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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 in a checking account, most companiesinvest their excess cash in temporary investments. The primary objectives of investing in temporary investments are to:a. earn interest revenueb. receive dividendsc. realize gains from increases in the market price of the securities
2. A gain or loss can occur when the selling price of the bond differs from the carrying amount (cost) of the bond. The price of bond investments can change due to changes in the market rate of interest. If the proceeds from the sale exceed the carrying amount (cost) of the bonds, then a gain is recorded.
3. The equity method is used for equity investments representing more than 20% and less than 50% of the outstanding shares of the investee.
4. Under the cost method, a dividend received is treated as dividend revenue. Under the equity method, a dividend received is not treated as dividend revenue, but is treated as a reduction inthe carrying amount of the investment.
5. An investment greater than 50% of the investee is considered to be an investment that exerts control. Thus, the financial statements of the investee (subsidiary) are consolidated (combined)with that of the investor (parent company).
6. Both portfolios are reported at fair value. However, changes in the fair value of trading securitiesduring a period are reported as an unrealized gain or loss on the statement of comprehensive income. For available-for-sale securities, changes in the fair value of the securities are reported in equity and,thus, are not recognized as part of net profit.
7. A credit balance in Valuation Allowance for Available-for-Sale Investments is subtracted fromAvailable-for-Sale Investments (at cost). The net reported amount is the available-for-sale securitiesat fair value.
8. A debit balance in Unrealized Gain (Loss) on Available-for-Sale Investments would be reported as areduction in the Equity section of the statement of financial position, after Retained Earnings.
9. Current GAAP requires fair value accounting for impaired assets. Current GAAP allows financialassets and liabilities to be reported at fair value. The assets and liabilities reported at fair value arebecoming a more significant portion of many companies’ statement of financial positions. International Financial Reporting Standards are also moving more aggressively toward fair value accounting. As a result of the desire to converge U.S. and international standards, the United States is also moving toward fair value reporting.
10. Fair values may not be readily obtainable for some assets or liabilities, which causes financial statement valuations to become more subjective. In addition, comparability between financial statements among different companies may be hampered by different methods of determining fairvalue. Lastly, using fair value can result in greater fluctuations in reported results, making predictionsof future trends potentially more difficult.
CHAPTER 13INVESTMENTS AND FAIR VALUE ACCOUNTING
DISCUSSION QUESTIONS
CHAPTER 13 Investments and Fair Value Accounting
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11. IAS 39 classifies investment in financial securities into four categories: (1)fair value through profit and loss (FVTPL), which includes securities held for tradingand designed as FVTPL, (2) loans and receivables, (4) securities held to maturity,and securities available for sale.IFRS 9 Financial Instruments reorganizes four categories of classification of financialassets under IAS 39 into two categories. Under IFRS 9, financial assets aremeasured at either fair value (FV) or amortized cost (AC).
12. A reporting entity should apply amortized cost if both of the following conditionsare met:1. The asset is held within a business model whose objective is to hold assets in orderto collect contractual cash flows.2. The contractual terms of the financial asset give rise on specified dates to cash flowsthat are solely payments of principal and interest on the principal amount outstanding.
13. Under US GAAP, a short-term investment in financial assets can be a trading securities, available-for sale invesment, or held-to-maturity investment.IAS 39 classifies short-term investment into four categoriesfair value through profit and loss (FVTPL), which includes securities held for tradingand designed as FVTPL, (2) loans and receivables, (4) securities held to maturity,and securities available for sale.IFRS 9 classifies short-term investment in financial assets into two categories according to their valuation: (1) fair value and (2) amortized cost.
14. The accounting for available-for-sale securities is similar to the accounting for trading securities,except for the reporting of changes in fair values. Specifically, changes in the fair values of tradingsecurities are reported as an unrealized gain or loss on the statement of comprehensiveincome. In contrast, changes in the fair values of available-for-sale securities arereported as part of equity and, thus, excluded from the statement of comprehensiveincome.Under IFRS 9, trading securities are classified into the category “Fair Value throughProfit and Loss (FVTPL)”. Changes in fair value result in a direct write-down of financialassets and financial asset will be restated at fair value. Valuation provision account is not used and gain and loss pass through profit and loss.Under IFRS 9, changes in fair value of available-for-sale (AFS) investment do notpass through profit and loss. Instead, they are recognized in other comprehensiveincome (OCI).
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–1
(1) 1 Financial Assets-Amortized Cost 48,227Cash 48,227
1 Cash ($50,000 × 8% × 1/2) 2,000Financial Assets-Amortized Cost 411Interest Revenue($48,227 × 10% × 1/2) 2,411
1 Cash ($32,000 + $600 – $500) 32,100 Financial Assets-Amortized Cost 29,313 ($48,638× 30/50+$130) Interest Revenue 730 [($48,227+$411) × 30/50×10% × 3/12)] Gain on Sale of Financial Assets 2,057 ($31,500 – $29,313 – $130 = $2,057)
31 Interest Receivable 800(2) Financial Assets-Amortized Cost 173
Interest Revenue 973[($48,227+$411) × 20/50×10% × 6/12)]
EXERCISES
Jan.
