*PROBLEM 17.14
(a) January 7, 2020
Put Option ……………………………………………………… 360
Cash ………………………………………………………… 360
(b) March 31, 2020
Put Option ……………………………………………………… 2,000
(d) July 6, 2020
Put Option ($5 X $400) …………………………………….. 2,000
Unrealized Holding Gain or Loss—Income …. 2,000
Unrealized Holding Gain or Loss—Income ……….. 65
Put Option ($90 – $25) ………………………………. 65
*PROBLEM 17.15
(a) (1) No entry necessary at the date of the swap because the fair value
of the swap at inception is zero.
(2) June 30, 2021
(3) June 30, 2021
Cash …………………………………………………………… 50,000
(4) June 30, 2021
Notes Payable …………………………..………………… 200,000
Unrealized Holding Gain or Loss—Income .. 200,000
(5) June 30, 2021
Unrealized Holding Gain or Loss—Income ……. 200,000
*PROBLEM 17.15 (Continued)
(c) Financial statement presentation as of June 30, 2021
Balance Sheet
Liabilities
(d) Financial statement presentation as of December 31, 2021
Balance Sheet
Assets
Swap contract $ 60,000
Liabilities
Notes payable 10,060,000
*Swap receivable
(8% X 10,000,000 X 1/2) 400,000
Payable at LIBOR
(7.5% X 10,000,000 X 1/2) (375,000)
*PROBLEM 17.16
(a) April 1, 2020
Memo entry to indicate entering into the futures contract.
(b) June 30, 2020
Futures Contract …………………………..………………… 5,000
(d) October 10, 2020
Inventory ……………………………………………………….. 157,500
Cash ($315 X 500 ounces) …………………………. 157,500
(e) December 20, 2020
Cash ………………………………………………………………. 350,000
Sales Revenue ………………………………………….. 350,000
*PROBLEM 17.16 (Continued)
(f) LEW JEWELRY COMPANY
Partial Balance Sheet
At June 30, 2020
Current Assets
Futures contract ……………………………………………………….. $5,000
(g) LEW JEWELRY COMPANY
Income Statement
For the Quarter Ended December 31, 2020
Sales revenue …………………………………………………………… $350,000
*PROBLEM 17.17
(a) (1) October 15, 2020
Inventory …………………………………………………. 240,000
(2) October 31, 2020
Unrealized Holding Gain or Loss—Income …. 125
Put Option ($300 – $175) ………………………. 125
(3) November 30, 2020
Unrealized Holding Gain or Loss—Income …. 70
Put Option ($175 – $105) ………………………. 70
*PROBLEM 17.17 (Continued)
(4) December 31, 2020
Unrealized Holding Gain or Loss—Income …. 65
Put Option ($105 – $40) ………………………… 65
(b) OIL PRODUCTS COMPANY
Partial Balance Sheet
At November 30, 2020
Assets
Inventory ($240,000 − $8,000 − $4,000) ………………. $228,000
(c) OIL PRODUCTS COMPANY
Partial Balance Sheet
At December 31, 2020
Assets
Inventory ($228,000 − $12,000) ………………………….. $216,000
Put option ($12,105 − $65 + $12,000) …………………. 24,040*
*PROBLEM 17.17 (Continued)
OIL PRODUCTS COMPANY
Income Statement
For the Month Ended December 31, 2020
Other Income (Loss)
Unrealized Holding Loss (Inventory) …………….. $(12,000)
Unrealized Holding Gain—put option …………….. $11,935
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 17.1 (Time 25–30 minutes)
Purpose—To provide the student with an opportunity to discuss the issues raised by FASB in
CA 17.2 (Time 25–30 minutes)
Purpose—To provide the student with an opportunity to discuss the justification for using fair value as a
CA 17.3 (Time 20–30 minutes)
Purpose—To provide the student with an understanding of the accounting applications dealing with
CA 17.4 (Time 15–25 minutes)
CA 17.5 (Time 25–35 minutes)
Purpose—To provide the student with an opportunity to discuss the equity method of accounting and
CA 17.6 (Time 25–35 minutes)
Purpose—To provide the student an opportunity to examine the ethical issues related to fair value
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 17.1
Situation 1 GAAP requires that debt securities which are classified as trading securities be
reported on the balance sheet at their fair value amount. Any changes in the fair
value of trading debt securities from one period to another are included in earnings.
