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PHOENIX COLLEGE / Acct, Fin, Ins & Risk Mgt Department / Acc 306 / fuzzy monkey technologies, inc., purchased as a long-term investment $

fuzzy monkey technologies, inc., purchased as a long-term investment $

fuzzy monkey technologies, inc., purchased as a long-term investment $

Description

School: Phoenix College
Department: Acct, Fin, Ins & Risk Mgt Department
Course: Intermediate Accounting II
Professor: De paul
Term: Spring 2017
Tags: ACC 306 Week 1 DQ 2 Judgment Case 13-9, ACC 306 Week 1 DQ 1 Equity Method, ACC 306 Week 1 Assignment E13-21, E13-22, P12-1, P12-7, P12-10, P12-14, and P13-6
Cost: 25
Name: ACC 306 Week 1 Notes
Description: ACC 306 Week 1 Assignment E13-21, E13-22, P12-1, P12-7,P12-10, P12-14, P13-6 ACC 306 Week 1 DQ 1 Equity Method ACC 306 Week 1 DQ 2 Judgment Case 13-9
Uploaded: 02/22/2017
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P 12–13 - Miller Properties - Equity method ● LO5 LO6 On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon  Company’s 6 million outstanding common shares. Miller’s CEO became a member of Marlon’s board of directors during the first quarter of 2011. The carrying amount of Marlon’s net assets was $66 million. Miller estimated the  fair value of those net as- sets to be the same except for a patent valued at $24  million above cost. The remaining amortization period for the patent is 10 years. Marlon reported earnings of $12 million and paid dividends of $6 million during  2011. On December 31, 2011, Marlon’s common stock was trading on the NYSE at  $18.50 per share. Required: 1. When considering whether to account for its investment in Marlon under the  equity method, what criteria should Miller’s management apply? 2. Assume Miller accounts for its investment in Marlon using the equity method.  Ignoring income taxes, deter- mine the amounts related to the investment to be  reported in its 2011:  a. Income statement.  b. Balance sheet. c. Statement of cash flows. Problem 12­13 Requirement 1  Miller’s   management   should   decide   whether   it   has   the   ability   to   exercise significant influence over operating and financial policies of the Marlon Company. Ability to exercise significant influence is presumed for investments of 20 percent or more of voting stock and presumed not to exist for investments of less than 20 percent, other things being equal.  Evidence to the contrary should be considered, including   participation   on   the   board   of   directors,   technological   dependency, material intercompany transactions, or interchange of managerial personnel. Requirement 2 a.  Income statement: ($ in  millions) Investment revenue  ($12 million x 1/6) $2.0 Patent amortization adjustment  ($4 million*  ÷  10)      (.4) *([$24 million] x 1/6])     $1.6 b. Balance sheet: Investment in Marlon Company    ($19 million + 2 million – 1 million – 0.4 million)     $19.6*                                  *Investment in Marlon Company            ($ in millions) Cost 19.0 Share of income 2.0 1.0 Dividends ($6 million x 1/6) .4 Amortization adjustment  _________________ Balance     19.6 c. Statement of cash flows:   $19 million cash outflow from investing activities  $1 million cash inflow (dividends) among operating activities  (Note: if Marlon uses the indirect method to report its operating cash flows, it would need an adjustment of ($0.6) to get from the $1.6 included as investment revenue in net income to the $1 of cash actually received in dividends and needing to be shown in cash from operations.)E13–21 ­ Disclosures of liabilities   LO1 through LO6 ● Required: Indicate (by letter) the way each of the items listed below should be reported in a  balance sheet at December 31, 2011. Exercise 13­21 Item Reporting Method __C_ 1. Commercial paper. N. Not reported __D_ 2. Noncommitted line of credit. C. Current liability __C_ 3. Customer advances. L. Long­term liability  __C_ 4. Estimated warranty cost. D. Disclosure note  only  __C_ 5. Accounts payable. A.  Asset __C_ 6. Long­term bonds that will be callable by the creditor in the upcoming year unless an existing violation is not corrected (there is a reasonable possibility the violation will be corrected within the grace period). __C_ 7. Note due March 3, 2012. __C_ 8. Interest accrued on note, Dec. 31, 2011. __L_ 9. Short­term bank loan to be paid with proceeds of sale of common stock. __D_ 10. A determinable gain that is contingent on a future event that appears  extremely likely to occur in three months. __C_ 11. Unasserted assessment of back taxes that probably will be asserted, in which case there would probably be a loss in six months. __N_ 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. __C_ 13. A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months. __A_ 14. Bond sinking fund. __C_ 15. Long­term bonds callable by the creditor in the upcoming year that are not expected to be called.E13–22 ­ Woodmier Lawn Products ­ Warranty expense; change in estimate ● LO5 LO6  Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one­year 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% × $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 than 2%. Required: 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. Exercise 13­22Requirement 1  Accrued liability and expense Warranty expense (3% x $3,600,000)................................108,000 Estimated warranty liability .............................................. 108,000 Actual expenditures (summary entry) Estimated warranty liability .......................................88,000 Cash, wages payable, parts and supplies, etc. ................... 88,000 Requirement 2  Actual expenditures (summary entry) Estimated warranty liability ($50,000 – $23,000)...................... 27,000 Loss on product warranty (3% – 2%] x $2,500,000)................... 25,000 Cash, wages payable, parts and supplies, etc. ................... 