selected+solutions ch+12

8/12/2019 Selected+Solutions Ch+12

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Requirement 1 ($ in millions)

Investment in bonds (face amount) ........................ 80Discount on bond investment (difference) ......... 14Cash (price of bonds) .......................................... 66

Requirement 2Cash (4 ! $80 million) .......................................... ".#0Discount on bond investment (difference) ............ .10

Interest revenue ( ! $66).................................... "."0


Interest revenue ( ! %$66 & 0.1')........................ "."1

Requirement 4u * +on,e* reports its investment in the December "1- #011- balance

sheet at its amorti ed cost that is- its boo, value/

Investment in bonds............................................................ $80.00ess/ Discount on bond investment ($14 .1 .11 million) 1" . 23morti ed cost................................................................ $66.#1

Increases and decreases in the fair value bet een the time a debt securit* isac5uired and the da* it matures to a prearran ed maturit* value are relativel*unimportant if sale before maturit* isn7t an alternative. or this reason- if aninvestor has the positive intent and abilit*9 to hold the securities tomaturit*- investments in debt securities are classified as held:to:maturit*9and reported at amorti ed cost rather than fair value in the balance sheet.

Problem 12-1


2/46

Problem 12-1 (concluded)

Requirement 5

u * +on,e*7s #011 statement of cash flo s ould be affected asfollo s/

;peratin cash flo s/ Cash inflo from interest of $".# &$".# < $6.4. (=ote/ if u * +on,e* prepares an indirectmethod statement of cash flo s- it ould have interestrevenue of $"."0 & $"."1 < $6.61 included in net income- so

ould have to include an ad>ustment of $6.4 $6.61 < ($0.#1)

to et from net income to cash from operations.)Investin cash flo s/ Cash outflo from purchasininvestments of $66.


Investment in bonds (face amount) ........................ 80Discount on bond investment (difference) ......... 14Cash (price of bonds) .......................................... 66



Requirement 3Cash (4 ! $80 million) .......................................... ".#0

Discount on bond investment (difference) ............ .11Interest revenue ( ! %$66 & 0.1')........................ "."1


sheet at its fair value- $ 0 million in this case. or investments in tradinsecurities- chan es in mar,et values- and thus mar,et returns- provide anindication of mana ement7s success in decidin hen to ac5uire theinvestment- hen to sell it- hether to invest in fi!ed:rate or variable:ratesecurities- and hether to invest in lon :term or short:term securities.

Problem 12-2


3/46

?o do this- e first need to determine the investment7s amorti ed cost (or boo, value) at the end of the *ear/


?hen- to record it at fair value- e increase the investment b* $ 0 66.#1 ustment......................................... ". 2 =et unreali ed holdin ains and losses ;CI ($ 0 66.#1) ". 2

ecause these are available:for:sale securities- the unreali ed holdin ainof $". 2 ould be reco ni ed in u * +on,e*7s #011 other comprehensiveincome- and serve to increase the accumulated other comprehensive incomesho n in shareholders7 e5uit*.


6/46


Requirement 5

u * +on,e*7s #011 statement of cash flo s ould be affected asfollo s/

;peratin cash flo s/ Cash inflo from interest of $".# &$".# < $6.4. (=ote/ if u * +on,e* prepares an indirectmethod statement of cash flo s- it ould have interestrevenue of $"."0 & $"."1 < $6.61 included in net income- so

ould have to include an ad>ustment of $6.4 $6.61 < ($0.#1)to et from net income to cash from operations.)

Investin cash flo s/ Cash outflo from purchasininvestments of $66.

=ote/ ecause u * +on,e* elected the fair value option-these investments ill be reclassified as tradin securities and

accounted for under that approach. ?herefore- the ans ers to e5uirements 1:

are the same as those to Eroblem 1#:#.

Requirement 1 ($ in millions)Investment in bonds (face amount) ........................ 80

Discount on bond investment (difference) ......... 14Cash (price of bonds) .......................................... 66




Interest revenue ( ! %$66 & 0.1')........................ "."1

Problem 12-4


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sheet at its fair value- $ 0 million in this case. or investments in tradinsecurities- chan es in mar,et values- and thus mar,et returns- provide anindication of mana ement7s success in decidin hen to ac5uire the

investment- hen to sell it- hether to invest in fi!ed:rate or variable:ratesecurities- and hether to invest in lon :term or short:term securities.

