1. A company may temporarily have excess cash that is not needed for use in its current
operations. Instead of letting excess cash remain idle, most companies invest their excess
cash in temporary investments. The primary objective of investing in temporary investments
is as follows:
a. Earn interest revenue
b. Receive dividends
c. Realize gains from increases in the market price of the securities
4. An investment greater than 50% of the investee is considered to be an investment that has
control over the investee (subsidiary). Thus, the financial statements of the investee (subsidiary)
are consolidated (combined) with that of the investor (parent company).
5. A gain or loss can occur when the selling price of the bond differs from the book value of the bond.
The price of bond investments can change due to changes in the market rate of interest. If the
p
roceeds from the sale exceed the book value of the bonds, a gain is recorded.
6. Both portfolios are reported at fair value. However, changes in the fair value of trading securities
during a period are reported as an unrealized gain or loss on the income statement. For available-for-
sale securities, changes in the fair value of the securities are reported in stockholders’ equity and,
thus, are not recognized as part of net income.
7. A credit balance in Valuation Allowance for Trading Investments is subtracted from Trading
Investments (at cost). The net amount is the trading investments at fair value.
p
CHAPTER 15
INVESTMENTS
DISCUSSION QUESTIONS
CHAPTER 15 Investments
PE 15-1A
23 Investments—Aurora Company Stock 375,150
Cash 375,150
* (15,000 shares × $25 per share) + $150
10 Cash 185,900
Gain on Sale of Investments 35,840
Investments—Aurora Company Stock 150,060
* (6,000 shares × $31) – $100
** 6,000 shares × ($375,150 ÷ 15,000 shares)
PE 15-1B
12 Investments—Denver Company Stock 120,300
Cash 120,300
* (3,000 shares × $40 per share) + $300
* $0.80 per share × 3,000 shares
10 Cash 57,450
Loss on Sale of Investments 6,710
Investments—Denver Company Stock 64,160
* (1,600 shares × $36) – $150
** 1,600 shares × ($120,300 ÷ 3,000 shares)
PRACTICE EXERCISES
Nov.
June
Sept.
Jan.
*
*
**
*
*
**
CHAPTER 15 Investments
PE 15-2A
20Y7
2 Investment in Violet Company Stock 720,000
Cash 720,000
31 Cash 12,000
Investment in Violet Company Stock 12,000
* 30% × $40,000
20Y8
31 Cash 770,000
Gain on Sale of Violet Company Stock 5,000
Investment in Violet Company Stock 765,000
* $720,000 + $57,000 – $12,000
PE 15-2B
20Y4
2 Investment in Aloof Company Stock 340,000
Cash 340,000
31 Investment in Aloof Company Stock 72,000
Income of Aloof Company 72,000
Recorded 40% of Aloof Company income,
40% × $180,000.
Jan.
Jan.
Dec.
Jan.
*
*
PE 15-3A
a. Investments—Vasquez City Bonds 420,000
Interest Receivable 6,300
Cash 426,300
*Sales proceeds ($210,000 × 99%)………………………
…
$207,900
Accrued interest……………………………………………
…
1,050
Total proceeds from sale…………………………………
…
$208,950
d. Cash 210,000
Investments—Vasquez City Bonds 210,000
PE 15-3B
a. Investments—Hotline Inc. Bonds 180,000
Interest Receivable 1,500
Cash 181,500
c. Cash 92,550
Interest Revenue 750
Gain on Sale of Investments 1,800
Investments—Hotline Inc. Bonds 90,000
…
…
…
d. Cash 90,000
Investments—Hotline Inc. Bonds 90,000
*
CHAPTER 15 Investments
PE 15-4A
PE 15-4B
20Y9
31 Valuation Allowance for Trading Investments
Unrealized Gain on Trading Investments 6,500
To record increase in fair value of
trading investments.
*Trading investments at fair value, December 31 …………………………
…
$79,100
Less trading investments at cost, December 31 …………………………
…
72,600
Unrealized gain on trading investments……………………………………
…
$ 6,500
PE 15-5A
20Y5
PE 15-5B
20Y7
31 Valuation Allowance for Available-for-Sale
Investments
Unrealized Gain on Available-for-Sale
Investments 3,830
To record increase in fair value of
available-for-sale securities.
