ACTG 351 Homework #3 (Investments) 1.Clear Monkey Technologies (CMT) purchased 10-year bonds issued from Banana Bandana’s Inc with a face value of $2,000,000 and a stated rate of 8 percent on January 1, 2016. Interest is payable semi-annually on December 31 and June 30. The market rate of interest for similar bonds is 10 percent. In addition, the market value of the bonds at June 30 and December 31 were $2,037,000 and $1,977,000, respectively. Assume the company prepares financial reports semiannually at June 30 and December 31. a) Assume CMT accounts for these bonds as (1) Held-to-Maturity Securities and (2) Available-for-Sale Securities. Please record the initial purchase of the bonds and the first two interest payments on June 30 and December 31, as well as any adjusting entries on June 30 and December 31 assuming these two classifications. b) CMT sells the bonds on April 1, 2017 for $1,988,000 (which includes accrued interest for 3 months). Please record the entry for the sale using the above two classifications. c)For the bonds classified at AFS, also make the fair value adjusting entry at the end of June, 2017 assuming this was the only AFS investment. 2.Outriggers International reported the following selected balances on its financial statements for each of the four years 2011-2014: 2011 2012 2013 2014 Fair Value Adjustment – AFS Securities $ 0 $ 6,200 $ 4,600 $ (800) Fair Value Adjustment – Trading Securities 0 (1,800) 300 1,550 Based on these balances, reconstruct the fair value adjusting entries that must have been made each year. Assume no investments were sold in 2013. Describe what happened to these investments in 2013 and how the investments affected net income in 2013. 3.On January 1, 2013, Cameron Inc. bought 20% of the outstanding common stock of Lake Construction Company for $300 million cash. At the date of acquisition of the stock, Lake’s net assets had a fair value of $900 million. Their book value was $800 million. The difference was attributable to the fair value of Lake’s buildings and its land exceeding book value, each accounting for one-half of the difference. Lake’s net income for the year ended December 31, 2013 was $150 million. During 2013, Lake declared and paid cash dividends of $30 million. The buildings have a remaining life of 10 years. a) Prepare all appropriate journal entries related to the investment during 2013, assuming Cameron accounts for this investment by the equity method. b) Determine the amounts to be reported by Cameron: a. As an investment in Cameron’s 2013 balance sheet. b. As investment revenue in the income statement. c. Among investing activities in the statement of cash flows.