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Chapter 12
Investments
Question 12-2
Increases and decreases in the market value between the time a debt security is acquired and the
day it matures to a prearranged maturity value are ignored for securities classified as held-tomaturity. These changes arent important if sale before maturity isnt an alternative, which is the
case if an investor has the positive intent and ability to hold the securities to maturity.
Question 12-3
The fair value of an equity security is considered readily determinable if its selling price (or
bid-and-asked quotation) is currently available on a securities exchange. When its fair value is not
readily determinable, an investment is carried and reported at cost. Any dividends received are
recognized as investment revenue, and a gain or loss is reported only when actually realized through
the sale of the investment.
Question 12-4
For investments to be held for an unspecified period of time, fair value information is more
relevant than for investments to be held to maturity. Changes in fair values are less relevant if the
investment is to be held to maturity because sale at that fair value is not an option. The investor
receives the same contracted interest payments and principal at maturity, regardless of movements in
market values. However, when the investment is of unspecified length, changes in fair values
indicate managements success in deciding when to acquire the investment and when to sell it, as
well as the propriety of investing in fixed-rate or variable-rate securities and long-term or short-term
securities.
Question 12-5
The way unrealized holding gains and losses are reported in the financial statements depends on
whether the investments are classified as securities available-for-sale or as trading securities.
Securities available-for-sale are reported at fair value, and resulting holding gains and losses are not
included in the determination of income for the period. Rather, they are reported as a separate
component of shareholders equity, as part of Other comprehensive income.
Question 12-6
Comprehensive income is a more expansive view of the change in shareholders equity than
traditional net income. It encompasses all changes in equity from nonowner transactions. So, in
addition to net income, comprehensive income includes up to four other changes in equity: Net
unrealized holding gains (losses) on investments, Net unrecognized loss on pensions, Deferred gains
(losses) from derivatives, and Gains (losses) from foreign currency translation.
The McGraw-Hill Companies, Inc., 2007
Solutions Manual, Vol. 1, Chapter 12
12-1
Question 12-8
Apparently, the drop in the market price of the stock is an other-than-temporary impairment. So,
when the investment is written down to its fair value, the amount of the write-down should be treated
as if it were a realized loss, meaning the loss is included in income for the period. Subsequent to the
other-than-temporary write-down, the usual treatment of unrealized gains or losses should be
resumed. Therefore, later changes in fair value will be reported as a separate component of
shareholders equity, accumulated other comprehensive income.
Question 12-9
When acquired, debt and equity securities are assigned to one of the three reporting
classifications held-to-maturity, available-for-sale, or trading. The appropriateness of the
classification is reassessed at each reporting date. A reclassification should be accounted for as
though the security had been sold and immediately reacquired at its fair value. Any unrealized
holding gain or loss should be accounted for in a manner consistent with the classification into
which the security is being transferred. Specifically, when a security is transferred:
1. Into the trading category, any unrealized holding gain or loss should be recognized in earnings
of the reclassification period.
2. Into the available-for-sale category, any unrealized holding gain or loss should be recorded as
a separate component of shareholders equity, Other comprehensive income.
3. Into the held-to-maturity category, any unrealized holding gain or loss should be amortized
over the remaining time to maturity.
Question 12-10
Yes. Although a company is not required to report individual amounts for the three categories of
investments held-to-maturity, available-for-sale, or trading on the face of the balance sheet, that
information should be presented in the disclosure notes. The following also should be disclosed for
each year presented: aggregate fair value, gross realized and unrealized holding gains, gross realized
and unrealized holding losses, the change in net unrealized holding gains and losses, and amortized
cost basis by major security type. In addition, information about maturities should be reported for
debt securities, by disclosing the fair value and cost for at least 4 maturity groupings: (a) within 1
year, (b) after 1 year through 5 years, (c) after 5 years through 10 years, and (d) after 10 years.
The McGraw-Hill Companies, Inc., 2007
12-2
Intermediate Accounting, 4e
Question 12-12
The equity method, like consolidation, views the investor and investee as a special type of single
entity. By the equity method, though, the investor doesnt include separate financial statement items
of the investee on an item-by-item basis as in consolidation. Rather, by the equity method, the
investor reports its equity interest in the investee as a single investment account. That single
investment account is periodically adjusted to reflect the effects of consolidation, without actually
consolidating financial statements.
Question 12-13
The investor should account for dividends from the investee as a reduction in the investment
account. Since investment revenue is recognized as the investee earns it, it would be inappropriate
to again recognize revenue when earnings are distributed as dividends. Rather, the dividend
distribution is considered to be a reduction of the investees net assets, indicating that the investors
ownership interest in those net assets declines proportionately.
Question 12-14
The equity method attempts to approximate the effects of accounting for the purchase of the
investee as a consolidation. Consolidated financial statements report acquired net assets at their fair
values. Both investment revenue and the investment would be reduced by the negative income
effect of the extra depreciation the higher fair value would cause. This would equal 40% x $12
million 10 years = $480,000 each year for ten years.
Question 12-15
The investment account was decreased by $40,000 (40% x $100,000). Cash increased the same
amount. There is no effect on the income statement.
