Chapter 12 – Reporting and Interpreting Investments in Other Corporations
Req. 1
The fair value method must be used for both the D common stock and F bonds. The
fair value method must be used for D common stock because less than 11.58% of it is
Req. 2
2011
2012
a.
Acquisition of the investments:
Investments in SAS (+A) ……………….
399,000
Cash (–A) ………………………………..
399,000
D common stock: 11,000 shares x $9
F bonds: at par
=
Total investment …………………………….
$399,000
b. Income reported by Corporations D & F:
No entry is required for either security because, under the fair value method,
revenue is recognized only when dividends are declared or interest is earned.
Cash (+A) ……………………………………
2011:
D common stock: 11,000 shares x $.70
=
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–22
P12–4. (continued)
2011
2012
d.
Fair value effects:
Investment in SAS (+A)…………………
26,500
Net unrealized losses/gains (+OCI, +SE)
26,500
Computations:
Year
Corporation
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2011
D
$88,000
−
$99,000
=
−$11,000
−
=
2012
D
−
=
−
=
Req. 3
a.
Balance Sheet:
2011
2012
Long-term Investments:
Investments in SAS (at fair value) ……………………………….
$368,000
$394,500
b.
Net unrealized losses/gains ………………………………………..
)
)
c.
Income Statement:
Dividend revenue ………………………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
P12–5.
Req. 1
Aug. 4, 2012
Investments in TS (+A)………………………………………………….
150,000
Cash (–A) ……………………………………………………….
150,000
Dec. 31, 2012
Investments in TS (+A)………………………………………………….
21,000
Net unrealized losses/gains (+Gain, +SE) …………………….
21,000
June 1, 2013
Cash (+A) ……………………………………………………….
Dividend revenue (+R, +SE) …………………………..
Investments in TS (–A) ………………………………………………
18,000
June 1, 2014
Cash (+A) ……………………………………………………….
Dividend revenue (+R, +SE) …………………………..
Dec. 31, 2014
Net unrealized losses/gains (+Loss, –SE)………………………..
Investments in TS (–A) ………………………………………………
24,000
Computations for Year-End Adjustments to Market:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2012
$171,000
−
$150,000
=
+$21,000
2013
−
=
2014
−
=
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–24
P12–5. (continued)
Req. 2
Aug. 4, 2012
Investments in SAS (+A) ………………………………………………
150,000
Cash (–A) ……………………………………………………….
150,000
Dec. 31, 2012
Investments in SAS (+A) ………………………………………………
21,000
Net unrealized losses/gains (+OCI, +SE) ……………………
21,000
Computations for Year-End Adjustments to Market:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2012
$171,000
−
$150,000
=
+$21,000
2013
−
=
2014
−
=
June 1, 2013
Cash (+A) ……………………………………………………….
Dividend revenue (+R, +SE) …………………………..
Dec. 31, 2013
Net unrealized losses/gains (–OCI, –SE) ………………………..
Investments in SAS (–A) …………………………..
June 1, 2014
Cash (+A) ……………………………………………………….
Dividend revenue (+R, +SE) …………………………..
Dec. 31, 2014
Net unrealized losses/gains (–OCI, –SE) ………………………..
Investments in SAS (–A) …………………………..
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
P12–5. (continued)
Req. 3
Aug. 4, 2012
Investments in affiliates (+A) ………………………………………….
150,000
Cash (–A) ………………………………………………………………..
150,000
Investments in affiliates (+A) ………………………………………….
13,500
Equity in affiliate earnings (+R, +SE) …………………………...
(30% x $45,000)
Cash (+A) ……………………………………………………………………
Investments in affiliates (–A) ……………………………………….
6,000
Dec. 31, 2013
Investments in affiliates (+A) ………………………………………….
13,500
Equity in affiliate earnings (+R, +SE) …………………………...
13,500
(30% x $45,000)
June 1, 2014
Cash (+A) ……………………………………………………………………
6,000
Investments in affiliates (–A) ……………………………………….
6,000
Investments in affiliates (+A) ………………………………………….
13,500
Equity in affiliate earnings (+R, +SE) …………………………...
(30% x $45,000)
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–26
P12–6.
Req. 1
CASE A
The fair value method must be used by Company P because it owns 12%
(3,000 ÷ 25,000) of the total outstanding common shares of Company T. The
fair value method must be used when less than 20% of the outstanding shares
are owned because the investor (Company P) cannot exercise significant
influence or control.
Req. 2
Case A-12%
Case B-35%
a.
January 1, 2011 purchase:
Investments in SAS (+A) ……………….
75,000
Cash (–A) ………………………………..
75,000
(3,000 shares x $25)
Investments in affiliates (+A) ………….
Cash (–A) ………………………………..
(8,750 shares x $25)
b.
Income reported by Company T:
Investments in affiliates (+A) ………….
Equity in affiliate earnings (+R, +SE)
($45,000 x 35%)
c.
