Stock investments
1. For what reasons do corporations purchase the stock of othercorporations?
2. Explain how marketable securities should be classified in the balancesheet.
3. Describe the valuation bases used for marketable equity securities.
4. Under what circumstances is the equity method used to account forstock investments?
5. Explain briefly the accounting for stock dividends and stock splits fromthe investor's point of view.
6. Of what significance is par value to the investing corporation?
7. What is the purpose of preparing consolidated financial statements?
8. Under what circumstances must consolidated financial statements beprepared?
9. Why is it necessary to make elimination entries on the consolidatedstatement work sheet? Are these elimination entries also posted to theaccounts of the parent and subsidiary? Why or why not?
10. Why might a corporation pay an amount in excess of the book value fora subsidiary's stock? Why might it pay an amount less than the bookvalue of the subsidiary's stock?
Demonstration problem
Demonstration problem A
Demonstration problem A Following are selected transactions and other data for Kelly Company for 2010:
Mar. 21 Purchased Goo shares of Sly Company common stock at USD 48.75 per share, plus a USD 450 broker's commission. Also purchased 100 shares of Rob Company common stock at USD 225 per share, plus a USD 376 broker's commission. Both investments are expected to be temporary.
June 2 Received cash dividends of USD 1.5o per share on the Sly common shares and USD 3 per share on the Rob common shares.
Aug. 12 Received shares representing a 100 percent stock dividend on the Rob shares.
3o Sold 100 shares of Rob common stock at USD 120 per share, less a USD 360 broker's commission.
Sept. 15 Received shares representing a 10 percent stock dividend on the Sly common stock. Market price today was USD 52.50 per share.
Dec. 31 Per share market values for the two investments in common stock are Sly, USD 45.75, and Rob, USD 106.50. Both investments are considered temporary.
Prepare journal entries to record these transactions and the necessary adjustments for a December 31 closing.
Demonstration problem B Lanford Company acquired all of the outstanding voting common stock of Casey Company on 2010 January 2, for USD 300,000 cash. After the close of business on the date of acquisition, the balance sheets for the two companies were as follows:
|
Assets
|
La ndford
Company
|
Casey Company
|
|
Cash
|
$75,000
|
$30,000
|
|
Accounts receivable, net
|
90,000
|
37,700
|
|
Notes receivable
|
15,000
|
7,750
|
|
Merchandise inventory
|
112,500
|
45,000
|
|
|
300,000
|
|
|
Investment in Casey Company
|
|
Investment in bonds
|
|
30,000
|
|
Plant and equipment, net
|
303,000
|
195,000
|
|
Total assets
|
$895,500
|
$345,000
|
|
Liabilities and stockholders equity
|
|
|
|
Accounts payable
|
$ 75,000
|
$ 45,000
|
|
Notes payable
|
22,500
|
15,000
|
|
Bonds payable
|
225,000
|
|
|
Common stock - $.50 par value
|
300,000
|
150,000
|
|
Paid-in capital excess of par value - common
|
|
60,000
|
|
Retained eamings
|
273,000
|
75,000
|
|
Total liabilities and stockholders equity
|
$895,500
|
$345,000
|
On 2010 January 2, Casey Company borrowed USD 15,000 from Lanford Company by giving a note. On that same day, Casey Company purchased USD 30,000 of Lanford Company's bonds. The excess of cost over book value is attributable to Casey Company's above-average earnings prospects.
Prepare a work sheet for a consolidated balance sheet on the date of acquisition.
Long-term financing: Bonds
1. What are the advantages of obtaining long-term funds by the issuanceof bonds rather than additional shares of capital stock? What are thedisadvantages?
2. What is a bond indenture? What parties are usually associated with it?Explain why.
3. Explain what is meant by the terms coupon, callable, convertible, anddebenture.
5. What is meant by the term trading on the equity?
6. When bonds are issued between interest dates, why should the issuingcorporation receive cash equal to the amount of accrued interest(accrued since the preceding interest date) in addition to the issue priceof the bonds?
7. Why might it be more accurate to describe a sinking fund as a bondredemption fund?
8. Why is the effective interest rate method of computing periodic interestexpense considered theoretically preferable to the straight-linemethod?
9. Why would an investor whose intent is to hold bonds to maturity paymore for the bonds than their face value?
10. Of what use is the times interest earned ratio?
Demonstration problem
Problem B
Demonstration problem:
Jackson Company issued USD 100,000 face value of 15 percent, 20-year junk bonds on 2010 April 3o. The bonds are dated 2010 April 3o, call for semiannual interest payments on April 3o and October 31, and are issued to yield 16 percent (8 percent per period).
a. Compute the amount received for the bonds.
b. Prepare an amortization schedule. Enter data in the schedule for only the first two interest periods. Use the effective interest rate method.
c. Prepare journal entries to record issuance of the bonds, the first six months' interest expense on the bonds, the adjustment needed on 2010 December 31 (assuming Jackson's accounting year ends on that date), and the second six months' interest expense on 2011 April 30.
Ecological Water Filtration, Inc., is going to issue USD 400,000 facevalue of 10 percent, 15-year bonds. The bonds are dated 2009 June 30, call forsemiannual interest payments, and mature on 2024 June 30.
a. Compute the price investors should offer if they seek a yield of 8 percent onthese bonds. Also, compute the first six months' interest, assuming the bonds areissued at this price. Use the interest method and calculate all amounts to the nearestdollar.