Questions -
Q1. The following information pertains to June Inc.'s portfolio of investments for the year ended December 31, 2006.
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Cost
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Fair Value 12/31/05
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2006 Purchases
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2006 Sales
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Fair Value 12/31/06
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Held-to-maturity securities
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Security Carl
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$50,000
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$54,000
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Trading securities
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|
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Security Guy
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$150,000
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$40,000
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60,000
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Security Paul
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7,000
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9,000
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$9,000
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Available-for-sale securities
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|
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Security Norm
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100,000
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80,000
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130,000
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Security Linda
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20,000
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26,000
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28,000
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Assume that Security Carl is a debt security that was purchased at a premium. The premium amortization for 2006 was $500. All declines in fair value are considered to be temporary.
Required:
1. What is the carrying amount of Security Carl at December 31, 2006?
2. What is the carrying amount of Security Guy at December 31, 2006?
3. What is the carrying amount of Security Linda at December 31, 2006?
4. What is the amount of realized gain or loss on Security Paul for 2006?
5. What is the amount of realized gain or loss on Security Norm for 2006?
6. What is the amount of unrealized gain or loss to be reported on the 2006 income statement?
7. What is the amount of unrealized gain or loss to be reported at December 31, 2006, as a separate component of stockholders' equity?
Q2. Jet Company, an airplane manufacturer, is in the process of preparing its financial statements for the year ended December 31, 2006. Jet expects to issue its 2006 financial statements on February 28, 2007. Consider the proper accounting for each of the following items. You may ignore income tax effects in all cases.
a. A former employee of Jet Company has brought a wrongful dismissal suit against Jet. Jet's lawyers believe the suit to be without merit.
b. A government contract completed during 2006 is subject to renegotiation. Jet estimates that it is reasonably possible that a refund to the government of approximately $300,000 to $400,000 may be required.
c. On November 15, 2006, Jet guaranteed a bank loan of $100,000 for the CEO's personal use. The risk of loss is remote.
d. On November 1, 2006, Jet was sued for $450,000. The coverage under the comprehensive insurance policy is limited to $200,000. Jet's attorney believes that an unfavorable outcome is probable and that a reasonable estimate of the settlement is $450,000. The case is expected to be resolved early in 2007.
e. Jet offers a warranty on all new airplanes. Sales during 2006 were $100,000,000. Jet estimates its warranty expense to be 3 percent of sales. Warranty expenses paid in 2006 were $500,000.
f. On December 1, 2006, Jet was awarded damages of $750,000 in a patent infringement suit it brought against a competitor. The defendant did not appeal the verdict, and payment was received on January 31, 2007.
g. On January 12, 2007, a plant with a carrying value of $4,000,000 and a fair value of $8,000,000 was destroyed by an explosion. Insurance proceeds of $1,500,000 are expected by year end.
h. During 2004, Jet was involved in a tax dispute with the IRS concerning the 2004 tax year. As of December 31, 2006, Jet's tax accountants believed that a favorable outcome was probable. A reasonable estimate of the tax refund was between $4,000,000 and $6,000,000.
Required: For each of the above items, determine if an adjustment is required and indicate the amount and appropriate classifications of any liability on the December 31, 2006, balance sheet.