Question: I. 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.
2016 March 1 Purchased 2 million Platinum Gems, Inc. common shares for $124 million, including 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, including 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.
2017 January 25 Sold half the Platinum Gems, Inc. shares for $65 per share.
March 1 Sold the SPI International preferred shares for $78 per share.
December 31 Recorded the necessary adjusting entry(s) relating to the investments. The market price of the investments is $65 per share for Platinum Gems, Inc.
Required: 1. Prepare the appropriate journal entry for each transaction or event.
2. Show the amounts that would be reported on the company's 2016 income statement relative to these investments.
II. As a long-term investment at the beginning of the fiscal year, Paper Products International purchased 35% of Reed's Restaurant Supplies, Inc.'s 12 million shares for $73 million. The fair value and book value of the shares were the same at that time. During the year, Reed's Restaurant Supplies earned net income of $20 million and distributed cash dividends of $1.10 per share. At the end of the year, the fair value of the shares is $59 million.
Required: Prepare the appropriate journal entries from the purchase through the end of the year.
III. On January 4, 2016, 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, 2016, and Austin reported net income of $320,000 for the year ended December 31, 2016. The market value of Austin's common stock at December 31, 2016, was $32 per share. The book value of Austin's net assets was $1,600,000.
Required: 1. Prepare all appropriate journal entries related to the investment during 2016, assuming RTN accounts for this investment by the equity method.
2. Prepare the journal entries required by RTN, assuming that the 20,000 shares represent a 10% interest in the net assets of Austin rather than a 30% interest, and that RTN anticipates selling their investment in Austin for the foreseeable future.