133. Required:

Assuming Arctic's effective tax rate is 30%, what gain or loss would be realized if the available for sale securities on Arctic Cat's 3/31/05 balance sheet were sold immediately for their fair value? Show the journal entry for such a sale.

Answer:

Arctic would report a $63,700 gain, net of $27,300 in taxes. This is the difference between the amortized cost of the investments ($3,105,000) and their fair value ($3,196,000), or $91,000, taxed at 30%. The transaction would be recorded as follows:

Cash	3,196,000
Available for Sale Debt Securities		3,196,000
Unrealized gain (net)	63,700
Realized gain (net) on sale of securities		63,700

Learning Objective: 2 Level of Learning: 3

Use the following to answer questions 134-135:

Fragrance International, a large perfume manufacturer, reported the following in its 2005 annual report to shareholders:

ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income (loss) ("OCI") included in the accompanying consolidated balance sheets consist of the following:

	YEAR ENDED JUNE 30
	2005		2004		2003
	(IN MILLIONS)
Net unrealized investment gains, beginning
of year	$ 2.9		$ 13.9		$ 6.1
Unrealized investment gains (losses)	(5.0	)	(18.3	)	13.0
Provision for deferred income taxes	2.0		7.3		(5.2)	)
Net unrealized investment gains (losses),
end of year	(0.1	)	2.9		13.9

CONSOLIDATED STATEMENTS OF CASH FLOWS

	YEAR ENDED JUNE 30
	2005		2004		2003
	(IN MILLIONS)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .	(203.2	)	(192.2	)	(180.9	)
Acquisition of businesses, net of
acquired cash	(18.5	)	(16.0	)	(180.5	)
Purchases of long-term investments	--		--		(15.9	)
Proceeds from disposition of long-term
investments .	4.7		1.9		3.0
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES	(217.0	)	(206.3	)	(374.3	)

Investments sold during 2005 originally cost $3.0 million and were unchanged in value from the date of purchase to the date of sale.

134. Required:

What was the realized gain or loss on the sale of available-for-sale securities in 2005? Assume a 40% tax rate.

Answer: $1.7 million gain before taxes ($4.7 proceeds - $3.0 securities). Taxes would be $0.68 million ($1.7 million x .4 tax rate). Thus, the after-tax gain would be $1.02 million.

Learning Objective: 2 Level of Learning: 3

135. Required:

Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized gain or loss on available-for-sale securities at 7/1/04?

Answer: $4.833 million unrealized gain. At a 40% tax rate, the after-tax unrealized gain is 60% of the total. Therefore, $2.9 million is 60% of the total. Total is $2.9/.6 = $4.833 million.

Learning Objective: 2 Level of Learning: 3

136. Required:

What was the adjusting journal entry that Fragrance International recorded at 6/30/05 to bring the available-for-sale securities held to fair value?

Answer:

Unrealized investment loss	5.0 million
Available for sale securities		3.0 million
Deferred income taxes		2.0 million

Learning Objective: 2 Level of Learning: 3

137. On July 1, 2006, Silverwood Company purchased for cash 35% of the voting common stock of Yellowstone Corporation. Both companies have a December 31 fiscal year-end. Yellowstone Corporation, which is publicly traded on an organized stock exchange, reported its net income for the year to Silverwood and paid a dividend to Silverwood during the year.