Chapter 15 Investments and Fair Value Accounting Student: _ Although marketable securities may be retained for several years, they continue to be classified as temporary, provided they are readily marketable and can be sold for cash at any time True False As with other assets, the cost of a bond investment includes all costs related to the purchase True False If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment True False When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded True False The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue True False Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment True False To record a bond investment between interest payment periods, Investment in Bonds would be debited and Cash and Interest Revenue would be credited True False When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price True False If the proceeds from the sale of bond investments exceeds the carrying amount of the bonds, a gain is realized True False 10 Any gains or losses on the sale of bonds normally would be reported in the Other Income (Loss) section of the income statement True False 11 An equity investment in less than 20% of another company’s stock is accounted for using the cost method True False 12 Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method True False 13 The investor carrying an investment by the equity method records cash dividends received as an increase in the carrying amount of the investment True False 14 Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period True False 15 The equity method causes the investment account to mirror the proportional changes in book value of the investee True False 16 Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments True False 17 The corporation owning all or a majority of the voting stock of another corporation is known as the parent company True False 18 When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income True False 19 The financial statements resulting from combining parent and subsidiary statements are called consolidated statements True False 20 It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company True False 21 The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee True False 22 When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds True False 23 The amortization of discounts or premiums are recorded as part of interest income on the income statement True False 24 Held-to-maturity securities are reported on the balance sheet at fair market value True False 25 Held-to-maturity securities maturing beyond a year are reported as noncurrent assets True False 26 Trading securities should be reported on the financial statements at fair market value True False 27 Investments in bonds that management intends to hold to maturity are called trading securities True False 28 Investment in Bonds are reported on the balance sheet at lower of cost or market True False 29 Investment in Bonds is listed on the balance sheet after Bonds Payable True False 30 Temporary investments are recorded at their cost which would include broker’s commissions True False 31 Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit True False 32 Trading securities are reported on the balance sheet at cost True False 33 Any difference between the fair market values of the securities and their cost is a realized gain or loss True False 34 Unrealized gains and losses on trading securities are not included in the calculation of net income True False 35 Investments in stocks that are expected to be held for the long term are listed in the stockholder's equity section of the balance sheet True False 36 In order to maintain the original value of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments True False 37 Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and liabilities True False 38 Fair value accounting is used more under Generally Accepted Accounting Principles (GAAP) than it is under International Financial Reporting Standards (IRFS) True False 39 Growth firms generally pay regular dividends to stockholders True False 40 Comprehensive income is all changes in stockholders' equity during the period except those resulting from dividends and stockholders' investments True False 41 Comprehensive income must be reported on the income statement True False 42 The cumulative effects of other comprehensive income items must be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income True False 43 Comprehensive income does not affect net income or retained earnings True False 44 The cumulative effects of