?o determine the >ournal entr* that u * +on,e* must ma,e- e first needto determine the investment7s amorti ed cost (or boo, value) at the end ofthe *ear/



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March 18Cash.............................................................................. 8-000

Investment revenue.................................................. 8-000

September 1Investment in 3merican Instruments bonds ................ 200-000Cash.......................................................................... 200-000

ctober 20Cash.............................................................................. 4# -000

Investment in Distribution ?ransformers ............... 400-000Gain on sale of investments..................................... # -000

!o"ember 1Investment in +HD Corporation shares ..................... 1-400-000

Cash.......................................................................... 1-400-000


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Problem 12-5 (continued)

#ecember 31$%&u'tin( entrie')

Investment revenue receivable..................................... "0-000Investment revenue ($200-000 ! 10 ! 4A1#)............... "0-000

$ccumulate%

*nreali+e%$"ailable-,or-Sale Securitie' o't Fair .alue /ain o''+ H D Corporation shares $1-400-000 $1-460-000 $60-0003merican Instruments bonds 200-000 8 0-000 ( 0-000 )

?otals Dec. "1- #011 $#-"00-000 $#-"10-000 $10-000

air value ad>ustment (calculated above) ......................... 10-000

=et unreali ed holdin ains and losses ;CI...... ...10-000

?he $10-000 credit balance in the net unreali ed holdin ain is reported as #011 Othercomprehensive income in the statement of comprehensive income. It serves to increase

Accumulated other comprehensive income - a component of Bhareholders7 e5uit* in the#011 balance sheet.


11/46


Requirement 2ncome 'tatement)

Investment revenue ($8-000 & "0-000) $ "8-000Gain on sale of investments # -000

=ote/ Jnli,e for tradin securities- unreali ed holdin ains and losses are notincluded in income for securities available:for:sale.

Statement o, comprehen'i"e income )

=et unreali ed holdin ains and losses on investments $ 10-000

alance 'heet)Current AssetsInvestment revenue receivable $

"0-000

Becurities available:for:sale $#-"00-000Elus/ air value ad>ustment 10-000

$#-"10-000 Shareholders Equity Accumulated other comprehensive income

=et unreali ed holdin ain (loss) ($60-000 0-000) $ 10-000

Can be reported either (a) as an additional section of the income statement- (b) as part ofthe statement of shareholders7 e5uit*- or (c) as a separate statement in a disclosure note.


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Requirement 3

2012anuary 20

Cash.............................................................................. 1-48 -000Gain on sale of investments (to balance) .................... 8 -000Investment in +HD Corporation shares (cost) ......... 1-400-000

March 1Cash.............................................................................. 4 -000

Investment revenue receivable................................. "0-000Investment revenue.................................................. 1 -000

$u(u't 12Investment in Kast Communications shares ............... 6 0-000

Cash.......................................................................... 6 0-000

September 1

Cash.............................................................................. 4 -000Investment revenue.................................................. 4 -000


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#ecember 31$%&u'tin( entrie')

Investment revenue receivable..................................... "0-000Investment revenue ($200-000 ! 10 ! 4A1#)............... "0-000

$ccumulate%

*nreali+e%Securitie' o't Fair .alue /ain o''Kast Communication shares $6 0-000 $6 0-000 $#0-0003merican Instruments bonds 200-000 8"0-000 ( 0-000 )

?otals Dec. "1- #01# $1- 0-000 $1- 00-000 $( 0-000)

+ovin from a positive $10-000 (#011) to a ne ative $ 0-000 re5uires adecrease of $60-000/

:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: 0-000 0 &10-000 -------------------------------------------- 760 000

=et unreali ed holdin ains and losses@;CI.......... . 60-000

air value ad>ustment (calculated above) ................... 60-000

?he $60-000 debit balance in the net unreali ed holdin ains and losses isreported as #01# ;ther comprehensive income in the statement ofcomprehensive income. It serves to decrease 3ccumulated othercomprehensive income- a component of Bhareholders7 e5uit* in the #01#

balance sheet- from the $10-000 credit balance it sho ed on the #011 balance sheet to the $ 0-000 debit balance it sho s in the #01# balancesheet.

Fair .alue$%&u'tment

alance needed in fair value ad>ustment ($ 0)L!istin balance in fair value ad>ustment/ $10

Increase (decrease) needed in fair value ad>ustment/ ($60)


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Requirement 4ncome 'tatement)

Investment revenue ($1 -000 & 4 -000 & "0-000) $ 20-000Gain on sale of investments 8 -000

=ote/ Jnli,e for tradin securities- unreali ed holdin ains and losses arenot included in income for securities available:for:sale.

Statement o, comprehen'i"e income9) =et unreali ed holdin ains and losses on investments $ (60-000)

alance 'heet)Current AssetsInvestment revenue receivable $

"0-000

Becurities available:for:sale $1- 0-000

ess/ air value ad>ustment ( 0-000 )$1- 00-000

Shareholders Equity Accumulated other comprehensive income

=et unreali ed holdin ain (loss) ($#0-000 0-000) $ ( 0-000)

Can be reported either (a) as an additional section of the incomestatement- (b) as part of the statement of shareholders7 e5uit*- or (c) as aseparate statement in a disclosure note.

