Page 585 - Accounting Principles (A Business Perspective)

14. Stock investments

share less a broker's commission of USD 1,152. On 2010 December 1, Rome Company issued shares comprising a
100 per cent stock dividend declared on its capital stock on November 18.
On 2010 December 31, the end of Paris Company's calendar-year accounting period, the market quotation for

Rome Company's common stock was USD 331.20 per share. The decline was considered to be temporary.
a. Prepare journal entries to record all of these data assuming the securities are considered temporary
investments classified as trading securities. Where should the accounts in the last entry appear in the financial
statements?
b. Assume Rome Company has become a major customer so the shares are held for long-term affiliation
purposes. Indicate how the investment should be shown in the balance sheet.
Problem B On 2010 October 17, Strong Company purchased the following common stocks (all trading

securities) at the indicated per share prices that included commissions:
600 shares of X Company common stock @ $129,600
$216
1,000 shares of Y Company common stock @ 144,000
$144
1,600 shares of Z Company common stock @ 115,200
$72
$388,800
On 2010 December 31, the market prices per share of the above common stocks were X, USD 223.20; Y, USD
136.80; and Z, USD 54.
Summarized, the cash dividends per share received in 2011 were X, USD 14.40; Y, USD 7.20; and Z, USD 5.40.
On 2011 December 31, the per share market prices were X, USD 252.80; Y, USD 115.20; and Z, USD 72.
All of these changes in market prices are considered temporary.

Prepare journal entries for all of these transactions, including calendar year-end adjusting entries, assuming the
shares of common stock acquired are considered trading securities.
If the securities acquired are considered available-for-sale securities, how would the entries differ?
For both parts a and b, give the descriptions (titles) and the dollar amounts of the items that would appear in the
income statements for 2010 and 2011.
Problem C On 2010 January 1, Long Company acquired 80 per cent of the outstanding voting common stock
of Fall Company for USD 4,032,000 cash. Long Company uses the equity method. During 2010, Fall reported USD
672,000 of net income and paid USD 288,000 in dividends. The stockholders' equity section of the 2009 December
31, balance sheet for Fall follows:

Stockholders' equity:
Paid-in capital:
Common stock - $42 par $4,200,000
Retained earnings 840,000
Total stockholders' equity $5,040,000
a. Prepare the general journal entries to record the investment and the effect of Fall's income and dividends on

Long Company's accounts.
b. Prepare the elimination entry that would be made on the work sheet for a consolidated balance sheet as of the
date of acquisition.
Problem D Pearson Company acquired 75 per cent of the outstanding voting common stock of Frost Company
for USD 1,444,800 cash on 2010 January 1. The investment is accounted for under the equity method. During 2010,
2011, and 2012, Frost Company reported the following:

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