Exercise 12-2
November 1
($ in millions)
Cash ................................................................
Investment revenue .....................................
December 1
Investment in Facsimile Enterprises bonds ....
Cash .............................................................
December 31
Investment in U.S. Treasury bills ..................
Cash .............................................................
December 31
Investment revenue receivable - Convenience
bonds ($48 million x 10% x 2/12) .......................
Investment revenue receivable - Facsimile
Enterprises bonds ($30 million x 12% x 1/12) ....
Investment revenue .....................................
2.4
2.4
30
30
8.9
8.9
0.8
0.3
1.1
Note: Securities held-to-maturity are not adjusted to fair value.
Exercise 12-3
Investment in GM common shares ................
Cash ([800 shares x $50] + $1,200) ...................
41,200
Cash ([800 shares x $53] – $1,300) .......................
Loss on sale of investments ............................
Investment in GM common shares ............
41,100
100
41,200
41,200
Exercise 12-11
Requirement 1
The sale of the A Corporation shares decreased Harlon’s pretax earnings by $5
million. The purchase of the C Corporation shares had no effect on Harlon’s 2007
earnings. Here are the entries used to record those two transactions:
June 1, 2007
Cash
Loss on sale of investments (difference)
Investment in A Corporation shares (cost)
September 12, 2007
Investment in C Corporation shares
Cash
($ in millions)
15
5
20
15
15
Exercise 12-11 (concluded)
Requirement 2
Harlon’s securities available-for-sale portfolio should be reported in its 2007
balance sheet at its fair value of $101 million:
December 31, 2007
($ in millions)
Cost, Dec. 31
Securities Available-for-Sale 2006 2007
A Corporation shares
B Corporation bonds
C Corporation shares
D Industries shares
Totals
$20
35
na
45
$100
na
$35
15
45
$95
Fair Value, Dec. 31
2006
2007
$14
35
na
46
$95
na
$ 37
14
50
$101
Moving from a negative $5 (2006) to a positive $6 requires an increase of $11:
---------------------------------------------------------5
0
+6
+11 ----------------------------->
Fair value adjustment ($5 credit to $6 debit)
11
Net unrealized holding gains and losses ($5 debit to $6 credit)
11
The adjustment has no effect on earnings. Unlike for trading securities,
unrealized holding gains and losses are not included in income for securities
available-for-sale.
Exercise 12-4
Requirement 1
($ in 000s)
Net unrealized holding gains and losses ..................................
Fair value adjustment ($405 - 480) .........................................
75
Fair value adjustment ($480 - 450).............................................
Net unrealized holding gains and losses ..............................
30
Fair value adjustment ($560 - 480).............................................
Net unrealized holding gains and losses ..............................
80
Net unrealized holding gains and losses ..................................
Fair value adjustment ($660 - 720) .........................................
60
75
30
80
60
Requirement 2
None. Accumulated net holding gains and losses for securities availablefor-sale are reported as a component of shareholders’ equity, and changes
in the balance are reported as Other comprehensive income or loss rather
than as part of earnings. This amount can be reported either (a) as an
additional section of the income statement, (b) as part of the statement of
shareholders’ equity, or (c) as a separate statement in a disclosure note.
Exercise 12-5
Requirement 1
Securities “held-to-maturity” are debt securities an investor has the “positive
intent and ability” to hold to maturity. Actively traded investments in debt or
equity securities acquired principally for the purpose of selling them in the near
term are classified as “trading securities.” The IBM shares are neither. They
are classified as “available-for-sale” since all investments in debt and equity
securities that don’t fit the definitions of the other reporting categories are
classified this way. Of course, the equity method isn’t appropriate either
because 10,000 shares of IBM certainly don’t constitute “significant
influence.”
Investments in securities available-for-sale are reported at fair value, and
holding gains or losses are not included in the determination of income for the
period. Instead, they are reported as Other comprehensive income or loss.
This amount can be reported either (a) as an additional section of the income
statement, (b) as part of the statement of shareholders’ equity, or (c) as a
separate statement in a disclosure note. Accumulated net holding gains and
losses for securities available-for-sale are reported as a separate component of
shareholders’ equity.
Requirement 2
December 31, 2006
Net unrealized holding gains and losses (10,000 shares x [$58 - 60])
Fair value adjustment ..............................................................
20,000
20,000
Exercise 12-5 (concluded)
Requirement 3
December 31, 2007
($ in 000s)
Available-for-Sale Securities
IBM shares – Dec. 31, 2007
Cost
$600
Fair Value
$610
Accumulated
Unrealized
Gain (Loss)
$10
Moving from a negative $20 (2006) to a positive $10 requires an increase of
$30:
--------------------------------------------------------20
0
+10
+30 ----------------------------->
Fair value adjustment (10,000 shares x [$61 - 58]) ...........................
