Exercise 12-1

November 1
( in millions)

Cash.................................................................
Investment revenue.....................................

December 1
Investment in Facsimile Enterprises bonds.....
Cash.............................................................

December 31
Investment in U.S. Treasury bills ..................
Cash.............................................................

2.4
2.4

30
30

9.8
9.8

December 31
Investment revenue receivable - Conference
bonds (48 million x 10% x 2/12).........................

0.8

Investment revenue receivable - Facsimile

Enterprises bonds (30 million x 12% x 1/12)......
Investment revenue ......................................
Note: Securities held-to-maturity are not adjusted to fair value.

0.3
1.1

Exercise 12-2
Requirement 1
Investment in bonds (face amount)........................
Discount on bond investment (difference).........
Cash (price of bonds)..........................................

Requirement 2
Cash (3% x $240 million)........................................
Discount on bond investment (difference)............
Interest revenue (4% x $200)..................................

( in millions)

240
40
200

7.2
.8
8.0

Requirement 3
Tanner-UNF reports its investment in the December 31, 2003, balance sheet at
its amortized cost that is, its book value:
Investment in bonds............................................
Less: Discount on bond investment ($40 - .8 million)
Amortized cost................................................

$240.0
39.2
$200.8

If sale before maturity isnt an alternative, increases and decreases in the

market value between the time a debt security is acquired and the day it
matures to a prearranged maturity value are relatively unimportant. For this
reason, if an investor has the positive intent and ability to hold the securities
to maturity, investments in debt securities are classified as held-to-maturity
and reported at amortized cost rather than fair value in the balance sheet.
Requirement 4
Cash (proceeds from sale).......................................
Discount on bond investment (balance, determined above)
Loss on sale of investments (to balance)...............
Investment in bonds (face amount)....................

( in millions)

195.0
39.2
5.8
240.0

Exercise 12-3
Requirement 1
( in 000s)

Unrealized holding loss on investment in Blair, Inc. shares. . .

Investment in Blair, Inc. shares (410 - 480)...........................

70

Investment in ARC shares (480 - 450).......................................

Unrealized holding gain on investment in ANC shares.......

30

Investment in Drake shares (565 - 480).....................................

Unrealized holding gain on investment in Drake shares.....

85

Unrealized holding loss on investment

in Aaron Industries shares.....................................................
Investment in Aaron Industries shares (660 - 720)................

70

30

85

60
60

Requirement 2
None. Holding gains and losses for securities available-for-sale are reported as a
component of shareholders equity rather than as part of earnings.

Exercise 12-4
Investment in GM common shares ................
Cash ([800 shares x 50] + $1,300).....................

41,300

Cash ([800 shares x 53] 1,400)...........................

Loss on sale of investments............................
Investment in GM common shares .............

41,000
300

41,300

41,300

Exercise 12-5
Requirement 1
2006

March 2
($ in millions)

Investment in Platinum Gauges, Inc. shares ...............................

Cash.........................................................................................

31
31

April 12
Investment in Zenith bonds.........................................................
Cash.........................................................................................

20

July 18
Cash.............................................................................................
Investment revenue..................................................................

October 15
Cash.............................................................................................
Investment revenue..................................................................

October 16
Cash.............................................................................................
Investment in Zenith bonds.....................................................
Gain on sale of investments.....................................................

November 1
Investment in LYZ preferred shares ...........................................
Cash.........................................................................................

December 31
Adjusting entries:

20

21
20
1

42
42

Investment in Platinum Gauges shares .......................................

Unrealized holding gain on investments

1
1

([$32 x 1 million shares] - $31 million)................................................

Unrealized holding loss on investments

([$76 x 500,000 shares] - $42 million)..............................................
Investment in LYZ preferred shares .......................................

8
8

Exercise 12-5 (concluded)

2007
January 23
($ in millions)

Cash ([1 million shares x 1/2] x $32)................................................

16.0

Unrealized holding gain on

investments (1/2 amount from adjusting entry)...............................

.5

Gain on sale of investments (difference)....................................

Investment in Platinum Gauges

.5

shares ($32 million balance after adjusting entry x 1/2).................

16.0

March 1
Cash ($78 x 500,000 shares).............................................................
Loss on sale of investments (difference)........................................
Unrealized holding loss on investments (from adjusting entry)...
Investment in LYZ preferred (balance after adjusting entry)........

Requirement 2
2006 Income Statement
($ in millions)

Investment revenue (from July 18; Oct. 15)................................. $3

Gain on sale of investments (from Oct. 16).................................. 1

Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.

