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Exercise 121
Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Crane Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Hudson Company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any answer field blank. Enter 0 for amounts.)
(a) Fair Value Method | (b) Equity Method | |||||||||
Transaction | Investment Account | Dividend Revenue | Investment Account | Investment Revenue | ||||||
1. | At the beginning of Year 1, Crane bought 25% of Hudson’s common stock at its book value. Total book value of all Hudson’s common stock was $880,000 on this date. | |||||||||
2. | During Year 1, Hudson reported $56,000 of net income and paid $28,000 of dividends. | |||||||||
3. | During Year 2, Hudson reported $30,000 of net income and paid $22,000 of dividends. | |||||||||
4. | During Year 3, Hudson reported a net loss of $8,000 and paid $4,400 of dividends. | |||||||||
5. | Indicate the Year 3 ending balance in the Investment account, and cumulative totals for Years 1, 2, and 3 for dividend revenue and investment revenue. |
Warning
Brief Exercise 17-11
Culver Company invests $10,300,000 in 5% 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 $10,790,000. Interest is paid on January 1.
Prepare journal entries for Culver Company to (a) record the transactions related to these bonds in 2017, assuming Culver does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Culver Company elects the fair value option to account for these bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
No. | Date | Account Titles and Explanation | Debit | Credit |
(a) | Jan. 1, 2017 Dec. 31, 2017 | |||
Jan. 1, 2017 Dec. 31, 2017 | ||||
(To record interest revenue) | ||||
(To record fair value adjustment) |
No. | Date | Account Titles and Explanation | Debit | Credit |
(b) | Jan. 1, 2017 Dec. 31, 2017 | |||
Jan. 1, 2017 Dec. 31, 2017 | ||||
(To record interest revenue) | ||||
Exercise 17-12
The following are two independent situations.
Situation 1
Sheridan Cosmetics acquired 10% of the 191,000 shares of common stock of Martinez Fashion at a total cost of $14 per share on March 18, 2017. On June 30, Martinez declared and paid $80,900 cash dividend to all stockholders. On December 31, Martinez reported net income of $121,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share.
Situation 2
Skysong, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 29,700 outstanding shares of common stock at a total cost of $10 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of $33,000. On December 31, Seles reported a net income of $79,200 for the year.
Prepare all necessary journal entries in 2017 for both situations. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Date | Account Titles and Explanation | Debit | Credit |
Situation 1: Sheridan Cosmetics | |||
Jan. 1, 2017 Mar. 18, 2017 June 15, 2017 June 30, 2017 Dec. 31, 2017 | |||
Jan. 1, 2017 Mar. 18, 2017 June 15, 2017 June 30, 2017 Dec. 31, 2017 | |||
Jan. 1, 2017 Mar. 18, 2017 June 15, 2017 June 30, 2017 Dec. 31, 2017 | |||
Situation 2: Skysong, Inc | |||
Jan. 1, 2017 Mar. 18, 2017 June 15, 2017 June 30, 2017 Dec. 31, 2017 | |||
Jan. 1, 2017 Mar. 18, 2017 June 15, 2017 June 30, 2017 Dec. 31, 2017 | |||
Jan. 1, 2017 Mar. 18, 2017 June 15, 2017 June 30, 2017 Dec. 31, 2017 | |||
Exercise 17-27
On August 15, 2016, Flint Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $810. The notional value of the call option is 900 shares, and the option price is $90. 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 | Time Value of Call Option | ||
September 30, 2016 | $108 per share | $405 | ||
December 31, 2016 | $104 per share | 146 | ||
January 15, 2017 | $106 per share | 68 |
Prepare the journal entries for Flint for the following dates.
(a) | Investment in call option on Counting Crows shares on August 15, 2016. | |
(b) | September 30, 2016—Flint prepares financial statements. | |
(c) | December 31, 2016—Flint prepares financial statements. | |
(d) | January 15, 2017—Flint settles the call option on the Counting Crows shares. |
(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
No. | Date | Account Titles and Explanation | Debit | Credit |
(a) | Aug. 15, 2016 Sep. 30, 2016 Dec. 31, 2016 Jan. 15, 2017 | |||
(b) | Aug. 15, 2016 Sep. 30, 2016 Dec. 31, 2016 Jan. 15, 2017 | |||
(To record the change in intrinsic value.) | ||||
(To record the time value change.) | ||||
(c) | Aug. 15, 2016 Sep. 30, 2016 Dec. 31, 2016 Jan. 15, 2017 | |||
(To record the change in intrinsic value.) | ||||
(To record the time value change.) | ||||
(d) | Aug. 15, 2016 Sep. 30, 2016 Dec. 31, 2016 Jan. 15, 2017 | |||
(To record the time value change.) | ||||
(To record settlement of call option.) |
Brief Exercise 19-2
Kingbird Corporation began operations in 2017 and reported pretax financial income of $212,000 for the year. Kingbird’s tax depreciation exceeded its book depreciation by $33,000. Kingbird’s tax rate for 2017 and years thereafter is 30%. In its December 31, 2017, balance sheet, what amount of deferred tax liability should be reported?
Deferred tax liability to be reported | $ |
Brief Exercise 19-6
At December 31, 2017, Buffalo Inc. had a deferred tax asset of $28,200. At December 31, 2018, the deferred tax asset is $55,400. The corporation’s 2018 current tax expense is $63,200.
What amount should Buffalo report as total 2018 income tax expense?
Total income tax expense for 2018 | $ |
Brief Exercise 19-11
At December 31, 2017, Windsor Corporation had a deferred tax liability of $555,000, resulting from future taxable amounts of $1,850,000 and an enacted tax rate of 30%. In May 2018, a new income tax act is signed into law that raises the tax rate to 35% for 2018 and future years.
Prepare the journal entry for Windsor to adjust the deferred tax liability. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit |
Brief Exercise 19-14
Ayayai Inc. incurred a net operating loss of $518,000 in 2017. Combined income for 2015 and 2016 was $336,000. The tax rate for all years is 30%. Ayayai elects the carryback option. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years.
Prepare all the journal entries necessary at the end of 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Account Titles and Explanation | Debit | Credit | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
(To record carryback.) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(To record carryforward.) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(To record allowance.) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Exercise 19-20 (Part Level Submission)
The differences between the book basis and tax basis of the assets and liabilities of Indigo Corporation at the end of 2016 are presented below.
Book Basis | Tax Basis | |||
Accounts receivable | $48,500 | $0 | ||
Litigation liability | 29,400 | 0 |
It is estimated that the litigation liability will be settled in 2017. The difference in accounts receivable will result in taxable amounts of $31,800 in 2017 and $16,700 in 2018. The company has taxable income of $334,000 in 2016 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years.
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Exercise 19-24 (Part Level Submission)
Monty Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.)
Year | Pretax Income (Loss) | Tax Rate | ||||
2015 | $121,000 | 40 | % | |||
2016 | 93,000 | 40 | % | |||
2017 | (287,000 | ) | 45 | % | ||
2018 | 129,000 | 45 | % |
The tax rates listed were all enacted by the beginning of 2015.
(a)
Prepare the journal entries for years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select “No Entry” for the account titles and enter 0 for the amounts.)
Date | Account Titles and Explanation | Debit | Credit | |||
2015 | ||||||
2016 | ||||||
2017 | ||||||
(To record refund.) | ||||||
(To record allowance.) | ||||||
2018 | ||||||
(To record income taxes.) | ||||||
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