EXERCISES QUESTION -

Q1. Max Weinberg is studying for an accounting test and has developed the following ques¬tions about investments.

1. What are three reasons why companies purchase investments in debt or stock securities?

2. Why would a corporation have excess cash that it does not need for operations?

3. What is the typical investment when investing cash for short periods of time?

4. What are the typical investments when investing cash to generate earnings?

5. Why would a company invest in securities that provide no current cash flows?

6. What is the typical stock investment when investing cash for strategic reasons?

Instructions - Provide answers for Max.

Q2. Foren Corporation had the following transactions pertaining to debt investments.

Jan. 1 Purchased 50 8%, $1,000 Choate Co. bonds for $50,000 cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1.

July 1 Received semiannual interest on Choate Co. bonds.

July 1 Sold 30 Choate Co. bonds for $34,000 less $500 brokerage fees.

Instructions

(a) Journalize the transactions.

(b) Prepare the adjusting entry for the accrual of interest at December 31.

Q3. Emmy Lou Company purchased 70 Harris Company 12%, 10-year, $1,000 bonds on January 1, 2010, for $73,000. EmmyLou Company also had to pay $500 of broker's fees. The bonds pay interest semiannually on July 1 and January 1. On January 1,2011, after receipt of interest, EmmyLou Company sold 40 of the bonds for $40,100.

Instructions - Prepare the journal entries to record the transactions described above.

Q4. Dossett Company had the following transactions pertaining to stock investments.

Feb. 1 Purchased 600 shares of Goetz common stock (2%) for $6,000 cash, plus brokerage fees of $200.

July 1 Received cash dividends of $1 per share on Goetz common stock.

Sept. 1 Sold 300 shares of Goetz common stock for $4,400, less brokerage fees of $100.

Dec. 1 Received cash dividends of $1 per share on Goetz common stock.

Instructions -

(a) Journalize the transactions.

(b) Explain how dividend revenue and the gain (loss) on sale should be reported in the income statement.

Q5. Wyrick Inc. had the following transactions pertaining to investments in common stock.

Jan. 1 Purchased 2,500 shares of Murphy Corporation common stock (5%) for $140,000 cash plus $2,100 broker's commission.

July 1 Received a cash dividend of $3 per share.

Dec. 1 Sold 500 shares of Murphy Corporation common stock for $32,000 cash, less $800 broker's commission.

Dec. 31 Received a cash dividend of $3 per share.

Instructions - Journalize the transactions.

Q6. On February 1, Neil Company purchased 500 shares (2% ownership) of Young Company common stock for $30 per share plus brokerage fees of $400. On March 20, Neil Company sold 100 shares of Young stock for $2,900, less a $50 brokerage fee. Neil received a dividend of $1.00 per share on April 25. On June 15, Neil sold 200 shares of Young stock for $7,400, less a $90 brokerage fee. On July 28, Neil received a dividend of $1.25 per share.

Instructions - Prepare the journal entries to record the transactions described above.