Financial Accounting: An Integrated Statements Approach, 2nd Edition

Exercise 12-24

Entries for purchase and sale

of investment in bonds; gain

Goal 4

Toys“R”Us Inc.is a major retailer of toys in the United States. A recent balance sheet dis-

closed a long-term investment in Toys-Japan, a public company trading on the Tokyo over-

the-counter market. The balance sheet disclosure for two comparative years was as follows:

Feb. 2, 2002 Feb. 3, 2001

Investment in Toys-Japan (in millions) $123 $108

In addition, the Toys“R”Us income statement disclosed equity earnings in the Toys-Japan

investment as follows (in millions):

Feb. 2, 2002 Feb. 3, 2001

Equity in net earnings of Toys-Japan $29 $31

The notes to the financial statements provided the following additional information about

this investment:

The company accounts for its investment in the common stock of Toys-Japan under the “equity

method” of accounting since the initial public offering on April 24, 2000. The quoted market

value of the company’s investment in Toys-Japan was $283 at February 2, 2002.

a. Explain the change in the investment in Toys-Japan account for fiscal year ended

February 2, 2002.

b. Why is the Investment in Toys-Japan not recognized at market value?

The following note to the consolidated financial statements for The Goodyear Tire and Rubber

Co.relates to investments in affiliated companies:

Goodyear’s investments in 20% to 50% owned companies in which it has the ability to exercise

significant influence over operating and financial policies are accounted for by the equity method.

Accordingly, Goodyear’s share of the earnings of these companies is included in consolidated net

income (loss).

Dividends received by the Company from its unconsolidated affiliates accounted for under

the equity method was $2.8 million.

a. Is Goodyear required to use the equity method for these investments? Explain.

b. Journalize the entry for receipt of the dividend making the credit to Investment in

Affiliates.

Laser Vision Co. sells optical supplies to opticians and ophthalmologists. Prepare the entries to

record the following selected transactions of Laser Vision Co.:

a. Purchased for cash $450,000 of Pierce Co. 8% bonds at 101^1 – 2 plus accrued interest of

$9,000.

b. Received first semiannual interest.

c. At the end of the first year, amortized $540 of the bond premium.

d. Sold the bonds at 99 plus accrued interest of $3,000. The bonds were carried at $453,750 at

the time of the sale.

Inez Company develops and sells graphics software for use by architects. Prepare the entries to

record the following selected transactions of Inez Company:

a. Purchased for cash $270,000 of Theisen Co. 5% bonds at 98 plus accrued interest of $2,250.

b. Received first semiannual interest.

c. Amortized $450 on the bond investment at the end of the first year.

d. Sold the bonds at 100 plus accrued interest of $4,500. The bonds were carried at $267,250

at the time of the sale.

566 Chapter 12 Special Income and Investment Reporting Issues

Exercise 12-21

Equity method for stock

investment

Goal 3

Exercise 12-22

Equity method for stock

investment

Goal 3

Exercise 12-23

Entries for purchase and sale

of investment in bonds; loss

Goal 4