Jul.
Dec.
Oct.
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–2
1 Financial Assets-Amortized Cost 56,231Cash 56,231
1 Cash ($50,000 × 12% × 6/12) 3,000Financial Assets-Amortized Cost 188Interest Revenue 2,812($56,231 × 10% × 6/12)
31 Interest Receivable 3,000Financial Assets-Amortized Cost 198Interest Revenue 2,802[($56,231 – $188) × 10% × 6/12)]
1 Cash 3,000Interest Receivable 3,000
Cash 3,007Loss on Sale of Financial Assets 33,507($55,845× 30/50)
2012Jan.
Jan. 2011
Dec.
Jul.
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–3
(1) 1 Financial Assets-Amortized Cost 55,367Cash 55,367
1 Cash ($60,000 × 8% × 6/12) 2,400Financial Assets-Amortized Cost 368
Interest Revenue($55,367 × 10% × 6/12) 2,76817,600
Financial Assets-Amortized Cost 13,934[($55,367+$368) × 15/60]
3,666
(2) 31 Interest Receivable 1,800Financial Assets-Amortized Cost 290Interest Revenue 2,090[($55,367+$368) × 45/60 ×10% × 6/12)]
Gain on Sale of Financial Assets
Cash ($18,000 – $400)
($31,500 – $29,313 – $130 = $2,057)
Jan.
July
Dec.
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–4
a. 1. Investment in Larson Corp. Stock 480,000Income of Larson Corp. 480,000
Record 40% share of Larson Corp.net profit, $1,200,000 × (160,000 shares ÷ 400,000 shares).
2. Cash* 320,000Investment in Larson Corp. Stock 320,000
*160,000 shares × $2.00
b. Stieg’s investment in Larson Corp. represents 40% of the outstanding shares of Larson Corp. An investment amount between 20% and 50% of the outstanding ordinary share of the investee is presumed to represent significant influence. The equity method is appropriate when the investor can exercise significant influence over the investee.
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–5
a.6 Investment in Gator Co. Stock 212,000
Cash 212,000
30 Cash* 8,160Investment in Gator Co. Stock 8,160
*$24,000 × 34%
31 Loss of Gator Co. 19,040Investment in Gator Co. Stock 19,040
Record 34% share of Gator Co. net loss, $56,000 × 34%.
b. Initial acquisition cost……………………………………………………………… $212,000Equity loss for 2014………………………………………………………………… (19,040)Cash dividends received…………………………………………………………… (8,160)Investment in Gator Co. Stock balance, December 31, 2014………………… $184,800
June
2014 Jan.
Dec.
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–5 (Concluded)
c. Under the equity method, the investor will record their proportionate share of the net increase (or decrease) of the carrying amount of the investee resulting from earnings and dividend distributions. The fair value method uses market price information to value the investment in the investee. These two methods result in different valuations because the equity method is based upon book accounting, while the fair value approach uses market information. The two methods need not be related to each other over time. While changes in book value can influence market prices, many other variables can influence the market price of a stock.
Ex. 13–6a. $6,000 $35,000 [from (c)] – $29,000 [from (b)]b. $29,000 $17,000 – (– $12,000)c. $35,000 $245,000 – $210,000d. $132,000 $144,000 – $12,000e. $39,000 $28,000 + $11,000f. $185,000 $168,000 + $17,000g. $6,000 $17,000 – $11,000h. $211,000 $205,000 + $6,000i. $273,000 $245,000 + $28,000
CHAPTER 13 Investments and Fair Value Accounting
13-9© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
Ex. 13–7
(1) 5 8,000Financial Assets-Trading (50 ÷ 200 × $28,000) 7,000Gain on Sale of Financial Assets 1,000
30 95050
Cash 1,0009 2000
100Cash 2,100
(2)
Unrealized Loss—Trading 650 Financial Assets-Trading 650
$38,950 $38,300
Adler Preference Shares 400 6,000 5,600Hill Ordinary Shares 375 11,950 9,000
Stock Number of Shares Cost Fair ValueCarey Ordinary Shares 150 $21,000 $23,700
Brokerage Fees
Sept. Financial Assets-TradingBrokerage Fees
Feb. Cash
Mar. Financial Assets-Trading
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–8
(1) 2 Financial Assets-Trading 18,000Cash 18,000
1 Financial Assets-Trading 220,000Brokerage Fees 1,000
Cash 221,00030 Cash 800
Dividend Revenue 80015 Cash 6,000
Financial Assets-Trading 5,400Gain on Sale of Financial Assets 600
Dec. 31 Cash 11,000Interest Revenue 11,000
31 Cash 560Dividend Revenue 560
(2) Cost Fair Value$12,600 $13,440220,000 230,000
$232,600 $243,440Financial Assets—Trading 10,840
Unrealized Gain—Trading 10,840
PortfolioDolen Ordinary SharesPslo Bonds
July
Number280200
Sept.
