CHAPTER 8
INVESTMENTS IN EQUITY SECURITIES
BRIEF EXERCISES
BE8–1
a. Comprehensive income includes all non-owner changes in shareholder equity that do not already
appear on the income statement. For example, the change in value of assets that have been sold and
in certain assets that have not been sold appear as comprehensive income, but net income only
includes the changes in assets that have been sold.
b. The investments are considered Available-for-Sale Securities, because the Unrealized Gains/Losses
are not posted to the Income Statement; instead, as shown in the disclosure the Unrealized
Gains/Losses are carried directly to Stockholders’ Equity through Comprehensive Income. In 2012
BE8–2
Bristol-Myers Squibb designated its Marketable Securities as Available-for-Sale Securities and as such
BE8–3
a. The excerpts from the financial statements indicate that Pepsi stopped using the equity method for
accounting for its investment in bottling companies in 2011. Ownership percentages and perceived
BE8–4
BE8–5
Assets (+A) 1,323
Goodwill (+A) 1,800
E8–1
a. (1) Trading Securities (+A) ………………………………………………………….. 50,000
Cash (–A) ………………………………………………………………………. 50,000
Invested in IBM.
(2) Trading Securities (+A) ………………………………………………………….. 40,000
(5) Trading Securities (+A) ………………………………………………………….. 8,000
Cash (–A) ………………………………………………………………………. 8,000
Invested in Xerox.
(6) Cash (+A) …………………………………………………………………………….. 7,500
Realized Loss on Sale of Trading
E8–1 Concluded
b. The transactions that affected the income statement for Monroe Auto Supplies are the gains and losses
E8–2
a. Change in the wealth level of each of the four companies can be computed by comparing the beginning
and year-end balance in the short-term equity investment account. Therefore, the amounts for each
b. The amount that should be reported as holding gains and losses on the income statement is always due
c. The reason that the answers to (a) and (b) are not the same is due to the fact that in part (a) the
d. If the company were to choose the fair market value option, the change in market values for the
E8–3
a. (1) 1/28 Short-Term Investments (+A) ………………………………….. 140
Cash (–A) ……………………………………………………….. 140
E8–3 Continued
(4) 4/29 Cash (+A) ……………………………………………………………… 75
Short-Term Investments (–A) ……………………………. 70
Realized Gain on Sale of Short-Term
Marketable Securities (–A) ……………………………….. 130
Sold Baker Co. stock.
b. Cost Market Value
Able (5 shares) 70 85
Baker (15 shares) 390 300
(2) If Able is a trading security and Baker is an available-for-sale security:
Able
(3) If Able is considered an available-for-sale security and Baker is considered a trading security:
Able
Available-for-Sale Securities (+A) …………………………………………… 15
E8–3 Concluded
Available-for-Sale Securities (–A) ……………………………………… 75
c. Since management usually want to keep losses off the income statement, the second combination in
E8–4
a. Trading Available-For–Sale
1. 20 shares were purchased at $8, and on 12/31/14 their market value has increased to $10 a share. An
2. 20 shares @ $10 a share as of 12/31/14.
3. 2015 Cash (+A) …………………………..…………………………………………. 90
4. For available-for-sale securities, the Journal entries would remain the same, but all the unrealized price
5. Purchased 20 shares @ $8 = $160
12/31/14 Mark to Market @ $10 = 40
E8–4 Concluded
6. Cash (+A) ……………………………………………………………………………………… 140
7. For available-for-sale securities, the entry would remain the same, but the $40 unrealized price
increase debit would go directly to the stockholders’ equity section, leaving the $60 realized gain on the
E8–5
a. Fair market value of Biomet’s available-for-sale securities:
b. The effect on the company’s comprehensive income associated with its available-for-sale securities is:
2011 2012
c. The income that would be realized would be ($0.2) [$4.8 – $4.6].
E8–6
a.
Tom Miller
Balance Sheet
December 31, 2014
Assets Liabilities & Stockholders’ Equity
Cash ………………………………… $ 2,880 Accounts payable …………….. $ 1,500
Larry Rogers
Balance Sheet
December 31, 2014
Assets Liabilities & Stockholders’ Equity
Cash ………………………………… $ 2,880b Accounts payable …………….. $ 1,500
Marketable securities ………… 3,840a Contributed capital ………….. 6,000
b.
Tom Miller Larry Rogers
d. Tom Miller is actually in better financial position than Larry Rogers. Both of them own the exact same
E8–7
a.
(1) This investment should be classified as a long-term investment and accounted for using the equity
method. Hartney Consulting owns 40% of the investee’s common stock, which indicates that it can
(3) This investment should be classified as a long-term investment and accounted for using the cost
method. To be classified as a short-term investment, a ready market for the securities must exist so
that the investor can dispose of the investment at any time. In this case, because the company is
closely held, Hartney Consulting could not dispose of the investment when it desires.
(4) This investment should be classified as a long-term investment and accounted for using the equity
intends to hold the investment for four years.
b. To be classified as a short-term marketable equity investment, the equity investment must meet two
criteria. First, the investor must intend to dispose of the investment within the time frame of current
assets. Second, a ready market for the securities must exist. A ready market for the investment enables
the investor to dispose of the investment at any time. In the case of nonmarketable equity securities,
E8–8
(1) Investment in Equity Securities (+A) ……………………………………………. 260,000
Cash (–A) ……………………………………………………………………………. 260,000
Invested in Thayers International.
E8–9
a. (1) Available-For-Sale Securities (+A) ………………………………………… 260,000
Cash (–A) ……………………………………………………………………. 260,000
Invested in Thayers International.