52,000*    *(3% x $2,500,000) – $23,000 = $52,000 P 12–1 ­ Fuzzy Monkey Technologies, Inc. ­ Securities held­ to­maturity; bond investment;  effective interest   LO1 ● Fuzzy Monkey Technologies, Inc., purchased as a long­term 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 $70 million. Required:1.Prepare the journal entry to record Fuzzy Monkey’s investment on January  1, 2011.  2.Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effective rate).  3.Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the  effective rate).  4. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance  sheet? Why? 5. How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment? Problem 12­1 Requirement 1 ($ in millions) Investment in bonds (face amount)........................ 80 Discount on bond investment (difference)......... 14 Cash (price of bonds).......................................... 66 Requirement 2  Cash (4% x $80 million).......................................... 3.20 Discount on bond investment (difference)............ .10 Interest revenue (5% x $66).................................... 3.30 Requirement 3  Cash (4% x $80 million).......................................... 3.20 Discount on bond investment (difference)............ .11 Interest revenue (5% x [$66 + 0.1])........................ 3.31 Requirement 4  Fuzzy Monkey reports its investment in the December 31, 2011, balance  sheet at its amortized cost – that is, its book value: Investment in bonds............................................................ $80.00 Less: Discount on bond investment ($14 –.1 –.11 million)      13.79 Amortized cost................................................................ $66.21Increases and decreases in the fair value between the time a debt security is  acquired and the day it matures to a prearranged maturity value are relatively unimportant if sale before maturity isn’t an alternative.  For this reason, if an investor has the “positive intent and ability” to hold the securities to  maturity, investments in debt securities are classified as “held­to­maturity”  and reported at amortized cost rather than fair value in the balance sheet.  Requirement 5  Fuzzy Monkey’s 2011 statement of cash flows would be affected as  follows: Operating cash flows: Cash inflow from interest of $3.2 +  $3.2 = $6.4.  (Note: if Fuzzy Monkey prepares an indirect  method statement of cash flows, it would have interest  revenue of $3.30 + $3.31 = $6.61 included in net income, so  would have to include an adjustment of $6.4 – $6.61 = ($0.21) to get from net income to cash from operations.) Investing cash flows: Cash outflow from purchasing  investments of $66.P 12–7 - Amalgamated General Corporation - Securities held-to- maturity,  securities available for sale, and trading securities ● LO1 LO2 LO3 (also see  included excel file) 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. 2011 Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58  million as a speculative investment to be sold under suitable circumstances.   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.  Sold the Kansas Abstractors bonds 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.   20 Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to  earn profits on short-term differences in prices.  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.  23 Sold the Treasury bonds for $5.7 million.  29 Received cash dividends of $3 million from the Millwork Ventures Company  preferred shares.  31 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. 2012 Jan. 7 Sold the NXS Corporation common shares for $43 million. Required: Prepare the appropriate journal entry for each transaction or event. Problem 12­7 2011 ($ in millions) October 18 Investment in Millwork Ventures preferred shares ..................... 58 Cash.......................................................................................... 58 October 31 Cash.............................................................................................. 1.5 Investment revenue................................................................... 1.5 November 1 Investment in Holistic Entertainment bonds................................. 18 Cash.......................................................................................... 18 November 1 Cash.............................................................................................. 28 Loss on sale of investments ($28 – 30)........................................... 2 Investment in Kansas Abstractors bonds ................................. 30 December 1Investment in Household Plastics bonds...................................... 60 Cash.......................................................................................... 60 December 20 Investment in U.S. Treasury bonds .............................................. 5.6 Cash.......................................................................................... 5.6 December 21 Investment in NXS common shares ............................................ 44 Cash.......................................................................................... 44 December 23 Cash.............................................................................................. 5.7  Investment in U.S. Treasury bonds .......................................... 5.6 Gain on sale of investments ($5.7 – 5.6)..................................... .1 ($ in millions) December 29 Cash.............................................................................................. 3 Investment revenue................................................................ 3 December 31 Accrued interest: Investment revenue receivable ­ Holistic    Entertainment ($18 million x 10% x 2/12)....................................... 0.3 Investment revenue receivable ­ Household    Plastics ($60 million x 12% x 1/12).................................................. 