12-3
Question 12-17
A financial instrument is: (a) cash, (b) evidence of an ownership interest in an entity, (c) a
contract that (1) imposes on one entity an obligation to deliver cash or another financial instrument
and (2) conveys to a second entity a right to receive cash or another financial instrument, or (d) a
contract that (1) imposes on one entity an obligation to exchange financial instruments on potentially
unfavorable terms and (2) conveys to a second entity a right to exchange other financial instruments
on potentially favorable terms. Accounts payable, bank loans, and investments in securities are
examples.
Question 12-18
These instruments derive their values or contractually required cash flows from some other
security or index.
Question 12-19
Since this fund wont be used within the upcoming operating cycle, it is a noncurrent asset. It
should be reported as part of Investments and funds.
Question 12-20
Part of each premium payment the company makes is not used by the insurance company to pay
for life insurance coverage, but rather is invested on behalf of the insured company in a fixedincome investment. As a result, the periodic insurance premium should not be expensed in its
entirety; an appropriate portion should be recorded instead as a noncurrent asset cash surrender
value.
Question 12-21
When a creditors investment in a receivable becomes impaired, due to a troubled debt
restructuring or for any other reason, the receivable is re-measured based on the discounted present
value of currently expected cash flows at the loans original effective rate (regardless of the extent to
which expected cash receipts have been reduced). The extent of the impairment is the difference
between the carrying amount of the receivable (the present value of the receivables cash flows prior
to the restructuring) and the present value of the revised cash flows discounted at the loans original
effective rate. This difference is recorded as a loss at the time the receivable is reduced.
Intermediate Accounting, 4e
BRIEF EXERCISES
Brief Exercise 12-1
(a)
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds).........................................
720,000
10,800
1,200
120,000
600,000
(b)
12,000
54,900
57,050
54,900
2,150
54,900
60,000
60,000
12-5
875,000
December 31
Unrealized holding loss ......................................................
Investment in Coca Cola shares ([$875,000 - $873,000)......
2,000
875,000
2,000
2007
January 3
Cash (selling price)................................................................
Gain on investments (to balance) ......................................
Investment in Coca Cola shares (account balance) .............
880,000
7,000
873,000
Intermediate Accounting, 4e
875,000
December 31
Unrealized holding loss (shareholders equity) .....................
Fair value adjustment ($875,000 - $873,000) ......................
2,000
875,000
2,000
2007
January 3
Cash (selling price)................................................................
Gain on investments (to balance) ......................................
Investment in Coca Cola shares (cost) .............................
880,000
5,000
875,000
2,000
2,000
12-7
Intermediate Accounting, 4e
450,000
450,000
The investment is written down to its fair value, and the amount of the write-down
should be treated as if it were a realized loss, meaning the loss is included in LEDs
earnings for the period. Following the other-than-temporary write-down, the usual
treatment of unrealized gains or losses should be resumed. Therefore, later changes in
fair value will be reported as Other comprehensive income or loss - a separate
component of shareholders equity.
12-9
EXERCISES
Exercise 12-1
Requirement 1
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds).........................................
Requirement 2
Cash (3% x $240 million) ......................................
Discount on bond investment (difference)............
Interest revenue (4% x $200) ................................
($ in millions)
240
40
200
7.2
.8
8.0
Requirement 3
Tanner-UNF reports its investment in the December 31, 2006, balance sheet at
its amortized cost that is, its book value:
Investment in bonds ..........................................
Less: Discount on bond investment ($40 - .8 million)
Amortized cost...............................................
$240.0
39.2
$200.8
($ in millions)
190.0
39.2
10.8
240.0
Intermediate Accounting, 4e
Exercise 12-2
November 1
($ in millions)
Cash ..............................................................
Investment revenue ....................................
2.4
2.4
December 1
Investment in Facsimile Enterprises bonds ....
Cash...........................................................
30
30
December 31
Investment in U.S. Treasury bills .................
Cash...........................................................
8.9
8.9
December 31
Investment revenue receivable - Convenience
bonds ($48 million x 10% x 2/12) ......................
Investment revenue receivable - Facsimile
Enterprises bonds ($30 million x 12% x 1/12) ....
Investment revenue ....................................
0.8
0.3
1.1
Exercise 12-3
Investment in GM common shares ...............
Cash ([800 shares x $50] + $1,200) ..................
41,200
41,100
100
41,200
41,200
12-11
Exercise 12-4
Requirement 1
($ in 000s)
75
30
80
60
75
30
80
60
Requirement 2
None. Accumulated net holding gains and losses for securities available-forsale are reported as a component of shareholders equity, and changes in the
balance are reported as Other comprehensive income or loss rather than as
part of earnings. This amount can be reported either (a) as an additional
section of the income statement, (b) as part of the statement of shareholders
equity, or (c) as a separate statement in a disclosure note.
