Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 14
2. When a company acquires another, and both companies
continue their separate legal existence, consolidated
financial statements must be presented
a. The parent company is the company that gains control
over the other company
b. The subsidiary company is the company that the
parent acquires
c. When the parent buys 100% of the subsidiary, the
resulting consolidated financial statements look the
same as they would if the companies were combined
into one in a simple merger (as discussed above)
Refer students to Pause for
Feedback – Self-Study Quiz
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 15
IV. Chapter Supplement A – Held-to–Maturity Bonds Purchased at
Other than Par Value: Amortized Cost Method
A. Bond Purchases
1. On the date of purchase, a bond may be acquired at the
maturity amount (at par), for less than the maturity
amount (at a discount), or for more than the maturity
amount (at a premium)
2. The total cost of the bond, including all incidental
acquisition costs such as transfer fees and broker
commissions, is debited to the Held-to-Maturity
Investments account
3. On 7/1/13, Washington Post paid $92,277 cash for an 8%,
5-year $100,000 bond that paid interest semiannually (on
6/30 and 12/31); bond’s yield was 10%
Present value of the bond investment = Present value of
the face + Present value of the interest annuity
$92,277 = ($100,000 x .6139) + ($4,000 x 7.7217)
[n = 10 periods; interest rate = 5%]
dr Held-to-Maturity Investments
(+A)
92,277
cr Cash (−A)
92,277
Assets = Liabilities + Stockholders’ Equity
Held-to-Maturity Investments (A) + 92,277 + Cash (A)
− 92,277 = 0
B. Interest Earned
1. The discount that needs to be amortized over the life of
the investment; using the effective interest amortization
method:
a. Cash received is based on the face amount of the bond
multiplied by the stated rate of interest for half of a
year (4%)
b. Revenue earned is computed by multiplying the
present value of the bond times the market rate for half
of a year (5%)
2. Receipt of interest on 12/31/13:
dr Cash (+A)
4,000
dr Held-to-Maturity Investments
(+A)
614
cr Interest Revenue (+R, +SE)
4,614
Assets = Liabilities + Stockholders’ Equity
Cash (A) + 4,000 + Held-to-Maturity Investments (A) +
614 = Interest Revenue (R) + 4,614
3. The amount reported on the balance sheet at 12/31/13 is
$92,891 ($92,277 + $614), which will be the present
value of the bond used in determining interest revenue on
the next payment date of 6/30/14
4. If the bond investment must be sold before maturity, any
difference between market value on the date of sale and
net book value would be reported as a gain or loss on sale
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 16
Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 12-1
Use Handout 12-1 for an in-class activity to review the accounting for available-for-sale securities.
The solution follows the handout master.
2. Handout 12-2
Use Handout 12-2 for an in-class activity to review the accounting for trading securities. The solution
follows the handout master.
3. Handout 12-3
Use Handout 12-3 for an in-class activity to review the equity method. The solution follows the
handout master.
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 17
HANDOUT E – 1
BELLOWS CORP.
1. Bellows Corp. had $100,000 in its Cash account on January 1, 2014. On June 15, 2014, Bellows
Corp. acquired 100 shares of Sonny, Inc. for $75 per share. Assume that Bellows considers the stock
as an available-for-sale security. Prepare the journal entry required to record this transaction and, after
entering the beginning Cash account balance, post it to the appropriate T-accounts:
June 15
2. On September 15, 2014, Bellows Corp. received dividends from Sonny of $2 per share. Prepare the
journal entry required to record this transaction and update the appropriate T-accounts:
Sept. 15
3. At December 31, 2014, the value of the stock was $120 per share. Prepare the journal entry required
to record this transaction and update the appropriate T-accounts:
Computation of amount:
Dec. 31
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 18
HANDOUT E – 1, continued
4. At February 17, 2015, Bellows sold the stock for $115 per share. Prepare the journal entry required to
record this transaction and update the appropriate T-accounts:
Feb. 17
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 19
HANDOUT E – 1 Solution
BELLOWS CORP.
