Professional Documents
Culture Documents
(in millions)
a.
$49 + 32 = $81
b.
Unrealized gains and losses on trading securities are reported in income.
c.
Investment in trading securities
81
Cash
81
32
Investment in trading securities
d.
Cash
32
60
49
11
a.
The AFS securities held at the end of 2008 have net unrealized gains of $181 million (= $193 $12), which are reported in AOCI. The unrealized loss on AFS securities for 2008 is $44
million. Therefore $225 million (= $181 + $44) in net unrealized gains must have occurred in
prior years.
b.
Cash
Realized losses (income)
35
5
Investment in AFS securities
8
Realized gains (income)
40
E1.3
Held-to-Maturity Investments
5,222,591
Cash
5,222,591
250,000
Investment income
Investment in HTM securities
December 31, 2011
Cash
208,904
41,096
250,000
Investment income
Investment in HTM securities
December 31, 2012
Cash
207,260
42,740
250,000
Investment income
Investment in HTM securities
December 31, 2013
Cash
205,550
44,450
250,000
Investment income
Investment in HTM securities
December 31, 2014
Cash
203,772
46,228
250,000
Investment income
Investment in HTM securities
201,923
48,077
Cash
5,000,000
Investment in HTM securities
E1.4
5,000,000
Income statement
Investment gains
Investment losses
Interest income
Balance sheet
Assets
Investments-trading
Investments-AFS
Investments-HTM
Equity
AOCI gains (losses)
$ 10,000
(20,000)
380,000
640,000
40,000
2011
2012
$ 25,000
7,778
$ (40,000)
7,849
510,000
196,227
535,000
198,076
(90,000)
35,000
$ 350,000
49,000
(54,250)
$ 344,750
344,750
344,750
E1.6
$ 5,000,000
$ 2,400,000
1,600,000
400,000
4,400,000
$ 600,000
$ 360,000
(160,000)
(80,000)
$ 120,000
5,000,000
Cash
During 2011
Cash
5,000,000
100,000
Investment in Ronco
December 31, 2011
Investment in Ronco
100,000
120,000
120,000
$225,000
(125,000)
$100,000
6,000,000
Cash
Investment in Turner
6,000,000
100,000
100,000
60,000
Investment in Turner
Cambridge Business Publishers, 2010
4
Edition
60,000
OCI
7,500
Investment in Turner
E1.8
7,500
2011
$ 600,000
2012
$ 560,000
(320,000)
$ 280,000
(100,000)
$ 180,000
(320,000)
$ 240,000
(92,000)
$ 148,000
Joint Venture
(in millions)
Each investor reports the investment on its December 31, 2012 balance sheet at $2,250,000 (=
$2,000,000 + 50% x $500,000).
Each investor reports equity in the joint ventures net income at $250,000 on its 2012 income
statement.
The individual assets and liabilities of the joint venture are not reported separately by the
venturers.
E1.10 Equity Method Investment with Indefinite Life Intangibles Several Years Later
Calculation of 2011 equity in Taylors net income:
Saxtons share of Taylors reported income (25% x $250,000)
- Depreciation of plant and equipment (25% x $1,800,000/15)
Equity in net income of Taylor
$ 62,500
(30,000)
$ 32,500
Note: There is no amortization of the customer database because its life is over. The equity
method does not report impairment losses on indefinite life intangibles.
25,000
Investment in Taylor
25,000
32,500
Equity in net income of Taylor
32,500
10.0
51.8
.5
1.5
4.2
Current liabilities
Long-term debt
Cash
b.
Investment in Taylor
16
40
12
12
Cash
12
10
40
25
23
Current liabilities
Long-term debt
Cash
12
36
50
PROBLEMS
P1.1
a.
3/5/10
Investment in trading security A
350,000
Cash
350,000
6/3/10
Cash
Loss on sale of trading securities
(income)
325,000
25,000
Investment in trading
security A
350,000
7/14/10
Investment in trading security B
225,000
Cash
225,000
8/2/10
Investment in AFS security D
175,000
Cash
175,000
11/20/10
Investment in AFS security E
300,000
Cash
300,000
12/31/10
Investment in trading security B
27,000
Unrealized gain on trading
securities (income)
27,000
50,000
Investment in AFS security E
15,000
Unrealized gain on AFS
securities (OCI)
50,000
15,000
1/15/11
Cash
Realized loss on trading securities
(income)
235,000
17,000
Investment in trading
security B
4/2/11
Cash
252,000
213,000
190,000
23,000
15,000
15,000
710,000
Cash
9/1/11
Investment in trading security C
710,000
400,000
Cash
12/31/11
Investment in trading security C
400,000
10,000
10,000
35,000
20,000
Investment in AFS security F
35,000
20,000
b.
Equity:
AOCI
(25,000)
27,000
2,000 increase
1,315,000
Equity:
AOCI ($35,000 15,000 35,000 20,000)
Income Statement, 2011
Realized loss
Realized gain ($23,000 + 15,000)
Unrealized gain
Net change in income
692,000
(17,000)
38,000
10,000
31,000 increase
c.