39
3
4
38

Exercise 12-6
Requirement 1
Securities held-to-maturity are debt securities an investor has the positive intent
and ability to hold to maturity. Actively traded investments in debt or equity
securities acquired principally for the purpose of selling them in the near term are
classified as trading securities. The IBM shares are neither. They are classified as
available-for-sale since all investments in debt and equity securities that dont fit
the definitions of the other reporting categories are classified this way. Of course,
the equity method isnt appropriate either because 10,000 shares of IBM certainly
dont constitute significant influence.
Investments in securities available-for-sale are reported at fair value, and holding
gains or losses are not included in the determination of income for the period.
Instead, they are reported as a separate component of shareholders equity.

Requirement 2
Unrealized holding loss on investments (10,000 shares x [$59 - 60])
Investment in IBM shares .......................................................

10,000
10,000

Requirement 3
Investment in IBM shares (10,000 shares x [$61 - 59]).....................
Unrealized holding loss on investment
in IBM shares (from previous adjustment).................................
Unrealized holding gain on investment
in IBM shares (difference)......................................................

20,000
10,000
10,000

Exercise 12-7
Requirement 1
2006
December 17
Investment in Grocers Supply preferred shares ................
Cash..................................................................................

350,000

December 28
Cash......................................................................................
Investment revenue..........................................................

3,000

December 31
Investment in Grocers Supply preferred shares ................
Unrealized holding gain on
investments ([$4 x 100,000 shares] - $350,000)...................

2007

350,000

3,000

50,000
50,000

January 5
Cash (selling price).................................................................
Loss on investments (to balance)............................................
Investment in Grocers Supply preferred
shares (balance after adjusting entry).................................

396,000
4,000
400,000

Requirement 2
Balance Sheet
(short-term investment):
Investment in Grocers Supply preferred shares
(balance after adjusting entry).............................................
Income Statement:
Investment revenue (dividends)...........................................
Unrealized holding gain on investments
(from adjusting entry)........................................................

$400,000

3,000
50,000

Note: Unlike for securities available-for-sale, unrealized holding gains and losses are
included in income for trading securities.

Exercise 12-8
Requirement 1

Purchase

($ in millions)

Investment in Jackson Industry shares........................................

Cash ........................................................................................

92
92

Net income

No entry
Dividends

Cash (5% x $60 million)..................................................................

Investment revenue..................................................................

3
3

Adjusting entry

Investment in Jackson Industry shares ($98 - 92 million)...............

Unrealized holding gain on investment in Jackson Industry shares

Requirement 2

Investment revenue..........................

$3 million

An unrealized holding gain is not included in income for securities availablefor-sale.

Exercise 12-10
1. Investments reported as current assets.
Security A
$ 900,000
Security B
105,000
Security C
700,000
Security E
490,000
Total
$2,195,000
2. Investments reported as noncurrent assets.
Security D
$ 900,000
Security F
615,000
$1,515,000

3. Unrealized gain (or loss) component of income before taxes.

Trading Securities:

Security

A
B

Totals

Cost

Fair value

$ 900,000
105,000
$1,005,000

$ 915,000
95,000
$1,010,000

Unrealized
gain (loss)
$15,000
(10,000)
$ 5,000

4. Unrealized gain (or loss) component of shareholders equity.

Securities Available-for-sale:

Security
Totals

C
D

Cost

Fair value

$ 700,000
900,000
$1,600,000

$ 780,000
915,000
$1,695,000

Unrealized
gain (loss)
$80,000
15,000
$95,000

Exercise 12-13
Purchase

Investment in Nursery Supplies shares....................................

Cash ....................................................................................

($ in millions)

58
58

Net income

Investment in Nursery Supplies shares (30% x 40 million) ........

Investment revenue..............................................................

12
12

Dividends

Cash (30% x 8 million shares x 2.0)...............................................

Investment in Nursery Supplies shares................................

Adjusting entry

No entry

4.8
4.8

Exercise 12-14
Requirement 1
Purchase

Investment in AMC common shares....................................

Cash ...............................................................................

485,000
485,000

Net income

No entry
Dividends

Cash (20% x 400,000 shares x $0.25).........................................

Investment revenue.........................................................

20,000
20,000

Adjusting entry

Investment in AMC common shares ($510,000 - 485,000).....

Unrealized holding gain on investment
in AMC common shares ..............................................

Requirement 2

25,000
25,000

Purchase

Investment in AMC common shares....................................

Cash ...............................................................................

485,000
485,000

Net income

Investment in AMC common shares (20% x $250,000) .........

Investment revenue.........................................................

50,000
50,000

Dividends

Cash (20% x 400,000 shares x $0.25).........................................

