INTERMEDIATE ACCOUNTING II EXAM 1 Name _________________________________ To receive full credit s how computations where necessary. 1. XYZ Co. owns securities, which are considered to be available for sale. Cost FMV Dec. 31, YI FMV Dec. 31, YII FMV Dec. 31, YIII A 30,000 25,000 33,000 29,000 B 60,000 62,000 64,000 C 40,000 38,000 42,000 27,000 D 50,000 51,000 E 62,000 In Year II, XYZ purchased security D for $57,000. In Year III XYZ sold security B for $54,000 and purchased security E for $58,000. Prepare adjusting entries for Year I, II, and III and for the purchase and sale of securities during Years II and III. Dec 31, Year I Adjustment Dec 31, Year I Adjustment: At the end of Year I, XYZ needs to adjust the securities' fair market value (FMV) to the available - for - sale value. The fair value adjustments are done by debiting or crediting "Unrealized Holding Gain/Loss" and adjusting "Fair Value Adjustment" for each security. • Security A: o FMV on Dec 31, Year I = $25,000 o Cost = $30,000 o Unrealized loss = $30,000 - $25,000 = $5,000 Journal Entry: o Debit: Unrealized Holding Loss $5,000 o Credit: Fair Value Adjustment - Security A $5,000 • Security B: o FMV on Dec 31, Year I = $62,000 o Cost = $60,000 o Unrealized gain = $62,000 - $60,000 = $2,000 Journal Entry: o Debit: Fair Value Adjustment - Security B $2,000 2 o Credit: Unrealized Holding Gain $2,000 • Security C: o FMV on Dec 31, Year I = $38,000 o Cost = $40,000 o Unreali zed loss = $40,000 - $38,000 = $2,000 Journal Entry: o Debit: Unrealized Holding Loss $2,000 o Credit: Fair Value Adjustment - Security C $2,000 • Security D: o No value adjustment needed as it was not yet purchased in Year I. Year II Purchase Year II Purchase: In Year II, XYZ purchased security D for $57,000. Journal Entry for Purchase: • Debit: Available - for - Sale Securities (Security D) $57,000 • Credit: Cash $57,000 Dec 31, Year II Adjustment Dec 31, Year II Adjustment: At the end of Year II, XYZ n eeds to adjust the fair market values of each security. • Security A: o FMV on Dec 31, Year II = $33,000 o Cost = $30,000 o Unrealized gain = $33,000 - $30,000 = $3,000 Journal Entry: o Debit: Fair Value Adjustment - Security A $3,000 o Credit: Unrealized Holding Gain $3,000 • Security B: o FMV on Dec 31, Year II = $64,000 o Cost = $60,000 o Unrealized gain = $64,000 - $60,000 = $4,000 Journal Entry: o Debit: Fair Value Adjustment - Security B $4,000 o Credit: Unrealized Holding Gain $4,000 • Security C: o FMV on Dec 31, Year II = $42,000 o Cost = $40,000 o Unrealized gain = $42,000 - $40,000 = $2,000 Journal Entry: o Debit: Fair Value Adjustment - Security C $2,000 o Credit: Unrealized Holding Gain $2,000 • Security D: 3 o FMV on Dec 31, Year II = $51,000 o C ost = $57,000 o Unrealized loss = $57,000 - $51,000 = $6,000 Journal Entry: o Debit: Unrealized Holding Loss $6,000 o Credit: Fair Value Adjustment - Security D $6,000 Year III Sale Year III Sale: In Year III, XYZ sold security B for $54,000. Journal Entry for Sale: • Debit: Cash $54,000 • Debit: Fair Value Adjustment - Security B $4,000 (to reverse previous adjustment) • Credit: Available - for - Sale Securities $60,000 (to remove cost of security B) • Credit: Unrealized Holding Gain $2,000 (realized gain from prior adju stment) Year III Purchase Year III Purchase: In Year III, XYZ purchased security E for $58,000. Journal Entry for Purchase: • Debit: Available - for - Sale Securities (Security E) $58,000 • Credit: Cash $58,000 Dec 31, Year III Adjustment Dec 31, Year II I Adjustment: At the end of Year III, XYZ needs to adjust the fair market values of each security. • Security A: o FMV on Dec 31, Year III = $29,000 o Cost = $30,000 o Unrealized loss = $30,000 - $29,000 = $1,000 Journal Entry: o Debit: Unrealized Holding Loss $1,000 o Credit: Fair Value Adjustment - Security A $1,000 • Security C: o FMV on Dec 31, Year III = $27,000 o Cost = $40,000 o Unrealized loss = $40,000 - $27,000 = $13,000 Journal Entry: o Debit: Unrealized Holding Loss $13,000 o Credit: Fair Value Adjustment - Security C $13,000 4 • Security D: o FMV on Dec 31, Year III = $51,000 o Cost = $57,000 o Unrealized loss = $57,000 - $51,000 = $6,000 Journal Entry: o Debit: Unrealized Holding Loss $6,000 o Credit: Fair Value Adjustment - Security D $6,000 • S ecurity E: o FMV on Dec 31, Year III = $62,000 o Cost = $58,000 o Unrealized gain = $62,000 - $58,000 = $4,000 Journal Entry: o Debit: Fair Value Adjustment - Security E $4,000 o Credit: Unrealized Holding Gain $4,000 The following information pertains to Crystal Inc.’s portfolio of investments for the year ended December 31, 20 10 : Cost Fair Value 12/31/0 9 20 10 Purchases 20 10 Sales Fair Value 12/31 /10 Held - to - maturity securities Security Joy $128,000 $130,000 Trading equity securities Security Kris $700,000 $725,000 705,000 Security Andrew 100,000 110,000 $1 3 0,000 Available - for - sale equity securities Security Stan 400,000 380,000 5 1 0,000 Security Lloyd 100,000 95,000 10 5 ,000 Assume that Security Joy is a debt security that was purchased at a premium. The premium amortization for 20 10 was $ 4 ,000. All declines in fair value are considered temporary. Answer questions 2 - 8 using the above info rmation. 2. What is the amount of Security Joy at December 31, 20 10 that should be carried on the balance sheet? Security Joy: • Cost = $128,000 • Amortization of premium = $4,000 • Carrying value = $128,000 + $4,000 = $132,000 5 3. What is the amount of Security Kris at December 31, 20 10 that should be carried on the balance sheet? Security Kris: • FMV on 12/31/10 = $705,000 4 . What is the amount of Security Lloyd at December 31, 20 10 that should be carried on the balance sheet? Security Lloyd: • FMV on 12/31/10 = $105,000 5 . What is the journal entry recorded on the sale of Security Andrew? Sale of Security Andrew: • FMV = $130,000 • Cost = $100,000 • Gain on sale = $130,000 - $100,000 = $30,000 Journal Entry: • Debit: Cash $130,000 • Credit: A vailable - for - Sale Securities $100,000 • Credit: Realized Gain on Sale of Security $30,000 6 . What is the amount of realized gain or loss on Security Stan? Security Stan: • FMV = $510,000 • Cost = $400,000 • Realized gain = $510,000 - $400,000 = $110,0 00 7 . What is the amount of unrealized gain or loss to be reported on the 20 10 income statement? Unrealized gain/loss on trading securities: • Security Kris : FMV = $705,000, Cost = $700,000 → Unrealized gain = $705,000 - $700,000 = $5,000 • Security And rew : FMV = $130,000, Cost = $100,000 → Unrealized gain = $130,000 - $100,000 = $30,000