The valuation of investments on the balance sheet is the same. Each years net losses reported in
AOCI on the balance sheet are instead reported on the income statement.
In 2011, $15,000 of the realized gain on sale of AFS securities is not reported in income, since it
was reported in income in 2010. The $55,000 net unrealized loss on AFS securities recognized
at year-end appears on the income statement.
Classified as
Trading
Change in income if
AFS securities
classified as trading
2010 income
Realized loss
Unrealized gain
Unrealized loss
Change in income
$(25,000)
27,000
$ 2,000
$(25,000)
42,000
(50,000)
$(33,000)
$(35,000)
2011 income
Realized loss
Realized gain
Unrealized loss
Unrealized gain
Change in income
$(17,000)
38,000
10,000
$ 31,000
$(17,000)
23,000
(55,000)
10,000
$(39,000)
$(70,000)
By classifying the loss securities as AFS, the company delays reporting the losses in income until
the securities are sold.
P1.2
a.
Cash flow
$60,000
$60,000
$60,000
$60,000
$1,060,000
Total price
Present value
$ 57,143
54,422
51,830
49,362
830,538
$1,043,295
Present value
$ 19,048
18,141
17,277
427,805
$ 482,271
Amortization
($60,000 interest
income)
$52,165
51,773
51,362
50,930
50,475
$7,835
8,227
8,638
9,070
9,525
Investment balance
(beginning balance
amortization)
$1,043,295
1,035,460
1,027,233
1,018,595
1,009,525
1,000,000
Bond #2
Interest income
(5% x beginning
investment balance)
1/1/2010
12/31/2010
12/31/2011
12/31/2012
12/31/2013
Amortization
(interest income
$20,000)
$24,114
24,319
24,535
24,761
$4,114
4,319
4,535
4,761
Investment balance
(beginning balance
+ amortization)
$482,271
$486,385
490,704
495,239
500,000
b.
Bond #1
Bond #2
Total interest income
2010
$ 52,165
24,114
$ 76,279
2011
$ 51,773
24,319
$ 76,092
c.
$1,018,595 + $495,239 = $1,513,834
d.
U.S. GAAP indicates that there must be an other than temporary decline in the value of the
security, making it improbable that the bond issuer will be able to make the remaining interest
and principal payments per the bond agreement. Factors indicating impairment loss relate to the
financial health of the bond issuer, such as failure to make payments on other debts and a
significant decline in credit rating.
The December 31, 2013 carrying value for the $1,000,000 bond is $1,009,525. The impairment
loss is $509,525, reported in income.
P1.3
a.
Impairment loss
1,100,000
Investments in HTM securities
1,100,000
175,000
305,000
Interest revenue
480,000
a.
$ 1,125,000
(450,000)
(270,000)
$ 405,000
405,000
405,000
292,500
292,500
Advanced Accounting, 1st
b.
Investment balance, January 2, 2009
+ 45% x 2009 to 2012 reported income less dividends (45% x
($25,000,000 $13,000,000))
4 years of revaluation write-offs:
$450,000 x 4
$270,000 x 4
Investment balance, December 31, 2012
P1.5
$ 30,000,000
5,400,000
(1,800,000)
(1,080,000)
$ 32,520,000
a.
(Calculation of equity in net income for 2010-2011 provided in addition to 2012s calculation,
for use in requirement c.)
Equity in net income calculation
30% x Seaways net income
Write-off of P&E revaluation (30% x $4,000,000/10
each year)
Amortization of intangibles (30% x $6,000,000/2 for
2010 and 2011 only)
2011 ending inventory profit, upstream
(30% x ($925,000 $925,000/1.25))
2011 ending inventory profit, downstream
(30% x ($420,000 $420,000/1.2))
2012 ending inventory profit, upstream
(30% x ($625,000 $625,000/1.25))
2012 ending inventory profit, downstream
(30% x ($696,000 $696,000/1.2))
Equity in net income
b.
Investment in Seaway
2010-2011
$ 4,200,000
2012
$1,200,000
240,000
120,000
(1,800,000)
(55,500)
55,500
(21,000)
21,000
(37,500)
_______
$ 2,563,500
1,324,200
1,324,200
240,000
Investment in Seaway
Cash
240,000
450,000
Investment in Seaway
(34,800)
$ 1,324,200
450,000
c.
Investment, January 1, 2010
+ Equity in net income, 2010-2011
+ Unrealized gains on AFS securities, 2010-2011 (30% x $1 million)
Dividends, 2010-2011 (30% x $5 million)
+ Equity in net income, 2012
Unrealized losses on AFS securities, 2012 (30% x $800,000)
Dividends, 2012 (30% x $1.5 million)
Investment, December 31, 2012
P1.6
$ 10,000,000
2,563,500
300,000
(1,500,000)
1,324,200
(240,000)
(450,000)
$ 11,997,700
a.