0.6 Investment revenue ............................................................... 0.9 Revaluations: Net unrealized holding gains and losses—OCI     ([2 million shares of Millwork Ventures x $27.50] – $58 million).......... 3 Fair value adjustment ............................................................ 3 Fair value adjustment ................................................................... 2 Net unrealized holding gains and losses—I/S           ([4 million shares of NXS x $11.50] – $44 million)........................ 2 Note: Securities held­to­maturity are not adjusted to fair value. Closing entry: Net unrealized holding gains and losses—I/S (NXS).................... 2.0 Investment revenue ($3.0 + 1.5 + .9)............................................... 5.4 Gain on sale of investments (U.S. Treasury bonds).......................... .1 Loss on sale of investments (Kansas Abstractors)...................... 2.0 Income summary (to balance)................................................... 5.5 Note: Unlike for securities available­for­sale, unrealized holding gains  and losses are included in income for trading securities. 2012 January 7 Cash.............................................................................................. 43 Loss on sale of investments (to balance)......................................... 1 Investment in NXS common shares (account balance)................ 44 Assuming no other transactions involving trading securities, the 2012 adjusting entry to remove the fair value adjustment associated with the sold securities would be: December 31 Net unrealized holding gains and losses—I/S.............................. 2.0 Fair value adjustment (account balance).................................. 2.0P12–10 - Runyan Bakery - Fair value option; equity method investments ● LO2 LO4 LO7 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 $80 million. b. The remainder of the excess of the cost of the investment over the book value of net  assets purchased was attributable to goodwill. Required: 1. Prepare all appropriate journal entries related to the investment during 2011,  assuming Runyan accounts for this investment under the fair value option and accounts for  the Lavery investment in a manner similar to what they would use for trading securities. 2. Prepare the journal entries required by Runyan, assuming that the 10 million shares  represents a 10% interest in the net assets of Lavery rather than a 30% interest. Problem 12­10 Requirement 1  Purchase ($ in millions) Investment in Lavery Labeling shares.......................................... 324 Cash ......................................................................................... 324 Net incomeNo entry Dividends Cash (10 million shares x $2)............................................................. 20 Investment revenue................................................................... 20 Adjusting entry Net unrealized holding gains and losses—I/S   ([10 million shares x $31] – $324 million).................................................. 14 Fair value adjustment................................................................ 14 Requirement 2  Because Runyan is accounting for the Lavery investment under the fair value  option, the unrealized holding loss would be included in 2011 net income.   Therefore, total effect on net income would be $20 million – 14 million, or $6  million.  P12–14 Classifying investments ● LO1 through LO5 Required:Indicate (by letter) the way each of the investments listed below most likely should be  accounted for based on the information provided.  See next page! Problem 12­14 Item Reporting Category __A_ 1. 35% of the nonvoting preferred stock  T. Trading securities  of American Aircraft Company M. Securities   held­to maturity  __M_ 2. Treasury bills to be held­to­maturity A. Securities   available­for sale   __M_ 3. Two­year note receivable from affiliate E. Equity method   __N_ 4. Accounts receivable C. Consolidation __M_ 5. Treasury bond maturing in one week N. None of these  __T_ 6. Common stock held in trading account  for immediate resale. __T_ 7. Bonds acquired to profit from short­term differences in price. __E_ 8. 35%   of   the   voting   common   stock   of   Computer   Storage   Devices Company. __C_ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.__A_10. Corporate bonds of Primary Smelting Company to be sold if interest rates fall 1/2%. __A_11. 25% of the voting common stock of Smith Foundries Corporation: 51% family­owned by Smith family; fair value determinable. __E_12. 17% of the voting common stock of Shipping Barrels Corporation: Investor’s   CEO   on   the board   of   directors   of   Shipping   Barrels Corporation. P13–6 - Eastern Manufacturing - Various contingencies ● LO5 LO6 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.Required: 1. Determine the appropriate means of reporting each situation. Explain your reasoning. 2. Prepare any necessary journal entries and disclosure notes. Problem 13­6 a. This is a loss contingency.  Eastern can use the information occurring after the end   of   the   year   in   determining   appropriate   disclosure.     It   is   unlikely   that Eastern would choose to accrue the $122 million loss because the judgment will   be   appealed   and   that   outcome   is   uncertain.     A   disclosure   note   is appropriate: _______________________________ Note X: Contingency In a lawsuit resulting from a dispute with a supplier, a judgment was rendered against Eastern Manufacturing Corporation in the amount of $107 million plus interest, a total of $122 million at February 3, 2012.  Eastern plans to appeal the judgment.  While management and legal counsel are presently unable to predict the outcome or to estimate the amount of any liability the company may have with respect to this lawsuit, it is not expected that this matter will have a material adverse effect on the company.


