November 1
( in millions)
Cash.................................................................
Investment revenue.....................................
December 1
Investment in Facsimile Enterprises bonds.....
Cash.............................................................
December 31
Investment in U.S. Treasury bills ..................
Cash.............................................................
2.4
2.4
30
30
9.8
9.8
December 31
Investment revenue receivable - Conference
bonds (48 million x 10% x 2/12).........................
0.8
0.3
1.1
Exercise 12-2
Requirement 1
Investment in bonds (face amount)........................
Discount on bond investment (difference).........
Cash (price of bonds)..........................................
Requirement 2
Cash (3% x $240 million)........................................
Discount on bond investment (difference)............
Interest revenue (4% x $200)..................................
( in millions)
240
40
200
7.2
.8
8.0
Requirement 3
Tanner-UNF reports its investment in the December 31, 2003, balance sheet at
its amortized cost that is, its book value:
Investment in bonds............................................
Less: Discount on bond investment ($40 - .8 million)
Amortized cost................................................
$240.0
39.2
$200.8
( in millions)
195.0
39.2
5.8
240.0
Exercise 12-3
Requirement 1
( in 000s)
70
30
85
70
30
85
60
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 12-4
Investment in GM common shares ................
Cash ([800 shares x 50] + $1,300).....................
41,300
41,000
300
41,300
41,300
Exercise 12-5
Requirement 1
2006
March 2
($ in millions)
31
31
April 12
Investment in Zenith bonds.........................................................
Cash.........................................................................................
20
July 18
Cash.............................................................................................
Investment revenue..................................................................
October 15
Cash.............................................................................................
Investment revenue..................................................................
October 16
Cash.............................................................................................
Investment in Zenith bonds.....................................................
Gain on sale of investments.....................................................
November 1
Investment in LYZ preferred shares ...........................................
Cash.........................................................................................
December 31
Adjusting entries:
20
21
20
1
42
42
1
1
8
8
16.0
.5
.5
16.0
March 1
Cash ($78 x 500,000 shares).............................................................
Loss on sale of investments (difference)........................................
Unrealized holding loss on investments (from adjusting entry)...
Investment in LYZ preferred (balance after adjusting entry)........
Requirement 2
2006 Income Statement
($ in millions)
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
39
3
4
38
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 dont fit
the definitions of the other reporting categories are classified this way. Of course,
the equity method isnt appropriate either because 10,000 shares of IBM certainly
dont 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])
Investment in IBM shares .......................................................
10,000
10,000
Requirement 3
Investment in IBM shares (10,000 shares x [$61 - 59]).....................
Unrealized holding loss on investment
in IBM shares (from previous adjustment).................................
Unrealized holding gain on investment
in IBM shares (difference)......................................................
20,000
10,000
10,000
Exercise 12-7
Requirement 1
2006
December 17
Investment in Grocers Supply preferred shares ................
Cash..................................................................................
350,000
December 28
Cash......................................................................................
Investment revenue..........................................................
3,000
December 31
Investment in Grocers Supply preferred shares ................
Unrealized holding gain on
investments ([$4 x 100,000 shares] - $350,000)...................
2007
350,000
3,000
50,000
50,000
January 5
Cash (selling price).................................................................
Loss on investments (to balance)............................................
Investment in Grocers Supply preferred
shares (balance after adjusting entry).................................
396,000
4,000
400,000
Requirement 2
Balance Sheet
(short-term investment):
Investment in Grocers Supply preferred shares
(balance after adjusting entry).............................................
Income Statement:
Investment revenue (dividends)...........................................
Unrealized holding gain on investments
(from adjusting entry)........................................................
$400,000
3,000
50,000
Note: Unlike for securities available-for-sale, unrealized holding gains and losses are
included in income for trading securities.
Exercise 12-8
Requirement 1
Purchase
($ in millions)
92
92
Net income
No entry
Dividends
3
3
Adjusting entry
Requirement 2
Investment revenue..........................
