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12-41 Solutions
2008 ............................ $ 2,300 $ 3,300 $ 3,300
end of 2009 appears in income if these securities are trading securities but
in a separate shareholders’ equity account if these securities are se-
Solutions 12-42
12.26 d. continued.
curities available for sale (either a current asset or a noncurrent asset).
Total shareholders’ equity is the same. Retained earnings (pre-tax) are
12.27 (Analysis of financial statement disclosures related to marketable securities
and quality of earnings.) (Amounts in Millions)
Realized Loss on Sale of Securities Available for
Sale ....................................................................... 113
Realized Gain on Securities Available for
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+37,600
–113
IncSt → RE
–37,270a
+443
IncSt → RE
Unrealized Holding Loss on Securities Available
for Sale (= $37,270 – $37,008) (Other Com-
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+262
+262
OCInc →
AOCInc
b. Balance, December 31, 2008 (= $957 – $510) .................. $ 447 Cr.
Net Unrealized Holding Loss on Securities Sold (from
12-43 Solutions
c. Interest and Dividend Revenue ........................................ $ 1,081
Net Realized Gain on Securities Sold from Market
Solutions 12-44
12.27 continued.
d. The bank sold marketable securities during 2009, which had net
unrealized holding losses of $262 million as of December 31, 2009. The
sale of these securities at a gain suggests that fair prices increased
substantially ($592 million) during 2009. The substantial increase in the
12.28 (Accounting for forward commodity price contract as a cash flow hedge.)
a. Firm D does not make an entry on October 31, 2008, because the forward
b. The fair value of the forward contract increases $100,000 [= 10,000 X
December 31, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+100,000
+100,000
OCInc →
AOCInc
The forward contract is an asset because the firm has the right to receive
12-45 Solutions
c. The fair value of the inventory of approximately $310 per gallon exceeds
Solutions 12-46
12.28 continued.
d. March 31, 2009
Forward Commodity Contract ................................... 400,000
Other Comprehensive Income .............................. 400,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+400,000
+400,000
OCInc →
AOCInc
e. March 31, 2009
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–400,000
–400,000
OCInc →
AOCInc
f. March 31, 2009
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+500,000
–500,000
g. March 31, 2009
Cash .......................................................................... 2,700,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+2,700,000
+2,700,000
IncSt → RE
12-47 Solutions
12.28 g. continued.
March 31, 2009
Other Comprehensive Income .................................. 500,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–500,000
OCInc →
AOCInc
–2,250,000
–1,750,000
IncSt → RE
The net balance in Other Comprehensive Income before the entry above
reported if it had not obtained the forward contract and the market price for
whiskey on March 31, 2009 had been Firm D's anticipated amount of $320
shifted the risk of changes in the selling price to the counterparty.
h. Firm D would recognize changes in the fair value of both the inventory
i. A justification for treating the forward commodity price contract as a fair
value hedge is that the firm wanted to protect the gross margin on the
12.29 (Owens Corporation; accounting for forward foreign exchange contract as a
fair value hedge and a cash flow hedge.)
a. October 1, 2008: The purchase commitment and the forward foreign
exchange contract are mutually unexecuted contracts as of October 1,
Solutions 12-48
December 31, 2008: The change in the value of the undiscounted cash
flows related to the purchase commitment and the forward foreign
12-49 Solutions
12.29 a. continued.
December 31, 2008
Loss on Firm Commitment ........................................ 1,731
Commitment to Purchase Equipment .................... 1,731
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+1,731
–1,731
IncSt → RE
To record a loss in net income on a previously un-
recognized firm commitment because the U.S. dollar
decreased in value relative to the euro.
December 31, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+1,731
+1,731
IncSt → RE
To measure the foreign exchange contract at fair
value and recognize a gain in net income.
June 30, 2009
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+69
–69
IncSt → RE
To recognize interest on the commitment because of
June 30, 2009
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+69
+69
IncSt → RE
Solutions 12-50
12-51 Solutions
12.29 a. continued.
The change in the value of the purchase commitment and the forward
foreign exchange contract due to exchange rate changes between
June 30, 2009
Loss on Firm Commitment ........................................ 3,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+3,000
–3,000
IncSt → RE
To record a loss on the purchase commitment because
the value of the U.S. dollar declined relative to the
euro.
June 30, 2009
Forward Foreign Exchange Contract ........................ 3,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+3,000
+3,000
IncSt → RE
To record the increase in the fair value of the forward
foreign exchange contract because the U.S. dollar
declined in value relative to the euro.
June 30, 2009
Equipment ................................................................. 79,200
Cash ...................................................................... 84,000
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+79,200
–4,800
–84,000
To record the amount paid in U.S. dollars to acquire
Solutions 12-52
12-53 Solutions
12.29 a. continued.
June 30, 2009
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+4,800
–4,800
To record cash received from the counterparty and
b. Owens Corporation would not recognize changes in the value of the
purchase commitment. The entries for changes in the fair value of the
forward foreign exchange contract would affect other comprehensive
c. To treat this hedge as a fair value hedge, Owens Corporation must desire
to protect the value of the equipment. Perhaps Owens Corporation has
Solutions 12-54
12.30 (Sandretto Corporation; accounting for interest rate swap as a fair value
hedge.)
a. January 1, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+50,000
+50,000
To record the acquisition of equipment by giving a
$50,000 note payable with a fixed interest rate of 6%.
December 31, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–3,000
–3,000
IncSt → RE
To recognize interest expense and cash payment at
the fixed interest rate of 6%: $3,000 = .06 X $50,000.
Interest rates increased during 2008. On December 31, the counterparty
with whom Sandretto Corporation entered into the swap contract resets
the interest rate for 2009 to 8%. Sandretto Corporation must restate the
note payable to fair value and record the change in the fair value of the
swap contract caused by the increase in the interest rate. The present
value of the remaining cash flows on the note payable when discounted
at 8% is:
Sandretto Corporation makes the following entry to record the change in
fair value:
12-55 Solutions
12.30 a. continued.
December 31, 2008
Note Payable ............................................................. 1,783
Gain on Revaluation of Note Payable ................... 1,783
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–1,783
+1,783
IncSt → RE
To measure the note payable at fair value with cash
flows discounted at 8%: $1,783 = $50,000 – $48,217.
The increase in interest rate to 8% means that Sandretto Corporation
interest payments. The present value of a $1,000 annuity for two periods
contract increased from zero at the beginning of 2008 to $1,783 at the
end of 2008. Sandretto Corporation makes the following entry:
December 31, 2008
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
+1,783
–1,783
IncSt → RE
To measure the swap contract at fair value and recog-
nize a liability on the balance sheet and a loss in net
income.
December 31, 2009
Interest Expense ....................................................... 3,857
Assets
=
Liabilities
+
Shareholders'
Equity
(Class.)
–3,000
+857
–3,857
IncSt → RE
To record interest expense at 8% of the carrying value