When considering whether to account for its investment in Marlon under the equity method, what criteria should Miller’s management apply?



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b. This is a loss contingency.  Eastern can use the information occurring after the end of the year in determining appropriate disclosure.  Eastern should accrue the $140 million loss because the ultimate outcome appears settled and the loss is probable.   Loss – litigation........................................... 140,000,000 Liability ­ litigation.................................. 140,000,000A disclosure note also is appropriate:_________________________________ Notes: Litigation In November 2010, the State of Nevada filed suit against the Company, seeking civil   penalties   and   injunctive   relief   for   violations   of   environmental   laws regulating hazardous waste.   On January 12, 2012, the Company announced that it had reached a settlement with state authorities on this matter.   Based upon discussions with legal counsel, the Company has accrued and charged to operations in 2011, $140 million to cover the anticipated cost of all violations. The Company believes that the ultimate settlement of this claim will not have a material adverse effect on the Company's financial position.


At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance sheet?



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Problem 13-6 (concluded) c. This is a gain contingency.  Gain contingencies are not accrued even if the gain is probable and reasonably estimable.     The gain should be recognized only when realized.   Though gain contingencies are not recorded in the accounts, they should be disclosed in notes to the financial statements.   _______________________________ Note X: Contingency Eastern   is  the   plaintiff   in   a   pending   lawsuit   filed   against   United   Steel   for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal.   No amount has been accrued in the financial statements for possible collection of any claims in this litigation.

d. No disclosure is required because an EPA claim is as yet unasserted, and an assessment is not probable.  Even if an unfavorable outcome is thought to be probable in the event of an assessment and the amount is estimable, disclosure is not required unless an unasserted claim is probable.ACC306 - ACC 306 - Week 1 DQ2 - Judgment Case 13-9 - Intermediate Accounting I - AU Judgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ●  LO5 LO6 In the March 2012 meeting of Valleck Corporation’s board of directors, a question  arose as to the way a possible obligation should be disclosed in the forthcoming  financial statements for the year ended December 31. A veteran board member  brought to the meeting a draft of a disclosure note that had been prepared by the  controller’s office for inclusion in the annual report. Here is the note: On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a  Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act.  Subsequently, in June 2011, the EPA commenced a civil action with respect to the  foregoing violation seeking civil penalties of approximately $853,000. The EPA  alleges that Valleck exceeded applicable volatile organic substance emission limits.  The Company estimates that the cost to achieve compliance will be $190,000; in  addition the Company expects to settle the EPA lawsuit for a civil penalty of  $205,000 which will be paid in 2014.  “ Where did we get the $205,000 figure? ” he asked. On being informed that this is  the amount negotiated last month by company attorneys with the EPA, the director  inquires, “Aren’t we supposed to report a liability for that in addition to the note? ” Required: Explain whether Valleck should report a liability in addition to the note. Why or why  not? For full disclosure, should anything be added to the disclosure note itself? Judgment Case 13­9 This is a loss contingency.  Valleck can use the information from the February negotiations   (occurring   after   the   end   of   the   year)   in   determining   appropriate disclosure.  The cause for the suit existed at the end of the year.  Valleck should accrue both the $190,000 compliance cost and the $205,000 penalty because an agreement has been reached making the loss probable and the amount at least reasonably estimable.  These are the two conditions that require accrual of a loss contingency. The disclosure note should also indicate that accrual was made.  This can be accomplished by adding the following sentence to the end of the note:.......  Both of the above amounts have been fully accrued as of December 31, 2011.


