Intermediate Accounting Spiceland 7th Edition

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Intermediate Accounting Spiceland 7th Edition Solutions Manual

Chapter 12 Investments

Exercise 12-1
Requirement 1
20112013
March 1
($ in millions)
Investment in Platinum Gems, Inc. shares ................................. 124
Cash ......................................................................................... 124
April 13
Investment in Oracle bonds ......................................................... 200
Cash ......................................................................................... 200
July 20
Cash ............................................................................................. 3
Investment revenue .................................................................. 3
October 13
Cash ............................................................................................. 10
Investment revenue .................................................................. 10
October 14
Cash ............................................................................................. 205
Investment in Oracle bonds ..................................................... 200
Gain on sale of investments ..................................................... 5
November 1
Investment in SPI preferred shares ............................................. 40
Cash ......................................................................................... 40

© The McGraw-Hill Companies, Inc., 20131

Alternate Exercise and Problem Solutions 12-1

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Exercise 12-1 (continued)
December 31, 20112013

($ in millions) Unrealized
Available-for-Sale Securities Cost Fair Value Gain (Loss)
Platinum Gems, Inc. shares $124 $128* $4
SPI preferred shares 40 37** (3)
Totals $164 $165 $1

* $64 x 2 million shares

** $74 x 500,000 shares

Adjusting entry:
Fair value adjustment ($165 – 164) ............................................... 1
Net unrealized holding gains and losses -- OCI ($165 – 164) ... 1

20122014
January 23
($ in millions)
Cash ([2 million shares x 1/2] x $65) ................................................. 65
Gain on sale of investments (difference) ................................... 13
Investment in Platinum Gems
shares ($128 124 million balance after adjusting entry x 1/2) ......... 6462

March 1
Cash ($78 x 500,000 shares) ............................................................ 39

GainLoss on sale of investments (difference) ........................... 1 2

Investment in SPI preferred (balance after adjusting entry) .......... 3740

© The McGraw-Hill Companies, Inc., 20131

12-2 Intermediate Accounting, 76e
December 31, 20112013

($ in millions) Unrealized
Available-for-Sale Securities Cost Fair Value Gain (Loss)
Platinum Gems, Inc. shares $ 62* $ 65** $3
Less 12/31/09 balance $1
Total adjustment needed $2

* $62 x 1 million shares

** $65 x 1 million shares

Adjusting entry:
Fair value adjustment .................................................................. 2
Net unrealized holding gains and losses -- OCI ...................... 2

Requirement 2
20112013 Income Statement
($ in millions)
Investment revenue (from July 20; Oct. 13) ............................... $13
Gain on sale of investments (from Oct. 14) .................................. 5

Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available for sale.

© The McGraw-Hill Companies, Inc., 20131

Alternate Exercise and Problem Solutions 12-3
Exercise 12-2
1. Investments reported as current assets.
Security A $ 725,000
Security B 200,000
Security C 560,000
Security E 970,000
Total $2,455,000
2. Investments reported as noncurrent assets.
Security D $ 865,000
Security F 412,000
$1,277,000

3. Unrealized gain (or loss) component of income before taxes.

Trading Securities:
Cost Fair value Unrealized
gain (loss)
Security A $ 700,000 $ 725,000 $25,000
B 210,000 200,000 (10,000)
Totals $ 910,000 $ 925,000 $ 15,000

4. Unrealized gain (or loss) component of other comprehensive income.

Securities Available For Sale:
Cost Fair value Unrealized
gain (loss)
Security C $ 500,000 $ 560,000 $60,000
D 850,000 865,000 15,000
Totals $1,350,000 $1,425,000 $75,000

© The McGraw-Hill Companies, Inc., 20131

12-4 Intermediate Accounting, 76e
Exercise 12-3

Purchase ($ in millions)
Investment in Reed’s Restaurant Supplies shares ................... 73
Cash .................................................................................... 73
Net income
Investment in Reed’s Rest. Supplies shares (35% x $20million) 7
Investment revenue .............................................................. 7
Dividends
Cash (35% x 12 million shares x $1.10) ......................................... 4.62
Investment in Reed’s Restaurant Supplies shares ............... 4.62
Adjusting entry
No entry

© The McGraw-Hill Companies, Inc., 20131

Alternate Exercise and Problem Solutions 12-5
Exercise 12-4
Purchase ($ in millions)
Investment in Conley Trucks ............................................... 76
Cash ................................................................................. 76
Net income
Investment in Conley Trucks shares (25% x $60 million) ...... 15
Investment revenue .......................................................... 15
Dividends
Cash (5 million shares x $1.20) ................................................. 6
Investment in Conley Trucks shares ................................ 6
Depreciation Adjustment
Investment revenue ($10 million [calculation below‡] ÷ 5 years) 2
Investment in Conley Trucks shares ................................ 2
‡Calculations:
Investee Net Assets Difference
Net Assets Purchased Attributed to:
  
Cost $76
 Goodwill: $13
Fair value: $252* x 25% = $63
 Undervaluation
Book value: $212 x 25% = $53 of assets: $10

*[$212 + 40] = $252

Adjusting entry
No entry

© The McGraw-Hill Companies, Inc., 20131

12-6 Intermediate Accounting, 76e
Exercise 12-5
Requirement 1
Cash (4% x $10,000) .............................................. 400
Interest revenue ............................................... 400
Requirement 2
Fred would report the bonds at amortized cost, given that the bonds are
“simple” debt and Fred intends to hold the bonds to maturity. Therefore, Fred
would not record any unrealized gain or loss.

