EXERCISES. Exercise 18-1

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1 EXERCISES Exercise 18-1 Requirement 1 Comprehensive income is a more expansive view of the change in shareholders equity than traditional net income. It is the total nonowner change in equity for a reporting period. In fact, it encompasses all changes in equity other than from transactions with owners. Transactions between the corporation and its shareholders primarily include dividends and the sale or purchase of shares of the company s stock. Most nonowner changes are reported in the income statement. So, the changes other than those that are part of traditional net income are the ones reported as other comprehensive income. Requirement 2 Two attributes of other comprehensive income are reported: (1) components of comprehensive income created during the reporting period and (2) the comprehensive income accumulated over the current and prior periods. The second measure - the comprehensive income accumulated over the current and prior periods is reported in the balance sheet as a separate component of shareholders equity. This is what Kaufman reported in its balance sheet ($107 million in 2009). Be sure to realize this amount represents the cumulative sum of the changes in each component created during each reporting period (the disclosure note) throughout all prior years. Solutions Manual, Vol.2, Chapter

2 Exercise 18-1 (continued) Requirement 3 Kaufman's 2009 balance sheet amount ($107 million) differs from the 2009 amount reported in the disclosure note. On the other hand, the comprehensive income created during the reporting period can be reported either (a) as an additional section of the income statement, (b) as part of the statement of shareholders equity, or (c) in a disclosure note. This is the measure of comprehensive income Kaufman reported in the disclosure note. Regardless of the placement a company chooses, the presentation is similar. It will report net income, other components of comprehensive income, and total comprehensive income, similar to the following: ($ in millions) Net income $xxx Other comprehensive income: Net unrealized holding gains (losses) on investments (net of tax) $ x Gains (losses) from and amendments to postretirement plans (net of tax) (x) Deferred gains (losses) from derivatives (net of tax) x Gains (losses) from foreign currency translation (net of tax)* x xx Comprehensive income $xxx Changes in the market value of securities available-for-sale. Gains and losses due to revising assumptions or market returns differing from expectations and prior service cost from amending the plan (described in Chapter 17). When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction (described in the Derivatives Appendix to the text). * Gains or losses from changes in foreign currency exchange rates. The amount could be an addition to or reduction in shareholders equity. (This item is discussed elsewhere in your accounting curriculum.) Notice that each component is reported net of its related income tax expense or income tax benefit Intermediate Accounting, 5e

3 Exercise 18-1 (concluded) Requirement 4 From the information Kaufman's financial statements provide, we can determine how the company calculated the $107 million accumulated other comprehensive income in 2009: ($ in millions) Accumulated other comprehensive income, 2008 $75 Change in net unrealized gains on investments 34 Change in other (2) Accumulated other comprehensive income, 2009 $ 107 Exercise 18-2 Cash (3 million shares x $17.15 per share)... 51,450,000 Common stock (3 million shares x $.01 par per share)... 30,000 Paid-in capital excess of par (remainder)... 51,420,000 Solutions Manual, Vol.2, Chapter

4 Exercise 18-3 February 12 Cash (2 million shares x $9 per share)... 18,000,000 Common stock (2 million shares x $1 par)... 2,000,000 Paid-in capital excess of par (difference)... 16,000,000 February 13 Legal expenses (40,000 shares x $9 per share) ,000 Common stock (40,000 shares x $1 par)... 40,000 Paid-in capital excess of par (difference) ,000 Note: Because 2 million shares sold the previous day for $9 per share, it s reasonable to assume a $9 per share fair value. February 13 Cash ,000 Common stock (80,000 shares x $1 par)... 80,000 Paid-in capital excess of par, common* ,000 Preferred stock (4,000 shares x $50 par) ,000 Paid-in capital excess of par, preferred**... 25,000 * 80,000 shares x [$9 market value - $1 par] ** Since the value of the common shares is known ($720,000), the market value of the preferred ($225,000) is assumed from the total selling price ($945,000). November 15 Property, plant, and equipment (cash value)... 3,688,000 Common stock (380,000 shares at $1 par per share) ,000 Paid-in capital excess of par (difference)... 3,308, Intermediate Accounting, 5e

5 Exercise January 23, 2009 ($ in millions) Treasury stock (10 million shares x $20) Cash September 3, 2009 Cash (1 million shares x $21) Treasury stock (1 million shares x $20) Paid-in capital share repurchase (remainder) November 4, 2009 Cash (1 million shares x $18) Paid-in capital share repurchase (from 2.)... 1 Retained earnings (remainder)... 1 Treasury stock (1 million shares x $20) Balance Sheet as of 12/31/2009 Shareholders Equity Paid-in Capital Common Stock Additional Paid-in Capital... 2,240 Retained Earnings... xx AOCI... xx Treasury Stock Solutions Manual, Vol.2, Chapter