*Available-for-sale investments at fair value, December 31 ………………
…
$22,870
Less available-for-sale investments at cost, December 31 ………………
…
19,040
Unrealized gain on available-for-sale investments………………………… $ 3,830
Dec. 6,500
Dec.
3,830
*
*
…
…
…
PE 15-6A
$8.00
$100.00
Dividends per Share of Common Stock
Market Price per Share of Common Stock
Dividend Yield
= 0.08, or 8%
=
=
CHAPTER 15 Investments
Ex. 15-1
a. 22 Investments—Jupiter Co. Stock 850,680
Cash 850,680
* (34,000 shares × $25) + $680
c. 12 Cash 216,900
Gain on Sale of Investments 41,760
Investments—Jupiter Co. Stock 175,140
* (7,000 shares × $31) – $100
** ($850,680 ÷ 34,000 shares) × 7,000 shares
d. 31 Valuation Allowance for Equity
Ex. 15-2
Apr. 10 Investments—Delew Company Stock 660,220
Cash 660,220
* (11,000 shares × $60) + $220
Sept. 10 Cash 161,910
Loss on Sale of Investments 18,150
Investments—Delew Company Stock 180,060
* (3,000 shares × $54) – $90
** 3,000 shares × ($660,220 ÷ 11,000 shares)
Dec.
EXERCISES
Feb.
Nov.
*
*
**
*
*
**
CHAPTER 15 Investments
Ex. 15-3
2 Investments—Celeste Inc. Stock 99,324
Cash 99,324
* (3,100 shares × $32) + $124
7 Investments—Celeste Inc. Stock 53,256
Cash 53,256
* (1,400 shares × $38) + $56
*(4,000 shares × $41) – $100
** 3,100 shares purchased……………………………………………………
…
$ 99,324
900 shares × ($53,256 ÷ 1,400 shares)……………………………………
…
34,236
Total cost………………………………………………………………………
…
$133,560
25 Cash 310
Dividend Revenue 310
* 500 shares × $0.62
Feb.
June
Sept.
*
*
*
CHAPTER 15 Investments
Ex. 15-4
Feb. 24 Investments—Tett Co. Stock 85,150
Cash 85,150
* (1,000 shares × $85) + $150
May 16 Investments—Issacson Co. Stock 90,100
Cash 90,100
* (2,500 shares × $36) + $100
Aug. 12 Cash 24,295
Loss on Sale of Investments 2,735
Investments—Issacson Co. Stock 27,030
* (750 shares × $32.50) – $80
** 750 shares × ($90,100 ÷ 2,500 shares)
Oct. 31 Cash 240
Dividend Revenue 240
* (1,000 shares – 400 shares) × $0.40
Ex. 15-5
a. 1. Investment in Tran Corp. Stock 210,000
Income of Tran Corp. 210,000
To record 35% share of Tran Corp.
net income [$600,000 × (280,000 shares ÷
800,000 shares)].
2. Cash 140,000
Investment in Tran Corp. Stock 140,000
* 280,000 shares × $0.50
*
*
*
**
*
*
CHAPTER 15 Investments
Ex. 15-6
a.
4 Investment in Silva Company Stock 14,400,000
Cash 14,400,000
* 480,000 shares × $30 per share
2 Cash 300,000
Investment in Silva Company Stock 300,000
* $750,000 × (480,000 ÷ 1,200,000 shares)
b. Initial acquisition cost…………………………………………………………
…
$14,400,000
Equity earnings for 20Y4………………………………………………………
…
800,000
Cash dividends received………………………………………………………
…
(300,000)
Investment in Silva Company Stock balance,
December 31, 20Y4……………………………………….…………………… $14,900,000
Ex. 15-7
a.
