CH 17 IN CLASS PROBLEMS

EXERCISE 17-12 (1520 minutes)

Situation 1: Journal entries by Hatcher Cosmetics:
To record purchase of 20,000 shares of Ramirez Fashion at a cost of
$14 per share:
March 18, 2012
Equity Investments (Available-for-Sale) .......................
Cash ........................................................................

280,000
280,000

To record the dividend revenue from Ramirez Fashion:

June 30, 2012
Cash ...................................................................................
Dividend Revenue ($75,000 X 10%) ..........................

7,500
7,500

To record the investment at fair value:

December 31, 2012
Fair Value Adjustment (Available-for-Sale) .....................
Unrealized Holding Gain or LossEquity ...............

20,000
20,000*

*($15 $14) X 20,000 shares = $20,000

Situation 2: Journal entries by Holmes, Inc.:
To record the purchase of 25% of Nadal Corporations common stock:
January 1, 2012
Equity Investments (Nadal Corp.) ....................................
Cash [(30,000 X 25%) X $9] .......................................

67,500
67,500

Since Holmes, Inc. obtained significant influence over Nadal Corp.,

Holmes, Inc. now employs the equity method of accounting.
To record the receipt of cash dividends from Nadal Corporation:
June 15, 2012

Cash ($36,000 X 25%) .......................................................

Equity Investments (Nadal Corp.) ............................

9,000
9,000

To record Holmess share (25%) of Nadal Corporations net income of

$85,000:
December 31, 2012
Equity Investments (Nadal Corp.) ...................................
Revenue from Investment (25% X $85,000).............

21,250
21,250

EXERCISE 17-17 (1015 minutes)

Equity Investments (Pirates Co.)...........................
Cash.................................................................

200,000

Cash ($20,000 X .25) ...............................................

Equity Investments (Pirates Co.) ...................

5,000

Equity Investments (Pirates Co.)...........................

Revenue from Investment
(.25 X $80,000) ..............................................

20,000

200,000
5,000

20,000

PROBLEM 17-6

(a) (1)

October 10, 2012

Cash (5,000 X $54) ..........................................
Gain on Sale of Investments ..................
Equity Investments (Trading) .................

(2)

270,000
55,000
215,000

November 2, 2012
Equity Investments (Trading) .......................
Cash (3,000 X $54.50) ..............................

163,500
163,500

(3) At September 30, 2012, McElroy had the following fair value
adjustment:

Trading Securities PortfolioSeptember 30, 2012

Securities
Horton, Inc. common
Monty, Inc. preferred
Oakwood Corp. common
Total of portfolio
Previous fair value adjustment
balance
Fair value adjustmentCr.

Cost
$215,000
133,000
180,000
$528,000

Fair
Value

Unrealized
Gain (Loss)

$200,000
140,000
179,000
$519,000

($(15,000)
( 7,000)
( (1,000)
((9,000)
(
0)
($ (9,000)

PROBLEM 17-6 (Continued)

At December 31, 2012, McElroy had the following fair value
adjustment:
Trading Securities PortfolioDecember 31, 2012
Securities
Monty, Inc. preferred
Oakwood Corp. common
Patriot common
Total of portfolio
Previous fair value adjustment
balanceCr.
Fair value adjustmentCr.

Cost

Fair
Value

Unrealized
Gain (Loss)

$133,000 $106,000
180,000 193,000
163,500 132,000
$476,500 $431,000

($(27,000)
13,000)
( (31,500)
(45,500)
(9,000)
($(36,500)

The entry on December 31, 2012 is therefore as follows:

Unrealized Holding Gain or LossIncome ......
Fair Value Adjustment (Trading) ...............

36,500
36,500

(b) The entries would be the same except that instead of debiting and
crediting accounts associated with trading securities, the
accounts used would be associated with available-for-sale
securities. In addition, the Unrealized Holding Gain or Loss
Equity account is used instead of Unrealized Holding Gain or
LossIncome. The unrealized holding loss in this case would be
deducted from the stockholders equity section rather than
charged to the income statement.