Therefore, the $4,200 decrease will be reported on the income statement as an
unrealized holding loss.
Situation 4 When a reduction in the fair value of a debt security classified as held-to–maturity is
considered to be an impairment, the new cost basis of the security is its fair value.
The security is written down to the fair value amount and the loss is included in
CA 17.2
(a) The reporting of equity securities at fair value provides the financial statement user with more
relevant financial information. The fair value of the securities is essentially the present value of
CA 17.2 (Continued)
(b) Lexington Company should record the following journal entry and then report the following
amounts on its balance sheet.
December 31, 2020
Unrealized Holding Gain or Loss—Income …………………………….. 1,100
(c) No, Lexington Company did not properly account for the sale of the Summerset Company stock.
The cost basis of the Summerset stock is still $9,500. Therefore, Lexington should have recorded
a $300 ($9,200 – $9,500) loss on investments as follows:
Cash ………………………………………………………………………………… 9,200
Loss on Sale of Investments ………………………………………………… 300
Equity Investments ……………………………………………………. 9,500
(d) December 31, 2021
Fair Value Adjustment ……………………………………………………….. 1,500
Unrealized Holding Gain or Loss—Income …………………….. 1,500
CA 17.3
Situation 1 The carrying value of the trading debt investment will be the fair value on the date of
the transfer. The unrealized holding loss, the difference between the current fair
value and the cost, will be recognized immediately.
CA 17.4
Since Fontaine Company purchased 40% of Knoblett Company’s outstanding stock, Fontaine is
considered to have significant influence over Knoblett Company. Therefore, Fontaine will account for
this investment using the equity method. The investment is reported on the December 31 balance sheet
CA 17.5
Memo on accounting treatment to be accorded Investment in Spoor Corporation:
Selig Company should follow the equity method of accounting for its investment in Spoor Corporation
because Selig Company is presumed to be able to exercise significant influence over the operating and
CA 17.6
(a) Classifying the securities as they propose will indeed have the effect on net income that they say
it will. Classifying all the gains as from trading securities will cause all the gains to flow through
the income statement this year and classifying the losses as held-to-maturity will defer the losses
from this year’s income statement. Classifying the gains and losses in the opposite manner will
have the opposite effect.
(b) What each proposes is unethical since it is knowingly not in accordance with GAAP. The financial
FINANCIAL REPORTING PROBLEM
(a) P&G shows available-for-sale investments in the current assets section of its balance sheet in the
amount of $9,568 million. No other investments are reported. In its summary of significant
accounting policies (note 1), P&G states:
Investments
Investment securities consist of readily marketable debt and equity securities. Unrealized gains or
losses from investments classified as trading, if any, are charged to earnings. Unrealized gains or
losses on securities classified as available-for-sale are generally recorded in OCI. If an available-for-
(b) Per P&G’s summary of significant accounting policies (note 1):
Fair Values of Financial Instruments
Certain financial instruments are required to be recorded at fair value. Changes in assumptions or
Fair Value Hierarchy
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that
financial assets and liabilities carried at fair value be classified and disclosed in one of the following
categories:
1. Level 1: Quoted market prices in active markets for identical assets or liabilities.
2. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
FINANCIAL REPORTING PROBLEM (Continued)
When active market quotes are not available for financial assets and liabilities, we use industry
standard valuation models. Where applicable, these models project future cash flows and discount the
future amounts to a present value using market- based observable inputs including credit risk, interest
Fair Value Asset
As of June 30 2017 2016
Investments:
U.S. government securities $ 6,297 $ 4,839
Corporate bond securities 3,271 1,407
Other investments 132 28
TOTAL $ 9,700 $ 6,274
Investment securities are presented in Available-for-sale investment securities and Other noncurrent
assets. The amortized cost
of the U.S. government securities with maturities less than one year was
The fair value of long-term debt was $21,396 and $24,362 as of June 30, 2017 and 2016, respectively.
