Exercise 12-1 November 1 ( in millions) Cash.......................... 2.4 Investment revenue.......... 2.4 December 1 Investment in Facsimile Enterprises bonds 30 Cash........................ 30 December 31 Investment in U.S. Treasury bills 9.8 Cash........................ 9.8 December 31 Investment revenue receivable - Conference bonds (48 million x 10% x 2 / 12 ).. 0.8 Investment revenue receivable - Facsimile Enterprises bonds (30 million x 12% x 1 / 12 ) 0.3 Investment revenue .......... 1.1 Note: Securities held-to-maturity are not adjusted to fair value. Exercise 12-2 Requirement 1 ( in millions) Investment in bonds (face amount). 240 Discount on bond investment (difference) 40 Cash (price of bonds)............ 200
December 31 Investment revenue receivable - Conference bonds (48 million x 10% x 2/12)......................... 0.8Investment revenue receivable - Facsimile Enterprises bonds (30 million x 12% x 1/12)...... 0.3
If sale before maturity isn’t an alternative, increases and decreases in the market value between the time a debt security is acquired and the day it matures to a prearranged maturity value are relatively unimportant. For this reason, if an investor has the “positive intent and ability” to hold the securities to maturity, investments in debt securities are classified as “held-to-maturity” and reported at amortized cost rather than fair value in the balance sheet.
Requirement 4 ( in millions)Cash (proceeds from sale)....................................... 195.0Discount on bond investment (balance, determined above) 39.2Loss on sale of investments (to balance)............... 5.8
Investment in bonds (face amount).................... 240.0
Exercise 12-3
Requirement 1 ( in 000s)
Unrealized holding loss on investment in Blair, Inc. shares. . . 70Investment in Blair, Inc. shares (410 - 480)........................... 70
Investment in ARC shares (480 - 450)....................................... 30Unrealized holding gain on investment in ANC shares....... 30
Investment in Drake shares (565 - 480)..................................... 85Unrealized holding gain on investment in Drake shares..... 85
Unrealized holding loss on investment in Aaron Industries shares..................................................... 60
Investment in Aaron Industries shares (660 - 720)................ 60
Requirement 2
None. Holding gains and losses for securities available-for-sale are reported as a component of shareholders’ equity rather than as part of earnings.
Exercise 12-4Investment in GM common shares ................ 41,300
Cash ([800 shares x 50] + $1,300)..................... 41,300
Cash ([800 shares x 53] – 1,400)........................... 41,000Loss on sale of investments............................ 300
Investment in GM common shares ............. 41,300
Exercise 12-5
Requirement 1
2006
March 2($ in millions)
Investment in Platinum Gauges, Inc. shares ............................... 31Cash......................................................................................... 31
April 12Investment in Zenith bonds......................................................... 20
October 16 Cash............................................................................................. 21
Investment in Zenith bonds..................................................... 20Gain on sale of investments..................................................... 1
November 1Investment in LYZ preferred shares ........................................... 42
December 31Adjusting entries:Investment in Platinum Gauges shares ....................................... 1
Unrealized holding gain on investments ([$32 x 1 million shares] - $31 million)................................................ 1
Unrealized holding loss on investments ([$76 x 500,000 shares] - $42 million).............................................. 8
Investment in LYZ preferred shares ....................................... 8
Exercise 12-5 (concluded)
2007
January 23($ in millions)
Cash ([1 million shares x 1/2] x $32)................................................ 16.0Unrealized holding gain on investments (1/2 amount from adjusting entry)............................... .5
Gain on sale of investments (difference).................................... .5Investment in Platinum Gauges shares ($32 million balance after adjusting entry x 1/2)................. 16.0
March 1Cash ($78 x 500,000 shares)............................................................. 39Loss on sale of investments (difference)........................................ 3
Unrealized holding loss on investments (from adjusting entry)... 4Investment in LYZ preferred (balance after adjusting entry)......... 38
Requirement 2 2006 Income Statement
($ in millions)Investment revenue (from July 18; Oct. 15).................................$3Gain on sale of investments (from Oct. 16)..................................1
Note: Unlike for trading securities, unrealized holding gains and losses are not included in income for securities available-for-sale.
Exercise 12-6
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 a separate component of shareholders’ equity.
