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 intention to convert it to cash in the short run. In contrast, a
long-term investment is one that does not meet both of these tests. Most long–
2. For passive investments in bonds, companies may report the investment at
unamortized cost if the intent is to hold the bonds until maturity. Otherwise, the
investments in bonds are to be accounted for using the same fair value method
as is used for passive investments in equity securities. Each year end, the
3. Only bonds that management has the plans and ability to hold until maturity can
be reported in the held-to-maturity portfolio. The investment in held-to-maturity
4. When shares of capital stock of another company are purchased as an
investment, they are measured and recorded at cost in accordance with the cost
5. Under the fair value method, revenues are measured by the investor company in
periods during which the other company declares a cash dividend. Unrealized
gains and losses are recorded when the stock price increases or decreases.
6. 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 received. This is because the equity
7. Under the equity method, dividends received from the affiliate company (the other
company) are not recorded as revenue because to record the dividends as
revenue would involve double counting. There would be double counting because
8. The identifiable assets and liabilities of the acquired company are recorded at
their fair values on the date of acquisition. This is called the acquisition method.
9. 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
identifiable assets less liabilities of the acquired company. The goodwill must be
recognized as an asset and is not expensed unless impaired.
Financial Accounting, 9/e Appendix A-3
MULTIPLE CHOICE
1. b
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
45
3
45
3
30
4
6
4
20
4
40
4
40
4
20
5
6
5
20
5
40
5
5
10
6
6
6
20
6
40
6
6
20
7
6
7
25
7
20
8
8
6
8
10
8
20
9
5
9
10
9
20
10
10
10
10
10
30
1
20
11
5
11
15
11
20
* 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
students often benefit from the extra effort, we find that some become frustrated by
Financial Accounting, 9/e Appendix A-5
MINI-EXERCISES
MA–1.
D
1. Less than 20 percent ownership.
MA –2.
Bond investments (+A)* ………………………………………………..
900,000
Cash (−A) ………………………………………………………………..
900,000
D
2. Current fair value.
C
3. More than 50 percent ownership.
B
4. At least 20 percent but not more than 50 percent ownership.
A
5. Bonds held to maturity.
A
6. Original cost less any amortization of premium or discount associated with the
B
7. Original cost plus proportionate part of the income of the affiliate less
MA –3.
December 2:
Investments in AFS securities (+A) …………………………….
93,750
Cash (−A)………………………………………………………….
93,750
(6,250 shares x $15 per share); 12.5% ownership of voting stock
Cash (+A) ……………………………………………………………….
12,500
December 31:
Net unrealized gains (losses) (−OCI, −SE) …………………..
18,750
Investments in AFS securities (−A) ………………………
18,750
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
Financial Accounting, 9/e Appendix A-7
MA–4.
December 2:
Investments in TS (+A) ……………………………………………..
93,750
Cash (−A)………………………………………………………….
93,750
(6,250 shares x $15 per share); 12.5% ownership of voting stock
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
Current
$75,000
(6,250 x $12)
−
$93,750
=
−$18,750
MA–5.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
12/2
MA–6.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
12/2
+93,750
–93,750
Cash (+A) ……………………………………………………………….
12,500
12,500
(6,250 shares x $2 = $12,500)
Investments in TS (−A) ……………………………………….
18,750
MA–7.
July 2:
Cash (+A) ……………………………………………………………….
4,000,000
Investments in affiliates (−A) ………………………………..
4,000,000
(800,000 shares x $5 = $4,000,000); 35% ownership
Investments in affiliates (+A) ……………………………………..
(35% x $400,000)
MA–8.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
7/2
+4,000,000
MA–9.
Property and equipment (+A) …………………………………………
750,000
Goodwill (+A) ………………………………………………………………
85,000
175,000
Financial Accounting, 9/e Appendix A-9
MA–10.
2017
2018
2019
Dividends + Change
in Fair Value*
$3,000 + $6,000
$4,200 + $12,000
$3,500 – $2,000
Beginning Fair Value
of Investments
$64,000
$70,000
$82,000
MA–11.
Disney reports a large amount of goodwill because it has purchased other businesses,
paying more than the fair market value of the net assets (assets – liabilities) of the
acquired companies.
=
.1406 (14.06%)
EXERCISES
EA–1.
Req. 1
July 1:
EA–2.
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.
c
When Co. B declares a cash dividend;
not for any holding gains and losses
on available-for-sale securities.
