Required:

How should Silverwood report the above information in its year-end income statement and balance sheet? Discuss the rationale for your answer.

Answer: The Silverwood Company should follow the equity method of accounting for this investment. Because Silverwood owns 35% of the voting stock of Yellowstone, the presumption of significant influence exists. 35 % of Yellowstone's net income would be added to Silverwood's Investment account balance. Adjustments would also be made, if appropriate, to reflect additional depreciation. The investment account's adjusted balance would be reported as a long-term investment in the asset section of the balance sheet. 35% of Yellowstone's net income, minus any additional depreciation, would be reflected in Silverwood's income statement. Since the equity method is appropriate for this investment, the dividends would not be included in income.

Learning Objective: 5 Level of Learning: 2

138. LaBelle Corporation owns a $6 million whole life insurance policy on the life of its CEO, naming LaBelle as beneficiary. The annual premiums are $95,000 and are payable at the beginning of each year. The cash surrender value of the policy was $56,000 at the beginning of 2006.

Required:

1. Prepare the appropriate 2006 journal entry to record insurance expense and the increase in the investment, assuming the cash surrender value of the policy increased according to the contract to $70,000.

2. The CEO died at the end of 2006. Prepare the appropriate journal entry.

Answer:

1)	Insurance expense (difference)	81,000
	Cash surrender value of life insurance ($70,000 – 56,000)	14,000
	Cash (2006 premium)		95,000
2)	Cash (death benefit)	6,000,000
	Cash surrender value of life insurance (account balance)		70,000
	Gain on life insurance settlement (to balance)		5,930,000

Learning Objective: Appendix Level of Learning: 3

139. Guido Properties owes First State Bank $60 million under a 7% note with two years remaining to maturity. Due to financial difficulties of Guido, the previous year's interest ($4.2 million) was not received. The bank agrees to settle the note receivable and accrued interest receivable in exchange for land having a fair market value of $44 million.

Required: Compute the loss on troubled debt restructuring that the bank would record.

Answer: $20.2 million

Land	44.0 million
Loss on troubled debt restructuring	20.2 million
Accrued interest receivable (7% x $60 million)		4.2 million
Note receivable		60.0 million

Learning Objective: Appendix Level of Learning: 3

Essay

Instructions:

The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

140. Previously, marketable equity securities were reported using a technique referred to as "lower of cost or market." The current accounting standard requires fair value reporting for trading securities and securities available for sale. Some accountants believe that the FASB was inconsistent when Statement No. 115 was released requiring changes in the value of trading securities to be reported on the income statement and balance sheet, while changes in the value of securities available for sale are reported only on the balance sheet.