A2_Check_Numbers
Assignment #2
Check Numbers
Problem #1
Requirement c
Income Statement
Unrealized Holding Loss: ($4,000)
Problem #2
Requirement b
Unrealized Holding Gain: $2,980,000
Problem #3
Requirement c
Investment Revenue for 2022: $720,000
Problem #4
Requirement b
Goodwill purchased: $156,000
ACCTG472_A2 new
Page 1
THE PENNSYLVANIA STATE UNIVERSITY
Accounting 472
Intermediate Financial Accounting II – Spring 2021
Assignment #2
GENERAL INSTRUCTIONS:
This assignment is due on Thursday, Fe
uary 11th at 5:00 p.m. Please submit your solution on
Canvas using Excel by 5:00 p.m. on the due date. Note that late assignments will not be
accepted.
Problem #1
Fair Value Accounting for Equity Investments
On September 30, 2021, the Christensen Corporation purchased the following investments in
other corporations common and prefe
ed stock:
Green Inc. 1,000 shares of common stock, no par. Paid $100 per share.
Xie Inc. 2,000 shares of prefe
ed stock, $20 par. Paid $20 per share.
At the end of 2021, which is also the end of Christensen Corporation's fiscal year, Green Inc.
market price was $110 per share and Xie Inc.'s market price was $13 per share.
On April 30, 2022, Christensen Corporation received from Green Inc. dividends of $2 per share
and from Xie Inc. dividends of $1 per share. On July 31, 2022, 200 shares of Green were sold for
$115 per share. At the end of 2022, Green Inc. market price was $90 per share and Xie Inc.'s
market price was $19.
REQUIRED:
a) Record the purchase of the Green Inc. and Xie Inc. share on September 30, 2021.
) Record the fair value of the share at the end of 2021 for Christensen Corporation.
c) Indicate how these investments would affect Christensen Corporation’s income statement
and balance sheet for 2021.
d) Record all journal entries for 2022.
e) Indicate how these investments would affect Christensen Corporation’s income statement
and balance sheet for 2022.
Page 2
Problem #2
Fair Value Accounting for Debt Investments (HTM, TS, and AFS)
On July 1, 2022, Watson paid $42 million for bonds of Carnes Inc; the bonds have a face value
of $58 million. The coupon rate on the bonds is 5% and the market rate of interest was 7% at the
time of purchase. The bonds pay interest every June 30 and December 31. The market value of
the bonds was $45 million at the end of XXXXXXXXXXWatson accounts for investments using the net
method.
REQUIRED:
a) Assume that the bonds are held-to-maturity securities, prepare the journal entries for
Watson Corporation to record the acquisition of the bonds on July 1 and the required
entries on December 31 (the fiscal year end for Watson Corporation).
) Assume that the bonds are held as trading securities, prepare the journal entries for
Watson Corporation to record the acquisition of the bonds on July 1 and the required
entries on December 31 (the fiscal year end for Watson Corporation).
c) Assume that the bonds are held as available-for-sale securities, prepare the journal entries
for Watson Corporation to record the acquisition of the bonds on July 1 and the required
entries on December 31 (the fiscal year end for Watson Corporation).
Problem #3
Equity Method
Wright Corporation purchased 40 percent of the outstanding common stock of Licastro Inc. for
$12,000,000 on January 12, XXXXXXXXXXOn the date of acquisition, Licastro Inc. reported the
following amounts on its balance sheet:
§ Depreciable assets $10,000,000
§ Non-depreciable assets $14,000,000
§ Liabilities $7,000,000
§ Common stock, par $10 $10,000,000
§ Retained earnings 7,000,000
The book values of the assets and liabilities are the same as their market values with the
exception of the depreciable assets which have a market value of $12,000,000. The assets are
depreciated using straight-line over 10 years.
REQUIRED:
a) Using the equity method, prepare the journal entry for Wright Corporation to record the
acquisition.
) Calculate how much goodwill Wright acquired.
c) Licastro Inc. reported net income during 2022 of $2,000,000 and paid a cash dividend of
$0.50 per share. Prepare the required journal entries for 2022 using the equity method.
Problem #4
Comparison of the Fair Value through Net Income and Equity Methods
On January 1, 2022, Reddy Company purchased 20 percent (40,000 shares) of Raich Corporation
for $280,000. The balance sheet of Raich Corporation on the acquisition contained the following
information:
Page 3
§ Assets subject to depreciation (use straight-line over 8 years) $500,000
§ Assets not subject to depreciation $150,000
§ Liabilities $70,000
The assets subject to depreciation have a market value of $540,000. The book values of the other
assets and liabilities equal their market values. Both companies have December 31 year-ends.
REQUIRED:
a) Prepare the required journal entries using the fair value through net income method for
the following events:
• Acquisition (if applicable, also compute the amount of goodwill acquired)
• Net income earned by Raich Corporation during 2022 of $28,000.
• Additional depreciation expense
• The price of Raich Corporation stock declined to $5 per share at the end of 2022.
• A cash dividend of $0.25 per share paid on August 3, 2022
) Prepare the required journal entries using the equity method for the same events listed
above.