Appendix E: Reporting and Interpreting Investments in Other Corporations

Appendix E - Reporting and Interpreting Investments in Other Corporations
Appendix E
Reporting and Interpreting Investments in
Other Corporations
ANSWERS TO QUESTIONS
1.
A short-term investment is one that meets the two tests of (1) ready marketability
and (2) management intention to convert it to cash in the short run. In contrast, a
long-term investment is one that does not meet both of these tests. Most longterm investments are marketable securities, either stocks or bonds. A short-term
investment is classified as a current asset on the balance sheet, while long-term
investments are reported as noncurrent assets.
2.
For passive investments in bonds, companies may report the investment at

unamortized cost if the intent is to hold the bonds until maturity. Otherwise, the
investments in bonds are to be accounted for using the same fair value method
as is used for passive investments in equity securities. Each year end, the
investments are adjusted to fair value. Passive equity investments are those in
which the investor has less than 20% of the outstanding shares of voting
common stock, unless there is evidence to the contrary.
When a company can exert significant influence over the investing and financing
decisions of another company, the equity method is used to account for and
report the investment. In applying the equity method, considered a one-line
consolidation, dividends received from the affiliate company reduce the
investment account; the investors percentage share of the affiliates net income
or loss is included as income or loss on the investors income statement with a
corresponding change in the investment account. The ability to exert significant
influence over an affiliate company is presumed if the investor owns between
20% and 50% of the outstanding shares of voting common stock.
When an investor owns over 50% of the outstanding shares of voting common
stock, the investor has control over the affiliate. Consolidated statements are
prepared.
3.
Only bonds that management has the plans and ability to hold until maturity can
be reported in the held-to-maturity portfolio. The investment in held-to-maturity
bonds is reported on the balance sheet at unamortized cost, not fair value, at the
end of each year.
Financial Accounting, 8/e
Appendix E-1
2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
4.
When shares of capital stock of another company are purchased as an

investment, they are measured and recorded at cost in accordance with the cost
principle. Cost is defined as the total expenditures incurred in obtaining the other
shares. The total outlay includes the market price plus all commissions and other
buying costs.
5.
Under the fair value method, revenues are measured by the investor company in
periods during which the other company declares a cash dividend. Unrealized
gains and losses are recorded when the stock price increases or decreases.
6.
Under the equity method, investment revenue is measured on a proportionate

basis by the investor company when earnings are reported by the affiliate
company, rather than when the dividends are received. This is because the
equity method is applied in the situation where the investor company has a
sufficient number of the shares of voting stock of the other company to exercise a
significant influence. When a significant influence can be exercised over the
dividend policies of another corporation, it means that income of the other
corporation can be obtained, almost at will, by the investor company. Thus, when
the affiliate company reports income, the investor company should record a
proportionate share of that income as investment revenue because it is
considered earned under the requirements of the revenue principle.
7.
Under the equity method, dividends received from the affiliate company (the other
company) are not recorded as revenue because to record the dividends as
revenue would involve double counting. There would be double counting because
the investor company has already shown, as revenue earned, its proportionate
share of the earnings of the affiliate company. Because the dividends from the
affiliate company are paid out of those earnings, to record them as revenue by
the investor company would be double counting. As a consequence, under the
equity method, a dividend received from the affiliate company is debited to Cash
and credited to the Investment account.
8. The identifiable assets and liabilities of the acquired company are recorded at
their fair values on the date of acquisition. This is called the acquisition method.
9.
Goodwill is only recorded when one company purchases a controlling interest in

another. Goodwill is equal to the purchase price minus the fair value of the
identifiable assets less liabilities of the acquired company. The goodwill must be
recognized as an asset and is not expensed unless impaired.
Appendix E-2
Solutions Manual
MULTIPLE CHOICE
1. b
2. a
3. b
4. d
5. c
6. c
7. b
8. d
9. d
10. c
Appendix E-3
Authors Recommended Solution Time

(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
10
20
20
20
15
30
30
15
20
45
45
30
20
40
40
20
20
40
20
10
20
40
20
20
25
20
10
20
10
20
10
10
10
10
10
30
11
11
15
11
20
Continuing Case
1
20
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by
the perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.
Appendix E-4
Solutions Manual
MINI-EXERCISES
ME1.
D
D
C
B
A
A
B
1.
2.
3.
4.
5.
6.
Less than 20 percent ownership.

Current fair value.
More than 50 percent ownership.
At least 20 percent but not more than 50 percent ownership.
Bonds held to maturity.
Original cost less any amortization of premium or discount associated with the
purchase.
7. Original cost plus proportionate part of the income of the affiliate less
proportionate part of the dividends declared by the affiliate.
ME 2.
Held-to maturity investments (+A) .........................................
Cash (A) ..........................................................................
900,000
900,000
Appendix E-5
ME 3.
December 2, 2014:
Investments in AFS securities (+A) ..................................
93,750
Cash (A) ..................................................................
(6,250 shares x $15 per share); 12.5% ownership of voting stock
December 15, 2014:
Cash (+A) .........................................................................
Dividend revenue (+R, +SE) .....................................
(6,250 shares x $2 = $12,500)
December 31, 2014:
Net unrealized gains (losses) (OCI, SE).......................
Investments in AFS securities (A)...........................
Year
Fair Value
2014
$75,000
(6,250 x $12)
Book Value before

Adjustment
$93,750
93,750
12,500
12,500
18,750
18,750
=
=
Amount for
Adjusting Entry
$18,750
Unrealized loss
Appendix E-6
Solutions Manual
ME4.
December 2, 2014:
Investments in TS (+A).....................................................
93,750
Cash (A) ..................................................................
(6,250 shares x $15 per share); 12.5% ownership of voting stock
December 15, 2014:
Cash (+A) .........................................................................
Dividend revenue (+R, +SE) .....................................
(6,250 shares x $2 = $12,500)
December 31, 2014:
Net unrealized gains (losses) (+Loss, SE) .....................
Investments in TS (A) ..............................................
Year
Fair Value
2014
$75,000
(6,250 x $12)
Book Value before