Net unrealized holding gains and losses (-$20 less $10) ............
30,000
30,000
Exercise 12-6
Requirement 1
2006
March 2
($ in millions)
Investment in Platinum Gauges, Inc. shares ...............................
Cash .........................................................................................
31
31
April 12
Investment in Zenith bonds .........................................................
Cash .........................................................................................
20
July 18
Cash .............................................................................................
Investment revenue ..................................................................
2
October 15
Cash .............................................................................................
Investment revenue ..................................................................
1
October 16
Cash .............................................................................................
Investment in Zenith bonds .....................................................
Gain on sale of investments .....................................................
November 1
Investment in LTD preferred shares ...........................................
Cash .........................................................................................
20
2
1
21
20
1
40
40
Exercise 12-6 (continued)
December 31
($ in millions)
Available-for-Sale Securities
Platinum Gauges, Inc. shares
LTD preferred shares
Totals
Cost
$31
40
$71
Fair Value
$32*
37**
$69
Accumulated
Unrealized
Gain (Loss)
$1
(3)
$(2)
* $32 x 1 million shares
** $74 x 500,000 shares
Adjusting entry:
Net unrealized holding gains and losses ($71 – 69) ......................
Fair value adjustment ($71 – 69) ...............................................
2
2
2007
January 23
($ in millions)
Cash ([1 million shares x 1/2] x $32) ................................................
Gain on sale of investments (difference)....................................
Investment in Platinum Gauges
shares ($31 million cost x 1/2) ...................................................
March 1
Cash ($76 x 500,000 shares) .............................................................
Loss on sale of investments (difference) ........................................
Investment in LTD preferred (cost) ..........................................
16.0
.5
15.5
38
2
40
Exercise 12-6 (concluded)
Requirement 2
2006 Income Statement
($ in millions)
Investment revenue (from July 18; Oct. 15) .....................................
Gain on sale of investments (from Oct. 16) ....................................
$3
1
Other comprehensive income:*
Unrealized holding loss on investments** ...........................
$2
* Assuming Construction Forms chooses to report Other comprehensive income as an
additional section of the income statement. Alternatively, it can report this (a) as part of
the statement of shareholders’ equity or (b) as a separate statement in a disclosure note.
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Exercise 12-7
Requirement 1
Purchase
($ in millions)
Investment in Jackson Industry shares ........................................
Cash ........................................................................................
90
90
Net income
No entry
Dividends
Cash (5% x $60 million) ..................................................................
3
Investment revenue ..................................................................
3
Adjusting entry
Fair value adjustment ($98 - 90 million) .........................................
Net unrealized holding gains and losses ..................................
Requirement 2
Investment revenue ..........................
$3 million
An unrealized holding gain is not included in income for securities
available-for-sale.
8
8
Exercise 12-8
Requirement 1
2006
December 17
Investment in Grocers’ Supply preferred shares ................
Cash .................................................................................
350,000
December 28
Cash .....................................................................................
Investment revenue ..........................................................
2,000
December 31
Investment in Grocers’ Supply preferred shares .................
Unrealized holding gain ([$4 x 100,000 shares] - $350,000)..
50,000
350,000
2,000
50,000
2007
January 5
Cash (selling price) .................................................................
Loss on investments (to balance) ...........................................
Investment in Grocers’ Supply preferred
shares (account balance) .................................................
395,000
5,000
400,000
Requirement 2
Balance Sheet
(short-term investment):
Trading securities....................................................
Income Statement:
Investment revenue (dividends) ..........................................
Unrealized holding gain (from adjusting entry) ....................
$400,000
$ 2,000
50,000
Note: Unlike for securities available-for-sale, unrealized holding gains and losses for
trading securities are included in income.
Problem 12-3
Requirement 1
2006
February 21
Investment in Distribution Transformers shares ........
Cash .........................................................................
400,000
400,000
March 18
Cash .............................................................................
Investment revenue ..................................................
8,000
September 1
Investment in American Instruments bonds ...............
Cash .........................................................................
900,000
October 20
Cash .............................................................................
Investment in Distribution Transformers ..............
Gain on sale of investments .....................................
November 1
Investment in M&D Corporation shares ....................
Cash .........................................................................
8,000
900,000
425,000
400,000
25,000
1,400,000
1,400,000
Problem 12-3 (continued)
December 31
Adjusting entries:
Investment revenue receivable.....................................
Investment revenue ($900,000 x 10% x 4/12) ..............
Available-for-Sale Securities
M & D Corporation shares
American Instruments bonds
Totals – Dec. 31, 2006
Cost
$1,400,000
900,000
$2,300,000
30,000
Fair Value
$1,460,000
850,000
$2,310,000
30,000
Accumulated
Unrealized
Gain (Loss)
$60,000
(50,000)
$10,000*
Fair value adjustment (calculated above) ........................