Intermediate Accounting, 4e
Exercise 12-5
Requirement 1
Securities held-to-maturity are debt securities an investor has the positive
intent and ability to hold to maturity. Actively traded investments in debt or
equity securities acquired principally for the purpose of selling them in the near
term are classified as trading securities. The IBM shares are neither. They are
classified as available-for-sale since all investments in debt and equity securities
that dont fit the definitions of the other reporting categories are classified this
way. Of course, the equity method isnt appropriate either because 10,000 shares
of IBM certainly dont constitute significant influence.
Investments in securities available-for-sale are reported at fair value, and holding
gains or losses are not included in the determination of income for the period.
Instead, they are reported as Other comprehensive income or loss. This amount
can be reported either (a) as an additional section of the income statement, (b) as
part of the statement of shareholders equity, or (c) as a separate statement in a
disclosure note. Accumulated net holding gains and losses for securities
available-for-sale are reported as a separate component of shareholders equity.
Requirement 2
December 31, 2006
Net unrealized holding gains and losses (10,000 shares x [$58 - 60])
Fair value adjustment ...........................................................
20,000
20,000
12-13
Cost
$600
Fair Value
$610
Accumulated
Unrealized
Gain (Loss)
$10
Moving from a negative $20 (2006) to a positive $10 requires an increase of $30:
--------------------------------------------------------20
0
+10
+30 ----------------------------->
30,000
30,000
Intermediate Accounting, 4e
Exercise 12-6
Requirement 1
2006
March 2
($ in millions)
31
31
April 12
Investment in Zenith bonds .......................................................
Cash ......................................................................................
20
July 18
Cash ..........................................................................................
Investment revenue ...............................................................
October 15
Cash ..........................................................................................
Investment revenue ...............................................................
October 16
Cash ..........................................................................................
Investment in Zenith bonds ...................................................
Gain on sale of investments...................................................
November 1
Investment in LTD preferred shares .........................................
Cash ......................................................................................
20
1
21
20
1
40
40
12-15
Available-for-Sale Securities
Platinum Gauges, Inc. shares
LTD preferred shares
Totals
Cost
$31
40
$71
Fair Value
$32*
37**
$69
Accumulated
Unrealized
Gain (Loss)
$1
(3)
$(2)
Adjusting entry:
Net unrealized holding gains and losses ($71 69).....................
Fair value adjustment ($71 69)..............................................
2
2
2007
January 23
($ in millions)
16.0
.5
15.5
38
2
40
Intermediate Accounting, 4e
$3
1
$2
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
12-17
Exercise 12-7
Requirement 1
Purchase
($ in millions)
90
90
Net income
No entry
Dividends
Cash (5% x $60 million) ................................................................
Adjusting entry
8
8
Requirement 2
Investment revenue .........................
$3 million
Intermediate Accounting, 4e
Exercise 12-8
Requirement 1
2006
December 17
Investment in Grocers Supply preferred shares ................
Cash ...............................................................................
350,000
December 28
Cash ...................................................................................
Investment revenue ........................................................
2,000
December 31
Investment in Grocers Supply preferred shares .................
Unrealized holding gain ([$4 x 100,000 shares] - $350,000) ..
50,000
350,000
2,000
50,000
2007
January 5
Cash (selling price)................................................................
Loss on investments (to balance) ..........................................
Investment in Grocers Supply preferred
shares (account balance)................................................
395,000
5,000
400,000
Requirement 2
Balance Sheet
(short-term investment):
Trading securities ..................................................
Income Statement:
Investment revenue (dividends) .........................................
Unrealized holding gain (from adjusting entry) ....................
$400,000
$
2,000
50,000
Note: Unlike for securities available-for-sale, unrealized holding gains and losses for
trading securities are included in income.
12-19
Exercise 12-9
1. Investments reported as current assets.
Security A
$ 910,000
Security B
100,000
Security C
780,000
Security E
490,000
Total
$2,280,000
2. Investments reported as noncurrent assets.
Security D
$ 915,000
Security F
615,000
$1,530,000
A
B
Totals
Cost
Fair value
$ 900,000
105,000
$1,005,000
$ 910,000
100,000
$1,010,000
Unrealized
gain (loss)
$10,000
(5,000)
$ 5,000
Security
Totals
C
D
Cost
Fair value
$ 700,000
900,000
$1,600,000
$ 780,000
915,000
$1,695,000
Unrealized
gain (loss)
$80,000
15,000
$95,000
Intermediate Accounting, 4e
Exercise 12-10
Requirement 1
($ in 000s)
Available-for-Sale Securities
IBM shares Dec. 31, 2006
Cost
$1,345
Fair Value
$1,175
Accumulated
Unrealized
Gain (Loss)
$(170)
Cost
$1,345
Fair Value
$1,275
25,000
25,000
Accumulated
Unrealized
Gain (Loss)
$(70)
-------------------------------------------------------------------------------------------145
-70
0
+75 ---------------------->
75,000
75,000
12-21
Cost
$1,345
Fair Value
$1,375
Accumulated
Unrealized
Gain (Loss)
$30
175,000
175,000
Intermediate Accounting, 4e
Exercise 12-11
Requirement 1
The sale of the A Corporation shares decreased Harlons pretax earnings by $5
million. The purchase of the C Corporation shares had no effect on Harlons 2007
earnings. Here are the entries used to record those two transactions:
June 1, 2007
Cash
Loss on sale of investments (difference)
Investment in A Corporation shares (cost)
September 12, 2007
Investment in C Corporation shares
Cash
($ in millions)
15
5
20
15
15
12-23
A Corporation shares
B Corporation bonds
C Corporation shares
D Industries shares
Totals
$20
35
na
45
$100
na
$35
15
45
$95
$14
35
na
46
$95
na
$ 37
14
50
$101
11
The adjustment has no effect on earnings. Unlike for trading securities, unrealized
holding gains and losses are not included in income for securities available-forsale.