Jun.
CHAPTER 13 Investments and Fair Value Accounting
13-11© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Ex. 13–9
(1) 1 Financial Assets-Trading 9,150Brokerage Fees 300
Cash 9,4501 Cash (1,500 × $.50) 750
Dividend Revenue 75015 Cash ($2,500 – $100) 2,400
Loss on Sale of Financial Assets 40Financial Assets-Trading 2,440
Dec. 1 Cash (1,100 × $.50) 550Dividend Revenue 550
(2) Cost Fair Value$6,710 $8,800$6,710 $8,800
Financial Assets—Trading 2,090 Unrealized Gain—Trading 2,090
Quayle Ordinary Shares 1100
Sept.
Stock
Jan.
June
Number of Shares
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–10
(1) 1) Financial Assets-Non-trading 701,000Cash 701,000
2) Cash 10,000 Dividend Revenue 10,000Financial Assets-Non-trading 174,000 Unrealized Gain-Non-trading 174,000
(2) 1) Share Investments 701,000Cash 701,000
2) Share Investments 60,000Revenue from Investment (₤300,000 × 20% = ₤60,000) 60,000
Cash 20,000 Share Investments (₤100,000 × 20% =₤20,000) 20,000
CHAPTER 13 Investments and Fair Value Accounting
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website, in whole or in part.
Ex. 13–11
(1) 1) Financial Assets-Non-trading 721,000Cash 721,000
2) Cash 15,000 Dividend Revenue 15,000Unrealized Gain-Non-trading 21,000 Financial Assets-Non-trading 21,000
(2) 1) Share Investments 721,000Cash 721,000
2) Share Investments 60,000Revenue from Investment (₤200,000 × 30% = ₤60,000) 60,000
Cash 45,000 Share Investments (₤150,000 × 30% =₤20,000) 45,000
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–12
(1) 1) Financial Assets-Non-trading 802,000Cash 802,000
2) Cash 30,000 Dividend Revenue 30,000Financial Assets-Non-trading 38,000 Unrealized Gain-Non-trading 38,000
(2) 1) Share Investments 802,000Cash 802,000
2) Share Investments 80,000Revenue from Investment (₤400,000 × 20% = ₤80,000) 80,000
Cash 40,000 Share Investments (₤200,000 × 20% =₤40,000) 40,000
CHAPTER 13 Investments and Fair Value Accounting
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Ex. 13–13
$2.44$93.49
Ex. 13–14The investor would receive a return on the investment through share price appreciation as internally generated funds are used to fund growth and earningsopportunities. Thus, investors in eBay would likely approve of this policy, because the company is able to earn superior returns with internally generated earnings beyond what investors could likely earn on their own by investing dividend distributions.
Dividend Yield
Dividend Yield 2.6%
= Cash Dividends per Share of Ordinary ShareMarket Price per Share of Ordinary Share
==
CHAPTER 13 Investments and Fair Value Accounting
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Appendix Ex. 13–15
Net profit $50,000Other comprehensive income (loss):
Unrealized gain on available-for-sale investments* 24,000Comprehensive income $74,000
* 2,000 shares × ($124 per share – $112 per share)
CHEWCO CO.For the Year Ended December 31, 2014
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–1A1.
1 Investments—Buncombe Co. Bonds 50,000Interest Receivable 250
Cash 50,250
16 Investments—French Broad Bonds 84,000Interest Receivable 175
Cash 84,175
1 Cash* 1,500Interest Receivable 250Interest Revenue 1,250
*$50,000 × 6% × 1/2
31 Cash* 19,900 Loss on Sale of Investment 200
Interest Revenue 100Investments—Buncombe Co. Bonds 20,000
*($20,000 × 0.99) + $100
1 Cash* 2,100Interest Receivable 175Interest Revenue 1,925
*$84,000 × 5% × 1/2
31 Interest Receivable 750Interest Revenue 750
31 Interest Receivable 1,400Interest Revenue 1,400
Dec.
PROBLEMS
2014 Mar.
Aug.
Sept.
