B-37
Problem C-2B (Continued)
Year 2
Apr. 26
Cash ………………………………………………………………………………
51,250
Loss on Sale of Debt Investments …………………………..
5,000
Debt Investments—AFS …………………………..
56,250
Sold
Ford
notes.
Debt Investments—AFS …………………………………………………..
34,650
Cash ……………………………………………………….
34,650
Purchased
Debt Investments—AFS …………………………………………………..
Cash ……………………………………………………….
Purchased
Nov. 27
Cash ……………………………………………………………………………..
Gain on Sale of Debt Investments …………………………..
2,400
28,200
Sold
Polaroid
bonds.
Dec. 31
Unrealized Gain—Equity ………………………………………………….
1,400
Fair Value Adjustment—AFS* …………………………..
1,400
Adjustment to fair value of LT AFS portfolio.
*
Cost _
Fair Value
Apple ………..
$30,600
$31,000
Duracell …….
34,650
32,400
Sears ………..
End.
Problem C-2B (Continued)
Year 3
Jan. 28
Debt Investments—AFS …………………………………………………..
40,000
Cash ……………………………………………………….
40,000
Purchased
Coca-Cola
bonds.
Aug. 22
Cash ……………………………………………………………………………..
25,800
Loss on Sale of Debt Investments …………………………..
4,800
Debt Investments—AFS ……………………………………………..
30,600
Sold
Apple
bonds.
Debt Investments—AFS …………………………………………………..
Purchased
Motorola
Oct. 9
Cash ……………………………………………………………………………..
Gain on Sale of Debt Investments …………………………..
3,600
Debt Investments—AFS ……………………………………………..
Sold
Sears
notes.
Oct. 31
Cash ………………………………………………………………………………
27,000
Loss on Sale of Debt Investments …………………………..
7,650
Debt Investments—AFS ……………………………………………..
34,650
Sold Duracell bonds.
Dec. 31
Fair Value Adjustment—AFS* …………………………..
5,450
Unrealized Gain—Equity ……………………………………………..
5,450
Adjustment to fair value of LT AFS portfolio.
*
Cost _
Fair Value
Coca-Cola ……………………
$ 40,000
$ 48,000
Motorola ………………………
We can also use a T-account to help determine the needed adjustment to fair value:
Unadj.
550
B-39
Problem C-2B (Concluded)
Part 2
Portfolio of LT AFS Securities
12/31/Yr. 1
12/31/Yr. 2
12/31/Yr. 3
Long-Term AFS Securities (cost)……………
$115,050
$90,450
$124,000
Long-Term AFS Securities (fair value) ……
Part 3
Year 1
Year 2
Year 3
Realized gains (losses)
Sale of Ford ……………………………………..
$(5,000)
Total realized gain (loss) ……………………
$(2,600)
Problem C-3B (40 minutes)
Part 1
Jan. 13
Cash ………………………………………………………………………………
72,250
Loss on Sale of Debt Investments …………………………..
4,845
Debt Investments—AFS* ……………………………………………
77,095
Sold
S
notes. *$308,380 x 1/4
Apr. 5
Debt Investments—AFS …………………………………………
Cash ………………………………………………………………..
Purchased
V
Cash ………………………………………………………………………………
Gain on Sale of Debt Investments …………………………..
9,455
Debt Investments—AFS* ……………………………………………
Sold
T
Oct. 30
Debt Investments—AFS …………………………………………
48,750
Cash ………………………………………………………………..
48,750
Purchased
X
notes.
Dec. 31
Unrealized Gain—Equity …………………………………………………
690
Fair Value Adjustment—AFS* …………………………..
690
Adjustment to fair value of LT AFS portfolio.
Available-for-sale securities portfolio at December 31 year end:
Security
Cost
Fair Value
Company R bonds …………………………..
$559,125
$568,125
Company S notes …………………………..
Company V bonds …………………………..
Company X notes …………………………..
* Beginning year available-for-sale securities portfolio:
Fair Value Adjustment account:
B-41
Problem C-3B (Concluded)
Part 2
Disclosure
The portfolio of available-for-sale securities is reported on the December 31
Part 3
Only realized gains or realized losses on the sale of available–for-sale
balance sheet.
Realized gains (losses) for the year
Securities Sold
Cost
Sale
Gain (Loss)
Problem C-4B (40 minutes)
Part 1
Feb. 6
Stock Investments ………………………………………..
139,400
Cash ……………………………………………………….
139,400
Purchased 3,400 shares of
Nokia
(3,400 sh x $41).
Stock Investments ………………………………………..
Cash ……………………………………………………….
46,800
Purchased 1,200 shares of
Dell
Stock Investments ………………………………………..
Cash ……………………………………………………….
Purchased 2,500 shares of
Merck
Aug. 11
Cash*……………………………………………………………
39,100
Gain on Sale of Stock Investments …………….
4,250
Stock Investments** ………………………………..
34,850
Sold 850 shares of
Nokia
.
*850 sh x $46 **$139,400 x (850 sh / 3,400 sh)
or 850 sh x $41
Cash …………………………………………………………….
B-43
Problem C-4B (Concluded)
Part 2
Comparison of Cost and Fair Values of Stock Portfolio
Unrealized
Cost Fair Value Gain (Loss)
Nokia 2,550 x $41 …………………………. $104,550
Part 3
Dec. 31
Unrealized Loss—Income ……………………………………
32,650
Part 4
The balance sheet would report the cost of the short-term stock
investments at $331,350 and show a subtraction of $32,650 for the fair
Part 5
(a) Income statement
(i) Dividend Revenue, $7,525 [$3,400 + $120 + $3,825 + $180]
(b) Equity section of Balance sheet
(i) Decrease to equity from the $20,875 decrease in income (loss)
Problem C-5B (30 minutes)
Journal entries—Assuming significant influence
Year 1
Jan. 5
Equity Method Investments …………………………………………….
