Storm, Inc. purchased the following available-for-sale securities during 2014, its first year of operations:

Storm, Inc. purchased the following available-for-sale securities during 2014, its first year of operations:



Name Number of Shares Cost
Dust Devil, Inc. 1,900 $ 81,700
Gale Co. 850 68,000
Whirlwind Co. 2,850 114,000
Total $263,700
The market price per share for the available-for-sale security portfolio on December
31, 2014, was as follows:
Market Price per Share,
Dec. 31, 2014
Dust Devil, Inc. $40
Gale Co. 75
Whirlwind Co. 42


a. Provide the journal entry to adjust the available-for-sale security portfolio to fair value on December 31, 2014.

b. Describe the income statement impact from the December 31, 2014, journal entry.


Answer:

2014
a. Dec. 31 Unrealized Gain (Loss) on Available-forSale
Investments 4,250
Valuation Allowance for Available-forSale
Investments* 4,250
* $259,450 – $263,700, as determined from the following schedule:
Cost
Fair Value
(Dec. 31, 2014)
Dust Devil, Inc. …………………………………………………………………… $ 81,700 $ 76,0001
Gale Co. …………………………………………………………………………. 68,000 63,7502
Whirlwind Co. …………………………………………………………………… 114,000 119,7003
Total………………………………………………………………………….. $263,700 $259,450
1 1,900 shares × $40 per share
2 850 shares × $75 per share
3 2,850 shares × $42 per share
b. There is no income statement impact from the December 31, 2014, adjusting
entry. Unrealized Gain (Loss) on Available-for-Sale Investments is reported
in the Stockholders’ Equity section of the balance sheet. On December 31,
2014, Unrealized Gain or Loss on Available-for-Sale Investments would be
disclosed as follows:
Unrealized gain (loss) on available-for-sale investments…………………… $(4,250)

Wishaw, Inc. produces and sells outdoor equipment. On July 1, 2014, Wishaw, Inc. issued $150,000,000 of 20-year

Wishaw, Inc. produces and sells outdoor equipment. On July 1, 2014, Wishaw, Inc. issued $150,000,000 of 20-year, 12% bonds at a market (effective) interest rate of 9%, receiving cash of $191,403,720. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.


Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014.

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)

3. Determine the total interest expense for 2014.

4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?

5. (Appendix 1) Compute the price of 191,403,720 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)


Answer:

1. Cash 191,403,720
Premium on Bonds Payable 41,403,720
Bonds Payable 150,000,000
2. a. Interest Expense 7,964,907
Premium on Bonds Payable* 1,035,093
Cash 9,000,000
* $41,403,720 ÷ 40 seminannual payments
b. Interest Expense 7,964,907
Premium on Bonds Payable* 1,035,093
Cash 9,000,000
* $41,403,720 ÷ 40 semiannual payments
3. $7,964,907
4. Yes. Investors will be willing to pay more than the face amount of the bonds
when the interest payments they will receive from the bonds exceed the amount
of interest that they could receive from investing in other bonds.
5. Present value of $1 for 40 semiannual
periods at 4.5% semiannual rate……………………………… 0.17193
Face amount of bonds…………………………………………… ×
Present value of annuity of $1
$150,000,000 $ 25,789,500
for 40 semiannual periods at 4.5% semiannual rate……… 18.40158
Semiannual interest payment…………………………………… × $ 9,000,000 165,614,220
Proceeds of bond issue………………………………………… $191,403,720

The comparative balance sheet of Coulson, Inc. at December 31, 2014 and 2013, is as follows:

The comparative balance sheet of Coulson, Inc. at December 31, 2014 and 2013, is as follows:






Dec. 31, 2014 Dec. 31, 2013
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,600 $ 337,800
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704,400 609,600
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 918,600 865,800
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,600 26,400
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 990,000 1,386,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,000 990,000
Accumulated depreciation—buildings . . . . . . . . . . . . . . . . . . . . . (397,200) (366,000)
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660,600 529,800
Accumulated depreciation—equipment . . . . . . . . . . . . . . . . . . . . (133,200) (162,000)
$5,042,400 $4,217,400
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . $ 594,000 $ 631,200
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,400 21,600
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,000 0
Common stock, $20 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 180,000
Paid-in capital: Excess of issue price over par—common stock . . . . . . . . 950,000 810,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,822,000 2,574,600
$5,042,400 $4,217,400

The noncurrent asset, noncurrent liability, and stockholders’ equity accounts for 2014 are as follows:


ACCOUNT Land ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Realized $456,000 cash
 from sale
1
20
Jan.
Apr.
1,386,000
396,000 990,000
ACCOUNT Buildings ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Acquired for cash
1
20
Jan.
Apr.
990,000
990,000 1,980,000
ACCOUNT Accumulated Depreciation—Buildings ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Depreciation for year
1
31
Jan.
Dec.
366,000
31,200 397,200
ACCOUNT Equipment ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Discarded, no salvage
Purchased for cash
1
26
11
Jan.
Aug.
529,800
463,800
660,600
66,000
196,800
ACCOUNT Accumulated Depreciation—Equipment ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Equipment discarded
Depreciation for year
1
26
31
Jan.
Dec.
162,000
96,000
37,200 133,200
66,000
ACCOUNT Bonds Payable ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
May 1 Issued 20-year bonds 330,000 330,000
ACCOUNT Common Stock, $10 par ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Issued 7,000 shares of common
 stock for $40 per share
1
7
Jan.
Dec.
180,000
140,000 320,000
ACCOUNT Paid-In Capital in Excess of Par—Common Stock ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Issued 7,000 shares of common
 stock for $40 per share
1
7
Jan.
Dec.
810,000
140,000 950,000
ACCOUNT Retained Earnings ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2014
Balance
Net income
Cash dividends
1
31
31
Jan.
Dec.
2,574,600
2,901,200
2,822,000

Instructions
Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.


Answer:




COULSON INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income $ 326,600
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation 68,400
Gain on sale of land (60,000)
Changes in current operating assets
and liabilities:
Increase in accounts receivable (94,800)
Increase in inventories (52,800)
Decrease in prepaid expenses 7,800
Decrease in accounts payable (37,200)
Increase in income taxes payable 4,800
Net cash flow from operating activities $ 162,800
Cash flows from investing activities:
Cash received from sale of land $ 456,000
Less: Cash paid for acquisition
of building $990,000
Cash paid for purchase
of equipment 196,800 1,186,800
Net cash flow used for investing activities (730,800)
Cash flows from financing activities:
Cash received from issuance of
bonds payable $330,000
Cash received from issuance of
common stock 280,000 $ 610,000
Less cash paid for dividends 79,200
Net cash flow from financing activities 530,800
Decrease in cash $ (37,200)
Cash at the beginning of the year 337,800
Cash at the end of the year $ 300,600
COULSON INC.
Spreadsheet (Work Sheet) for Statement of Cash Flows
For the Year Ended December 31, 2014
Account Title
Balance
Dec. 31, 2013
Transactions Balance
Debit Credit Dec. 31, 2014
Cash 337,800 (p) 37,200 300,600
Accounts receivable (net) 609,600 (i) 94,800 704,400
Inventories 865,800 (h) 52,800 918,600
Prepaid expenses 26,400 (g) 7,800 18,600
Land 1,386,000 (m) 396,000 990,000
Buildings 990,000 (l) 990,000 1,980,000
Accum. depr.—buildings (366,000) (f) 31,200 (397,200)
Equipment 529,800 (j) 196,800 (k) 66,000 660,600
Accum. depr.—equipment (162,000) (k) 66,000 (e) 37,200 (133,200)
Accounts payable (631,200) (d) 37,200 (594,000)
Income taxes payable (21,600) (c) 4,800 (26,400)
Bonds payable 0 (n) 330,000 (330,000)
Common stock, $20 par (180,000) (o) 140,000 (320,000)
Paid-in capital in excess of
par—common stock (810,000) (o) 140,000 (950,000)
Retained earnings (2,574,600) (b) 79,200 (a) 326,600 (2,822,000)
Totals 0 1,516,800 1,516,800 0
Operating activities:
Net income (a) 326,600
Depreciation—equipment (e) 37,200
Depreciation—buildings (f) 31,200
Gain on sale of land (m) 60,000
Increase in accts. receivable (i) 94,800
Increase in inventories (h) 52,800
Decrease in prepaid expenses (g) 7,800
Decrease in accounts payable (d) 37,200
Increase in income taxes
payable (c) 4,800
Investing activities:
Purchase of equipment (j) 196,800
Acquisition of building (l) 990,000
Sale of land (m) 456,000
Financing activities:
Payment of cash dividends (b) 79,200
Issuance of bonds payable (n) 330,000
Issuance of common stock (o) 280,000
Net decrease in cash (p) 37,200
Totals 1,510,800 1,510,800