How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment?



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P 12–13 - Miller Properties - Equity method ● LO5 LO6 On January 2, 2011, Miller Properties paid $19 million for 1 million shares of Marlon  Company’s 6 million outstanding common shares. Miller’s CEO became a member of Marlon’s board of directors during the first quarter of 2011. The carrying amount of Marlon’s net assets was $66 million. Miller estimated the  fair value of those net as- sets to be the same except for a patent valued at $24  million above cost. The remaining amortization period for the patent is 10 years. Marlon reported earnings of $12 million and paid dividends of $6 million during  2011. On December 31, 2011, Marlon’s common stock was trading on the NYSE at  $18.50 per share. Required: 1. When considering whether to account for its investment in Marlon under the  equity method, what criteria should Miller’s management apply? 2. Assume Miller accounts for its investment in Marlon using the equity method.  Ignoring income taxes, deter- mine the amounts related to the investment to be  reported in its 2011:  a. Income statement.  b. Balance sheet. c. Statement of cash flows. Problem 12­13 Requirement 1  Miller’s   management   should   decide   whether   it   has   the   ability   to   exercise significant influence over operating and financial policies of the Marlon Company. Ability to exercise significant influence is presumed for investments of 20 percent or more of voting stock and presumed not to exist for investments of less than 20 percent, other things being equal.  Evidence to the contrary should be considered, including   participation   on   the   board   of   directors,   technological   dependency, material intercompany transactions, or interchange of managerial personnel. Requirement 2 a.  Income statement: ($ in  millions) Investment revenue  ($12 million x 1/6) $2.0 Patent amortization adjustment  ($4 million*  ÷  10)      (.4) *([$24 million] x 1/6])     $1.6 b. Balance sheet: Investment in Marlon Company    ($19 million + 2 million – 1 million – 0.4 million)     $19.6*                                  *Investment in Marlon Company            ($ in millions) Cost 19.0 Share of income 2.0 1.0 Dividends ($6 million x 1/6) .4 Amortization adjustment  _________________ Balance     19.6 c. Statement of cash flows:   $19 million cash outflow from investing activities  $1 million cash inflow (dividends) among operating activities  (Note: if Marlon uses the indirect method to report its operating cash flows, it would need an adjustment of ($0.6) to get from the $1.6 included as investment revenue in net income to the $1 of cash actually received in dividends and needing to be shown in cash from operations.)E13–21 ­ Disclosures of liabilities   LO1 through LO6 ● Required: Indicate (by letter) the way each of the items listed below should be reported in a  balance sheet at December 31, 2011. Exercise 13­21 Item Reporting Method __C_ 1. Commercial paper. N. Not reported __D_ 2. Noncommitted line of credit. C. Current liability __C_ 3. Customer advances. L. Long­term liability  __C_ 4. Estimated warranty cost. D. Disclosure note  only  __C_ 5. Accounts payable. A.  Asset __C_ 6. Long­term bonds that will be callable by the creditor in the upcoming year unless an existing violation is not corrected (there is a reasonable possibility the violation will be corrected within the grace period). __C_ 7. Note due March 3, 2012. __C_ 8. Interest accrued on note, Dec. 31, 2011. __L_ 9. Short­term bank loan to be paid with proceeds of sale of common stock. __D_ 10. A determinable gain that is contingent on a future event that appears  extremely likely to occur in three months. __C_ 11. Unasserted assessment of back taxes that probably will be asserted, in which case there would probably be a loss in six months. __N_ 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. __C_ 13. A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months. __A_ 14. Bond sinking fund. __C_ 15. Long­term bonds callable by the creditor in the upcoming year that are not expected to be called.E13–22 ­ Woodmier Lawn Products ­ Warranty expense; change in estimate ● LO5 LO6  Woodmier Lawn Products introduced a new line of commercial sprinklers in 2010 that carry a one­year 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% × $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 than 2%. Required: 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. Exercise 13­22Requirement 1  Accrued liability and expense Warranty expense (3% x $3,600,000)................................108,000 Estimated warranty liability .............................................. 108,000 Actual expenditures (summary entry) Estimated warranty liability .......................................88,000 Cash, wages payable, parts and supplies, etc. ................... 88,000 Requirement 2  Actual expenditures (summary entry) Estimated warranty liability ($50,000 – $23,000)...................... 27,000 Loss on product warranty (3% – 2%] x $2,500,000)................... 25,000 Cash, wages payable, parts and supplies, etc. ................... 52,000*    *(3% x $2,500,000) – $23,000 = $52,000 P 12–1 ­ Fuzzy Monkey Technologies, Inc. ­ Securities held­ to­maturity; bond investment;  effective interest   LO1 ● Fuzzy Monkey Technologies, Inc., purchased as a long­term 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 $70 million. Required:1.Prepare the journal entry to record Fuzzy Monkey’s investment on January  1, 2011.  2.Prepare the journal entry by Fuzzy Monkey to record interest on June 30, 2011 (at the effective rate).  3.Prepare the journal entries by Fuzzy Monkey to record interest on December 31, 2011 (at the  effective rate).  