Adjustment
$93,750
93,750
12,500
12,500
18,750
18,750
=
Amount for
Adjusting Entry
$18,750
ME5.
Transaction
12/2
12/15
12/31
Assets
+93,750
93,750
+12,500
18,750
Balance Sheet
Income Statement
Stockholders Revenues/ Expenses/
Net
Liabilities
Equity
Gains
Losses
Income
+12,500
18,750
+12,500
+12,500
ME6.
Transaction
12/2
12/15
12/31
Assets
+93,750
93,750
+12,500
18,750
Balance Sheet
Income Statement
Net
Liabilities
Equity
Gains
Losses
Income
+12,500
18,750
+12,500
+18,750
+12,500
18,750
Appendix E-7
ME7.
July 2, 2014:
Cash (+A) .........................................................................
Investments in affiliates (A) .....................................
(800,000 shares x $5 = $4,000,000); 35% ownership
December 31, 2014:
Investments in affiliates (+A) ............................................
Equity in affiliate earnings (+R, +SE) .........................
(35% x $400,000)
4,000,000
4,000,000
140,000
140,000
ME8.
Transaction
Assets
7/2
+4,000,000
4,000,000
12/31
+140,000
Balance Sheet
Income Statement
Net
Liabilities
Equity
Gains
Losses
Income
+140,000
+140,000
+140,000
ME9.
Property and equipment (+A) ................................................
Goodwill (+A) ........................................................................
Bonds payable (+L) .......................................................
Cash (A) ......................................................................
750,000
85,000
Appendix E-8
175,000
660,000
Solutions Manual
ME10.
Dividends + Change
in Fair Value*
Beginning Fair Value
of Investments
Economic return from =
investing
2015
2016
2017
$3,000 + $6,000
$64,000
$4,200 + $12,000
$70,000
$3,500 - $2,000
$82,000
.1406 (14.06%)
.2314 (23.14%)
.0183 (1.83%)
* 2015: $70,000 - $64,000 = $6,000 increase in fair value

2016: $82,000 - $70,000 = $12,000 increase in fair value
2017: $80,000 - $82,000 = $2,000 decrease in fair value
Economic return from investing ratio measures the performance of a securities
investment portfolio during the year. For N.M.S. Company, the return was 14.06% in
2015 and increased to 23.14% in 2016. However, the return dropped significantly in
2017 to 1.83%, primarily due to a decline in the fair value of the securities.
ME11.
Disney reports a large amount of goodwill because it has purchased other
businesses, paying more than the fair market value of the net assets (assets
liabilities) of the acquired companies.
Appendix E-9
EXERCISES
EE1.
Req. 1
July 1, 2015:
Held-to-maturity investments (+A) .................................... 12,000,000
Cash (A) ..................................................................
12,000,000
Req. 2
Dec 31, 2015:
Cash (+A) .........................................................................
Interest revenue (+R, +SE) ........................................
($12 million x 8% x 6/12 of a year)
480,000
480,000
EE2.
Questions
Method of Measurement
Fair value Method
Equity Method
Less than 25%.
At least 25% but not more than 50%.
At cost: 4,500 shares x $25 = $112,500.
At cost: 10,800 shares x $25 = $270,000.
When Co. B declares a cash dividend; not

for any holding gains and losses on
available-for-sale securities.
When Co. B reports income or loss for the

period; not when dividends are declared
or paid.
Company A should increase and decrease

the investment account based on stock
price changes (to fair value).
Increase the investment account for

proportionate part of income, less
proportionate part of dividends and losses
of Co. B.
4,500 shares x $22 = $99,000 fair value.
Cost of $270,000 plus $20,100 ($67,000 x

30%) equity in affiliates earnings minus
$6,000 ($20,000 x 30%) dividends
received equals $284,100.
Company A owns 12.5% of Company B

(4,500 shares 36,000 shares
outstanding). $20,000 dividends declared
x 12.5% = $2,500 dividend revenue for
Company A.
$67,000 Company B net income x 30% =

$20,100 equity in earnings of affiliate.
Appendix E-10
Solutions Manual
4,500 x ($25 $22) = $13,500 net

unrealized loss reported in stockholders
equity.
None.
EE3.
June 30, 2014:
Investments in AFS securities (+A) (7,000 shares x $15)
Cash (A) .....................................................................
105,000
Dec. 31, 2014:

Investments in AFS securities (+A).. ................................
Net unrealized gains (losses) (+OCI, +SE) ....................
14,000
Dec. 31, 2015:

Net unrealized gains (losses) (OCI, SE) ......................
Investments in AFS securities (A)...............................
21,000
Dec. 31, 2016:

Investments in AFS securities (+A). .................................
28,000
105,000
14,000
21,000
28,000
Computations:
Year
2014
2015
2016
Book Value before

=
Adjustment
$119,000
$105,000
=
($17 x 7,000) shares

($15 x 7,000 shares)
98,000
119,000
=
($14 x 7,000 shares)

(from prior fair value)
126,000
98,000
=
($18 x 7,000 shares)

Balance in Net Unrealized Gains (Losses)
Fair Value
Feb. 14, 2017:

Cash (+A) (7,000 shares x $20). ......................................
Gain on sale of investment (+Gain, +SE) .....................
Amount for
Adjusting Entry
+$14,000
21,000
+ 28,000
+$21,000
140,000
21,000
126,000
35,000
Note: The net unrealized gains (losses) account is a balance sheet account. It does
not affect the computation of net income each year. Because it is a balance sheet
Appendix E-11
account, it maintains its balance from year to year. Therefore, the decline in stock
price that occurs in 2015 is reported as an adjustment to the net unrealized gains
(losses) account. When the stock is sold in 2017, the net unrealized gains (losses) is
closed, and the difference between the purchase price (original cost) and the selling
price is reported as a gain on the income statement.
Appendix E-12
Solutions Manual
EE4.
June 30, 2014:
Cash (A) .....................................................................
(7,000 shares x $15 per share)
105,000
105,000
Dec 31, 2014:

Net unrealized gains (losses) (+Gain, +SE)...................
14,000
Dec. 31, 2015:

Investments in TS (A) .................................................
21,000
Dec. 31, 2016:

Investment in TS (+A). .....................................................
28,000
14,000
21,000
28,000
Computations:
Year
Fair Value
2014
$119,000
($17 x 7,000) shares
98,000
($14 x 7,000 shares)
126,000
($18 x 7,000 shares)
2015
2016
Book Value before

Adjustment
$105,000
($15 x 7,000 shares)
119,000
98,000
Feb. 14, 2017:

Cash (+A) (7,000 shares x $20) ............................................
Gain on sale of investment (+Gain, +SE) ..........................
Investments in TS (A). .....................................................
Amount for
Adjusting Entry
+$14,000
21,000
+ 28,000
140,000
14,000
126,000
Note: The net unrealized gains (losses) is an income statement account. This item is
reported on the current income statement and affects the computation of net income.
It is closed to Retained Earnings at the end of each year.
Appendix E-13
EE5.
March 10, 2014:
Investments in AFS securities (+A) (15,000 shares x $35)
Cash (A) .....................................................................
525,000
Dec. 31, 2014:

30,000
Dec. 31, 2015:

45,000
Dec. 31, 2016:

60,000
525,000
30,000
45,000
60,000
Computations:
Year
2014
2015
2016
Book Value before

Adjustment
$495,000
$525,000
($33 x 15,000) shares

($35 x 15,000 shares)
540,000
495,000
($36 x 15,000 shares)

480,000
540,000
($32 x 15,000 shares)

Balance in Net Unrealized Gains (Losses)
Fair Value
Sept. 12, 2017:

Cash (+A) (15,000 shares x $30) .....................................
Loss on sale of securities (+Loss, SE) ...........................
Net unrealized gains (losses) (+OCI, +SE) ...................
Amount for
Adjusting Entry
$30,000
+ 45,000
60,000
$45,000
450,000
75,000
480,000
45,000
Note: The unrealized gains (losses) account is a balance sheet account. It does not
affect the computation of net income each year. Because it is a balance sheet
account, it maintains its balance from year to year. Therefore, the decline in stock
price that occurs in 2014 and 2016 is reported as an adjustment to the net unrealized
gains (losses) account and the increase in stock price that occurs in 2015 is also
reported as an adjustment to the net unrealized gains (losses) account. When the
stock is sold in 2017, the net unrealized gains (losses) is closed, and the difference
between the purchase price and the selling price is reported as a loss on the income
statement.
Appendix E-14
Solutions Manual
EE6.
March 10, 2014:
Cash (A) .....................................................................
525,000
525,000
Dec. 31, 2014:

Net unrealized gains (losses) TS (+Loss, SE).............
30,000
Dec. 31, 2015:

Net unrealized gains (losses) TS (+Gain, +SE) .........
45,000
Dec. 31, 2016:

Net unrealized gains (losses) TS (+Loss, SE).............
60,000
30,000
45,000
60,000
Computations:
Year
Fair Value
2014
$495,000
($33 x 15,000) shares
540,000
($36 x 15,000 shares)
480,000
($32 x 15,000 shares)
2015
2016
Book Value before

Adjustment
$525,000
($35 x 15,000 shares)
495,000
540,000
Sept. 12, 2017:

Cash (+A) (15,000 shares x $30) .....................................
Loss on sale of investment (+Loss, SE) .........................
Amount for
Adjusting Entry
$30,000
+ 45,000
60,000
450,000
30,000
480,000
Note: The net unrealized gains (losses) is an income statement account. This item is
reported on the current income statement and affects the computation of net income.
It is closed to Retained Earnings at the end of each year.
Appendix E-15
EE7.
Req. 1
The equity method must be used because the company owns 27.5% (17,875
65,000) of the total shares outstanding of Tristezza Corporation. The equity method
must be used when there is at least 20% but not more than 50% ownership in
existence. The Gioia Company must use the equity method because it can exercise
significant influence, but not control, over the operating and financing policies of
Tristezza Corporation.
Req. 2
January 10, 2014:
Investments in affiliates (+A) ...........................................
196,625
Cash (A) .....................................................................
(17,875 shares x $11 per share) 27.5% of the voting common stock
December 31, 2014:
Investments in affiliates (+A). ...........................................
Equity in affiliate earnings (+R, +SE) ............................
($80,000 x 27.5% = $22,000)
December 31, 2014:
Cash (+A) .........................................................................
Investments in affiliates (A)..........................................
(17,875 shares x $.60 = $10,725)
196,625
22,000
22,000
10,725
10,725
No entry is made under the equity method to record changes in fair value.
Req. 3
Balance SheetAt December 31, 2014
Long-term Investments:
Investments in affiliates (equity basis*) ........................................................
$207,900
Income StatementFor the Year Ended December 31, 2014

Equity in affiliate earnings .............................................................................
$ 22,000
*
Cost
% Affiliates net income
Investments in Affiliates
196,625
22,000 10,725
% Affiliates dividends declared
207,900
Appendix E-16
Solutions Manual
EE8.
Req. 1
Investing activities
Purchase of investments in affiliated companies
Req. 2
(196,625)
Operating activities
Net Income
Adjusted for:
Equity in earnings of affiliated companies
(no cash received)
Dividends received from affiliated companies
(cash received)
xxxxx
(22,000)
10,725
EE9.
(in millions)
Assets (+A, not detailed). ......................................................
Goodwill (+A) [$1,377 ($1,036 $70)] ...............................
Liabilities (+L, not detailed) ..............................................
Cash (A) ..........................................................................
1,036
411
70
1,377
EE10.
Req. 1
Economic Return =
from Investing
Dividends Received + Change in Fair Value*

Beginning Fair Value of Investment Portfolio
2014:
($23,906 $76,452) $836,451 = -0.0628
(-6.28%)
2015:
($24,399 + $46,346) $759,999 = +0.0931 (+9.31%)
2016:
($25,538 + $38,815) $806,345 = +0.0798 (+7.98%)
Change in fair value (ending beginning):

