M12-13.

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).

E12-25.

a. Investments classified as trading securities

1. Investment in Freeman, Co. (+A) ...................................... 80,000

Cash (-A) .................................................................. 80,000

2. Cash (+A) ......................................................................... 6,250

Dividend income (+R, +SE) ...................................... 6,250

3. Investment in Freeman, Co. (+A) ...................................... 7,500

Unrealized gain (+R, +SE) ........................................ 7,500

4. Cash (+A) ......................................................................... 86,400

Loss on sale of investment (+E, -SE) ................................ 1,100
Investment in Freeman, Co. (-A) ............................. 87,500

+ Cash (A) - + Investment in Freeman (A) -

2. 6,250 80,000 1. 1. 80,000
4. 86,400 3. 7,500 87,500 4.

- Dividend Income (R) +

6,250 2.

- Unrealized Gain (R) + + Loss on Sale (E) -

7,500 3. 4. 1,100

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net
Transaction Asset + Assets = ities + Capital + Capital Revenues - Expenses = Income
1. Ohlson Co. -80,000 +80,000 = - =
purchases 5,000 Cash Investment
common shares
of Freeman Co.
at $16 cash per
share.
 2. Ohlson Co. +6,250 = +6,250 +6,250 - = +6,250
receives a cash Cash Retained Dividend
dividend of Earnings Income
$1.25 per
common share
from Freeman.

3. Year-end market +7,500 = +7,500 +7,500 - = +7,500

price of Freeman Investment Retained Unrealized
common stock is Earnings Gain
$17.50 per share.

4. Ohlson Co. sells +86,400 -87,500 = + -1,100 - +1,100 = -1,100

all 5,000 common Cash Investment Retained Loss
shares of Freeman Earnings
for $86,400 cash.

b. Available for Sale Securities

1. Investment in Freeman, Co. (+A) ....................................... 80,000

Cash (-A) ................................................................. 80,000

2. Cash (+A) ........................................................................... 6,250

Dividend income (+R, +SE) ..................................... 6,250

3. Investment in Freeman, Co. (+A) ....................................... 7,500

Unrealized gain (+SE) ............................................. 7,500

4. Cash (+A) ........................................................................... 86,400

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

+ Cash (A) - + Investment in Freeman (A) -

2. 6,250 80,000 1. 1. 80,000
4. 86,400 3. 7,500 87,500 4.

- Dividend Income (R) +

6,250 2.

- Unrealized Gain (SE) + - Gain on Sale ( R) +

4. 7,500 7,500 3 6,400 4.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction Asset + Assets = ities + Capital + Capital Revenues - Expenses = Income
1. Ohlson Co. -80,000 +80,000 = - =
purchases Cash Investment
5,000 common
shares of
Freeman Co. at
$16 cash per
share.
 2. Ohlson Co. +6,250 = +6,250 +6,250 - = +6,250
receives a cash Cash Retained Dividend
dividend of Earnings Income
$1.25 per
common share
from Freeman.
3. Year-end +7,500 = +7,500 - =
market price of Investment AOCI
Freeman
common stock
is $17.50 per
share.
4. Ohlson Co. sells +86,400 -87,500 = -7,500 +6,400 - = +6,400
all 5,000 Cash Investment AOCI Gain
common shares +6,400
of Freeman for Retained
$86,400 cash. Earnings

P12-45.

a. Available-for-sale investments are reported at market value on the balance sheet.

Thus, Met Life’s bond investments are reported at:

$365,425 million as of 2014

$350,187 million as of 2013

b. Net unrealized gains (losses) at the end of 2014 are:

$30,757 million ($32,634 million - $1,877 million)

Net unrealized gains (losses) at the end of 2013 are:

$16,806 million ($21,180 million - $4,374 million)

Because the investments are accounted for as available-for-sale, these unrealized

gains (losses) did not affect reported income for 2014 and 2013. (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 $30,757 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 performance—albeit, 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.

E12-33.

a. Siemens’ available-for-sale securities are reported at Fair value. In 2014, that

amount was €925 million for the current portion of its portfolio and €1,611 million for
the non-current financial assets. The total value is €2,536 million. The unrealized
gains include €37 million in the current portion of the portfolio and €1,419 (€1,611-
€192) in the non-current portion of the portfolio. In total unrealized gain of €1,456
million is included in AOCI in stockholders’ equity.

b. Analyzing the investment portfolio at cost:

Beginning balance (at cost) 580
+ Securities purchased +613
- Cost of securities sold (plug) -305
Ending balance (at cost) 888
The original cost of securities sold was €305 million. The cash flow statement reported
that cash proceeds from the sale of these securities totaled €317 million. Thus, the
realized gain on the sale of securities was €12 million (€317-€305).

d. If the current portion of Siemens’ available-for-sale securities were classified as

trading securities, the unrealized gains would be reported in income. For fiscal
2014, that means that the change in the net unrealized gains (€37 - €20 = €17
million) would be added to the realized gain of €12 million for a total gain of €29
million.

