Chapter12Investments

Exercise121
Requirement1
2013
March1
InvestmentinPlatinumGems,Inc.shares.................................
Cash.........................................................................................

($inmillions)

124

124

April13
InvestmentinOraclebonds.........................................................
Cash.........................................................................................

200

July20
Cash.............................................................................................
Investmentrevenue..................................................................

October13
Cash.............................................................................................
Investmentrevenue..................................................................

10

October14
Cash.............................................................................................
InvestmentinOraclebonds.....................................................
Gainonsaleofinvestments.....................................................
November1
InvestmentinSPIpreferredshares.............................................
Cash.........................................................................................

200

10
205
200
5
40
40

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Exercise121(continued)
December31,2013
($ in millions)

Available-for-Sale Securities
PlatinumGems,Inc.shares
SPI preferred shares
Totals

Cost
$124
40
$164

Fair Value
$128*
37**
$165

Unrealized
Gain (Loss)
$4
(3)
$1

*$64x2millionshares
**$74x500,000shares

Adjustingentry:
Fairvalueadjustment($165164)................................................
Net unrealized holding gains and losses -- OCI ($165164)....

1
1

2014
January23
($inmillions)

Cash([2millionsharesx1/2]x$65).................................................
Gainonsaleofinvestments(difference)....................................
InvestmentinPlatinumGems
shares($128millionbalanceafteradjustingentryx1/2)................
March1
Cash($78x500,000shares).............................................................
Gainonsaleofinvestments(difference)....................................
InvestmentinSPIpreferred(balanceafteradjustingentry)...........

65
1
64

39
2
37

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December31,2013
($ in millions)

Available-for-Sale Securities
PlatinumGems,Inc.shares
Less 12/31/09 balance
Total adjustment needed

Cost
$ 62*

Fair Value
$ 65**

Unrealized
Gain (Loss)
$3
$1
$2

*$62x1millionshares
**$65x1millionshares

Adjustingentry:
Fairvalueadjustment...................................................................
Net unrealized holding gains and losses -- OCI......................

Requirement2
($inmillions)

2
2

2013IncomeStatement

Investmentrevenue(fromJuly20;Oct.13)...............................$13
Gainonsaleofinvestments(fromOct.14)..................................5
Note:Unlikefortradingsecurities,unrealizedholdinggainsandlossesarenot
includedinincomeforsecuritiesavailableforsale.

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Exercise122
1. Investmentsreportedascurrentassets.
Security A
$725,000
Security B
200,000
Security C
560,000
Security E
970,000
Total
$2,455,000
2. Investmentsreportedasnoncurrentassets.
Security D
$865,000
Security F
412,000
$1,277,000

3. Unrealizedgain(orloss)componentofincomebeforetaxes.
TradingSecurities:

Security

A
B

Totals

Cost

Fairvalue

$700,000
210,000
$910,000

$725,000
200,000
$925,000

Unrealized
gain(loss)
$25,000
(10,000)
$15,000

4. Unrealizedgain(orloss)componentofothercomprehensiveincome.
SecuritiesAvailableForSale:

Security

C
D

Totals

Cost

Fairvalue

$500,000
850,000
$1,350,000

$560,000
865,000
$1,425,000

Unrealized
gain(loss)
$60,000
15,000
$75,000

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Exercise123
Purchase

($inmillions)

InvestmentinReedsRestaurantSuppliesshares...................
Cash....................................................................................

73
73

Netincome

InvestmentinReedsRest.Suppliesshares(35%x$20million)
Investmentrevenue..............................................................
Dividends
Cash(35%x12millionsharesx$1.10)..........................................

InvestmentinReedsRestaurantSuppliesshares...............

7
7
4.62
4.62

Adjustingentry

Noentry

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Exercise124
Purchase

($inmillions)

InvestmentinConleyTrucks...............................................
Cash.................................................................................

76
76

Netincome

InvestmentinConleyTrucksshares(25%x$60million)......
Investmentrevenue..........................................................
Dividends
Cash(5millionsharesx$1.20).................................................

15
15
6

InvestmentinConleyTrucksshares................................

DepreciationAdjustment

Investmentrevenue($10million[calculationbelow]5years)
InvestmentinConleyTrucksshares................................