2014: $759,999 - $836,451 = - $76,452
2015: $806,345 - $759,999 = +$46,346
2016: $845,160 - $806,345 = +$38,815
Req. 2
Appendix E-17
Kukenberger, Inc.s investment portfolio had a negative economic return in 2014

(-6.28%) primarily due to the negative change in fair value. However, in 2015 and
2016, the portfolio experienced positive economic returns of 9.31% and 7.98%
respectively, again primarily due to the positive change in fair value each year.
Dividends remained relatively constant over the three years.
Appendix E-18
Solutions Manual
EE11 (Supplement A)
Req. 1
July 1, 2014:
Held-to-maturity investments (+A) ................................... 8,041,600
Cash (A) ...................................................................
8,041,600
(Present value of the bond investment = PV of the principal + PV of the interest annuity
$8,041,600 = ($7,000,000 x .5537) + ($280,000 x 14.8775))
Req. 2
December 31, 2014:
Cash (+A) .......................................................................
280,000
Held-to-maturity investments (A) ..............................
38,752
Interest revenue (+R, +SE) .........................................
241,248
(Cash = $7,000,000 principal x .08 x 6/12 months = $280,000
Interest revenue = $8,041,600 present value x .06 x 6/12 months = $241,248)
PROBLEMS
PE1.
Req. 1
When the bonds are purchased, the company increases Held-to-Maturity
Investments and decreases Cash.
Req. 2
When interest is received on the investments, Cash increases and Interest
Revenue increases. The bonds were purchased at par; the Held-to-Maturity
Investments account is not affected.
Req. 3
No journal entry is required. A decrease in the fair value of bonds in the held-tomaturity portfolio is not recorded.
Appendix E-19
PE2.
Req. 1
March 1, 2014
Investments in TS (+A) (20,000 shares x $10 per share).
Cash (A) .....................................................................
200,000
Dec. 31, 2014

40,000
Dec. 31, 2015

120,000
Dec. 31, 2016

60,000
200,000
40,000
120,000
60,000
Req. 2
March 1, 2014
Cash (A) .....................................................................
200,000
Dec. 31, 2014

40,000
Dec. 31, 2015

120,000
Dec. 31, 2016

60,000
200,000
40,000
120,000
60,000
Computations:
Year
Fair Value
2014
$160,000
($8 x 20,000) shares
280,000
($14 x 20,000 shares)
340,000
($17 x 20,000 shares)
2015
2016
Book Value before

Adjustment
$200,000
($10 x 20,000 shares)
160,000
280,000
Amount for
Adjusting Entry
$40,000
+ 120,000
+ 60,000
Appendix E-20
Solutions Manual
Balance in Net Unrealized Gains (Losses) for AFS Securities
+$140,000
PE3.
a. Investments in AFS securities (+A) ..................................

Cash (A) .....................................................................
19,000
b. Cash (+A) .........................................................................

Dividend revenue (+R, +SE) .........................................
7,771
c. Cash (+A) .........................................................................

Net unrealized gains (losses) (-OCI, -SE) ........................
Investments in AFS securities (-A) ...............................
Gain on sale of investments (+Gain, +SE) ...................
16,531
1,092
d. Investments in AFS securities (+A) ..................................

Net unrealized gains (losses) (+OCI, +SE) ...................
5,210
Fair
Book Value
19,000
7,771
15,239
2,384
5,210
Amount of
Value
Before Adjustment
Adjusting Entry
$14,558
$9,348
+$5,210
($5,587 beg. bal. + $19,000

purchase - $15,239 sale)
e. Balance Sheet
Assets:
Other investments
$14,558
Stockholders Equity:
Net unrealized gains (losses)
5,683
(in Other Comprehensive Income)
Appendix E-21
f. Income Statement
Other Items:
Gain on sale of investments $ 2,384
Dividend revenue
7,771
g. If the securities were categorized as trading securities, no net unrealized gain

would appear on the balance sheet. Therefore, when the securities were sold in
(c), no debit would be made to the Net Unrealized Gains (Losses) account.
Rather, there would be a gain on the sale of $1,292 [$16,531 cash $15,239 fair
value] reported on the income statement. Then at year-end, the net unrealized
gain of $5,210 would be reported on the income statement (not in stockholders
equity).
Appendix E-22
Solutions Manual
PE4.
Req. 1
The fair value method must be used for both the D common stock and F bonds. The
fair value method must be used for D common stock because only 14.74% of it is
owned. If less than 20% of the outstanding stock is owned, it is assumed there can be
no exercise of significant influence or control; therefore, the fair value method must be
used. The fair value method is used for F bonds because they are passive
investments not intended to be held to maturity.
Req. 2
2014
a.
Acquisition of the investments:

Investments in AFS securities (+A) ...
Cash (A) ....................................
2015
554,000
554,000
D common stock: 14,000 shares x $11

F bonds: at par
Total investment .................................
= $ 154,000
=
400,000
$554,000
b.
Income reported by Corporations D & F:

No entry is required for either security because, under the fair value method,
revenue is recognized only when dividends are declared or interest is earned.
c.
Dividends/interest received:
Cash (+A) ..........................................
Dividend revenue (+R, +SE) ......
Interest revenue (+R, +SE) .........
35,000
2014: D common stock: 14,000 shares x $.50

2015: D common stock: 14,000 shares x $.70
37,800
7,000
28,000
=
=
9,800
28,000
$7,000
$9,800
Appendix E-23
PE4. (continued)
2014
d. Fair value effects:
Net unrealized gains (losses) (OCI, SE)
Investment in AFS securities (A)
2015
39,000
39,000
Investment in AFS securities (+A)