Requirement 1

2011#ecember 12 ($ in millions)

Investment in HG Corporation bonds ..................................... 1#Cash.......................................................................................... 1#

Problem 12-6


15/46

#ecember 13Investment in err* common shares ............................................ ##

Cash.......................................................................................... ##

#ecember 15Cash.............................................................................................. 1#.1Investment in HG Corporation bonds ................................. 1#.0Gain on sale of investments ($1#.1 1#) .................................... 0.1

#ecember 22Investment in J.B. ?reasur* bills ................................................ 6Investment in J.B. ?reasur* bonds .............................................. 6

Cash.......................................................................................... 1#1

#ecember 23Cash.............................................................................................. 10

oss on sale of investments ($10 11) ........................................... 1Investment in err* common shares ($## ! 1A#)......................... 11

#ecember 26Cash (sellin price) ..........................................................................

Gain on sale of investments ($ 6)....................................... 1Investment in J.B. ?reasur* bills (account balance) .................... 6

#ecember 2:Cash (sellin price) .......................................................................... 6"

oss on sale of investments ($6" 6 ) ........................................... #Investment in J.B. ?reasur* bonds (account balance) ................. 6


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#ecember 28Cash.............................................................................................. 0.#

Investment revenue................................................................... 0.#

#ecember 31($ in millions)

$%&u'tin( entry)

=et unreali ed holdin ains and losses@IAB ($10 million %$## million ! 1A#') ................................................... 1.0

air value ad>ustment................................................................ 1.0

lo'in( entry)

Income summar* (to balance) ......................................................... .Investment revenue ($ & 0.# million) .............................................. .#Gain on sale of investments ($8 & 0.1 & 1 million) ........................... 2.1

oss on sale of investments ($11 & 1 & # million) ........................ 14.0

=et unreali ed holdin ains and losses@IAB (ad>ustin entr*)

... 1.0


17/46

=ote/ Jnli,e for securities available:for:sale- unreali ed holdin ains andlosses are included in income for tradin securities.


alance 'heet 'hort-term in"e'tment )?radin Becurities............................... 11

ess/ air value ad>ustment................. (1 )?otal..................................................... 10

ncome 'tatement)

Investment revenue (closin entr*) .#Gain on sale of investments (closin entr*) 2.1

oss on sale of investments (closin entr*) (14.0) =et unreali ed holdin ains and losses on investments (closin entr*) (1.0)


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Eroblem 1#:6 (continued)

Requirement 3

2012anuary 2

($ in millions)Cash (sellin price) .......................................................................... 10.#

oss on sale of investments (to balance) ........................................ 0.8Investment in err* common (account balance) ........................... 11.0

3ssumin no other transactions involvin tradin securities- the #01# ad>ustinentr* to remove the fair value ad>ustment associated ith the sold securities ould

be/#ecember 31

air value ad>ustment (account balance)...................................... 1.0 =et unreali ed holdin ains and losses@IAB.......................... 1.0

anuary 5Investment in Marehouse Desi ns bonds .................................... "4

Cash.......................................................................................... "4

2011($ in millions)

ctober 18Investment in +ill or, Kentures preferred shares ..................... 8

Cash.......................................................................................... 8

ctober 31Cash.............................................................................................. 1.

Investment revenue................................................................... 1.

!o"ember 1Investment in Folistic Lntertainment bonds................................. 18

Cash.......................................................................................... 18

Problem 12-:


19/46

!o"ember 1Cash.............................................................................................. #8

oss on sale of investments ($#8 "0) ........................................... #Investment in Nansas 3bstractors bonds ................................. "0

#ecember 1Investment in Fousehold Elastics bonds...................................... 60

Cash.......................................................................................... 60

#ecember 20Investment in J.B. ?reasur* bonds .............................................. .6

Cash.......................................................................................... .6

#ecember 21Investment in =OB common shares ............................................ 44

Cash.......................................................................................... 44

#ecember 23Cash.............................................................................................. .

Investment in J.B. ?reasur* bonds .......................................... .6Gain on sale of investments ($ . .6)..................................... .1


20/46

Problem 12-7 (continued)($ in millions)

#ecember 2;Cash.............................................................................................. "

Investment revenue................................................................ "

#ecember 31$ccrue% intere't)Investment revenue receivable : Folistic

Lntertainment ($18 million ! 10 ! #A1#)....................................... 0."Investment revenue receivable : Fousehold

Elastics ($60 million ! 1# ! 1A1#).................................................. 0.6Investment revenue ............................................................... 0.2

Re"aluation')

=et unreali ed holdin ains and losses@ ;CI (%# million shares of +ill or, Kentures ! $# . 0' $ 8 million) .......... "

air value ad>ustment ............................................................ "

air value ad>ustment ................................................................... # =et unreali ed holdin ains and losses@IAB

(%4 million shares of =OB ! $11. 0' $44 million) ........................ #

=ote/ Becurities held:to:maturit* are not ad>usted to fair value.

lo'in( entry)

=et unreali ed holdin ains and losses@IAB (=OB) .................... #.0

Investment revenue ($".0 & 1. & .2)............................................... .4Gain on sale of investments (J.B. ?reasur* bonds) .......................... .1oss on sale of investments (Nansas 3bstractors) ...................... #.0

Income summar* (to balance) ................................................... .

