Question

In: Accounting

please show work, thank you! Online Corp. decided to invest its excess cash in debt and...

please show work, thank you!

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)

Solutions

Expert Solution

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

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