4. At what amount will Fuzzy Monkey report its investment in the December 31, 2011, balance  sheet? Why? 5. How would Fuzzy Monkey’s 2011 statement of cash flows be affected by this investment? Problem 12­1 Requirement 1 ($ in millions) Investment in bonds (face amount)........................ 80 Discount on bond investment (difference)......... 14 Cash (price of bonds).......................................... 66 Requirement 2  Cash (4% x $80 million).......................................... 3.20 Discount on bond investment (difference)............ .10 Interest revenue (5% x $66).................................... 3.30 Requirement 3  Cash (4% x $80 million).......................................... 3.20 Discount on bond investment (difference)............ .11 Interest revenue (5% x [$66 + 0.1])........................ 3.31 Requirement 4  Fuzzy Monkey reports its investment in the December 31, 2011, balance  sheet at its amortized cost – that is, its book value: Investment in bonds............................................................ $80.00 Less: Discount on bond investment ($14 –.1 –.11 million)      13.79 Amortized cost................................................................ $66.21Increases and decreases in the fair value between the time a debt security is  acquired and the day it matures to a prearranged maturity value are relatively unimportant if sale before maturity isn’t an alternative.  For this reason, if an investor has the “positive intent and ability” to hold the securities to  maturity, investments in debt securities are classified as “held­to­maturity”  and reported at amortized cost rather than fair value in the balance sheet.  Requirement 5  Fuzzy Monkey’s 2011 statement of cash flows would be affected as  follows: Operating cash flows: Cash inflow from interest of $3.2 +  $3.2 = $6.4.  (Note: if Fuzzy Monkey prepares an indirect  method statement of cash flows, it would have interest  revenue of $3.30 + $3.31 = $6.61 included in net income, so  would have to include an adjustment of $6.4 – $6.61 = ($0.21) to get from net income to cash from operations.) Investing cash flows: Cash outflow from purchasing  investments of $66.P 12–7 - Amalgamated General Corporation - Securities held-to- maturity,  securities available for sale, and trading securities ● LO1 LO2 LO3 (also see  included excel file) 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. 2011 Oct. 18 Purchased 2 million preferred shares of Millwork Ventures Company for $58  million as a speculative investment to be sold under suitable circumstances.   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.  Sold the Kansas Abstractors bonds 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.   20 Purchased U. S. Treasury bonds for $5.6 million as trading securities, hoping to  earn profits on short-term differences in prices.  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.  23 Sold the Treasury bonds for $5.7 million.  29 Received cash dividends of $3 million from the Millwork Ventures Company  preferred shares.  31 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. 2012 Jan. 7 Sold the NXS Corporation common shares for $43 million. Required: Prepare the appropriate journal entry for each transaction or event. Problem 12­7 2011 ($ in millions) October 18 Investment in Millwork Ventures preferred shares ..................... 58 Cash.......................................................................................... 58 October 31 Cash.............................................................................................. 1.5 Investment revenue................................................................... 1.5 November 1 Investment in Holistic Entertainment bonds................................. 18 Cash.......................................................................................... 18 November 1 Cash.............................................................................................. 28 Loss on sale of investments ($28 – 30)........................................... 2 Investment in Kansas Abstractors bonds ................................. 30 December 1Investment in Household Plastics bonds...................................... 60 Cash.......................................................................................... 60 December 20 Investment in U.S. Treasury bonds .............................................. 5.6 Cash.......................................................................................... 5.6 December 21 Investment in NXS common shares ............................................ 44 Cash.......................................................................................... 44 December 23 Cash.............................................................................................. 5.7  Investment in U.S. Treasury bonds .......................................... 5.6 Gain on sale of investments ($5.7 – 5.6)..................................... .1 ($ in millions) December 29 Cash.............................................................................................. 3 Investment revenue................................................................ 3 December 31 Accrued interest: Investment revenue receivable ­ Holistic    Entertainment ($18 million x 10% x 2/12)....................................... 0.3 Investment revenue receivable ­ Household    Plastics ($60 million x 12% x 1/12).................................................. 0.6 Investment revenue ............................................................... 0.9 Revaluations: Net unrealized holding gains and losses—OCI     ([2 million shares of Millwork Ventures x $27.50] – $58 million).......... 