6 Investment in Gator Co. Stock 212,000
Cash 212,000
b. Initial acquisition cost…………………………………………………………
…
$212,000
Equity loss for 20Y8……………………………………………………………
…
(19,040)
Cash dividends received………………………………………………………
…
(8,160)
Investment in Gator Co. Stock balance, December 31, 20Y8……………
…
$184,800
20Y4
July
Jan.
20Y8
Jan.
*
*
CHAPTER 15 Investments
Ex. 15-7 (Concluded)
c. Under the equity method, the investor will record its proportionate share of
the net increase (or decrease) of the book value of the investee resulting from
earnings and dividend distributions. The fair value method uses market price
Ex. 15-8
Investment in Raven Company stock, December 31, 20Y5……………………
…
Plus equity earnings in Raven Company…………………………………………
…
Less dividends received*……………………………………………………………
…
Investment in Raven Company stock, December 31, 20Y6……………………
…
$281
(in millions)
$264
25
(8)
CHAPTER 15 Investments
Ex. 15-9
a. 1 Investments—Marimar Co. Bonds 150,000
Cash 150,000
b. 1 Cash 4,500
Interest Revenue 4,500
$150,000 × 6% × 6/12.
Ex. 15-10
a.
1 Investments—Effenstein Corp. Bonds 240,000
Cash 240,000
c.
1 Cash 9,600
Interest Receivable 4,800
Interest Revenue 4,800
* $240,000 × 8% × 3/12
e.
1 Cash 150,000
Investments—Effenstein Corp. Bonds 150,000
20Y8
Oct.
Nov.
May
20Y1
Oct.
Apr.
20Y2
*
CHAPTER 15 Investments
Ex. 15-11
a.
11 Investments—Lumpkin County Bonds 360,000
Interest Receivable 2,400
Cash 362,400
* $360,000 × 6% × 40 ÷ 360
c. 31 Cash 88,450
Loss on Sale of Investments 2,000
Interest Revenue 450
Investments—Lumpkin County Bonds 90,000
*Bond sale ($90,000 × 0.98)………………………………… $88,200
Accrued interest ($90,000 × 6% × 30 ÷ 360)……………
…
450
Less brokerage commission……………………………
…
(200)
Total proceeds………………………………………………
…
$88,450
Investments—Lumpkin County Bonds 270,000
May
Year 1
Oct.
*
*
CHAPTER 15 Investments
Ex. 15-12
a. 31 Investments—Government Bonds 75,000
Interest Receivable 375
Cash 75,375
* $75,000 × 6% × 30 ÷ 360
30 Cash 34,650
Loss on Sale of Investments 700
Interest Revenue 350
Investments—Government Bonds 35,000
*Bond sale ($35,000 × 98%)………………………………
…
$34,300
Accrued interest ($35,000 × 6% × 60/360)……………
…
350
Total proceeds from sale…………………………………
…
$34,650
c. 1 Cash 40,000
Investments—Government Bonds 40,000
Ex. 15-13
Interest earned
(
Februar
y
1 to Jul
y
1
)
1
…………………………………………… $2,500
Interest earned on sold bonds
(
Jul
y
1 to October 1
)
2
…………………………
…
500
Interest earned on remainin
g
bonds
(
Jul
y
1 to December 31
)
3
……………… 2,000
Total interest earned during the year……………………………………………
…
$5,000
July
Jan.
Aug.
*
*
CHAPTER 15 Investments
Ex. 15-14
a. {$35,000 [from (c)] – $29,000 [from (b)]}
b. [$17,000 – $(12,000)]
c. ($245,000 – $210,000)
d. ($144,000 – $12,000)
Ex. 15-15
a.
24 Trading Investments—Raiders Inc. 551,000
Cash 551,000
b. The unrealized gain or unrealized loss on trading investments is reported
on the income statement as Other Revenue (or a separate item if significant).
Unrealized losses would be deducted in determining net income, while
unrealized gains would be added in determining net income.
c. The unrealized gain on available-for-sale investments of $58,000 would be
reported as an addition to stockholders’ equity on the balance sheet. The
debit balance of Valuation Allowance for Available-for-Sale Investments of
$58,000 would be added to the balance of the investments account of
$551,000 to report the fair value of $609,000 on the balance sheet.
