Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12-1
Chapter 12
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
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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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
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
9. Goodwill is only recorded when one company purchases a controlling interest in
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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MULTIPLE CHOICE
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12-4
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
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3
1
10
1
20
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20
1
20
2
3
2
15
2
30
2
30
2
15
3
6
3
20
3
45
3
45
3
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
4
6
4
20
4
40
4
40
4
20
5
6
5
20
5
40
5
5
10
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20
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40
6
6
20
7
6
7
25
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20
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20
8
6
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10
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9
5
9
10
9
20
10
10
10
10
10
30
11
5
11
20
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12-5
MINI-EXERCISES
M12–1.
D
1. Less than 20 percent ownership.
D
2. Current fair value.
M12–2.
Held-to maturity investments (+A) …………………………………..
Cash (−A) ………………………………………………………………..
1,350,000
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
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
M12–3.
December 2, 2011:
Investments in SAS (+A) ……………………………………………….
Cash (−A) ……………………………………………………………..
162,500
(6,250 shares x $26 per share); 12.5% ownership of voting stock
Cash (+A) ……………………………………………………………………
(6,250 shares x $3 = $18,750)
Investments in SAS (−A) …………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12-7
M12–4.
December 2, 2011:
Investments in TS (+A) ………………………………………………….
Cash (−A) ……………………………………………………………..
162,500
(6,250 shares x $26 per share); 12.5% ownership of voting common stock
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
M12–5.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
12/2
+162,500
–162,500
M12–6.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
12/2
+162,500
–162,500
Cash (+A) ……………………………………………………………………
18,750
18,750
(6,250 shares x $3 = $18,750)
Investments in TS (−A) ……………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12-8
M12–7.
July 2, 2011:
Cash (+A) ……………………………………………………………………
4,800,000
Investments in affiliates (−A) …………………………………….
4,800,000
(1,200,000 shares x $4 = $4,800,000); 30% ownership
M12–8.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues/
Gains
Expenses/
Losses
Net
Income
7/2
+4,800,000
M12–9.
Property and equipment (+A) …………………………………………
Goodwill (+A) ………………………………………………………………
175,000
Investments in affiliates (+A) ………………………………………….
(30% x $250,000)
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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M12–10.
2012
2013
2014
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
Economic return from
investing
=
.1406 (14.06%)
.2314 (23.14%)
.0183 (1.83%)
M12–11.
Disney reports a large amount of goodwill because it has purchased other businesses,
EXERCISES
E12–1.
Req. 1
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
E12–2.
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.
e
2,500 shares x $17 = $42,500 fair
value.
Cost of $140,000 plus $20,650 ($59,000
x 35%) equity in affiliate’s earnings
minus $4,200 ($12,000 x 35%) dividends
received equals $156,450.
revenue for Company A.
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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E12–3.
June 30, 2011:
Investments in SAS (+A) (9,000 shares x $20) …………………
Cash (–A) ………………………………………………………………..
180,000
Dec. 31, 2011:
Investments in SAS (+A).. ……………………………………………..
Net unrealized losses/gains (+OCI, +SE) ……………………..
36,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2011
$216,000
−
$180,000
=
+$36,000
2012
−
=
Feb. 14, 2014:
Cash (+A) (9,000 shares x $23). …………………………………….
Net unrealized losses/gains (–OCI, –SE) …………………………
Investments in SAS (–A). ……………………………………………
234,000
Gain on sale of investment (+Gain, +SE) ……………………..
27,000
Investments in SAS (+A). ………………………………………………
Net unrealized losses/gains (+OCI, +SE) ……………………..
Net unrealized losses/gains (–OCI, –SE) …………………………
Investments in SAS (–A). ……………………………………………
27,000
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
E12–4.
June 30, 2011:
Investments in TS (+A) ………………………………………………….
Cash (–A) ………………………………………………………………..
180,000
(9,000 shares x $20 per share)
Dec 31, 2011:
Investments in TS (+A) ………………………………………………….
Net unrealized losses/gains (+Gain, +SE) …………………….
36,000
Investment in TS (+A). ………………………………………………….
Net unrealized losses/gains (+Gain, +SE) …………………….
Net unrealized losses/gains (+Loss, –SE) ………………………..
Investments in TS (–A) ………………………………………………
27,000
Computations:
Year
Fair Value
−
Book Value before
Adujustment
=
Amount for
Adjusting Entry
2011
$216,000
−
$180,000
=
+$36,000
2012
−
=
+45,000
2013
−
=
Cash (+A) (9,000 shares x $23) ……………………………………..
Loss on sale of investment (+Loss, –SE) …………………………
Investments in TS (–A). ……………………………………………..