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–1A (Concluded)
1 Cash* 900Interest Receivable 750Interest Revenue 150
*$30,000 × 6% × 1/2
1 Cash* 2,100Interest Receivable 1,400Interest Revenue 700
*$84,000 × 5% × 1/2
2. If the bonds are classified as available-for-sale securities, then the portfolioof bonds would need to be adjusted to fair value. This would be accomplished by using a valuation provision account and an unrealized gain (loss) accountas part of equity. If the fair value were greater than the cost of the bond portfolio, the two accounts would be positive, and thus added to investments and equity, respectively. If the fair value were less than the cost of thebond portfolio, the two accounts would be negative, and thus subtracted from investments and equity, respectively.
2015
Mar.
Feb.
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–2A1.
14 Investments—Wilkomm Inc.* 200,500Cash 200,500
*(5,000 shares × $40 per share) + $500
24 Investments—McMarsh Inc.* 90,198Cash 90,198
*(1,800 shares × $50 per share) + $198
1 Cash* 98,700Loss on Sale of Investments 5,560
Investments—Wilkomm Inc.** 104,260 *(2,600 shares × $38.00 per share) – $100**2,600 shares × ($200,500 ÷ 5,000 shares)
30 Cash* 840Dividend Revenue 840
*(5,000 shares – 2,600 shares) × $0.35
31 Unrealized Loss on Trading Investments 7,038Valuation Allowance for TradingInvestments* 7,038
* $179,400 – $186,438, in table below
Numberof Fair Value Fair
Shares per Share Cost Value
Wilkomm Inc. ………………… 2,400 $40.10 $38 $ 96,240 $ 91,200McMarsh Inc. ………………… 1,800 $50.11 $49 90,198 88,200
Total………………………… $186,438 $179,400
1 $200,500 ÷ 5,000 shares = $40.10 per share2 $90,198 ÷ 1,800 shares = $50.11 per share
Shareper
Cost
Dec.
2014
June
Mar.
Apr.
1 2
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–2A (Concluded)
4 Investments—Daley Inc.* 105,175Cash 105,175
*(3,500 shares × $30 per share) + $175
28 Cash* 960Dividend Revenue 960
*2,400 shares × $0.40 per share
9 Cash* 22,350Gain on Sale of Investments 1,315Investments—Daley Inc.** 21,035
*(700 shares × $32 per share) – $50**700 shares × ($105,175 ÷ 3,500 shares)
31 Valuation Allowance for Trading Investments* 86,460Unrealized Gain on Trading Investments 86,460
*$7,038 + $79,422
2.
Current assets:Trading investments (at cost) $270,578Plus valuation allowance for trading investments 79,422Trading investments (at fair value) $350,000
3. Unrealized gains or losses are reported on the statement of comprehensive income, often as “Other Income (Losses).” For 2014, Scofield Financial Co. would have reported an unrealized loss of $7,038 as “Other Losses.” For 2015, Scofield Financial Co. would have reported an unrealized gain of $86,460 as “Other Income.” If unrealized gains and losses were significant for Scofield Financial, then they would be separately disclosed on the statement of comprehensive income.
June
SCOFIELD FINANCIAL CO.
Sept.
Statement of Financial Position (selected items)December 31, 2015
2015
Dec.
Apr.
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–3A1.
1 Investments—Acuity Inc.* 324,000Cash 324,000
*12,000 shares × $27 per share
18 Cash* 2,160Dividend Revenue 2,160
*12,000 shares × $0.18 per share
12 Cash* 2,880Dividend Revenue 2,880
*12,000 shares × $0.24 per share
28 Cash* 20,950Loss on Sale of Investments 6,050
Investments—Acuity Inc.** 27,000 *(1,000 shares × $21.00) – $50**1,000 shares × $27 per share
31 Valuation Allowance for Available-for-Sale Investments 66,000
Unrealized Gain (Loss) on Available-for-Sale Investments 66,000
11,000 shares × ($33.00 – $27.00).
23 Investment in Shouse Inc. Stock 376,000Cash 376,000
16 Cash* 2,640Dividend Revenue 2,640
*(12,000 shares – 1,000 shares) × $0.24 per share
Mar.
2015 Jan.
Dec.
2014 Feb.
Mar.
Sept.
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–3A (Concluded)
16 Cash* 3,300Dividend Revenue 3,300
*11,000 shares × ($0.24 + $0.06)
31 Cash 30,100Investment in Shouse Inc. Stock 30,100
31 Investment in Shouse Inc. Stock 53,200Income of Shouse Inc. 53,200
To record 28% of Shouse Inc. income $190,000 × (70,000 shares ÷ 250,000 shares).
31 Unrealized Gain (Loss) on Available-for-Sale Investments 33,000
Valuation Allowance for Available-for-Sale Investments* 33,000
*($30.00 – $33.00) × 11,000 shares
2.
