Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 12-9
2. Fair value is the amount for which a security could be sold in a normal
market.
3. Companies report trading securities at fair value with the unrealized gains or
losses reported as part of net income. Companies report the unrealized
losses) section in the income statement.
ACCOUNTING ACROSS THE ORGANIZATION
Many companies have equity investments of some type. For example, the total
approximately $403 billion.
Why might the use of the equity method not lead to full disclosure in the financial
statements?
account is shown. The pro-rata share of the investee’s assets and
liabilities are not reported. Because the pro–rata share of the investee’s
principle is violated.
4. Companies report available-for-sale securities at fair value and the
equity.
5. Companies use a Fair Value Adjustment account to adjust the securities
to their fair value. Companies add (deduct) the Fair Value Adjustment
debit (credit) balance to (from) the cost of the investments to arrive at
the securities’ fair value.
E. Short-Term and Long-Term Investments.
1. Short-term investments (marketable securities) are securities held by a
company that are (1) readily marketable and (2) intended to be converted
into cash within the next year or operating cycle, whichever is longer.
2. Investments that do not meet both criteria are classified as long-term
investments.
Stock Exchange).
b. Intent to convert means that management intends to sell the investment
fair value.
d. Companies generally report long-term investments in a separate
section of the balance sheet immediately below “Current assets”.
1. Companies must report in the income statement in the nonoperating activi-
unrealized.
2. Companies report an unrealized gain or loss on available-for-sale securities
as a separate component of stockholders’ equity.
*G. Consolidated Balance Sheet
1. Transactions between affiliated companies are identified as intercom-
pany transactions. The process of excluding these transactions in preparing
consolidated statements is referred to as intercompany eliminations.
2. The preparation of consolidated balance sheets is usually facilitated by
(3) consolidated data.
3. Companies make intercompany eliminations solely on the worksheet to
affect the ledger accounts.
4. When the parent acquires 100% ownership of a subsidiary company and
balance.
Earnings accounts for their respective balances.
5. When the parent acquires 100% ownership and the acquisition cost is
Cost Over Book Value of Subsidiary.
6. In the consolidated balance sheet, the parent first allocates the excess
of cost over book value amount to specific assets (i.e. inventory, plant
and equipment) if their fair values on the acquisition date exceed their
book values. Any remainder is considered to be goodwill.
*H. Consolidated Income Statements
1. A consolidated income statement shows the results of operations of
affiliated companies as though they are one economic unit.
2. All intercompany revenue and expense transactions must be eliminated.
Intercompany transactions such as sales between affiliates and interest
on loans between affiliates must be eliminated.
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. To be considered a short-term investment, the investment must be readily marketable
and management should intend to convert the investment into cash within the next year
or operating cycle, whichever is longer.
True False
dividend revenue, and the sale.
True False
3. The accounting guidelines for long-term investments in stock are based on the extent of
the investor’s influence over the operating affairs of the issuing corporation.
True False
True False
5. A parent/subsidiary relationship exists only when the parent company has a controlling
interest in the subsidiary company.
True False
6. Consolidated financial statements are useful to parent company stockholders and managers
common control.
True False
7. The Fair Value Adjustment balance could be added to the cost of the investments to
arrive at their fair value.
True False
8. Under the fair value method, companies report the unrealized gain in the income state-
ment for available-for-sale securities.
True False
9. Companies report both realized and unrealized gains and losses on trading securities in
the income statement.
True False
*10. The consolidated income statement shows only revenue and expense transactions
between the consolidated entity and companies and individuals who are outside the
affiliated group.
True False
Multiple Choice
1. Ross Corporation purchased 6,000 shares of Hunter common stock at $60 per share
plus $7,200 brokerage fees as a short-term investment. The shares were subsequently
sold at $65 per share less $8,400 brokerage fees. The cost of the securities purchased
Cost Gain or Loss
a. $360,000 $30,000 gain
b. $360,000 $14,400 gain
c. $367,200 $14,400 gain
d. $367,200 $14,400 loss
a. $577,500.
b. $622,500.
c. $636,000.
d. $675,000.
3. The equity method is used when the investor
a. makes long-term investments in stocks.
Cost Fair Value
Magnum Corp. $38,000 $40,000
Spencer Inc. 49,000 43,000
$87,000 $83,000
The unrealized loss to be recognized is
a. $2,000.
b. $6,000.
c. $4,000.
d. none of the above.
a. Unrealized gain on trading securities.
b. Realized gain on available-for-sale securities.
c. Unrealized loss on available-for-sale securities.
d. Realized loss on trading securities.
ANSWERS TO QUIZ
True/False
Multiple Choice