M11-35. (15 minutes)

a. No entry is required when the options are granted. The compensation expense is
recognized ratably over the vesting period. As the options vest, the following entry is
required (assume one-third vested in 2014):

Compensation expense (+E, -SE) .................................... 11,026,960

Additional paid in capital (+SE) .............................. 11,026,960

b. Granted stock options (whether vested or not) are included in the denominator of
diluted EPS whenever the stock price is greater than the exercise price. These
options would reduce diluted EPS but have no effect on basic EPS.

c. Cash (+A) ...................................................................... 1,560,000

 Contributed capital (+SE) ...................................... 1,560,000

The details of the credit to contributed capital would depend on where the shares
came from. If they had been held as treasury shares, the credit would have been to
the treasury shares contra asset, with either a debit or credit in additional paid-in
capital. If the shares were newly issued, the credit would have been to the par value
and additional paid-in capital for Merck’s common stock.

d. When options are exercised, the number of outstanding shares increases. This
would reduce basic EPS. It might also lower diluted EPS, though most likely to a
lesser degree. This is because the dilutive effect may already be reflected in diluted
EPS prior to exercise.

M11-36.

Total Total Total Operating

Year Assets Liabilities Stockholders’ Equity EPS Income
1 ….. Increase No effect Increase Decrease No effect
2 ….. Decrease No effect Decrease Increase No effect
3 ….. No effect Increase Decrease No effect No effect

P11-56.

a.
Balance Sheet Income Statement
Cash Noncash Liabil- Contrib. Earned Contra Net
Transaction Asset + Assets = ities + Capital + Capital - Equity Revenues - Expenses = Income
Purchased -100,000 = - +100,0001 - =
10,000 shares Cash Treasury
of treasury Stock
stock for cash.

Sold 1,500 +18,000 = +3,000 - -15,0002 - =

shares of Cash Add’l Treasury
treasury stock. Paid-in Stock
Capital

Issued 5,000 +55,000 = +25,0003 - - =

shares of Cash Common
common Stock
stock. +30,000
Add’l
Paid-in
Capital

Sold 1,200 +10,800 = -1,200 - -12,0004 - =

shares of Cash Add’l Treasury
treasury stock. Paid-in Stock
Capital
Notes:
 1
The stock is acquired for 10,000 shares × $10 = $100,000. This is reflected as a reduction in Cash and a corresponding increase in the
Treasury Stock account, a contra-equity account which reduces contributed capital.
2
Cash received is 1,500 shares × $12 per shares = $18,000. Treasury Stock is reduced by its original cost of $10 per share and the balance
($3,000) is reflected as an increase in Additional Paid-in Capital.
3
Cash received is 5,000 shares × $11 per share. Common Stock is increased by the par value of the shares issued (5,000 × $5 = $25,000) and
Additional Paid-in Capital is increased by the balance ($30,000).
4
Cash received is 1,200 shares × $9 = $10,800. Treasury Stock is reduced by the original cost of the shares (1,200 shares × $10 =
$12,000) and Additional Paid-in Capital is reduced by the balance ($10,800 - $12,000 = -$1,200).
b.
1/12 No entry is required for the 3-for-1 stock split.

9/1 Treasury stock (+XSE, -SE) ............................................... 100,000

Cash (-A) ...................................................................... 100,000

10/12 Cash (+A) ...................................................................... 18,000

Treasury stock (-XSE, +SE) .................................... 15,000
Additional paid-in capital (+SE) ............................... 3,000

11/21 Cash (+A) ...................................................................... 55,000

Common stock (+SE) .............................................. 25,000
Additional paid-in capital (+SE) ................................ 30,000

12/28 Cash (+A) ...................................................................... 10,800

Additional paid-in capital (-SE) ........................................ 1,200
Treasury stock (-XSE, +SE) .................................... 12,000

c.
+ Cash (A) - - Common Stock (SE) +
10/12 18,000 100,000 9/1 25,000 11/21
11/21 55,000
12/28 10,800
+ Treasury Stock (XSE) - - Additional Paid-in Capital (SE) +
9/1 100,000 15,000 10/12 12/28 1,200 3,000 10/12
12,000 12/28 30,000 11/21

d. 1/12: stock split – decrease basic EPS

9/1: purchase treasury stock – increase basic EPS
10/12: sold treasury stock – decrease basic EPS
11/21: issued common stock – decrease basic EPS
12/28: sold treasury stock – decrease basic EPS

e.
Stockholders’ Equity
Paid-in capital
7% Preferred stock, $100 par value, 20,000 shares authorized;
5,000 shares issued and outstanding $500,000
Common stock, $5 par value, 300,000 shares authorized;
125,000 shares issued, of which 7,300 shares are in
the treasury 625,000 $1,125,000
Additional paid-in capital
Paid-in capital in excess of par value—Preferred stock 24,000
 Paid-in capital in excess of par value—Common stock 390,000
Paid-in capital from treasury stock 1,800 415,800
Total paid-in capital 1,540,800
Retained earnings 408,000
1,948,800
Less: Treasury stock (7,300 common Shares) at cost 73,000
Total stockholders' equity $1,875,800

f. Because Sougiannis did not pay the 7% dividend on its preferred stock, ROCE is
computed as follows:

$83,000 / [($1,875,800+$1,809,000)/2 -$500,000] = 0.062 or 6.2%