Current assets:Available-for-sale investments (at cost)1 $297,000Plus valuation allowance for available-for-
sale investments 33,000Available-for-sale investments (at fair value)2 $330,000
Investments:Investment in Shouse Inc. stock3 $399,100
Equity:Retained earnings $465,000Unrealized gain (loss) on available-for-sale
investments 33,000
1 11,000 shares × $27 per share2 11,000 shares × $30 per share3 $376,000 + $53,200 – $30,100
December 31, 2015Statement of Financial Position (selected items)
DAFFITAR INC.
Sept.
Dec.
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–4Aa. $236,170 (see table below)b. $(5,800) ($230,370 – $236,170, from table)c. $230,370 (from table)
MarketCost per Value per
No. of Share (or Share (orShares (or $100 of $100 of Total Fair
Investments face amount) face amount) face amount) Cost Value
Bernard Co. stock……… 2,250 $17.00 $15.40 $ 38,250 $ 34,650Chadwick Co. stock…… 1,260 52.00 46.00 65,520 57,960Gozar Inc. stock………… 3,080 30.00 32.00 92,400 98,560Nightline Co. bonds…… $40,000 100 98 40,000 39,200
$236,170 $230,370
d. $600 ($40,000 × 6% × 3/12)e. $98,100 [$77,000 + ($112,000 × 30%) – $12,500]f. $813,960 ($233,000 + $136,530 + $230,730 + $600 + $98,100 + $115,000)g. $454,930 ($308,700 + $146,230)h. $(5,800) [same as (b)]i. $843,530 ($69,400 + $70,000 + $255,000 + $454,930 – $5,800)
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–4A (Continued)The completed comparative unclassified statement of financial positions are as follows:
Dec. 31, Dec. 31,2015 2014
Office equipment (net) $115,000 $130,000Investment in Jolly Roger Co. stock—Note 2 98,100 77,000Interest receivable 600 —
Available-for-sale investments (at cost)—Note 1 $236,170 $103,770Less valuation allowance for available-for-sale
investments 5,800 2,500Available-for-sale investments (fair value) $230,370 $101,270
Accounts receivable (net) 136,530 $138,000Cash $233,000 $220,000
Total assets $813,600 $666,270
Accounts payable $ 69,400 $ 60,000Share Capital—Ordinary 70,000 70,000Excess of issue price over par 225,000 225,000Retained earnings 455,000 308,770Unrealized gain (loss) on available-for-sale
investments (5,800) 2,500Total liabilities and equity $813,600 $666,270
Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, 2014, are as follows:
No. of Cost per Total Total FairShares Share Cost Value
Bernard Co. stock………………………… 2,250 $17.00 $ 38,250 $ 37,500Chadwick Co. stock……………………… 1,260 52.00 65,520 63,770
$103,770 $101,270
O'BRIEN INDUSTRIES, INC.Statement of Financial Position
December 31, 2015 and 2014
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–4A (Concluded)For December 31, 2015:
MarketCost per Value per
No. of Share (or Share (orShares (or $100 of $100 of Total Fair
face amount) face amount) face amount) Cost Value
Bernard Co. stock……… 2,250 $17.00 $15.40 $ 38,250 $ 34,650Chadwick Co. stock…… 1,260 52.00 46.00 65,520 57,960Gozar Inc. stock………… 3,080 30.00 32.00 92,400 98,560Nightline Co. bonds…… $40,000 100 98 40,000 39,200
$236,170 $230,370
Note 2. The investment in Jolly Roger Co. stock is an equity method investment representing 30% of the outstanding shares of Jolly Roger Co.
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–1B1.
18 Investments—Malmo Inc.* 360,000Cash 360,000
*9,000 shares × $40 per share
22 Cash* 27,000Dividend Revenue 27,000
*9,000 shares × $3.00 per share
5 Cash* 28,900Gain on Sale of Investments 8,900Investments—Malmo Inc.** 20,000
*(500 shares × $58.00) – $100**500 shares × $40 per share
18 Cash* 25,500Dividend Revenue 25,500
*(9,000 shares – 500 shares) × $3.00
31 Unrealized Gain (Loss) on Available-for-Sale Investments 34,000
Valuation Allowance for Available-for-Sale Investments 34,000
8,500 shares × ($36.00 – $40).
25 Investment in Helsi Co. Stock 800,000Cash 800,000
16 Cash* 25,500Dividend Revenue 25,500
*8,500 shares × $3.00 per share
July
Jan.
Dec.
2015
2014
Oct.
Jan.
July
CHAPTER 13 Investments and Fair Value Accounting
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Prob. 13–1B (Concluded)
16 Cash* 27,200Dividend Revenue 27,200
*8,500 shares × ($3.00 + $0.20)
31 Cash 38,000Investment in Helsi Co. Stock 38,000
31 Investment in Helsi Co. Stock 51,000Income of Helsi Co. 51,000
To record 30% of Helsi Co. income$170,000 × (75,000 shares ÷ 250,000shares).
