Chapter 12: Investments Questions For Review of Key Topics

Chapter12Investments
QUESTIONSFORREVIEWOFKEYTOPICS
Investmentindebtsecuritiesandinvestmentsinequitysecuritiesthatarecapableofprompt
Question121liquidationand that management intentstoconvert intocashwithinoneyearareclassifiedas
TemporaryInvestments.
Increasesanddecreasesinthemarketvaluebetweenthetimeadebtsecurityisacquiredand
Question122 thedayitmaturestoaprearrangedmaturityvalueareignoredforsecuritiesclassifiedasheldto
maturity.Thesechangesarentimportantifsalebeforematurityisntanalternative,whichisthe
caseifaninvestorhasthepositiveintentandabilitytoholdthesecuritiestomaturity.
Atemporaryinvestmentinequitysecurityisreportedatacquisitiondateatcost.Attheendof
Question123 eachaccountingperiod,thetemporaryinvestmentisvaluedusinglowerofcostandmarket.
Temporary investment lossesarereported ontheincome statement asLossontemporary
Question124investments.Thetemporaryinvestmentsareclassifiedascurrentassetsonthebalancesheetand
the reduction of the value for the lower market value isreported using an allowance account.
Example:
CurrentAssets:
Temporaryinvestments,atcostXXX
Less:AllowancetoreducetomarketXXX
Question125
Temporaryinvestmentlossesontradingsecuritiesarereportedontheincomestatementwhenthemarketvalueis
lowerthanthecost.Anallowanceaccountissetuptoreducethecosttomarketvalue.
Managementsintenthaschangedregardingtheinvestment. Itwasoriginallyclassifiedas
Question126 temporary but now that management wants to keep the investment to maturity, it must be
reclassifiedaslongterminvestments.Longterminvestmentinbondsiscarriedatamortizedcost.
When acquired, debt and equity securities are assigned to one of the two reporting
Question127 classificationstemporaryinvestmentsandlongterminvestments. Thevalueofthetemporary
investmentsisreassessedateachreportingdate. Thecarryingvalueiscomparedtothemarket
valueateachreportingdate.Whenthevalueofaninvestmentfallsbelowitsacquisitioncost,alosshasoccurred.The
lossisrecognizedbyapplyingthelowerofcostandmarketrule.TheLCMruleisusuallyappliedtotheportfolioasa
whole.Individualamountsofeachinvestmentisreportedonthefinancialstatements.
Fortemporaryinvestments,GAAPrequiresacompanytoincludethefollowinginformation:
Whentemporaryinvestmentsincludeholdingsofsecuritiesissuedbyaffiliatedcompanies,theseshouldbeset
outseparately
Thebasisofvaluation
Ifinmarketablesecurities,theirmarketvalueaswellastheircarryingvalue
Whenthemarketvalueoftemporaryinvestmentshasdeclinedbelowthecarryingvalue,theyshouldbecarried
atmarketvalue.
Forlongterminvestments:
Question127(continued)
Thebasisofvaluation
Investments in companies subject to significant influence, other affiliated companies, or other longterm
investmentsshouldbeshownseparately.
Incomefromtheaboveitemsshouldalsobeshownseparately.
McGrawHillRyerson,Ltd.,2004
SolutionsManual,Chapter12 121
Wheretheequitymethodisused,disclosureshouldbemadeofthedifferencebetweentheinvestmentcostand
theunderlyingnetbookvalueoftheinvesteesnetassetsatthedateofthepurchaseaswellasthetreatmentof
thecomponentsofthedifference.
Fairvalueaswellascarryingvalueforallmarketablesecuritiesclassifiedasportfolioinvestments.
Forbothtemporaryandlongterminvestments:
termsandconditions
interestraterisk
creditrisk.
Theequitymethodisusedwhenaninvestorcantcontrol,butcansignificantlyinfluencethe
Question128 investee. If effective control isabsent, the investor still might be able to exercise significant
influence over the operating and financial policies ofthe investee iftheinvestor owns alarge
percentageoftheoutstandingsharesrelativetoothershareholders.Byvotingthosesharesasablock,theinvestoroften
canswaydecisionsinthedirectiondesired.Wepresume,intheabsenceofevidencetothecontrary,thattheinvestor
exercisessignificantinfluenceovertheinvesteewhenitownsbetween20%and50%oftheinvestee'svotingshares.
Theequitymethod,likeconsolidation,viewstheinvestorandinvesteeasaspecialtypeof
Question129 single entity. By the equity method, though, the investor doesnt include separate financial
statementitemsoftheinvesteeonanitembyitembasisasinconsolidation.Rather,bytheequity
method,theinvestorreportsitsequityinterestintheinvesteeasasingleinvestmentaccount.Thatsingleinvestment
account is periodically adjusted to reflect the effects of consolidation, without actually consolidating financial
statements.
Theinvestorshouldaccountfordividendsfromtheinvesteeasareductionintheinvestment
Question1210 account. Since investment revenue is recognized as the investee earns it, it would be
inappropriatetoagainrecognizerevenuewhenearningsaredistributedasdividends.Rather,the
dividend distribution is considered to be a reduction of the investees net assets, indicating that the investors
ownershipinterestinthosenetassetsdeclinesproportionately.
Bothinvestmentrevenueandtheinvestmentwouldbereducedbythenegativeincomeeffect
Question1211 oftheextraamortizationthehigherfairvaluewouldcause.Thiswouldbe40%x$12million
10years=$480,000eachyearfortenyears.
Theinvestmentaccountwasdecreasedby$40,000(40%x$100,000). Cashincreasedthe
Question1212 sameamount.Thereisnoeffectontheincomestatement.
Whenitbecomesnecessarytochangefromtheequitymethodto
AnswerstoQuestions(concluded) anothermethod, noadjustmentismadetothecarryingamountofthe