Exercise 12-12
1. b
2. b
Intermediate Accounting, 4e
Exercise 12-13
Requirement 1
Purchase
480,000
480,000
Net income
No entry
Dividends
Cash (20% x 400,000 shares x $0.25) ........................................
20,000
20,000
Adjusting entry
25,000
25,000
Requirement 2
Purchase
480,000
480,000
Net income
50,000
50,000
20,000
20,000
Adjusting entry
No entry
12-25
Exercise 12-14
Purchase
($ in millions)
56
56
Net income
12
12
3
Adjusting entry
No entry
Exercise 12-15
Requirement 1
($ in millions)
17
17
Requirement 2
Financial statements would be recast to reflect the equity method for each year
reported for comparative purposes. A disclosure note also should describe the
change, justify the switch, and indicate its effects on all financial statement items.
Requirement 3
When a company changes from the equity method, no adjustment is made to the
carrying amount of the investment. Instead, the equity method is simply
discontinued, and the new method is applied from then on. The balance in the
investment account when the equity method is discontinued would serve as the new
cost basis for writing the investment up or down to market value in the next set of
financial statements. There also would be no revision of prior years, but the change
should be described in a disclosure note.
Intermediate Accounting, 4e
Exercise 12-16
1. Error discovered before the books are adjusted or closed in 2006.
Investments ($100,000 80,000) ......................
Gain on sale of investments....................
20,000
20,000
20,000
20,000
12-27
Exercise 12-17
Purchase
($ in millions)
68
68
Net income
10
10
4
Depreciation Adjustment
1
1
Calculations:
Investee
Net Assets
Net Assets
Purchased
Difference
Attributed to:
Cost
$68
Fair value:
Book value:
Goodwill:$12
Undervaluation
of assets: $8
No entry
Intermediate Accounting, 4e
Exercise 12-18
Requirement 1
Purchase
($ in millions)
300
300
Net income
30
30
Dividends
Cash (20% x $30 million) .......................................................
1
1
calculation:
Investee
Net Assets
Net Assets
Purchased
Cost
Fair value:
Book value:
Difference
Attributed to:
$300
Goodwill:
Undervaluation
$120
Requirement 2
a. Investment in Lake Construction shares
_________________________________________
($ in millions)
Cost
300
Share of income 30
Balance
6 Dividends
1 Depreciation adjustment
_________________
323
The McGraw-Hill Companies, Inc., 2007
12-29
Exercise 12-19
1. b
2. b
3. b
Intermediate Accounting, 4e
Exercise 12-20
1. c. According to SFAS 115, available-for-sale securities are investments in debt
securities that are not classified as held-to-maturity or trading securities and
in equity securities with readily determinable fair values that are not
classified as trading securities. They are measured at fair value in the
balance sheet.
2. b. Available-for-sale securities include (1) equity securities with readily
determinable fair values that are not classified as trading securities and (2)
debt securities that are not classified as held-to-maturity or trading securities.
Unrealized holding gains and losses are measured by the difference between
the amortized cost and fair value, excluded from earnings, and reported in
other comprehensive income. The balance is reported net of the tax effect
(ignored in this question). Thus, the difference at May 31, year 3 is $8,005
($643,500 fair value $635,495 amortized cost). This unrealized gain is
reported as a credit to accumulated other comprehensive income.
3. d. Debt securities that the company has the positive intent and ability to hold to
maturity are classified as held-to-maturity. Held-to-maturity securities are
reported at amortized cost. Under the provisions of SFAS 115, any
unrealized gains or losses are not recognized.
Exercise 12-21
Requirement 1
Insurance expense (difference) ..............................................
Cash surrender value of life insurance ($27,000 21,000)......
Cash (2006 premium).........................................................
Requirement 2
Cash (death benefit) .......................................................
Cash surrender value of life insurance (account balance)
Gain on life insurance settlement (to balance) ...........
64,000
6,000
70,000
4,000,000
27,000
3,973,000
12-31
Intermediate Accounting, 4e
Exercise 12-22
Requirement 1
Insurance expense (difference) ......................................
Cash surrender value of life insurance ($4,600 2,500).
Cash (premium) ........................................................
22,900
2,100
25,000
Requirement 2
Cash (death benefit) .......................................................
Cash surrender value of life insurance (account balance)
Gain on life insurance settlement (to balance) ...........