Net unrealized gains (losses) (+OCI, +SE)
31,000
31,000
Computations:
Year
Corporation
Fair Value
2014
D
F
2015
D
F
$140,000
375,000
515,000
161,000
385,000
546,000
Book Value
before
Adjustment
$154,000
400,000
140,000
375,000
Req. 3
a. Balance Sheet:
Investments in AFS securities (at fair value) .....................
b.
c.
=
=
=
=
=
Amount for
Adjusting
Entry
$14,000
25,000
39,000
+21,000
+10,000
+31,000
2014
2015
$515,000
$546,000
Net unrealized gains (losses) (in OCI) ...............................
(39,000)
(8,000)
Income Statement:
Dividend revenue...............................................................
Interest revenue .................................................................
7,000
28,000
9,800
28,000
Appendix E-24
Solutions Manual
PE5.
Req. 1
Aug. 4, 2015
Investments in TS (+A) .................................... 180,000

Cash (A) .....................................................
Dec. 31, 2015 Net unrealized gains (losses) (+Loss, SE) .....
Investments in TS (A) .................................
June 1, 2016
10,000
10,000
Cash (+A) .........................................................

Dividend revenue (+R, +SE) .........................
7,000
Dec. 31, 2016 Investments in TS (+A) ....................................

Net unrealized gains (losses) (+Gain, +SE) .
12,000
June 1, 2017
180,000
7,000
12,000
Cash (+A) .........................................................

7,000
Dec. 31, 2017 Investments in TS (+A) ....................................

Net unrealized gains (losses) (+Gain, +SE) .
6,000
7,000
6,000
Computations for Year-End Adjustments to Market:

Year
Fair Value
Book Value before

Adjustment
2015
$170,000
($85 x 2,000 shares)
182,000
($91 x 2,000 shares)
188,000
($94 x 2,000 shares)
$180,000
Amount for
Adjusting
Entry
$10,000
170,000
182,000
+12,000
+6,000
2016
2017
Appendix E-25
PE5. (continued)
Req. 2
Aug. 4, 2015
Investments in AFS securities (+A) .................. 180,000

Cash (A)......................................................
Dec. 31, 2015 Net unrealized gains (losses) (OCI, SE) .......
Investments in AFS securities (A) ...............
June 1, 2016
10,000
10,000
Cash (+A) .........................................................

7,000
Dec. 31, 2016 Investments in AFS securities (+A) ..................

Net unrealized gains (losses) (+OCI, +SE) ..
12,000
June 1, 2017
180,000
7,000
12,000
Cash (+A) .........................................................

7,000
Dec. 31, 2017 Investments in AFS securities (+A) ..................

Net unrealized gains (losses) (+OCI, +SE) ..
6,000
7,000
6,000

Year
Fair Value
Book Value before

Adjustment
$170,000
$180,000
=
($85 x 2,000 shares)

2016
182,000
170,000
=
($91 x 2,000 shares)

2017
188,000
182,000
=
($94 x 2,000 shares)

Balance in Net Unrealized Gains (Losses) for AFS Securities
2015
Amount for
Adjusting
Entry
$10,000
Appendix E-26
+12,000
+6,000
+$8,000
Solutions Manual
PE5. (continued)
Req. 3
Aug. 4, 2015
Investments in affiliates (+A) ............................ 180,000

Cash (A)......................................................
Dec. 31, 2015 Investments in affiliates (+A) ............................

Equity in affiliate earnings (+R, +SE) ...........
(30% x $30,000)
9,000
June 1, 2016
Cash (+A) .........................................................

Investments in affiliates (A) ........................
7,000

(30% x $30,000)
9,000
June 1, 2017
Cash (+A) .........................................................

Investments in affiliates (A) ........................
7,000

(30% x $30,000)
9,000
180,000
9,000
7,000
9,000
7,000
9,000
Appendix E-27
PE6.
Req. 1
CASE A
The fair value method must be used by Company P because it owns 14%
(4,900 35,000) of the total outstanding common shares of Company T. The
fair value method must be used when less than 20% of the outstanding shares
are owned because the investor (Company P) cannot exercise significant
influence or control.
CASE B
The equity method must be used by Company P because it owns 30% (10,500
35,000) of the outstanding common shares of Company T. The equity
method must be used if the level of ownership is at least 20% but not more
than 50% because the investor (Company P) can exercise significant influence,
but not control, over the operating and financing policies of Company T.
Req. 2
Case A-14%
a. January 1, 2014 purchase:
Cash (A) ......................................
(4,900 shares x $24)
117,600
117,600
Investments in affiliates (+A).............

Cash (A) ......................................
(10,500 shares x $24)
b. Income reported by Company T:
252,000
252,000
None
Investments in affiliates (+A).............

Equity in affiliate earnings (+R, +SE)
($50,000 x 30%)
c. Dividends declared and paid by Co. T:
Cash (+A) .........................................
Dividend revenue (+R, +SE) ........
($21,500 x 14%)
Case B-30%
15,000
15,000
3,010
3,010
Cash (+A)..........................................
Investments in affiliates (A) .......
6,450
6,450
($21,500 x 30%)
d.
Net unrealized gains (losses) (OCI, SE) 14,700

Investments in AFS securities (A)
14,700
4,900 shares x ($21 fair value $24 cost) = $14,700.
Appendix E-28
None
Solutions Manual
PE6. (continued)
Req. 3
Case A-14%
Balance Sheet:
Investments:
Investments in AFS securities (1) .......
Investments in affiliates (2) ..................
Other comprehensive income:
Net unrealized losses/gains ...........
Income Statement:
Dividend revenue .................................
Equity in earnings of affiliate ................
Case B-30%
$102,900
$260,550
(14,700)
None
3,010
15,000
(1) Cost $117,600 Year-end adjustment to fair value $14,700 = $102,900 fair value
(reported on balance sheet)
(2) Cost $252,000 + % Affiliates net income $15,000 % Affiliates dividends
declared $6,450 = $260,550 book value (reported on balance sheet)
Req. 4
Assets (investments), stockholders equity (retained earnings), and revenues (from
investments) are different because (1) different methods of recognizing revenue are
required and (2) adjustments for changes in fair value are recorded only under the fair
value method.
Appendix E-29
PE7.
Req. 1
CASE The fair value method must be used by the company because it owns 14% (21,000
A
150,000) of the total shares of the outstanding common stock of Surge
Corporation. The fair value method must be used when less than 20% of the
outstanding stock is owned because the investor cannot exercise either significant
influence or control.
CASE The equity method must be used by the company because it owns 30% (45,000
B
150,000) of the total shares of the outstanding common stock of Surge Corporation.
The equity method must be used when at least 20% but not more than 50% of the
outstanding stock is owned, because the investor can exercise significant influence,
but not control, over the operating and financing policies of the other company.
Req. 2
Case A-14%
a.
Jan. 10, 2014 purchase:

Investments in AFS securities (+A) ........
Cash (A) ........................................
(21,000 shares x $22)
Investments in affiliates (+A) ..................