investment. Theequitymethodissimplydiscontinuedandthenew
methodisappliedfromthenon.Theinvestmentaccountbalancewhen
Question1213 theequitymethodisdiscontinuedwouldserveasthenewcostbasis
forwritingtheinvestmentupordowntomarketvalueonthenextsetoffinancialstatements.
Afinancialinstrumentis:(a)cash,(b)evidenceofanownershipinterestinanentity,(c)a
Question1214 contract that (1) imposes on one entity an obligation to deliver cash or another financial
instrument and (2) conveys to a second entity a right to receive cash or another financial
instrument, or (d) a contract that (1) imposes on one entity an obligation to exchange financial instruments on
potentiallyunfavourabletermsand(2)conveystoasecondentityarightto exchange otherfinancialinstrumentson
potentiallyfavourableterms.Accountspayable,bankloans,andinvestmentsinsecuritiesareexamples.
Theseinstrumentsderivetheirvaluesorcontractuallyrequiredcashflowsfromsome
Question1215 othersecurityorindex.
Sincethisfundwontbeusedwithintheupcomingoperatingcycle,itisanoncurrentasset.
Question1216 ItshouldbereportedaspartofInvestmentsandfunds.
Partofeachpremiumpaymentthecompanymakesisnotusedbytheinsurancecompanyto
Question1217 payforlifeinsurancecoverage,butratherisinvestedonbehalfoftheinsuredcompanyina
fixedincomeinvestment.Asaresult,theperiodicinsurancepremiumshouldnotbeexpensedin
itsentirety;anappropriateportionshouldberecordedinsteadasanoncurrentassetcashsurrendervalue.
122 IntermediateAccounting,1/e
EXERCISES
Exercise121November1
($inmillions)
Cash................................................................. 2.4
Investmentrevenue...................................... 2.4
December1
($inmillions)
InvestmentinFacsimileEnterprisesbonds..... 30
Cash............................................................. 30
December31
($inmillions)
InvestmentinTreasurybills........................... 8.9
Cash............................................................. 8.9
December31
($inmillions)
InvestmentrevenuereceivableConvenience
bonds($48millionx10%x2/12).............................. 0.8
InvestmentrevenuereceivableFacsimile
Enterprisesbonds($30millionx12%x1/12)........... 0.3
Investmentrevenue...................................... 1.1
Note:Securitiesheldtomaturityarenotadjustedtofairvalue.
InvestmentinGMcommonshares 41,200
Exercise122 Cash([800sharesx$50]+$1,200)
................................41,200
Cash([800sharesx$53]$1,300).............................. 41,100
Lossonsaleofinvestments............................. 100
InvestmentinGMcommonshares............. 41,200
Requirement1
Exercise123
($in000s)
Lossontemporaryinvestments............................................... 45
Allowancetoreducetemporaryinvestments($930$885)....... 45
Onlylossesontemporaryinvestmentsarerecorded.Unrealizedholdinggains
areneverrecorded.Unrealizedholdinglossesarenotrecordedforlongterm
investments,unlesstherehasbeenalossinvalueontheinvestmentthatisother
thanatemporarydecline.Inthiscaseitistemporary.
Requirement2
ReportedontheincomestatementatDecember31,2005:
LossonTemporaryInvestments.$45,000
Exercise124
Requirement1
Lossontemporaryinvestments(10,000sharesx[$58$60])................. 20,000
Allowancetoreducetomarket................................................ 20,000
Requirement2
Allowancetoreducetomarket(10,000sharesx[$60$58]).................. 20,000
Lossrecoveryontemporaryinvestments................................. 20,000
Exercise125Requirement1
2005
March2
($inmillions)
InvestmentinPlatinumGauges,Inc.shares............................... 31
Cash......................................................................................... 31
April12
InvestmentinZenithbonds.......................................................... 20
Cash......................................................................................... 20
July18
Cash............................................................................................. 2
Investmentrevenue.................................................................. 2
October15
Cash............................................................................................. 1
October16
Cash............................................................................................. 21
InvestmentinZenithbonds...................................................... 20
Gainonsaleofinvestments..................................................... 1
November1
InvestmentinLTDpreferredshares........................................... 40
Cash......................................................................................... 40
December31
Adjustingentries:
Lossontemporaryinvestments
([$74x500,000shares]$40million)....................................................... 3
Allowancetoreduceinvestmentstomarket............................ 3
Exercise125(concluded) 2006
January23
($inmillions)
Cash([1millionsharesx1/2]x$32)....................................................... 16.0
Gainonsaleofinvestments(difference)...................................... .5
InvestmentinPlatinumGauges
shares($31millionbalanceafteradjustingentryx1/2)............................ 15.5
March1
Cash($76x500,000shares).................................................................. 38
Allowancetoreduceinvestmenttomarket.................................. 3