31 Valuation Allowance for Available-for-Sale Investments* 68,000
Unrealized Gain (Loss) on Available-for-Sale Investments 68,000
*8,500 × ($44 – $36.00)
2.
Current assets:Available-for-sale investments (at cost)1 $340,000Plus valuation allowance for available-for-
sale investments 8,500Available-for-sale investments (at fair value)2 $374,000
Investments:Investment in Helsi Co. stock3 $813,000
Equity:Retained earnings $700,000Unrealized gain (loss) on available-for-sale
investments 34,000
1 8,500 shares × $40 per share2 8,500 shares × $44 per share3 $800,000 + $51,000 – $38,000
December 31, 2015Statement of Financial Position (selected items)
GLACIER PRODUCTS, INC.
Dec.
CHAPTER 13 Investments and Fair Value Accounting
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1. a. Cash 450,000Share Capital—Ordinary 300,000Share Premium—Ordinary 150,000
b. Cash 400,000Share Capital—Preference 320,000Share Premium—Preference 80,000
c. Cash* 520,000Bonds Payable 500,000Premium on Bonds Payable 20,000
*$500,000 × 1.04
d. Cash Dividends* 50,000Cash Dividends Payable 50,000
*100,000 shares × $0.50 per share
Cash Dividends* 20,000Cash Dividends Payable 20,000
*20,000 shares × $1.00 per share
e. Cash Dividends Payable 70,000Cash 70,000
f. Investments—Solstice Corp.* 300,150Cash 300,150
*(7,500 shares × $40 per share) + $150
g. Treasury Share* 264,000Cash 264,000
*8,000 shares × $33 per share
h. Investment in Pinkberry Co. Stock* 960,000Cash 960,000
*40,000 shares × $24 per share
COMPREHENSIVE PROBLEM 4
CHAPTER 13 Investments and Fair Value Accounting
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Comp. Prob. 4 (Continued)
i. Cash Dividends 20,000Cash Dividends Payable 20,000
j. Cash Dividends Payable 20,000Cash 20,000
k. Cash 27,500Investment in Pinkberry Co. Stock 27,500
l. Investments—Dream Inc. Bonds 90,000Interest Receivable 375
Cash 90,375
m. Cash* 98,800Treasury Share** 85,800Share Premium from Sale of Treasury Share 13,000
* 2,600 shares × $38 per share** 2,600 shares × $33 per share
n. Cash* 4,500Dividend Revenue 4,500
* 7,500 shares × $0.60 per share
o. Cash* 45,000Gain on Sale of Investment 4,980Investments—Solstice Corp.** 40,020
* 1,000 shares × $45.00 per share** 1,000 shares × ($300,150 ÷ 7,500 shares)
CHAPTER 13 Investments and Fair Value Accounting
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Comp. Prob. 4 (Continued)
p. Interest Expense 11,500Premium on Bonds Payable 1,000
Cash 12,500
Computations:Semiannual interest payment ($500,000 × 5% × 1/2)……………… $12,500Less amortization premium [($20,000 ÷ 10 years) × 1/2]…………… 1,000Interest expense…………………………………………………………… $11,500
q. Interest Receivable 1,125Interest Revenue 1,125
Interest accrued for three months.
Computation: $90,000 × 5% × 3/12 = $1,125
r. Investment in Pinkberry Co. Stock* 76,800Income from Pinkberry Co. 76,800
Recorded 32% share of Pinkberry Co.net profit.
* $240,000 × 32%, 32% = 40,000 shares ÷ 125,000 shares
s. Unrealized Gain (Loss) on Available-for-SaleInvestments 6,500
Valuation Allowance for Available-for-SaleInvestments 6,500
6,500 shares × ($39.02 – $40.02*).* $40.02 = $300,150 ÷ 7,500 shares
CHAPTER 13 Investments and Fair Value Accounting
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Comp. Prob. 4 (Continued)2. a.
Sales $5,254,000Cost of goods sold 3,700,000Gross profit $1,554,000Operating expenses:
Selling expenses:Sales salaries expense $385,000Sales commissions 185,000Advertising expense 150,000Depreciation expense—store buildings
and equipment 100,000Delivery expense 30,000Store supplies expense 21,000Miscellaneous selling expense 14,000 $885,000
Administrative expenses:Office salaries expense $170,000Office rent expense 50,000Depreciation expense—office buildings
and equipment 30,000Office supplies expense 10,000Miscellaneous administrative expense 7,500 267,500
Total operating expenses 1,152,500Operating profit $ 401,500
Other expenses and income:Dividend revenue $ 4,500Interest revenue 2,720Income from Pinkberry Co. investment 76,800Gain on sale of investment 4,980Interest expense -21,000 68,000
Profit before income tax $ 469,500Income tax 140,500Net profit $ 329,000
Earnings per common share:Net profit* $2.29
* ($329,000 – $100,000 preferred dividends) ÷ 100,000 common shares, rounded
EQUINOX PRODUCTS INC.Statement of Comprehensive Income
For the Year Ended December 31, 2014
CHAPTER 13 Investments and Fair Value Accounting
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Comp. Prob. 4 (Continued)
b.
