Financial Investments

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Exercise 1

As auditor for Banquo & Associates, you have been assigned to check Duncan Corporation’s computation of earnings per share for the current year. The controller, Mac Beth, has supplied you with the following computations.

Net income $3,374,960
Common shares issued and outstanding:  

Beginning of year

 1,285,000

End of year

 1,200,000

Average

 1,242,500
Earnings per share:  
   
$3,374,960 = $2.72 per share
1,242,500

You have developed the following additional information.

  1. There are no other equity securities in addition to the common shares.
  2. There are no options or warrants outstanding to purchase common shares.
  3. There are no convertible debt securities.
  4. Activity in common shares during the year was as follows.
Outstanding, Jan. 1 1,285,000
Treasury shares acquired, Oct. 1 (250,000)
  1,035,000
Shares reissued, Dec. 1 165,000
Outstanding, Dec. 31 1,200,000

Questions:

  1. On the basis of the information above, do you agree with the controller’s computation of earnings per share for the year? If you disagree, prepare a revised computation of earnings per share.
  2. Assume the same facts as those presented above, except that options had been issued to purchase 140,000 shares of common stock at $10 per share. These options were outstanding at the beginning of the year, and none had been exercised or canceled during the year. The average market price of the common shares during the year was $25, and the ending market price was $35. What earnings per share amounts will be reported?

Exercise 2

Powerpuff Corp. carries an account in its general ledger called investments, which contained the following debits for investment purchases and no credits.

Feb. 1, 2012 Blossom Company common stock, $100 par, 200 shares $ 37,400
April 1 U.S. Government bonds, 11%, due April 1, 2012, interest payable April 1 and October 1, 100 bonds of $1,000 par each 100,000
July 1 Buttercup Company 12% bonds, par $50,000, dated March 1, 2012, purchased at par plus accrued interest, interest payable annually on March 1, due March 1, 2032 52,000

 

 

Questions:

  1. Assuming that all the investments are classified as available-for-sale, use the spreadsheet Journal Entries to prepare the journal entries necessary to classify the amounts into the proper accounts.
  2. Prepare the entry to record the accrued interest on December 31, 2012.
  3. The fair values of the investments on December 31, 2012, were:
     
  • Blossom Company common stock $ 33,800 (1% interest)
  • U.S. Government bonds 124,700
  • Buttercup Company bonds 58,600
 
Use the spreadsheet
 Available for Sale to prepare a schedule indicating any fair value adjustment needed at December 31, 2012.
 
 
 
4.  Now assume Powerpuff’s investment in Blossom Company represents 30% of Blossom’s shares. In 2012, Blossom declared and paid dividends of $9,000 (on September 30) and reported net income of $30,000. Prepare a brief memorandum explaining how the accounting for the Blossom investment will change, and discuss the impact on the financial statements of Powerpuff Corp.

 

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