Appendix D
Investments in Other Corporations
ANSWERS TO QUESTIONS
1. The appropriate method of accounting for investments in another corporation
depends on the level of involvement the investor has over the other company.
When the investor controls the affiliate, the acquisition/consolidation method is
2. The accounting methods used for available-for-sale securities and trading
securities differ primarily in how unrealized gains or losses are recorded and
3. The primary differences between passive investments and those involving a
significant influence (i.e., equity method investments) involve the recording and
reporting of the affiliate’s net income and dividends. The investor’s share of the
affiliate’s net income is recorded as income for equity method investments because
4. Investments involving significant influence are accounted for using the equity
method whereas those involving control are accounted for using the acquisition/
5. Consolidated financial statements are financial statements prepared under the
6. Under the equity method, dividends received from the affiliated company are not
recorded as revenue because to record the dividends as revenue would involve
7. Passive investments earn a return from (1) dividends received, and (2) increases in
the stock price of the investee.
8. Unrealized gains and losses for available-for-sale securities are reported in other
comprehensive income. Unrealized gains and losses for trading securities are
reported as revenues and expenses on the income statement when calculating net
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
No.
Time
No.
Time
No.
Time
1
6
1
20
CP1
40
2
6
2
15
CP2
40
3
6
3
15
PA1
40
4
6
4
15
PA2
40
5
6
5
15
6
6
6
15
7
4
7
15
D–4 Solutions Manual
© 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
ANSWERS TO MINI-EXERCISES
MD–1
January 2:
Investment in Affiliates ………………………………………………….
100,000
Cash ……………………………………………………………………
Purchased 10,000 shares of E-Net.
Cash ………………………………………………………………………….
30,000
Investment in Affiliates ……………………………………………
Cash dividend received (10,000 shares x $3 = $30,000).
Investment in Affiliates …………………………………………………
50,000
Equity in Affiliate Earnings ………………………………………
Recognize earnings from associated company (25% x $200,000)
MD–2
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
1/2
+100,000
–100,000
7/2
+30,000
–30,000
12/31
+50,000
+50,000
+50,000
+50,000
MD–3
July 2:
Trading Securities ……………………………………………………….
224,000
Cash ……………………………………………………………………
Purchased 8,000 shares (16%) of Cox Corporation common stock at $28 per share.
Cash ………………………………………………………………………….
16,000
Dividend Revenue ………………………………………………..
Cash dividend received (8,000 shares x $2 = $16,000).
Trading Securities ……………………………………………………….
8,000
Net Unrealized Losses/Gains ………………………………….
Fair Value − Cost = Adjustment
$232,000 $224,000 $8,000
MD–4
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
7/2
+224,000
–224,000
12/15
+16,000
+16,000
+16,000
+16,000
12/31
+8,000
+8,000
+8,000
+8,000
MD–5
July 2:
Available-for-Sale Securities …………………………………………
224,000
Cash ……………………………………………………………………
Purchased 8,000 shares (16%) of Cox Corporation common stock at $28 per share.
Cash ………………………………………………………………………….
16,000
Dividend Revenue …………………………..……………………
Cash dividend received (8,000 shares x $2 = $16,000).
Balance Sheet
Income Statement
Stockholders’
Net
MD–7
March 20:
Trading Securities ……………………………………………………….
17,400
Cash ……………………………………………………………………
Purchased 600 shares of General Eccentric stock at $29 per share.
Cash ………………………………………………………………………….
19,800
Trading Securities …………………………………………………
Gain on Sale of Investments …………………………………..
Sold shares for $19,800 (600 x $33), realizing a gain of
$2,400 ($19,800 – $17,400).
ANSWERS TO EXERCISES
ED–1
Req. 1
The equity method must be used because the company owns 35% (21,000 ÷ 60,000) of
the total shares outstanding of Nueces Corporation. The equity method must be used
when there is at least 20% but not more than 50% ownership in existence. The investor
must use the equity method because it can exercise significant influence, but not
control, over the operating and financing policies of Nueces Corporation.
Req. 2
Investment in Affiliates …………………………………………………
252,000
Cash ……………………………………………………………………..
Purchased 21,000 shares (35%) of the common stock of
Nueces Corp. at $12 per share.
Investment in Affiliates …………………………………………………
31,500
Equity in Affiliate Earnings ………………………………………..
To record 35% of the net income reported by Nueces Corp.
($90,000 x 35% = $31,500)
December 31:
Cash ………………………………………………………………………….
12,600
Investment in Affiliates ……………………………………………..
To record 35% of cash dividends paid by Nueces Corp.
(21,000 shares x $.60 = $12,600)
Investments in Affiliates ………………………………………………………………………
Other items:
ED–2
June 30, 2015:
Available-for-Sale Securities …………………………………………
200,000
Cash ……………………………………………………………………..
Dec. 31, 2015:
Available-for-Sale Securities …………………………………………
40,000
Net Unrealized Losses/Gains ……………………………………
Dec. 31, 2016:
Available-for-Sale Securities …………………………………………
70,000
Net Unrealized Losses/Gains ……………………………………
Computations:
Year Fair Value − Investment = Adjustment
2015 $240,000 $200,000 $40,000
2016 310,000 240,000 70,000
ED–3
June 30, 2015:
Trading Securities ……………………………………………………….
200,000
Cash ……………………………………………………………………..
Dec 31, 2015:
Trading Securities ……………………………………………………….
40,000
Net Unrealized Losses/Gains ……………………………………
Dec. 31, 2016:
Trading Securities ……………………………………………………….
70,000
Net Unrealized Losses/Gains ……………………………………
Computations:
Year Fair Value − Investment = Adjustment
2015 $240,000 $200,000 $40,000
2016 310,000 240,000 70,000
ED–4
Req. 1
On the Balance Sheet On the Income Statement
2016 2015 2016 2015
Noncurrent Assets: Other Items:
n/a
ED–5
March 10, 2015:
Available-for-Sale Securities …………………………………………
250,000
Cash ……………………………………………………………………..
Dec. 31, 2016:
Net Unrealized Losses/Gains ………………………………………..
25,000
Available-for-Sale Securities ……………………………………..
Dec. 31, 2016:
Net Unrealized Losses/Gains ………………………………………..
15,000
Available-for-Sale Securities ……………………………………..
Computations:
Year Fair Value − Investment = Adjustment
2015 $225,000 $250,000 – $25,000
2016 210,000 225,000 – 15,000