=ote/ Jnli,e for securities available:for:sale- unreali ed holdin ainsand losses are included in income for tradin securities.


21/46


2012anuary :

Cash.............................................................................................. 4"oss on sale of investments (to balance) ......................................... 1Investment in =OB common shares (account balance) ................ 44

3ssumin no other transactions involvin tradin securities- the #01# ad>ustinentr* to remove the fair value ad>ustment associated ith the sold securities ould

be/

#ecember 31 =et unreali ed holdin ains and losses@IAB.............................. #.0air value ad>ustment (account balance).................................. #.0

Requirement 1

eale should report its securities available:for:sale in its December "1- #01#- balance sheet at their fair value- $ 4 million.

Requirement 2

?he >ournal entr* needed to enable the investment to be reported at fair valueis/

($ in millions)air value ad>ustment ($4 debit to $ debit) 1 =et unreali ed holdin ains and losses ;CI ($4 credit to $ credit) 1

Requirement 3

3s of December "1- #011- the cost of the Bch ab Eharmaceuticals investmentas $# million and its fair value as $# million. ?herefore- in the *ear:end

#011 ad>ustment process- eale must have made hatever ad>ustment asnecessar* to produce a debit balance of $# in the fair value ad>ustmentvaluation allo ance for Bch ab Eharmaceuticals and a credit balance of that

amount in accumulated other comprehensive income. ecause the Bch abEharmaceuticals investment as sold durin #01#- the reclassificationad>ustment ould have to remove that amount in #01#. eale7s statement of

Problem 12-8


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comprehensive income can be provided as (a) an e!tension of its incomestatement- (b) as part of its statement of shareholders7 e5uit*- or (c) in adisclosure note in a manner similar to this/

S


23/46


Comprehensive income includes both net income and other comprehensiveincome . =et income in #01# includes the $" million ain reali ed from sellin theBch ab shares. Fo ever- $# million of that ain alread* has been reported in

comprehensive income as an unreali ed holdin ain in a prior *ear or *earshen the shares7 value increased from $# million to $# million. ?o avoiddouble:countin - eale must compensate b* reducin comprehensive income b*the $# million portion of the #01# reali ed ain that alread* has been reported.?hat7s hat the reclassification ad>ustment doesP it reduces this *ear7scomprehensive income b* the amount that as reported previousl* to ,eep it from

bein reported t ice. or there to be a total increase in 3;CI of $1 million (from$4 million to $ million)- and the reclassification servin to reduce 3;CI b* $#million- $" million of unreali ed holdin ains must have occurred durin #01#.

Requirement 1

Purcha'e ($ in millions)Investment in aver* abelin shares.......................................... "#4

Cash ......................................................................................... "#4

!et income

Investment in aver* abelin shares ("0 ! $160 million) .......... 48Investment revenue................................................................... 48

#i"i%en%'

Cash (10 million shares ! $#) ............................................................. #0Investment in aver* abelin shares...................................... #0

#epreciation a%&u'tment

Investment revenue (%$80 million ! "0 ' Q 6 *ears) ? ...................... 4Investment in aver* abelin shares...................................... 4

Problem 12-;


24/46

? alculation')

n"e'tee !et $''et' #i,,erence!et $''et' Purcha'e% $ttribute% to)

o't $"#4Goodwill / $60

Fair "alue) $880 ! "0


25/46


Requirement 2

Purcha'e($ in millions)

Investment in aver* abelin shares.......................................... "#4Cash ......................................................................................... "#4

!et income =o entr*

#i"i%en%'

Cash (10 million shares ! $#) ............................................................. #0Investment revenue................................................................... #0

$%&u'tin( entry

=et unreali ed holdin ains and losses ;CI (%10 million shares ! $"1' $"#4 million)................................................. 14

air value ad>ustment................................................................ 14

Requirement 1


Cash ......................................................................................... "#4

!et income =o entr*

#i"i%en%'


Problem 12-10


26/46

$%&u'tin( entry

=et unreali ed holdin ains and losses@IAB (%10 million shares ! $"1' $"#4 million).................................................. 14


Requirement 2

ecause un*an is accountin for the aver* investment under the fair valueoption- the unreali ed holdin loss ould be included in #011 net income.?herefore- total effect on net income ould be $#0 million 14 million- or $6million.

