Appendix A
Reporting and Interpreting Investments in
Other Corporations
ANSWERS TO QUESTIONS
1. A short-term investment is one that meets the two tests of (1) ready marketability
and (2) management’s intention to convert it to cash in the short run. In contrast,
2. For passive investments in bonds, companies may report the investment at
amortized cost if the intent is to hold the bonds until maturity. Otherwise, the
investments in bonds are to be accounted for using the fair value method with the
investments adjusted up or down to fair value at year end. If management’s
intent is to trade the bond securities actively, the trading securities are classified
3. Only bonds that management has the plans and ability to hold until maturity can
be reported in the held-to-maturity portfolio. The investments in held-to-maturity
4. Under the fair value method, revenues are measured by the investor company
when (1) the other company declares a cash dividend on equity securities or
5. Under the equity method, investment revenue is measured on a proportionate
basis by the investor company when earnings are reported by the affiliate
company, rather than when the dividends are declared. This is because the
6. Under the equity method, the investor’s share of dividends declared by the
affiliate company (the other company) are not recorded as revenue because,
when an investor can exercise significant influence over the dividend policies of
7. The identifiable assets and liabilities of the acquired company are recorded at
their fair value on the date of acquisition. This is called the acquisition method.
8. Goodwill is only recorded when one company purchases a controlling interest in
another. Goodwill is equal to the purchase price minus the fair value of the
Financial Accounting, 10/e Appendix A-3
recognized as an asset and is not expensed unless impaired.
MULTIPLE CHOICE
1. b
2. a
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
3
1
10
1
20
1
20
1
20
2
3
2
15
2
30
2
30
2
15
3
6
3
20
3
30
3
40
3
30
4
6
4
20
4
40
4
40
4
20
6
6
6
20
6
40
6
20
6
10
7
6
7
25
7
30
7
8
6
8
10
8
20
9
5
9
10
9
20
10
5
10
20
1
30
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
MINI-EXERCISES
MA–1.
D
D
C
B
A
A
B
MA–2.
Investments (+A)* …………………………………………………………
900,000
Cash (−A) …………………………………………………………….
900,000
MA-3
December 31, 2018:
Unrealized loss (−OCI, −SE) ……………………………………..
25,000
Investments (−A) ………………………………………………
25,000
Unrealized gain (−OCI, −SE) ……………………………………..
Investments (−A) ………………………………………………
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2018
$775,000
−
$800,000
=
−$25,000
MA-4
December 31, 2018:
Unrealized loss (+E, −SE) …………………………………………
25,000
Investments (−A) ………………………………………………
25,000
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2018
$775,000
−
$800,000
=
−$25,000
MA–5.
Balance Sheet
Income Statement
Transaction
Date
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
12/31/18
–25,000
–25,000
MA–6.
Balance Sheet
Income Statement
Transaction
Date
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
12/31/18
–25,000
–25,000
+25,000
–25,000
+27,000
MA –7
December 2:
Investments (+A) ……………………………………………………..
93,750
Cash (−A)………………………………………………………….
93,750
(6,250 shares x $15 per share); 12.5% ownership of voting stock
Dividend receivable (+A) …………………………..………………
12,500
12,500
(6,250 shares x $2 = $12,500)
Investments (−A) ……………………………………………….
18,750
MA–8.
July 2:
Dividend receivable (+A) …………………………..………………
4,000,000
Investments (−A) ………………………………………………..
4,000,000
Cash (+A) ……………………………………………………………….
MA–9.
Balance Sheet
Income Statement
Transaction
Date
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
+140,000
MA–10.
Disney reports a large amount of goodwill because it has purchased other businesses,
EXERCISES
EA–1.
Req. 1
July 1:
Investments (+A) ……………………………………………………..
Cash (–A)………………………………………………………….
Cash (+A) ……………………………………………………………….
480,000
Interest revenue (+R, +SE) ………………………………….
480,000
EA–2.
July 1, 2019:
Investments (+A) …………………………………………………….
350,000
Cash (–A)………………………………………………………….
350,000
Dec. 31, 2019:
Cash (+A).. …………………………..………………………………….
($350,000 x 0.06 x 6/12 of a year)
Investments (+A).. …………………………..……………………….