250,000
16,000
234,000
12-33
Exercise 12-23
ANALYSIS
Previous Value:
$ 1,200,000
12,000,000
$13,200,000
New Value:
Interest
$1 million
x 1.73554 *
Principal $11 million
x 0.82645 **
Present value of the receivable
=
=
$1,735,540
9,090,950
(10,826,490)
$ 2,373,510
Loss:
* present value of an ordinary annuity of $1: n=2, i=10%
** present value of $1: n=2, i=10%
JOURNAL ENTRIES
January 1, 2006
Loss on troubled debt restructuring (to balance) ...........
Accrued interest receivable (account balance) ............
Note receivable ($12,000,000 - 10,826,490) .................
2,373,510
1,200,000
1,173,510
1,000,000
82,649
1,000,000
90,861
1,082,649
1,090,861*
11,000,000
11,000,000
Intermediate Accounting, 4e
1
2
1,000,000
1,000,000
Effective
Increase in
Interest
Balance
10% x Outstanding Balance Discount Reduction
.10 (10,826,490) = 1,082,649
.10 (10,909,139) = 1,090,861*
2,000,000
* rounded
2,173,510
82,649
90,861
Outstanding
Balance
10,826,490
10,909,139
11,000,000
173,510
12-35
Exercise 12-24
ANALYSIS
Previous Value:
$ 24,000
240,000
$264,000
New Value:
(226,997)
$ 37,003
JOURNAL ENTRIES
January 1, 2006
Loss on troubled debt restructuring (to balance) ...........
Accrued interest receivable (10% x $240,000) ...........
Note receivable ($240,000 - $226,997)........................
37,003
24,000
13,003
22,700
24,968
22,700
24,968*
274,665
274,665
Intermediate Accounting, 4e
1
2
0
0
Effective
Interest
10% x Outstanding Balance
.10 (226,997) = 22,700
.10 (249,697) = 24,968*
47,668
Increase in
Outstanding
Balance
Balance
Discount Reduction
22,700
24,968
226,997
249,697
274,665
47,668
* rounded
12-37
PROBLEMS
Problem 12-1
Requirement 1
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds).........................................
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million) ........................................
Discount on bond investment (difference)............
Interest revenue (5% x $66) ..................................
3.20
.10
Requirement 3
Cash (4% x $80 million) ........................................
Discount on bond investment (difference)............
Interest revenue (5% x [$66 + 0.1]).......................
3.20
.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2006, balance sheet
at its amortized cost that is, its book value:
Investment in bonds .........................................................
Less: Discount on bond investment ($14 .1 .11 million)
Amortized cost..............................................................
$80.00
13.79
$66.21
Increases and decreases in the market value between the time a debt security
is acquired and the day it matures to a prearranged maturity value are relatively
unimportant if sale before maturity isnt an alternative. For this reason, if an
investor has the positive intent and ability to hold the securities to maturity,
investments in debt securities are classified as held-to-maturity and reported
at amortized cost rather than fair value in the balance sheet.
Intermediate Accounting, 4e
Problem 12-2
Requirement 1
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds).........................................
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million) ........................................
Discount on bond investment (difference)............
Interest revenue (5% x $66)...................................
3.20
.10
Requirement 3
Cash (4% x $80 million) ........................................
Discount on bond investment (difference)............
Interest revenue (5% x [$66 + 0.1]) .......................
3.20
.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2006, balance sheet
at its fair value, $70 million in this case. For investments in securities
available-for-sale, changes in market values, and thus market returns, provide
an indication of managements success in deciding when to acquire the
investment, when to sell it, whether to invest in fixed-rate or variable-rate
securities, and whether to invest in long-term or short-term securities.
To do this, we first need to determine the investments amortized cost (or book
value) at the end of the year:
Investment in bonds .........................................................
Less: Discount on bond investment ($14 .1 .11 million)
Amortized cost..............................................................
$80.00
13.79
$66.21
3.79
3.79
12-39
Problem 12-3
Requirement 1
2006
February 21
Investment in Distribution Transformers shares ........
Cash .......................................................................
400,000
400,000
March 18
Cash ...........................................................................
Investment revenue ................................................
8,000
September 1
Investment in American Instruments bonds ...............
Cash .......................................................................
900,000
October 20
Cash ...........................................................................
Investment in Distribution Transformers ..............
Gain on sale of investments....................................
November 1
Investment in M&D Corporation shares ....................
Cash .......................................................................
8,000
900,000
425,000
400,000
25,000
1,400,000
1,400,000
Intermediate Accounting, 4e
Available-for-Sale Securities
M & D Corporation shares
American Instruments bonds
Totals Dec. 31, 2006
Cost
$1,400,000
900,000
$2,300,000
30,000
Fair Value
$1,460,000
850,000
$2,310,000
30,000
Accumulated
Unrealized
Gain (Loss)
$60,000
(50,000)
$10,000*
12-41
38,000
25,000
10,000
Balance sheet:
Current Assets
Investment revenue receivable
30,000
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Securities available-for-sale
Plus: Fair value adjustment
$2,300,000
10,000 $2,310,000
Shareholders Equity
Accumulated other comprehensive income
Net unrealized holding gain (loss) ($60,000 - 50,000)
10,000
* Can be reported either (a) as an additional section of the income statement, (b) as part of the
statement of shareholders equity, or (c) as a separate statement in a disclosure note.
