Problem 1 - Kutcher Company purchased 500 shares of Timpico Company stock at $25 per share and 300 shares of Lustre Company stock at $96 per share during 2014. The market value per share at December 31, 2014 and 2015 was as follows:
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2014
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2015
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Fair Market Value
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Fair Market Value
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Timpico Co.
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$28
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$30
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Lustre Co.
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89
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94
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Kutcher Company intended to hold both stocks for several years. Assume that the two stock holdings are the only securities in their investment portfolio.
Required:
1. How would Kutcher classify this stock? (Trading, Available-for-sale, Held-to-Maturity, Equity security or other?)
2. Prepare the entries necessary to adjust the securities to market value at the end of 2014 and 2015. (Be sure to specify whether your unrealized holding gains/losses are reported in income or equity).
3. Assume that in 2016, Kutcher sold half of its shares of the Timpico Company stock for $35 per share plus $300 in brokerage selling fees. Prepare the journal entry to record the sale of the Timpico Company stock.
4. What other adjustments would Kutcher need to make to its financials to account for the sale of the Timpico stock?
5. Assume that Kutcher had instead elected to use the fair value option to account for these stocks. Where would it report unrealized holding gains/losses each period?
Problem 2 - Sebastian Company purchased $10,000 of 12 percent, five-year bonds on January 1, 2015, for $10,800. The bonds were selling for $10,100 as of December 31, 2015 and had an amortized cost of $10,640 on that date. The bonds pay interest annually on December 31, and they mature on December 31, 2019.
Required:
1. Assume that Sebastian does not plan to sell these securities in the short-term, nor do they intend to hold the bonds until December 31, 2019. How would they classify these bonds? (Trading, Available-for-Sale, Held-to-Maturity).
2. Based on your answer to question 1, at what amount would the bonds be reported on the balance sheet at December 31, 2015?
3. Based on your answer to question 1, prepare the journal entry to adjust the security to market value on December 31, 2015, if applicable.
4. Ignoring your answers to questions 1 -3, assume, instead, that Sebastian DOES intend to hold the bonds until December 31, 2019. How would Sebastian classify the bonds? (Trading, Available-for-Sale, Held-to-Maturity).
5. Based on your answer to question 4, at what amount would the bonds be reported on the balance sheet at December 31, 2015?
6. Based on your answer to question 4, prepare the journal entry to adjust the security to market value on December 31, 2015, if applicable.
Problem 3 - On January 1, 2015, Sanchez Company purchased 25,000 of the 100,000 outstanding common shares of Manitoba Company for $10 per share. During the year, Manitoba Company declared net income of $300,000 and paid $60,000 of dividends. On December 31, 2015, Manitoba Company's stock had a fair value of $12 per share.
Required:
a. Prepare all necessary entries, assuming that Sanchez Company is able to exert significant influence over Manitoba Company.
b. Prepare all necessary entries assuming that Sanchez Company is NOT able to exert significant influence over Manitoba Company.