CHAPTER 13investments and fair value accounting
PRACTICE EXERCISES
PE 13–1A
a. Investments—Belmont City Bonds...... 250,000
Interest Receivable...... 1,500
Cash...... 251,500
b. Cash...... 5,000*
Interest Receivable...... 1,500
Interest Revenue...... 3,500
*$250,000 × 4% × ½
c. Cash...... 78,100*
Loss on Sale of Investments...... 2,400
Interest Revenue...... 500
Investments—Belmont City Bonds...... 80,000
*Sale proceeds ($80,000 × 97%)...... $77,600
Accrued interest...... 500
Total proceeds from sale...... $78,100
PE 13–1B
a. Investments—Tech Grove, Inc. Bonds...... 40,000
Interest Receivable...... 850
Cash...... 40,850
b. Cash...... 1,200*
Interest Receivable...... 850
Interest Revenue...... 350
*$40,000 × 6% × ½
c. Cash...... 15,450*
Interest Revenue...... 150
Gain on Sale of Investments...... 300
Investments—Tech Grove, Inc. Bonds...... 15,000
*Sale proceeds ($15,000 × 102%)...... $15,300
Accrued interest...... 150
Total proceeds from sale...... $15,450
PE 13–2A
Feb. 12Investments—Mid-Ex Company Stock...... 120,200*
Cash...... 120,200
*(5,000 shares × $24 per share) + $200
Apr. 22Cash...... 1,800*
Dividend Revenue...... 1,800
*$0.36 per share × 5,000 shares
May 10Cash...... 123,840*
Gain on Sale of Investments...... 27,680
Investments—Mid-Ex Company Stock...... 96,160**
*(4,000 shares × $31) – $160
**4,000 shares × ($120,200/5,000 shares)
PE 13–2B
Aug.15Investments—Birch Company Stock...... 70,560*
Cash...... 70,560
*(1,600 shares × $44 per share) + $160
Sept. 10...... Cash1,200*
Dividend Revenue...... 1,200
*$0.75 per share × 1,600 shares
Oct. 5Cash...... 17,450*
Loss on Sale of Investments...... 4,600
Investments—Birch Company Stock...... 22,050**
*(500 shares × $35) – $50
**500 shares × ($70,560/1,600 shares)
PE 13–3A
Jan. 2Investment in First Alert Company Stock...... 155,000
Cash...... 155,000
Dec. 31Investment in First Alert Company Stock...... 16,800
Income of First Alert Company...... 16,800
Record 40% of First Alert Company income,
40% × $42,000.
Dec. 31Cash...... 4,800*
Investment in First Alert Company Stock.....4,800
*40% × $12,000
PE 13–3B
Jan. 2Investment in Nassim Company Stock...... 400,000
Cash...... 400,000
Dec. 31Investment in Nassim Company Stock...... 33,000
Income of Nassim Company...... 33,000
Record 30% of Nassim Company income,
30% × $110,000.
Dec. 31Cash...... 13,800*
Investment in Nassim Company Stock.....13,800
*30% × $46,000
PE 13–4A
2012
Dec. 31Unrealized Loss on Trading Investments...... 4,200*
Valuation Allowance for Trading Investments4,200
To record decrease in fair value of
trading investments.
*Trading investments at fair value, December 31, 2012.. $101,600
Trading investments at cost, December 31, 2012...... 105,800
Unrealized loss on trading investments...... $ (4,200)
PE 13–4B
2012
Dec. 31Valuation Allowance for Trading Investments....6,300*
Unrealized Gain on Trading Investments.....6,300
To record increase in fair value of
trading investments.
*Trading investments at fair value, December 31, 2012.. $39,500
Trading investments at cost, December 31, 2012...... 33,200
Unrealized gain on trading investments...... $ 6,300
PE 13–5A
2012
Dec. 31Unrealized Gain (Loss) on Available-for-Sale
Investments...... 5,500*
Valuation Allowance for Available-for-Sale
Investments...... 5,500
To record decrease in fair value of
available-for-sale securities.
*Available-for-sale investments at fair value,
December 31, 2012...... $56,900
Available-for-sale investments at cost, December 31, 2012. 62,400
Unrealized gain (loss) on available-for-sale investments....$ (5,500)
PE 13–5B
2012
Dec.31Valuation Allowance for Available-for-Sale
Investments...... 1,900*
Unrealized Gain (Loss) on Available-for-Sale
Investments...... 1,900
To record increase in fair value of
available-for-sale securities.