Retained earnings, January 1, 2014 $9,319,725Net profit for year $329,000Less cash dividends:
Common $155,120Preferred 100,000 255,120
Increase in retained earnings 73,880Retained earnings, December 31, 2014 $9,393,605
c.
Current assets:Available-for-sale investments $ 260,130Less valuation allowance for
available-for-sale investment 6,500 $ 253,630Accounts receivable $ 545,000Less provision for doubtful accounts 8,450 536,550Inventory, at lower of
cost (FIFO) or market 778,000Interest receivable 1,125Prepaid expenses 27,400Cash 246,000
Total current assets $ 1,842,705Investments:
Investment in Pinkberry Co. stock 1,009,300Investment in Dream Inc. bonds 90,000
Property, plant, and equipment:Store buildings and equipment $12,560,000Less accumulated depreciation 4,126,000 $8,434,000Office buildings and equipment $ 4,320,000Less accumulated depreciation 1,580,000 2,740,000
Total property, plant, and equipment 11,174,000
Intangible assets:Goodwill 500,000
Total assets $14,616,005
Assets
EQUINOX PRODUCTS INC.Retained Earnings Statement
For the Year Ended December 31, 2014
EQUINOX PRODUCTS INC.Statement of Financial Position
For the Year Ended December 31, 2014
CHAPTER 13 Investments and Fair Value Accounting
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Comp. Prob. 4 (Concluded)
Share Capital:Share capital—Preference 5%, $80 par
(30,000 shares authorized;20,000 shares issued) $1,600,000
Excess of issue price over par 150,000 $ 1,750,000Share Capital—Ordinary, $20 par (400,000
shares authorized; 100,000 sharesissued, 94,600 shares outstanding) $2,000,000
Excess of issue price over par 886,800 2,886,800From sale of treasury share 13,000Total paid-in capital $ 4,649,800
Retained earnings 9,393,605Unrealized gain (loss) on available-
for-sale investments -6,500Total $14,036,905
Deduct treasury Share Capital—Ordinary(5,400 shares at cost) 178,200
Total equity 13,858,705
Non-current liabilities:Bonds payable, 5%, due 2022 $ 500,000Add premium on bonds payable 19,000 519,000
Current liabilities:Accounts payable $ 194,300Income tax payable 44,000
Total current liabilities $ 238,300Total liabilities $ 757,300
Total liabilities and equity $14,616,005
EQUINOX PRODUCTS INC.
Equity
Statement of Financial PositionFor the Year Ended December 31, 2014
Liabilities
CHAPTER 13 Investments and Fair Value Accounting
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CP 13–11. Under generally accepted accounting principles, the land would be reported
at $350,000 for Wyatt Corp. and $2,000,000 for TexoPete Inc. These valuationsreflect their historical costs.
2. The historical cost valuation reduces the ability to compare the two companies.In this scenario, both companies have nearly identical land holdings. Wyatt Corp. purchased its land in 1996; thus, the land is valued according to a 1996 valuation. TexoPete Inc., purchased its land in 2014, reflecting a more current valuation. Thus, both companies have a similar asset; however, the balance sheet reports very different valuations (Wyatt’s valuation is approximately 17.5% of TexoPete’s). Therefore, comparability is reduced. If the land were valued at fair value, then both companies would report the land at nearly identical valuations, which is a better reflection of reality.
CP 13–21. There is an emerging trend toward more uniform accounting standards
worldwide. This is caused by companies participating in multiple capital markets. For example, many companies not only have their stock trade on the New York Stock Exchange, but might also have their stock trade in London or Japan. In these cases, companies must provide financial reports that conform to the laws of the country in which their stock trades. Lack of accounting uniformity causes unnecessary reporting expenses for companies that wish to broaden the market for their stock worldwide, while making financial statements less comparable for users around the world. Thus, the United States and the European Union are working to align their financial accounting standards. When the International Accounting Standards Board (IASB, European Union) releases a standard such as IAS No. 16 , it influences U.S.GAAP. In this case, the United States does not embrace IAS No. 16 , so it isnot U.S. GAAP. However, as the United States and Europe work to converge standards, we might see the substance of IAS No. 16 reflected in a futureFASB pronouncement.
