Exercise 12-5
Requirement 1
Securities “held to maturity” are debt securities an investor has the “positive intent and ability” to hold to maturity. Actively traded investments in debt or equity securities acquired principally for the purpose of selling them in the near term are classified as “trading securities.” The IBM shares are neither. They are classified as “available for sale” since all investments in debt and equity securities that don’t fit the definitions of the other reporting categories are classified this way. Of course, the equity method isn’t appropriate either because 10,000 shares of IBM certainly don’t constitute “significant influence.”
Investments in securities available for sale are reported at fair value, and holding gains or losses are not included in the determination of income for the period. Instead, they are reported as a separate component of shareholders’ equity.
Requirement 2
Unrealized holding loss on investments (10,000 shares x [$58 - $60]) 20,000
Investment in IBM shares 20,000
Requirement 3
Investment in IBM shares (10,000 shares x [$61 - $58]) 30,000
Unrealized holding loss on investment
in IBM shares (from previous adjustment) 20,000
Unrealized holding gain on investment
in IBM shares (difference) 10,000
Note: This entry creates a net gain in a single account. It would be acceptable, but mechanically more cumbersome to leave a $20,000 balance in the loss account and also create a $30,000 gain.
Exercise 12-6
Requirement 1
2000
March 2
($ in millions)
Investment in Platinum Gauges, Inc. shares 31
Cash 31
April 12
Investment in Zenith bonds 20
Cash 20
July 18
Cash 2
Investment revenue 2
October 15
Cash 1
Investment revenue 1
October 16
Cash 21
Investment in Zenith bonds 20
Gain on sale of investments 1
November 1
Investment in LTD preferred shares 40
Cash 40
December 31
Adjusting entries:
Investment in Platinum Gauges shares 1
Unrealized holding gain on investments
([$32 x 1 million shares] - $31 million) 1
Unrealized holding loss on investments
([$74 x 500,000 shares] - $40 million) 3
Investment in LTD preferred shares 3
Exercise 12-6 (concluded)
2001
January 23
($ in millions)
Cash ([1 million shares x 1/2] x $32) 16.0
Unrealized holding gain on
investments (1/2 amountfrom adjusting entry) .5
Gain on sale of investments (difference) .5
Investment in Platinum Gauges
shares ($32 million balance after adjusting entry x 1/2) 16.0
March 1
Cash ($76 x 500,000 shares) 38
Loss on sale of investments (difference) 2
Unrealized holding loss on investments (from adjusting entry) 3
Investment in LTD preferred (balance after adjusting entry) 37
Requirement 2
2000 Income Statement
($ in millions)
Investment revenue (from July 18; Oct. 15) $3
Gain on sale of investments (from Oct. 16) 1
Note: Unlike for trading securities, unrealized holding gains and losses are not included in income for securities available for sale.
Exercise 12-7
Requirement 1
Purchase ($ in millions)
Investment in Jackson Industry shares 90
Cash 90
Net income
No entry
Dividends
Cash (5% x $60 million) 3
Investment revenue 3
Adjusting entry
Investment in Jackson Industry shares ($98 - 90 million) 8
Unrealized holding gain on investment in Jackson Industry shares 8
Requirement 2
Investment revenue $3 million
An unrealized holding gain is not included in income for securities available for sale.
Exercise 12-8
Requirement 1
2000
December 17
Investment in Grocers’ Supply preferred shares 350,000
Cash 350,000
December 28
Cash 2,000
Investment revenue 2,000
December 31
Investment in Grocers’ Supply preferred shares 50,000
Unrealized holding gain on
investments ([$4 x 100,000 shares] - $350,000) 50,000
2001
January 5
Cash (selling price) 395,000
Loss on investments (to balance) 5,000
Investment in Grocers’ Supply preferred
shares (balance after adjusting entry) 400,000
Requirement 2
Balance Sheet
(short-term investment):
Investment in Grocers’ Supply preferred shares
(balance after adjusting entry) $400,000
Income Statement:
Investment revenue (dividends) $ 2,000
Unrealized holding gain on investments
(from adjusting entry) 50,000
Note: Unlike for securities available for sale, unrealized holding gains and losses are included in income for trading securities.
Exercise 12-9
1.Investments reported as current assets.
SecurityA $ 910,000
SecurityB 100,000
SecurityC 780,000
Security E 490,000
Total $2,280,000
2.Investments reported as noncurrent assets.
SecurityD $ 915,000
Security F 615,000
$1,530,000
3.Unrealized gain (or loss) component of income before taxes.
Trading Securities:
Cost Fair value Unrealized
gain (loss)
SecurityA $ 900,000 $ 910,000 $10,000
B 105,000 100,000 (5,000)
Totals $1,005,000 $1,010,000 $ 5,000
4.Unrealized gain (or loss) component of shareholders’ equity.
Securities Available For Sale:
Cost Fair value Unrealized
gain (loss)
Security C $ 700,000 $ 780,000 $80,000
D 900,000 915,000 15,000
Totals $1,600,000 $1,695,000 $95,000
Exercise 12-13
Purchase ($ in millions)
Investment in Nursery Supplies shares 56
Cash 56
Net income
Investment in Nursery Supplies shares (30% x $40 million) 12
Investment revenue 12
Dividends
Cash (30% x 8 million shares x $1.25) 3
Investment in Nursery Supplies shares 3
Adjusting entry
No entry