1. Bellows Corp. had $100,000 in its Cash account on January 1, 2014. On June 15, 2014, Bellows
Corp. acquired 100 shares of Sonny, Inc. for $75 per share. Assuming that Bellows considers the
stock as an available-for-sale security, prepare the journal entry required to record this transaction and
post it to the appropriate T-accounts:
June 15
7,500
7,500
+ Investments in AFS (A) –
June 15
7,500
7,500
+ Cash (A) –
Jan. 1
100,000
7,500
June 15
92,500
2. On September 15, 2014, Bellows Corp. received dividends from Sonny of $2 per share. Prepare the
journal entry required to record this transaction and update the appropriate T-accounts:
Sept. 15
200
200
– Dividend Revenue (R, SE) +
200
Sep. 15
200
+ Cash (A) –
Jan. 1
100,000
Sept. 15
200
7,500
June 15
92,700
3. At December 31, 2014, the value of the stock was $120 per share. Prepare the journal entry required
to record this transaction and update the appropriate T-accounts:
Year
Fair Value
–
Book Value before Adjustment
=
Amount for Adjusting Entry
2014
$12,000 ($120 x 100)
–
7,500
=
4,500
Dec. 31
4,500
4,500
+ Investments in AFS (A) –
Dec. 31
7,500
Dec. 31
4,500
12,000
– Net Unrealized Losses/Gains (OCI, SE) +
4,500
Dec. 31
4.500
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 20
HANDOUT E – 1 Solution, continued
4. On February 17, 2015, Bellows sold the stock for $115 per share. Prepare the journal entry required
to record this transaction and update the appropriate T-accounts:
Feb. 17
11,500
4,500
12,000
4,000
+ Cash (A) –
Jan. 1
92,700
Feb. 17
11,500
104,200
+ Investments in AFS (A) –
June 15
7,500
Dec 31
4,500
12,000
Feb. 17
0
– Net Unrealized Losses/Gains (OCI, SE) +
4,500
Dec. 31
Feb. 17
4,500
0
– Gain on Sale of Investments (Gain, SE) +
4,000
Feb. 17
4,000
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 21
HANDOUT E – 2
BAWL CORP.
1. Bellows Corp. had $100,000 in its Cash account on January 1, 2014. On June 15, 2014, Bellows
Corp. acquired 100 shares of Sonny, Inc. for $75 per share. Assuming that Bellows considers the
stock as a trading security, prepare the journal entry required to record this transaction and post it to
the appropriate T-accounts:
June 15
2. On September 15, 2014, Bawl Corp. received dividends from Darkness of $2 per share. Prepare the
journal entry required to record this transaction and update the appropriate T-accounts:
Sept. 15
3. At December 31, 2014, the value of the stock was $120 per share. Prepare the journal entry required
to record this transaction and update the appropriate T-accounts:
Computation of amount:
Dec. 31
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 22
HANDOUT E – 2, continued
4. At February 17, 2015, Bawl sold the stock for $115 per share. Prepare the journal entry required to
record this transaction and update the appropriate T-accounts:
Feb. 17
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 23
HANDOUT E – 2 Solution
BAWL CORP.
