Reference no: EM133108104
Question 1 - Hurricane Inc. purchased a portfolio of available-for-sale securities in Year 1, its first year of operations. The cost and fair value of this portfolio on December 31, Year 1, was as follows:
|
Name
|
Number of Shares
|
Total Cost
|
Total Fair Value
|
|
Tornado Inc.
|
1,250
|
$16,750
|
$18,590
|
|
Tsunami Corp.
|
850
|
27,880
|
30,390
|
|
Typhoon Corp.
|
200
|
6,400
|
6,080
|
|
Total
|
|
$51,030
|
$55,060
|
On June 12, Year 2, Hurricane purchased 600 shares of Rogue Wave Inc. at $32 per share plus a $80 brokerage commission.
Required -
a. Provide the journal entries to record the following:
1. The adjustment of the available-for-sale security portfolio to fair value on December 31, Year 1.
2. The June 12, Year 2, purchase of Rogue Wave Inc. stock.
b. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?
Question 2 - On January 6, Year 1, Bulldog Co. purchased 29% of the outstanding stock of Gator Co. for $176,000. Gator Co. paid total dividends of $19,400 to all shareholders on June 30. Gator Co. had a net loss of $33,400 Year 1.
Required -
a. Journalize Bulldog's purchase of the stock, receipt of the dividends, and the adjusting entry for the equity loss in Gator Co. stock.
b. Compute the balance of Investment in Gator Co. Stock on December 31, Year 1.
c. How does valuing an investment under the equity method differ from valuing an investment at fair value?