*PROBLEM 17-15
(a) January 7, 2014
Put Option ……………………………………………………… 360
Cash ………………………………………………………… 360
(b) March 31, 2014
(d) July 6, 2014
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 17-16
(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, 2015
Interest Expense …………………………………………. 400,000
Cash (8% X $10,000,000 X 1/2) …………………. 400,000
(3) June 30, 2015
Cash …………………………………………………………… 50,000
Cash settlement …………………………..…………………………
50,000
(4) June 30, 2015
Notes Payable …………………………………………….. 200,000
Unrealized Holding Gain or Loss—Income .. 200,000
(5) June 30, 2015
(b) Financial statement presentation as of December 31, 2014
Balance Sheet
*PROBLEM 17-16 (Continued)
(c) Financial statement presentation as of June 30, 2015
Balance Sheet
Liabilities
Notes payable $ 9,800,000
Swap contract 200,000
(d) Financial statement presentation as of December 31, 2015
Balance Sheet
Assets
Swap contract $ 60,000
Liabilities
Notes payable 10,060,000
Income Statement
Interest expense
*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
Cash settlement $ 25,000
*PROBLEM 17-17
(a) April 1, 2014
Memo entry to indicate entering into the futures contract.
(b) June 30, 2014
Futures Contract …………………………………………….. 5,000
(d) October 10, 2014
Inventory ……………………………………………………….. 157,500
Cash ($315 X 500 ounces) …………………………. 157,500
(e) December 20, 2014
Cash ………………………………………………………………. 350,000
Sales Revenue ………………………………………….. 350,000
*PROBLEM 17-17 (Continued)
(f) LEW JEWELRY COMPANY
Partial Balance Sheet
At June 30, 2014
Current Assets
Futures contract ……………………………………………………….. $5,000
Stockholders’ Equity
(g) LEW JEWELRY COMPANY
Income Statement
For the Quarter Ended December 30, 2014
Sales revenue …………………………………………………………… $350,000
*PROBLEM 17-18
(a) (1) November 3, 2014
Equity Investments (available-for-sale) ………. 200,000
(2) December 31, 2014
(3) March 31, 2015
Unrealized Holding Gain or Loss—Income …. 20,000
Fair Value Adjustment (available-for-sale)
[($50 – $45) X 4,000] …………………………... 20,000
(4) June 30, 2015
Unrealized Holding Gain or Loss—Income …. 8,000
Fair Value Adjustment (available-for-sale)
[($45 – $43) X 4,000] …………………………... 8,000
*PROBLEM 17-18 (Continued)
(5) July 1, 2015
Cash ($7 X 4,000) ……………………………………… 28,000
Loss on Settlement of Put Option ……………… 40
Put Option …………………………………………… 28,040
Income ……………………………………………… 28,000
(b) SPRINKLE COMPANY
Partial Balance Sheet
At December 31, 2014
Assets
Equity Investments (available-for-sale) ……………… $200,000
Put option ……………………………………………………….. 375
SPRINKLE COMPANY
Income Statement
For the Year Ended December 31, 2014
*PROBLEM 17-18 (Continued)
(c) SPRINKLE COMPANY
Partial Balance Sheet
At June 30, 2015
SPRINKLE COMPANY
Partial Income Statement
For Six Months Ended June 30, 2015
Other Income (Loss)
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)
CA 17-4 (Time 15–25 minutes)
Purpose—To allow the student to discuss the equity method of accounting for investments and to provide
rationale for this method of accounting.
CA 17-5 (Time 25–35 minutes)
CA 17-6 (Time 25–35 minutes)
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 17-1
Situation 1 GAAP requires that 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 trad–
ing 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 security is considered to be an impairment,
the new cost basis of the security is its fair value. The security is written down to the
CA 17-2
(a) The reporting of available-for-sale 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 the securities’ future cash flows and so this helps investors and creditors assess the
entity’s liquidity. Also, the fair value of the securities helps the financial statement user to assess
the entity’s investment strategies. The financial statements of the entity will reflect which
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, 2014
Unrealized Holding Gain or Loss—Equity ………………………………. 1,100
Fair Value Adjustment (available-for-sale) ……………………… 1,100
Balance Sheet—December 31, 2014
Long-term investment:
Equity investments (available-for-sale), at cost ………………. $49,500
Investments classified as available-for-sale securities should initially be recorded at their
acquisition price. The valuation of these investments is subsequently reported at their fair value.