Note: The net unrealized losses/gains 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.
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–13
E12–5.
March 10, 2011:
Investments in SAS (+A) (10,000 shares x $48) ……………….
Cash (–A) ………………………………………………………………..
480,000
Dec. 31, 2013:
Investments in SAS (+A) ……………………………………………….
Net unrealized losses/gains (+OCI, +SE) ……………………..
20,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2011
$490,000
−
$480,000
=
+$10,000
2012
−
=
Investments in SAS (+A) ……………………………………………….
10,000
Net unrealized losses/gains (+OCI, +SE) ……………………..
10,000
Net unrealized losses/gains (–OCI, –SE) …………………………
Investments in SAS (–A) …………………………………………….
140,000
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–14
Sept. 12, 2014:
Cash (+A) (10,000 shares x $33) ……………………………………
Loss on sale of securities (+Loss, –SE) …………………………..
Investments in SAS (–A) …………………………………………….
370,000
Net unrealized losses/gains (+OCI, +SE) ……………………..
110,000
E12–6.
March 10, 2011:
Investments in TS (+A) ………………………………………………….
Cash (–A) ………………………………………………………………..
480,000
(10,000 shares x $48 per share)
Investments in TS (+A) ………………………………………………….
Net unrealized losses/gains – TS (+Gain, +SE) …………….
10,000
Net unrealized losses/gains – TS (+Loss, –SE) ………………..
Investments in TS (–A) ………………………………………………
140,000
Dec. 31, 2013:
Investments in TS (+A) ………………………………………………….
Net unrealized losses/gains – TS (+Gain, +SE) …………….
20,000
Computations:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2011
$490,000
−
$480,000
=
+$10,000
2012
−
=
2013
−
=
+20,000
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–15
Note: The net unrealized losses/gains 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.
E12–7.
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
Req. 2
January 10, 2011:
Investments in affiliates (+A) ………………………………………….
Cash (–A) ………………………………………………………………..
196,625
(17,875 shares x $11 per share) → 27.5% of the voting common stock
Investments in affiliates (+A). …………………………………………
Equity in affiliate earnings (+R, +SE) …………………………...
($80,000 x 27.5% = $22,000)
Cash (+A) ……………………………………………………………………
(17,875 shares x $.60 = $10,725)
Cash (+A) (10,000 shares x $33) ……………………………………
Loss on sale of investment (+Loss, –SE) …………………………
Investments in TS (–A) ………………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–16
Req. 3
Balance Sheet—At December 31, 2011
Long-term Investments:
Investments in affiliates (equity basis*) ………………………………………………..
$207,900
E12–8.
Req. 1 Investing activities
Purchase of investments in affiliated companies (196,625)
E12–9.
(in millions)
Assets (+A, not detailed). ………………………………………………
Equity in affiliate earnings …………………………………………………………………..
$ 22,000
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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E12–10.
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 2011
(-6.28%) primarily due to the negative change in fair value. However, in 2012 and
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
PROBLEMS
P12–1.
Req. 1
When the bonds are purchased, the company increases Held–to-Maturity
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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P12-2.
Req. 1
March 1, 2011
Investments in TS (+A) …………………………………………………
Cash (–A) ………………………………………………………………..
136,000
Req. 2
March 1, 2011
Investments in SAS (+A) ……………………………………………….
Cash (–A) ………………………………………………………………..
136,000
Dec. 31, 2011
Net unrealized losses/gains (–OCI, –SE) …………………………
Investments in SAS (–A) …………………………………………….
Investments in SAS (+A) ……………………………………………….
Investments in SAS (+A) ……………………………………………….
−
−
−
(8,000 shares x $17 per share)
Net unrealized losses/gains (+Loss, –SE) ………………………..
Investments in TS (–A) ………………………………………………
Investments in TS (+A) ………………………………………………….
Investments in TS (+A) ………………………………………………….
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
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P12-3.
a. Investments in SAS (+A) …………………………………………..
Cash (–A) ……………………………………………………………
19,000
b. Cash (+A) ……………………………………………………………….
Dividend revenue (+R, +SE) …………………………………..
7,771
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:
Other investments $14,558
f. Income Statement
Other Items:
Gain on sale of investments $ 2,384
Dividend revenue 7,771
g. If the securities were categorized as trading securities, no net unrealized gain
c. Cash (+A) ……………………………………………………………….
16,531
1,092
Investments in SAS (-A) ………………………………………..
15,239
Gain on sale of investments (+Gain, +SE) ……………….
2,384
d. Investments in SAS (+A) …………………………………………..
5,210
5,210