a. (1) Trading Securities (+A)... 50,000 Cash ( A)... 50,000 Invested in IBM.

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1 Pratt Chapter 8 Solutions BE8 1 a. Comprehensive income includes all non-owner changes in shareholder equity that do not already appear on the income statement. For example, the change in value of assets that have been sold and in certain assets that have not been sold appear as comprehensive income, but net income only includes the changes in assets that have been sold. b. The investments are considered Available-for-Sale Securities, because the Unrealized Gains/Losses are not posted to the Income Statement; instead, as shown in the disclosure the Unrealized Gains/Losses are carried directly to Stockholders Equity through Comprehensive Income. In 2012 the Available-for-Sale Securities increased $52 million in market value. In 2011 the Available-for-Sale Securities decreased $10 million in market value. In 2010 the Available-for-Sale Securities dropped $2 million in market value. In each of the three years, Merck did not sell the securities at the year-end value. (An Unrealized Gain/Loss is a holding gain/loss, meaning the securities were not sold but simply marked to the current market value.) BE8 2 Bristol-Myers Squibb designated its Marketable Securities as Available-for-Sale Securities and as such reflected holding gains/losses (unrealized) in Comprehensive Income, not on the Income Statement. The $12 million reflected a change in the market value of the Securities which were still owned by the company. The asset section of the balance sheet will also show the change, with the carrying value of the Securities adjusted by the $12 million. E8 1 a. (1) Trading Securities (+A)... 50,000 Cash ( A)... 50,000 Invested in IBM. (2) Trading Securities (+A)... 40,000 Cash ( A)... 40,000 Invested in GM. (3) Cash (+A)... 45,000 Trading Securities ( A)... 37,500 Realized Gain on Sale of Trading Securities (Ga, +SE)... 7,500 Sold IBM stock. (4) Cash (+A) Dividend Receivable Received dividend. (5) Trading Securities (+A)... 8,000 Cash ( A)... 8,000 Invested in Xerox.

2 (6) Cash (+A)... 7,500 Realized Loss on Sale of Trading Securities (Lo, SE)... 5,000 Trading Securities ( A)... 12,500 Sold IBM stock. (7) Cash (+A)... 11,600 Trading Securities ( A)... 8,000 Realized Gain on Sale of Marketable Securities (Ga, +SE) 3,600 Sold Xerox stock. (8) Cash (+A)... 30,000 Realized Loss on Sale of Trading Securities (Lo, SE)... 10,000 Trading Securities ( A)... 40,000 Sold GM stock. b. The transactions that affected the income statement for Monroe Auto Supplies are the gains and losses Monroe Auto Supplies realized from selling marketable securities for amounts different from their purchase prices. Monroe Auto Supplies realized gains of $7,500 and $3,600, respectively, on the first sales of IBM and Xerox stock and realized losses of $5,000 and $10,000, respectively, on the second sale of IBM stock and on GM stock. Thus, the net effect of the dividends, gains, and losses on net income was to decrease net income by $3,900. The dividends received from the General Motors stock were recognized as income in the previous period. E8 2 a. Change in the wealth level of each of the four companies can be computed by comparing the beginning and year-end balance in the short-term equity investment account. Therefore, the amounts for each company are as follows. Wearever Fabrics $12,000 Frames Corp. 2,000 Pacific Transport (24,000) Video Magic 13,000 b. The amount that should be reported as holding gains and losses on the income statement is always due to changes in the market value of trading securities. Therefore, the holding gains and losses for each company are as follows. Wearever Fabrics $20,000 Frames Corp. (10,000) Pacific Transport (20,000) Video Magic 10,000