Cash (+A).. …………………………..………………………………….
Cash (+A).. …………………………..………………………………….
($350,000 x 0.06 x 6/12 of a year)
Unrealized loss (–OCI, –SE).. …………………………………….
EA–2. (continued)
June 30, 2021:
Cash (+A).. …………………………..………………………………….
10,500
Interest revenue (+R, +SE) ………………………………….
10,500
($350,000 x 0.06 x 6/12 of a year)
Investments (+A). …………………………………………………….
Unrealized gain (+OCI, +SE) ……………………………….
Cash (+A). ………………………………………………………………
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2019
$356,000
−
$350,000
=
+$6,000
2020
−
=
2021
353,000
−
=
Financial Accounting, 10/e Appendix A-11
EA–3.
July 1, 2019:
Investments (+A) …………………………………………………….
350,000
Cash (–A)…………………………………………………………
350,000
Cash (+A).. …………………………..………………………………….
10,500
Interest revenue (+R, +SE) …………………………………..
10,500
($350,000 x 0.06 x 6/12 of a year)
Investments (+A).. …………………………..……………………….
6,000
Unrealized gain (+R, +SE) ……………………………………
6,000
Cash (+A).. …………………………..………………………………….
10,500
Interest revenue (+R, +SE) …………………………………..
10,500
($350,000 x 0.06 x 6/12 of a year)
Dec. 31, 2020:
Cash (+A).. …………………………..………………………………….
10,500
Interest revenue (+R, +SE) …………………………………..
10,500
($350,000 x 0.06 x 6/12 of a year)
Unrealized loss (+E, –SE).. ………………………………………..
4,000
Investments (–A) ……………………………………………….
4,000
Cash (+A).. ………………………………………………………………
10,500
Interest revenue (+R, +SE) …………………………………..
10,500
($350,000 x 0.06 x 6/12 of a year)
Investments (+A). ……………………………………………………..
Unrealized gain (+R, +SE) ……………………………………
Cash (+A). ………………………………………………………………
Investments (–A). ………………………………………………
353,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2019
$356,000
−
$350,000
=
+$6,000
2020
−
=
EA–4.
March 10, 2019:
Investments (+A) (15,000 shares x $35) ……………………..
525,000
Cash (–A)…………………………………………………………
525,000
Dec. 31, 2019:
Unrealized loss (+E, –SE) …………………………………………
30,000
Investments (–A) ……………………………………………….
30,000
Investments (+A) ……………………………………………………..
45,000
Unrealized loss (+E, –SE) …………………………………………
60,000
Investments (–A) ……………………………………………….
60,000
Unrealized loss (+E, –SE) …………………………………………
30,000
Investments (–A) ……………………………………………….
30,000
Cash (+A) ……………………………………………………………….
450,000
Investments (–A) ……………………………………………….
450,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2019
$495,000
($33 x 15,000) shares
−
$525,000
($35 x 15,000 shares)
=
−$30,000
2020
540,000
($36 x 15,000 shares)
−
=
2021
($32 x 15,000 shares)
−
=
2022
($30 x 15,000 shares)
−
=
EA–5.
Req. 1
The equity method is applied when there is at least 20% but not more than 50%
ownership of an investee’s voting stock. At these levels of ownership, it is presumed
Req. 2
January 10:
Investments (+A) …………………………………………………….
196,625
Cash (–A)…………………………………………………………
196,625
(17,875 shares x $11 per share) → 27.5% of the
common stock
Equity in investee earnings (+R, +SE) ………………….
($80,000 investee income x 27.5% = $22,000)
Investments (–A). ……………………………………………..
(17,875 shares owned x $0.60 dividend per share = $10,725)
Req. 3
Balance Sheet—At December 31, Current Year
Long-term Investments:
Investments (equity basis*) ……………………………………………………………
$207,900
Income Statement—For the Current Year Ended December 31
Equity in investee earnings …………………………………………………………….
$ 22,000
EA–6.
Req. 1 Investing activities
Purchase of investments in affiliated companies $(196,625)
EA–7.
Questions
Method of Measurement
Fair value Method
Equity Method
a
Less than 20%.