10,000
Net unrealized holding gains and losses (change in accumulated balance)
10,000*
* The $10,000 credit balance in the Net unrealized holding gains and losses is reported as
Accumulated other comprehensive income, a component of Shareholders’ equity in the
2006 balance sheet. The $10,000 change in the accumulated balance is reported as 2006
Other comprehensive income.
Problem 12-3 (continued)
Requirement 2
Income statement:
Investment revenue ($8,000 + 30,000)
Gain on sale of investments
$
38,000
25,000
Other comprehensive income:
Net unrealized holding gain on investments*
$
10,000
Balance sheet:
Current Assets
Investment revenue receivable
$
30,000
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Securities available-for-sale
Plus: Fair value adjustment
$2,300,000
10,000 $2,310,000
Shareholders’ Equity
Accumulated other comprehensive income
Net unrealized holding gain (loss) ($60,000 - 50,000)
$ 10,000
* Can be reported either (a) as an additional section of the income statement, (b) as part of
the statement of shareholders’ equity, or (c) as a separate statement in a disclosure note.
Problem 12-3 (continued)
Requirement 3
2007
January 20
Cash .............................................................................
Gain on sale of investments (to balance)....................
Investment in M&D Corporation shares (cost).........
March 1
Cash .............................................................................
Investment revenue receivable ................................
Investment revenue ..................................................
1,485,000
85,000
1,400,000
45,000
30,000
15,000
August 12
Investment in Vast Communications shares ...............
Cash .........................................................................
650,000
September 1
Cash .............................................................................
Investment revenue ..................................................
45,000
650,000
45,000
Problem 12-3 (continued)
December 31
Adjusting entries:
Investment revenue receivable.....................................
Investment revenue ($900,000 x 10% x 4/12) ..............
Securities
Vast Communication shares
American Instruments bonds
Totals – Dec. 31, 2007
Cost
$650,000
900,000
$1,550,000
30,000
Fair Value
$670,000
830,000
$1,500,000
30,000
Accumulated
Unrealized
Gain (Loss)
$20,000
(70,000)
$(50,000)*
Moving from a positive $10,000 (2006) to a negative $50,000 requires a
decrease of $60,000:
-------------------------------------------------------------------------------------------50,000
0
+10,000
<-------------------------------------------- $60,000
Net unrealized holding gains and losses (change in accumulated balance) 60,000*
Fair value adjustment (calculated above) ....................
60,000
* The $50,000 debit balance in the Net unrealized holding gains and losses is reported as
Accumulated other comprehensive income, a negative component of Shareholders’ equity
in the 2007 balance sheet. The $60,000 change in the accumulated balance is reported as
2007 Other comprehensive income.
Problem 12-3 (continued)
Requirement 4
Income statement:
Investment revenue ($15,000 + 45,000 + 30,000)
Gain on sale of investments
$
90,000
85,000
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Other comprehensive income:
Net unrealized holding loss on investments*
$ (60,000)
Balance sheet:
Current Assets
Investment revenue receivable
$
Securities available-for-sale
Less: Fair value adjustment
30,000
$1,550,000
(50,000) $1,500,000
Shareholders’ Equity
Accumulated other comprehensive income
Net unrealized holding gain (loss) ($20,000 - 70,000)
$ (50,000)
* Can be reported either (a) as an additional section of the income statement, (b) as part of
the statement of shareholders’ equity, or (c) as a separate statement in a disclosure note.
Problem 12-6
Requirement 1
Beale should report its securities available-for-sale in its December 31, 2007,
balance sheet at their fair value, $54 million.
Requirement 2
The journal entry needed to enable the investment to be reported at fair value
is:
($ in millions)
Fair value adjustment ($4 debit to $5 debit)
Net unrealized holding gains and losses ($4 credit to $5 credit)
1
1
Requirement 3
The reclassification adjustment to 2007 other comprehensive income is $2
million. Beale’s statement of comprehensive income can be provided as (a) an
extension of its income statement, (b) as part of its statement of shareholders’
equity, or (c) in a disclosure note in a manner similar to this:
OTHER COMPREHENSIVE INCOME
($ in millions)
Unrealized holding gains (losses) on investments
$3
Reclassification adjustment of prior years’ unrealized
gain included in 2007 net income
(2)
Net unrealized holding gains (losses)
$1
Comprehensive income includes both net income and other comprehensive
income. Net income in 2007 includes the $3 million gain realized from selling the
Schwab shares. However, $2 million of that gain already has been reported in
comprehensive income – as an unrealized holding gain in a prior year or years
when the shares’ value increased from $25 million to $27 million. To avoid
double-counting, Beale must compensate by reducing comprehensive income by
the $2 million portion of the 2007 realized gain that already has been reported.
That’s what the reclassification adjustment does; it reduces this year’s
comprehensive income by the amount that was reported previously to keep it from
being reported twice.