Question 1 - For the following investments identify whether they are:
1. Trading securities
2. Available-for-sale securities
3. Held-to-maturity securities
Each case is independent of the other.
(a) Purchase bonds maturing in 20 years. The company intends to use the cash flow generated by the interest payments on the bond to provide employee bonuses.
(b) Common stock was purchased based on a recommendation from the CEO's broker. The broker believes the price will increase substantially over the next couple of months.
(c) An investment grade bond that matures in 8 years was purchased. The company will probably hold the bonds until they mature at which time the proceeds will be used to retire maturing debt.
(d) Five-year bonds of a troubled company were purchased this year for substantially below par value. The bonds mature in 2 months.
(e) Excess cash was used to purchase preferred stock. The preferred stock may need to be sold within the next year if a planned expansion is completed.
(f) 15% of the outstanding stock of another company was purchased last year. The company is considering purchasing another 20% of the company.
Question 2 - On December 31, 2014, InterSteel Inc. provided you with the following information regarding its trading securities:
December 31, 2014
Investments (Trading) Cost Fair Value
JAK Inc. stock $ 40,000 $ 46,000
Kibby Co. stock 101,000 99,500
Lorton Corp. stock 31,000 34,500
All of the securities were purchased during 2014.
During 2015, InterSteel sold its Lorton Corp. stock for $33,200. The fair value of the stock on December 31, 2015, was: JAK Inc. stock-$47,600; Kibby Co. stock-$95,400.
Instructions -
(a) Prepare the adjusting journal entry needed on December 31, 2014.
(b) Prepare the journal entry to record the sale of the Lorton Corp. stock during 2015.
(c) Prepare the adjusting journal entry needed on December 31, 2015.
Question 3 - On January 1, 2014, Copa Company purchased $300,000, 6% bonds of Cabana Co. for $313,128. The bonds were purchased to yield 5% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2019. Copa Company uses the effective-interest method to amortize discount or premium. On January 1, 2016, Copa Company sold the bonds for $305,600 after receiving interest to meet its liquidity needs.
Instructions
(a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available-for-sale.
(b) Prepare the amortization schedule for the bonds.
(c) Prepare the journal entries to record the semiannual interest on July 1, 2014, and December 31, 2014.
(d) If the fair value of Cabana bonds is $310,000 on December 31, 2015, prepare the necessary adjusting entry. (Assume the fair value adjustment balance on January 1, 2015, is a credit of $2,790.)
(e) Prepare the journal entry to record the sale of the bonds on January 1, 2016.
Question 4 - Young Tree Construction Company uses the percentage-of-completion method of accounting. In 2014, Young Tree began work under a contract with a contract price of $1,500,000. Other details follow:
2014 2015
Costs incurred during the year $980,000 $1,375,000
Estimated costs to complete, as of December 31 420,000 -0-
Billings to date 800,000 1,500,000
Collections to date 250,000 1,500,000
Instructions -
(a) What portion of the total contract price would be recognized as revenue in 2014? In 2015?
(b) Assuming the same facts as those above except that Young Tree uses the completed-contract method of accounting, what portion of the total contract price would be recognized as revenue in 2015?
(c) Prepare a complete set of journal entries for 2014 (using percentage-of-completion).
Question 5 - On May 1, 2014, Jackson Construction Company contracted to construct a factory building for a total contract price of $9,600,000. The building was completed by May 31, 2016. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2014, 2015, and 2016 are given below.
2014 2015 2016
Contract costs incurred during the year $3,400,000 $2,400,000 $2,900,000
Estimated costs to complete the contract at 12/31 4,600,000 3,100,000 -0-
Billings 1,200,000 4,100,000 4,300,000
Instructions (round to nearest dollar) -
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. (Ignore incomes taxes.)
(c) Prepare all necessary journal entries for 2015 and 2016 under the percentage-of -completion method.