ED–6
March 10, 2015:
Trading Securities ……………………………………………………….
250,000
Cash ……………………………………………………………………..
250,000
Dec. 31, 2015:
Net Unrealized Losses/Gains ………………………………………..
25,000
Trading Securities ……………………………………………………
25,000
Dec. 31, 2016:
Net Unrealized Losses/Gains ………………………………………..
15,000
Trading Securities ……………………………………………………
15,000
Computations:
Year Fair Value − Investment = Adjustment
2015 $225,000 $250,000 – $25,000
2016 210,000 225,000 – 15,000
ED–7
Req. 1
On the Balance Sheet On the Income Statement
2016 2015 2016 2015
Noncurrent Assets: Other Items:
Available-for-Sale Securities $210,000 $225,000
D–12 Solutions Manual
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ANSWERS TO COACHED PROBLEMS
CPD–1
Req. 1
Aug. 4, 2014
Available-for-Sale Securities ……………………………….………..
45,000
Cash ……………………………………………………………………..
Dec. 31, 2014
Available-for-Sale Securities ……………………………….………..
7,000
Net Unrealized Losses/Gains …………………………..
June 1, 2015
Cash ……………………………………………………………….………..
2,000
Dividend Revenue …………………………………………………..
Dec. 31, 2015
Net Unrealized Losses/Gains ……………………………..………..
5,000
Available-for-Sale Securities …………………………..………..
June 1, 2016
Cash ……………………………………………………………….………..
2,000
Dividend Revenue …………………………………………………..
Dec. 31, 2016
Net Unrealized Losses/Gains ……………………………..………..
9,000
Available-for-Sale Securities …………………………..………..
Computations for Year-End Adjustments to Fair Value:
Year Fair Value − Investment = Adjustment
2014 $52,000 $45,000 +$7,000
2015 47,000 52,000 − 5,000
2016 38,000 47,000 − 9,000
CPD–1 (continued)
Req. 2
Aug. 4, 2014
Trading Securities ……………………………………………………….
45,000
Cash ………………………………………………….……
45,000
Dec. 31, 2014
Trading Securities ……………………………………………………….
7,000
Net Unrealized Losses/Gains ………………..…………
7,000
June 1, 2015
Cash ……………………………………………………….
2,000
Dividend Revenue ……………………………….………………….
2,000
Dec. 31, 2015
Net Unrealized Losses/Gains …………………….…….
5,000
Trading Securities ………………………………..………………….
5,000
June 1, 2016
Cash ……………………………………………………….
2,000
Dividend Revenue ……………………………….………………….
2,000
Dec. 31, 2016
Net Unrealized Losses/Gains …………………….…….
9,000
Trading Securities ………………………………..………………….
9,000
Computations for Year-End Adjustments to Fair Value:
Year Fair Value − Investment = Adjustment
2014 $52,000 $45,000 +$7,000
2015 47,000 52,000 − 5,000
2016 38,000 47,000 − 9,000
CPD–1 (continued)
Req. 3
Aug. 4, 2014
Investment in Affiliates …………………………………………………
45,000
Cash ……………………………………………………………………..
45,000
Dec. 31, 2014
Investment in Affiliates …………………………………………………
15,000
Equity in Affiliate Earnings ………………………………………..
15,000
(30% x $50,000)
Cash ………………………………………………………………………….
2,000
Investment in Affiliates ……………………………………………..
2,000
Dec. 31, 2015
Investment in Affiliates …………………………………………………
15,000
Equity in Affiliate Earnings ………………………………………..
15,000
(30% x $50,000)
Cash ………………………………………………………………………….
2,000
Investment in Affiliates ……………………………………………..
2,000
Dec. 31, 2016
Investment in Affiliates …………………………………………………
15,000
Equity in Affiliate Earnings ………………………………………..
15,000
(30% x $50,000)
CPD–2
Req. 1
Case A
The fair value method must be used by Homer Company because it owns
12% (3,600 ÷ 30,000) of the total outstanding common shares of Bart
Company. The fair value method must be used when less than 20% of the
outstanding shares are owned because the investor (Homer Company)
cannot exercise significant influence or control.
Case B
The equity method must be used by Homer Company because it owns 35%
(10,500 ÷ 30,000) of the outstanding common shares of Bart Company. The
equity method must be used if the level of ownership is at least 20% but not
more than 50% because the investor (Homer Company) can exercise
significant influence, but not control, over the operating and financing
policies of Bart Company.
Req. 2
Case A-12%
Case B-35%
a.
January 1, 2015 purchase:
Available-for-Sale Securities …………
90,000
Cash ………………………………….
90,000
(3,600 shares x $25)
Investment in Affiliates …………………
262,500
Cash ………………………………….
262,500
(10,500 shares x $25)
b.
Income reported by Bart:
Investment in Affiliates …………………
No entry
17,500
Equity in Affiliate Earnings …………
17,500
($50,000 x 35%)
c.
Dividends declared and paid by Bart::
Cash …………………………………………
8,925
Investment in Affiliates …………….
8,925
*
Cash …………………………………………
3,060
Dividend Revenue …………………..
3,060
*
*Computations
$25,500 x 12% = $3,060
$25,500 x 35% = $8,925
d.
Net Unrealized Losses/Gains …………
10,800
No entry
Available-for-Sale Securities ………
10,800
[3,600 shares x ($22 fair value – $25 cost) = −$10,800]
CPD–2 (continued)
Req. 3
Case A-12%
Case B-35%
Balance Sheet:
Long-term Assets:
Available-for-Sale Securities
$79,200
Investment in Affiliates
$271,075
*
Stockholders’ Equity:
Net Unrealized Gains (Losses) …………
(10,800
)
None
Income Statement:
Dividend Revenue …………………………...
3,060
Equity in Affiliate Earnings …………………
17,500
*Cost $262,500 + % Affiliate’s net income $17,500 – % Affiliate’s dividends $8,925 =
$271,075 book value (reported on balance sheet)
Req. 4
Assets (investments), stockholders’ equity (unrealized loss), and revenues (from
dividends) are different because (1) different methods of recognizing revenue are
required, and (2) adjustments for changes in fair value are recorded only under the fair
value method.