Requirement 2
Unrealized holding loss on investments (10,000 shares x [$59 - 60]) 10,000Investment in IBM shares ....................................................... 10,000
Requirement 3
Investment in IBM shares (10,000 shares x [$61 - 59])..................... 20,000Unrealized holding loss on investment in IBM shares (from previous adjustment)................................. 10,000Unrealized holding gain on investment in IBM shares (difference)....................................................... 10,000
Exercise 12-7
Requirement 1
2006
December 17Investment in Grocers’ Supply preferred shares ................. 350,000
December 31Investment in Grocers’ Supply preferred shares ................. 50,000
Unrealized holding gain on investments ([$4 x 100,000 shares] - $350,000)................... 50,000
2007
January 5Cash (selling price).................................................................. 396,000Loss on investments (to balance)............................................ 4,000
Investment in Grocers’ Supply preferred shares (balance after adjusting entry)................................. 400,000
Requirement 2 Balance Sheet
(short-term investment):Investment in Grocers’ Supply preferred shares (balance after adjusting entry)............................................. $400,000
Income Statement:Investment revenue (dividends)........................................... $ 3,000Unrealized holding gain on investments (from adjusting entry)......................................................... 50,000
Note: Unlike for securities available-for-sale, unrealized holding gains and losses are included in income for trading securities.
Exercise 12-8
Requirement 1
Purchase ($ in millions)Investment in Jackson Industry shares........................................ 92
Increases and decreases in the market value between the time a debt security is acquired and the day it matures to a prearranged maturity value are relatively unimportant if sale before maturity isn’t an alternative. For this reason, if an investor has the “positive intent and ability” to hold the securities to maturity, investments in debt securities are classified as “held-to-maturity” and reported at amortized cost rather than fair value in the balance sheet.
Problem 12-4($ in millions)
October 18Investment in Millwork Ventures preferred shares ..................... 58
November 1Cash.............................................................................................. 28 Loss on sale of investments ($28 – 30)........................................... 2
Investment in Kansas Abstractors bonds ................................. 30
December 1Investment in Household Plastics bonds...................................... 60
December 23Cash.............................................................................................. 5.9
Investment in U.S. Treasury bonds .......................................... 5.8Gain on sale of investments ($5.7 – 5.6)..................................... .1
Problem 12-4 (continued)($ in millions)
December 29Cash.............................................................................................. 3
December 31Accrued interest:Investment revenue receivable - Holistic Entertainment ($18 million x 10% x 2/12)....................................... 0.3Investment revenue receivable - Household Plastics ($60 million x 12% x 1/12).................................................. 0.6
Revaluations:Unrealized holding loss on investments ([2 million shares x $27.50] - $58 million)..................... 3
Investment in Millwork Ventures preferred shares ............... 3
Investment in NXS common shares ............................................ 2Unrealized holding gain on investments ([4 million shares x $11.50] - $44 million)............... 2
Note: Securities held-to-maturity are not adjusted to fair value.
Closing entry:Unrealized holding gain on investments (NXS)............................. 2.0Investment revenue ($3.0 + 1.5 + .9)............................................... 5.4Gain on sale of investments (U.S. Treasury bonds).......................... .1
Loss on sale of investments (Kansas Abstractors)...................... 2.0Income summary (to balance)................................................... 5.5
Note: Unlike for securities available-for-sale, unrealized holding gains and losses are included in income for trading securities.
2007January 7
Cash.............................................................................................. 43 Loss on sale of investments (to balance)......................................... 3
Investment in NXS common shares (after adjusting entry)........... 46
Problem 12-11
Item Reporting Category
__A_ 1. 35% of the nonvoting preferred stock T. Trading securities of American Aircraft Company M. Securities held-to-maturity
__M_ 2. Treasury bills to be held-to-maturity A. Securities available-for-sale __M_ 3. Two-year note receivable from affiliate E. Equity method __N_ 4. Accounts receivable C. Consolidation__M_ 5. Treasury bond maturing in one week N. None of these
__T_ 6. Common stock held in trading account for immediate resale.
__T_ 7. Bonds acquired to profit from short-term differences in price.__E_ 8. 35% of the voting common stock of Computer Storage Devices Company.__C_ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.__A_10. Corporate bonds of Primary Smelting Company to be sold if interest rates fall
1/2%.__A_11. 25% of the voting common stock of Smith Foundries Corporation: 51%
family-owned by Smith family; fair value determinable.__E_12. 17% of the voting common stock of Shipping Barrels Corporation: Investor’s
CEO on the board of directors of Shipping Barrels Corporation.