Exercise 12-6
Requirement 1
Cash (4% x $10,000) .............................................. 400
Interest revenue ............................................... 400
Requirement 2
The bonds are “simple” debt, so Fred would report half of the bonds at FV-NI
(because the bonds are held for sale) and the other half at FV-OCI (because the
bonds are held for investment purposes). Therefore, Fred would prepare the
following journal entry:

Fair value adjustment ($12,000 – $10,000) ......................... 2,000 Formatted: Indent: Left: 0.31", Hanging: 0.5"

Net unrealized holding gains and losses—I/S

([$12,000 – $10,000] ÷ 2) ............................................... 1,000 Formatted: Tab stops: 0.81", Left + Not at 0.5"

Net unrealized holding gains and losses—OCI

([$12,000 – $10,000] ÷ 2) ............................................... 1,000

© The McGraw-Hill Companies, Inc., 20131

Alternate Exercise and Problem Solutions 12-7
 PROBLEMS
Problem 12-1
Requirement 1

Purchase ($ in 000s)
Investment in Austin shares .......................................................... 648
Cash .......................................................................................... 648

Net income
Investment in Austin shares (30% x $320,000) ............................... 96
Investment revenue ................................................................... 96
Dividends
Cash (20,000 shares x $3) .................................................................. 60
Investment in Austin shares ...................................................... 60
Depreciation Adjustment
Investment revenue [calculation below‡] ÷ 8 years) ........................... 6
Investment in Austin shares ...................................................... 6

‡Calculations:

Investee Net Assets Difference

Net Assets Purchased Attributed to:
  
Cost $648
 Goodwill: $120
Fair value: $1,760* x 30% =$528
 Undervaluation
Book value: $1,600 x 30% =$480 of assets: $48

*[$1,600 + 160] = $1,760

Adjusting entry
No entry

© The McGraw-Hill Companies, Inc., 20131

12-8 Intermediate Accounting, 76e
Problem 12-1 (concluded)
Requirement 2

Purchase ($ in 000s)
Investment in Austin shares.......................................................... 648
Cash ......................................................................................... 648

Net income
No entry

Dividends
Cash (20,000 shares x $3) ................................................................. 60
Investment revenue ................................................................... 60

Adjusting entry
Net unrealized holding loss on investments -- OCI
([20,000 shares x $32] – $648,000)............................................................ 8
Fair value adjustment ............................................................... 8

© The McGraw-Hill Companies, Inc., 20131

Alternate Exercise and Problem Solutions 12-9
Problem 12-2
Requirement 1
Purchase ($ in millions)
Investment in Monterrey shares .................................................... 80.0
Cash .......................................................................................... 80.0
Net income
Investment in Monterrey shares (40% x $28 million) ...................... 11.2
Investment revenue ................................................................... 11.2
Dividends
Cash (40% x $6 million).................................................................... 2.4
Investment in Monterrey shares ................................................ 2.4
Inventory
Investment revenue ($1 million x 40%: all sold in 20112013).............. .4
Investment in Monterrey shares ................................................ .4
Depreciation
Investment revenue ([$4 million x 40%] ÷ 8 years) ............................ .2
Investment in Monterrey shares ................................................ .2
‡Calculations:
Investee Net Assets Difference
Net Assets Purchased Attributed to:
  
Cost $80
 Goodwill: $16 [plug]
Fair value: $160* x 40% = $64
inventory (1) x 40%  Undervaluation
of inventory: $0.4
plant facilities (4) x 40%  Undervaluation
of plant: $1.6
Book value: $155 x 40% = $62

* $155 + 1 + 4

© The McGraw-Hill Companies, Inc., 20131

12-10 Intermediate Accounting, 76e
Intermediate Accounting Spiceland 7th Edition Solutions Manual

Problem 12-2 (concluded)

Requirement 2

Investment Revenue
($ in millions)
11.2 Share of income
Inventory .4
Depreciation .2
_________________
Balance 10.6

Requirement 3

Investment in Monterrey shares

($ in millions)
Cost 80.0
Share of income 11.2
2.4 Dividends
.4 Inventory
.2 Depreciation
_________________
Balance 88.2

Requirement 4
$80 million cash outflow from investing activities
$2.4 million cash inflow (dividends) among operating activities

© The McGraw-Hill Companies, Inc., 20131

Alternate Exercise and Problem Solutions 12-11

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