Cash (A) ........................................
(45,000 shares x $22)
b. Net income of Surge Co.:
Investments in affiliates (+A) ..................
Equity in affiliate earnings (+R, +SE)
($289,000 x 30%)
c. Dividends paid by Surge Corporation:
Cash (+A) ..........................................
Dividend revenue (+R, +SE) ..........
(21,000 shares x $.6)
462,000
462,000
990,000
990,000
None1
86,700
86,700
12,600
Cash (+A) ..........................................

Investments in affiliates (A) ........
(45,000 shares x $1)
d. Year-end valuation:
Net unrealized gains (losses) (OCI, SE) 42,000
[21,000 x ($20 fair value $22 cost) = $42,000]
1
Not recorded under fair value method.
Case B-30%
12,600
45,000
45,000
None2
42,000
Not recorded under the equity method.
Appendix E-30
Solutions Manual
PE7. (continued)
Req. 3
Case A
a. Balance Sheet:
Investments in AFS securities, at fair value (1) .................
Investments in affiliates (2) ...............................................
b. Stockholders Equity
Net unrealized losses/gains .........................................
c. Income Statement:
Dividend revenue .............................................................
Equity in affiliate earnings ................................................
Case B
$420,000
$1,049,700
(42,000)
12,600
86,700
(1) Cost $462,000 Year-end adjustment to fair value $42,000 = Fair value $420,000
reported on the balance sheet
(2) Cost $990,000 + % Affiliates net income $86,700 % Affiliates dividends
declared $27,000 = $1,049,700 reported on the balance sheet
Req. 4
The amounts reported in Requirement (3) are different because of (1) the two
different approaches used in recognizing investment revenue and (2) adjustments for
changes in fair value that are made only under the fair value method.
Appendix E-31
PE8.
a. Investments in affiliates (+A) ............................................
Cash (A) .....................................................................
15,685
b. Cash (+A) .........................................................................

Investments in affiliates (-A) .........................................
8,564
c. Investments in affiliates (+A) ............................................

Equity in affiliate earnings (+R, +SE) ............................
3,897
15,685
8,564
3,897
d. Balance Sheet
Assets:
Investments in affiliates
$67,450
e. Income Statement
Other Items:
Equity in affiliate earnings
$ 3,897
PE9.
Since Bradford Company acquired 42% (37,800/90,000) of Halls outstanding
common stock, this investment is accounted for using the equity method.
Statement of Cash Flows:
Operating activities
Net Income
Adjusted for:
Equity in earnings of affiliates (no cash received)
Dividends received from affiliates (cash received)
$ xxx,xxx
(91,140)
49,140
Appendix E-32
Solutions Manual
Investing activities
Purchase of investments in affiliates
(1,171,800)
(Note that the change in fair value does not have any effect on the cash flow
statement.)
Appendix E-33
PE10.
Req. 1
Purchase price for the net assets
Fair value of net assets acquired*
Goodwill purchased
$145,000
- 95,000
$ 50,000
*$23,000 cash + $85,000 fair value of property and equipment + $3,000 fair value of
patent $16,000 liabilities = $95,000
Req. 2
Patent (+A) ...........................................................................
Goodwill (+A) ........................................................................
Liabilities (not detailed) (+L) .............................................
Cash (A) ($145,000 paid - $23,000 received)..................
85,000
3,000
50,000
16,000
122,000
PE11.
Req. 1
2008
Dividends + Change in Fair Value
Beginning Fair Value of Investments
Economic return from investing
* $122,306
- 39,150
83,156
- 81,620
+$ 1,536
$572 + $1,536*
$81,620
=
0.026 (or 2.6%)
ending investments
end of year purchases that did not experience a change in fair value
adjusted ending investments
beginning investments
change in fair value
Req. 2
The economic return from investing measures the performance of a companys
investment portfolio each year. However, as noted in the text, computations of
realistic portfolios are more complex if securities are bought and sold throughout the
year, as was the case for Apple. Assuming the additional purchase of investments
was made at the end of the year, the computation suggests Apple, Inc.s return was
2.6% during the year. If the additional purchases of $39,150 had been made at the
beginning of the year, the economic return on investing would have been lower at
1.35% [($572 + $1,081) / $122,306].
Appendix E-34
Solutions Manual
ALTERNATE PROBLEMS
APE1.
Req. 1
When the bonds were purchased, the company increased Held-to-Maturity
Investments and decreased Cash.
Req. 2
When interest was received on the investments, Cash increased (based on the
stated rate) and Interest Revenue increased (based on the effective rate). The
bonds were purchased at a premium, so the Held-to-Maturity Investments
account was decreased for the difference between the cash received and the
interest revenue recorded.
Req. 3
No journal entry is required. A decrease in the fair value of bonds in the held-tomaturity portfolio is not recorded.
Appendix E-35
APE2.
Req. 1
Sept 15, 2014
Cash ( A) [7,000 shares x $32] ....................................
224,000
Dec. 31, 2014

14,000
Dec. 31, 2015

Investments in TS ( A) ................................................
63,000
Dec. 31, 2016

Investments in TS ( A) ................................................
28,000
224,000
14,000
63,000
28,000
Req. 2
Sept 15, 2014
Cash ( A) ....................................................................
224,000
Dec. 31, 2014

