C-37
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
Debt Investments—AFS …………………………
30,600
Sold
Apple
bonds.
Debt Investments—AFS ………………………………
84,000
Purchased
Motorola
Oct. 9
Cash …………………………………………………………
28,800
Gain on Sale of Debt Investments …………
3,600
Debt Investments—AFS …………………………
25,200
Sold
Sears
notes.
Oct. 31
Cash ………………………………………………………….
27,000
Debt Investments—AFS …………………………
34,650
Dec. 31
5,450
*
Cost _
Fair Value
Coca-Cola …………………
$ 40,000
$ 48,000
Motorola …………………..
84,000
82,000
Total …………………………
$124,000
$130,000
We can also use a T-account to help determine the needed adjustment to fair value:
12/31/Year 3—F.V. Adj—AFS (LT)
Unadj.
550
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)
Sale of Polaroid ………………………………
2,400
Sale of Apple ………………………………….
Sale of Sears ………………………………….
Sale of Duracell ………………………………
Total realized gain (loss) …………………..
$(2,600)
C-39
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 …………………………………………………………..
133,875
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:
Cost _
Fair Value
Fair Value Adjustment account:
$1,025,490 – $1,014,800 = $ 10,690 Dr. balance at beginning of year
Problem C-3B (Concluded)
Part 2
Disclosure
The portfolio of available-for-sale securities is reported on the December 31
balance sheet at its fair value of $983,035.
Part 3
Only realized gains or realized losses on the sale of available-for-sale
securities appear on the annual income statement. Unrealized gains or
C-41
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 …………………………………………………………….
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 value adjustment.
Part 5
(a) Income statement
(i) Dividend Revenue, $7,525 [$3,400 + $120 + $3,825 + $180]
(ii) Gain on Sale of Stock Investments, $4,250
C-43
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 ………………………………
Dec. 31
Equity Method Investments ………………………………
20,500
Earnings from Equity Method Investments ….
Year 2
Aug. 1
Cash ………………………………………………………………..
27,000
Equity Method Investments …………………………
27,000
Dec. 31
Equity Method Investments ………………………………
19,500
Earnings from Equity Method Investments ….
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
C-44
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
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
Jan. 8
Cash …………………………………………………………..
12,025
Stock Investments* ………………………………..
Gain on Sale of Stock Investments …………
C-45
Serial Problem — SP C
Serial Problem, Business Solutions (35 minutes)
Part 1
April 16
Debt Investments—Trading ………………………..
10,000
Cash …………………………………………………….
10,000
April 30
Debt Investments—Trading …………………………..
4,400
Cash …………………………………………………….
4,400
Part 2
June 30
Fair Value Adjustment—Trading* ……………….
1,400
Unrealized Gain—Income ……………………..
1,400
C-46
Company Analysis — AA C-1 (15 minutes)
$ millions
1. Apple’s return on total assets
2. Unfavorable
3. Consolidation
Explanation: When a company owns over 50% of the voting stock of
C-47
Comparative Analysis — AA C-2 (30 minutes)
$ millions
1. Apple’s return on total assets
Current Year: $55,256 / [($338,516 + $365,725) / 2] = 15.7%
2. Apple
3. Apple’s profit margin
Current Year: $55,256 / $260,174 = 21.2%
Extended Analysis — AA C-3 (25 minutes)
$ millions
1. Samsung
Return on total assets = Net Income / Average Total Assets
2. a. Worse
Explanation: Samsung’s return on total assets is lower than Apple’s
3. Samsung’s profit margin
DISCUSSION QUESTIONS
1. To be classified as current assets, investments must be (i) capable of being converted
2. Short-term debt investments in trading securities are reported on the balance sheet
at the fair (market) value of the portfolio of trading securities.
4. The three classes of debt investments are:
a) Trading.
5. To be classified as current assets, investments must be capable of being converted
into cash quickly and management must intend to sell the investments as a source of
6. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale debt securities. Unrealized gains and losses for these
7. Unrealized Loss⎯Equity ……………………………………………. ##
Fair Value Adjustment—Available-for-Sale (LT) ……. ##
8. The portfolio for investments in available-for-sale debt securities is reported on the
balance sheet at fair (market) value—this is separated into short- and long-term.
9. The portfolio of long-term investments in debt securities is reported at cost and
10. The equity method is used when the investor has a “significant influence” over the
11. A company prepares consolidated statements if the company has control over a
subsidiary as a result of owning more than 50% of the subsidiary’s voting stock.
C-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-sale
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
C-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
equity method, investments are reported at the investor’s cost plus its share
C-52
Teamwork in Action — BTN C-3
There is no specific solution to this activity. The instructor should serve as
Entrepreneurial Decision — BTN C-4
1.
Jan. 1
Equity Method Investments …………………………...
15,500
Cash ………………………………………………………..
15,500
Record purchase of investment.
Investment is 40% of Sustain’s stock (200/500)—the equity
method is used.
July 1
Equity Method Investments ………………………
Equity Method Investments …………………………...
Earnings from Equity Method Investments ..