Financial Accounting, 10/e Appendix A-35
APA–3.
Req. 1
The fair value method must be used for both securities:
(1) For Square common stock, only 6% of the outstanding shares is owned (below the
Req. 2
2019
2020
a.
Purchase of the investments:
Investments (+A) ………………………….
500,000
Cash (–A) ……………………………..
Square common stock: 12,000 shares x $25
Rectangle bonds: at par
Total investment …………………………….
c. Dividends/interest received:
Cash (+A) ………………………………….
19,000
22,000
Dividend revenue (+R, +SE) ….
9,000
12,000
Interest revenue (+R, +SE) …….
10,000
10,000
Computations:
Year
Company
Fair
Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2019
Square
$348,000
−
$300,000
=
+$48,000
−
=
APA–3. (continued)
Req. 3
a.
Balance Sheet (as a noncurrent asset):
2019
2020
Investments …………………………………………………………….
$558,000
$519,000
b.
Other Comprehensive Income:
c.
Income Statement (under Other Items):
Dividend revenue ………………………………………………………
)
Financial Accounting, 10/e Appendix A-37
APA–4.
Req. 1
CASE A
significant influence or control. Cardinal Corporation owns 5% (10,000 ÷
The fair value method must be used when less than 20% of the outstanding
shares are owned and it is presumed that the investor cannot exercise
CASE B
The equity method must be used if the level of ownership is at least 20% but
Req. 2
Case A-5%
Case B-42%
a.
January 10 purchase:
Investments (+A) …………………………………….
120,000
Cash (–A) …………………………………………
120,000
(10,000 shares x $12)
Investments (+A) …………………………………….
Cash (–A) …………………………………………
b.
Income reported by Arbor:
Investments (+A) ……………………………………
Equity in investee earnings (+R, +SE)
($90,000 x 42%)
c.
Dividends declared and then paid by
Arbor:
Dividends receivable (+A) ($15,000 x 5%) ….
750
Dividend revenue (+R, +SE) ………………
750
•
Cash (+A) ……………………………………………..
750
•
Dividends receivable (+A) ($15,000 x 42%)
Investments (–A) ……………………………..
Cash (+A) ……………………………………………..
Dividends receivable (–A) …………………
d.
Investments (+A) ………………………………….
Unrealized gain (+R, +SE) …………………..
20,000
APA–4. (continued)
Req. 3
Case A-5%
Case B-42%
Balance Sheet (noncurrent assets):
Investments …………………………………..
$140,000
(1)
$1,039,500
(2)
Income Statement (Other items):
Req. 4
Assets and revenues are different because the accounting treatment corresponds to
the amount of “control” an investor has over the investee. For a passive investment (<
20% ownership), it is presumed the investor cannot influence the investee’s activities.
Financial Accounting, 10/e Appendix A-39
APA–5.
On the Statement of Cash Flows:
Case A
Case B
Operating Activities:
Net income
$ xxx,xxx
$xxx,xxx
Adjusted for:
Equity in investee earnings (no cash received)
(37,800)
as revenue under the equity method)
Investing Activities:
Purchase of investments
(120,000)
(1,008,000)
APA–6.
Req. 1
Purchase price for the net assets $140,000
Req. 2
Inventory (+A) ……………………………………………………………..
12,000
Property and equipment (+A) …………………………………………
Goodwill (+A) ………………………………………………………………
82,000
CONTINUING PROBLEM
CONA-1.
Req. 1 (passive investment in equity securities – Pool Corporation owns less than 1%
of outstanding shares of The Walt Disney Company)
November 21, 2018:
Investments (+A) ……………………………………………………..
4,120,000
Cash (–A)………………………………………………………….
4,120,000
Investments (–A) ………………………………………………..
Investments (+A) …………………………..…………………………
Investments (–A) ………………………………………………..
Sale:
Cash (+A) …………………………..…………………………………..
4,240,000
Investments (–A) ………………………………………………..