Investment in AMC common shares..............................

20,000
20,000

Adjusting entry

No entry

Problem 12-2
Requirement 1
Investment in bonds (face amount)........................
Discount on bond investment (difference).........
Cash (price of bonds)..........................................

($ in millions)

80
14
66

Requirement 2
Cash (4% x $80 million)..........................................
Discount on bond investment (difference)............
Interest revenue (5% x $66)....................................

3.20
.10

Requirement 3
Cash (4% x $80 million)..........................................
Discount on bond investment (difference)............
Interest revenue (5% x [$66 + 0.1])........................

3.20
.11

3.30

3.31

Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2003, balance sheet
at its amortized cost that is, its book value:
Investment in bonds............................................................
Less: Discount on bond investment ($14 - .1 - .11 million)
Amortized cost................................................................

$80.00
13.79
$66.21

Increases and decreases in the market value between the time a debt security
is acquired and the day it matures to a prearranged maturity value are relatively
unimportant if sale before maturity isnt an alternative. For this reason, if an
investor has the positive intent and ability to hold the securities to maturity,
investments in debt securities are classified as held-to-maturity and reported
at amortized cost rather than fair value in the balance sheet.

Problem 12-4
($ in millions)

October 18
Investment in Millwork Ventures preferred shares .....................
Cash..........................................................................................

October 31
Cash..............................................................................................
Investment revenue...................................................................

58
58

1.5
1.5

November 1
Investment in Holistic Entertainment bonds.................................
Cash..........................................................................................

18

November 1
Cash..............................................................................................
Loss on sale of investments ($28 30)...........................................
Investment in Kansas Abstractors bonds .................................

28
2

December 1
Investment in Household Plastics bonds......................................
Cash..........................................................................................

60

December 20
Investment in U.S. Treasury bonds ..............................................
Cash..........................................................................................

18

30

60

5.8
5.8

December 21
Investment in NXS common shares ............................................
Cash..........................................................................................

December 23
Cash..............................................................................................
Investment in U.S. Treasury bonds ..........................................
Gain on sale of investments ($5.7 5.6).....................................

44
44

5.9
5.8
.1

Problem 12-4 (continued)

($ in millions)

December 29
Cash..............................................................................................
Investment revenue................................................................

3
3

December 31
Accrued interest:
Investment revenue receivable - Holistic
Entertainment ($18 million x 10% x 2/12).......................................

0.3

Investment revenue receivable - Household

Plastics ($60 million x 12% x 1/12)..................................................

0.6

Investment revenue ...............................................................

0.9

Revaluations:
Unrealized holding loss on
investments ([2 million shares x $27.50] - $58 million).....................
Investment in Millwork Ventures preferred shares ..............
Investment in NXS common shares ............................................
Unrealized holding gain on
investments ([4 million shares x $11.50] - $44 million)...............

3
3
2
2

Note: Securities held-to-maturity are not adjusted to fair value.

Closing entry:
Unrealized holding gain on investments (NXS).............................
Investment revenue ($3.0 + 1.5 + .9)...............................................
Gain on sale of investments (U.S. Treasury bonds)..........................
Loss on sale of investments (Kansas Abstractors)......................
Income summary (to balance)...................................................

2.0
5.4
.1
2.0
5.5

Note: Unlike for securities available-for-sale, unrealized holding gains and losses are
included in income for trading securities.

2007
January 7
Cash..............................................................................................
Loss on sale of investments (to balance).........................................
Investment in NXS common shares (after adjusting entry)...........

43
3
46

Problem 12-11
Item
__A_ 1. 35% of the nonvoting preferred stock
of American Aircraft Company
__M_ 2. Treasury bills to be held-to-maturity
__M_ 3. Two-year note receivable from affiliate
__N_ 4. Accounts receivable
__M_ 5. Treasury bond maturing in one week

Reporting Category
T.
M.
A.
E.
C.
N.

Trading securities
Securities held-to-maturity
Securities available-for-sale
Equity method
Consolidation
None of these

__T_ 6. Common stock held in trading account

for immediate resale.
__T_ 7. Bonds acquired to profit from short-term differences in price.
__E_ 8. 35% of the voting common stock of Computer Storage Devices Company.
__C_ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.
__A_10. Corporate bonds of Primary Smelting Company to be sold if interest rates
fall 1/2%.
__A_11. 25% of the voting common stock of Smith Foundries Corporation: 51%
family-owned by Smith family; fair value determinable.
__E_ 12. 17% of the voting common stock of Shipping Barrels Corporation: Investors
CEO on the board of directors of Shipping Barrels Corporation.