(2) Available-For-Sale Securities (+A) ………………………………………… 875,000
E8–9 Concluded
b.
Securities Shares Held Cost Market Value
Bayhe 20,500 $ 717,500 $ 656,000
E8–10
a. 2014
Investment in Equity Securities (+A) ………………………………………………… 190,000
Cash (–A) ………………………………………………………………………………… 190,000
Invested in Reilly Manufacturing.
Cash (+A) ……………………………………………………………………………………… 15,000
Investment in Equity Securities (–A) ………………………………………….. 1,500
Incurred investment loss (equity method).
b. Cost of investment $ 190,000
Plus: Portion of investee’s 2014 net income 18,750
E8–11
a. During 2012 Duke Energy reported equity losses of $148 million on its income statement. Since it owns
40% of its affiliates, the affiliates reported net losses of $148 million ÷ 40% or $370 million.
b. While the income (losses) claimed from the affiliates increases (decrease) the value of the long-term
E8–12
a. Since Mainmont Industries owns 30% of Tumbleweed Construction, 30% of Tumbleweed Construction’s
Construction’s total net income for 2014 would have been $40,000 ($12,000 ÷ 30%).
b. Long-term investment in equity securities: 12/31/13 $25,000
30% of Tumbleweed Construction’s 2014 net income 12,000
c. Cash (+A) ……………………………………………………………………………………… 8,000
Investment in Equity Securities (–A) ………………………………………….. 8,000
Equity Investments net of the cash received in dividends ($4,000 net, for 2014).
E8–13
a. Cash (+A) ……………………………………………………………………………. 90,000
Accounts Receivable (+A) ……………………………………………………… 60,000
Inventory (+A)……………………………………………………………………. 160,000
Purchased Lipley Company.
b. The net book values of assets and liabilities represent the amounts at which the assets and liabilities
are carried on the balance sheet. Some assets are carried at original cost, others at net realizable value
E8–14
Purchase Price = Net Book Value + Net Market Value in Excess of Book Value + Goodwill
Transactions:
(1) Purchase Price = $7,000 + $1,000 + $1,000
E8–15
a. Book Value per Share = Book Value ÷ Number of Common Shares Outstanding
c. Conglomerate would be willing to pay more than the market value per share due to goodwill. Camden
d. Investment in Subsidiary (+A) …………………………………………………………. 66,000*
Cash (–A) ………………………………………………………………………………… 66,000
Acquired subsidiary.
*66,000 = $22 per Share Purchase Price 3,000 Common Shares Outstanding
E8–16
a. The consolidating entries are shown below: [Note: assets and liabilities purchased are added at Fair
Market Value]
Investment in Subsidiary (+A) ……………………………………………………………….. 144,000*
Cash (–A) ………………………………………………………………………………… 144,000
Acquired subsidiary.
*144,000 = $18 per Share Purchase Price 8,000 Shares (80% of Outstanding)
b. If Maxwell uses IFRS and assumes that minority shareholders have no interest in goodwill, the entry
would be:
Current Assets (+A)………………………………………………………………………… 150,000
c. The minority interest would be disclosed in the shareholders’ equity section of the balance sheet
(under both U.S. GAAP and IFRS).
E8–17
Adjustments and
Eliminations Consolidated
Accounts Glover Ward Debit Credit Balance Sheet
Cash 73,000 10,000 83,000
Accts. Receivable 110,000 40,000 150,000
Inventory 220,000 60,000 10,000 290,000
Investment in Sub. 100,000 0 100,000 0
PROBLEMS
P8–1
a. The total gains and losses reported on the income statement are as follows:
Realized Gains and Losses Unrealized Price
on Trading as well as Changes for Trading Dividend Income
12/31/14
# of Cost Market Total Total
Security Shares per Share per Share Cost Market
Houser 30 $22 $25 $ 660 $ 750
b. If O’Leary used the fair market value option, then the unrealized gains and losses on the available–
for-securities (Letter and Nordic) would affect net income as well.
12/31/14
# of Cost Market Total Total
Security Shares per Share per Share Cost Market
P8–2
a.
(1) 3/10 Trading Securities (+A) …………………………………………………. 28,000
Cash (–A) ……………………………………………………………… 28,000
Invested in Arctic Oil & Gas.
(2) 3/31 Trading Securities (+A) …………………………………………………. 8,000
Realized Gain on Sale of Trading
Securities (Ga, +SE)……………………………………………….. 5,600
Sold Arctic Oil & Gas stock.
(6) 9/27 Cash (+A) ……………………………………………………………………. 4,000
Realized Loss on Sale of Trading Securities (Lo, –SE) … 1,000
P8–2 Concluded
Computation for adjusting journal entry on 12/31:
Number Market Total Total
Security of Shares Cost/Share Value/Share Cost Market Value
Arctic Oil & Gas 0 $28 $32 $ 0 $ 0
Adjusted marketable securities to LCM.
b. Marketable securities $41,000
c.
Transaction Income Statement Effect Explanation
(1) 3/10 $ 0
(2) 3/31 0
P8–3
a. 10/18/14 Available-For -Sale Securities (+A) …………………………………. 3,200
Cash (–A) ……………………………………………………………… 3,200
b. 10/18/14 Trading Securities (+A) …………………………..…………………….. 3,200
Cash ……………………………………………………….……………. 3,200
c. Income Effect
Trading Available-
Transactions Securities for-Sale Securities
P8–4
a. ___Guyer Books___ _____Levy Co._____
Balance Balance
Sheet Income Sheet Income
Securities
b. Guyer and Levy’s income statements would differ only if the security is classified as available–for-sale.