other comprehensive income items is included in retained earnings, on the balance sheet True False 45 Foreign currency translation adjustment is an example of an item that would be included in Other Comprehensive Income True False 46 Temporary investments A are reported as current assets B include cash equivalents C not include equity securities D all of the above 47 Which of the following is not a reason to invest excess cash in temporary investments? A earn interest revenue B influence the operations of another company C receive dividends D realize gains from the increase in market value of the securities 48 Investment in certificates of deposit and other securities that not change in value are reported in the balance sheet as: A equity investments B available-for-sale securities C cash and cash equivalents D held to maturity securities 49 Long-term investments are held for all of the listed reasons below except A to earn the interest or dividend income B for its long-term gain potential C to influence over another business entity D to meet current cash needs 50 Temporary investments such as in trading securities are A recorded at cost but reported at fair market value B recorded at cost and reported at cost C recorded at cost but reported at lower of cost or fair market value D recorded at fair market value and reported at fair market value 51 On June 1, $50,000 of treasury bonds were purchased between interest dates The broker commission was $500 The bonds pay interest at 12%, which is paid semiannually on January and July What is the total cost to be debited to the Investment - Treasury Bonds account? A $50,000 B $50,500 C $49,500 D $53,000 52 On June 1, $40,000 of treasury bonds were purchased between interest dates The broker commission was $600 The bonds pay interest at 12%, which is paid semiannually on January and July How much interest revenue will be recorded on July 1? A $400 B $406 C $2,000 D $2,400 53 Interest revenue on bonds is reported A as an addition to the Investment in Bonds account B as part of Comprehensive Income but not as part of Net Income C as part of other income D as part of operating income 54 Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest The bond interest rate is 8% and interest is paid semi-annually The journal entry to record the purchase would be: A Debit: Investment in Bonds $101,500; Credit: Cash $101,500 B Debit: Investment in Bonds $100,000; Credit: Interest Revenue $1,500 and Cash $98,500 C Debit: Investment in Bonds $100,000 and Interest Receivable $1,500; Credit: Cash $101,500 D Investment in Bonds $100,000; Credit: Cash $100,000 55 Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest The bond interest rate is 8% and interest is paid semi-annually The journal entry to record the receipt of interest on the next interest payment date would be: A Debit: Cash $4,000; Credit: Interest Revenue $4,000 B Debit: Cash $4,000; Credit: Interest Receivable $4,000 C Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500 D Debit: Cash $2,500; Credit: Interest Revenue $2,500 56 Ruben Company purchased $100,000 of Evans Company bonds at 100 Ruben later sold the bonds at $104,500 plus $500 in accrued interest The journal entry to record the sale of the bonds would be: A Debit: Cash $105,000; Credit: Investment in Bonds $104,500 and Interest Revenue $500 B Debit: Cash $105,000; Credit: Investment in Bonds $100,000 and Gain on Sale of Investments $5,000 C Debit: Cash $104,500 and Interest Receivable $500; Credit: Investment in Bonds $100,000, Gain on Sale of Investments $4,500 and Interest Revenue $500 D Debit: Cash $105,000; Credit: Investment in Bonds $100,000; Gain on Sale of Investments $4,500 and Interest Revenue $500 57 Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock The stock is purchased for $45 a share plus brokerage fees of $280 The entry for the purchase is: A Cash Stock Investments - Saxton Company 4,500 B Stock Investments - Saxton Company Cash 4,780 4,780 C Stock Investments - Saxton Company Brokerage Fee Expense Cash 4,500 280 4,780 D Stock Investments - Saxton Company Cash 4,500 4,500 4,500 58 Jacks Corporation purchases $200,000 bonds plus accrued interest for months of $2,000 from Kennedy Company on March The bonds have an annual interest rate of 6% payable on June 30 and December 31 The entry to record the purchase of the bonds would include: A Interest Receivable debit $2,000 B Investment in Bonds debit $202,000 C Cash debit $200,000 D Interest Revenue credit $2,000 59 On April 1, 2011, Albert Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued interest of $2,000 On June 30, 2011, Albert received its first semiannual interest On February 1, 2012, Albert sold $40,000 of the bonds at 103 plus accrued interest The journal entry Albert will record on April 1, 2011 for the purchase of the bonds will include: A a credit to Interest Payable for $2,000 B a debit to Investments - Tetter Company for $52,000 C a debit for Cash of $50,000 D a debit to Investments - Tetter Company for $50,000 60 On May 1, 2014, Stanton Company purchased $60,000 of Harris Company’s 12% bonds at 100 plus accrued interest of $2,400 On June 30, 2014, Stanton received its first semiannual interest On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest The journal entry Stanton will record on June 30, 2014, will include: A a credit to Interest Revenue for $2,400 B a debit to Cash for $3,600 C a credit to Cash for $2,400 D a credit to Interest Receivable for $1,200 61 On May 1, 2014, Stanton Company purchased $60,000 of Harris Company’s 12% bonds at 100 plus accrued interest of $2,400 On June 30, 2014, Stanton received its first semiannual interest On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest The journal entry Stanton will record on February 1, 2015, will include: A a credit to Interest Revenue for $1,500 B a credit to Gain on Sale of Investments for $1,500 C a credit to Cash for $52,500 D a credit to Interest Receivable for $600 62 On May 1, 2014, Stanton Company purchased $60,000 of Harris Company’s 12% bonds at 100 plus accrued interest of $2,400 On June 30, 2014, Stanton received its first semiannual interest On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest What are the total proceeds from the February 1, 2015 sale? A $52,400 B $51,500 C $50,000 D $52,000 63 Which of the following stock investments should be accounted for using the cost method? A investments of less than 20% B investments between 20 % and 50% C investments of less than 20% and investments between 20% and 50% D all stock investments should be accounted for using the cost method 64 Which of the following statements below is not a reason a company may purchase another company's stock? A earning a return on excess cash B sustain the other company's stock price C gaining control of another company's operations D developing or maintaining business relationships 65 The cost method of accounting for stock A recognizes dividends as income B is only appropriate as part of a consolidation C requires the investment be increased by the reported net income of the investee D requires the investment be decreased by the reported net income of the investee 66 An investor purchased 500 shares of common stock, $25 par, for $21,750 Subsequently, 100 shares were sold for $49.50 per share What is the amount of gain or loss on the sale? A $12,750 gain B $600 gain C $600 loss D $9,250 loss 67 Held to maturity securities A are reported at fair market value B include stocks as well as bonds C may be reported as current or noncurrent assets D all of the above 68 The equity method of accounting for investments A requires a year-end adjustment to revalue the stock to lower of cost or market B requires the investment to be reported at its original cost C requires the investment be increased by the reported net income of the investee D requires the investment be increased by the dividends paid by the investee Required: Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31, 2012 Where will the information from the journal entry be reported on the financial statements? Unrea 2,300 lized Gain (Loss) on Tradi ng Invest ments Valu2,30 atio n Allo wan ce for Trad ing Inve stme nts To record the decre ase in fair value of tradin g invest ments ($45, 700 – $48,0 00) The unrealized loss will be reported on the income statement as part of Other Income (Loss) The valuation allowance will reduce the value of the portfolio on the balance sheet 124 Skyline, Inc purchased a portfolio of available-for-sale securities during 2012 The cost and fair value of this portfolio on December 31, 2012, was as follows: Name Blackstone, Inc Flagler Company Patternson Corporation Total Number of Shares 400 200 600 Total Cost $4,000 3,000 7,500 $14,500 Total Fair Value $5,200 2,700 9,800 $17,700 Required: Provide the journal entry to record the adjustment of the available-for-sale security portfolio to fair value on December 31, 2012 Where will the information from the journal entry be reported on the financial statements? Valua 3,200 tion Allow ance for Avail able-f or-Sal e Invest ments Unrealize 3,20 d Gain (Loss) on Availablefor-Sale I nvestment