Chapter 14, P 3. (Continued)
2. User Insight: Goodwill accounts discussed
The Goodwill account would indicate that Arrak Company paid more than fair
value for Bivak Company. On the balance sheet, goodwill appears as an asset.
Consolidated
Sheet
368,000
*** 680,000
** 40,000
4,488,000
*** 960,000
Sheet,
Accounts
Cash
Other assets
Total assets
Accounts payable
Accounts receivable
40,000
3,473,600
640,000
320,000
520,000
Eliminations
Balance
Root
Credit
Balance
1. Worksheet for consolidated balance sheet prepared
Root and Mandela Companies
Work Sheet for Consolidated Balance Sheet
June 30, 2011
Company Company
Balance
Debit
Sheet,
Mandela
48,000
240,000
1,848,000
80,000
160,000
80,000
160,000
400,000
2. User Insight: Minority Interest account discussed
Chapter 14, P 4. (Continued)
The Minority Interest account would indicate that Root owned less than 100 per-
300,000 1st quarter—Dividend 8,000
16,000 2nd quarter—Dividend 8,000
Chapter 14, P 5.
4.
1.
Investment in Kiev Company*
T account prepared
Bon Company records its share of Kiev’s net income as an increase in the in-
2.
If Bon Company owned only 10 percent of Kiev Company, Bon would use the
Beg. Bal.
1st quarter—Income
cost-adjusted-to-market method of accounting. The dividends received would
3.
Because Bon Company owns 40 percent of Kiev Company, Bon would receive
*Each entry represents 40 percent of either earnings or dividends paid.
User Insight: Income statement effects discussed
User Insight: Cash flow effects discussed
User Insight: Percentage ownership effects discussed
Balance Balance
Sheet, Sheet, Consolidated
Company Company Sheet
400,000 120,000 520,000
550,000 1,200,000 1,750,000
Eliminations
Chapter 14, P 6.
Accounts
1. Worksheet for consolidated balance sheet prepared
Cheese and Ham Companies
Work Sheet for Consolidated Balance Sheet
December 31, 2011
Cash
Accounts receivable
Credit
Debit
BalanceCheese Ham
2. User Insight: Goodwill accounts discussed
The Goodwill account would indicate that Cheese Company paid more than fair
value for Ham Company. On the balance sheet, goodwill appears as an asset. You
Chapter 14, P 6. (Continued)
2 184,000
5 36,000
16 36,000
4,000
30 32,000
31 10,000
Drennan stock at $6.00
36,000
to Market
To record reduction of long-term
10,000
32,000
To record purchase of securities below.
Long-Term Investments
184,000
Sept.
July
Unrealized Loss on Long-Term InvestmentsDec.
Allowance to Adjust Long-Term Investments
Cash
Chapter 14, P 7.
Long-Term InvestmentsJan.
1.
May Long-Term Investments
To record purchase of 6,000 shares of
Cash
Loss on Sale of Investments
Journal entries prepared
Cash
2011
Cash
1 4,000
31
9,000
Dividend Income
Chapter 14, P 7. (Continued)
Cash
2012
Feb.
Unrealized Loss on Long-Term Investments
4,000
portfolio to market
Dec.
to Market
To record receipt of a cash dividend from
Kane of $0.20 per share
Cash
To record the adjustment of investment
Parmet for $14 per share
To record purchase of 3,000 shares of
9,000
42,000
Allowance to Adjust Long-Term Investments
User Insight: Effect of investment increases discussed
Chapter 14, P 7. (Continued)
The current method used is cost-adjusted-to-market because all the invest-
2.
16 146,000
15 550,000
550,000
16 150,000
146,000
4,000
2 27,500
27,500
30 55,000
55,000
follows:
Dividend Income
May
Cash
Cash
June
Short-Term Investments
Interest Income
Unrealized Loss on Short-Term Investments
Allowance to Adjust Short-Term
Chapter 14, P 8.
Journal entries prepared1.
Investments to Market
Apr.
Jan.