1. Bellows Corp. had $100,000 in its Cash account on January 1, 2014. On June 15, 2014, Bellows
Corp. acquired 100 shares of Sonny, Inc. for $75 per share. Assuming that Bellows considers the
stock as a trading security, prepare the journal entry required to record this transaction and post it to
the appropriate T-accounts:
June 15
7,500
7,500
+ Investments in TS (A) –
June 15
7,500
7,500
+ Cash (A) –
Jan. 1
100,000
7,500
June 15
92,500
2. On September 15, Bawl Corp. received dividends from Darkness of $2 per share. Prepare the journal
entry required to record this transaction and update the appropriate T-accounts:
Sept. 15
200
200
+ Cash (A) –
Jan. 1
100,000
Sept. 15
200
7,500
June 15
92,700
– Dividend Revenue (R, SE) +
200
Sep. 15
200
3. At December 31, 2014, the value of the stock was $120 per share. Prepare the journal entry required
to record this transaction and update the appropriate T-accounts:
Year
Fair Value
–
Book Value before Adjustment
=
Amount for Adjusting Entry
2014
$12,000 ($120 x 100)
–
7,500
=
4,500
Dec. 31
4,500
4,500
+ Investments in TS (A) –
June 15
7,500
Dec. 31
4,500
12,000
– Net Unrealized Losses/Gains (Gain, SE) +
4,500
Dec. 31
4,500
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 24
HANDOUT E – 2 Solution, continued
4. At February 17, 2015, Bawl sold the stock for $115 per share. Prepare the journal entry required to
record this transaction and update the appropriate T-accounts:
Feb. 17
11,500
500
12,000
+ Cash (A) –
Jan. 1
92,700
Feb. 17
11,500
104,200
+ Investments in TS (A) –
June 15
7,500
Dec. 31
4,500
12,000
Feb. 17
0
+ Loss on Sale of Investments (+Loss, –SE)
Feb. 17
500
500
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 25
HANDOUT E – 3
PARADE CORP.
1. Parade Corp. had $10,000,000 in its Cash account on January 1, 2014. On January 2, 2014, Parade
Corp. paid $5,000,000 cash to acquire 400,000 shares of stock in Band Corp. These shares represent
40% of Band Corp.’s total outstanding stock. Parade accounted for this acquisition using the equity
method. Prepare the journal entry required to record this transaction and, after entering the beginning
Cash account balance, post it to the appropriate T-accounts:
Jan. 2
2. For the year ended December 31, 2014, Band Corp. earned $800,000 in net income. Prepare the
journal entry required to record this transaction and update the appropriate T-accounts:
Dec. 31
3. On December 31, 2014, Band Corp. declared and paid $500,000 in dividends. Prepare the journal
entry required to record this transaction and update the appropriate T-accounts:
Dec. 31
Appendix E – Reporting and Interpreting Investments in Other Corporations
App E – 26
HANDOUT E – 3 Solution
PARADE CORP.
1. Parade Corp. had $10,000,000 in its Cash account on January 1, 2014. On January 2, 2014, Parade
Corp. paid $5,000,000 cash to acquire 400,000 shares of stock in Band Corp. These shares represent
40% of Band Corp.’s total outstanding stock. Parade accounted for this acquisition using the equity
method. Prepare the journal entry required to record this transaction and, after entering the beginning
Cash account balance, post it to the appropriate T-accounts:
Jan. 2
5,000,000
5,000,000
+ Investments in Affiliates (A) –
Jan. 1
0
Jan. 2
5,000,000
5,000,000
+ Cash (A) –
Jan. 1
10,000,000
5,000,000
Jan. 2
5,000,000
2. For the year ended December 31, 2014, Band Corp. earned $800,000 in net income. Prepare the
journal entry required to record this transaction and update the appropriate T-accounts:
Dec. 31
320,000
320,000
$800,000 x 40% = $320,000
+ Investments in Affiliates (A) –
Jan. 1
0
Jan. 2
5,000,000
Dec. 31
320,000
5,320,000
– Equity in Affiliate Earnings (R, SE) +
320,000
Dec. 31
320,000
3. On December 31, 2014, Band Corp. declared and paid $500,000 in dividends. Prepare the journal
entry required to record this transaction and update the appropriate T-accounts:
Dec. 31
200,000
200,000
$500,000 x 40% = $200,000
+ Investments in Affiliates (A) –
Jan. 1
0
Jan. 2
5,000,000
Dec. 31
320,000
200,000
Dec. 31
End Bal
5,120,000
+ Cash (A) –
Jan. 1
10,000,000
Dec. 31
200,000
5,000,000
Jan. 2
End Bal
5,200,000