Question 1 - On August 15, 2016, Indigo Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $540. The notional value of the call option is 600 shares, and the option price is $60. The option expires on January 31, 2017. The following data are available with respect to the call option.
|
Date
|
Market Price of Counting
Crows Shares
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Time Value of Call
Option
|
|
September 30, 2016
|
$72 per share
|
$270
|
|
December 31, 2016
|
$69 per share
|
98
|
|
January 15, 2017
|
$71 per share
|
45
|
Prepare the journal entries for Indigo for the following dates.
(a) Investment in call option on Counting Crows shares on August 15, 2016.
(b) September 30, 2016-Indigo prepares financial statements.
(c) December 31, 2016-Indigo prepares financial statements.
(d) January 15, 2017-Indigo settles the call option on the Counting Crows shares.
Question 2 - Teal Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $721,000, an amortized cost of $721,000, and a fair value of $636,000. The company believes that impairment accounting is now appropriate for these bonds.
Prepare the journal entry to recognize the impairment.
What is the new cost basis of the municipal bonds?
Given that the maturity value of the bonds is $721,000, should Teal Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?
Question 3 - The following are two independent situations.
Situation 1 - Martinez Cosmetics acquired 10% of the 189,000 shares of common stock of Martinez Fashion at a total cost of $12 per share on March 18, 2017. On June 30, Martinez declared and paid $77,300 cash dividend to all stockholders. On December 31, Martinez reported net income of $122,300 for the year. At December 31, the market price of Martinez Fashion was $13 per share.
Situation 2 - Sandhill, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles's 32,100 outstanding shares of common stock at a total cost of $9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of $32,700. On December 31, Seles reported a net income of $78,800 for the year.
Prepare all necessary journal entries in 2017 for both situations.
Question 4 - Presented below are two independent cases related to available-for-sale debt investments.
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Case 1
|
Case 2
|
|
Amortized cost
|
$37,430
|
$103,800
|
|
Fair value
|
27,620
|
113,530
|
|
Expected credit losses
|
22,120
|
95,320
|
For each case, determine the amount of impairment loss, if any.
Question 5 - Waterway Company invests $10,400,000 in 4% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $11,092,000. Interest is paid on January 1.
Prepare journal entries for Waterway Company to (a) record the transactions related to these bonds in 2017, assuming Waterway does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Waterway Company elects the fair value option to account for these bonds.
Question 6 - Indigo Corporation purchased for $282,000 a 30% interest in Murphy, Inc. This investment enables Indigo to exert significant influence over Murphy. During the year, Murphy earned net income of $172,000 and paid dividends of $65,000.
Prepare Indigo's journal entries related to this investment.
Question 7 - Flint Corporation purchased 360 shares of Sherman Inc. common stock for $12,500 (Flint does not have significant influence). During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman stock was selling for $36.00 per share.
Prepare Flint' journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)
Question 8 - On April 1, 2018, West Company purchased $380,000 of 5.00% bonds for $394,950 plus accrued interest as an available-for-sale security. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2023.
Prepare the journal entry on April 1, 2018.