Smith obtained following nformation related to the investments from Acme's ecember 31, Year , financial state • 20% ownership interest in Kern Co., represented by 200,000 shares of outstanding common stock purchased 7, for $600,000. . • Acquired debt securities from Wand Co., on January 2, Year 7, for $300,000 with the intent to hold them for a s time. • On January 2, Year 7, the carrying values of the acquired investments equaled their purchase price. • Kern reported earnings of $400,000 for the year ended December 31, Year 7, and declared and paid dividends during Year 7. • Acme received $52,000 in interest payments from Wand Co. during the year. • On December 31, Year 7. Kern's common stock was trading over-the counter at $18 per share. The fair value of from Wand was $360,000. • The investment in Kern is accounted for using the equity method and the debt securities are accounted for as Smith recalculated the amounts reported in Acme's December 31, Year 7, financial statements, and determined that t Stressing that the information available in the financial statements was limited, Smith advised Johnson that, assumin applied generally accepted accounting principles, Acme may have appropriately used two different methods to acco investments. Acme did not elect the fair value option regarding its financial instruments. Required: Complete the schedule indicating the amounts Acme should report for the two investments in its December 31, Year statement of income, and other comprehensive income. Ignore income taxes. (Leave no answer blank - enter O for have an amount to enter.) Carrying Value on Balance Sheet Kern investment on B/S Trading securities on B/S Income on Income Statement (I/S) From Kern investment From trading securities Other comprehensive income (OCI) From Kern investment From trading securities Answers
Smith obtained following nformation related to the investments from Acme's ecember 31, Year , financial state • 20% ownership interest in Kern Co., represented by 200,000 shares of outstanding common stock purchased 7, for $600,000. . • Acquired debt securities from Wand Co., on January 2, Year 7, for $300,000 with the intent to hold them for a s time. • On January 2, Year 7, the carrying values of the acquired investments equaled their purchase price. • Kern reported earnings of $400,000 for the year ended December 31, Year 7, and declared and paid dividends during Year 7. • Acme received $52,000 in interest payments from Wand Co. during the year. • On December 31, Year 7. Kern's common stock was trading over-the counter at $18 per share. The fair value of from Wand was $360,000. • The investment in Kern is accounted for using the equity method and the debt securities are accounted for as Smith recalculated the amounts reported in Acme's December 31, Year 7, financial statements, and determined that t Stressing that the information available in the financial statements was limited, Smith advised Johnson that, assumin applied generally accepted accounting principles, Acme may have appropriately used two different methods to acco investments. Acme did not elect the fair value option regarding its financial instruments. Required: Complete the schedule indicating the amounts Acme should report for the two investments in its December 31, Year statement of income, and other comprehensive income. Ignore income taxes. (Leave no answer blank - enter O for have an amount to enter.) Carrying Value on Balance Sheet Kern investment on B/S Trading securities on B/S Income on Income Statement (I/S) From Kern investment From trading securities Other comprehensive income (OCI) From Kern investment From trading securities Answers
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Educational Website Content: Transcription and Analysis of Financial Statement Problem**
**Scenario:**
Johnson, an investor in Acme Co., approached Smith, CPA, for guidance on the propriety of Acme’s financial reporting relating to two investments. Smith reviewed the financial information from Acme’s December 31, Year 7 financials:
1. **Investment in Kern Co.:**
- **Details:** 20% ownership interest in Kern Co. acquired on January 2, Year 7 for $600,000, represented by 200,000 shares of common stock.
- **Earnings and Dividends:** Kern reported earnings of $400,000 and declared dividends of $100,000 in Year 7.
- **Accounting Treatment:** Equity method is used.
2. **Investment in Wand Co. Debt Securities:**
- **Details:** Acquired on January 2, Year 7, for $300,000, with the intent to hold the securities for a short period.
- **Value:** On December 31, Year 7, the securities valued at $360,000 with interest payments of $52,000 received during the year.
- **Accounting Treatment:** Trading securities approach is applied.
Smith confirmed that these figures were correctly presented in Acme’s Year 7 financial statements. The investments are accounted using appropriate methods without the election of the fair value option.
**Required Task:**
Complete a schedule indicating the amounts Acme should report for the two investments as of December 31, Year 7 for the balance sheet, statement of income, and other comprehensive income, excluding tax impacts.
**Schedule for Financial Reporting:**
| **Carrying Value on Balance Sheet** | **Answers** |
|--------------------------------------|-------------|
| **Kern investment on B/S** | |
| **Trading securities on B/S** | |
| **Income on Income Statement (I/S)** | |
| From Kern investment | |
| From trading securities | |
| **Other comprehensive income (OCI)** | |
| From Kern investment | 0 |
| From trading securities | |
- **Graphical Explanation**: The table provided is a template to fill in the financial information. The equity investment in Kern affects both the balance sheet and the income statement due to the use of the equity method. The trading securities need to be reported at their fair value, impacting both
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