Acc306 Intermediate Accounting: Week 1 (P12-1, P12-7, P12-10, P12-14, E12-21, E13-22, P13-6)

Acc306 Intermediate Accounting
Week 1 Assignment (P12-1, P12-7, P12-10, P12-14, E12-21, E13-22, P13-6)
P12-1 Fuzzy Monkey Technologies Inc.
P12-7 Amalgamated General Corporation
P12-10 Runyan Bakery
P12-14 Classifying Investments
E12-21 Disclosures of Liabilities
E13-22 Woodmier Lawn Products
P13-6 Eastern Manufacturing

P12-1 Securities held-to-maturity; bond investment; effective interest
Fuzzy Monkey Technologies, Inc., purchased as a long-term investment $80 million of 8% bonds, dated January 1, on January 1, 2011. Management has the positive intent and ability to hold the bonds until maturity. For bonds of similar risk and maturity the market yield was 10%.
The price paid for the bonds was $66 million. Interest is received semiannually on June 30 and December 31. Due to changing market conditions, the fair value of the bonds at December 31, 2011, was $70 million.

1. Prepare the journal entry to record Fuzzy Monkey’s investment on January 1, 2011.
2. Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effective rate).
3. Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the effective rate).
4. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance sheet? Why?
5. How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment?

P12–7 Securities held-to-maturity, securities available for sale, and trading securities
Amalgamated General Corporation is a consulting firm that also offers financial services through its credit division. From time to time the company buys and sells securities intending to earn profits on short-term differences in price. The following selected transactions relate to Amalgamated’s investment activities during the last quarter of 2011 and the first month of 2012. The only securities held by Amalgamated at October 1 were $30 million of 10% bonds of Kansas Abstractors, Inc., purchased on May 1 at face value. The company’s fiscal year ends on December 31.
Oct 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58 million as a speculative investment to be sold under suitable circumstances.
Oct 31 Received semiannual interest of $1.5 million from the Kansas Abstractors bonds.
Nov 1 Purchased 10% bonds of Holistic Entertainment Enterprises at their $18 million face value, to be held until they mature in 2018. Semiannual interest is payable April 30 and October 31.
Nov 1 Sold the Kansas Abstractors bond for $28 million because rising interest rates are expected to cause their fair value to continue to fall.
Dec 1 Purchased 12% bonds of Household Plastics Corporation at their $60 million face value, to be held until they mature in 2028. Semiannual interest is payable May 31 and November 30.
Dec 20 Purchased U.S. Treasury bonds for $5.6 million as trading securities, hoping to earn profits on short-term differences in prices.
Dec 21 Purchased 4 million common shares of NXS Corporation for $44 million as trading securities, hoping to earn profits on short-term differences in prices.
Dec 22 Sold the Treasury bonds for $5.7 million.
Dec 29 Received cash dividends of $3 million from the Millwork Ventures Company preferred shares.
Dec 30 Recorded any necessary adjusting entry(s) and closing entries relating to the investments. The market price of the Millwork Ventures Company preferred stock was $27.50 per share and $11.50 per share for the NXS Corporation common. The fair values of the bond investments were $58.7 million for Household Plastics Corporation and $16.7 million for Holistic Entertainment Enterprises.
Jan. 7 Sold the NXS Corporation common shares for $43 million.

Prepare the appropriate journal entry for each transaction or event.

P12–10 Fair value option; equity method investments
On January 4, 2011, Runyan Bakery paid $324 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery’s operations. Runyan chose the fair value option to account for this investment. Runyan received dividends of $2.00 per share on December 15, 2011, and Lavery reported net income of $160 million for the year ended December 31, 2011. The market value of Lavery’s common stock at December 31, 2011, was $31 per share. On the purchase date, the book value of Lavery’s net assets was $800 million and:
a. The fair value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million.
b. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill.

1. Prepare all appropriate journal entries related to the investment during 2011, assuming Runyan accounts for this investment under the fair value option and accounts for the Lavery investment in a manner similar to what they would use for trading securities.
2. What would be the effect of this investment on Runyan's 2011 net income?