Intermediate Accounting, 4e
1,485,000
85,000
1,400,000
45,000
30,000
15,000
August 12
Investment in Vast Communications shares ..............
Cash .......................................................................
650,000
September 1
Cash ...........................................................................
Investment revenue ................................................
45,000
650,000
45,000
12-43
Securities
Vast Communication shares
American Instruments bonds
Totals Dec. 31, 2007
Cost
$650,000
900,000
$1,550,000
30,000
Fair Value
$670,000
830,000
$1,500,000
30,000
Accumulated
Unrealized
Gain (Loss)
$20,000
(70,000)
$(50,000)*
Net unrealized holding gains and losses (change in accumulated balance) 60,000*
Fair value adjustment (calculated above) ....................
60,000
* The $50,000 debit balance in the Net unrealized holding gains and losses is reported as
Accumulated other comprehensive income, a negative component of Shareholders equity in
the 2007 balance sheet. The $60,000 change in the accumulated balance is reported as 2007
Other comprehensive income.
Intermediate Accounting, 4e
90,000
85,000
(60,000)
Balance sheet:
Current Assets
Investment revenue receivable
30,000
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Securities available-for-sale
Less: Fair value adjustment
$1,550,000
(50,000) $1,500,000
Shareholders Equity
Accumulated other comprehensive income
Net unrealized holding gain (loss) ($20,000 - 70,000)
$ (50,000)
* Can be reported either (a) as an additional section of the income statement, (b) as part of the
statement of shareholders equity, or (c) as a separate statement in a disclosure note.
12-45
Problem 12-4
Requirement 1
2006
December 12
Investment in FF&G Corporation bonds ...................................
Cash .......................................................................................
December 13
Investment in Ferry common shares ..........................................
Cash .......................................................................................
December 15
Cash ...........................................................................................
Investment in FF&G Corporation bonds ................................
Gain on sale of investments ($12.1 12)...................................
($ in millions)
12
12
22
22
12.1
12.0
0.1
December 22
Investment in U.S. Treasury bills ..............................................
Investment in U.S. Treasury bonds ............................................
Cash .......................................................................................
56
65
December 23
Cash ...........................................................................................
Loss on sale of investments ($10 11) .........................................
Investment in Ferry common shares ($22 x 1/2) .......................
10
1
December 26
Cash (selling price)........................................................................
Gain on sale of investments ($57 56) .....................................
Investment in U.S. Treasury bills (balance) ..............................
December 27
Cash (selling price)........................................................................
Loss on sale of investments ($63 65) .........................................
Investment in U.S. Treasury bonds (balance) ...........................
121
11
57
1
56
63
2
65
Intermediate Accounting, 4e
December 28
Cash ...........................................................................................
Investment revenue ................................................................
0.2
0.2
12-47
Adjusting entry:
Unrealized holding loss on investments ($10 million - [$22 million x 1/2])
Investment in Ferry common shares ......................................
Closing entry:
Income summary (to balance) .......................................................
Investment revenue ($5 + 0.2 million)............................................
Gain on sale of investments ($8 + 0.1 + 1 million) ..........................
Loss on sale of investments ($11 + 1 + 2 million) .......................
Unrealized holding loss on investments (adjusting entry) ...........
1.0
1.0
.7
5.2
9.1
14.0
1.0
Note: Unlike for securities available-for-sale, unrealized holding gains and losses are
included in income for trading securities.
Requirement 2
($ in millions)
10.0
5.2
9.1
(14.0)
(1.0)
Requirement 3
2007
January 2
($ in millions)
10.2
10.0
.2
34
34
Intermediate Accounting, 4e
Problem 12-5
($ in millions)
October 18
Investment in Millwork Ventures preferred shares ....................
Cash .......................................................................................
October 31
Cash ...........................................................................................
Investment revenue ................................................................
58
58
1.5
1.5
November 1
Investment in Holistic Entertainment bonds ...............................
Cash .......................................................................................
18
November 1
Cash ...........................................................................................
Loss on sale of investments ($28 30) .........................................
Investment in Kansas Abstractors bonds ...............................
28
2
December 1
Investment in Household Plastics bonds.....................................
Cash .......................................................................................
60
December 20
Investment in U.S. Treasury bonds ............................................
Cash .......................................................................................
December 21
Investment in NXS common shares ...........................................
Cash .......................................................................................
December 23
Cash ...........................................................................................
Investment in U.S. Treasury bonds ........................................
Gain on sale of investments ($5.7 5.6) ...................................
18
30
60
5.6
5.6
44
44
5.7
5.6
.1
12-49
December 29
Cash ...........................................................................................
Investment revenue ..............................................................
December 31
Accrued interest:
Investment revenue receivable - Holistic
Entertainment ($18 million x 10% x 2/12)......................................
Investment revenue receivable - Household
Plastics ($60 million x 12% x 1/12)................................................