Dividends declared and paid by Co. T:
Cash (+A) …………………………………..
1,980
Dividend revenue (+R, +SE) ……..
1,980
•
($16,500 x 12%)
•
Cash (+A) ……………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–27
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–28
P12–6. (continued)
Req. 3
Case A-12%
Case B-35%
Balance Sheet:
Investments:
(1) Cost $75,000 – Year-end adjustment to fair value $9,000 = $66,000 fair value
(reported on balance sheet)
(2) Cost $218,750 + % Affiliate’s net income $15,750 – % Affiliate’s dividends
declared $5,775 = $228,725 book value (reported on balance sheet)
Req. 4
Assets (investments), stockholders’ equity (retained earnings), and revenues (from
Investments in SAS (1) ……………………
)
Income Statement:
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
P12–7.
Req. 1
CASE
A
The fair value method must be used by the company because it owns 10% (10,000
÷ 100,000) of the total shares of the outstanding common stock of Cruise
Corporation. The fair value method must be used when less than 20% of the
outstanding stock is owned because the investor cannot exercise either significant
influence or control.
Req. 2
Case A-10%
Case B-40%
a.
Jan. 10, 2011 purchase:
Investments in SAS (+A) ……………………
200,000
Cash (–A) ………………………………….
200,000
(10,000 shares x $20)
Investments in affiliates (+A) ………………
800,000
Cash (–A) ………………………………….
800,000
(40,000 shares x $20)
b.
Net income of Cruise Co.:
Investments in affiliates (+A) ………………
Equity in affiliate earnings (+R, +SE)
c.
Dividends paid by Cruise Corporation:
Cash (+A) ……………………………………
Cash (+A) ……………………………………
24,000
Investments in affiliates (–A) ………
24,000
(40,000 shares x $.60)
d.
Year-end valuation:
Net unrealized losses/gains (–OCI, –SE)
20,000
None2
Investments in SAS (–A) ……………
20,000
[10,000 x ($18 fair value – $20 cost) = −$20,000]
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–30
P12–7. (continued)
Req. 3
Case A
Case B
a.
Balance Sheet:
Long-term Investments:
Investments in SAS, at fair value (1) …………………………...
$180,000
Investments in affiliates (2) …………………………………………
$888,000
(1) Cost $200,000 – Year-end adjustment to fair value $20,000 = Fair value $180,000
reported on the balance sheet
b.
Net unrealized losses/gains ……………………………………
)
c.
Income Statement:
Equity in affiliate earnings …………………………………………
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
P12-8.
a. Investments in affiliates (+A) ……………………………………..
12,844
Cash (–A) ……………………………………………………………
12,844
b. Cash (+A) ……………………………………………………………….
10,102
c. Investments in affiliates (+A) ……………………………………..
d. Balance Sheet
Assets:
Investments in affiliates $89,230
e. Income Statement
P12–9.
Since Bradford Company acquired 45% (40,500/90,000) of Hall’s outstanding
common stock, this investment is accounted for using the equity method.
Statement of Cash Flows:
Operating activities
Net Income $xxx,xxx
Adjusted for:
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–32
P12–10.
Req. 1
Purchase price for the net assets $124,000
Req. 2
Property and equipment (+A) …………………………………………
72,000
Patent (+A) …………………………..…………………………………….
4,000
Goodwill (+A) ………………………………………………………………
37,000
12,000
P12–11.
Req. 1
2008
Dividends + Change in Fair Value
$282 – $210*
Beginning Fair Value of Investments
$1,538
Req. 2
The economic return from investing measures the performance of a company’s
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–33
ALTERNATE PROBLEMS
AP12–1.
Req. 1
When the bonds were purchased, the company increased Held-to-Maturity
Investments and decreased Cash.
Req. 2
When interest was received on the investments, Cash increased (based on the
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
12–34
AP12–2.
Req. 1
Sept 15, 2011
Investments in TS (+A) ………………………………………………….
224,000
Cash (– A) [7,000 shares x $32] ………………………………….
224,000
Dec. 31, 2011
Investments in TS (+A) ………………………………………………….
14,000
Net unrealized losses/gains (+Gain, +SE) …………………….
14,000
Computations for Year-End Adjustments to Market:
Year
Fair Value
−
Book Value before
Adjustment
=
Amount for
Adjusting Entry
2011
$238,000
−
$224,000
=
+$14,000
2012
−
=
2013
−
=
28,000
Chapter 12 – Reporting and Interpreting Investments in Other Corporations
Req. 2
Sept 15, 2011
Investments in SAS (+A) ……………………………………………….
224,000
Cash (– A) …………………………..…………………………………..
224,000
Investments in SAS (+A) ……………………………………………….
Net unrealized losses/gains (–OCI, – SE) ………………………..
Investments in SAS (– A) ……………………………………………
Net unrealized losses/gains (–OCI, – SE) ………………………..
Investments SAS (– A) ………………………………………………