*Available-for-sale investments at fair value,
December 31, 2012...... $9,500
Available-for-sale investments at cost, December 31, 2012. 7,600
Unrealized gain (loss) on available-for-sale investments.... $1,900
PE 13–6A
Dividend Yield =
Dividend Yield = = 0.02, or 2%
PE 13–6B
Dividend Yield =
Dividend Yield = = 0.06, or 6%
EXERCISES
Ex. 13–1
a.2012
Apr.1Investments—Reynolds Co. Bonds...... 56,000
Cash...... 56,000
b.2012
Oct.1Cash...... 1,260
Interest Revenue...... 1,260
$56,000 ×4.5% × 6/12.
c.2012
Oct.1Cash...... 19,800*
Loss on Sale of Investments...... 200
Investments—Reynolds Corp. Bonds.. 20,000
*$20,000 × 99%
d.2012
Dec. 31Interest Receivable...... 637
Interest Revenue...... 637
Accrued interest, $56,000 × 4.5%
× 91/360.
Ex. 13–2
a.2012
Sept.1Investments—Carlisle Corp. Bonds...... 40,000
Cash...... 40,000
b.2012
Dec.31Interest Receivable...... 1,200
Interest Revenue...... 1,200
...... Accrued interest, $40,000 ×9% × 4/12.
c.2013
Mar.1Cash...... 1,800
Interest Receivable...... 1,200
Interest Revenue...... 600*
*$40,000 ×9% × 2/12
d.2013
Mar. 1Cash...... 10,300*
Gain on Sale of Investments...... 300
Investments—Carlisle Corp. Bonds.. 10,000
*$10,000 × 103%
Ex. 13–3
a.2012
July 12Investments—Davis County Bonds...... 24,000
Interest Receivable...... 192*
Cash...... 24,192
*$24,000 × 4% × 72/360
b.Nov.1Cash...... 480*
Interest Receivable...... 192
Interest Revenue...... 288
*$24,000 × 4% × ½
c.Dec. 1Cash...... 5,800*
Loss on Sale of Investments...... 220
Interest Revenue...... 20
Investments—Davis County Bonds.... 6,000
*Bond sale ($6,000 × 0.98)...... $5,880
Accrued interest...... 20
Less brokerage commission...... (100)
Total proceeds...... $5,800
d.Dec.31Interest Receivable...... 120
Interest Revenue...... 120
To accrue interest.
Ex. 13–4
a.2012
Jan.21Investments—Government Bonds...... 50,000
Interest Receivable...... 125*
Cash...... 50,125
*$50,000 × 4.5% × 20/360
June30Cash...... 1,125*
Interest Receivable...... 125
Interest Revenue...... 1,000
*$50,000 × 4.5% × ½
Sept.5Cash...... 23,481*
Loss on Sale of Investments...... 720
Interest Revenue...... 201
Investments—Government Bonds... 24,000
*Bond sale ($24,000 × 97%)...... $23,280
Accrued interest...... 201
Total proceeds from sale...... $23,481
b.2012
Dec.31Interest Receivable...... 585
Interest Revenue...... 585
Accrued interest, $26,000 ×4.5% ×½.
