Problem 5. On November 1, 2017, US Pelican Company entered into a 90 day forward contract of £200,000 pounds to hedge a commitment to purchase special equipment on February 1, 2018 from a British firm Raven Inc. Assume Pelican uses a 12% interest rate.

The relevant exchange rates are of dollars per pound:

Instructions

1. What journal entry did Pelican record on November 1, 2017?

2. What journal entry did Pelican record on December 31, 2017?

3. What journal entry did Pelican record on February 1, 2018 if the purchase was made?

4. If this is a “forecasted transaction”, what journal entry did Pelican record on November 1, 2017, on December 31, 2017, and on February 1, 2018 if the purchase was made?

a. A patent was purchased from the Lou Company for $1,600,000 on January 1, 2016. Janes estimated the remaining useful life of the patent to be 10 years. The patent was carried on Lou’s accounting records at a net book value of $530,000 when Lou sold it to Janes.

b. During 2018, a franchise was purchased from the Rink Company for $680,000. The contractual life of the franchise is 10 years and Janes records a full year of amortization in the year of purchase.

c. Janes incurred research and development costs in 2018 as follows:

d. Effective January 1, 2018, based on new events that have occurred, Janes estimates that the remaining life of the patent purchased from Lou is only five more years.

Required:
1. Prepare the entries necessary for years 2016 through 2018 to reflect the above information.
2. Prepare a schedule showing the intangible asset section of Janes’s December 31, 2018, balance sheet.

The following data is given:

December 31, 2018 2017

Cash $66,500 $49,500

Accounts receivable (net) 90,000 59,000

Inventories 90,000 105,000

Plant assets (net) 382,500 324,000

Accounts payable 55,500 39,500

Salaries and wages payable 12,000 5,500

Bonds payable 68,500 72,000 8%

Preferred stock, $40 par 100,000 100,000

Common stock, $10 par 120,000 90,000

Paid-in capital in excess of par 75,000 70,000

Retained earnings 198,000 160,500

Net credit sales 995,000

Cost of goods sold 740,000

Net income 82,000

Compute the following ratios:

On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2016 2017 2018 Costs incurred during the year $ 70 $ 60 $ 30 Estimated costs to complete as of December 31 130 30 — Compute the revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion. Compute the amount of revenue and gross profit or loss to be recognized in 2016, 2017, and 2018 using the completed contract method. Suppose the estimated costs to complete at the end of 2017 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2017 using the percentage of completion method.

The Prince-Robbins partnership has the following capital account balances on January 1, 2018:

Prince is allocated 70 percent of all profits and losses with the remaining 30 percent assigned to Robbins after interest of 7 percent is given to each partner based on beginning capital balances.

On January 2, 2018, Jeffrey invests $43,000 cash for a 20 percent interest in the partnership. This transaction is recorded by the goodwill method. After this transaction, 7 percent interest is still to go to each partner. Profits and losses will then be split as follows: Prince (50 percent), Robbins (30 percent), and Jeffrey (20 percent). In 2018, the partnership reports a net income of $12,000.

Prepare the journal entry to record Jeffrey’s entrance into the partnership on January 2, 2018.

(Record the entry for goodwill allocation, during the admission of a new partner.)

(record the cash received from new partner)

Determine the allocation of income at the end of 2018.

Prince?

Robbins?

Jeffrey?

Mills Corporation acquired as a long-term investment $200 million of 7% bonds, dated July 1, on July 1, 2018. Company management has the positive intent and ability to hold the bonds until maturity. The market interest rate (yield) was 5% for bonds of similar risk and maturity. Mills paid $240 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $210 million. Required: 1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate. 3. At what amount will Mills report its investment in the December 31, 2018, balance sheet? 4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $250 million. Prepare the journal entry to record the sale.

Mills Corporation acquired as a long-term investment $270 million of 8% bonds, dated July 1, on July 1, 2018. Mills determined that it should account for the bonds as an available-for-sale investment. The market interest rate (yield) was 6% for bonds of similar risk and maturity. Mills paid $310 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $290 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $320 million. Prepare the journal entries to record the sale.

P16-8B (L07) (Computation of Basic and Diluted EPS) The information below pertains to Payson Company for 2018. Net income for the year $8,670,000 6% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 60 shares of common stock 5,000,000 4% convertible, cumulative preferred stock, $100 par value; each share is convertible into 4 shares of common stock 2,500,000 Common stock, $1 par value 9,500,000 Tax rate for 2018 40% Average market price of common stock $18 per share There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 120,000 shares of common stock at $12 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018.

Mills Corporation acquired as a long-term investment $260 million of 5% bonds, dated July 1, on July 1, 2018. Company management is holding the bonds in its trading portfolio. The market interest rate (yield) was 3% for bonds of similar risk and maturity. Mills paid $300 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2018, was $280 million.

Required:
1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2018 and interest on December 31, 2018, at the effective (market) rate.
3. At what amount will Mills report its investment in the December 31, 2018, balance sheet?
4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2019, for $315 million. Prepare the journal entries to record the sale.