200,500
Cash …………………………………………………………………………
200,500
Purchased
Bloch
shares.
Aug. 1
Cash ………………………………………………………………………………
21,000
Equity Method Investments ………………………………………………
Received cash dividend (20,000 sh x $1.05).
Dec. 31
Equity Method Investments …………………………………………….
20,500
Earnings from Equity Method Investments …………………
($82,000 x 25%).
Year 2
Aug. 1
Cash ………………………………………………………………………………
27,000
Equity Method Investments …………………………..
27,000
Record cash dividend (20,000 sh x $1.35).
Dec. 31
Equity Method Investments …………………………………………….
19,500
Earnings from Equity Method Investments …………………
($78,000 x 25%).
Year 3
Jan. 8
Cash ………………………………………………………………………………
12,025
Equity Method Investments* …………………………..
9,625
Gain on Sale of Stock Investments …………………………..
2,400
Sold
Bloch
shares. 5% x $192,500*
*Investment carrying value at Jan. 8, Year 3
Original cost ……………………………………
$200,500
Less Year 1 dividends ……………………..
Plus Year 1 earnings ………………………..
Less Year 2 dividends ……………………..
Plus Year 2 earnings ………………………..
Carrying value at date of sale …………..
$192,500
B-45
Problem C-6B (30 minutes)
Journal entries—Assuming NO significant influence
Year 1
Jan. 5
Stock Investments ……………………………………………………….
200,500
Cash ……………………………………………………….
200,500
Purchased
Bloch
shares.
Aug. 1
Cash ………………………………………………………………………………
21,000
Dividend Revenue …………………………………………………….
21,000
Dec. 31
37,500
Unrealized Gain—Income …………………………..
37,500
$238,000 – $200,500 = $37,500 Dr.
Year 2
Aug. 1
Cash ………………………………………………………………………………
27,000
Dividend Revenue …………………………………………………….
27,000
Received cash dividends (20,000 x $1.35).
Dec. 31
35,000
Unrealized Gain—Income …………………………..
35,000
$273,000 – $200,500 = $72,500 Dr.
$72,500 Dr. – $37,500 Dr. = $35,000 Dr.
Year 3
Jan. 8
Cash ………………………………………………………………………………
12,025
Stock Investments* …………………………………………………..
10,025
Gain on Sale of Stock Investments …………………………..
B-46
Serial Problem — SP C
Serial Problem, Business Solutions (35 minutes)
Part 1
April 16
Debt Investments—Trading …………………………..
10,000
April 30
Debt Investments—Trading ………………………………
4,400
Part 2
June 30
Fair Value Adjustment—Trading* ……………………
1,400
* Fair Value Adjustment computations
Trading securities’ portfolio
Fair
Value
Cost
Unrealized
Gain (Loss)
$12,000
Company Analysis — AA C-1 (20 minutes)
1. Apple’s return on total assets
2. Unfavorable
3. Consolidation
Explanation: When a company owns over 50% of the voting stock of
B-48
Comparative Analysis — AA C-2 (30 minutes)
1. Apple’s return on total assets
Current Year: $48,351 / [($375,319 + $321,686) / 2] = 13.9%
2. Apple
3. Apple’s profit margin
Current Year: $48,351 / $229,234 = 21.1%
B-49
Global Analysis — AA C-3 (25 minutes)
₩ millions
1. Samsung
2. a. Better
Explanation: Samsung’s return on total assets is higher than Apple’s
3. Samsung’s profit margin (Apple and Google results in AA C-2, part 4)
Current Year: $42,186,747 / $239,575,376 = 17.6%
B-50
Ethics Challenge — BTN C-1
1. Kasey’s bonus is not contingent on the classification of available–for-
sale versus held-to-maturity. Designation of the bonds as available-for–
2. Generally, Kasey must classify its debt securities as either short or long
term and as available-for-sale or held-to-maturity. Since the bonds are
5-year bonds they should be classified as long-term investments unless
3. The company’s auditors (internal and external) and/or its board of
B-51
Communicating in Practice — BTN C-2
TO: Mary Jolee
FROM: (Your Name)
SUBJECT: Sale of Kemper Common Stock
The $6,000 loss on the sale of Kemper common stock is correctly stated.
Jolee Company owned 40% of the outstanding shares, and therefore
accounts for the investment according to the equity method. Under the
Taking It to the Net — BTN C-3
($ millions for Parts 1 through 4)
2. Mutual funds; Commercial paper; Certificates of deposit; U.S.
3. Unrealized gains = $4,895; and Unrealized losses = $(302).
B-52
Teamwork in Action — BTN C-4
There is no specific solution to this activity. The instructor should serve as
a facilitator during this learning reinforcement activity.
Entrepreneurial Decision — BTN C-5
1.
Jan. 1
Equity Method Investments* ………………………….
15,500
Cash ………………………………………………………..
15,500
2.
July 1
Cash ……………………………………………………………..
400
Equity Method Investments ………………………
400
3.
Dec. 31
Equity Method Investments …………………………...
Earnings from Equity Method Investments .
Hitting the Road — BTN C-6
There is no specific solution to this activity. The instructor should serve as