Ex. 13–5
Interest earned (May 1 to September 1)...... $1,1001
Interest earned on sold bonds (September 1 to October 1)...... 1002
Interest earned on remaining bonds (September 1 to December 1).. 7003
Total interest earned in 2012...... $1,900
1$66,000 × 5% × 4/12
2$24,000 × 5% × 1/12
3$42,000 × 5% × 4/12
Ex. 13–6
a.Feb.17Investments—Lycore Co. Stock...... 90,200*
Cash...... 90,200
*(4,000 shares × $22.50) + $200
b.July11Cash...... 3,200*
Dividend Revenue...... 3,200
*($0.80 × 4,000 shares)
c.Dec.4Cash...... 28,175*
Gain on Sale of Investments...... 5,625
Investments—Lycore Co. Stock...... 22,550**
*(1,000 shares × $28.30) – $125
**($90,200/4,000 shares) × 1,000 shares
Ex. 13–7
Jan.12Investments—Inskip Company Stock...... 68,572*
Cash...... 68,572
*(1,400 shares × $48.90) + $112
Apr.10Cash...... 308*
Dividend Revenue...... 308
*($0.22 × 1,400 shares)
June3Cash...... 39,985*
Loss on Sale of Investments...... 4,097
Investments—Inskip Company Stock...... 44,082**
*(900 shares × $44.50) – $65
**900 shares × ($68,572/1,400 shares)
Ex. 13–8
Feb. 2Investments—Parr Inc. Stock...... 22,520*
Cash...... 22,520
*(800 shares × $28) + $120
Apr. 16Cash...... 96*
Dividend Revenue...... 96
*800 shares × $0.12
June 17Investments—Parr Inc. Stock...... 19,950*
Cash...... 19,950
*(600 shares × $33) + $150
Aug.19Cash...... 40,800*
Gain on Sale of Investments...... 11,630
Investments—Parr Inc. Stock...... 29,170**
*(1,000 shares × $41) – $200
**800 shares purchased...... $22,520
200 shares × ($19,950/600 shares)...... 6,650
Total cost...... $29,170
Nov. 14Cash...... 60*
Dividend Revenue...... 60
*400 shares × $0.15
Ex. 13–9
Feb. 2Investments—Randolph Co. Stock...... 56,125*
Cash...... 56,125
*(500 shares × $112) + $125
Apr.21Investments—Sterling Co. Stock...... 39,298*
Cash...... 39,298
*(1,400 shares × $28) + $98
Aug.15Cash...... 24,720*
Gain on Sale of Investments...... 2,270
Investments—Randolph Co. Stock...... 22,450**
*(200 shares × $124) – $80
**200 shares × ($56,125/500 shares)
Sept. 8Cash...... 11,180*
Loss on Sale of Investments...... 2,855
Investments—Sterling Co. Stock...... 14,035**
*(500 shares × $22.50) – $70
**500 shares × ($39,298/1,400 shares)
Oct. 31Cash...... 78*
Dividend Revenue...... 78
*(500 shares – 200 shares) × $0.26
Ex. 13–10
a.Investment in Teller Corp. Stock...... 282,000
Income of Teller Corp...... 282,000
Record 30% share of Teller Corp.
net income, $940,000 × (60,000 shares/
200,000 shares).
b.Cash...... 150,000*
Investment in Teller Corp. Stock...... 150,000
*60,000 shares × $2.50
c.Penn’s investment in Teller Corp. represents 30% of the outstanding shares of Teller Corp. An investment amount in excess of 20% of the outstanding common stock of the investee is presumed to represent significant control. The equity method is appropriate when the investor can exercise significant control over the investee.
Ex. 13–11
a.
2012
Jan.15Investment in Escape Tours Inc. Stock...... 3,591,000*
Cash...... 3,591,000
*94,500 shares × $38 per share
July 2Cash...... 96,600*
Investment in Escape Tours Inc. Stock.....96,600
*$230,000 × (94,500 shares/225,000 shares)
Dec.31Investment in Escape Tours Inc. Stock...... 291,900
Income of Escape Tours Inc...... 291,900
Record 42% share of Escape Tours Inc.
net income, $695,000 × (94,500 shares/
225,000 shares).
b.Initial acquisition cost...... $3,591,000
Equity earnings for 2012...... 291,900
Cash dividends received...... (96,600)
Investment in Escape Tours Inc. Stock balance,
December 31, 2012...... $3,786,300
Ex. 13–12
2012
Jan.10Investment in Crest Co. Stock...... 123,000
Cash...... 123,000
July 15Cash...... 4,500*
Investment in Crest Co. Stock...... 4,500
*$15,000 × 30%
Dec.31Loss of Crest Co........ 7,500
Investment in Crest Co. Stock...... 7,500
Record 30% share of Crest Co.
net loss, $25,000 × 30%.
b.Initial acquisition cost...... $123,000
Equity loss for 2012...... (7,500)
Cash dividends received...... (4,500)
Investment in Crest Co. Stock balance,
December 31, 2012...... $111,000
Ex. 13–12(Concluded)
c.Under the equity method, the investor will record their proportionate share of net increase (or decrease) of the book value 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. 13–13
(in millions)
Investment in Moss Company stock, December 31, 2012...... $105
Plus equity earnings in Moss Company...... 15
Less dividends received...... (4)*
Investment in Moss Company stock, December 31, 2013...... $116
*The Moss Company investment is accounted for under the equity method. Since there were no purchases or sales of Moss Company stock, a dividend must have been received. This would explain how the ending balance of the investment
account went from $105 to $116, with $15 million in equity earnings. Since the investment is accounted for under the equity method, the fair value is not used for valuation purposes.