When Co. B reports income or loss for
the period; not when dividends are
declared or paid.
Company A should increase and
decrease the investment account
value.
f
Company A owns 12.5% of Company
B (2,500 shares ÷ 20,000 shares
outstanding). $12,000 dividends
declared x 12.5% = $1,500 dividend
revenue for Company A.
$59,000 Company B net income x 35%
= $20,650 equity in earnings of affiliate.
unrealized loss reported in
EA–3.
Financial Accounting, 9/e Appendix A-11
June 30, 2016:
Investments in AFS securities (+A) (7,000 shares x $15)
105,000
Cash (–A) ……………………………………………………………
105,000
Dec. 31, 20188:
Investments in AFS securities (+A). …………………………...
28,000
Net unrealized gains (losses) (+OCI, +SE) ………………..
28,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2016
$119,000
($17 x 7,000) shares
−
$105,000
($15 x 7,000 shares)
=
+$14,000
2017
($14 x 7,000 shares)
−
=
Cash (+A) (7,000 shares x $20). ………………………………..
21,000
Investments in AFS securities (–A). …………………………
35,000
Note: The net unrealized gains (losses) account is a balance sheet account. It does
not affect the computation of net income each year. Because it is a balance sheet
account, it maintains its balance from year to year. Therefore, the decline in stock
price that occurs in 2017 is reported as an adjustment to the net unrealized gains
(losses) account. When the stock is sold in 2019, the net unrealized gains (losses) is
closed, and the difference between the purchase price (original cost) and the selling
price is reported as a gain on the income statement.
Investments in AFS securities (+A).. …………………………..
14,000
Net unrealized gains (losses) (+OCI, +SE) ………………..
14,000
Investments in AFS securities (–A). …………………………
21,000
EA–4.
June 30, 2016:
Investments in TS (+A) ……………………………………………..
105,000
Cash (–A) ……………………………………………………………
105,000
(7,000 shares x $15 per share)
Investments in TS (+A) ……………………………………………..
14,000
Net unrealized gains (losses) (+Gain, +SE) ……………….
14,000
21,000
Investments in TS (–A) ………………………………………….
21,000
Dec. 31, 2018:
Investment in TS (+A). ……………………………………………..
28,000
Net unrealized gains (losses) (+Gain, +SE) ……………….
28,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2016
2018
−
=
Cash (+A) (7,000 shares x $20) ……………………………………..
Gain on sale of investment (+Gain, +SE) ……………………..
14,000
$119,000
−
$105,000
=
+$14,000
Note: The net unrealized gains (losses) is an income statement account. This item is
reported on the current income statement and affects the computation of net income.
It is closed to Retained Earnings at the end of each year.
Financial Accounting, 9/e Appendix A-13
EA–5.
March 10, 2015:
Investments in AFS securities (+A) (15,000 shares x $35)
525,000
Cash (–A) ……………………………………………………………
525,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2015
$495,000
($33 x 15,000) shares
−
$525,000
($35 x 15,000 shares)
=
−$30,000
2017
($32 x 15,000 shares)
−
=
Cash (+A) (15,000 shares x $30) ……………………………….
450,000
Investments in AFS securities (–A) ………………………….
480,000
Note: The unrealized gains (losses) account is a balance sheet account. It does not
affect the computation of net income each year. Because it is a balance sheet
account, it maintains its balance from year to year. Therefore, the decline in stock
price that occurs in 2015 and 2017 is reported as an adjustment to the net unrealized
gains (losses) account and the increase in stock price that occurs in 2016 is also
reported as an adjustment to the net unrealized gains (losses) account. When the
stock is sold in 2018, the net unrealized gains (losses) is closed, and the difference
between the purchase price and the selling price is reported as a loss on the income
statement.
Investments in AFS securities (–A) ………………………….
Investments in AFS securities (+A) …………………………….
Investments in AFS securities (–A) ………………………….
EA–6.
March 10, 2015:
Investments in TS (+A) ……………………………………………..
525,000
Cash (–A) ……………………………………………………………
525,000
(15,000 shares x $35 per share)
Investments in TS (–A) ………………………………………….
Investments in TS (+A) ……………………………………………..
Net unrealized gains (losses) – TS (+Gain, +SE) ………
Investments in TS (–A) ………………………………………….
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2015
$495,000
($33 x 15,000) shares
−
$525,000
($35 x 15,000 shares)
=
−$30,000
2017
($32 x 15,000 shares)
−
=
Cash (+A) (15,000 shares x $30) ……………………………….