Ex. 15-16
a.
31 Unrealized Loss on Trading Investments 1,950
20Y3
Dec.
$6,000
$29,000
$35,000
Feb.
$132,000
20Y7
CHAPTER 15 Investments
Ex. 15-16 (Concluded)
b.
10 Trading Investments—Carroll Inc. 34,900
Cash
c.
31 Valuation Allowance for Trading
Investments 24,550
* Since the Valuation Allowance for Trading Investments has an “unadjusted” credit balance of
$1,950 on December 31, 20Y4, $1,950 must be added to arrive at an “adjusted” balance of
$22,600 ($175,000 – $117,500 – $34,900) on December 31, 20Y4.
d. $175,000; the fair value of the trading investments, which is the sum of the
trading investments account of $152,400 and the valuation account of $22,600.
Ex. 15-17
* $337,500 – $320,000, as determined from the following schedule:
Issuing Company Cost
Arden Enterprises Inc. ……………………………………………………… $150,000
French Broad Industries Inc. ………………………………………………
…
66,000
Pisgah Construction Inc. …………………………………………………… 104,000
Total………………………………………………………………………… $320,000
b. There would be no adjusting entry for December 31, 20Y6, if the fair value of
the portfolio of securities is unchanged from December 31, 20Y5. This is
34,900
$170,000
Dec.
20Y4
May
20Y4
Fair Value
Dec. 31, 20Y5
71,500
96,000
$337,500
CHAPTER 15 Investments
Ex. 15-17 (Concluded)
c.
31 Valuation Allowance for Available-for-
Sale Investments 2,500
Unrealized Gain on Available-
d.
31 Unrealized Loss on Available-for-Sale
Investments 7,500
Valuation Allowance for Available-
for-Sale Investments
Ex. 15-18
Ex. 15-19
a. Current: Dividend Yield = $1.68 ÷ $101.57 = 1.65%
Previous: Dividend Yield = $1.56 ÷ $85.95 = 1.82%
b. Dividends per share increased in the current year from the previous year. The
dividend yield, however, decreased from 1.82% in the previous year to 1.65% in the
current year. This decrease is a result of a decrease in the dividend relative to stock
price. Microsoft provides a small return to the shareholder in terms of a dividend
yield and an additional return in terms of price appreciation of the stock.
Ex. 15-20
7,500
Dividend Yield Cash Dividends per Share of Common Stock
Market Price per Share of Common Stock
20Y6
Dec.
2.1%
=
=$198.01
$4.19 =
20Y6
Dec.
CHAPTER 15 Investments
Appendix Ex. 15-21
Net income
Other comprehensive income (loss):
Valur Co.
For the Year Ended December 31, 20Y8
$210,000
CHAPTER 15 Investments
Prob. 15-1A
1.
1 Investments—Caldwell Inc. Stock 375,075
Cash 375,075
* (7,500 shares × $50 per share) + $75
31 Cash 1,500
Dividend Revenue 1,500
* (7,500 shares – 4,500 shares) × $0.50
Nov. 15 Cash 152,910
Gain on Sale of Investments 2,880
Investments—Caldwell Inc. Stock 150,030
* (3,000 shares × $51 per share) – $90
** 3,000 shares × ($375,075 ÷ 7,500 shares)
PROBLEMS
20Y2
Feb.
*
*
*
**
CHAPTER 15 Investments
Prob. 15-1A (Concluded)
1 Trading Investments—Fuller Inc. 125,000
Cash 125,000
14 Cash 30,000
Gain on Sale of Investments 5,000
2.
Current assets:
Trading investments (at cost) $226,000
3. Unrealized gains or losses are reported on the income statement, often as
“Other Revenue (Losses).” For 20Y2, Rios Co. would have reported an
unrealized loss of $6,000 as “Other Losses.” For 20Y3, Rios Co. would have
Rios Co.
Oct.
Balance Sheet (selected items)
December 31, 20Y3
20Y3
Apr.
*
**