InvestmentinLTDpreferred(balanceafteradjustingentry)................ 40
GainonsaleofInvestmentinLTD.. 1
Requirement2
2005IncomeStatement
($inmillions)
Investmentrevenue(fromJuly18;Oct.15).......................................$3
Gainonsaleofinvestments(fromOct.16)......................................1
Lossontemporaryinvestments..3
Requirement1
Exercise126
Purchase ($inmillions)
InvestmentinJacksonIndustryshares......................................... 90
Cash........................................................................................ 90
Netincome
Noentry
Dividends
Cash(5%x$60million)....................................................................... 3
Marketvalue$98
Noentry
Requirement2
Investmentrevenue.......................... $3million
Requirement1
Exercise127
2005
December17
LongTermInvestments...................................................... 350,000
Cash.................................................................................. 350,000
December28
Cash...................................................................................... 2,000
Investmentrevenue.......................................................... 2,000
December31
Noentry
2006
January5
Cash(sellingprice)..................................................................... 395,000
Gainonsaleofinvestments(tobalance)............................... 45,000
LongTermInvestments(balanceafteradjustingentry)............... 350,000
Requirement2
BalanceSheet
(longterminvestment):
LongTermInvestments
(balanceafteradjustingentry).................................................... $350,000
IncomeStatement:
Investmentrevenue(dividends)............................................. $2,000
Exercise1281. Investmentsreportedascurrentassets.
Security A $900,000
Security B 105,000
Total$1,005,000
Less:Allowance(5,000)$1,000,000
2. Investmentsreportedaslongtermassets.
Security C $700,000
Security D 900,000
$1,600,000
3. Lossontemporaryinvestmentcomponentofincomebeforetaxes.
Cost Fairvalue Unrealized
gain(loss)
Security A $900,000 $900,000 $0
B 105,000 100,000 (5,000)
Totals $1,005,000 $1,000,000 $(5,000)
Lossontemporaryinvestmentin
YucatanGrowerscommonshares....................................... 25,000
Allowancetoreduceinvestmentstomarket
($1,175,000$1,200,000)................................................................. 25,000
Requirement2
Noentry
Requirement3
Noentry
Exercise1210 1. c
2. d
Purchase
InvestmentinAMCcommonshares.................................... 480,000
Cash............................................................................... 480,000
Netincome
Noentry
Dividends
Cash(20%x400,000sharesx$0.25)................................................ 20,000
Investmentrevenue......................................................... 20,000
Noadjustmentformarketvalue.
Requirement2
Purchase
InvestmentinAMCcommonshares.................................... 480,000
Cash............................................................................... 480,000
Netincome
InvestmentinAMCcommonshares(20%x$250,000)............. 50,000
Investmentrevenue......................................................... 50,000
Dividends
Cash(20%x400,000sharesx$0.25)................................................ 20,000
InvestmentinAMCcommonshares............................... 20,000
Adjustingentry
Noentry
Exercise1212
InvestmentinNurserySuppliesshares.................................... 56
Cash.................................................................................... 56
Netincome
InvestmentinNurserySuppliesshares(30%x$40million)........... 12
Investmentrevenue.............................................................. 12
Dividends
Cash(30%x8millionsharesx$1.25)................................................... 3
InvestmentinNurserySuppliesshares................................ 3
Adjustingentry
Noentry
Exercise1213
Requirement1
Adisclosurenotealsoshoulddescribethechange.Therecordedcarryingvalue
atthedateofthetransferisregardedastheinitialcostoftheinvestment,similartothe
purchasepriceiftheinvestorweretoacquiretheinvestmentatthatdate.Theinvestor
mustdeterminethefairvalueofthenetassetsownedanddeterminetheamountof
goodwillasthedifferencebetweentherecordedcostandthefairvalueofthenetassets
acquiredasofthedatethatsignificantinfluencewasobtained.
Requirement2
Itdoesnotmatter,ifthechangeisfromcostmethodtoequityorfromequity
method to cost method, there is no restatement of prior results. This is not
consideredtobeachangeinaccountingpolicy.
Purchase
Exercise1214 ($inmillions)
InvestmentinCarneCosmeticsshares................................. 68
Cash................................................................................. 68
Netincome
InvestmentinCarneCosmeticsshares(25%x$40million)........ 10
Investmentrevenue.......................................................... 10
Dividends
Cash(4millionsharesx$1)........................................................... 4
InvestmentinCarneCosmeticsshares............................. 4
Amortization
Investmentrevenue($8million[calculationbelow]8years).......... 1
InvestmentinCarneCosmeticsshares............................. 1
Calculations:
Investee NetAssets Difference
NetAssets Purchased Attributedto:

Cost $68
Goodwill:$12
Fairvalue: $224*x25%= $56
Undervaluation
Bookvalue: $192x25%= $48 ofassets: $8
*[$192+32]=$224
Adjustingentry
Noentry
InvestmentinLakeConstructionshares.............................. 300
Cash................................................................................. 300
Netincome
InvestmentinLakeConstructionshares(20%x$150million)..... 30
Investmentrevenue.......................................................... 30
Dividends
Cash(20%x$30million)............................................................. 6
InvestmentinLakeConstructionshares.......................... 6
Exercise1215(continued)
goodwillcalculation:

Cost $300
Goodwill: $120
Fairvalue: $900x20%= $180
Undervaluation
Requirement2
a. InvestmentinLakeConstructionshares
__________________________________________
($inmillions)
Cost 300
Shareofincome 30
6 Dividends
_________________
Balance 324
b. Asinvestmentrevenueontheincomestatement.
$30million(shareofincome)=
$30million
c. Amonginvestingactivitiesonthecashflowstatement.
$300million
[Cashdividendsreceived($6million)alsoarereportedaspartofoperatingactivities.]
Exercise1216 1. a
2. c
3. b
4. b$82,000$81,000
5. c
6. c
7. c
Insuranceexpense(difference).................................................. 64,000
Cashsurrendervalueoflifeinsurance($27,000$21,000)......... 6,000
Cash(2005premium).............................................................. 70,000
Requirement2
Cash(deathbenefit)............................................................ 4,000,000
Cashsurrendervalueoflifeinsurance(accountbalance). 27,000
Gainonlifeinsurancesettlement(tobalance)............... 3,973,000
Insuranceexpense(difference).......................................... 22,900
Cashsurrendervalueoflifeinsurance($4,600$2,500)...... 2,100
Cash(premium)............................................................. 25,000
Requirement2
Cash(deathbenefit)............................................................ 250,000
Cashsurrendervalueoflifeinsurance(accountbalance). 16,000
PROBLEMS
Gainonlifeinsurancesettlement(tobalance)............... 234,000
Problem121Requirement1:
Investmentincomeis$3,000($15,000x0.20)
Requirement2:
BalanceintheinvestmentaccountonDecember31,2005is;
$698,000+(0.20x$88,000)(0.20x$15,000)=$712,600
Problem122
Requirement1:
i)Lossontemporaryinvestments.......... 2,000
Allowancetoreducetomarket 2,000
ii) Cash................ 29,000