450,000
Investments in TS (–A) ………………………………………….
480,000
Financial Accounting, 9/e Appendix A-15
EA–7.
Req. 1
The equity method must be used because the company owns 27.5% (17,875 ÷
65,000) of the total shares outstanding of Tristezza Corporation. The equity method
must be used when there is at least 20% but not more than 50% ownership in
Req. 2
January 10:
Investments in affiliates (+A) …………………………………….
196,625
Cash (–A) ……………………………………………………………
196,625
(17,875 shares x $11 per share) → 27.5% of the voting common stock
Investments in affiliates (+A). …………………………………….
($80,000 x 27.5% = $22,000)
Cash (+A) ……………………………………………………………….
(17,875 shares x $.60 = $10,725)
Req. 3
Balance Sheet—At December 31 of the current year
Long-term Investments:
Investments in affiliates (equity basis*) ………………………………………………..
$207,900
Income Statement—For the Current Year Ended December 31
Equity in affiliate earnings …………………………………………………………………..
$ 22,000
EA–8.
Req. 1 Investing activities
Purchase of investments in affiliated companies (196,625)
Req. 2 Operating activities
Net Income $ xxxxx
EA–9.
(in millions)
EA–10.
Req. 1
Economic Return = Dividends Received + Change in Fair Value*
from Investing Beginning Fair Value of Investment Portfolio
Req. 2
Kukenberger, Inc.’s investment portfolio had a negative economic return in 2016
(-6.28%) primarily due to the negative change in fair value. However, in 2017 and
Financial Accounting, 9/e Appendix A-17
EA–11 (Supplement A)
Req. 1
July 1:
Held-to-maturity investments (+A) ……………………………..
13,785,600
Cash (–A) ………………………………………………………….
13,785,600
(Present value of the bond investment = PV of the principal + PV of the interest annuity
$13,785,600 = ($12,000,000 x .5537) + ($480,000 x 14.8775))
Req. 2
Cash (+A) ……………………………………………………………..
Held-to-maturity investments (–A) …………………………
Interest revenue (+R, +SE) …………………………………..
Interest revenue = $13,785,600 present value x .06 x 6/12 months = $413,568)
PROBLEMS
PA–1.
Req. 1
When the bonds are purchased, the company increases Held–to-Maturity
Investments and decreases Cash.
Req. 2
Financial Accounting, 9/e Appendix A-19
PA–2.
Req. 1
March 1, 2016
Investments in TS (+A) (20,000 shares x $10 per share) .
200,000
Cash (–A) ……………………………………………………………
200,000
Req. 2
March 1, 2016
Investments in AFS securities (+A) …………………………….
200,000
Cash (–A) ……………………………………………………………
200,000
Dec. 31, 2016
Net unrealized gains (losses) (–OCI, –SE) …………………..
40,000
Investments in AFS securities (–A) ………………………….
40,000
Investments in AFS securities (+A) …………………………….
120,000
120,000
Investments in AFS securities (+A) …………………………….
60,000
60,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2016
$160,000
($8 x 20,000) shares
−
$200,000
($10 x 20,000 shares)
=
−$40,000
2017
($14 x 20,000 shares)
−
=
2018
($17 x 20,000 shares)
−
=
Balance in Net Unrealized Gains (Losses) for AFS Securities
+$140,000
PA–3.
Net unrealized gains (losses) (+Loss, –SE) …………………
40,000
Investments in TS (–A) ………………………………………….
40,000
Investments in TS (+A) ……………………………………………..
120,000
Investments in TS (+A) ……………………………………………..
60,000
a. Investments in AFS securities (+A) …………………………….
19,000
Cash (–A) ……………………………………………………………
19,000
b. Cash (+A) ……………………………………………………………….
7,771
7,771
c. Cash (+A) ……………………………………………………………….
1,092
Gain on sale of investments (+Gain, +SE) ……………….
2,384
d. Investments in AFS securities (+A) …………………………….
5,210
Net unrealized gains (losses) (+OCI, +SE) ……………….
5,210
Fair
Book Value
Amount of
Value
–
Before Adjustment
=
Adjusting Entry
$14,558
–
$9,348
=
+$5,210
($5,587 beg. bal. + $19,000
purchase – $15,239 sale)
e. Balance Sheet
Assets:
f. Income Statement
Other Items:
Gain on sale of investments $ 2,384
Dividend revenue 7,771