3 Fair value adjustment ............................................................ 3 Fair value adjustment ................................................................... 2 Net unrealized holding gains and losses—I/S           ([4 million shares of NXS x $11.50] – $44 million)........................ 2 Note: Securities held­to­maturity are not adjusted to fair value. Closing entry: Net unrealized holding gains and losses—I/S (NXS).................... 2.0 Investment revenue ($3.0 + 1.5 + .9)............................................... 5.4 Gain on sale of investments (U.S. Treasury bonds).......................... .1 Loss on sale of investments (Kansas Abstractors)...................... 2.0 Income summary (to balance)................................................... 5.5 Note: Unlike for securities available­for­sale, unrealized holding gains  and losses are included in income for trading securities. 2012 January 7 Cash.............................................................................................. 43 Loss on sale of investments (to balance)......................................... 1 Investment in NXS common shares (account balance)................ 44 Assuming no other transactions involving trading securities, the 2012 adjusting entry to remove the fair value adjustment associated with the sold securities would be: December 31 Net unrealized holding gains and losses—I/S.............................. 2.0 Fair value adjustment (account balance).................................. 2.0P12–10 - Runyan Bakery - Fair value option; equity method investments ● LO2 LO4 LO7 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 $80 million. b. The remainder of the excess of the cost of the investment over the book value of net  assets purchased was attributable to goodwill. Required: 1. Prepare all appropriate journal entries related to the investment during 2011,  assuming Runyan accounts for this investment under the fair value option and accounts for  the Lavery investment in a manner similar to what they would use for trading securities. 2. Prepare the journal entries required by Runyan, assuming that the 10 million shares  represents a 10% interest in the net assets of Lavery rather than a 30% interest. Problem 12­10 Requirement 1  Purchase ($ in millions) Investment in Lavery Labeling shares.......................................... 324 Cash ......................................................................................... 324 Net incomeNo entry Dividends Cash (10 million shares x $2)............................................................. 20 Investment revenue................................................................... 20 Adjusting entry Net unrealized holding gains and losses—I/S   ([10 million shares x $31] – $324 million).................................................. 14 Fair value adjustment................................................................ 14 Requirement 2  Because Runyan is accounting for the Lavery investment under the fair value  option, the unrealized holding loss would be included in 2011 net income.   Therefore, total effect on net income would be $20 million – 14 million, or $6  million.  P12–14 Classifying investments ● LO1 through LO5 Required:Indicate (by letter) the way each of the investments listed below most likely should be  accounted for based on the information provided.  See next page! Problem 12­14 Item Reporting Category __A_ 1. 35% of the nonvoting preferred stock  T. Trading securities  of American Aircraft Company M. Securities   held­to maturity  __M_ 2. Treasury bills to be held­to­maturity A. Securities   available­for sale   __M_ 3. Two­year note receivable from affiliate E. Equity method   __N_ 4. Accounts receivable C. Consolidation __M_ 5. Treasury bond maturing in one week N. None of these  __T_ 6. Common stock held in trading account  for immediate resale. __T_ 7. Bonds acquired to profit from short­term differences in price. __E_ 8. 35%   of   the   voting   common   stock   of   Computer   Storage   Devices Company. __C_ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.__A_10. Corporate bonds of Primary Smelting Company to be sold if interest rates fall 1/2%. __A_11. 25% of the voting common stock of Smith Foundries Corporation: 51% family­owned by Smith family; fair value determinable. __E_12. 17% of the voting common stock of Shipping Barrels Corporation: Investor’s   CEO   on   the board   of   directors   of   Shipping   Barrels Corporation. P13–6 - Eastern Manufacturing - Various contingencies ● LO5 LO6 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.Required: 1. Determine the appropriate means of reporting each situation. Explain your reasoning. 2. Prepare any necessary journal entries and disclosure notes. Problem 13­6 a. This is a loss contingency.  Eastern can use the information occurring after the end   of   the   year   in   determining   appropriate   disclosure.     It   is   unlikely   that Eastern would choose to accrue the $122 million loss because the judgment will   be   appealed   and   that   outcome   is   uncertain.     A   disclosure   note   is appropriate: _______________________________ Note X: Contingency In a lawsuit resulting from a dispute with a supplier, a judgment was rendered against Eastern Manufacturing Corporation in the amount of $107 million plus interest, a total of $122 million at February 3, 2012.  Eastern plans to appeal the judgment.  While management and legal counsel are presently unable to predict the outcome or to estimate the amount of any liability the company may have with respect to this lawsuit, it is not expected that this matter will have a material adverse effect on the company.