Lossonsaleofinvestments............... 3,000
InvestmentMM 32,000
iii)Allowancetoreducetomarket................ 2,000
Gainontemporaryinvestments 2,000
Requirement2:
Pros:
Themarketvaluemethodpresentsamoreaccuratepictureofthevalueofthe
firmsinvestments.
Theuseofthemarketvaluemethodpreventsmanagementfrommanipulating
earningsbychoosingwhentoselltheinvestments.
Touseofmarketvaluespresentsmorereliableinformationtotheusersof
financialstatements;thatis,itisfreefrombiassincethevaluesaredetermined
inanopenmarket.
Cons:
Themarketvaluemethodviolatesthecostprinciple.
Marketvaluesarenotalwaysavailable(andiftheyare,theymaynotbefair).
Themarketvaluemethodignoresoralterstherevenuerecognitionprinciple.
Managementhasnocontrol,asindicatedbytoomanyincomefluctuations.
Problem123Requirement1
2005
February21
LongTermInvestmentsDistributionTransformers.400,000
Cash400,000
March18
Cash..8,000
Investmentincome. 8,000
September1
InvestmentinGovernmentofCanadaBonds..900,000
Cash..900,000
October20
Cash425,000
LongTermInvestmentsDistributionTransformers400,000
Gainonsaleofinvestments25,000
November1
LongTermInvestmentsM&DCorp..1,400,000
Cash1,400,000
December31
Adjustingentries:
Investmentrevenuereceivable..30,000
Investmentrevenue($900,000x10%X4/12).. 30,000
Noentryformarketvalue.
Closingentries:
Investmentrevenue($8,000+$30,000)38,000
Gainonsaleofinvestments.25,000
Incomesummary 63,000
Requirement2
Balancesheet:
Investmentrevenuereceivable $30,000
Problem123(continued)
Balancesheet(LongTerminvestments):
InvestmentinGovernmentofCanadabonds 900,000
InvestmentinM&DCorporationshares1,400,000
Incomestatement:
Investmentrevenue($8,000+$30,000) $30,000
Gainonsaleofinvestments 25,000
Requirement3
2006
January20
Cash..1,485,000
Gainonsaleofinvestments(tobalance) 85,000
InvestmentinM&DCorporationshares... 1,400,000
March1
Cash45,000
Interestreceivable 30,000
Investmentrevenue. 15,000
Problem124
Requirement1
2005
December12 ($inmillions)
InvestmentinFF&GCorporationbonds...................................... 12
Cash.......................................................................................... 12
December13
InvestmentinInvestmentinFerrycommonshares..................... 22
Cash.......................................................................................... 22
December15
Cash.............................................................................................. 12.1
InvestmentinFF&GCorporationbonds.................................. 12.0
Gainonsaleofinvestments($12.112)....................................... 0.1
December22
InvestmentinTreasurybills......................................................... 56
InvestmentinTreasurybonds...................................................... 65
Cash.......................................................................................... 121
December23
Cash.............................................................................................. 10
Lossonsaleofinvestments($10$11)............................................ 1
InvestmentinFerrycommonshares($22x1/2)............................ 11
December26
Cash(sellingprice).............................................................................. 57
Gainonsaleofinvestments($57$56)........................................ 1
InvestmentinTreasurybills(balance).......................................... 56
December27
Cash(sellingprice).............................................................................. 63
InvestmentinTreasurybonds(balance)....................................... 65
December28
Cash.............................................................................................. 0.2
Investmentrevenue................................................................... 0.2
December31
($inmillions)
Adjustingentry:
Lossontemporary
investments($10million[$22millionx1/2])....................................... 1.0
Allowancetoreducecosttomarket.......................................... 1.0
Closingentry:
Incomesummary(tobalance)............................................................ .7
Investmentrevenue($5+$0.2million)................................................ 5.2
Gainonsaleofinvestments($8+$0.1+$1million)............................. 9.1
Lossonsaleofinvestments($11+$1+$2million).......................... 14.0
Lossontemporaryinvestments(adjustingentry)............................. 1.0