s To record the increase in fair value of trading investmen ts ($17,700 – $14,500) The unrealized gain will be reported on the balance sheet as part of Stockholders’ Equity The valuation allowance will increase the value of the portfolio on the balance sheet 125 The income statement for Hudson Company reported net income of $345,000 for the year ended December 31, 2012 before considering the following: During the year the company purchased trading securities At year end, the fair value of the investment portfolio was $23,000 less than cost The balance of retained earnings was $823,000 on December 31, 2011 Hudson Company paid $43,000 in cash dividends in 2012 Calculate the balance of retained earnings on December 31, 2012 a Retained earnings, December 31, 2011 Plus net income * Less dividends Retained earnings, December 31, 2012 $ 823,000 322,000 $1,145,000 43,000 $1,102,000 * Because these are trading securities, the decrease in fair market value is part of the net income calculation ($345,000 - $23,000 = $322,000) 126 The income statement for Dodson Corporation reported net income of $22,400 for the year ended December 31, 2012 before considering the following: During the year the company purchased available-for-sale securities At year end, the fair value of the investment portfolio was $2,100 more than cost The balance of retained earnings was $83,000 on December 31, 2011 Dobson Corporation paid $9,000 in cash dividends in 2012 Calculate the balance of retained earnings on December 31, 2012 a Retained earnings, December 31, 2011 Plus net income * $ 83,000 22,400 $ 105,400 9,000 $ 96,400 Less dividends Retained earnings, December 31, 2012 * Because these are available-for-sale securities, the increase in fair market value is part of stockholders’ equity, not net income 127 During 2012, its first year of operations, Makala Company purchased two available-for-sale investments as follows: Security Oceanna Company Rockledge, Inc Shares Purchased 700 1,900 Cost $29,000 41,000 Assume that as of December 31, 2012, the Oceanna Company stock had a market value of $49 per share and Rockledge, Inc stock had a market value of $20 per share Makala had 10,000 shares of no par stock outstanding that was issued for $150,000 For the year ending December 31, 2012, Makala had a net income of $105,000 No dividends were paid Required: (1) Prepare the Current Assets section of the balance sheet presentation for the available-for sale securities as of December 31, 2012 (2) Prepare the Stockholders’ Equity section of the balance sheet as of December 31, 2012 (1) Makala Company Balance Sheet (selected items) Decembe r 31, 2012 A s s e ts Cur rent asse ts: Ava $ ilabl e-fo r-sal , e inve stm ents , at cost Plus valu atio n allo wan ce for avai labl e-fo r-sal e inve $72, stm , 300 ents 0 * *Co mpu tatio n: M a r k e t: O $34, c 300 e a n n a C o m p a n y : 0 s h a r e s ´ $ R 38,0 o 00 c k l e d g e , I n c : , 0 s h a r e s ´ $ S 72,3 u 00 b t o t a l Cos t ($2 , 9,00 0+ $41, 000 ) Unr $ eali zed gain , 0 (2) Maka la Com pany Balan ce Sheet (selec ted items ) Dece mber 31, 2012 S t o c k h o l d e r s ’ E q u it y Com mon Stock Retai ned earni ngs $150,000 105,000 Unre alized gain (loss) on availa ble-fo r-sale invest ments 2,300 Total Stockholders’ Equity $257,300 128 On January 1, 2012, Valuation Allowance for Available-for-Sale Investments had a zero balance On December 31, 2012, the cost of the available-for-sale securities was $48,700, and the fair value was $39,200 Prepare the adjusting entry to record the unrealized gain or loss for available-for-sale investments on December 31, 2012 2012 Dec 31 Unrealized Gain (Loss) on Available-for-Sale Investments 9,500 Valuation Allowance for Available-for-Sale Investments 9,500 Available-for-sale investments at fair value, 12/31/12 $39,200 Available-for-sale investments at cost, 12/31/12 48,700 Unrealized Gain (Loss) on Available-for-Sale Investments, 12/31/12 ($9,500) 129 On April 1, 2015, ValueTime, Inc had a market price per common share of $24 For the previous year ValueTime paid a dividend of $1.50 per share Compute the dividend yield for ValueTime, Inc Dividend yield: Dividends per share of common stock = Market price per share of common stock $1.50 $24 = 0625 or 6.25% 130 Gerardo Company had a net income of $75,000, and other comprehensive income of $12,500 for 2012 On January 1, 2012, the Retained Earnings balance was $525,000 and the Accumulated Other Comprehensive Income balance was $55,000 Determine the (a) comprehensive income for 2012, (b) Retained Earnings balance on