APE–2.
Req. 1
Sept 15, 2014
Investments in TS (+A) ……………………………………………..
224,000
Cash (– A) [7,000 shares x $32] ………………………………
224,000
Dec. 31, 2014
Investments in TS (+A) ……………………………………………..
14,000
Net unrealized gains (losses) (+Gain, +SE) ……………….
14,000
Net unrealized gains (losses) (+Loss, –SE) …………………
63,000
Investments in TS (– A) …………………………………………
63,000
Net unrealized gains (losses) (+Loss, –SE) …………………
28,000
Investments in TS (– A) …………………………………………
28,000
Req. 2
Sept 15, 2014
Investments in AFS securities (+A) …………………………….
224,000
Cash (– A) …………………………………………………………..
224,000
Investments in AFS securities (+A) …………………………….
14,000
Net unrealized gains (losses) (+OCI, +SE) ………………..
14,000
Net unrealized gains (losses) (–OCI, – SE) ………………….
63,000
Investments in AFS securities (– A) …………………………
63,000
Dec. 31, 2016
Net unrealized gains (losses) (–OCI, – SE) ………………….
28,000
Investments AFS securities (– A) …………………………….
28,000
Computations for Year-End Adjustments to Market:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2014
$238,000
($34 x 7,000 shares)
−
$224,000
=
+$14,000
2015
175,000
($25 x 7,000 shares)
−
238,000
(from prior fair value)
=
−63,000
2016
147,000
($21 x 7,000 shares)
−
175,000
(from prior fair value)
=
−28,000
APE–3.
Req. 1
The fair value method of accounting for long-term investments must be used in this
situation because 6% of the outstanding voting stock of Square Corporation is owned
(12,000 shares ÷ 200,000 shares outstanding). The fair value method must be used
when less than 20% of the outstanding stock is owned because the investor company
cannot exercise significant influence or control.
Req. 2
a.
Acquisition:
2014
2015
Investments in AFS securities (+A) …
300,000
Cash (– A) ……………………………….
300,000
(12,000 shares x $25 per share)
Revenue should not be recognized by the company on the basis of Square Corp.
income in either 2014 or 2015 because, under the fair value method, revenue is
not recognized until dividends are declared.
c.
Dividends received:
Cash (+A) ……………………………………
3,600
4,800
Dividend revenue (+R, +SE) ……….
3,600
4,800
2014: $60,000 x 6% = $3,600
2015: $80,000 x 6% = $4,800
d.
Fair value effects:
Investments in AFS securities (+ A) ..
36,000
Net unrealized gains (losses) (+OCI,
+ SE) ……………………………………..
36,000
Net unrealized gains (losses) (–OCI,– SE)
12,000
Investments in AFS securities (–A)
12,000
Computations for Year-End Adjustments to Market:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2014
$336,000
($28 x 12,000 shares)
−
$300,000
=
+$36,000
2015
324,000
($27 x 12,000 shares)
−
336,000
(from prior fair value)
=
−12,000
APE–3. (continued)
Req. 3
2014
2015
a.
Balance sheet:
Long-term Investments:
Investments in AFS securities (at fair value) …………………
$336,000
$324,000
b.
Stockholders’ Equity:
Other comprehensive income:
Net unrealized gains (losses) …………………………………
36,000
24,000
c.
Income Statement:
Dividend revenue ……………………………………………………..
3,600
4,800
APE–4.
Req. 1
CASE A
The fair value method must be used by the company because it owns 15%
(30,000 ÷ 200,000) of the total shares. When ownership is less than 20% the
fair value method must be used because the investor cannot exercise either
significant influence or control.
CASE B
The equity method must be used by the company because it owns 40%
(80,000 ÷ 200,000) of the total shares. When ownership is at least 20% but not
more than 50%, the equity method must be used because the investor can
exercise significant influence, but not control, over the operating and financing
policies of the other company.
Case A-15%
Case B-40%
January 10, 2015:
Investments in AFS securities (+A) ……….
360,000
(30,000 shares x $12)
Investments in affiliates (+A) ……………….
(80,000 shares x $12)
960,000
Cash (– A) …………………………………..
360,000
960,000
December 31, 2015:
None1
Investments in affiliates (+A) ………………..
36,000
Equity in affiliate earnings (+R, +SE) ..
36,000
CASE B—$90,000 x 40% = $36,000
December 31, 2015:
Cash (+A) ………………………………………….
18,000
48,000
Investments in affiliates (–A) ……………..
48,000
Dividend revenue (+R, +SE) ……………..
18,000
CASE A—30,000 x $.60 = $18,000
CASE B—80,000 x $.60 = $48,000
December 31, 2015:
Net unrealized gains (losses) (–OCI, –SE)
90,000
None2
Investments in AFS securities (–A) ……
90,000
CASE A—30,000 shares x ($9 fair value –
$12 cost) = $90,000 unrealized loss
1 Not recorded under fair value method. 2 Not recorded under the equity method.
APE–4. (continued)
Req. 3
Case A
Case B
December 31, 2015:
Balance sheet (partial):
Investments:
Investments in AFS securities …………………………………..