$3 million
Exercise 12-10
1. Investments reported as current assets.
Security A
$ 900,000
Security B
105,000
Security C
700,000
Security E
490,000
Total
$2,195,000
2. Investments reported as noncurrent assets.
Security D
$ 900,000
Security F
615,000
$1,515,000
Security
A
B
Totals
Cost
Fair value
$ 900,000
105,000
$1,005,000
$ 915,000
95,000
$1,010,000
Unrealized
gain (loss)
$15,000
(10,000)
$ 5,000
Security
Totals
C
D
Cost
Fair value
$ 700,000
900,000
$1,600,000
$ 780,000
915,000
$1,695,000
Unrealized
gain (loss)
$80,000
15,000
$95,000
Exercise 12-13
Purchase
($ in millions)
58
58
Net income
12
12
Dividends
Adjusting entry
No entry
4.8
4.8
Exercise 12-14
Requirement 1
Purchase
485,000
485,000
Net income
No entry
Dividends
20,000
20,000
Adjusting entry
Requirement 2
25,000
25,000
Purchase
485,000
485,000
Net income
50,000
50,000
Dividends
20,000
20,000
Adjusting entry
No entry
Problem 12-2
Requirement 1
Investment in bonds (face amount)........................
Discount on bond investment (difference).........
Cash (price of bonds)..........................................
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million)..........................................
Discount on bond investment (difference)............
Interest revenue (5% x $66)....................................
3.20
.10
Requirement 3
Cash (4% x $80 million)..........................................
Discount on bond investment (difference)............
Interest revenue (5% x [$66 + 0.1])........................
3.20
.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2003, balance sheet
at its amortized cost that is, its book value:
Investment in bonds............................................................
Less: Discount on bond investment ($14 - .1 - .11 million)
Amortized cost................................................................
$80.00
13.79
$66.21
Increases and decreases in the market value between the time a debt security
is acquired and the day it matures to a prearranged maturity value are relatively
unimportant if sale before maturity isnt an alternative. For this reason, if an
investor has the positive intent and ability to hold the securities to maturity,
investments in debt securities are classified as held-to-maturity and reported
at amortized cost rather than fair value in the balance sheet.
Problem 12-4
($ in millions)
October 18
Investment in Millwork Ventures preferred shares .....................
Cash..........................................................................................
October 31
Cash..............................................................................................
Investment revenue...................................................................
58
58
1.5
1.5
November 1
Investment in Holistic Entertainment bonds.................................
Cash..........................................................................................
18
November 1
Cash..............................................................................................
Loss on sale of investments ($28 30)...........................................
Investment in Kansas Abstractors bonds .................................
28
2
December 1
Investment in Household Plastics bonds......................................
Cash..........................................................................................
60
December 20
Investment in U.S. Treasury bonds ..............................................
Cash..........................................................................................
18
30
60
5.8
5.8
December 21
Investment in NXS common shares ............................................
Cash..........................................................................................
December 23
Cash..............................................................................................
Investment in U.S. Treasury bonds ..........................................
Gain on sale of investments ($5.7 5.6).....................................
44
44
5.9
5.8
.1
December 29
Cash..............................................................................................
Investment revenue................................................................
3
3
December 31
Accrued interest:
Investment revenue receivable - Holistic
Entertainment ($18 million x 10% x 2/12).......................................
0.3
0.6
0.9
Revaluations:
Unrealized holding loss on
investments ([2 million shares x $27.50] - $58 million).....................
Investment in Millwork Ventures preferred shares ..............
Investment in NXS common shares ............................................
Unrealized holding gain on
investments ([4 million shares x $11.50] - $44 million)...............
3
3
2
2
Closing entry:
Unrealized holding gain on investments (NXS).............................
Investment revenue ($3.0 + 1.5 + .9)...............................................
Gain on sale of investments (U.S. Treasury bonds)..........................
Loss on sale of investments (Kansas Abstractors)......................
Income summary (to balance)...................................................
2.0
5.4
.1
2.0
5.5
Note: Unlike for securities available-for-sale, unrealized holding gains and losses are
included in income for trading securities.
2007
January 7
Cash..............................................................................................
Loss on sale of investments (to balance).........................................
Investment in NXS common shares (after adjusting entry)...........
43
3
46
Problem 12-11
Item
__A_ 1. 35% of the nonvoting preferred stock
of American Aircraft Company
__M_ 2. Treasury bills to be held-to-maturity
__M_ 3. Two-year note receivable from affiliate
__N_ 4. Accounts receivable
__M_ 5. Treasury bond maturing in one week
Reporting Category
T.
M.
A.
E.
C.
N.
Trading securities
Securities held-to-maturity
Securities available-for-sale
Equity method
Consolidation
None of these