2
2

Calculations:
Investee
NetAssets

Cost
Fairvalue:

NetAssets
Purchased

$76

$252*x25%= $63

Goodwill:$13

Bookvalue:

Difference
Attributedto:

$212x25%= $53

Undervaluation
ofassets:$10

*[$212+40]=$252
Adjustingentry

Noentry

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Exercise 12-5
Requirement 1
Cash (4% x $10,000)..............................................
Interest revenue...............................................

400
400

Requirement 2
Fred would report the bonds at amortized cost, given that the bonds are
simple debt and Fred intends to hold the bonds to maturity. Therefore, Fred
would not record any unrealized gain or loss.

Exercise 12-6
Requirement 1
Cash (4% x $10,000)..............................................
Interest revenue...............................................

400
400

Requirement 2
The bonds are simple debt, so Fred would report half of the bonds at FV-NI
(because the bonds are held for sale) and the other half at FV-OCI (because the
bonds are held for investment purposes). Therefore, Fred would prepare the
following journal entry:
Fair value adjustment ($12,000 $10,000).
2,000
Net unrealized holding gains and lossesI/S
([$12,000 $10,000] 2).......................
1,000
Net unrealized holding gains and lossesOCI
([$12,000 $10,000] 2).......................
1,000

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PROBLEMS
Problem121
Requirement1
Purchase
InvestmentinAustinshares..........................................................
Cash.........................................................................................

648

Netincome
InvestmentinAustinshares(30%x$320,000)...............................
Investmentrevenue...................................................................

96

Dividends
Cash(20,000sharesx$3)..................................................................
InvestmentinAustinshares......................................................

60

($in000s)

648

96

60

DepreciationAdjustment
Investmentrevenue[calculationbelow]8years)...........................
InvestmentinAustinshares......................................................

6
6

Calculations:
Investee
NetAssets

Cost

NetAssets
Purchased

Goodwill:

$120

Undervaluation
ofassets:

$48

$1,760*x30%=$528

Bookvalue:

$648

Fairvalue:

Difference
Attributedto:

$1,600x30%=$480

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*[$1,600+160]=$1,760
Adjustingentry
Noentry

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Problem121(concluded)
Requirement2
Purchase
InvestmentinAustinshares..........................................................
Cash.........................................................................................

($in000s)

648
648

Netincome
Noentry
Dividends
Cash(20,000sharesx$3)..................................................................
Investmentrevenue...................................................................
Adjustingentry
NetunrealizedholdinglossoninvestmentsOCI
([20,000sharesx$32]$648,000)............................................................
Fairvalueadjustment................................................................

60
60

8
8

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Problem122
Requirement1
Purchase
InvestmentinMonterreyshares....................................................
Cash.........................................................................................

($inmillions)

80.0
80.0

Netincome
InvestmentinMonterreyshares(40%x$28million)......................
Investmentrevenue...................................................................

11.2

Dividends
Cash(40%x$6million)...................................................................
InvestmentinMonterreyshares................................................

2.4

Inventory
Investmentrevenue($1millionx40%:allsoldin2013)....................
InvestmentinMonterreyshares................................................

.4

Depreciation
Investmentrevenue([$4millionx40%]8years)............................
InvestmentinMonterreyshares................................................

.2

11.2

2.4

.4

.2

Calculations:

Cost

Investee
NetAssets

NetAssets
Purchased

$80

Fairvalue:
inventory
plantfacilities
Bookvalue:

Difference
Attributedto:

Goodwill:

$16[plug]

$160*x40%= $64

(1)x40%
(4)x40%

Undervaluation
ofinventory:

$0.4

Undervaluation
ofplant:

$1.6

$155x40%= $62

*$155+1+4
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Problem122(concluded)
Requirement2
Investment Revenue
($ in millions)

Inventory
Depreciation
Balance

11.2 Share of income

.4
.2
_________________
10.6

Requirement3
Investment in Monterrey shares

($ in millions)

Cost
Share of income

Balance

80.0
11.2

2.4 Dividends
.4 Inventory
.2 Depreciation
_________________
88.2

Requirement4
$80 million cash outflow from investing activities
$2.4 million cash inflow (dividends) among operating activities

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