4,240,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2018
$4,000,000
($100 x 40,000 shares)
−
$4,120,000
($103 x 40,000 shares)
=
−$120,000
2019
−
=
2020
($104 x 40,000 shares)
−
=
−
4,160,000
=
CONA-1. (continued)
Req. 2 (investment in available-for-sale debt securities)
November 21, 2018:
Investments (+A) ……………………………………………………..
4,120,000
Cash (–A)………………………………………………………….
4,120,000
Investments (+A) ……………………………………………………..
1,000
1,000
6,000
6,000
Investments (+A) ……………………………………………………..
9,000
9,000
Sept. 15, 2021:
Adjustment to fair value:
Investments (+A) ……………………………………………………..
6,000
Unrealized gain (+OCI, +SE) ………………………………
6,000
Reclassification of net unrealized gain:
Sale of investments:
Cash (+A) …………………………………………………………….
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2018
$4,121,000
−
$4,120,000
=
+$1,000
2019
−
=
2020
−
=
−
=
Financial Accounting, 10/e Appendix A-43
CONA-1. (continued)
Req. 3 (investment in trading securities)
November 21, 2018:
Investments (+A) ……………………………………………………..
4,120,000
Cash (–A)………………………………………………………….
4,120,000
Investments (+A) ……………………………………………………..
1,000
1,000
6,000
6,000
Investments (+A) ……………………………………………………..
9,000
Unrealized gain (+R, +SE) ……………………………………
9,000
Sept. 15, 2021:
Adjustment to fair value:
Investments (+A) ……………………………………………………..
6,000
Unrealized gain (+R, +SE) ………………………………….
6,000
Sale of investments:
Cash (+A) …………………………..………………………………….
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2018
$4,121,000
−
$4,120,000
=
+$1,000
2019
−
=
−
=
CASES AND PROJECTS
ANNUAL REPORT CASES
CPA–1 (dollars in thousands)
Req. 1.
Based on American Eagle’s balance sheet, the company does not report any short- or
long-term investments on its balance sheet as of February 3, 2018. Note 3, under the
(In thousands)
February 3,
2018
January 28,
2017
Cash and cash equivalents:
Total cash and cash equivalents
Req. 2.
A balance of $15,070 was reported for goodwill on the February 3, 2018, balance
Financial Accounting, 10/e Appendix A-45
CPA–2.
Req. 1. (dollars in thousands)
Express, Inc., does not report any short-or long-term investments on its balance sheet
Req. 2.
Express, Inc., had the following disclosure in Note 2 under Investment in Equity
Interests:
In the second quarter of 2016, the Company made a $10.1 million
FINANCIAL REPORTING AND ANALYSIS CASES
CPA–3.
Req. 1
Under the equity method, the investment amount (i.e., $485,000) was increased by
Req. 2
The net increase in the investment account was $71,000 ($556,000 – $485,000).
Req. 3
If the fair value method were used, investment revenue for the current year would be
Req. 4
The fair value of Maryn stock increased during the current year; therefore, the amount
of the investment account balance would be $550,000.
Financial Accounting, 10/e Appendix A-47
CPA–4.
Because Diageo’s policy states that “Interest and dividends from available-for-sale
standard, only debt securities are classified as available-for-sale.
Note: Below is the standard presented on the IFRS.org web site:
“IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early
application permitted.
. . .When an entity first recognises a financial asset, it classifies it based on the entity’s
business model for managing the asset and the asset’s contractual cash flow
characteristics, as follows:
• Amortised cost—a financial asset is measured at amortised cost if both of the
following conditions are met:
o the asset is held within a business model whose objective is to hold
CRITICAL THINKING CASES
CPA–5.
This case deals with insider (non-public) information. The plan to acquire 80% of
CPA–6.
The assets, liabilities, revenues and expenses of the two companies will be added
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CPA–7.
The solutions to this project will depend on the company and/or accounting period