December 31, 2012, and (c) the Accumulated Other Comprehensive Income on December 31, 2012 (a) (b) (c) $87,500 = $75,000 + $12,500 $600,000 = $525,000 + $75,000 $67,500 = $55,000 + $12,500 131 Herberto Company had a net income of $74,000, and other comprehensive loss of $8,500 for 2012 On January 1, 2012, the Retained Earnings balance was $425,000 and the Accumulated Other Comprehensive Income balance was $52,000 Determine the (a) comprehensive income for 2012, (b) Retained Earnings balance on December 31, 2012, and (c) the Accumulated Other Comprehensive Income on December 31, 2012 (a) (b) (c) $65,500 = $74,000 - $8,500 $499,000 = $425,000 + $74,000 $43,500 = $52,000 - $8,500 132 Compare and contrast why companies invest cash in short-term temporary investments vs long-term investments When companies temporarily have excess cash not needed for current operations, they often invest it in debt or equity securities These investments can be temporary or short-term or more long term in nature The primary reason companies invest short-term is to earn interest or dividends and to realize gains from the increase in the market price of the securities When companies make temporary investments, they are listed as Current Assets on the balance sheet Long-term investments may be made for the same reasons However, many long term investments involve the purchase of stock of another company This type of purchase may be made for strategic reasons such as an attempt to reduce operating costs, replace management, expand or integrate 133 On August 1, 2011, Airport Company sold Paxton Company $1,000,000 of 10-year, 6% bonds, dated July at 100 plus accrued interest On March 1, 2012, Paxton sold half of the bonds for $520,000 plus accrued interest Present entries to record the following transactions: Paxton Company: (1) Purchase of bonds on August 1, 2011 (2) Receipt of first semiannual interest amount on December 31, 2011 (3) The sale of the bonds on March 1, 2012 (1) (2) (3) Investment in Airport Co Bonds Interest Receivable ($1,000,000 x 6%) x 1/12 Cash 1,000,000 5,000 Cash Interest Revenue Interest Receivable 30,000 Cash Interest Revenue ($500,000 x 6%) x 2/12 525,000 Gain on Sale of Investments Investment in Airport Co Bonds 1,005,000 25,000 5,000 5,000 20,000 500,000 134 Journalize the entries to record the following selected transactions of Oliver Co.: (a) (b) (c) Purchased $100,000 of Kruse Co 8% bonds at par value plus accrued interest of $2,000 Received first semiannual interest payment Sold the bonds at 97 plus accrued interest of $1,500 (a) Investment in Kruse Co Bonds Interest Receivable Cash (b) Cash Interest Receivable Interest Revenue (c) Cash Loss on Sale of Investments Investment in Kruse Co Bonds Interest Revenue 100,000 2,000 102,000 4,000 2,000 2,000 98,500 3,000 100,000 1,500 135 Albright Company purchased as a long-term investment $500,000 of Benton Corporation 10-year, 9% bonds Present entries to record the following selected transactions: (a) (b) Purchased bonds for $465,000 Sold half the bonds at 98 plus accrued interest of $4,000 The broker deducted $200 for brokerage fees and taxes, remitting the balance The bonds were carried at $479,000 at the time of the sale (a) Investment in Benton Corporation Bonds Cash (b) Cash Interest Revenue Investment in Benton Corporation Bonds Gain on Sale of Investment 465,000 465,000 248,800 4,000 239,500 5,300 136 Prepare the journal entries for the following transactions for Batson Co (a) Batson Co purchased 1,200 shares of the total of 100,000 outstanding shares of Michael Corp stock for $20.75 per share plus a $70 commission Michael’s total earnings for the period are $84,000 Michael paid a total of $40,000 in cash dividends to shareholders of record (b) (c) (a) Investment in Michael Corp Stock Cash (1,200 x $20.75 + $70) 24,970 24,970 (b) No entry (c) Cash Dividend Revenue ($40,000 / 100,000 x 1,200) 480 480 137 Prepare the journal entries for the following transactions for Morgan Co (a) Morgan Co purchased 32,000 shares of the total of 100,000 outstanding shares of Gordon Corp stock for $10 per share plus a $400 commission Gordon Corp.'s total earnings for the period are $80,000 Gordon Corp paid a total of $45,000 in cash dividends (b) (c) (a) Investment in Gordon Corp Stock Cash (b) Investment in Gordon Corp Stock Income of Gordon Corp ($80,000 x 32%) (c) Cash Investment in Gordon Corp Stock ($45,000 x 32%) 320,400 320,400 25 ,6 00 25,600 14,400 14,400 138 Present entries to record the following selected transactions of Masterson Co (a) (b) (c) (d) (e) (f) Purchased 600 