2. Fair value reporting for property, plant, and equipment is a very aggressive fair value position. This is because property, plant, and equipment fair values are usually very subjective. Given this subjectivity, there is concern that the reported statement of financial position amounts for property, plant, and equipment would be subject to manipulation and possible abuse. Moreover, the lack of objective fair values for these types of assets could reduce the comparability of financial statements across companies, depending on the subjective assumptions selected in the valuation.
CASES & PROJECTS
CHAPTER 13 Investments and Fair Value Accounting
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CP 13–2 (Concluded)3. The accounting treatment for increases in fair value for property, plant, and
equipment under International Accounting Standards is similar to the treatment for unrealized gains and losses from available-for-sale investments. Increases in fair value bypass the statement of comprehensive income and are reported directly in equity. Thus, increases in property, plant, and equipment fair values would not be reported in earnings. Decreases in fair value are reported on the Statement of comprehensive income as an expense. Statement of comprehensive income treatment is similar to the treatment for unrealized gains and losses from trading securities. If the property, plant, and equipment fair value declines, the statement of comprehensive income impact of this decline is fully disclosed.
CP 13–3Since many complex and exotic investment vehicles do not have ready market values, management must value these investments using mathematical models, subjective inputs, and risk assessments. These mathematically determined valuations are subject to wide variation, depending on the assumptions. Therein lies the ethical challenge. Since the valuation is subjective, it is possible for managers to over- or underestimate fair values to meet their personal objectives. Moreover, the ability for auditors to verify these values independently is difficult, since there is a lack of agreed-upon objectivity.
CP 13–41. Look-through earnings is a Warren Buffett term. It is the GAAP net profit
plus an adjustment for the equity earnings (the “forgotten-but-not-gone"earnings) in investments where less than 20% of the outstanding shares areowned. Thus, look-through earnings would be significantly greater than GAAP net profit for a company that held a large portfolio of these types of investments(which Berkshire does). These are supplemental disclosures that Buffet provides his shareholders in addition to GAAP disclosures. Essentially, he is treating these investments as if they were being accounted for under the equity method.
2. Buffett makes the case that there is no reason for the equity method to be usedonly for 20%–50% investees, but that the rationale for the equity method appliesequally well for investments of less than 20%. Thus, Berkshire Hathaway provides an additional non-GAAP disclosure to its investors, which essentially adds theafter-tax equity earnings of its less than 20% investees to its net profit. In so doing, Buffett argues that the earning power of all of his investments is properlydisclosed in look-through earnings. He argues that the dividends that he receivesfrom his less than 20%-owned investees do not reflect the earning power of hisinvestment, even though that is what is required by GAAP.
CHAPTER 13 Investments and Fair Value Accounting
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CP 13–5
The following are portions of Notes 3 and 4 from the financial statements dated June 30, 2011, for Microsoft.
Investment Components, Including Associated Derivatives
Cash Equity andCost Unrealized Unrealized Recorded and Cash Short-Term Other
(In millions) Basis Gains Losses Basis Equivalents Investments Investments
June 30, 2011Cash $ 1,648 $ — $ — $ 1,648 $1,648 $ — $ —Mutual funds 1,752 — — 1,752 1,752 — —Commercial paper 639 — — 639 414 225 —Certificates of deposit 598 — — 598 372 226 —U.S. Government and Agency securities 33,607 162 (7) 33,762 2,049 31,713 —Foreign government bonds 658 11 (2) 667 — 667 —Mortgage-backed securities 2,307 121 (4) 2,424 — 2,424 —Corporate notes and bonds 10,575 260 (11) 10,824 3,375 7,449 —Municipal securities 441 15 (2) 454 — 454 —Ordinary and preference share 7,925 2,483 (193) 10,215 — — 10,215Other investments 654 — — 654 — 4 650
Total $60,804 $3,052 $(219) $63,637 $9,610 $43,162 $10,865
NOTE 4 INVESTMENTS
CHAPTER 13 Investments and Fair Value Accounting
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CP 13–5 (Concluded)
The components of other income (expense) were as follows:
$ 900 $ 843 $ 744(295) (151) (38)439 348 (125)(77) (140) (558)(26) 1 (509)(31) 14 (56)
$ 910 $ 915 $(542)
Note to Instructors: This solution is provided as a guide. Students may have differentnumbers, depending on the date of the financial statements.
Answers in millions.
1. $60,8042. $63,637 (termed, “recorded basis” by Microsoft)3.4.5. a. $9,610 ÷ $63,637 = 15.1%
b. $43,162 ÷ $63,637 = 67.8% c. $10,865 ÷ $63,637 = 17.1%
6. $9007.
Dividends and interest Net recognized gains (losses) on investments
2010 2009
NOTE 3 OTHER INCOME (EXPENSE)
(In millions)Year Ended June 30, 2011
Net gains (losses) on derivatives Net gains (losses) on foreign currency
($295)
$3,052 ($219)
Other Total
remeasurements
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