Question

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Online Corp. decided to invest its excess cash in debt and equity securities. The following securities were purchased on January 2, 2017:

Bonds issued by the Jata Corp. The bonds have a face value of $100,000, a 10 year life, and a stated interest rate of 5%. Interest is paid annually on December 31st. The bonds were purchased at $108,111 to yield 4% and Online classifies the debt investment as Available for Sale.

8,000 shares of Micro Corp.’s common stock at $60 per share. The securities are accounted for using the fair value method.

200,000 shares of Quazno Corp. at $25 per share. The shares make up 40% of the outstanding shares for Quazno, so are accounted for using the equity method. During 2017, Quazno reported net income of $600,000.

Additional Information:

Fair values as of December 31, 2017: Jata bonds $106,000

Micro stock $65 per share

Quazno stock $31 per share

In addition to the interest paid on the Jata bonds, the following dividends were paid on the equities during 2017: Micro $.40 per share

Quazno $.30 per share

REQUIRED

1. Prepare all entries related to the securities for 2017, including purchase, dividends and/or interest and any necessary adjusting entries. (14 points)

2. Ignoring income taxes, compute the amount to be included in 2017 net income and in 2017 other comprehensive related to Online’s investments. (4 points)

3. Compute the amount at which Quazno would be carried in the December 31, 2017 balance sheet. (2 points)

Check Figures: Net Income $287,524; Comprehensive Income ($1,435)

Answer 1

1..
Jan 2.2017	Investment in Jata Corp. Bonds(AFS)	108111
	Cash		108111
	Investment in Micro Corp.Common stock	480000
	Cash		480000
	Investment in Quazno Corp.Common stock	5000000
	Cash		5000000
	Fair Value adj.--Investment in Jata Corp. Bonds(AFS)	6000
	Unrealised holding gain on Jata Corp.bonds(106000-100000)		6000
	Fair Value adj.--Micro Corp. stock(65-60)*8000	40000
	Unrealised holding gain on Micro Corp.stock		40000
	Quazno Fair Value
	NO ENTRY
	Investment in Quazno Corp.Common stock	240000
	Investment Income		240000
	(40%*600000)
	Cash	3200
	Dividend Income		3200
	(Micro Corp.--8000*0.40)
	Cash	60000
	Investment in Quazno Corp.Common stock		60000
	(200000*0.30)
	Cash (100000*5%)	5000
	Interest income (100000*4%)		4000
	Investment in Jata Corp. Bonds(AFS)--(Bal.Premium amortisation)		1000
	2… Amt. to be included in Net Income
	Investment income from Investment in Quazno Corp.Common stock	240000
	Dividend Income--Mini. Corp.	3200
	Interest income-- Jata Corp. Bonds	4000
	Total	247200
	Other comprehensive Income
	Unrealised holding gain on Jata Corp.bonds(106000-100000)	6000
	Unrealised holding gain on Micro Corp.stock	40000
	Total balance in OCI	46000
	3..Balance in Investment in Quazno Corp.Common stock
	Investment in Quazno Corp.Common stock	5000000
	Investment Income from Investment in Quazno Corp.Common stock	240000
	Less: Dividend income from Investment in Quazno Corp.Common stock	-60000
	Total	5180000