shares of the 100,000 shares outstanding $10 par common shares of Dankin Corporation for $5,100 Purchased 3,500 shares of the 10,000 shares no par common shares of Ramon Co for $45,700 The investment was accounted for by the equity method Received a cash dividend of $1 per share on the Dankin Corporation stock acquired in (a) Received a cash dividend of $2 per share on the Ramon Co stock acquired in (b) Sold 100 shares of the Dankin Corporation shares acquired in (a) for $2,100 Dankin Corporation reported net income of $30,000 and Ramon Company’s reported net income was $50,000 (a) Investment in Dankin Corporation Stock Cash 5,100 5,100 (b) Investment in Ramon Co Stock Cash 45,700 (c) Cash Dividend Revenue 600 (d) Cash Investment in Ramon Co Stock 7,000 (e) Cash Investment in Dankin Corporation Stock ($5,100 / 6) Gain on Sale of Investments (f) Investment in Ramon Co Stock Income of Ramon Co ($50,000 x 35%) 45,700 600 7,000 2,100 850 1,250 17,500 17,500 139 Discuss the appropriate financial treatment when an investor has a greater than 50% ownership in another company If an investor purchases more than 50% of another company, the investor is considered to have control over the investee The purchase is deemed a business combination The corporation that owns the majority interest is called the parent company; the controlled company is called the subsidiary Parent and subsidiary corporations may continue to maintain separate accounting records throughout the year and prepare their own financial statements If that is the case, at the end of the year, the financial statements of the parent and subsidiary(ies) are combined into consolidated financial statements 140 Discuss the similarities and differences in reporting trading securities, available-for-sale securities and held-to-maturity securities Both trading securities and available-for-sale securities are reported at fair value on the balance sheet date Held-to-maturity securities are reported at amortized cost Unrealized gains and losses on trading securities are reported on the income statement as part of other income or loss Unrealized gains and losses on available-for-sale securities are reported in the stockholder equity section of the balance sheet Unrealized gains and losses are not calculated or reported on held-to-maturity securities Trading securities are always reported as current assets Available-for-sale and held-to-maturity securities may be reported as current or noncurrent assets The classification for available-for-sale securities depends on management intent The classification for held-to-maturity securities depends upon the remaining time to maturity 141 The cost and fair value of the trading securities held by AdBrand Company as of December 31, 2012 are as follows: Name Alcorn, Inc Bristen Corp Geston Company Quanter Company Total Number of Shares Cost per Share 1,200 $10.50 600 9.00 900 4.10 400 7.35 Fair Value per Share $11.05 9.85 4.00 6.82 Total Cost Total Fair Value Required: (1) Complete the table above to find the total cost and fair value for the company’s trading securities portfolio (2) Calculate and record the required December 31, 2012 adjustment (3) Explain how the adjustment from step (2) is reported on AdBrand’s 2012 financial statements Name Alcorn, Inc Bristen Corp Geston Company Quanter Company Total Number of Shares Cost per Share 1,200 $10.50 600 9.00 900 4.10 400 7.35 Accounts (2) Valuation Allowance for Trading Investments Unrealized Gain on Trading Investments *$ 25,498 -$ 24,630 = $ 868 Unrealized Gain Fair Value per Share $11.05 9.85 4.00 6.82 DR Total Cost $12,600 5,400 3,690 2,940 $24,630 CR 868* 868 Total Fair Value $13,260 5,910 3,600 2,728 $25,498 (3) The unrealized gain will be reported on the income statement as Other Income The valuation allowance will be added to the cost of the investments and be reported under Current Assets 142 Following is data for the available-for-sale securities held by AdBrand Company as of December 31, 2012 Name Capstone, Inc Dayton Corp Huddle Company Stanton Company Total Number of Shares Cost per Share 1,200 $15.00 800 8.00 700 14.10 900 12.35 Fair Value per Share $15.40 8.25 13.00 10.77 Total Fair Value Total Cost Required: (1) Complete the table above to find the total cost and fair value for the company’s available-for-sale securities portfolio (2) Calculate and record the required December 31, 2012 adjustment (3) Explain how the adjustment from step (2) is reported on AdBrand’s 2012 financial statements Name Capstone, Inc Dayton Corp Huddle Company Stanton Company Total Number