Requirement2
($inmillions)
Balancesheet(shortterminvestment):
InvestmentinFerrycommonshares11.0
Less:Allowancetoreducetomarket(1.0)10.0
Incomestatement:
Investmentrevenue(closingentry) 5.2
Gainonsaleofinvestments(closingentry) 9.1
Lossonsaleofinvestments(closingentry) (14.0)
Lossontemporaryinvestments(closingentry) (1.0)
Requirement3
2006
January2
($inmillions)
Cash(sellingprice).............................................................................. 10.2
Lossonsaleofinvestments($10.2$11). 0.8
InvestmentinFerrycommon($22/2)........................................... 11.0
January5
InvestmentinWarehouseDesignsbonds.................................... 34
Cash.......................................................................................... 34
Problem125 ($inmillions)
2005
October18
InvestmentinMillworkVenturespreferredshares(temporary)... 58
Cash.......................................................................................... 58
October31
Cash.............................................................................................. 1.5
November1
InvestmentinHolisticEntertainmentbonds(longterm).............. 18
Cash.......................................................................................... 18
November1
Cash.............................................................................................. 28
InvestmentinCalgaryAbstractorsbonds................................ 30
December1
InvestmentinHouseholdPlasticsbonds(longterm)................... 60
Cash.......................................................................................... 60
December20
InvestmentinTreasurybonds(temporary)................................... 5.6
Cash.......................................................................................... 5.6
December21
InvestmentinNXScommonshares(temporary)......................... 44
Cash.......................................................................................... 44
December23
Cash.............................................................................................. 5.7
InvestmentinTreasurybonds................................................. 5.6
Gainonsaleofinvestments($5.75.6)........................................ .1
($inmillions)
December29
Cash.............................................................................................. 3
Investmentrevenue................................................................. 3
December31
Accruedinterest:
InvestmentrevenuereceivableHolistic
Entertainment($18millionx10%x2/12)............................................. 0.3
InvestmentrevenuereceivableHousehold
Plastics($60millionx12%x1/12)........................................................ 0.6
Investmentrevenue................................................................ 0.9
Revaluations:
LossonInvestments([2millionsharesx$27.50]$58million)3
Allowancetoreducetemporaryinvestments 3
Note:Securitiesheldaslongterminvestmentsarenotadjustedtofairvalue.Onlyholdinglossesare
recorded.
Closingentry:
Investmentrevenue($3.0+1.5+.9)................................................... 5.4
Gainonsaleofinvestments(Treasurybonds)..................................... .1
Lossonsaleofinvestments(CalgaryAbstractors).......................... 2.0
Incomesummary(tobalance)...................................................... 3.5
2006
January7
Cash.............................................................................................. 43
Lossonsaleofinvestments(tobalance)............................................ 1
InvestmentinNXScommonshares(afteradjustingentry)................ 44
InvestmentinLaveryLabelingshares.......................................... 324
Cash......................................................................................... 324
Netincome
InvestmentinLaveryLabelingshares(30%x$160million)................ 48
Investmentrevenue................................................................... 48
Dividends
Cash(10millionsharesx$2).................................................................. 20
InvestmentinLaveryLabelingshares...................................... 20
Amortization
Investmentrevenue([$80millionx30%]6years)................................ 4
InvestmentinLaveryLabelingshares...................................... 4
Calculations:


Cost $324
Goodwill: $60
Fairvalue: $880*x30%= $264
Undervaluation
*[$800+80]=$880
Adjustingentry
Noentry
Problem126(concluded) Requirement2
InvestmentinLaveryLabelingshares.......................................... 324
Cash......................................................................................... 324
Netincome
Noentry
Dividends
Cash(10millionsharesx$2).................................................................. 20
Investmentrevenue................................................................... 20
Noentry
InvestmentinNorthwestT&Mshares.......................................... 400.0
Cash......................................................................................... 400.0
Netincome
InvestmentinNorthwestT&Mshares(40%x$140million)............... 56.0
Dividends
Cash(40%x$30million)...................................................................... 12.0
InvestmentinNorthwestT&Mshares...................................... 12.0
Inventory
Investmentrevenue($5millionx40%:allsoldin2005)............................ 2.0
InvestmentinNorthwestT&Mshares...................................... 2.0
Amortization
Investmentrevenue([$20millionx40%]16years)............................... .5
InvestmentinNorthwestT&Mshares...................................... .5
Calculations:

Cost $400
Goodwill: $80[plug]
Fairvalue: $800*x40%= $320
inventory (5)x40% Undervaluation

ofinventory: $2
plantfacilities (20)x40% Undervaluation

ofplant: $8
Bookvalue: $775x40%= $310
*$775+5+20
Problem127(concluded) Requirement2
Investment Revenue
($ in millions)
56.0 Share of income
Inventory 2.0
Amortization .5
_________________
Balance 53.5
Requirement3
Investment in Northwest T&M shares

($ in millions)
Cost 400.0
Share of income 56.0
12.0 Dividends
2.0 Inventory
.5 Amortization
_________________
Balance 441.5
Requirement4
$400 million cash outflow from investing activities
$12 million cash inflow (dividends) among operating activities
Problem128
Requirement1
Millersmanagementshoulddecidewhetherithastheabilitytoexercisesignificant
influenceoveroperatingandfinancialpoliciesoftheMarlonCompany. Abilityto
exercisesignificantinfluenceispresumedforinvestmentsof20percentormoreof
votingsharesandpresumednottoexistforinvestmentsoflessthan20percent,other
things being equal. Evidence to the contrary should be considered, including
participation on the board of directors, technological dependency, material
intercompanytransactions,orinterchangeofmanagerialpersonnel.
Requirement2
a. Incomestatement: ($inmillions)
Investmentrevenue($12millionx1/6) $2.0
b. Balancesheet:
InvestmentinMarlonCompany
($19million+2million1million) $20*
*Investment in Marlon Company

($ in millions)
Cost 19.0
Share of income 2.0
1.0 Dividends ($6 million x 1/6)
_________________
Balance 20.0
c. CashflowStatement:
$19 million cash outflow from investing activities
$1 million cash inflow (dividends) among operating activities
Problem 12-9
Item Reporting Category
_T or M_ 1. 35% of nonvoting preferred shares T. Temporary Investments
of Canadian Aircraft Company. M. Long-Term Investments
_M_ 2. Treasury bills to be held to E. Equity method
maturity. C. Consolidation
_M_ 3. Two-year note receivable from N. None of these
affiliate
_N_ 4. Accounts Receivable
_T_ 5. Treasury bond maturing In one week
_T_ 6. Common shares held In trading account
for Immediate resale
_T_ 7. Bonds acquired to profit from short-term difference In price.
_E_ 8. 35% of voting common shares of Computer Storage Devices
Company.
_C_ 9. 90% of the voting common shares of Affiliated Peripherals,
Inc.
_T_ 10. Corporate bonds of Primary Smelting Company to be sold
if Interest rates fall 1/2%.
_M_ 11. 25% of the voting common shares of Smith Foundries
Corporation: 51% family-owned by Smith family; fair value
determinable.
_E_ 12. 17% of the voting common shares of Shipping Barrels
Corporation: Investor's CEO on the board of directors of Shipping
Barrels Corporation.
Problem 12-10
Requirement 1
Temporary Investments (1,000 shares x $70). 70,000
Temporary Investments (700 shares x $30) 21,000
Cash 91,000
Requirement 2
LCM
McGrawHillRyerson,Ltd.,2004 Cost Market
Bei Wei Corporation 70,000 66,000