Requirement 1 note) requirement 1 ha' the 'ame an'Aera' %oe' P 12-10


Cash ......................................................................................... "#4

!et income =o entr*

#i"i%en%'


$%&u'tin( entry

=et unreali ed holdin ains and losses@IAB (%10 million shares ! $"1' $"#4 million)................................................. 14


ecause un*an is accountin for the aver* investment under the fair valueoption- the unreali ed holdin loss ould be included in #011 net income.?herefore- total effect on net income ould be $#0 of dividend $14 ofunreali ed holdin loss- or $6. ?he investment ould be sho n in the

balance sheet at its fair value of $"10.

Problem 12-11


27/46


Requirement 2

Purcha'e ($ in millions)

Investment in aver* abelin shares.......................................... "#4Cash ......................................................................................... "#4

!et income

Investment in aver* abelin shares ("0 ! $160 million) .......... 48Investment revenue................................................................... 48

#i"i%en%'

Cash (10 million shares ! $#) ............................................................. #0Investment in aver* abelin shares...................................... #0


Investment revenue (%$80 million ! "0 ' Q 6 *ears) ? ....................... 4Investment in aver* abelin shares...................................... 4

? alculation')

n"e'tee !et $''et' #i,,erence!et $''et' Purcha'e% $ttribute% to)

o't $"#4

Goodwill / $60

Fair "alue) $880 ! "0


28/46


=ote/ 3fter the precedin >ournal entries are recorded- the balance in theaver* abelin investment account ould be/

Investment in aver* abelin shares RRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRRR

($ in millions)Cost "#4Bhare of income 48

#0 Dividends4 Depreciation ad>ustment

RRRRRRRRRRRRRRRRR alance "48

3t December "1- #011- the fair value of that investment is $"10 (< 10million shares ! $"1Ashare)- impl*in need for the follo in ad>ustinentr* to ad>ust the carr*in value of the investment to fair value/

=et unreali ed holdin ains and losses@IAB (%10 million shares ! $"1' $"48 million)................................................. "8

air value ad>ustment................................................................ "8

ecause un*an is accountin for the aver* investment under the fair valueoption- the unreali ed holdin loss ould be included in #011 net income.?herefore- total effect on net income ould be $48 million for un*an7sshare of aver* income minus $4 million of depreciation ad>ustment andminus the $"8 million unreali ed holdin loss- *ieldin a total of $6 ofincome. ?he investment ould be sho n in the balance sheet at its fair valueof $"10 million.

=ote that the income effect and the carr*in value in the balance sheet arethe same in re5uirements 1 and #.

Requirement 1Problem 12-12


29/46

Purcha'e ($ in millions)Investment in Kancouver ?H+ shares......................................... 400.0

Cash ......................................................................................... 400.0

!et income

Investment in Kancouver ?H+ shares (40 ! $140 million) ......... 6.0Investment revenue................................................................... 6.0

#i"i%en%'

Cash (40 ! $"0 million) .................................................................. 1#.0Investment in Kancouver ?H+ shares..................................... 1#.0

n"entory a%&u'tment

Investment revenue ($ million ! 40 / all sold in #011 ).................... #.0Investment in Kancouver ?H+ shares..................................... #.0


Investment revenue ( %$#0 million ! 40 ' Q 16 *ears) ?

..................... .Investment in Kancouver ?H+ shares..................................... .


30/46

? alculation')n"e'tee !et $''et' #i,,erence

!et $''et' Purcha'e% $ttribute% to)

o't $400Goodwill / $80 %plu '

Fair "alue) $800 ! 40


31/46


Requirement 2

n"e'tment Re"enue($ in millions)

6.0 Bhare of incomeInventor* #.0Depreciation .

RRRRRRRRRRRRRRRRR alance 53 B5

Requirement 3

n"e'tment in .ancou"er ustment of ($41. ) to et from the $ ".included as investment revenue in net income to the $1# of cash actuall*received in dividends and needin to be sho n in cash from operations.)

Requirement 1

+iller7s mana ement should decide hether it has the abilit* to e!ercisesi nificant influence over operatin and financial policies of the +arlon Compan*.

3bilit* to e!ercise si nificant influence is presumed for investments of #0 percentor more of votin stoc, and presumed not to e!ist for investments of less than #0 percent- other thin s bein e5ual. Lvidence to the contrar* should be considered-

Problem 12-13


32/46

includin participation on the board of directors- technolo ical dependenc*-material intercompan* transactions- or interchan e of mana erial personnel.