of Shares Cost per Share 1,200 $15.00 800 8.00 700 14.10 900 12.35 Accounts (2) Unrealized Loss on Available-for-Sale Investments Valuation Allowance for Available-for-Sale Investments Fair Value per Share $15.40 8.25 13.00 10.77 Total Fair Value $18,480 6,600 9,100 9,693 $43,873 Total Cost $18,000 6,400 9,870 11,115 $45,385 DR CR 1,512 1,512 $45,385 - $43,873 = $1,512 Unrealized Loss (3) The unrealized loss will be shown as a reduction in stockholders’ equity and the valuation allowance will be shown as a reduction of the value of the Available-for-Sale investment portfolio (at cost) 143 (1) Discuss factors contributing to the trend to fair value accounting (2) What are some of the disadvantages associated with using fair value? Factors contributing to the trend to fair value accounting include: Current generally accepted accounting principles are a hybrid of varying measurement methods that often conflict with one another A greater percentage of total assets of many companies consists of financial assets whose fair values can be readily obtained Fair value is more often used by IFRS (International Financial Reporting Standards) Disadvantages associated with using fair value include: Fair value may not be readily obtainable for some assets Fair value makes it more difficult to compare companies if they use different methods of determining what fair value is Using fair values could lead to more fluctuations in accounting reports because fair values usually change from year to year 144 Newville Corporation reported net income of $50,000 in 2015 They have 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 common stock outstanding During 2012 Newville paid the preferred stockholder’s a $6 per share dividend and also paid $30,000 to common shareholders The market value of Newville’s stock is: Preferred - $105 and Common - $10 (1) Calculate Newville’s dividend yield (2) Why does the dividend yield vary widely across firms? (1) Dividend yield = $0.60 ** / $10.00 = 6% ** $30,000 / 50,000 = $0.60 per share common stock dividend (2) Growth firms tend to retain their earnings to fund future growth, resulting in a small dividend yield Other companies regularly pay dividends to stockholders resulting in larger dividend yields 145 Mangrill, Inc reported net income for the year ending December 31, 2012 of $483,500 Dividends paid during the year totaled $42,900 The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $171,000 at the end of the year They also hold trading securities with an original cost of $150,000 and a fair value of $147,000 Retained Earnings on January 1, 2012 was $736,400 and Accumulated Other Comprehensive Income on January 1, 2012 was $16,200 Required: Calculate the following balances to be reported in the financial statements dated December 31, 2012 (1) Valuation Allowance for Available-for-Sale securities (2) Comprehensive Income (3) Retained Earnings (4) Accumulated Other Comprehensive Income (1) Valuation Adjustment for Available-for-Sale securities $171,000 - $162,000 = $9,000 (2) Comprehensive Income $483,500 + $9,000 = $492,500 (3) Retained Earnings $736,400 + $483,500 - $42,900 = $1,177,000 (4) Accumulated Other Comprehensive Income $16,200 + $9,000 = $25,200 146 What is comprehensive income? How is it calculated? What are some examples of items included in other comprehensive income? Where is comprehensive income reported? Comprehensive income is all changes in stockholders’ equity during a period except those resulting from dividends and stockholders’ investments It is calculated by adding other comprehensive income to net income Other comprehensive income items include unrealized gains and losses on available-for-sale-securities and other items including foreign currency and pension liability adjustments Comprehensive income is reported in the financial statements in one of the following ways: On the income statement In a separate statement of comprehensive income In the statement of stockholders’ equity ... stock investments should be accounted for using the cost method? A investments of less than 20% B investments between 20 % and 50% C investments of less than 20% and investments between 20% and. .. (GAAP) require the use of fair value accounting for all assets and liabilities True False 38 Fair value accounting is used more under Generally Accepted Accounting Principles (GAAP) than it is... similarities and differences in reporting trading securities, available-for-sale securities and held-to-maturity securities 141 The cost and fair value of the trading securities held by AdBrand Company