Fa4e SM Ch12

Chapter 12
Reporting and Analyzing Financial

Investments
Learning Objectives coverage by question
MiniExercises
Exercises
11, 12 - 18,
24 - 33,
20 - 23
35 - 42
LO2 Describe the term fair value

and the fair value hierarchy.
13
34
LO3 Describe and analyze

accounting for passive investments.
11, 12,
LO1 Explain and interpret the three

levels of investor influence over an
investee passive, significant, and
controlling.
20 - 22
Problems
Cases and
Projects
45 - 48
49 - 52
51, 52
24, 25,
27, 29, 32,
44, 47
50 - 52
44, 47, 48
49 - 51
44 - 47
49
48
49
35 - 37
26, 28,
LO4 Explain and analyze

accounting for investments with
significant influence.
14 - 16, 19
LO5 Describe and analyze

accounting for investments with
control.
17, - 19, 23
30 - 34,
37, 38
41, 42
LO6 Appendix 12A Illustrate and

analyze accounting mechanics for
equity method investments.
LO7 Appendix 12B Apply equity
method accounting mechanics to
consolidations.
39, 40, 42
LO8 Appendix 12C Discuss the

reporting of derivative securities.
43
45, 46
Cambridge Business Publishers, 2014

Solutions Manual, Chapter 12
12-1
DISCUSSION QUESTIONS
Q12-1. a) Trading securities are reported at their fair value in the balance sheet. b)
Available-for-sale securities are reported at their fair value in the balance sheet.
c) Held-to-maturity securities are reported at their amortized cost in the balance
sheet.
Q12-2. An unrealized holding gain (loss) is an increase (decrease) in the fair value of
an asset (in this case, an investment security) that is still owned.
Q12-3. Unrealized holding gains and losses related to trading securities are reported in
the current-year income statement (and also retained earnings). Unrealized
holding gains and losses related to available-for-sale securities are reported as
a separate component of stockholders' equity called Other Comprehensive
Income (OCI).
Q12-4. Significant influence gives the owner of the stock the ability to influence
significantly the operating and financing activities of the company whose stock
is owned. Normally, this is accomplished with a 20% through 50% ownership of
the company's voting stock.
The equity method is used to account for investments with significant influence.
Such an investment is initially recorded at cost; the investment is increased by
the proportionate share of the investee company's net income, and equity
income is reported in the income statement; the investment account is
decreased by dividends received on the investment; and the investment
account is reported in the balance sheet at its book value. Unrealized
appreciation in the market value of the investment is not recognized.
Q12-5. Yetman Company's investment in Livnat Company is an investment with
significant influence, and should, therefore, be accounted for using the equity
method. At year-end, the investment should be reported in the balance sheet at
$258,000 [$250,000 + (40% $80,000) - (40% x $60,000)].
Q12-6. A stock investment representing more than 50% of the investee company's
voting stock is generally viewed as conferring control over the investee
company. The investor and investee companies must be consolidated for
financial reporting purposes.
Q12-7. Consolidated financial statements attempt to portray the financial position,
operating results, and cash flows of affiliated companies as a single economic
unit so that the scope of the entire (whole) entity is more realistically conveyed.

12-2
Financial Accounting, 4th Edition
Q12-8. The $750,000 investment in Murray Company appearing in Finn Company's

balance sheet and the $300,000 common stock and $450,000 retained
earnings appearing on Murray Company's balance sheet are eliminated. The
two balance sheets (less the accounts eliminated) are then summed to yield the
consolidated balance sheet.
Q12-9.B The $75,000 accounts payable on Dee's balance sheet and the $75,000
accounts receivable on Bradshaw's balance sheet are eliminated. In a
consolidation, all intercompany items are eliminated so that the consolidated
statements show only the interests of outsiders.
Q12-10. Limitations of consolidated statements include the possibility that the
performances of poor companies in a group are "masked" in consolidation.
Likewise, rates of return, other ratios, and percentages calculated from
consolidated statements might prove deceptive because they are composites.
Consolidated statements also eliminate detail about product lines, divisional
operations, and the relative profitability of various business segments. (Some of
this information is likely to be available in the footnote disclosures relating to the
business segments of certain public firms.) Finally, shareholders and creditors
of subsidiary companies find it difficult to isolate amounts related to their legal
rights by inspecting only consolidated statements.

12-3
MINI EXERCISES
M12-11. (10 minutes)
a. Available-for-sale securities are reported at fair value on the balance sheet. For
2011, this is equal to the original cost ($36,135 million) plus unrecognized gains
($810 million) and less unrealized losses ($22 million), or $36,923 million.
b. Unrealized gains (and losses) on available-for-sale securities are reported as a
component of Accumulated Other Comprehensive Income (AOCI) in the
shareholders equity section of the balance sheet.

a. Wasley will report the dividends received of $6,600 (6,000 shares $1.10 per share)
as income. If the investment is accounted for as available-for-sale, the increase in
the market price of the stock will not be recognized as income until the stock is sold.
Unrealized gains (losses) are reported as Other Comprehensive Income in the
stockholders equity section of the balance sheet.
b. If the investment is accounted for as trading, Wasley will report $6,600 of dividend
income plus income relating to the increase in the market price of the stock of
$6,000 ($13 - $12 price increase for 6,000 shares).

a. All of these investments are marked to fair value, but the determination differs.
Level 1 fair values are determined by reference to an active market where identical
assets are traded. Level 2 fair values are determined by using a model (discounted
cash flow, prices of similar assets, etc.) for which the inputs and assumptions can be
found from observable value. Level 3 fair values are also determined by using a
model, but the inputs and assumptions are not observable except to the reporting
company.
b. Only Level 1 investments are marked-to-market, the others are marked-to-model.
Level 1 values would be the most objective since they come from an active market.
Level 3 would be most subjective because they depend significantly on
managements judgments.
c. Level 1 assets are most liquid, because they are traded in active markets. Level 3
assets are likely to be least liquid because their value depends significantly on
information that is not publicly known.

12-4

a. Given the 30% ownership, significant influence is presumed and the investment
must be accounted for using the equity method. The year-end balance of the
investment account is computed as follows:
Beginning balance ............................
% Lang income earned .....................
% Dividends received .......................
Ending balance .................................
$1,000,000
30,000
(12,000)
$1,018,000
($100,000 0.3)
($40,000 0.3)
b. $30,000 ($100,000 0.3) - Equity earnings are computed as the reported net
income of the investee (Lang Company) multiplied by the percentage of the
outstanding common stock owned.
c. (1) In contrast to the market method, the equity method of accounting does not
report investments at market value. The unrealized gain of $200,000 is not reflected
in either the balance sheet or the income statement.
d.
1.
Investment in Lang Company (+A) ...................................................

1,000,000
Cash (-A) .......................................................................................... 1,000,000
2.
Investment in Lang Company (+A) ...................................................

30,000
Investment income (+R, +SE) ..........................................................
30,000
Cash (+A) .........................................................................................

12,000
Investment in Lang Company (-A) ....................................................
12,000
3.
e.
+
3.
+
1.
2.
Cash (A)
1,000,000
12,000
Investment in Lang Company (A)

1,000,000
30,000
12,000
Investment Income (R)

30,000
1.
+
2.
3.
f.
Transaction
Purchase stock in
Lang Company.
Cash
Asset
-1,000,000
Cash
Recognize share of
Lang income.
Receive dividend
from Lang.
+12,000
Cash
Noncash
Assets
Balance Sheet
LiabilContrib.
=
+
+
ities
Capital
+1,000,000
Investment
+30,000
Investment
-12,000
Investment
Income Statement
Earned
Capital
+30,000
Retained
Earnings
Revenues -
+30,000
Investment
Income
Expenses
Net
Income
+30,000

12-5

Equity income on this investment is computed as the investee company (Penno)
earnings multiplied by the percentage of the company owned. In this case, equity
earnings equal:
$600,000 40% = $240,000
Note that dividends are treated as a return of investment (reduce the investment
balance by $80,000, computed as $200,000 40%), and not as income. Also, the
investment is recorded at adjusted cost, not at market value, and unrealized gains
(losses) are neither recognized on the balance sheet nor in the income statement.

a. General Mills reports income from its joint ventures at $96.4 million on its 2011
income statement. Equity method investments are reported on the balance sheet at
adjusted cost, not at current market value. Adjusted cost is the original purchase
price plus (minus) General Mills proportionate share of investee companies profits
(losses), less dividends received.
b. Merck will account for the $72.7 million in cash dividends received on equity method
investments as a reduction of the investment balance, not as income.
c. The starting balance of $398.1 million would have been increased by $96.4 million
by the recognized income and decreased by $72.7 million, leaving a balance of
$421.8 million. That would imply that General Mills increased its advances to joint
ventures by $519.1 million - $421.8 million, or $97.3 million.

The $600,000 investment in Hirst Company appearing on Philipich Company's balance
sheet and the $300,000 common stock and $450,000 retained earnings of Hirst
Company would be eliminated.
In addition, a $150,000 minority interest [20% of ($300,000 + $450,000)] would appear
on the consolidated balance sheet. Many analysts treat the minority interest as an
equity account, and FASB has issued an exposure draft requiring presentation as such
if the proposal becomes GAAP.

12-6

Benartzi Company net income ...................................................
90% of $150,000 Liang Company net income ...........................
Consolidated net income............................................................
$600,000
135,000
$735,000

a. If DeFond purchases 100% of Verduzcos common stock, then it must produce
consolidated reports.
Current assets
DeFond
Company
(before
investment)
$ 800
DeFond
Company
(after
investment)
$ 500
Verduzco
Company
$ 100
Eliminating
entries
DeFond
Company
(Consolidated)
$ 600
300
Noncurrent assets
2,000
2,000
900
2,900
Liabilities
2,200
2,200
700
2,900
600
600
300
Investment
Shareholders Equity
(300)
(300)
600
b. If DeFond purchases 50% of the common stock of Lin Company, it uses the equity
method.
Current assets
DeFond Company
(before investment)
$ 800
DeFond Company
(after investment)
$ 500
Lin
Company
$ 200
300
Noncurrent assets
2,000
2,000
1,800
Liabilities
2,200
2,200
1,400
600
600
600
Investment
Shareholders Equity
c. If we compare DeFonds consolidated balance sheet to the equity method balance

sheet, we can see that the total assets are higher and the liabilities are higher.
DeFonds stockholders equity accounts are the same. So, the Debt-to-Equity ratio
will be higher if DeFond purchases the subsidiary rather than investing in the joint
venture. If reported profits are the same under either scenario, then purchasing the
subsidiary would produce a lower Return on Assets than the joint venture. Other
ratios would change as well (like the Current Ratio), but not in a predictable
direction.

12-7

a. 2013
10/1
Investment in Skyline, Inc. (+A) ........................................................

486,000
Cash (-A) ..........................................................................................486,000
12/31 Interest receivable (+A) .....................................................................

8,750
Interest revenue (+R, +SE) ..............................................................
8,750
12/31 Investment in Skyline, Inc. (+A) ........................................................

4,000
Unrealized gain (+R, +SE) ...............................................................
4,000
2014
3/3
1
Cash (+A) ........................................................................................

17,500
Interest receivable (-A) ....................................................................
Interest revenue (+R, +SE) .............................................................
4/1
8,750
8,750
Cash (+A) ........................................................................................

492,300
Realized gain (+R, +SE) ................................................................. 2,300
Investment in Skyline, Inc. (-A) ....................................................... 490,000
b. Assuming the firms fiscal year ends 12/31, the unrealized gain of $4,000 in Skyline
Inc. bonds is closed to retained earnings in 2013 increasing net income and retained
earnings.
+
Interest Revenue (R)

8,750
8,750
+
12/31/13
3/31/14
+
Investment in Skyline Bonds (A)
10/1/13
486,000
12/31/13
4,000
490,000
4/1/14
Unrealized Gain (R)

4,000
+
12/31/13
+
12/31/13
Realized Gain (R)

2,300
3/31/14
4/1/14
Cash (A)
486,000
10/1/13
17,500
492,300
Interest Receivable (A)

8,750
8,750
3/31/14
+
4/1/14
continued next page

12-8
M12-20. concluded
c.
Transaction
10/1/13 Purchase
$500,000 of Skyline
bonds at 97.
Cash
Asset
-486,000
Cash
Balance Sheet
Noncash
LiabilContrib.
=
+
+
Assets
ities
Capital
+ 486,000
Investment
12/31/13
Recognize interest
revenue.
+8,750
Interest
Receivable
12/31/13
Record unrealized
gain.
+4,000
Investment
3/31/14 Recognize
interest income.
+17,500
Cash
4/1/14
Sold Skyline
investment.
+492,300
Cash
-8,750
Interest =
Receivable
-490,000
Investment
Income Statement
Earned
Capital
Revenues -
Expenses
Net
Income
+8,750
+4,000
Unrealized Gain
+4,000
+8,750
Retained
Earnings
+8,750
Interest
Revenue
+8,750
+2,300
Retained
Earnings
+2,300
Realized
Gain
+2,300
+8,750
Retained
Earnings
+4,000
Retained
Earnings
+8,750
Interest
Revenue

a. 2013
11/15 Investment in Lane, Inc. (+A) ............................................................
171,200
Cash (-A) .......................................................................................... 171,200
12/22 Cash (+A) .........................................................................................
10,000
Dividend income (+R, +SE) ..............................................................
10,000
12/31 Unrealized loss (+E, -SE) .................................................................

16,200
Investment in Lane, Inc. (-A) .............................................................
16,200
2014
1/20
Cash (+A) .........................................................................................

150,000
Loss on sale of investment in Lane, Inc. (+E, -SE) ...........................
5,000
Investment in Lane, Inc. (-A) .............................................................155,000
continued next page

12-9
M12-21. concluded
b. Assuming the firms fiscal year ends 12/31, the unrealized loss of $16,200 is closed to
the income summary in 2013, reducing net income and retained earnings.
+ Cash (A) 10,000 171,200
150,000
12/22
1/20
11/15
11/15
+ Investment in Lane Inc (A) 171,200

16,200
155,000
+
Loss (E)
12/31
1/20
1/20
5,000
+
12/31
Unrealized Loss (E)

16,200
- Dividend Income (R) +

10,000
12/22
c.
Balance Sheet
Transaction
Cash
Asset
11/15 Purchase
6,000 shares of
Lane Inc
common.
-171,200
Cash
12/22 Dividend
income.
+10,000
Cash
12/31 Decrease in
Investment.
1/20 Sale of Lane
common.
Noncash
Assets
+171,200
Investment
Contrib.
+
+
Capital
Income Statement
Earned
Capital
Revenues
Expenses
-16,200
Investment
+150,000
Cash
Liabil
=
-ities
-155,000
=
Investment
Net
Income
+10,000
Retained
Earnings
-16,200
Retained
Earnings
-5,000
Retained
Earnings
+10,000
Dividend
Income
+10,000
+16,200
Unrealized
Loss
-16,200
+5,000
Realized
Loss
-5,000

12-10

The main effect is to defer the loss in value experienced in 2013 to the year 2014.
2013
11/15 Investment in Lane, Inc. (+A) ............................................................
171,200
Cash (-A) .......................................................................................... 171,200
12/22 Cash (+A) .........................................................................................
10,000
10,000
12/31 Unrealized loss AOCI (-SE) ...........................................................

16,200
Investment in Lane, Inc. (-A) .............................................................
16,200
2014 The adjusting entry can be done on the date of sale or 12/31/2014.
1/20
Cash (+A) .........................................................................................

150,000
Loss on sale of investment in Lane, Inc. (+E, -SE) ...........................
21,200
Unrealized loss AOCI (+SE) .......................................................... 16,200
Investment in Lane, Inc. (-A) .............................................................155,000
+ Cash (A) 10,000 171,200
150,000
12/22
1/20
11/15
11/15
+ Investment in Lane Inc (A) 171,200

16,200
155,000
1/20
+
12/31
Unrealized Loss (AOCI)

16,200
16,200
1/20
+ Loss (E)
21,200
12/31
1/20

10,000
11/22
Note that most of the loss occurred in 2013, but was not recognized on the income
statement until management decided to sell the securities in 2014.

Halen Inc. now owns all of Jolson. The company reports will be consolidated. The total
in the consolidated stockholders equity section on 1/1 is the stockholders equity
section of the parent company, determined as follows:
Common stock..
Retained earnings..
Total Equity
$600,000
310,000
$910,000
Jolsons equity accounts are eliminated in the consolidation process.

12-11
EXERCISES
E12-24. (30 minutes)
a. Trading securities
1 Investment in Liu, Inc. (+A) ...............................................................
72,000
Cash (-A) .......................................................................................... 72,000
2 Cash (+A) .........................................................................................
6,600
6,600
3 Unrealized loss (+E, -SE) .................................................................

4,500
Investment in Liu, Inc. (-A) ...............................................................
4,500
4 Cash (+A) .........................................................................................

66,900
Loss on sale of investment (+E, -SE) ............................................... 600
Investment in Liu, Inc. (-A) ................................................................ 67,500
b.
+ Cash (A) 6,600
72,000
66,900
2.
4.
1.
1.
+ Investment in Liu (A) 72,000

4,500
67,500
- Retained Earnings (SE)
6,600
+
4.
Unrealized Loss (E) 4,500
4.
3.
4.
+
2.
+ Loss on Sale (E) 600
c.
Balance Sheet
Transaction
1. Purchased 6,000
common shares of
Liu, Inc., for $12
per share.
2. Received a cash
dividend of $1.10
per common share
from Liu.
3. Year-end market
price of Liu
common stock is
$11.25 per share.
4. Sold all 6,000
common shares of
Liu for $66,900.
Cash
Asset
-72,000
Cash
Noncash
Assets
+72,000
Investment
+6,600
Cash
-4,500
Investment
+66,900
Cash
- 67,500
=
Investment
Liabilities
Income Statement
Contrib.
+
Capital
Earned
Capital
+6,600
Retained
Earnings
-4,500
Retained
Earnings
600
Retained
Earnings
Revenues - Expenses
+6,600
Dividend
Income
+4,500
Unrealized =
Loss
+600
Loss
Net
Income
+6,600
-4,500
600
continued next page

12-12
E12-24. concluded
d. Available-for-Sale Securities
1 Investment in Liu, Inc. (+A) ...............................................................
72,000
Cash (-A) ..........................................................................................
72,000
2 Cash (+A) .........................................................................................

6,600
6,600
3 Unrealized loss (-SE) ........................................................................

4,500
Investment in Liu, Inc. (-A) ...............................................................
4,500
4 Cash (+A) .........................................................................................

66,900
Loss on sale of investment (+E, -SE) ...............................................
5,100
Unrealized loss (+SE) ......................................................................
Investment in Liu, Inc. (-A) ................................................................
4,500
67,500
2.
4.
3.
Transaction
1. Purchased 6,000
common shares of
Liu, Inc., for $12
per share.
2. Received a cash
dividend of $1.10
per common
sharefrom Liu.
3. Year-end market
price of Liu
common stock is
$11.25 per share.
4. Sold all 6,000
common shares of
Liu for $66,900.
+ Cash (A) 6,600

72,000
66,900
+ Unrealized Loss (SE) 4,500

4,500
Cash
Asset
-72,000
Cash
Noncash
+
Assets
+72,000
Investment
+6,600
Cash
-4,500
Investment
+66,900
Cash
1.
4.
1.
+ Investment in Liu (A) 72,000

4,500
67,500
3.
4.
- Retained Earnings (SE) +

6,600
2.
+ Loss (E) 5,100
4.
Balance Sheet
LiabilContrib.
=
+
+
ities
Capital
Income Statement
Earned
Capital
Revenues
Expenses
+6,600
Retained
Earnings
-4,500 AOCI
+4,500
AOCI
-5,100
Retained
Earnings
-67,500
Investmen =
t
+6,600
Dividend
Income
Net
Income
+6,600
+5,100
Loss
5,100

12-13

a. Investments classified as trading securities
1 Investment in Freeman, Inc. (+A) .....................................................
80,000
Cash (-A) ..........................................................................................
80,000
2 Cash (+A) .........................................................................................

6,250
6,250

7,500
Unrealized gain (+R, +SE) ...............................................................
7,500
4 Cash (+A) .........................................................................................

86,400
1,100
Investment in Freeman, Inc. (-A) .......................................................
87,500
+ Cash (A) 6,250

80,000
86,400
2.
4.
1.
- Unrealized Gain (R) +

7,500
3.
1.
3.
+ Investment in Freeman (A) 80,000

7,500
87,500
4.

6,250
2.
+ Loss on Sale (E) 1,100
4.
Balance Sheet
Transaction
Cash
Asset
1. Ohlson Co. purchases

5,000 common shares
of Freeman Co. at $16
cash per share.
-80,000
Cash
2. Ohlson Co. receives a

cash dividend of $1.25
per common share from
Freeman.
+6,250
Cash
3. Year-end market price

of Freeman common
stock is $17.50 per
share.
4. Ohlson Co. sells all 5,000
common shares of
+86,400
Freeman for $86,400
Cash
cash.
Noncash
Assets
+80,000
Investment
+7,500
=
Investment
-87,500
Investment
Liabilities
Income Statement
+
Contrib.
+
Capital
Earned
Capital
Revenues
Expenses
Net
Income
+6,250
Dividend
Revenue
= +6,250
+7,500
+7,500
Retained Unrealized
Earnings
Gain
= +7,500
+6,250
Retained
Earnings
-1,100
+ Retained
Earnings
+1,100
Loss
-1,100
continued next page

12-14
E12-25. concluded
b. Available for Sale Securities
80,000
Cash (-A) ..........................................................................................
80,000
2 Cash (+A) .........................................................................................

6,250
6,250

7,500
Unrealized gain (+SE) ......................................................................
7,500
4 Cash (+A) .........................................................................................

86,400
Unrealized gain (-SE) .......................................................................
7,500
Gain on sale of investment (+R, +SE) ..............................................
Investment in Freeman, Inc. (-A) .......................................................
6,400
87,500
+ Cash (A) 6,250

80,000
86,400
2.
4.
4.
1.
- Unrealized Gain (SE) +

7,500
7,500
1.
3.
+ Investment in Freeman (A) 80,000

7,500
87,500
4.

6,250
2.
Gain on Sale ( R) +
6,400
Balance Sheet
Transaction
Cash
Asset
1. Ohlson Co. purchases

5,000 common shares
of Freeman Co. at $16
cash per share.
-80,000
Cash
2. Ohlson Co. receives a

cash dividend of $1.25
per common share from
Freeman.
+6,250
Cash
3. Year-end market price

of Freeman common
stock is $17.50 per
share.
4. Ohlson Co. sells all 5,000
common shares of
+86,400
Freeman for $86,400
Cash
cash.
Noncash
Assets
+80,000
Investment
+7,500
=
Investment
-87,500
Investment
Liabilities
4.
Income Statement
+
Contrib.
Capital
Earned
Capital
+6,250
Retained
Earnings
Revenues
+6,250
Dividend
Revenue
+7,500
AOCI
-7,500
AOCI
+6,400
Retained
Earnings
+6,400
Gain
- Expenses =
Net
Income
+6,250
+6,400

12-15

a. The amortized cost of the Coca-Cola shares was $110 thousand, or $0.0023 per
share (the result of many stock splits over the years.). Coca-Colas shares would be
a Level 1 fair value, meaning they are marked-to-market at the end of the year.
The value was $2,324,826 thousand, or $48.25 per share. The difference between
the two values is an unrealized holding gain that would appear as part of AOCI in the
SunTrust shareholders equity section of the balance sheet.
b. Selling all the shares would result in the maximum realized holding gain, which is the
same as the unrealized gain in the footnote table $2,324,716 thousand. After-tax,
that would increase net income and retained earnings by (1.0 0.35)$2,324,716
thousand, or $1,511,065 thousand (about a billion and a half).
c. The proceeds will be $51.004.605 million = $234,855,000. The original cost of the
shares is $0.00234.605 million = $10,592, producing a realized gain of
$234,844,408 (=$234,855,000 - $10,592). The book value of the shares at the end
of 2006 is $48.254.605 million = $222,191,250. Therefore, the journal entry will be
the following:
Cash (+A) .........................................................................................
234,855,000
Unrealized Gain (-AOCI, -SE) ................. 222,180,658
Common stock of The Coca-Cola Company (-A) .............................. 222,191,250
Gain on sale of securities (+R, +SE)..
234,844,408

a. 2013:
11/1 Investment in Joos, Inc. (+A) ............................................................
306,900
Cash (-A) .......................................................................................... 306,900
12/31 Interest receivable (+A) ....................................................................
4,500
4,500

5,400
Investment in Joos, Inc. (-A) .............................................................
5,400
2014:
4/30 Cash (+A) .........................................................................................
13,500
Interest receivable (-A) .....................................................................
4,500
9,000
5/1
Cash (+A) .........................................................................................

300,900
Loss on sale of investments (+E, -SE) .............................................
600
Investment in Joos, Inc. (-A).............................................................. 301,500
continued next page

12-16
E12-27. concluded
b.
+ Cash (A) 13,500 306,900
300,900
4/30
5/1
12/31
+ Unrealized Loss (E)

5,400
11/1
11/1
12/31
- Interest Revenue (R) +

4,500
9,000
+
12/31
4/30
5/1
+ Investment in Joos Inc. (A) 306,900

5,400
301,500
12/31
2/1
+ Interest Receivable (A) 4,500

4,500
4/30
Loss on Sale of Investments (E) 600
c.
Balance Sheet
Noncash
Assets
+306,900
Investment
12/31. Accrue
interest.
+4,500
Interest
Receivable
12/31. Recognize
decline in value
of bonds.
-5,400
Investment
Transaction
11/1. Buy
$300,000 Joos
bonds @102.
Cash
Asset
-306,900
Cash
4/30. Receive
interest.
+13,500
Cash
5/1. Sold Joos

bonds.
+300,900
Cash
-4,500
Interest
Receivable
-301,500
Investment
Liabilities
Income Statement
Contrib.
+
Capital
Earned
Capital
+4,500
Retained
Earnings
Revenues
+4,500
Interest
Revenue
-5,400
Retained
Earnings
+9,000
Retained
Earnings
-600
Retained
Earnings
Net
Income
+4,500
-5,400
+9,000
-600
+9,000
Interest
Revenue
Expenses
+5,400
Unrealized
Loss
+600
Loss

12-17

Baylor Company now owns 75% of Reed. The company reports will be consolidated.
The total in the consolidated stockholders equity section on 1/1 is determined as
follows:
Common stock.
Retained earnings...
Baylor Company shareholders equity
Noncontrolling interests
Total equity
900,000
440,000
$1,340,000
200,000
$1,540,000

a. The equity securities investment portfolio is reported at its current fair value of
$40,241 million. The cost of the portfolio is $37,633 million, there are $3,149 million
in unrealized gains and $541 million of unrealized losses.
b. Because the investments are accounted for as available-for-sale, unrealized gains
(losses) on investments are reported in Accumulated Other Comprehensive Income
(AOCI), rather than current income. The investments are reported on the balance
sheet at current market value on the statement date.
c. Impairment losses are recognized in current income when the securities decline in
market value and the decline is deemed to be other than temporary. Gains and
losses realized from the sale of securities are recognized in current income. A
reclassification adjustment is required in Other Comprehensive Income. Because
the gains and losses from the sale of securities will be recognized in current income
(and retained earnings), they need to be removed from AOCI to avoid doublecounting the gains and losses in stockholders equity.

12-18

a. 1
Investment in Barth Co. (+A) ............................................................

108,000
Cash (-A) .......................................................................................... 108,000
Cash (+A) .........................................................................................
15,000
Investment in Barth Co. (-A) .............................................................
15,000
Investment in Barth Co. (+A) ............................................................

24,000
Investment revenue (+R, +SE) .........................................................
24,000
Cash (+A) .........................................................................................

120,500
3,500
Investment in Barth Co. (-A) ............................................................. 117,000
b.
+ Cash (A) 15,000 108,000
120,500
2.
4.
1.
- Gain (R) +
3,500
+ Investment in Barth (A) 108,000

15,000
24,000
117,000
2.
4.
- Investment Revenue (R) +

24,000
3.
1.
3.
4.
c.
Balance Sheet
Transaction
Cash
Asset
Noncash
Assets
Liabilities
Income Statement
+
Contrib.
+
Capital
Earned
Capital
Revenues
Expenses
Net
Income
1. Buy 30% of
Barth stock.
-108,000
Cash
+108,000
Investment
2. Receive
dividend.
+15,000
Cash
-15,000
Investment
+24,000
Investment
+24,000
+3,500
3. Recognize
share of net
income of
Barth.
4. Sold Barth
investment.
+120,500
Cash
-117,000
Investment
+24,000
Retained
Earnings
+3,500
Retained
Earnings
+24,000
Investment
Revenue
+3,500
Gain

12-19

a.
1 Investment in Palepu Co. (+A) ..........................................................
120,000
Cash (-A) .......................................................................................... 120,000
2 Cash (+A) .........................................................................................
12,000
Investment in Palepu Co. (-A) ...........................................................
12,000
3 Investment in Palepu Co. (+A) ..........................................................

30,000
Investment revenue (+R, +SE) .........................................................
30,000
4 Cash (+A) .........................................................................................

140,000
2,000
Investment in Palepu Co. (-A) ........................................................... 138,000
b.
+ Cash (A) 12,000 120,000
140,000
2.
4.
1.
- Gain (R) +
2,000
1.
3.
4.
+ Investment in Palepu (A) 120,000

12,000
30,000
138,000
2.
4.
- Investment Revenue (R) +

30,000
3.
c.
Balance Sheet
Transaction
Cash
Asset
Noncash
Assets
Liabilities
Income Statement
+
Contrib.
+
Capital
Earned
Capital
Revenues
Expenses
Net
Income
1. Buy 25% of
Palepu stock.
-120,000
Cash
+120,000
Investment
2. Receive
dividend.
+12,000
Cash
-12,000
Investment
+30,000
Investment
+30,000
Investment Revenue
+30,000
+2,000
3. Recognize
share of net
income of
Palepu.
4. Sold Palepu
investment.
+140,000
Cash
-138,000
Investment
+30,000
Retained
Earnings
+2,000
Retained
Earnings
+2,000
Gain

12-20

a. 1. Market Value Method (AFS Securities)
1 Investment in Leftwich Co. (+A) .......................................................
150,000
Cash (-A) .......................................................................................... 150,000
2 No entry
3 Cash (+A) ..........................................................................................
11,000
Dividend revenue (+R, +SE) ............................................................
11,000
4 Investment in Leftwich Co. (+A) .......................................................

40,000
40,000
2.
+ Cash (A) 11,000 150,000
3.
- Unrealized Gain (AOCI) +

40,000
1.
1.
4.
+ Investment in Leftwich (A) 150,000

40,000
-
4.
Dividend Income (R) +

11,000
3.
3.
Transaction
1. Purchase
Common shares.
Cash
Asset
-150,000
Cash
Noncash
Assets
+150,000
Investment
2. No entry.
3. Received a cash
dividend of $1.10
per common
share.
4. Recognize
increase in
investment value
at yearend .
+11,000
Cash
Balance Sheet
LiabilContrib.
=
+
+
ities
Capital
Revenues
Expenses
+40,000
Investment
Income Statement
Earned
Capital
+11,000
Retained
Earnings
+40,000
AOCI
+11,000
Dividend
Revenue
Net
Income
+11,000
continued next page

12-21
E12-32. concluded
b. 1. Equity Value Method
1 Investment in Leftwich Co. (+A) ................................................................
150,000
Cash (-A) ...................................................................................................
150,000
2 Investment in Leftwich Co. (+A) ................................................................
24,000
Investment revenue (+R, +SE) ..................................................................24,000
3 Cash (+A) .................................................................................................
11,000
Investment in Leftwich Co. (-A) ..................................................................11,000
4 No entry
2.
+ Cash (A) 11,000 150,000
3.
1.
1.
2.
+ Investment in Leftwich (A) 150,000

11,000
24,000
- Investment Income (R) +
24,000
3.
Balance Sheet
Transaction
1. Purchase
Common shares.
Cash
Asset
-150,000
Cash
2. Recognize 30%
portion of Leftwich
net income.
3. Received a cash
dividend of $1.10
per common
share.
4. No entry.
+11,000
Cash
Noncash
Assets
+150,000
Investment
+24,000
Investment
-11,000
Investment
Liabilities
Contrib.
+
+
Capital
Income Statement
Earned
Capital
Revenues
Expenses
+24,000
Retained
Earnings
+24,000
Investment
Income
Net
Income
+24,000

12-22
3.
2.

a. Coca-Colas Equity Method Investments asset account would be increased by their
share of Equity Income and decreased by their share of dividends received from the
bottlers. Therefore, $6,954 million + $690 million Dividends = $7,234 million, or
Dividends = $410 million.
b. There is a relatively modest difference between the $421 million reported by CocaCola and the $410 million we found in part a. There must have been some other
event (or events) that resulted in an $11 million increase in the asset. It may be that
Coca-Cola increased its investments in the equity method companies.In an indirect
method statement of operating cash flows, the equity income of $690 million is
included in the top line (net income), while the actual cash flow (which should be
included in the bottom line cash from operations) is $421 million. Therefore, the
adjustments to net income in arriving at cash from operations should include an
adjustment subtracting the difference $269 million.
c. The $1,575 million difference is goodwill from Coca-Colas original investment in
these bottling companies. When we use the equity method, goodwill is not listed
separately, but it is a part of the asset Equity Method Investments. Goodwill is not
amortized, though it must be tested annually for impairment.
d. In consolidating its bottling companies, Pepsico would include their liabilities in the
consolidated liabilities. However, when Coca-Cola uses the equity method, none of
its bottlers liabilities show up on the consolidated balance sheet. The financial
statements of Coca-Cola and Pepsico are reporting about two different types of
organizations, and are, therefore, not easily compared. Other ratios would also be
affected.
.

12-23

a. The amounts reported for all these separately-identifiable assets and liabilities must
be fair values at the date of the acquisition. So, any inventory would be reported at
what we would expect to get for it, rather than historical cost. Any financial liabilities
would be estimated at the value required to discharge them at the date of the
acquisition. In the fair value hierarchy, most of these amounts will be determined
using Level 2 or Level 3 approaches.
b. Goodwill is equal to the amount of consideration given for the transaction minus the
fair value of the net assets acquired. Other than goodwill, the asset fair value is
$230 million and the fair value of liabilities is $81 million. So, the fair value of
separately-identifiable net assets is $149 million (= $230 million - $81 million). As a
result, the goodwill is $348 million (= $497 million - $149 million). This amount would
not be amortized in the future, but Medtronic would have to assess its value annually
for impairment. If the goodwill value is impaired, the goodwill asset is reduced and a
charge is recognized in income.
c. Investors are likely to prefer acquisitions of identifiable net assets (even if
intangible), rather than vaguely-defined synergy effects. When the acquired
company goes to the highest bidder, there is a real risk that the highest bidder was
the one that most overestimated the potential for future synergies. When purchase
price allocations are disclosed subsequent to the acquisition, stock prices respond
favorably (unfavorably) to the disclosure that less (more) goodwill was acquired.

12-24

a. 2013:
11/15 Investment in Core, Inc. (+A) ............................................................
80,900
Cash (-A) .......................................................................................... 80,900
12/22 Cash (+A) .........................................................................................
6,250
6,250

6,600
Unrealized gain (+R, +SE) ................................................................
6,600
2014:
1/20 Cash (+A) .........................................................................................
86,400
1,100
Investment in Core, Inc. (-A) ............................................................. 87,500
b. Assuming the firms fiscal year ends 12/31, the unrealized gain of 6,600 increases
net income and retained earnings in 2013.
+ Cash (A) 6,250
80,900
86,400
12/22/13
1/20/14
11/15/13
11/15/13
12/31/13
+ Investment in Core Inc (A) 80,900

6,600
87,500
1/20/14
+ Loss on Sale of Investment (E)

1/20/14
1,100
-
Unrealized Gain (R)

6,600
+
12/31/13

6,250
12/22/13
c.
Balance Sheet
Transaction
Cash
Asset
11/15 Purchase
5,000 shares of
Core Inc
common.
-80,900
Cash
12/22 Dividend
income.
+6,250
Cash
12/31 Increase in
Investment.
1/20 Sale of Core
common.
Noncash
Assets
+80,900
Investment
+6,600
Investment
+86,400
Cash
-87,500
Investment
Liabilities
Income Statement
Contrib.
+
+
Capital
Earned
Capital
Revenues
Expenses
Net
Income
+6,250
Retained
Earnings
+6,600
Retained
Earnings
-1,100
Retained
Earnings
+6,250
Dividend
Income
+6,250
+6,600
Unrealized
Gain
+6,600
-1,100
+1,100
Loss on
Sale

12-25
E12-36 (30 minutes)

a. 2013:
80,900
Cash (-A) .......................................................................................... 80,900
12/22 Cash (+A) .........................................................................................
6,250
6,250

6,600
6,600
2014:
1/20 Cash (+A) .........................................................................................
86,400
Unrealized gain (-SE) .......................................................................
6,600
Investment in Core, Inc. (-A) ............................................................. 87,500
Gain on sale of investment (+R, +SE) .............................................. 5,500
b.
+ Cash (A) 12/22/13
1/20/14
6,250
86,400
+ Investment in Core Inc (A) -
80,900
11/15/13
11/15/13
12/31/13
80,900
6,600
87,500
1/20/14
- Gain on Sale of Investment (R) +

5,500
1/20/14
1/20/14
Unrealized Gain (AOCI)

6,600
6,600
+
12/31/13

6,250
12/22/13
c.
Income Statement
Balance Sheet
Transaction
Cash
Asset
11/15 Purchase
5,000 shares of
Core Inc
common.
-80,900
Cash
12/20 Dividend
income.
+6,250
Cash
12/31 Increase
in Investment.
1/20 Sale of
Core common.
Noncash
Assets
+80,900
Investment
Contrib.
Capital
Earned
Capital
+6,250
Retained
Earnings
+6,600
AOCI
-87,500
=
Investment
-6,600
AOCI
+5,500
Retained
Earnings
+6,600
Investment
+86,400
Cash
Liabilities
Revenues
+6,250
Dividend
Income
+5,500
Gain
Expenses
Net
Income
+6,250
+5,500

12-26

a. The trading stock investments will be reported at $225,300. This amount is computed
using their market values at year-end; specifically, $65,300 + $160,000, or $225,300.
b. The available-for-sale stock investments will be reported at $346,700. This amount is
computed using their market values at year-end; specifically, $192,000 + 154,700, or
$346,700.
c. The equity method stock investments will be reported at $236,000. This amount is
computed using their equity method value at year-end; specifically, $100,000 +
$136,000, or $236,000.
d. Unrealized holding losses of $5,200 will appear in the 2013 income statement. These
losses relate to the trading securities; specifically Barth: $68,000 - $65,300 = $2,700;
Foster: $162,500 - $160,000 = $2,500; total of $2,700 + $2,500 = $5,200.
e. (i) Unrealized holding losses of $7,300 will appear in the stockholders' equity section of
the December 31, 2013, balance sheet under other comprehensive income. These
losses relate to the available-for-sale securities; specifically McNichols: $197,000
- $192,000 = $5,000; Patell: $157,000 - $154,700 = $2,300; total of $5,000 +
$2,300 = $7,300.
(ii) Unrealized holding losses of $5,200 will appear in the stockholders equity section of
the December 31, 2013, balance sheet under retained earnings. These losses
relate to the trading securities; specifically Barth: $68,000 - $65,300 = $2,700;
Foster: $162,500 - $160,000 = $2,500; total of $2,700 + $2,500 = $5,200.
(iii) Total unrealized holding losses in equity of $12,500total of (i) & (ii)
f. (i) A fair value adjustment to investments of $7,300 will appear in the December 31,
2013, balance sheet. This adjustment relates to the available-for-sale securities.
See part (e) for the supporting computations. The fair value adjustment decreases
the book value of the available-for-sale securities to their year-end market value.
(ii) A fair value adjustment to investments of $5,200 will appear in the December 31,
2013, balance sheet. This adjustment relates to the trading securities. See part (e)
for supporting computations. The fair value adjustment decreases the book value of
the trading securities to their year-end market value.
(iii) Total fair value adjustment is $12,500total of (i) & (ii)

12-27

(Entries in $ millions)
a. Record share of income:
DR Investment in affiliates (+A)
Income from affiliates (+R, +SE)
$610
$610
b. Record receipt of cash dividends:

DR Cash (+A)
CR Investment in affiliates (-A)
$216
$216
c. Record divestiture of JJMCP:

DR Cash (+A)
CR Gain on JJMCP disposal (+R, +SE)
CR Investment in affiliates-JJMCP (-A)
$175
$136
$39
d. The ending balance should be $494 million + $610 million - $216 million - $39 million
= $849 million. The actual balance, $886 million, was $37 million higher. This
difference could be due to advances (loans) made to the affiliates or AOCI
adjustments at the affiliates or some other transactions (or adjustments) besides the
ones described above.

1 & 2.
Healy
Miller
Current assets
$1,700,000 $ 120,000
Investment in Miller
500,000
Plant assets........................ 3,000,000
410,000
Goodwill..............................
.
.
Total assets ........................ $5,200,000
$530,000
Liabilities............................. $ 700,000
Contributed capital ............. 3,500,000
Retained earnings .............. 1,000,000
Total liabilities &
stockholders equity ........ $5,200,000
$90,000
400,000
40,000
$530,000
Consolidating
Adjustments Consolidated
$ 1,820,000
0
$(500,000)
15,000
3,425,000
45,000
45,000
$5,290,000
(400,000)
(40,000)
$790,000
3,500,000
1,000,000
$5,290,000
continued next page

12-28
E12-39. concluded
3. Miller contributed capital (-SE) ...........................................................
400,000
Miller retained earnings (-SE) .............................................................
40,000
Plant assets (+A) ...............................................................................
15,000
Goodwill (+A) .....................................................................................
45,000
Investment in Miller Co. (-A) .............................................................
500,000
4.
+ Investment in Miller Co. (A) 500,000
1/1
+ Goodwill (A) 45,000
1/1
-
Miller Contributed Capital (SE) +

400,000
Miller Retained Earnings (SE) +

40,000
1/1
+ Plant Assets (A) 15,000
1/1
1/1
5.
Income Statement
Balance Sheet
Transaction
Cash
Asset
Noncash
Assets
-500,000
Investment
in Miller
1/1 To
consolidate
Healy & Miller.
+45,000
Goodwill
+15,000
Plant Assets
Liabilities
Contrib.
Capital
Earned
Capital
-400,000
Miller
Contributed
Capital
Revenues
- Expenses =
Net
Income
-40,000
Miller Retained
Earnings

12-29

1 & 2.
Rayburn Company purchased all of Kanodia Company's common stock for cash on
January 1, after which the separate balance sheets of the two corporations appeared
as follows:
Consolidating
Adjustments
(600,000)
Investment in Kanodia ................
Rayburn
$ 600,000
Kanodia
Consolidated
$
0
Other assets ................................
2,300,000
$ 700,000
20,000
3,020,000
Goodwill .......................................
40,000
40,000
Total assets .................................
$2,900,000
$700,000
$3,060,000
Liabilities ......................................
$ 900,000
$160,000
$1,060,000
Contributed capital ......................
1,400,000
300,000
(300,000)
1,400,000
Retained earnings .......................
600,000
240,000
(240,000)
600,000
Total liabilities & stockholders

equity ........................................
$2,900,000
$700,000
$3,060,000
3. Kanodia contributed capital (-SE) ......................................................

300,000
Kanodia retained earnings (-SE) ........................................................
240,000
Other assets (+A) ...............................................................................
20,000
Goodwill (+A) .....................................................................................
40,000
Investment in Miller Co. (-A) ..............................................................
600,000
4.
+ Investment in Kanodia Inc. (A) 600,000
1/1
1/1
+ Other Assets (A) 20,000
1/1
+ Goodwill (A) 40,000
1/1
-Kanodia Contributed Capital (SE) +

300,000
-
1/1
Kanodia Retained Earnings (SE) +

240,000
5.
Transaction
1/1 To
consolidate
Rayburn &
Kanodia.
Cash
Asset
Noncash
Assets
-600,000
Investment
in Kanodia
+40,000
Goodwill
+20,000
Plant Assets
Balance Sheet
LiabilContrib.
+
+
ities
Capital
Income Statement
Earned Capital Revenues
-300,000
Kanodia
Contributed
Capital
-240,000
Kanodia
Retained
Earnings
Expenses =
Net
Income

12-30

a. The investment is initially recorded on Engels balance sheet at the purchase price of
$16.8 million, including $600,000 of goodwill. Because the fair value of Ball is less than
the carrying amount of the investment on Engels balance sheet, the goodwill may be
deemed to be impaired. To determine impairment, the imputed value of the goodwill is
determined to be 12.5 million - $12.3 million = $200,000. Because this is less than the
carrying amount of the goodwill, it is deemed to be impaired.
b. Goodwill must be written down by $400,000. The write-down will reduce the carrying
amount of goodwill by $400,000, and the write-down will be recorded as a loss in
Engels income statement, thereby reducing retained earnings by that amount.
E12-42.B (60 minutes)
a.
Cash paid ..........................................................................
Fair market value of shares issued ...................................
Purchase price ..................................................................
Less: Book value of Harris ................................................
Excess payment................................................................
Excess payment assigned to specific
accounts based on fair market value:
Buildings ...........................................................................
Patent ...............................................................................
Goodwill ............................................................................
$210,000
180,000
390,000
280,000
110,000
40,000
30,000
$ 40,000
$110,000
b.
Accounts
Cash
Receivables
Inventory
Investment in Harris
Land
Buildings, net
Equipment, net
Patent
Goodwill
Totals
Easton,
Company
$ 84,000
160,000
220,000
390,000
Harris
Co.
$ 40,000
90,000
130,000
100,000
400,000
120,000
0
$1,474,000
60,000
110,000
50,000
$ 480,000
Consolidation
Entries
[S]
[A]
$(280,000)
(110,000)
[A]
40,000
[A]
[A]
30,000
40,000
Consolidated
Totals
$ 124,000
250,000
350,000
160,000
550,000
170,000
30,000
40,000
$1,674,000
continued next page

12-31
E12-42.B concluded
Table continued from previous page
Easton,
Accounts
Company
Accounts payable
$ 160,000
Long-term liabilities
380,000
Common stock
500,000
Additional paid-in capital
74,000
Retained earnings
360,000
Totals
$1,474,000
Harris
Co.
$ 30,000
170,000
40,000
240,000
$ 480,000
Consolidation
Entries
[S]
(40,000)
[S]
(240,000)
Consolidated
Totals
$ 190,000
550,000
500,000
74,000
360,000
$1,674,000
c. The tangible assets are accounted for just like any other acquired asset. The
receivables are removed when collected, inventories affect future cost of goods sold,
and depreciable assets are depreciated over their estimated useful lives. Intangible
assets with a determinable life are amortized (depreciated) over that useful life. Finally,
intangible assets with an indeterminate useful life (such as goodwill) are not amortized,
but are either tested annually for impairment, or more often if circumstances require.
E12-43.C (20 minutes)
a. Companies use derivative securities in order to mitigate risks, such as commodity price
risks, risks relating to foreign exchange fluctuations, or risks relating to fluctuations in
interest rates.
b. Derivatives are reported on the balance sheet as are the assets or liabilities to which
they relate. Generally, derivatives and the related assets/liabilities are reported on the
balance sheet at their fair market value.
c. The unrealized gains (losses) on HPs derivatives are reported in the Accumulated
Other Comprehensive Income section of its stockholders equity. This reporting
indicates that they have not yet affected HPs profits. Once the underlying transaction
is settled, these unrealized gains (losses) will be removed from AOCI and transferred
into current income, thus affecting HPs profitability.

12-32
PROBLEMS
P12-44. (50 minutes)
a. Available-for-sale investments are reported at market value on the balance sheet.
Thus, Met Lifes bond investments are reported at:
$350,271 million as of 2011
$324,797 million as of 2010
b. Net unrealized gains (losses) for 2011 are
$21,184 million ($25,973 million - $4,789 million)
Net unrealized gains (losses) for 2010 are
$7,781 million ($13,760 million - $5,979 million)
Because the investments are accounted for as available-for-sale, these unrealized
gains (losses) did not affect reported income for 2011 and 2010. (Note: Had these
investments been accounted for as trading securities, those unrealized gains
(losses) would have affected reported income.)
c. Realized gains (losses) are gains (losses) that occur as a result of sales of
securities. These are reported in the income statement and affect reported income.
Unrealized gains (losses) reflect the difference between the current market price of
the security and its acquisition cost. Only unrealized gains (losses) from trading
securities are reported in income. If MetLife had sold all of the AFS securities on
which it had gains, its pre-tax income would have increased by $25,973 million.
d. The evaluation of investment performance is difficult as companies have discretion
over the timing of realized investment gains (losses) and can, thereby, affect
reported income. By including unrealized gains (losses) in the analysis, we are able
to get a clearer picture of overall investment performancealbeit, with an
understanding that these gains and losses are not yet realized. These returns could
then be compared with those of competitors and market rates in general for
investments of comparable risk. We believe this reporting metric provides useful
insights as noted.

12-33
Gem
Alpine
$160,000
Current assets
Investment in Alpine
Plant assets (net)
Total assets .......................
Liabilities
$258,000
392,000
265,000
$915,000
$ 50,000
Common stock...................
Retained earnings .............
Noncontrolling interest
Total liabilities &
stockholders equity ........
700,000
165,000
420,000
140,000
$915,000
$620,000
Consolidating
Adjustments
$(392,000)
460,000
$620,000
$ 60,000
(420,000)
(140,000)
168,000
Consolidated
$ 418,000
0
725,000
$1,143,000
$ 110,000
700,000
165,000
168,000
$1,143,000

a. (in $millions)
Cash and cash equivalents .............................................................
1,267
Accounts receivable ........................................................................ 764
Inventories ........................................................................................
925
Property, plant, and equipment ....................................................... 1,933
Non-current financial assets
102
Total tangible assets
4,991
Other intangible assets ...................................................................
10,063
Goodwill ......................................................................................... 4,086
Total intangible assets ......................................................................
14,149
The intangible assets were valued by Sanofi at 74% of Genzymes value. However,
only 21% of the total assets acquired was allocated to Goodwill.
b. All assets of the acquired company are reported on the consolidated balance sheet at
their fair market values on the date of the acquisition, not at the their net book value.
c. The tangible assets are accounted for just like any other acquired asset: the
receivables are removed when collected, inventories affect future cost of goods sold,
and depreciable assets are depreciated over their estimated remaining useful lives.
Intangible assets with a determinable life are amortized (depreciated) over that useful
life. Finally, intangible assets with an indefinite useful life (e.g., goodwill) are not
amortized, but are tested annually for impairment, or more often if circumstances
require.
12-34

a. The trading security investments will be reported at $375,300. This value is computed
using their market values at year-end; specifically, $105,300 + $270,000.
b. The available-for-sale investments will be reported at $359,000. This value is
computed using their market values at year-end; specifically, $199,000 + 160,000.
c. The held-to-maturity bond investments will be reported at $237,200. This value is
computed using their amortized cost value at year-end; specifically, $101,200 +
$136,000.
d. Unrealized holding gains of $10,400 will appear in the 2013 income statement. These
gains relate to the trading securities; specifically Ling: $105,300 - $102,400 = $2,900
gain; Wren: $270,000 - $262,500 = $7,500; total of $2,900 + $7,500 = $10,400. The
calculation is only possible because this is the first year the bonds have been held.
Therefore, the entire price difference occurred this year.
e. (i) Unrealized holding gains of $8,000 will appear in the stockholders' equity section of
the December 31, 2013, balance sheet under accumulated other comprehensive
income (AOCI). These losses relate to the available-for-sale securities; specifically
Olanamic: $199,000 - $197,000 = $2,000; Fossil: $160,000 - $154,000 = $6,000;
total of $2,000 + $6,000 = $8,000.
(ii) Unrealized holding gains of $10,400 will appear in the stockholders equity section
of the December 31, 2013, balance sheet under retained earnings (see answer to
requirement d).
(iii) Total unrealized holding gains in equity of $18,400totals of (i) & (ii).
f. (i) A fair market value adjustment to investments of $8,000 will appear in the
December 31, 2013, balance sheet. This adjustment relates to the
available-for-sale securities. See part (e) for the supporting computations. The fair
value adjustment increases the book value of the available-for-sale securities to
their year-end market value.
(ii) A fair market value adjustment to investments of $10,400 will appear in the
December 31, 2013, balance sheet. This adjustment relates to the trading
securities. See part (d) for supporting computations. The fair value adjustment
increases the book value of the trading securities to their year-end market value.
(iii) No fair market adjustment is made to the bonds to be held to maturity. However,
the reported value of each bond is adjusted for the amortization of premium or
discount. Thus the Meander bond will be shown at a value of $101,200 and the
Resin bond will be valued at $136,000. The changes in these asset values on the
Columbia Company balance sheet will be matched by the related interest revenue.

12-35

a. Yes, each individual company (e.g., parent and subsidiary) maintains its own
financial statements. This approach is necessary to report on the activities of the
individual units and to report to the respective stakeholders of each unit.
The purpose of consolidation is to combine these separate statements to more
clearly reflect the operations and financial condition of the combined (whole) entity.
b. The Investment in Financial Products Subsidiaries is reported on the parents
(Machinery and Power Systems) balance sheet at $4,035 million.
This amount is the same balance as reported for stockholders equity of the
Financial Products subsidiary.
This relation will always exist so long as the investment is originally purchased at
book value (e.g., no goodwill from the purchase).
c. The consolidated balance sheet more clearly reflects the actual assets and liabilities
of the combined company vis--vis that revealed in the equity method of accounting.
That is, it better reflects operations as one entity as far as investors and creditors are
concerned.
The equity method of accounting that is used by the parent company to account for
its investment in the subsidiary reflects only its proportionate share (100% in this
case) of the investee company stockholders equity and does not report the
individual assets and liabilities comprising that equity.
d. The consolidating adjustments generally accomplish three objectives:
(i) They eliminate the equity method investment on the parents balance sheet and
replace it with the actual assets and liabilities of the investee company to which it
relates.
(ii) They record any additional assets that are included in the investment balance
that may not be reflected on the subsidiarys balance sheet, like goodwill, for
example.
(iii) They eliminate any intercompany sales and receivables/payables.
e. The consolidated stockholders equity and the stockholders equity of the parent
company are equal. This equality will always be the case. The consolidation process
replaces the investment account with the assets and liabilities to which it relates.
Thus, stockholders equity remains unaffected.
continued next page

12-36
P12-48. concluded
f. Consolidated net income will equal the net income of the parent company. The
reason for this result is that the parent reflects the income of the subsidiary via the
equity method of accounting for its investment. The consolidation process merely
replaces the equity income account with the actual and individual sales and
expenses to which it relates. Net income is unaffected.
g. The equity method of accounting reports investments at adjusted cost (beginning
balance plus equity earnings and less dividends received)this contrasts with the
market method. Unrealized gains for a subsidiary are, therefore, not reflected on the
consolidated balance sheet and income statement. Instead, the subsidiary is
reflected on the balance sheet at its purchase price net of depreciation and
amortization, just like any other asset. The consolidation process merely replaces
the investment account with the actual assets and liabilities to which it relates. Thus,
there can exist substantial unrealized gains subsequent to the acquisition that are
not reflected in the consolidated financial statements.