P12–14 Classifying Investments
Reporting category Item
T. Securities ___ 1. 35% of the nonvoting preferred stock of American Aircraft Company.
M. Securities held-to-maturity ___ 2. Treasury bills to be held to maturity.
A. Securities available-for-sale ___ 3. Two-year note receivable from affiliate.
E. Equity method ___ 4. Accounts receivable.
C. Consolidation ___ 5. Treasury bond maturing in one week.
N. None of these ___ 6. Common stock held in trading account for immediate resale.
___ 7. Bonds aquired to profit from short-term differences in price.
___ 8. 35% of the voting common stock of Computer Storage Devices Company.
___ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.
___ 10. Corporate bonds of Primary Smelting Company to be sold if interest rates fall 1/2%.
___ 11. 25% of the voting common stock of Smith Foundries Corporation: 51% family-owned by Smith family; fair value determinable.
___ 12. 17% of the voting common stock of Shipping Barrels Corporation; Investor's CEO on the board of directors of Shipping Barrels Corporation.

Indicate (by letter) the way each of the investments listed below most likely should be accounted for based on the information provided.

E13–21 - Disclosures of liabilities
Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2011.
Item Reporting Category
1. Commercial paper. N. Not reported
2. Noncommitted line of credit. C. Current liability
3. Customer advances. L. Long-term liability
4. Estimated warranty cost. D. Disclosure note only
5. Accounts payable. A. Asset
6. Long-term bonds that will be callable by the creditor in ther upcoming year unless an existing violation is not corrected (there is a reasonable possibility the violation will be corrected within the grace period).
7. Note due March 3, 2012.
8. Interest accrued on note, Dec. 31, 2011.
9. Short-term bank loan to be paid with proceeds of sale of common stock.
10. A determinable gain that is contingent on a future event that appears extremely likely to occur in three months.
11. Unasserted assessment of back taxes that probably will be asserted, in which case there would probably be a loss in six months.
12. Unasserted assessment of back taxes with a reasonable possibility of being asserted, in which case there would probably be a loss in 13 months.
13. A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months.
14. Bond sinking fund.
15. Long-term bonds callable by the creditor in the upcoming year that are not expected to be called.

E13–22 Warranty expense; change in estimate
Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one-year warranty against manufacturer’s defects. Because this was the first product for which the company offered a warranty, trade publications were consulted to determine the experience of others in the industry. Based on that experience, warranty costs were expected to approximate 2% of sales. Sales of the sprinklers in 2010 were $2.5 million. Accordingly, the following entries relating to the contingency for warranty costs were recorded during the first year of selling the product:
Accrued liability and expense
Warranty expense (2% x $ 2,500,000) 50,000
Estimated warranty liability 50,000
Actual expenditures (summary entry)
Estimated warranty liability 23,000
Cash, wages payable, parts and supplies, etc. 23,000
In late 2011, the company's claims experience was evaluated and it was determined that claims were far more than expected - 3% of sales rather that 2%.

1. Assuming sales of the sprinklers in 2011 were $3.6 million and warranty expenditures in 2011 totaled $88,000, prepare any journal entries related to the warranty.
2. Assuming sales of the sprinklers were discontinued after 2010, prepare any journal entry(s) in 2011 related to the warranty.

P13–6 Various contingencies
Eastern Manufacturing is involved with several situations that possibly involve contingencies. Each is described below. Eastern’s fiscal year ends December 31, and the 2011 financial statements are issued on March 15, 2012.
a. Eastern is involved in a lawsuit resulting from a dispute with a supplier. On February 3, 2012, judgment was rendered against Eastern in the amount of $107 million plus interest, a total of $122 million. Eastern plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.
b. In November 2010, the State of Nevada filed suit against Eastern, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On January 12, 2012, Eastern reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $140 million will be required to cover the cost of violations. Eastern believes that the ultimate settlement of this claim will not have a material adverse effect on the company.
c. Eastern is the plaintiff in a $200 million lawsuit filed against United Steel for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Eastern will prevail and be awarded $100 million.
d. At March 15, 2012, the Environmental Protection Agency is in the process of investigating possible soil contamination at various locations of several companies including Eastern. The EPA has not yet proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $33 million is reasonably possible.

1. Determine the appropriate means of reporting each situation. Explain your reasoning.
2. Prepare any necessary journal entries and disclosure notes.
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