Intermediate Accounting II, ACCT-2164
Chapter 12 Practice Problem Solutions
Brief Exercise 12–1
(a)
Investment in bonds (face amount) ....................
Discount on bond investment (difference) .....
Cash (price of bonds) ......................................
720,000
120,000
600,000
(b)
Cash (1.5% x $720,000) .....................................
Discount on bond investment (difference) .........
Interest revenue (2% x $600,000) ...................
10,800
1,200
12,000
Brief Exercise 12–2
Unlike securities available-for-sale, unrealized holding gains and losses for trading securities are
included in earnings. S&L reports its $2,000 holding loss in 2013 earnings. When the fair value
rises by $7,000 in 2014, that amount is reported in 2014 earnings ($5,000 as a realized gain, and
$2,000 as the reversal of the unrealized loss that was recognized in 2013). S&L’s journal entries
for these transactions would be:
2013
December 27
Investment in Coca Cola shares ..........................................
Cash .................................................................................
875,000
875,000
December 31
Net unrealized holding gains and losses—I/S .....................
Fair value adjustment ($875,000 – 873,000) ........................
2,000
2014
January 3
Cash (selling price) .................................................................
Gain on investments (to balance) .......................................
Investment in Coca Cola shares (account balance) .............
880,000
2,000
5,000
875,000
Assuming no other trading securities, the 2014 adjusting entry to remove the fair value adjustment
associated with the sold securities would be:
December 31
Fair value adjustment (account balance) .................................
Net unrealized holding gains and losses—I/S (to balance)
2,000
2,000
Exercise 12–9
Requirement 1
2013
March 2
($ 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 12–9 (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—OCI ($71 – 69) ...........
Fair value adjustment ($71 – 69) ...............................................
2
2
2014
January 23
($ in millions)
1/ x
2]
Cash ([1 million shares 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
0.5
15.5
38
2
40
Note: As part of the process of recording the normal, period-end fair value
adjusting entry at 12/31/2014, Construction would debit fair value adjustment and
credit net unrealized gains and losses—OCI for the $2.5 million associated with
the sold investments to remove their effects from the financial statements.
(Construction sold only half the Platinum investments so only half of the Platinum
fair value adjustment should be removed. The 2.5 amount comes from 3.0 LTD –
0.5 Platinum.)
Exercise 12–9 (concluded)
Requirement 2
2013 Income Statement
($ in millions)
Investment revenue (from July 18; Oct. 15) .....................................
Gain on sale of investments (from Oct. 16) ....................................
$3
1
Other comprehensive income:*
Net unrealized holding gains and losses on investments . **
$2
* Note: Unlike for trading securities, unrealized holding gains and losses are not included
in income for securities available-for-sale. Rather, they are included in other
comprehensive income, and accumulated in shareholders’ equity in accumulated other
comprehensive income.
** Assuming Construction Forms chooses to report other comprehensive income in a
combined statement of comprehensive income that includes net income and other
comprehensive income.
Brief Exercise 12–1
Requirement 1
Purchase
($ in millions)
Investment in Lake Construction shares..............................
Cash ................................................................................
300
300
Net income
Investment in Lake Construction shares (20% x $150 million)
Investment revenue ..........................................................
30
30
Dividends
Cash (20% x $30 million).........................................................
6
Investment in Lake Construction shares..........................
Adjustment for depreciation
6
‡
Investment revenue ($10 million [calculation below ] ÷ 10 years)
Investment in Lake Construction shares..........................
‡
1
1
calculation:
Cost
Investee
Net Assets
Net Assets
Purchased



$300

Fair value:
Goodwill:
$120
$900 x 20% = $180

Book value:
Difference
Attributed to:
$800 x 20% = $160
Undervaluation
of buildings ($10) and land ($10): $20
Exercise 12–19 (concluded)
Requirement 2
a. Investment in Lake Construction shares
_______________________________________
($ in millions)
Cost
300
Share of income 30
Balance
6 Dividends
1 Depreciation adjustment
_________________
323
b. As investment revenue in the income statement.
$30 million (share of income) – 1 million (depreciation adjustment) =
$29 million
c. Among investing activities in the statement of cash flows.
$300 million
[Cash dividends received ($6 million) also are reported—as part of
operating activities. If Cameron reports cash flows using the indirect
method, the operating activities section of its statement of cash flows
would include an adjustment of ($23 million) to get from the net income
figure that includes $29 million of revenue to a cash flow number that
should only include $6 million of cash flow.]