titles Debit Credit (b) On the Income Statement: On the Balance Sheet: (c) On the Income Statement: On the Balance Sheet: