CHAPTER 13

INVESTMENTS 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. 12 Investments—Mid-Ex Company Stock................ 120,200*
Cash................................................................... 120,200
*(5,000 shares × $24 per share) + $200
Apr. 22 Cash........................................................................ 1,800*
Dividend Revenue............................................ 1,800
*$0.36 per share × 5,000 shares
May 10 Cash........................................................................ 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. 15 Investments—Birch Company Stock.................. 70,560*

Cash................................................................... 70,560
*(1,600 shares × $44 per share) + $160
Sept. 10 Cash........................................................................ 1,200*
Dividend Revenue............................................ 1,200
*$0.75 per share × 1,600 shares
Oct. 5 Cash........................................................................ 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. 2 Investment in First Alert Company Stock............... 155,000
Cash....................................................................... 155,000
Dec. 31 Investment 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. 31 Cash............................................................................ 4,800*
Investment in First Alert Company Stock......... 4,800
*40% × $12,000

PE 13–3B

Jan. 2 Investment in Nassim Company Stock............... 400,000

Cash................................................................... 400,000
Dec. 31 Investment in Nassim Company Stock............... 33,000
Income of Nassim Company........................... 33,000
Record 30% of Nassim Company income,
30% × $110,000.
Dec. 31 Cash........................................................................ 13,800*
Investment in Nassim Company Stock.......... 13,800
*30% × $46,000

PE 13–4A
2012
Dec. 31 Unrealized Loss on Trading Investments............... 4,200*
Valuation Allowance for Trading Investments 4,200
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. 31 Valuation 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. 31 Unrealized 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. 31 Valuation 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. 1 Investments—Reynolds Co. Bonds............ 56,000
Cash........................................................... 56,000
b. 2012
Oct. 1 Cash................................................................ 1,260
Interest Revenue...................................... 1,260
$56,000 × 4.5% × 6/12.
c. 2012
Oct. 1 Cash................................................................ 19,800*
Loss on Sale of Investments........................ 200
Investments—Reynolds Corp. Bonds... 20,000
*$20,000 × 99%
d. 2012
Dec. 31 Interest Receivable........................................ 637
Interest Revenue...................................... 637
Accrued interest, $56,000 × 4.5%
× 91/360.

Ex. 13–2

a. 2012
Sept. 1 Investments—Carlisle Corp. Bonds............ 40,000
Cash........................................................... 40,000
b. 2012
Dec. 31 Interest Receivable........................................ 1,200
Interest Revenue...................................... 1,200
Accrued interest, $40,000 × 9% × 4/12.
c. 2013
Mar. 1 Cash................................................................ 1,800
Interest Receivable.................................. 1,200
Interest Revenue...................................... 600*
*$40,000 × 9% × 2/12
d. 2013
Mar. 1 Cash................................................................ 10,300*
Gain on Sale of Investments................... 300
Investments—Carlisle Corp. Bonds. . . 10,000
*$10,000 × 103%
Ex. 13–3
a. 2012
July 12 Investments—Davis County Bonds............ 24,000
Interest Receivable........................................ 192*
Cash........................................................... 24,192
*$24,000 × 4% × 72/360

b. Nov. 1 Cash................................................................ 480*

Interest Receivable.................................. 192
Interest Revenue...................................... 288
*$24,000 × 4% × ½

c. Dec. 1 Cash................................................................ 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. 31 Interest Receivable........................................ 120

Interest Revenue...................................... 120
To accrue interest.
Ex. 13–4
a. 2012
Jan. 21 Investments—Government Bonds.............. 50,000
Interest Receivable........................................ 125*
Cash........................................................... 50,125
*$50,000 × 4.5% × 20/360
June 30 Cash................................................................ 1,125*
Interest Receivable.................................. 125
Interest Revenue...................................... 1,000
*$50,000 × 4.5% × ½
Sept. 5 Cash................................................................ 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. 31 Interest 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. 17 Investments—Lycore Co. Stock.................. 90,200*
Cash........................................................... 90,200
*(4,000 shares × $22.50) + $200

b. July 11 Cash................................................................ 3,200*