Cambridge has $500,000/$0.50 = 1,000,000 shares outstanding
40% x 1,000,000 = 400,000 shares acquired
b.
Calculation of 2011 equity in net income (in thousands)
Cambridges net income (40% x $1,000)
$ 400
Adjusted for Birminghams share of revaluation write-offs:
Additional cost of goods sold (40% x $300)
(120)
+ Depreciation on revaluation of P&E (40% x $400/20)
8
Amortization of franchises (40% x ($1,300/5))
(104)
Equity in Cambridge net income
$ 184
Note: Because Cambridge uses FIFO, the beginning inventory is completely sold during the
year.
P1.7
(in thousands)
a.
Since none of the merchandise has been sold to outside parties, all intercompany profits are
unconfirmed.
Calculation of 2012 equity in net income:
Jacksons net income (40% x $30,000)
Unconfirmed profit on downstream ending inventory ($65,000
($65,000/1.3))x 40%
Unconfirmed profit on upstream ending inventory ($54,000
($54,000/1.35)) x 40%
Equity in Jacksons net income
Cambridge Business Publishers, 2010
14
Edition
$ 12,000
(6,000)
(5,600)
$
400
b.
Sales revenue
Cost of sales
Gross margin
Gross margin %
Harcker Corporation
As reported
Excluding
following U.S. Intercompan
GAAP
y
Transactions
$ 131,000
$ 66,000
110,000
60,000
$ 21,000
$ 6,000
16%
9%
Jackson Corporation
As reported
Excluding
following U.S. Intercompany
GAAP
Transactions
$ 264,000
229,000
$ 35,000
13%
$ 210,000
189,000
$ 21,000
10%
Both corporations report higher gross margins as a percent of sales when they include
intercompany transactions. One could easily make the argument that these intercompany sales
distort the 2012 financial results, since pricing to outside customers only achieves a 9% or 10%
gross margin on sales, while Harckers sales to Jackson achieve a 23% margin [ = ($65,000
50,000)/$65,000] and Jacksons sales to Harcker achieve a 26% margin [ = ($54,000 40,000)/
$54,000].
The equity method removes the investors share of unconfirmed gross profits on upstream and
downstream merchandise sales in the equity method income accrual, but does not adjust each
companys reported sales and cost of sales for intercompany transactions.
Note to instructor: This problem provides an introduction to elimination of unconfirmed
intercompany profits in consolidation, covered in Chapter 6.
P1.8
(in thousands)
a.
Balance Sheet, December 31, 2010
Current assets
$ 38,6001
Property, net
450,000
Investment in Quarry (AFS)
1,200
Identifiable intangibles
5,000
_____
Total assets
$ 494,800
2010 Income Statement
Sales revenue
Investment income
Cost of sales
Operating expenses
Net income
1
$38,600 = $40,000 $1,500 + $100
Current liabilities
Long-term liabilities
Capital stock
Retained earnings
AOCI
Total liabilities and equity
20,000
200,000
90,000
185,100
(300)
$ 494,800
$ 900,000
100
(750,000)
(140,000)
$ 10,100
b.
Balance Sheet, December 31, 2010
Current assets
$ 34,4001
Property, net
450,000
Investment in Quarry
6,8002
Identifiable intangibles
5,000
Total assets
$ 496,200
Current liabilities
Long-term liabilities
Capital stock
Retained earnings
Total liabilities and equity
20,000
200,000
90,000
186,200
$ 496,200
$ 900,000
1,200
(750,000)
(140,000)
$ 11,200
Current liabilities
Long-term liabilities
Capital stock
Retained earnings
Total liabilities and equity
23,000
281,000
90,000
188,0003
$ 582,000
$ 960,000
(770,000)
(177,000)
$ 13,000
P1.9
(in millions)
Allen
Corp
$
7.251
210.00
225.00
$ 442.25
Current assets
Plant and equipment, net
Investment in Albarcol Enterprises
Intangibles
Total assets
Current liabilities
Noncurrent liabilities
Capital stock
Retained earnings
Total liabilities and equity
24.25
340.00
10.00
68.002
$ 442.25
Barkley
Corp
$ 0.4
65.0
4.23
5.0
$ 74.6
Collins
Corp
$ 0.6
42.0
1.5
$ 44.1
0.2
55.0
1.0
18.44
$ 74.6
0.8
30.0
5.0
8.3
$ 44.1
Note to instructor: Albarcol reported net income of $2 in 2012; $2 = $12 ending equity balance
- $10 original investment
P1.10 Balance Sheet after Business Acquisition
Wilson Corporation
Balance Sheet
(in millions)
Assets
Current assets
Property and equipment
Intangibles
Goodwill
Total assets
1
20
565
49
131
___
$ 647
Liabilities
Current liabilities
Long-term debt
Total liabilities
Equity
Capital stock
Retained earnings
AOCI
Total equity
Total liabilities and equity
27
465
$ 492
$
50
120
(15)
$ 155
$ 647
466
142
21
131
715
834
1,961
1,329
Accounts payable
Cash
Common stock
686
369
4,544