Investment revenue .............................................................
0.3
Revaluations:
Net unrealized holding loss on
investments ([2 million shares x $27.50] - $58 million) ....................
Fair value adjustment ..........................................................
Investment in NXS common shares ...........................................
Unrealized holding gain on
investments ([4 million shares x $11.50] - $44 million)..............
0.6
0.9
3
3
2
2
Closing entry:
Unrealized holding gain on investments (NXS) ...........................
Investment revenue ($3.0 + 1.5 + .9)..............................................
Gain on sale of investments (U.S. Treasury bonds) .........................
Loss on sale of investments (Kansas Abstractors) ....................
Income summary (to balance) .................................................
2.0
5.4
.1
2.0
5.5
Note: Unlike for securities available-for-sale, unrealized holding gains and losses are
included in income for trading securities.
2007
January 7
Cash ...........................................................................................
Loss on sale of investments (to balance) .......................................
Investment in NXS common shares (after adjusting entry) ..........
43
3
46
Intermediate Accounting, 4e
Problem 12-6
Requirement 1
Beale should report its securities available-for-sale in its December 31, 2007,
balance sheet at their fair value, $54 million.
Requirement 2
The journal entry needed to enable the investment to be reported at fair value is:
Fair value adjustment ($4 debit to $5 debit)
Net unrealized holding gains and losses ($4 credit to $5 credit)
($ in millions)
Requirement 3
The reclassification adjustment to 2007 other comprehensive income is $2 million.
Beales statement of comprehensive income can be provided as (a) an extension of
its income statement, (b) as part of its statement of shareholders equity, or (c) in a
disclosure note in a manner similar to this:
OTHER COMPREHENSIVE INCOME
($ in millions)
12-51
Problem 12-7
Requirement 1
Purchase
Investment in Lavery Labeling shares ........................................
Cash ......................................................................................
($ in millions)
324
324
Net income
Investment in Lavery Labeling shares (30% x $160 million) .........
Investment revenue ................................................................
48
Dividends
Cash (10 million shares x $2) ..........................................................
Investment in Lavery Labeling shares ....................................
20
Depreciation adjustment
Investment revenue ([$80 million x 30%] 6 years) .....................
Investment in Lavery Labeling shares ....................................
48
20
Calculations:
Investee
Net Assets
Net Assets
Purchased
Cost
Fair value:
Book value:
Difference
Attributed to:
$324
Goodwill:
$60
Undervaluation
of depr. assets:
$24
Intermediate Accounting, 4e
($ in millions)
324
324
Net income
No entry
Dividends
Cash (10 million shares x $2) ..........................................................
Investment revenue ................................................................
20
20
Adjusting entry
Net unrealized holding loss on investments
([10 million shares x $31] $324 million) ..............................................
14
14
12-53
Problem 12-8
Requirement 1
Purchase
Investment in Vancouver T&M shares .......................................
Cash ......................................................................................
($ in millions)
400.0
400.0
Net income
Investment in Vancouver T&M shares (40% x $140 million) ........
Investment revenue ................................................................
56.0
Dividends
Cash (40% x $30 million) ...............................................................
Investment in Vancouver T&M shares ...................................
12.0
Inventory adjustment
Investment revenue ($5 million x 40%: all sold in 2006) ...................
Investment in Vancouver T&M shares ...................................
2.0
Depreciation adjustment
Investment revenue ([$20 million x 40%] 16 years) ....................
Investment in Vancouver T&M shares ...................................
.5
56.0
12.0
2.0
.5
Calculations:
Investee
Net Assets
Net Assets
Purchased
Cost
Fair value:
inventory
plant facilities
Book value:
Difference
Attributed to:
$400
$800* x 40% = $320
(5) x 40%
(20) x 40%
$775
Goodwill:
Undervaluation
of inventory:
Undervaluation
of plant:
$80 [plug]
$2
$8
x 40% = $310
* $775 +5 +20
Intermediate Accounting, 4e
($ in millions)
2.0
.5
_________________
53.5
Requirement 3
Investment in Vancouver T&M shares
($ in millions)
Cost
400.0
Share of income 56.0
Balance
12.0 Dividends
2.0 Inventory
.5 Depreciation
_________________
441.5
Requirement 4
$400 million cash outflow from investing activities
$12 million cash inflow (dividends) among operating activities
12-55
Problem 12-9
Requirement 1
Millers management should decide whether it has the ability to exercise significant
influence over operating and financial policies of the Marlon Company. Ability to
exercise significant influence is presumed for investments of 20 percent or more of
voting stock and presumed not to exist for investments of less than 20 percent, other
things being equal. Evidence to the contrary should be considered, including
participation on the board of directors, technological dependency, material
intercompany transactions, or interchange of managerial personnel.