Any changes in the fair value of the investments are recorded in an unrealized holding gain or
loss account, which is included as other comprehensive income and as a separate component of
stockholders’ equity. Assuming the company prepared a statement of comprehensive income, it
would show an unrealized holding loss of $1,100 during the period.
(d) December 31, 2015
Fair Value Adjustment (available-for-sale) ……………………………… 1,500
Unrealized Holding Gain or Loss—Equity ……………………… 1,500
Available-for-sale securities are reported at their fair value. Therefore, an adjusting entry must be
made to show the $400 excess of fair value over cost in the portfolio. The unrealized holding loss
from the previous period must be reversed. As a result, $1,500 adjustment is needed to correctly
CA 17-3
Situation 1 The carrying value of the trading 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.
Situation 2 When a decrease in the fair value of a security is considered to be other than
The amount of the write-down is included in earnings as a realized loss.
Situation 3 Both the portfolio of trading securities and the portfolio of available-for-sale securities
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
financial policies of Spoor Corporation due to the size of its investment (40%).
CA 17-5 (Continued)
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 trading securities will cause all the gains to flow through the
income statement this year and classifying the losses as available-for-sale and held-to-maturity
will defer the losses from this year’s income statement. Classifying the gains and losses just the
opposite 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 does not separately report investment balances in 2011.
Investment securities consist of readily marketable debt and equity
securities. Unrealized gains or losses are charged to earnings for
investments classified as trading. Unrealized gains or losses on
securities classified as available-for-sale are generally recorded in
(b) Certain financial instruments are required to be recorded at fair value.
Changes in assumptions or estimation methods could affect the fair
value estimates; however, we do not believe any such changes would
have a material impact on our financial condition, results of
operations or cash flows. Other financial instruments, including cash
equivalents, other investments and short-term debt, are recorded at
cost, which approximates fair value. The fair values of long-term debt
and derivative instruments are disclosed in Note 4 and Note 5,
respectively.
FINANCIAL REPORTING PROBLEM (Continued)
(c) According to Note 5, 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
At inception, we formally designate and document qualifying instru–
ments as hedges of underlying exposures. We formally assess, both
at inception and at least quarterly, whether the financial instruments
used in hedging transactions are effective at offsetting changes in
Credit Risk Management
We have counterparty credit guidelines and generally enter into
transactions with investment grade financial institutions. Counterparty
FINANCIAL REPORTING PROBLEM (Continued)
We have not incurred and do not expect to incur material credit
losses on our risk management or other financial instruments. Certain
of the Company’s financial instruments used in hedging transactions
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 in which we agree to exchange with the
Foreign Currency Risk Management
We manufacture and sell our products in a number of countries
throughout the world and, as a result, are exposed to movements in
foreign currency exchange rates. The purpose of our foreign currency
hedging program is to manage the volatility associated with short
term changes in exchange rates.
FINANCIAL REPORTING PROBLEM (Continued)
To manage this exchange rate risk, we have historically utilized a
combination of forward contracts, options and currency swaps. As of
June 30, 2011, we had currency swaps with maturities up to five
years, which are intended to offset the effect of exchange rate
fluctuations on intercompany loans denominated in foreign currencies
The change in value of certain non-qualifying instruments used to
manage foreign exchange exposure of intercompany financing transac-
tions, income from international operations and other balance sheet
items subject to revaluation is immediately recognized in earnings,
substantially offsetting the foreign currency mark-to-market impact of
the related exposure.
Net Investment Hedging
We hedge certain net investment positions in major foreign subsidiar-
ies. To accomplish this, we either borrow directly in foreign currencies
and designate all or a portion of foreign currency debt as a hedge of
FINANCIAL REPORTING PROBLEM (Continued)
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
manage the volatility related to anticipated purchases of certain of