14,000
Dec. 31, 2015

Net unrealized gains (losses) (OCI, SE) .....................
Investments in AFS securities ( A)..............................
63,000
Dec. 31, 2016

Net unrealized gains (losses) (OCI, SE) .....................
Investments AFS securities ( A) .................................
28,000

Book Value before
Year
Fair Value
Adjustment
2014
$238,000
$224,000
($34 x 7,000 shares)

2015
175,000
238,000
($25 x 7,000 shares)

2016
147,000
175,000
Appendix E-36
($21 x 7,000 shares)
224,000
14,000
63,000
28,000
Amount for
Adjusting Entry
+$14,000
63,000
28,000
Solutions Manual
APE3.
Req. 1
The fair value method of accounting for long-term investments must be used in this
situation because 6% of the outstanding voting stock of Square Corporation is owned
(12,000 shares 200,000 shares outstanding). The fair value method must be used
when less than 20% of the outstanding stock is owned because the investor company
cannot exercise significant influence or control.
Req. 2
a.
Acquisition:
Cash ( A) .....................................
b.
Income reported by Square Corporation:

Revenue should not be recognized by the company on the basis of Square Corp.
income in either 2014 or 2015 because, under the fair value method, revenue is
not recognized until dividends are declared.
c.
Dividends received:
Cash (+A) ..........................................
Dividend revenue (+R, +SE) ..........
2014: $60,000 x 6% = $3,600
2015: $80,000 x 6% = $4,800
d.
2014
300,000
300,000
2015
3,600
Fair value effects:

Investments in AFS securities (+ A) .
36,000
Net unrealized gains (losses) (+OCI,
+ SE) ............................................
4,800
3,600
4,800
36,000
12,000
12,000

Year
Fair Value
2014
$336,000
($28 x 12,000 shares)
324,000
($27 x 12,000 shares)
2015
Book Value before

Adjustment
$300,000
336,000
Amount for
Adjusting Entry
+$36,000
12,000
Appendix E-37
APE3. (continued)
Req. 3
2014
2015
a. Balance sheet:
Investments in AFS securities (at fair value) .....................
$336,000
$324,000
b. Stockholders Equity:
Net unrealized gains (losses) .......................................
36,000
24,000
c. Income Statement:
Dividend revenue ..............................................................
3,600
4,800
Appendix E-38
Solutions Manual
APE4.
Req. 1
CASE A
CASE B
The fair value method must be used by the company because it owns 15%
(30,000 200,000) of the total shares. When ownership is less than 20% the
fair value method must be used because the investor cannot exercise either
significant influence or control.
The equity method must be used by the company because it owns 40%
(80,000 200,000) of the total shares. When ownership is at least 20% but not
more than 50%, the equity method must be used because the investor can
exercise significant influence, but not control, over the operating and financing
policies of the other company.
Req. 2
Case A-15%
January 10, 2015:
Investments in AFS securities (+A) ..........
(30,000 shares x $12)
Investments in affiliates (+A) ...................
(80,000 shares x $12)
Cash ( A) .........................................
December 31, 2015:
Investments in affiliates (+A) ....................
Equity in affiliate earnings (+R, +SE) ..
CASE B$90,000 x 40% = $36,000
December 31, 2015:
Cash (+A) .................................................
Investments in affiliates (A) ................
Dividend revenue (+R, +SE) .................
CASE A30,000 x $.60 = $18,000
CASE B80,000 x $.60 = $48,000
December 31, 2015:
Investments in AFS securities (A) ......
CASE A30,000 shares x ($9 fair value
$12 cost) = $90,000 unrealized loss
1
Not recorded under fair value method.
Case B-40%
360,000
960,000
360,000
960,000
None1
36,000
36,000
18,000
48,000
48,000
18,000
None2
90,000
90,000
Not recorded under the equity method.
Appendix E-39
APE4. (continued)
Req. 3
Case A
December 31, 2015:
Balance sheet (partial):
Investments:
Investments in AFS securities .........................................
Investments in affiliates* ................................................
Net unrealized gains (losses) ....................................
Income Statement (partial):
Dividend revenue ...............................................................
Equity in earnings of affiliate ..............................................
Case B
$270,000
$948,000
(90,000)
None
18,000
36,000
* Cost $960,000 + $36,000 portion of affiliates net income - $48,000 portion of

affiliates dividends declared
APE5.
On the Statement of Cash Flows:
Operating Activities:
Net income
Adjusted for:
Equity in earnings of affiliates (no cash received)
Dividends received (cash received)
Investing Activities:
Purchase of investments
Case A
Case B
$ xxx,xxx
$xxx,xxx
(36,000)
48,000
(360,000)
Appendix E-40
(960,000)
Solutions Manual
APE6.
Req. 1
Purchase price for the net assets
Fair value of net assets acquired*
Goodwill purchased
$140,000
110,000
$ 30,000
*($12,000 inventory + $180,000 property and equipment $82,000 liabilities)
Req. 2
Inventory (+A) .......................................................................
Goodwill (+A) ........................................................................
Liabilities (not detailed) (+L) .............................................
Cash (A) ..........................................................................
12,000
180,000
30,000
82,000
140,000
Appendix E-41
CASES AND PROJECTS

