Exercise 12–24
Requirement 1
Purchase ($ in millions)
Net income
Dividends
Amortization of differential
‡ calculation:
Investee Net Assets Difference
Net Assets Purchased Attributed to:
Cost $100
Goodwill: $12.5
Calculation of 2018 amortization of differential:
Inventory (all sold in latter half of 2018, so entire differential expensed): $5
Buildings ($20 ÷ 10 year remaining life × 0.5 year): 1
Equipment ($7.5 ÷ 5 year remaining life × 0.5 year):
0.75
Total:
Exercise 12–24 (concluded)
Requirement 2
a. Investment in VB shares
__________________________________________
($ in millions)
b. As investment revenue or loss in the income statement.
c. Among investing activities in the statement of cash flows.
$100 million investing outflow
[Cash dividends received ($6 million) also are reported as part of
operating activities. If Gupta reports cash flows using the indirect
Requirement 1
Electing the fair value option for held-to-maturity securities simply requires
Requirement 2 ($ in millions)
Requirement 3
Requirement 4
The amortized cost of the bonds is $240 – ($40 – 0.8) = $200.8. Therefore, to
adjust to fair value of $210, Tanner-UNF would need a fair value adjustment
of $210 – 200.8 = $9.2.
Fair-Value
Adjustment
7/1/2018 0
Tanner-UNF would record the following journal entry:
Fair Value
Adjustment
Balance on 7/1/2018 $0
± Adjustment needed to update fair value ?
Balance needed on 12/31/2018 ($210 – 200.8) $9.2
Exercise 12–25 (concluded)
Requirement 5
Requirement 6
1) Updating the fair-value adjustment:
Need to move from a fair-value adjustment of $9.2 to ($10.8):
Fair-Value
Adjustment
12/31/2018 9.2
Unrealized holding loss—NI (to balance)……………………………….. 20
Fair-value adjustment ……………………………………………………. 20
Note: the loss equals the difference between the proceeds ($190 million) and
the carrying value of the investment ($210 million).
2) Recording the sale transaction:
($ in millions)
Exercise 12–26
Fair Value
Adjustment
Balance on 12/31/2018 $9.2
± Adjustment needed to update fair value ?
Balance needed on 1/2/2019 ($190.0 – 200.8) ($10.8)
Requirement 1
a. July 1, 2018: Purchase of the Jackson bonds
Electing the fair value option requires that Colah account for the bonds the
same way it would account for trading securities. The securities would be
shown at fair value in Colah’s balance sheet and unrealized gains and losses
would be included in Colah’s income in the periods in which they arise.
b. December 31, 2018: Recognition of interest revenue
c. December 31, 2018: Year-end adjusting entries
Need to move from a fair-value adjustment of $0 to $200,000:
Fair-Value
Adjustment
7/1/2018 0
Exercise 12–26 (continued)
d. June 30, 2019: Recognition of interest revenue
Cash …………………………………………………………………….. 25,000
Interest revenue ($1,000,000 × 5% × ½ year) ………………. 25,000
Fair Value
Adjustment
Balance on 7/1/2018 $0
± Adjustment needed to update fair value ?
Balance needed on 12/31/2018 ($1,200,000 − 1,000,000) $200,000
carrying value of the investment ($1.2 million).
2) Recording the sale transaction:
Exercise 12–26 (concluded)
Requirement 2
2018 2019 Total
Net Income $25,000 + 200,000
$25,000 – 300,000
$225,000 + (275,000)
Exercise 12–27
Requirement 1
Electing the fair value option for significant-influence investments requires
use of the same basic accounting approach that is used for trading securities. The
securities would be shown at fair value in the balance sheet and unrealized gains
and losses would be included in net income in the periods in which they arise.
Requirement 2
Purchase ($ in millions)
Net income
No entry.
Dividends
Adjusting entry……………………………………………………………………………
Need to move from a fair-value adjustment of $0 to ($4) million:
Fair-Value
Adjustment
1/1/2018 0
Exercise 12–27 (concluded)
Fair Value
Adjustment
Balance at purchase $0
± Adjustment needed to update fair value ?
Balance needed at year end ($52 million – 56 million) ($4)
Florists would make the following journal entry:
Note: A different approach to reach the same outcome would be for Florists to use
equity method accounting throughout the year, and then at the end of the year make
whatever adjustment to fair value is necessary to adjust the investment account to
fair value. Under that approach, Florists would recognize 30% of Nursery’s $40
Exercise 12–28
Requirement 1
Requirement 2
a.