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b. This is a loss contingency.  Eastern can use the information occurring after the end of the year in determining appropriate disclosure.  Eastern should accrue the $140 million loss because the ultimate outcome appears settled and the loss is probable.   Loss – litigation........................................... 140,000,000 Liability ­ litigation.................................. 140,000,000A disclosure note also is appropriate:_________________________________ Notes: Litigation In November 2010, the State of Nevada filed suit against the Company, seeking civil   penalties   and   injunctive   relief   for   violations   of   environmental   laws regulating hazardous waste.   On January 12, 2012, the Company announced that it had reached a settlement with state authorities on this matter.   Based upon discussions with legal counsel, the Company has accrued and charged to operations in 2011, $140 million to cover the anticipated cost of all violations. The Company believes that the ultimate settlement of this claim will not have a material adverse effect on the Company's financial position.

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Problem 13-6 (concluded) c. This is a gain contingency.  Gain contingencies are not accrued even if the gain is probable and reasonably estimable.     The gain should be recognized only when realized.   Though gain contingencies are not recorded in the accounts, they should be disclosed in notes to the financial statements.   _______________________________ Note X: Contingency Eastern   is  the   plaintiff   in   a   pending   lawsuit   filed   against   United   Steel   for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal.   No amount has been accrued in the financial statements for possible collection of any claims in this litigation.

d. No disclosure is required because an EPA claim is as yet unasserted, and an assessment is not probable.  Even if an unfavorable outcome is thought to be probable in the event of an assessment and the amount is estimable, disclosure is not required unless an unasserted claim is probable.ACC306 - ACC 306 - Week 1 DQ2 - Judgment Case 13-9 - Intermediate Accounting I - AU Judgment Case 13–9 - Valleck Corporation - Loss contingency and full disclosure ●  LO5 LO6 In the March 2012 meeting of Valleck Corporation’s board of directors, a question  arose as to the way a possible obligation should be disclosed in the forthcoming  financial statements for the year ended December 31. A veteran board member  brought to the meeting a draft of a disclosure note that had been prepared by the  controller’s office for inclusion in the annual report. Here is the note: On May 9, 2011, the United States Environmental Protection Agency (EPA) issued a  Notice of Violation (NOV) to Valleck alleging violations of the Clean Air Act.  Subsequently, in June 2011, the EPA commenced a civil action with respect to the  foregoing violation seeking civil penalties of approximately $853,000. The EPA  alleges that Valleck exceeded applicable volatile organic substance emission limits.  The Company estimates that the cost to achieve compliance will be $190,000; in  addition the Company expects to settle the EPA lawsuit for a civil penalty of  $205,000 which will be paid in 2014.  “ Where did we get the $205,000 figure? ” he asked. On being informed that this is  the amount negotiated last month by company attorneys with the EPA, the director  inquires, “Aren’t we supposed to report a liability for that in addition to the note? ” Required: Explain whether Valleck should report a liability in addition to the note. Why or why  not? For full disclosure, should anything be added to the disclosure note itself? Judgment Case 13­9 This is a loss contingency.  Valleck can use the information from the February negotiations   (occurring   after   the   end   of   the   year)   in   determining   appropriate disclosure.  The cause for the suit existed at the end of the year.  Valleck should accrue both the $190,000 compliance cost and the $205,000 penalty because an agreement has been reached making the loss probable and the amount at least reasonably estimable.  These are the two conditions that require accrual of a loss contingency. The disclosure note should also indicate that accrual was made.  This can be accomplished by adding the following sentence to the end of the note:.......  Both of the above amounts have been fully accrued as of December 31, 2011.

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