ANNUAL REPORT CASES
CPE1
Req. 1
Note 2, under the heading Cash and Cash Equivalents, Short-term Investments and Longterm Investments, summarizes the types of securities that American Eagle holds in its
investment portfolio. Note 3 provides additional detail and indicates that short-term
investments totaling $25,499,000, consist of treasury bills and state and local government
auction rate securities (ARS); and long-term investments, totaling $847,000, consist of an
auction rate security call option.
Req. 2
A balance of $11,469,000 was reported for goodwill on the January 28, 2012, balance sheet.
There was a very slight change in goodwill during fiscal 2011 ($3,000 decrease). Since
goodwill can only result from the acquisition of another company at a price which exceeds the
individual fair market values of the assets and liabilities, it is unlikely that the company
purchased another company during this time period. Note 2, under the heading Goodwill,
indicates that goodwill was not impaired during fiscal 2011.
CPE2.
Req. 1
Appendix E-42
Solutions Manual
On its balance sheet as of January 31, 2012, Urban Outfitters reported $89,854,000 for shortterm marketable securities and $126,913,000 for long-term marketable securities. Note 3
indicates that short-term investments consist of corporate bonds, municipal bonds, certificates
of deposit, federal government agencies, and commercial paper. Long-term investments
consist of corporate bonds, municipal bonds, auction rate instruments, treasury bills,
certificate of deposit, and federal government agencies.
Req. 2
The company purchased marketable securities for $169,467,000 during the most recent year,
as disclosed on its statement of cash flows under investing activities.
Appendix E-43
FINANCIAL REPORTING AND ANALYSIS CASES
CPE3.
Req. 1
Under the equity method, the investment amount (i.e., $485,000) was increased by
the proportionate share in income reported by the affiliate corporation and decreased
by the proportionate share of the dividends declared by the affiliate corporation. Thus,
the increase in the investment account was caused by an excess of investment
income over dividends received.
Req. 2
The net increase in the investment account was $71,000 (i.e., $556,000 $485,000).
Dividends during 2015 reduced the investment account by the amount of $90,000;
therefore, investment revenue must be $161,000 (i.e., $90,000 + $71,000).
Req. 3
If the fair value method were used, investment revenue for 2015 would be $90,000
(the amount of dividends received). The unrealized gain ($550,000 - $485,000) does
not affect the income statement because the securities would be classified as
available for sale (held long term).
Req. 4
The fair value of Maryn stock increased during 2015; therefore, the amount of the
investment account balance would be $550,000.
CPE4.
Under the acquisition method of accounting in both the U.S. and under IFRS,
identifiable intangible assets acquired in a business combination are initially valued at
fair value. Those assets with indefinite useful lives and any goodwill amounts are not
amortized. They are subjected to periodic impairment reviews and any impairment
write-downs are recorded as losses on the income statement. Those intangible assets
with limited useful lives are amortized on a straight-line basis and recorded as an
expense on the income statement.
The only major differences between Diageos accounting and U.S. GAAP relate to
acquisitions from prior years. Prior to 2001, goodwill was recorded on the balance
sheet as an intangible asset and amortized over a period not to exceed 40 years in
the U.S. Under U.S. GAAP, amortization of these amounts of goodwill was stopped in
2001. In England, prior to 2006, the recorded amount of goodwill was subtracted from
retained earnings and not recorded as an asset. The financial statements of both U.S.
Appendix E-44
Solutions Manual
and U.K. companies were not restated for the acquisitions accounted for under the
old rules. So the older and newer acquisitions are accounted for in the current
statements using different methods.
CRITICAL THINKING CASES
CPE5.
This case deals with inside (non-public) information. The plan to acquire 80% of
another company is significant because, when announced, it will affect the stock price
of the other company. It is wrong both legally and ethically to trade on insider
information regardless of the size of your proposed investment. It is also wrong to
pass insider information on to another individual even if you do not profit directly from
the information.
CP E6.
The assets, liabilities, revenues and expenses of the two companies will be added
together. It is unlikely that the two companies have significant intercompany
transactions such as intercompany sales. The analyst cannot simply add the two
financial statements together because the investment account must be eliminated and
the assets of the acquired company stated at their fair value. Unfortunately, this
information is not available publicly.
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CPE7.
The solutions to this project will depend on the company and/or accounting period selected
for analysis.
Appendix E-45
CONTINUING CASE
CCE-1.
Req. 1
November 21, 2012
Investments in TS (+A)..................................................... 19,200,000
Cash (A) .....................................................................
Dec. 31, 2012
1,200,000
Dec. 31, 2013

Investments in TS (A) ..................................................
1,600,000
Dec. 31, 2014

3,200,000
19,200,000
1,200,000
1,600,000
3,200,000
Sept. 15, 2015

Cash (+A) ........................................................................ 20,000,000
Investments in TS (A)..................................................
Gain on sale of investments (+Gain, +SE) ....................
19,600,000
400,000
Computations:
Year
2012
2013
2014
Fair Value
$18,000,000
($45 x 400,000) shares

16,400,000
($41 x 400,000 shares)

19,600,000
($49 x 400,000 shares)
Book Value before

Adjustment
$19,200,000
($48 x 400,000 shares)
18,000,000
16,400,000
Amount for
Adjusting Entry
$1,200,000
1,600,000
+ 3,200,000
Appendix E-46
Solutions Manual
CCE-1. (continued)
Req. 2
November 21, 2012
Investments in AFS securities (+A) .................................. 19,200,000
Cash (A) .....................................................................
Dec. 31, 2012
1,200,000
Dec. 31, 2013

Investments in AFS securities (A) ................................
1,600,000
Dec. 31, 2014

3,200,000
19,200,000
1,200,000
1,600,000
3,200,000
Sept. 15, 2015

Cash (+A) ........................................................................ 20,000,000
400,000
Investments in AFS securities (A) ...............................
Gain on sale of investments (+Gain, +SE) ....................
19,600,000
800,000
Computations:
Book Value before
Adjustment
2012
$18,000,000
$19,200,000
($45 x 400,000) shares

($48 x 400,000 shares)
2013
16,400,000
18,000,000
($41 x 400,000 shares)

2014
19,600,000
16,400,000
($49 x 400,000 shares)

Balance in Net Unrealized Gains (Losses) account in OCI
Year
Fair Value
Amount for
Adjusting Entry
$1,200,000
1,600,000
+ 3,200,000
+$400,000
Appendix E-47

Appendix E: Reporting and Interpreting Investments in Other Corporations

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Appendix E: Reporting and Interpreting Investments in Other Corporations

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Available Formats

Appendix E - Reporting and Interpreting Investments in Other Corporations

For passive investments in bonds, companies may report the investment at

Financial Accounting, 8/e