This includes the current
portion of debt instruments ($1,694 and $2,761 as of June 30, 2017 and 2016,
respectively). Certain long-term debt approximates
fair value. Certain long-term debt is not recorded at
FINANCIAL REPORTING PROBLEM (Continued)
NOTE 9
RISK MANAGEMENT ACTIVITIES AND FAIR VALUE
MEASUREMENTS
As a multinational company with diverse product offerings, we are exposed to market risks, such as
changes in interest rates, currency exchange rates and commodity prices. We evaluate exposures on a
centralized basis to take advantage of natural exposure correlation and netting. To the extent we
choose to manage volatility associated with the net exposures, we enter into various financial
transactions that we account for using the applicable accounting guidance for derivative instruments
Credit Risk Management
We have counterparty credit guidelines and normally enter into transactions with investment grade
financial institutions, to the extent commercially viable. Counterparty exposures are monitored daily and
downgrades in counterparty credit ratings are reviewed on a timely basis. We have not incurred, and do
not expect to incur, material credit losses on our risk management or other financial instruments.
Interest Rate Risk Management
Our policy is to manage interest cost using a mixture of fixed rate and variable-rate debt. To manage
this risk in a cost efficient manner, we enter into interest rate swaps whereby we agree to exchange
with the counterparty, at specified intervals, the difference between fixed and variable interest amounts
calculated by reference to a notional amount.
FINANCIAL REPORTING PROBLEM (Continued)
Foreign Currency Risk Management
We manufacture and sell our products and finance our operations in a number of countries throughout
the world. As a result, we are exposed to movements in foreign currency exchange rates.
To manage the exchange rate risk primarily associated with the financing of our operations, we have
historically used a combination of forward contracts, options and currency swaps. Historically, we have
Net Investment Hedging
We hedge certain net investment positions in foreign subsidiaries. To accomplish this, we either borrow
directly in foreign currencies and designate all or a portion of the foreign currency debt as a hedge of
the applicable net investment position or we enter into foreign currency swaps that are designated as
Commodity Risk Management
Certain raw materials used in our products or production processes are subject to price volatility caused
by weather, supply conditions, political and economic variables and other unpredictable factors. To
Insurance
We self-insure for most insurable risks. However, we purchase insurance for Directors and Officers
COMPARATIVE ANALYSIS CASE
THE COCA-COLA COMPANY and PEPSICO, INC.
(a)
Coca-Cola
PepsiCo
(1)
Cash used in investing activities
$(2,385)
$(4,403)
(2)
Other comprehensive income (loss)
$(2,221)
$(5,770)
(c) Cost method investments
Cost method investments are initially recorded at cost, and we record
dividend income when applicable dividends are declared. Cost
method investments are reported as other investments in our
FINANCIAL STATEMENT ANALYSIS CASE
UNION PLANTERS
(a) While banks are primarily in the business of lending money, they also
need to balance their asset portfolio by investing in other assets. For
(b) Trading securities are shown on the balance sheet at current fair value,
and any unrealized gains and losses resulting from reporting them at
fair value are reported as part of income. Available-for-sale securities
(c) Securities are reported in three different categories because these three
different categories reflect the likelihood that any unrealized gains and
losses will eventually be realized by the company. That is, trading
FINANCIAL STATEMENT ANALYSIS CASE (Continued)
(d) The answer to this involves selling your “winner” bonds in your available-
for-sale portfolio at year-end. Union Planters could have increased
reported net income by $108 million (clearly, a material amount when