3 c. The reason that the answers to (a) and (b) are not the same is due to the fact that in part (a) the wealth charges are computed for the trading securities and available-for-sale securities together. In part (b) the holding gains and losses that are being reported on the income statement pertain to only trading securities. For the available-for-sale securities, the holding gains and losses are taken directly to the stockholders equity on the balance sheet via comprehensive income. d. If the company were to choose the fair market value option, the change in market values for the available-for-sale securities would also be included. Therefore, the income change would match the wealth change outlined in part a above. E8 3 a. (1) 1/28 Short-Term Investments (+A) Cash ( A) Invested in Able Co. (2) 2/18 Short-Term Investments (+A) Cash ( A) Invested in Baker Co. (3) 3/15 Cash (+A) Dividend Revenue (R, +SE) Received dividends. (4) 4/29 Cash (+A) Short-Term Investments ( A) Realized Gain on Sale of Short-Term Investments (Ga, +SE)... 5 Sold Able Co. stock. (5) 5/18 Cash (+A) Dividend Revenue (R, +SE) Received dividends. (6) 6/1 Cash (+A) Realized Loss on Sale of Short-Term Investments (Lo, SE) Marketable Securities ( A) Sold Baker Co. stock. b. Cost Market Value Able (5 shares) Baker (15 shares) Total June 30 Adjusting Entry (1) If Able and Baker are both considered trading securities: Unrealized Price Decrease on trading securities (Lo, SE) Trading Securities ( A) Revalued trading securities to market.

4 (2) If Able is a trading security and Baker is an available-for-sale security: Able Trading Securities (+A) Unrealized Price Increase on Trading Securities (Ga, +SE) Baker Unrealized Price Decrease ( SE) Available-for-Sale Securities ( A) (3) If Able is considered an available-for-sale security and Baker is considered a trading security: Able Available-for-Sale Securities (+A) Unrealized Price Increase on Available-for-Sale Securities (+SE) Baker Unrealized Price Decrease on Trading Securities (Lo, SE) Trading Securities ( A) (4) If Able and Baker are both considered available-for-sale securities: Unrealized Price Decrease on Available-for-Sale Securities ( SE) Available-for-Sale Securities ( A) c. Since management usually want to keep losses off the income statement, the second combination in (b) will depict the management as the most successful in the current period. All the losses ($90) are shown as unrealized losses in stockholders equity while the gain of $15 goes to the income statement. E8 4 a. Trading Available-For-Sale 2014 income $ 40 1 $ /31/14 balance sheet investment value income balance sheet investment value income Total income $ 70 $ shares were purchased at $8, and on 12/31/14 their market value has increased to $10 a share. An unrealized price increase of $40 for Trading Securities will go to the income statement, but the same unrealized gain for available-for-sale securities will go directly into the stockholders equity. Therefore there is no impact on the 2014 income statement $10 a share as of 12/31/14.

5 Cash (+A) Unrealized Price Increase ( Ga, SE) Trading Securities Realized Gain (+Ga, +SE) /31/15 Trading Securities (+A) Unrealized Price Increase (+Ga, +SE) The net value of all income statement-related accounts is $10 of increase in income. 4. For available-for-sale securities, the Journal entries would remain the same, but all the unrealized price increases would go directly to the stockholders equity account, leaving only $10 of realized gain on the income statement. 5. Purchased 20 $8 = $160 12/31/14 Mark to $10 = 40 Sold 10 cost basis of $10 = (100) 12/31/15 Mark to $12 = _ 20 12/31/15 balance sheet value = $ Cash (+A) Unrealized Price Increase ( Ga, SE) Trading Securities ( A) Realized Gain (+Ga, +SE) For available-for-sale securities, the entry would remain the same, but the $40 unrealized price increase debit would go directly to the stockholders equity section, leaving the $60 realized gain on the income statement. b. Whether a security is classified as a trading security or available-for-sale security, the balance sheet investment value remains the same due to the mark-to-market rule. However, the classification does impact the income statement as can be seen from this problem. Overall, whether the security is a trading security or an available-for-sale security, the total income would remain the same. E8 10 a Investment in Equity Securities (+A) ,000 Cash ( A) ,000 Invested in Reilly Manufacturing. Cash (+A)... 15,000 Investment in Equity Securities ( A)... 15,000 Received dividends (equity method). Investment in Equity Securities (+A)... 18,750* Income from Equity Investments (R, +SE)... 18,750 Earned investment revenue (equity method). * $18,750 = $75,000 investee net income 25%