Requirement 2
a. Income statement:
Investment revenue ($12 million x 1/6)
($ in millions)
$2.0
(.4)
$1.6
b. Balance sheet:
Investment in Marlon Company
($19 million + 2 million - 1 million - .4 million)
$19.6*
($ in millions)
Cost
Share of income
Balance
19.0
2.0
Intermediate Accounting, 4e
Problem 12-10
Item
__A_ 1. 35% of the nonvoting preferred stock
of American Aircraft Company
__M_ 2. Treasury bills to be held-to-maturity
__M_ 3. Two-year note receivable from affiliate
__N_ 4. Accounts receivable
__M_ 5. Treasury bond maturing in one week
Reporting Category
T.
M.
A.
E.
C.
N.
Trading securities
Securities held-to-maturity
Securities available-for-sale
Equity method
Consolidation
None of these
12-57
Problem 12-11
Requirement 1
($ in millions)
Land ...........................................................................................
Loss on debt restructuring ..........................................................
Note receivable ......................................................................
Accrued interest receivable ....................................................
16
6
20
2
Requirement 2
ANALYSIS
Previous Value:
Accrued interest (10% x $20,000,000)
Principal
Carrying amount of the receivable
New Value:
Interest
$1 million x 3.16987 *
Principal $15 million x 0.68301 **
Present value of the receivable
Loss:
$ 2,000,000
20,000,000
$22,000,000
=
=
$ 3,169,870
10,245,150
(13,415,020)
$ 8,584,980
January 1, 2006
Loss on troubled debt restructuring (to balance) ................
Accrued interest receivable (10% x $20,000,000) ............
Note receivable ($20,000,000 - $13,415,020) ...................
December 31, 2006
Cash (required by new agreement).........................................
Note receivable (to balance)...............................................
Interest revenue (10% x $13,415,020) ..............................
8,584,980
2,000,000
6,584,980
1,000,000
341,502
1,341,502
Intermediate Accounting, 4e
1,000,000
375,652
1,375,652
12-59
1,000,000
413,217
1,000,000
454,609
1,413,217
1,454,609*
1
2
3
4
1,000,000
1,000,000
1,000,000
1,000,000
4,000,000
Effective
Interest
10% x Outstanding Balance
.10(13,415,020) = 1,341,502
.10(13,756,522) = 1,375,652
.10(14,132,174) = 1,413,217
.10(14,545,391) = 1,454,609*
5,584,980
Increase in
Balance
Discount Reduction
341,502
375,652
413,217
454,609
1,584,980
Outstanding
Balance
13,415,020
13,756,522
14,132,174
14,545,391
15,000,000
* rounded
Intermediate Accounting, 4e
Previous Value:
Accrued interest (10% x $20,000,000)
Principal
Carrying amount of the receivable
New Value:
$27,775,000 x 0.68301 * =
Loss:
$ 2,000,000
20,000,000
$22,000,000
(18,970,603)
$ 3,029,397
January 1, 2006
..
Loss on troubled debt restructuring (to balance) ...................
Accrued interest receivable (10% x $20,000,000) ............
Note receivable ($20,000,000 - 18,970,603) ......................
3,029,397
2,000,000
1,029,397
1,897,060
2,086,766
2,295,443
2,525,128
1,897,060
2,086,766
2,295,443
2,525,128*
12-61
1
2
3
4
0
0
0
0
Effective
Increase in
Interest
Balance
10% x Outstanding Balance Discount Reduction
.10 (18,970,603)
.10 (20,867,663)
.10 (22,954,429)
.10 (25,249,872)
= 1,897,060
= 2,086,766
= 2,295,443
= 2,525,128*
8,804,397
1,897,060
2,086,766
2,295,443
2,525,128
8,804,397
Outstanding
Balance
18,970,603
20,867,663
22,954,429
25,249,872
27,775,000
* rounded
Intermediate Accounting, 4e
CASES
Real World Case 12-1
Requirement 1
December 31, 2004
($ in millions)
Securities available-for-sale
$90
Fair value adjustment ($42 + 25)
67
Investment (fair value)
$157
Requirement 2
($ in millions)
Securities Available-for-Sale
EarthLink shares
Cost
$90
Unrealized
Fair Value Gain (Loss)
$157
$ 67
Moving from a positive $61** (2003) to a positive $67 requires an increase of $6:
--------------------------------------------------------0
+ 61
+67*
+ 6 --------->
* $42 + 25 (tax)
** at year-end 2003, the gross (pre-tax) accumulated unrealized holding gains
were $38 + 23 = $61 million.
December 31, 2004
Fair value adjustment ($61 debit to $67 debit) ...................
Net unrealized holding gains and losses ($61 credit to $67 credit)
($ in millions)
6
6
12-63
($ in millions)
8.59
1.50
7.09
Calculation of cost:
$134.0 million
18.9 million
$7.09
1.0 million
$7.09 million
Intermediate Accounting, 4e
12-65
Intermediate Accounting, 4e
12-67
2003
CURRENT ASSETS:
Cash and cash equivalents
$2,878.8
$1,201.0
Short-term investments
$4,211.1
$2,972.0
$ 6,727.1
$7,941.2
NONCURRENT ASSETS:
Investments
Intermediate Accounting, 4e
12-69
Intermediate Accounting, 4e
(1,008.2 )
(474.2 )
(644.7 )
12-71
Intermediate Accounting, 4e