Diversified Services, Inc., offers a variety of business services, including financial services through its escrow division. Diversified entered into the following investment activities during the last month of 2011 and the first week of 2012. Diversified's fiscal year ends on December 31. The only securities held by Diversified at December 1 were 12 million common shares of Shelby Laminations, Inc., purchased in November for $50 million and classified as available for sale.
2011,Dec.1 Purchased $30 million of 12% bonds of VinceGill Amusement Corporation and $24 million of 10% bonds of Eastern Waste Disposal Corporation, both at face value and both to be held until they mature.
Interest on each bond issue is payable semiannually on November 30 and May 31.
9 Sold onehalf of the Shelby Laminations common shares for $26 million.
29 Received cash dividends of $1.5 million from the Shelby Laminations common shares.
30 Purchased U.S. Treasury bonds for $5.8 million as trading securities hoping to earn profits on shortterm differences in prices.
31 Recorded the necessary adjusting entry(s) relating to the investments.The year end market price of the Shelby Laminations common stock was $4.25 per share. The fair values of the bond investments were $32 million for VinceGill Amusement Corporation and $20 million for Eastern Waste Disposal Corporation. A sharp rise in short term interest rates on the last day of the year caused the fair value of the Treasury bonds to fall to $5.7 million.
2012,Jan. 7 Sold the remaining Shelby Laminations common shares for $27 million.
Required:
Prepare the appropriate journal entry for each transaction or event and show the amounts that would be reported in the company's 2011 income statement relative to these investments. Determine the effects of the Shelby Laminations investment on net income, other comprehensive income, and comprehensive income for 2011, 2012, and combined over both years.
2011,Dec.1 Purchased $30 million of 12% bonds of VinceGill Amusement Corporation and $24 million of 10% bonds of Eastern Waste Disposal Corporation, both at face value and both to be held until they mature. Interest on each bond issue is payable semiannually on November 30 andMay 31.
Dec.9 Sold onehalf of the Shelby Laminations common shares for $26 million.
Sale of onehalf of the Shelby Laminations shares results in a $1 million gain ($26 million sales price [$50 million cost · 2]).
Dec.29 Received cash dividends of $1.5 million from the Shelby Laminations common shares.
Dec.30 Purchased U.S. Treasury bonds for $5.8 million as trading securities, hoping to earn profits on short term differences in prices.
Dec.31 Recorded the necessary adjusting entry(s) relating to the investments.
2012,Jan. 7 Sold the remaining Shelby Laminations common shares for $27 million.
The fair value of the Shelby shares at the time of sale is $27 million. Those shares were purchased for $25 million ($50 million - ½), so the gain realized on the sale is $2 million.
Given that the fair value adjustment for the Shelby shares has a $0.5 million balance (recorded on 12/31/11), we need to remove that amount and eliminate the corresponding unrecognized gain from AOCI. This happens automatically when we next adjust the portfolio to fair value. If we were to make the adjustment separately, the entry would be:
The Shelby investment affected net income, other comprehensive income, and comprehensive income as follows ($ in millions):