Ex. 13–14
a.$23,000$36,000 [from (c)]– $13,000 [from (b)]
b.$13,000$9,000–(–$4,000)
c.$36,000$192,000 – $156,000
d.$119,000$123,000 – $4,000
e.$22,000$19,000 + $3,000
f.$155,000$146,000 + $9,000
g.$6,000$9,000 – $3,000
h.$178,000$172,000 + $6,000
i.$211,000$192,000 + $19,000
Ex. 13–15
a.
2012
Mar.3Investments—Cardio Solutions, Inc. Stock....198,000
Cash...... 198,000
9,000 shares × $22 per share.
Dec.31Valuation Allowance for Trading Investments..63,000
Unrealized Gain on Trading Investments...63,000
To record increase in fair value of
trading investments, 9,000 shares ×
($29 per share – $22 per share).
b.The unrealized gain or unrealized loss for trading investments is disclosed in the income statement as “other income” (or a separate item if significant). Unrealized losses would be deducted in determining net income, while un-realized gains would be added in determining net income.
Ex. 13–16
a.
2012
Dec.31Unrealized Loss on Trading Investments...... 2,900
Valuation Allowance for Trading Investments2,900
To record decrease in fair value of trading
investments, $45,100 – $48,000.
b.
2013
Apr.3Investments—Luke, Inc...... 18,100*
Cash...... 18,100
*(500 shares × $36 per share) + $100
Ex. 13–17
a.
2012
Dec.31Valuation Allowance for Trading Investments.12,600*
Unrealized Gain on Trading Investments...12,600
To record increase in fair value of trading
investments.
*$158,500 – $145,900, as determined from the following schedule:
Fair Value
Cost(Dec. 31, 2012)
B&T Transportation, Inc...... $ 74,200$ 88,4001
Citrus Foods, Inc. ...... 26,50028,5002
Stuart Housewares, Inc...... 45,200 41,6003
Total...... $145,900$158,500
13,400 shares × $26 per share
21,500 shares × $19 per share
3800 shares × $52 per share
b.There would be no adjusting entry for December 31, 2013, if the market prices remained unchanged from December 31, 2012. This is because the unrealized gain from the difference between the cost and market has already been
recognized on December 31, 2012. Only changes in market prices would be recognized subsequent to December 31, 2012.
Ex. 13–18
a.Retained earnings, December 31, 2011...... $614,000
Plus net income...... 126,000
$740,000
Less dividends...... 35,000
Retained earnings, December 31, 2012...... $705,000
b.Trading investments (at cost)...... $121,000*
Less valuation allowance for trading investments...... 34,000
Trading investments (at fair value)...... $ 87,000
*$166,000 – $45,000
Ex. 13–19
a.$46,000$50,000 – $4,000
b.$50,000$201,000 – $151,000
c.$84,000$78,000 + $6,000
d.$6,000Same as valuation allowance for available-for-sale investments
e.$59,000$68,000 – $9,000
f.($9,000)Same as valuation allowance for available-for-sale investments
g.($7,000) ($15,000) + $8,000
h.($11,000) Same as unrealized gain (loss) from available-for-sale investments
i.$84,000$95,000 – $11,000
j.$186,000$201,000 – $15,000
Ex. 13–20
a.
2012
Aug.10Investments—Pacific Wave, Inc. Stock...... 64,000
Cash...... 64,000
8,000 shares × $8 per share.
Dec.31Unrealized Gain (Loss) on Available-for-
Sale Investments...... 16,000
Valuation Allowance for Available-for-Sale
Investments...... 16,000
To record decrease in fair value of
available-for-sale investments, 8,000 shares ×
($8 per share – $6 per share).
b.Unrealized Gain (Loss) on Available-for-Sale Investments is disclosed in the Stockholders’ Equity section of the balance sheet, separately from the
retained earnings or paid-in capital accounts. On December 31, 2012 the account would show a debit balance of $16,000, that would be subtracted from stockholders’ equity.
Ex. 13–21
a.1.