At least 20% but not more than 50%.
b
At cost: 2,500 shares x $20 = $50,000.
At cost: 7,000 shares x $20 =
$140,000.
gains and losses on the investment in
Company A should increase and
decrease the investment account based
on stock price changes (to fair value).
Increase the investment account for
proportionate part of investee’s
income, less proportionate part of
e
2,500 shares x $17 = $42,500 fair value.
Cost of $140,000 plus $20,650
($59,000 x 35%) equity in investee’s
earnings minus $4,200 ($12,000 x
35%) dividends declared equals
$156,450.
x 12.5% = $1,500 dividend revenue for
Company A; in addition there is an
value – $42,500 fair value) to be reported
Financial Accounting, 10/e Appendix A-15
EA–8.
(in millions)
Liabilities (+L, not detailed) …………………………………….
Cash (–A) …………………………………………………………….
EA–9. (Appendix Supplement)
Req. 1
July 1:
Investments (+A) …………………………………………………….
13,785,346
Cash (–A) ………………………………………………………….
(Present value of the bond = PV of the principal + PV of the interest annuity
Req. 2
December 31:
Cash (+A) …………………………..…………………………………
480,000
Investments (–A) ……………………………………………..
66,440
Interest revenue = $13,785,346 carrying value x .06 x 6/12 months = $413,560)
PROBLEMS
PA–1.
Req. 1
When the bonds are purchased, the company increases Investments and
Financial Accounting, 10/e Appendix A-17
PA–2.
Req. 1
March 31, 2019:
Cash (+A) ………………………………………………………………
1,000
Interest revenue (+R, +SE) …………………………………
1,000
($80,000 x 0.05 x 3/12 of a year)
Req. 2
December 31, 2019 (trading securities):
Unrealized loss (+E, –SE). ………………………………………..
2,000
Investments (–A) ……………………………………………….
2,000
Investments (+A) ……………………………………………………..
9,000
Unrealized gain (+R, +SE). …………………………………..
9,000
Unrealized loss (+E, –SE) …………………………..…………….
6,000
Investments (–A) . ………………………………………………
6,000
July 14, 2022 (trading securities):
Investments (+A) ……………………………………………………..
2,000
Unrealized gain (+R, +SE) . …………………………………
2,000
Cash (+A) ……………………………………………………………….
Investments (–A) . ………………………………………………
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2019
$78,000
−
$80,000
=
−$2,000
2021
−
=
−
=
PA–2. (continued)
Req. 3
December 31, 2019 (available-for-sale securities):
Unrealized loss (–OCI, –SE). …………………………………….
2,000
Investments (–A) ……………………………………………….
2,000
Investments (+A) ……………………………………………………..
9,000
9,000
Unrealized loss (–OCI, –SE) ……………………………………..
6,000
6,000
Investments (+A) ……………………………………………………..
2,000
2,000
Unrealized gain (–OCI, –SE) ……………………………………..
3,000
3,000
Cash (+A) ……………………………………………………………….
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2019
$78,000
−
$80,000
=
−$2,000
2020
−
=
2021
−
=
−
=
Financial Accounting, 10/e Appendix A-19
PA–3.
a. Investments (+A) ……………………………………………………..
50,000
Cash (–A) ………………………………………………………….
50,000
b. Cash (+A) ……………………………………………………………….
3,000
Interest revenue (+R, +SE) …………………………..………
3,000
Unrealized gains (+OCI, +SE) ………………………………
1,600
Gain on sale of investments (+R, +SE) …………………
1,600
Investments (–A) ……………………………………………….
d. Investments (+A) ……………………………………………………..
1,200
Unrealized gain (+OCI, +SE) ………………………………..
1,200
Fair
Book Value
Amount of
Value
–
Before Adjustment
=
Adjusting Entry
$31,200
–
$30,000
=
+$1,200
+ $1,500 sale adjust. – $31,500 sale)
e. Balance Sheet
Assets (noncurrent):
Investments $31,200
f. Income Statement
g. If the securities were categorized as trading securities, the balance sheet amount
of $31,200 would be classified as current assets. When the securities are sold in
(c), only two entries would be recorded: (1) the adjustment to fair value of $1,500