Dividend Revenue.................................... 3,200
*($0.80 × 4,000 shares)

c. Dec. 4 Cash................................................................ 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. 12 Investments—Inskip Company Stock................. 68,572*
Cash................................................................... 68,572
*(1,400 shares × $48.90) + $112

Apr. 10 Cash........................................................................ 308*

Dividend Revenue............................................ 308
*($0.22 × 1,400 shares)

June 3 Cash........................................................................ 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. 2 Investments—Parr Inc. Stock............................... 22,520*
Cash................................................................... 22,520
*(800 shares × $28) + $120
Apr. 16 Cash........................................................................ 96*
Dividend Revenue............................................ 96
*800 shares × $0.12
June 17 Investments—Parr Inc. Stock............................... 19,950*
Cash................................................................... 19,950
*(600 shares × $33) + $150
Aug. 19 Cash........................................................................ 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. 14 Cash........................................................................ 60*

Dividend Revenue............................................ 60
*400 shares × $0.15
Ex. 13–9
Feb. 2 Investments—Randolph Co. Stock..................... 56,125*
Cash................................................................... 56,125
*(500 shares × $112) + $125
Apr. 21 Investments—Sterling Co. Stock......................... 39,298*
Cash................................................................... 39,298
*(1,400 shares × $28) + $98
Aug. 15 Cash........................................................................ 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. 8 Cash........................................................................ 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. 31 Cash........................................................................ 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. 15 Investment in Escape Tours Inc. Stock.............. 3,591,000*
Cash................................................................... 3,591,000
*94,500 shares × $38 per share
July 2 Cash........................................................................ 96,600*
Investment in Escape Tours Inc. Stock......... 96,600
*$230,000 × (94,500 shares/225,000 shares)
Dec. 31 Investment 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. 10 Investment in Crest Co. Stock............................. 123,000
Cash................................................................... 123,000
July 15 Cash........................................................................ 4,500*
Investment in Crest Co. Stock........................ 4,500
*$15,000 × 30%
Dec. 31 Loss 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 re-
sult 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. 3 Investments—Cardio Solutions, Inc. Stock........ 198,000
Cash................................................................... 198,000
9,000 shares × $22 per share.
Dec. 31 Valuation 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-re-
alized gains would be added in determining net income.

Ex. 13–16

a.
2012
Dec. 31 Unrealized Loss on Trading Investments........... 2,900
Valuation Allowance for Trading Investments 2,900
To record decrease in fair value of trading
investments, $45,100 – $48,000.

b.
2013
Apr. 3 Investments—Luke, Inc........................................ 18,100*
Cash................................................................... 18,100
*(500 shares × $36 per share) + $100
Ex. 13–17
a.
2012
Dec. 31 Valuation 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. ................................................ 26,500 28,5002
Stuart Housewares, Inc. ..................................... 45,200 41,6003
Total.................................................................. $145,900 $158,500
1
3,400 shares × $26 per share
2
1,500 shares × $19 per share
3
800 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. $6,000 Same 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. 10 Investments—Pacific Wave, Inc. Stock............... 64,000
Cash................................................................... 64,000
8,000 shares × $8 per share.

Dec. 31 Unrealized 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 ac-
count would show a debit balance of $16,000, that would be subtracted from
stockholders’ equity.
Ex. 13–21
a. 1.
2012
Dec. 31 Valuation 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
May 10 Investments—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 re-
flected 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. 31 Unrealized 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. ............................................................... 28,200 26,0002
Sharon Co. ........................................................... 66,100 70,4003
Total.................................................................. $136,800 $129,400
1
1,500 shares × $22 per share
2
400 shares × $65 per share
3
2,200 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)

Appendix Ex. 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 addi -
tion, the dividend yield declined from 2.37% in 2008 to 1.71% in 2009. The de -
crease 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 pro-
vides a small return to the shareholder in terms of a dividend yield and an ad-
ditional 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, be-
cause the company is able to earn superior returns with internally generated
earnings beyond what investors could likely earn on their own by investing divi -
dend distributions.