Requirement 2

aB ncome 'tatement) ($ inmillions)

Investment revenue ($1# million ! 1A6) $#.0

Eatent amorti ation ad>ustment ($4 million Q 10) ( .4)(%$#4 million' ! 1A6')

$1 .6

bB alance 'heet)Investment in +arlon Compan*

($12 million & # million 1 million 0.4 million) $12 .6


33/46


9 n"e'tment in Marlon ompany($ in millions)

Cost 12.0

Bhare of income #.0 1.0 Dividends ($6 million ! 1A6).4 3morti ation ad>ustment

RRRRRRRRRRRRRRRRR alance 1; B6

cB Statement o, ca'h ,loA')$12 million cash outflo from investin activities$1 million cash inflo (dividends) amon operatin activities(=ote/ if +arlon uses the indirect method to report its operatin cash flo s-it ould need an ad>ustment of ($0.6) to et from the $1.6 included asinvestment revenue in net income to the $1 of cash actuall* received individends and needin to be sho n in cash from operations.)


34/46

tem Reportin( ate(ory

RR3R 1. " of the nonvotin preferred stoc, ?. ?radin securities

of 3merican 3ircraft Compan* +. Becurities held:to:maturit* RR+R #. ?reasur* bills to be held:to:maturit* 3. Becurities available:for:

sale RR+R ". ? o:*ear note receivable from affiliate L. L5uit* method RR=R 4. 3ccounts receivable C. Consolidation RR+R . ?reasur* bond maturin in one ee, =. =one of these

RR?R 6. Common stoc, held in tradin accountfor immediate resale.

RR?R . onds ac5uired to profit from short:term differences in price. RRLR 8. " of the votin common stoc, of Computer Btora e Devices

Compan*. RRCR 2. 20 of the votin common stoc, of 3ffiliated Eeripherals- Inc. RR3R10. Corporate bonds of Erimar* Bmeltin Compan* to be sold if interest

rates fall 1A# . RR3R11. # of the votin common stoc, of Bmith oundries Corporation/ 1

famil*:o ned b* Bmith famil*P fair value determinable. RRLR1#. 1 of the votin common stoc, of Bhippin arrels Corporation/

Investor7s CL; on the board of directors of Bhippin arrelsCorporation.

Requirement 1

on% Fair .alue at 1D1D2011)Interest %($1 0-000 ! 6 ) A #' ! 14.#1#40 < $ 6"-2 6Erincipal $1 0-000 ! 0. 0# < -"86 Present value of the receivable $1"2-"4#

present value of an ordinar* annuit* of $1/ n


35/46

Requirement 2

anuary 1 2011Investment in bonds (face amount) ........................ 1 0-000

Discount on bond investment (difference) ......... 10-6 8

Cash (price of bonds) .......................................... 1"2-"4#

une 30 2011Cash %(1 0-000 ! 6 ) A #'........................................ 4- 00Discount on bond investment (difference) ............ "

Interest revenue %($1 0-000 10-6 8) ! ' A # . . 4-8

#ecember 31 2011

Cash (6 A # ! $1 0-000) ........................................ 4- 00Discount on bond investment (difference) ............ "20Interest revenue %S$1 0-000 ($10-6 8 " )T ! ' A # 4-820

=ote/ or held:to:maturit* investments- there are no ad>ustments to fairvalue.


36/46


Requirement 3

anuary 1 2011Investment in bonds (face amount) ........................ 1 0-000

Discount on bond investment (difference) ......... 10-6 8Cash (price of bonds) .......................................... 1"2-"4#

une 30 2011Cash ($1 0-000 ! 6 ) A # ....................................... 4- 00Discount on bond investment (difference) ............ "

Interest revenue %($1 0-000 10-6 8) ! ' A # . 4-8

on% Fair .alue at une 30 2011)Interest %($1 0-000 ! 6 ) A#' ! 1".1""24 < $ 2-10"Erincipal $1 0-000 ! 0.4 464 < 1-126 Present value of the receivable $1"0-#22



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#ecember 31 2011Cash ($1 0-000 ! 6 ) A # ....................................... 4- 00

Discount on bond investment (difference) ............ "20Interest revenue %S$1 0-000 ($10-6 8 " )T ! ' A # 4-820

on% Fair .alue at #ecember 31 2011)Interest %($1 0-000 ! 6 ) A#' ! 1#.1 222 < $ 4- #0Erincipal $1 0-000 ! 0.4 #80 < 6 -2#0

Present value of the receivable $1##-640



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;ther:than:temporar* impairment loss IAB..... . #40-000Discount on bond investment.......................... #40-000

;?? impairment loss ;CI .............................. #60-000

air value ad>ustment =on:credit loss.......... #60-000

#01#/ Bte art i nores the chan e in ee7s fair value durin #01#- as the eeinvestment is accounted for as an F?+ investment and fair value chan es are notrelevant unless vie ed as ;?? impairments. G33E does not allo recover* of

prior ;?? impairments hen fair value increases. ;ver the remainin life of the bonds- Bte art ould amorti e the bonds as if the* had a $#40-000 discount.Bte art also ould amorti e the $#60-000 of air value ad>ustment =on:creditloss9 in 3;CI over the remainin life of the bonds b* creditin that account anddebitin air value ad>ustment non:credit loss9 for a portion each period- thus

raduall* decreasin the amount sho n in 3;CI and increasin the carr*inamount of the bonds.