$270,000
Investments in affiliates* ………………………………………….
$948,000
Stockholders’ Equity:
Other comprehensive income:
Net unrealized gains (losses) ……………………………….
(90,000
)
None
Income Statement (partial):
Dividend revenue ………………………………………………………
18,000
Equity in earnings of affiliate ……………………………………….
36,000
* Cost $960,000 + $36,000 portion of affiliate’s net income – $48,000 portion of
affiliate’s dividends declared
APE–5.
On the Statement of Cash Flows:
Case A
Case B
Operating Activities:
Net income
$ xxx,xxx
$xxx,xxx
Adjusted for:
Equity in earnings of affiliates (no cash received)
(36,000)
Dividends received (cash received)
48,000
Investing Activities:
Purchase of investments
(360,000)
(960,000)
APE–6.
Req. 1
Purchase price for the net assets $140,000
Fair value of net assets acquired* 110,000
Goodwill purchased $ 30,000
CASES AND PROJECTS
ANNUAL REPORT CASES
CPE–1
Req. 1
Note 2, under the heading “Cash and Cash Equivalents, Short-term Investments and
Long-term Investments,” summarizes the types of securities that American Eagle
holds in its investment portfolio. Note 3 provides additional detail and indicates that
2011.
CPE–2.
Req. 1
On its balance sheet as of January 31, 2012, Urban Outfitters reported $89,854,000
for short-term marketable securities and $126,913,000 for long-term marketable
securities. Note 3 indicates that short-term investments consist of corporate bonds,
FINANCIAL REPORTING AND ANALYSIS CASES
CPE–3.
Req. 1
Under the equity method, the investment amount (i.e., $485,000) was increased by
the proportionate share in income reported by the affiliate corporation and decreased
by the proportionate share of the dividends declared by the affiliate corporation. Thus,
the increase in the investment account was caused by an excess of investment
CPE–4.
Under the acquisition method of accounting in both the U.S. and under IFRS,
identifiable intangible assets acquired in a business combination are initially valued at
fair value. Those assets with indefinite useful lives and any goodwill amounts are not
2001. In England, prior to 2006, the recorded amount of goodwill was subtracted from
retained earnings and not recorded as an asset. The financial statements of both U.S.
CRITICAL THINKING CASES
CPE–5.
This case deals with inside (non-public) information. The plan to acquire 80% of
another company is significant because, when announced, it will affect the stock price
of the other company. It is wrong both legally and ethically to trade on insider
information regardless of the size of your proposed investment. It is also wrong to
CPE–7.
The solutions to this project will depend on the company and/or accounting period
CONTINUING CASE
CCE–1.
Req. 1
November 21, 2012
Investments in TS (+A) ……………………………………………..
19,200,000
Cash (–A) ……………………………………………………………
19,200,000
Dec. 31, 2012
Net unrealized gains (losses) (+Loss, –SE) …………………
1,200,000
Investments in TS (–A) ………………………………………….
1,200,000
Dec. 31, 2013
Net unrealized gains (losses) (+Loss, –SE) …………………
1,600,000
Investments in TS (–A) …………………………………………..
1,600,000
Dec. 31, 2014
Investments in TS (+A) ……………………………………………..
3,200,000
Net unrealized gains (losses) (+Gain, +SE) ……………….
3,200,000
Sept. 15, 2015
Cash (+A) ………………………………………………………………
20,000,000
Investments in TS (–A) …………………………………………..
19,600,000
Gain on sale of investments (+Gain, +SE) …………………
400,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2012
$18,000,000
($45 x 400,000) shares
−
$19,200,000
($48 x 400,000 shares)
=
−$1,200,000
2013
16,400,000
($41 x 400,000 shares)
−
18,000,000
(from prior fair value)
=
− 1,600,000
2014
19,600,000
($49 x 400,000 shares)
−
16,400,000
(from prior fair value)
=
+ 3,200,000
CCE-1. (continued)
Req. 2
November 21, 2012
Investments in AFS securities (+A) …………………………….
19,200,000
Cash (–A) ……………………………………………………………
19,200,000
Dec. 31, 2012
Net unrealized gains (losses) (–OCI, –SE) …………………..
1,200,000
Investments in AFS securities (–A) ………………………….
1,200,000
Net unrealized gains (losses) (–OCI, –SE) …………………..
1,600,000
1,600,000
Investments in AFS securities (+A) …………………………….
3,200,000
3,200,000
Cash (+A) ………………………………………………………………
20,000,000
Net unrealized gains (losses) (–OCI, –SE) …………………..
19,600,000