2012
Dec.31Valuation Allowance for Available-for-
Sale Investments...... 3,300
Unrealized Gain (Loss) on Available-for-
Sale Investments...... 3,300
To record increase in fair value of available-
for-sale investments, $65,800 – $62,500.
2.
2013
May10Investments—Violet Inc...... 37,925*
Cash...... 37,925
*(900 shares × $42 per share) + $125
b.Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the Stockholders’ Equity section. As a result, the changes in fair value are not reflected on the income statement, as is the case with trading securities.
Bypassing the income statement is supported on the grounds that available-for-sale securities will be held for a longer time than trading securities; thus, fluctuations in market prices have a greater opportunity to “cancel out” over time.
Ex. 13–22
a.
2012
Dec.31Unrealized Gain (Loss) on Available-for-Sale
Investments...... 7,400
Valuation Allowance for Available-for-Sale
Investments...... 7,400*
To record increase in fair value of available-
for-sale investments.
*$129,400 – $136,800, as determined from the following schedule:
Fair Value
Cost(Dec. 31, 2012)
Abbotford Electronics, Inc...... $ 42,500$ 33,0001
Ryan Co. ...... 28,20026,0002
Sharon Co. ...... 66,100 70,4003
Total...... $136,800$129,400
11,500 shares × $22 per share
2400 shares ×$65 per share
32,200 shares × $32 per share
b. There is no income statement impact from the December 31, 2012, adjusting entry. Unrealized Gain (Loss) on Available-for-Sale Investments is disclosed in the Stockholders’ Equity section of the balance sheet. On December 31, 2012, Unrealized Gain or Loss on Available-for-Sale Investments would be disclosed as follows:
Unrealized gain (loss) on available-for-sale investments...... ($7,400)
Ex. 13–23
a.NEWTON COMPANY
Balance Sheet (selected items)
December 31, 2012
Assets
Current assets:
Available-for-sale investments, at cost...... $72,000
Plus valuation allowance for available-for-sale
investments...... 700* $72,700
*Computation:
Market:
Starlight Products, Inc.: 700 shares × $55..... $38,500
Reynolds Co.: 1,900 shares × $18...... 34,200
$72,700
Cost ($31,000 + $41,000)...... 72,000
Unrealized gain...... $ 700
b.NEWTON COMPANY
Balance Sheet (selected items)
December 31, 2012
Stockholders’ Equity
Retained earnings...... $250,000
Unrealized gain (loss) on available-for-sale
investments...... 700
Ex. 13–24
NORCROSS CORPORATION
Stockholders’ Equity
December 31, 2012
Common stock...... $ 50,000
Paid-in capital in excess of par value...... 350,000
Retained earnings...... 375,000*
Unrealized gain (loss) on available-for-sale investments...... (25,000)**
Total...... $750,000
*$265,000 + $110,000
**$40,000 + ($150,000 – $215,000), or $150,000 – $175,000
Appendix Ex. 13–25
FROST CO.
Statement of Comprehensive Income
For the Year Ended December 31, 2012
Net income...... $60,000
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments...... 19,500*
Comprehensive income...... $79,500
*1,500 shares × ($101 per share – $88 per share)
AppendixEx. 13–26
MEMPHIS CO.
Statement of Comprehensive Income
For the Year Ended December 31, 2012
Net income...... $150,000
Other comprehensive income (loss):
Unrealized loss on available-for-sale investments...... (11,000)*
Comprehensive income...... $139,000
*$94,000 – $105,000
Ex. 13–27
Dividend Yield =
Dividend Yield:= 3.2%
Ex. 13–28
a.2008: Dividend Yield = $0.46/$19.40 = 2.37%
2009: Dividend Yield = $0.52/$30.48 = 1.71%
b.Dividends per share increased from $0.46 in 2008 to $0.52 in 2009. In addition, the dividend yield declined from 2.37% in 2008 to 1.71% in 2009. The decrease in the dividend yield is a result of a slight increase in the dividend per share of $0.06 ($0.46 – $0.52) combined with a significant increase in the closing stock price of $11.08 per share ($30.48 – $19.40). Microsoft thus provides a small return to the shareholder in terms of a dividend yield and an additional return in terms of price appreciation of the stock.
Ex. 13–29
The investor would receive a return on the investment through share price
appreciation as internally generated funds are used to fund growth and earnings opportunities. 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.