12-
SECURITIES HELD TO MATURITY; BOND INVESTMENT; EFFECTIVE INTEREST
KISSES RICH INC, purchased as a log-term investment $80 million of 8% bonds dated January 1, on January 1, 2011. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10 %. The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2011 was $ 70 million.
Required:
1.Prepare the journal entry to record KISSES RICHs investment on January 1, 2011.
2.Prepare the journal entry KISSES RICHS TO RECORD INTEREST ON JUNE 30, 11 (at the effective rate).
3.Prepare the journal entries by KISSES RICH to record interest in the December 31, 2011, balance (at the effective rate).
4.At what amount will KISSES RICH INC,report its investment in the December
31,2011. Balance sheet? Why?
5.How would KISSES HUG s 2011 statementof cash flowns be affected by this investment?
P 12-7 Securities held-to maturity, securities available for sale, andtrading securities.
Baby r General Corporation is a consulting firm that also offers financial services through its credit division.
From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The companys fiscal year ends on December 31.
2011.
Oct.18 purchased 2 million preferred shares of Baby r Corporation for $58 million as a speculative investment to be sold under suitable circumstances.
Oct.31 Received semiannual interest of 1.5 million for the Kansas Abstractors bonds.
Nov. 1 Purchased 10 % bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
Nov.1 Sold the Kansas Abstractors bonds for $28 million because rising interest rates are expected to cause their fair value to continue fall.
Dec 1. Purchased 12% bonds of Household Plastics Corporation at their $60 Million face value, to be held until they mature in 2008. Semiannual interest is payable May 31 and November 30.
Dec 20. Purchased U.S. Treasure bonds for 5.6 million as trading securities , hoping to earn profits on short-term differences in prices.
Dec 21. Purchased 4 million common shares of NXS Corporation for 44 million as trading securities, hopping to earn profit on short-term differences in prices.
Dec 23 Sold the treasure bonds for $5.7 million.
Dec 29 Received cash dividends of $3 million from Baby r preferred shares.
Dec 31 Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of Babys R company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investment were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
2012
Jan. 7 Sold the NXS Corporation common shares for $43 million.
Required:
Prepared the appropriate journal entry for each transaction or event.
12-10
FAIR VALUE OPTION; EQUITY METHOD INVESTMENTS
On January 4,2011, Bakker paid $324 million for 10 million shares of Lis land Company common stock. The investment represents a 30% interest in the net assets of Lis land and gave Bakker the ability to exercise significant influence over Lis land s operations. Bakker chose the fair value option to account for this investment. Bakker received dividends of $ 2.00 per share on December 15, 2011, and Lis reported net income of $160 million for the year ended December 31, 2011. The market value of Lis land Company common stock at Dec 31,2011 was $31 per share. On the purchase date, the book value of Lis lands net assets was $800 million and :
a-The fair value of Lis lands depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million.
b-The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1-Prepare all appropriate journal entries related to the investment during 2011, assuming Bakker account for this investment under the fair value option and accounts for the Lis Land investment in a manner similar to what they would use for trading securities.
2-What would be the effect of this investment on Bakkers 2011 net Income ?