li"er orporation n"e'tment

#011/ Bte art accounts for the ;liver investment as a tradin securit*- so ;??impairment accountin is not relevant. Bte art simpl* continues to reco ni e in

earnin s an* unreali ed ains and losses associated ith fair value chan es. Giventhat the bonds alread* have a ne ative fair value ad>ustment of $#00-000- and needa ne ative fair value ad>ustment of $"00-000 to ad>ust from amorti ed cost of$#- 00-000 to fair value of $#-#00-000- Bte art must reco ni e additionalunreali ed losses of $100-000 for #011.

=et unreali ed holdin ains and losses@IAB......... 100-000air value ad>ustment.............................. ............. 100-000


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#01#/ air value increased to $#- 00-000 durin #01#- so Bte art needs to have a positive fair value ad>ustment of $#00-000 on the balance sheet to ad>ust from

amorti ed cost of $#- 00-000 to fair value of $#- 00-000. ?herefore- Bte art mustreco ni e an unreali ed ain $ 00-000 for #01#- movin the fair value ad>ustmentfrom a ne ative $"00-000 to a positive $#00-000. =ote that this is not a recover*of the ;?? impairment- but >ust normal on oin accountin for a ?B investment.

air value ad>ustment......................................... 00-000 =et unreali ed holdin ains and losses@IAB 00-000

one' nc n"e'tment

#011/ Bte art does not plan to sell the Uones investment- and does not believe it ismore li,el* than not that it ill have to sell the investment before fair valuerecovers- so the portion of the impairment that consists of credit and non:creditlosses is relevant. Bte art must reco ni e the $## -000 of credit losses as an ;??impairment in earnin s- and the other $ -000 as a reduction of ;CI- as follo s/

;ther:than:temporar* impairment loss IAB..... ## -000Investment in Uones bonds............................... ## -000

=et unreali ed holdin ains and losses@;CI. . -000air value ad>ustment...................................... -000

Bte art also must reclassif* the previousl* reco ni ed $400-000 unreali ed lossout of ;CI and the fair value ad>ustment/

air value ad>ustment.......................................... 400-000 =et unreali ed holdin ains and losses@;CI 400-000

=ote that Bte art could net the latter t o >ournal entries to ether to be/

=et unreali ed holdin ains and losses@;CI. . 1 -000air value ad>ustment...................................... 1 -000


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Fo ever- Bte art still ould need to sho on the face of the income statement thetotal ;?? impairment of $800-000 less the $ -000 in ;CI- *ieldin a $## -000

reduction in earnin s.#01#/ Bte art continues to treat the Uones investment as 3 B. ?herefore- Bte art

ould sho an unreali ed ain associated ith an increase of fair value from$#- 00-000 to $#-200-000. =ote that this is not a recover* of the ;?? impairment-

but >ust normal on oin accountin for an 3 B investment. ?he amount of creditloss and non:credit loss is not relevant to this subse5uent accountin .

air value ad>ustment.......................................... #00-000 =et unreali ed holdin ains and losses@;CI #00-000

>elm' orpB n"e'tment

#011/ ecause the Felms Corp. investment is e5uit*- Bte art bases the ;??impairment on the entire difference bet een amorti ed cost and fair value.

;ther:than:temporar* impairment loss............... 400-000Investment in Felms e5uit*............................. 400-000

Bte art also must reclassif* the previousl* reco ni ed $1#0-000 unreali ed ainout of ;CI and the fair value ad>ustment/

=et unreali ed holdin ains and losses@;CI. . 1#0-000air value ad>ustment...................................... 1#0-000

#01#/ Bte art continues to treat the Felms investment as 3 B. ?herefore- Bte artould sho an unreali ed ain associated ith an increase of fair value from

$600-000 to $ 00-000. =ote that this is not a recover* of the ;?? impairment- but >ust normal on oin accountin for an 3 B investment.


ee ompany n"e'tmentProblem 12-1:


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#011/ Jnder I B onl* the credit loss component is relevant for debt impairments.?herefore- Bte art reco ni es the $#40-000 of credit losses as an ;?? impairmentin earnin s- as follo s/

;ther:than:temporar* impairment loss.............. #40-000

Discount on bond investment.......................... #40-000

#01#/ I B allo s recover* of ;?? impairments on debt investments. ?herefore-Bte art ould record a reversal of ;?? impairment in earnin s to increase thecarr*in value of the ee investment to the level indicated b* a $140-000 creditloss.

Discount on bond investment.............................. 100-000

ecover* of other:than:temporar* impairment loss@IAB 100-000

li"er orporation n"e'tment

#011/ Bte art accounts for the ;liver investment as a tradin securit*- hichunder I B ould be called air value throu h profit and loss9- so ;??impairment accountin is not relevant. Bte art simpl* continues to reco ni e inearnin s an* unreali ed ains and losses associated ith fair value chan es. Given

that the bonds alread* have a ne ative fair value ad>ustment of $#00-000- and needa ne ative fair value ad>ustment of $"00-000 to ad>ust from amorti ed cost of$#- 00-000 to fair value of $#-#00-000- Bte art must reco ni e additionalunreali ed losses of $100-000 for #011.

=et unreali ed holdin ains and losses@IAB......... 100-000air value ad>ustment.............................. ............. 100-000


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#01#/ air value increased to $#- 00-000 durin #01#- so Bte art needs to have a positive fair value ad>ustment of $#00-000 on the balance sheet to ad>ust from

amorti ed cost of $#- 00-000 to fair value of $#- 00-000. ?herefore- Bte art mustreco ni e an unreali ed ain $ 00-000 for #01#- movin the fair value ad>ustmentfrom a ne ative $"00-000 to a positive $#00-000. =ote that this is not a recover*of the ;?? impairment- but >ust normal on oin accountin for a air valuethrou h profit and loss9 investment.

air value ad>ustment......................................... 00-000 =et unreali ed holdin ains and losses@IAB 00-000

one' nc n"e'tment

#011/ Given that this debt investment is 3 B- I B bases the ;?? impairment onfair value rather than on credit losses. ?herefore- Bte art reco ni es the entire$800-000 difference bet een amorti ed cost and fair value as an ;?? impairmentin earnin s- as follo s/

;ther:than:temporar* impairment loss.............. 800-000Investment in Uones bonds............................... 800-000

Bte art also must reclassif* the previousl* reco ni ed $400-000 unreali ed lossout of ;CI and the fair value ad>ustment/


#01#/ I B allo s recover* of ;?? impairments on debt investments. ?herefore-Bte art ould record a reversal of ;?? impairment in earnin s to increase thecarr*in value of the Uones investment to the fair value of $#-200-000.

Investment in Uones bonds.................................. #00-000 ecover* of other:than:temporar* impairment loss@IAB #00-000


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>elm' orpB n"e'tment

#011/ ecause the Felms Corp. investment is classified as 3 B- Bte art bases the;?? impairment on the entire difference bet een amorti ed cost and fair value.

;ther:than:temporar* impairment loss............... 400-000Investment in Felms e5uit*............................. 400-000

Bte art also must reclassif* the previousl* reco ni ed $1#0-000 unreali ed ainout of ;CI and the fair value ad>ustment/

=et unreali ed holdin ains and losses@;CI. . 1#0-000air value ad>ustment...................................... 1#0-000

#01#/ I B does not allo recover* of ;?? impairments for e5uit* investment.Fo ever- Bte art continues to treat the Felms investment as 3 B- so Bte art

ould sho an unreali ed ain associated ith an increase of fair value from$600-000 to $ 00-000. ?his is not a recover* of the ;?? impairment- but >ustnormal on oin accountin for an 3 B investment.



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CASES

Real Eorl% a'e 12-1

Requirement 1Fair .alue $%&u'tment $FS n"e'tment'

#10 ($## loss 1 ain on1#A# A08)

chan e over first half of #002 ##0 RRRRRRRRRRRR

$1"8 ain 1#8 loss on 6A# A02 10

Requirement 2

Intel needs to record unreali ed holdin ains and losses associated ith its3 B investments durin the first half of #002/

air value ad>ustment- 3 B investment.................. ##"

=et unreali ed holdin ains and losses@;CI ##"

Requirement 3Fair .alue $%&u'tment $FS n"e'tment'

#10 $## loss 1 ain on 1#A# A08unreali ed ains ##"

3 to balance RRRRRRRRRRRR

$1"8 ain 1#8 loss on 6A# A02 10


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Case 12-1 (concluded)

Mhat could account for the unaccounted:for credit of $"V ?he most li,el*e!planation is that there are reclassification ad>ustments for 3 Binvestments that have been sold or for hich ;?? impairments have been

reco ni ed. If Intel had previousl* reco ni ed an unreali ed ain for someinvestments- it ould have increased the fair value ad>ustment hen itincluded that ain in ;CI. If Intel sold or impaired those investments durinthe first half of #002- a reclassification entr* ould reduce (credit) the fairvalue ad>ustment and ;CI to remove those effects.

!ote)


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assists investors and creditors b* indicatin the direction the compan* is directinits funds.

3 disclosure note ma* provide information not available in the financialstatements- in part dependent on ho much information the financial statements

provide. ;ften the footnote ill indicate the cost of the securities.

selected+solutions ch+12

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