6 2015 Cash (+A)... 15,000 Investment in Equity Securities ( A)... 15,000 Received dividends (equity method). Loss on Equity Investments (Lo, SE)... 1,500* Investment in Equity Securities ( A)... 1,500 Incurred investment loss (equity method). * $1,500 = $6,000 investee net loss 25% b. Cost of investment $ 190,000 Plus: Portion of investee's 2014 net income 18,750 Less: Portion of investee's 2014 declared dividends (15,000) E8 12 Book value of investment as of December 31, 2014 $ 193,750 Less: Portion of investee's 2015 net loss (1,500) Less: Portion of investee's 2015 declared dividends (15,000) Book value of investment as of December 31, 2015 $ 177,250 a. Since Mainmont Industries owns 30% of Tumbleweed Construction, 30% of Tumbleweed Construction's net income "flows through" to Mainmont Industries' income statement. Consequently, Tumbleweed Construction's total net income for 2014 would have been $40,000 ($12,000 30%). b. Long-term investment in equity securities: 12/31/13 $25,000 30% of Tumbleweed Construction's 2014 net income 12,000 Less: 30% of Tumbleweed Construction's 2014 declared dividends X Long-term investment in equity securities: 12/31/14 $29,000 Mainmont Industries' portion of the dividends declared by Tumbleweed Construction was $8,000. Since this amount represents 30% of the total dividends declared by Tumbleweed, the total dividends declared by Tumbleweed were $26,667 ($8,000 30%). c. Cash (+A)... 8,000 Investment in Equity Securities ( A)... 8,000 Received dividends (equity method). Investment in Equity Securities (+A)... 12,000 Income from Equity Investments (R, +SE)... 12,000 Earned investment revenue (equity method). d. On its statement of cash flows (indirect), Mainmont would deduct from net income the Income from Equity Investments net of the cash received in dividends ($4,000 net, for 201 4).

7 P8 1 a. The total gains and losses reported on the income statement are as follows: Realized Gains and Losses Unrealized Price on Trading as well as Changes for Trading Dividend Income Available-for-Sale Securities + Securities + # of Realized Total Realized Security Shares Sold G/L per share Gain/Loss Houser Co. 60 $25 $22 = $3 $ 180 Miller, Inc = ($10) (900) Letter Books = $7 35 Nordic Equip = $25 3,625 $2,940 12/31/14 # of Cost Market Total Total Security Shares per Share per Share Cost Market Houser 30 $22 $25 $ 660 $ 750 Miller 90 $40 $35 3,600 3,150 $ 4,260 $ 3,900 Total unrealized price decrease on trading securities = $4,260 $3,900 = $360 Effect on 2014 reported income from all investment transactions and price changes: Net Realized Gain on Sale of Trading and Available-For-Sale Securities During the Year = $2, 940 Net Unrealized Price Decrease on Trading Securities = (360) Total Dividends Received during 2014 = 205 Total Effect on 2014 Income $ 2,785 b. If O Leary used the fair market value option, then the unrealized gains and losses on the available-for-securities (Letter and Nordic) would affect net income as well. 12/31/14 # of Cost Market Total Total Security Shares per Share per Share Cost Market Letter 70 $48 $46 $ 3,360 $ 3,220 Nordic 25 $70 $90 1,750 2,250 $ 5,110 $ 5,470 Total unrealized price increase on available-for-sale securities = $5,470 $5,110 = $360 Effect on 2014 reported income: $2,785 (from part a) + $360 = $3,145

Equity Securities Classified as Current Two criteria must be met for an investment in a security to be considered current and thus warrant inclusion

BUS210 Accounting for Investment Decisions: Short-term and Long-term Investments including Trading Securities, Available for Sale, Cost, Equity, and Consolidations Equity Securities Classified as Current