CASES
ResearchCase121
[Note: Thiscaseencouragesthestudenttoreferenceactualannualreports.]
Thefootnotethatdescribesaninvestmentinsecuritiesastemporaryinvestmentsor
longterminvestments,maybeheadedbyanyoneofavarietyofcaptionsorsubsumed
withinanotherdisclosurenote. Likewise,thecaptionbywhichtheinvestmentsare
reportedonthebalancesheetcanbereportedseparatelyasoneofseveralassettitlesor
includedwithinanotherassetcaption.
Theywillbereportedascurrentornoncurrentassetsdependingontheintentof
managementregardingthetimingoftheireventualsale.Realizedgainsorlossesare
reportedintheincomestatementifanyofthesesecuritiesweresoldduringanyyear
reported.
Investmentsinsecuritiesclassifiedastemporaryinvestmentsarereportedatfair
valuewhenthevalueofaninvestmentfallsbelowitsacquisitioncost. Losseson
temporary investments from using lowerofcostormarket value at the end of the
reportingperiodsareincludedinthedeterminationofincomefortheperiod. These
lossescanbecalculatedontheindividualsecuritiesoronthewholeportfolio.
Onthebalancesheet,anallowancetoreducecosttomarketisusedasacontra
accountunderthetemporaryinvestmentaccount.
Cashoutflowsfromacquiringtheseinvestmentsorinflowsfromsellingthemare
reportedasinvestingactivitiesinthecompanyscomparativecashflowstatements.
Whethertheyarespecificallyidentifiabledependsonthedegreeofdetailthecompany
usesinreportingitscashflows. Informationoninvestingactivitiesassistsinvestors
andcreditorsbyindicatingthedirectionthecompanyisdirectingitsfunds.
Adisclosurenotemayprovideinformationnotavailableinthefinancialstatements,
inpartdependentonhowmuchinformationthefinancialstatementsprovide. Often
the footnote will indicate the cost of the securities, the market value, terms and
condition,interestrisk.
InternationalCase122
As stated in Renaults disclosure note, France, like Canada, uses the equity
method. However,unlikeinCanada,changesinthenetassetsofequitymethod
investeesarenotreportedinnetincome. Instead,theyarereportedinshareholders
equityasanadjustmenttoEquityvaluationsurplus. Someofthechangecomes
fromdividendswhichalsoinCanadaarenotreportedasincome.
Anotherdifferencerelatestononequityinvestments. Thesearevaluedatthe
lowerofcostorfairmarketvalue.InCanada,theyareclassifiedastemporaryorlong
terminvestments. Temporary investmentsarereportedusingLCMand longterm
investmentsindebtarereportedatamortizedcost.
InternetCase123
Answers to the questions will, of course, vary because students will research
financialstatementsofdifferentcompanies.
The responses should identify securities held that are classified as trading
securities,availableforsale,orheldtomaturity.Althoughacompanyisnotrequired
toreportindividualamountsforthetwocategoriesofinvestmentsheldastemporary
orlongterminvestmentsonthefaceofthebalancesheet,thatinformationshould
be presented in the disclosure notes. Investments in securities as temporary
investmentsarereportedusinglowerofcostormarket,andlossesareincludedinthe
determinationofincomefortheperiod.
Theremayalsobegainsorlossesfromthesaleofinvestmentsduringtheyear.
Therealsowilllikelybeinvestmentrevenue(dividendsorinterest)ontheincome
statement.
Thecashflowstatement will reportacquisitionsordisposalsofinvestmentsas
investingactivities.Investmentrevenueisanoperatingactivity.
Case124
Rickie Corporation sold some of its investments in associated
Requirement 1
companies. ThebalanceintheaccountatDecember31,2004was
$99million. Theshareoflossesinassociatedcompanieswas$12million,which
wouldreducetheinvestmentaccountto$87million. Therefore,Rickiereducedits
investmentsby$9million(atcarryingvalue)during2005.
Notwithoutsomeadditionalinformationorthegrossamountof
Requirement 2
incomefromassociatesbeingdisclosed.

Chapter 12: Investments Questions For Review of Key Topics

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Chapter12Investments

ii) Cash................ 29,000

Investee NetAssets Difference

inventory (5)x40% Undervaluation

plantfacilities (20)x40% Undervaluation

Investment in Northwest T&M shares

*Investment in Marlon Company

Bei Wei Corporation 70,000 66,000

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