Question 1 - Parnell Industries buys securities to be available for sale when circumstances warrant, not to profit from short-term differences in price and not necessarily to hold debt securities to maturity. The following selected transactions relate to investment activities of Parnell Industries whose fiscal year ends on December 31. No investments were held by Parnell at the beginning of the year.
2018 -
March 1 - Purchased 2 million Platinum Gems, Inc. common shares for $124 million, plus $2 million in brokerage fees and commissions.
April 13 - Purchased $200 million of 10% bonds at face value from Oracle Wholesale Corporation.
July 20 - Received cash dividends of $3 million on the investment in Platinum Gems, Inc. common shares.
October 13 - Received semiannual interest of $10 million on the investment in Oracle bonds.
October 14 - Sold the Oracle bonds for $205 million.
November 1 - Purchased 500,000 SPI International preferred shares for $40 million, plus $1 million in brokerage fees and commissions.
December 31 - Recorded the necessary adjusting entry(s) relating to the investments. The market prices of the investments are $64 per share for Platinum Gems, Inc. and $74 per share for SPI International preferred shares.
Required:
1. Prepare the appropriate journal entry for each transaction or event, applying ASC 825-10 recognition and measurement which is effective for US GAAP public entities beginning in 2018.
2. Show the amounts that would be reported on the company's 2018 income statement related to these investments.
Question 2 - On January 4, 2018, RTN Industries paid $648,000 for 20,000 shares of Austin Cattle Company common stock. The investment represents a 30% interest in the net assets of Austin and gave RTN the ability to exercise significant influence over Austin's operations. RTN received dividends of $3.00 per share on December 6, 2018, and Austin reported net income of $320,000 for the year ended December 31, 2018. The market value of Austin's common stock at December 31, 2018, was $32 per share. The book value of Austin's net assets was $1,600,000 and:
a. The fair market value of Austin's depreciable assets, with an average remaining useful life of 8 years, exceeded their book value by $160,000.
b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related to the investment during 2008, assuming RTN accounts for this investment by the equity method. What is the carrying amount of this investment on RTN's balance sheet as of December 31, 2008? What's the effect of this investment on RTN's 2008 income before taxes?
2. Prepare the journal entries required by RTN, assuming that RTN elected the fair value option under SFAS 159. What is the carrying amount of this investment on RTN's balance sheet as of December 31, 2018? What's the effect of this investment on RTN's 2018 income before taxes?
Question 3 - Bridgeport Company buys and sells securities expecting to make money on short-term price movements. The company's fiscal year ends on December 31. The following transactions relating to Bridgeport's trading accounts occurred during December 2018 and the first week of 2019.
2018
December 3: Purchased 100,000 shares of VMWare Corporation's common stock at $80 per share.
December 7: Purchased 150,000 shares of Intel Corporation's common stock at $20 per share.
December 24: Received cash dividends of $0.10 per share from the Intel common stock.
December 31: Recorded any necessary adjusting entries relating to the VMWare and Intel shares. The market prices for VMWare and Intel were $77 per share and $23.50 per share respectively.
2019
January 2: Sold the 100,000 shares of VMWare common stock at $75 per share.
January 4: Sold the 150,000 shares of Intel common stock at $22 per share.
Required:
1. Prepare the appropriate journal entry for each transaction.
2. Indicate any amounts Bridgeport Company would report in its 2018 balance sheet and income statement as a result of these investments.