To record investment in the following
2011
Short-Term Investments
Cash
Short-Term Investments
To record receipt of cash dividends as
14 420,000
400,000
15 450,000
450,000
1 195,500
195,500
30
160,000
160,000
Market Gain/
Cost Value (Loss)
Allowance to Adjust Short-Term Investments
Unrealized Gain on Short-Term Investments
to Market
To record unrealized gain on trading
Security
portfolio:
Short-Term Investments
Chapter 14, P 8. (Continued)
2011
Nov.
Cash
2012
Apr.
MKD Communications
Feb.
Cash
To record investment in 9,000 shares of
Short-Term Investments
Short-Term Investments
Cash
$798,875
Security Cost
bills adjusted for the effects of interest, as follows:
Held-to-maturity securities are debt securities that management intends to hold
User Insight: The statement explained
Short-term investments (at cost)*
Note that short-term investments (at cost) includes the cost of U.S. Treasury*
3.
to their maturity date and whose cash value is not needed until that date. Trad-
Chapter 14, P 8. (Continued)
Balance sheet presentation shown2.
Statement Section Value
Balance sheet Current assets Fair value
Balance sheet Investments Fair value
1.
Chapter 14, C 1.
1. and 2. Items and their value on financial statements identified
Short-term investments
Long-term investments
3. Impairments and unrealized losses discussed
Chapter 14, C 2.
Impairments are declines in the fair value of an investment or other asset that is
judged to be more than temporary, and they are recorded as losses on the in-
corded on a consolidated balance sheet that represents the holdings of
Goodwill is the amount paid for a subsidiary that exceeds the fair value of
the subsidiary’s assets less its liabilities. Minority interest is the amount re-
Chapter 14, C 4.
Southwest Air has very substantial unrealized gains and losses in its other com-
Chapter 14, C 3.
a controlling interest in another company at a price that exceeds the fair value
CVS has an asset called goodwill. Goodwill arises when a company purchases
prehensive income on the statement of stockholders’ equity. The unrealized
1.
2.
3.
4.
Chapter 14, C 5.
Insider trading is the practice of buying or selling shares of a publicly held
company based on information that has not yet been made available to the
Insider trading in the United States is unethical and illegal because of a tra-
dition of full disclosure of information about public companies. No persons
should benefit at the expense of other persons because they are in pos-
This question is not answered in the text but is included to motivate stu-
dents to think about why practices may develop in another country differ-
ently from the way they do in the United States. For example, the principal
reason for different views of insider trading existing previously is that fun-
This question is meant to elicit a number of responses. More students agree
with the approach taken in the United States because of the reason stated
10 577,300
577,300
10 2,070
2,070
10 100,000
2,200
97,800
10 2,070
2,070
1 28,000
25,000
3,000
short-term marketable securities
Dividend Income
Cash
Short-Term Investments
May
To record investment of idle cash in
Jan.
1. Investment transactions recorded
Cash
CashFeb.
Short-Term Investments
CashApr.
Gain on Sale of Investments
Short-Term Investments
To record receipt of dividends on stock
Dividend Income
investments; same amount as above
June
Interest Income
Ford:
To record receipt of dividends on stock
investments
Cash
30 24,750
$ 50,000 $ 55,000 $ 5,000
100,000 92,000 ( 8,000)
304,500 282,750 ( 21,750)
$454,500 $429,750 ($24,750)
10 1,930
1,930
1 481,000
454,500
26,500
Nov. Cash
Short-Term Investments
To record sale of short-term
Chapter 14, C 6. (Continued)
Aug. Cash
Dividend Income
June
Gain on Sale of Investments
Ford:
To record receipt of dividends on stock
investments
Total
Unrealized Loss on Short-Term Investments
McDonald’s (4,000 shares)
Ford (5,000 shares)
IBM (4,350 shares)
$429,750
Allowance account discussed
The balance of Allowance to Adjust Short-Term Investments to Market is not
affected by the sale of securities on November 1. It remains the same as it was
4. Strategy assessed
3.
The strategy used by Malam Christmas Tree Company is acceptable, but there
Chapter 14, C 6. (Continued)
2. Balance sheet presentation on June 30 shown
Short-term investments (at market, cost is $454,500)