12-37
CASES
C12-49. (60 minutes)
a. Vodafones opening balance for investments in associates is 38,105 million
reported as Share of equity shareholders funds in associates. The Share in result
in associates of 4,963 million is Vodafones proportionate share of the income in
these equity method investments. This amount is included in the income statement
and increases the balance in the investment in associates.
b. The investing section of Vodafones statement of cash flows shows dividends
received from associates of 4,023 million. This amount would increase cash and
decrease the investments in associates.
c. The entries in parts a and b would increase the balance of investment in associates
from 38,105 million to 38,105 + 4,963 - 4,023 = 39,045. But the ending
balance was only 35,108, so there must have been other items affecting this
account that reduced it by approximately 4 billion. One change that can be seen in
the footnote information is that Vodafone sold its investment in Societ Franaise du
Radiotlphone S.A, (SFR). Footnote 32 of the previous years annual report said
that this investment had a carrying value of 4.2 billion. When Vodafone sold its
investment in SFR during fiscal year 2012, the investment in associates account
would be reduced by this amount. Other adjustments would account for the
remaining difference.

a. 2013:
1/2
Investment in Dye, Inc. (+A) .............................................................
420,000
Cash (-A) .......................................................................................... 420,000
12/31 Dividend receivable (+A) ..................................................................
16,000
16,000

60,000
Investment in Dye, Inc. (-A) ..............................................................
60,000
2014:
1/18 Cash (+A) .........................................................................................
16,000
Dividend receivable (-A) ...................................................................
16,000
continued next page

12-38
C12-50. continued
b.
+ Cash (A) 16,000 420,000
1/18/11
1/2/10
1/2/10
+ Investment in Dye Inc. (A) 420,000

60,000
12/31/10
+ Dividend Receivable (A) 12/31/10

16,000
16,000
12/31/10
+ Unrealized Loss (E) 60,000

16,000
1/18/11
12/31/10
c.
Balance Sheet
Noncash
Assets
+420,000
Investment
12/31/10 Declare
dividend
$.8/share.
+16,000
Dividend
Receivable
12/31/10
Recognize
decline in
investment.
-60,000
Investment
Transaction
1/2/10 Buy 20,000
shares of Dye.
1/18/11 Receipt of
dividend.
Cash
Asset
-420,000
Cash
+16,000
Cash
-16,000
Dividend
Receivable
Liabilities
Income Statement
Contrib.
+
+
Capital
Earned
Capital
+16,000
Retained
Earnings
-60,000
Retained
Earnings
Revenues
+16,000
Dividend
Income
Expenses
Net
Income
+16,000
-60,000
+60,000
Unrealized
Loss
d. 2010:
1/2
Investment in Dye, Inc. (+A) .............................................................
420,000
Cash (-A) .......................................................................................... 420,000
12/31 Dividend receivable (+A) ..................................................................
16,000
Investment in Dye, Inc. (-A) ..............................................................
16,000
12/31 Investment in Dye, Inc. (+A) .............................................................

112,000
Investment revenue (+R, +SE) ......................................................... 112,000
2011:
1/18 Cash (+A) .........................................................................................
16,000
Dividend receivable (-A) ...................................................................
16,000
continued next page

12-39
C12-50. concluded
e.
+ Cash (A) 16,000 420,000
1/18/11
1/2/10
+ Investment Revenue (R) 112,000

12/31/10
+ Investment in Dye Inc. (A) 1/2/10

420,000
12/31/10
112,000
16,000
12/31/10
12/31/10
+ Dividend Receivable (A) 16,000

16,000
1/18/11
f.
Balance Sheet
Transaction
Cash
Asset
1/2/10 Buy
20,000 shares -420,000
Cash
of Dye.
Noncash
Assets
+420,000
Investment
Liabilities
Contrib.
+
Capital
Earned
Capital
Revenues
Expenses
Net
Income
+16,000
12/31/10
Declare
dividend
$.8/share.
Dividend
Receivable
-16,000
Investment
12/31/10
Recognize
income from
investment.
1/18/11
Receipt of
dividend.
Income Statement
+112,000
Investment
+16,000
Cash
+112,000 +112,000
=
Retained
Earnings
Investment Revenue
= +112,000
-16,000
Dividend
Receivable

12-40

a. Consolidated statements present the total assets and liabilities of all firms in which
the reporting firm has more than a fifty percent ownership with intercompany
accounts and transactions eliminated.
b. Demski has a controlling interest in Asare and Demski Finance. Therefore, their
assets and liabilities are all added to those of Demski Inc. Demski does not have a
controlling interest in Knechel. Therefore, it must show its investment in Knechel Inc.
as a financial asset.
c. This excess is the amount paid to Asare in excess of the net book value of Asares
assets (assets less liabilities assumed) when Asare was acquired by Demski. The
amount is known more commonly as Goodwill and reflects the fact that Demski
believed the company was worth more than the net book value of its assets.
d. The amount represents the outside ownership claim on Asares net assets, which
are aggregated in the balances of Demskis accounts.

a. While the approach recommended by Gayle is not disallowed by a specific
accounting standard, it is not consistent with the intent of GAAP. Certainly from a
position of representational faithfulness, it specifically does not represent how
management regards the investment or intends to treat it in the future. The approach
recommended is a flagrant attempt to violate the spirit of GAAP in order to manage
earnings.
Such practice may get by the firms auditors once or twice, but failure to be
consistent in the accounting treatment over time is unlikely to be tolerated under
SOX and the increased scrutiny applied by the SEC in the wake of the numerous
accounting scandals of the recent past.
Further, such practice can lead to lawsuits by investors who can argue that
management was not accounting truthfully.
b. We believe the practice to be highly unethical.

12-41

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Chapter 12

Reporting and Analyzing Financial

LO2 Describe the term fair value

LO3 Describe and analyze

LO1 Explain and interpret the three

LO4 Explain and analyze

LO5 Describe and analyze

LO6 Appendix 12A Illustrate and

LO8 Appendix 12C Discuss the

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

Q12-8. The $750,000 investment in Murray Company appearing in Finn Company's

Cambridge Business Publishers, 2014

M12-12. (15 minutes)

M12-13. (10 minutes)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M12-14. (20 minutes)

Investment in Lang Company (+A) ...................................................

Investment in Lang Company (+A) ...................................................

Cash (+A) .........................................................................................

Investment in Lang Company (A)

Investment Income (R)

Cambridge Business Publishers, 2014

M12-15. (10 minutes)

M12-16. (15 minutes)

M12-17. (10 minutes)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M12-18. (10 minutes)

M12-19. (20 minutes)

c. If we compare DeFonds consolidated balance sheet to the equity method balance

Cambridge Business Publishers, 2014

M12-20. (40 minutes)

Investment in Skyline, Inc. (+A) ........................................................

12/31 Interest receivable (+A) .....................................................................

12/31 Investment in Skyline, Inc. (+A) ........................................................

Cash (+A) ........................................................................................

Cash (+A) ........................................................................................

Interest Revenue (R)

Unrealized Gain (R)

Realized Gain (R)

Interest Receivable (A)

continued next page

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M12-21. (40 minutes)

12/31 Unrealized loss (+E, -SE) .................................................................

Cash (+A) .........................................................................................

Cambridge Business Publishers, 2014

+ Investment in Lane Inc (A) 171,200

Unrealized Loss (E)

- Dividend Income (R) +

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M12-22. (30 minutes)

12/31 Unrealized loss AOCI (-SE) ...........................................................

Cash (+A) .........................................................................................

+ Investment in Lane Inc (A) 171,200

Unrealized Loss (AOCI)

- Dividend Income (R) +

M12-23. (10 minutes)