Instructions: Unit IV Case Study / Compensation and Benefits Read “Your Turn: Two-tier Wages” on pp. 242-243 and compose a paper using your responses to the questions following the Case Study on

On April 1, 2018, West Company purchased $472,000 of 6.50% bonds for $490,630 plus accrued interest as an available-for-sale security. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2023.

Prepare the journal entry on April 1, 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Apr. 1, 2018

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The bonds are sold on November 1, 2019 at 103 plus accrued interest. Amortization was recorded when interest was received by the straight-line method. Prepare all entries required to properly record the sale. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

Account Titles and Explanation	Debit	Credit


(To record amortization)


(To record interest)



(To record the sale of the bonds)

Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Crane Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Hudson Company. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Do not leave any answer field blank. Enter 0 for amounts.)

		(a) Fair Value Method		(b) Equity Method
	Transaction	Investment Account	Dividend Revenue	Investment Account	Investment Revenue
1.	At the beginning of Year 1, Crane bought 25% of Hudson's common stock at its book value. Total book value of all Hudson's common stock was $900,000 on this date.
2.	During Year 1, Hudson reported $66,000 of net income and paid $33,000 of dividends.

3.	During Year 2, Hudson reported $30,000 of net income and paid $19,500 of dividends.

4.	During Year 3, Hudson reported a net loss of $11,000 and paid $3,600 of dividends.

5.	Indicate the Year 3 ending balance in the Investment account, and cumulative totals for Years 1, 2, and 3 for dividend revenue and investment revenue.

On January 2, 2018, Tylor Company issued a 4-year, $550,000 note at 6% fixed interest, interest payable semiannually. Tylor now wants to change the note to a variable rate note. As a result, on January 2, 2018, Tylor Company enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.6% for the first 6 months on $550,000. At each 6-month period, the variable interest rate will be reset. The variable rate is reset to 6.5% on June 30, 2018.

Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2018.

Net interest expense

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Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2018.

Net interest expense

Sage Company purchased, on January 1, 2017, as an available-for-sale security, $75,000 of the 7%, 5-year bonds of Chester Corporation for $69,166, which provides an 9% return.
Prepare Sage’s journal entries for (a) the purchase of the investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $71,250. (Round answers to 0 decimal places, e.g. 1,225. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
(a)

(b)


(c)

Bramble Corporation purchased 420 shares of Sherman Inc. common stock for $13,100 (Bramble does not have significant influence). During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman stock was selling for $35.50 per share.
Prepare Bramble’ journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Account Titles and Explanation	Debit	Credit
(a)

(b)

(c)

Stellar Corporation purchased for $285,000 a 25% interest in Murphy, Inc. This investment enables Stellar to exert significant influence over Murphy. During the year, Murphy earned net income of $185,000 and paid dividends of $54,000.
Prepare Stellar’s journal entries related to this investment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit


(To record the purchase.)


(To record the net income.)


(To record the dividend.)

Blue Company invests $10,000,000 in 6% fixed rate corporate bonds on January 1, 2017. All the bonds are classified as available-for-sale and are purchased at par. At year-end, market interest rates have declined, and the fair value of the bonds is now $10,710,000. Interest is paid on January 1.
Prepare journal entries for Blue Company to (a) record the transactions related to these bonds in 2017, assuming Blue does not elect the fair option; and (b) record the transactions related to these bonds in 2017, assuming that Blue Company elects the fair value option to account for these bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)



		(To record interest revenue)


		(To record fair value adjustment)

No.	Date	Account Titles and Explanation	Debit	Credit
(b)



		(To record interest revenue)


		(To record fair value adjustment)

Presented below are two independent cases related to available-for-sale debt investments.

	Case 1	Case 2
Amortized cost	$36,310	$105,500
Fair value	27,230	114,530
Expected credit losses	22,700	98,260

For each case, determine the amount of impairment loss, if any. (If no loss, please enter 0. Do not leave any fields blank.)

Case 1
Impairment Loss

Case 2
Impairment Loss

On January 1, 2017, Windsor Company purchased 12% bonds having a maturity value of $270,000, for $290,470.00. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest receivable January 1 of each year. Windsor Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified in the held-to-maturity category.

(a)

Prepare the journal entry at the date of the bond purchase. (Enter answers to 2 decimal places, e.g. 2,525.25. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, 2017

At December 31, 2017, the available-for-sale debt portfolio for Ayayai, Inc. is as follows.

Security	Cost	Fair Value	Unrealized Gain (Loss)
	$18,375	$15,750	$(2,625
	13,125	14,700	1,575
	24,150	26,775	2,625
Total	$55,650	$57,225	1,575
Previous fair value adjustment balance—Dr.				420
Fair value adjustment—Dr.				$1,155

On January 20, 2018, Ayayai, Inc. sold security A for $15,855. The sale proceeds are net of brokerage fees.

(a)

Prepare the adjusting entry at December 31, 2017, to report the portfolio at fair value. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

The following are two independent situations.
Situation 1
Wildhorse Cosmetics acquired 10% of the 191,000 shares of common stock of Martinez Fashion at a total cost of $14 per share on March 18, 2017. On June 30, Martinez declared and paid $81,300 cash dividend to all stockholders. On December 31, Martinez reported net income of $118,600 for the year. At December 31, the market price of Martinez Fashion was $15 per share.
Situation 2
Sheffield, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 32,500 outstanding shares of common stock at a total cost of $9 per share on January 1, 2017. On June 15, Seles declared and paid cash dividends of $37,700. On December 31, Seles reported a net income of $83,000 for the year.
Prepare all necessary journal entries in 2017 for both situations. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Situation 1: Wildhorse Cosmetics






Situation 2: Sheffield, Inc

Marigold Corporation has municipal bonds classified as a held-to-maturity at December 31, 2017. These bonds have a par value of $871,000, an amortized cost of $871,000, and a fair value of $799,000. The company believes that impairment accounting is now appropriate for these bonds.

Prepare the journal entry to recognize the impairment. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit


(To record the impairment.)

SHOW LIST OF ACCOUNTS
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What is the new cost basis of the municipal bonds?

New cost basis of the municipal bonds

Given that the maturity value of the bonds is $871,000, should Marigold Corporation amortize the difference between the carrying amount and the maturity value over the life of the bonds?

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At December 31, 2018, the fair value of the municipal bonds is $839,000. Prepare the entry (if any) to record this information. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

On August 15, 2016, Wildhorse Co. invested idle cash by purchasing a call option on Counting Crows Inc. common shares for $378. The notional value of the call option is 420 shares, and the option price is $42. The option expires on January 31, 2017. The following data are available with respect to the call option.

Date	Market Price of Counting Crows Shares	Time Value of Call Option
September 30, 2016	$50 per share	$189
December 31, 2016	$48 per share	68
January 15, 2017	$49 per share	32

Prepare the journal entries for Wildhorse for the following dates.

(a)		Investment in call option on Counting Crows shares on August 15, 2016.
(b)		September 30, 2016—Wildhorse prepares financial statements.
(c)		December 31, 2016—Wildhorse prepares financial statements.
(d)		January 15, 2017—Wildhorse settles the call option on the Counting Crows shares.

(Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)

(b)

		(To record the change in intrinsic value.)


		(To record the time value change.)
(c)

		(To record the change in intrinsic value.)


		(To record the time value change.)
(d)

		(To record the time value change.)



		(To record settlement of call option.)