Chapter 15 - Investments and International Operations

Chapter 15
Investments and International Operations
EXERCISES
Exercise 15-1 (10 minutes)
1. Debt securities reflect a creditor relationship such as investments in
notes, bonds, and certificates of deposit.

2. Equity securities reflect an owner relationship such as shares of stock

issued by companies.

3. Short-term investments are securities that (1) management intends to

convert to cash within one year or the operating cycle, whichever is
longer, and (2) are readily convertible to cash.

4. Long-term investments in securities are defined as those securities that

are not readily convertible to cash or are not intended to be converted
into cash in the short term.
Exercise 15-2 (15 minutes)

a.
Mar. 22 Short-Term Investments—Trading (RIP) 10,080
Cash 10,080
Purchased 1,000 shares of stock for
(1,000 x $10) + $80 brokerage fee.

b.
Sept. 1 Cash 1,000
Dividend Revenue 1,000
Received dividend on stock (1,000 x $1.00).

c.
Oct. 8 Cash* 7,450
Short-Term Investments—Trading (RIP)** 5,040
Gain on Sale of Short-Term Investments 2,410
Sold 500 shares of stock.
* [(500 x $15) - $50] **($10,080/2)
 Chapter 15 - Investments and International Operations

Exercise 15-3 (20 minutes)

1.
2015
Dec. 31 Fair Value Adjustment—Trading 6,000
Unrealized Gain—Income 6,000
To reflect an unrealized gain in fair values of
trading securities.

2. The accounts in part (1) are reported on different financial statements.

i. The $6,000 debit balance in the Fair Value Adjustment—Trading
account is an adjunct asset account in the balance sheet. It increases
the balance of the Short-Term Investment—Trading account to the
securities’ fair value of $72,000.
ii. The Unrealized Gain of $6,000 is reported in the Other Revenues and
Gains section of the income statement.

3.
2016
Jan. 3 Cash 35,000
Gain on Sale of Short-Term Investments 2,000
Short-Term Investments—Trading 33,000
To record sale of trading securities.
 Chapter 15 - Investments and International Operations

Exercise 15-4 (10 minutes)

a.
Jun. 15 Short-Term Investments—HTM (Remedy) 1,000,000
Cash 1,000,000
Purchased 90-day, 10% debt securities.

b.
Sep. 16 Cash 1,025,000
Short-Term Investments—HTM (Remedy) 1,000,000
Interest Revenue 25,000
Collected proceeds of debt securities
with interest of $1,000,000 x .10 x 90/360.

Exercise 15-5 (10 minutes)

a.
Aug. 1 Short-Term Investments—AFS (Houtte) 450,000
Cash 450,000
Purchased 6-month, 10% debt securities.

b.
Oct. 30 Cash 10,125
Interest Revenue 10,125
Received cash interest payment
($450,000 x .09 x 90/360).
 Chapter 15 - Investments and International Operations

Exercise 15-6 (30 minutes)

2015
(a) Feb. 15 Short-Term Investments—HTM (A.G.) 160,000
Cash 160,000
Purchased 90-day, 10% notes.

(b) Mar. 22 Long-Term Investments—AFS (Fran) 35,850

Cash 35,850
Purchased 700 shares of Fran common
stock ([700 x $51] + $150).

(c) May 15 Cash 164,000

Short-Term Investments—HTM (A.G.) 160,000
Interest Revenue 4,000
Collected proceeds of 10% notes
($160,000 x 10% x 90/360).

(d) July 30 Short-Term Investments—Trading (MP3) 100,000

Cash 100,000
Purchased 8% notes, due Jan. 30, 2016.

(e) Sept. 1 Cash 700

Dividend Revenue 700
Received dividend on Fran shares
(700 x $1).

(f) Oct. 8 Cash* 22,275

Long-Term Investments—AFS (Fran)** 17,925
Gain on Sale of L-T Investments 4,350
Sold 350 shares of Fran stock.
*([350 x $64] - $125) **($35,850/2)

(g) Oct. 30 Cash 2,000

Interest Revenue 2,000
Received interest payment on 8% notes
($100,000 x .08 x 3/12).
 Chapter 15 - Investments and International Operations

Exercise 15-7 (15 minutes)

Unrealized
Available-for-Sale Portfolio Cost Fair Value Gain (Loss)
Verrizano Corporation bonds payable............... $ 89,600 $ 91,600
Preble Corporation notes payable..................... 70,600 62,900
Lucerne Company common stock..................... 86,500 83,100
$246,700 $237,600 $(9,100)

Dec. 31 Unrealized Loss—Equity 9,100

Fair Value Adjustment—AFS (ST) 9,100
To reflect unrealized loss.

Exercise 15-8 (15 minutes)

Computation of Fair Value Adjustment

Cost Fair Unrealized
Value Gain (Loss)
Nintendo Co. common stock $ 44,450 $ 48,900
Atlantic bonds payable 49,000 47,000
Kellogg Company notes payable 25,000 23,200
McDonald's Corp. common stock 46,300 44,800
$164,750 $163,900 $ (850)

Dec. 31 Unrealized Loss—Equity 850

Fair Value Adjustment—AFS (ST) 850
Record fair value adjustment for securities.
 Chapter 15 - Investments and International Operations

Exercise 15-9 (15 minutes)

Dec. 31 Fair Value Adjustment—AFS (LT) 32,078

Unrealized Loss—Equity 1,927
Unrealized Gain—Equity 30,151
Record fair value of AFS securities.

Computation of Fair Value Adjustment

12/31/2014 12/31/2015
Cost $120,483 $60,120
Fair value 118,556 90,271
Gain (loss) $ (1,927) $30,151

Adjustment = $1,927 + $30,151 = $32,078

(recovery of unrealized loss &
recording of unrealized gain)
 Chapter 15 - Investments and International Operations

Exercise 15-10 (30 minutes)

2013
Dec. 31 Unrealized Loss—Equity 11,140
Fair Value Adjustment—AFS (LT) 11,140
Record fair value of securities
($372,000 - $360,860).

2014
Dec. 31 Fair Value Adjustment—AFS (LT)* 38,440
Unrealized Loss—Equity 11,140
Unrealized Gain—Equity 27,300
Record fair value of securities.
* $428,500 - $455,800 = $27,300 net gain
($11,140 prior loss + $27,300 current period gain).

2015
Dec. 31 Fair Value Adjustment—AFS (LT)* 73,000
Unrealized Gain—Equity 73,000
Record fair value of securities.
* $600,200 - $700,500 = $100,300 net gain
($100,300 current period gain - $27,300 prior gain).

2016
Dec. 31 Unrealized Loss—Equity 96,700
Unrealized Gain—Equity 100,300
Fair Value Adjustment—AFS (LT)* 197,000
Record fair value of securities.
* $876,900 - $780,200 = $96,700 net loss
($100,300 prior gain + $96,700 current period loss).
 Chapter 15 - Investments and International Operations

Exercise 15-11 (15 minutes)

1. Classification of Investments in Securities

a. The Brava Company bonds are a long-term investment in held-to-

maturity debt securities.

b. The Baybridge stock is a long-term investment in equity securities

where the investor has a significant influence over the investee.

c. The Buffa stock is a long-term investment in available-for-sale

equity securities.

d. The Newton stock is a long-term investment in available-for-sale

equity securities.

e. Since the Farmers stock is marketable and is held as an investment

of cash available for operations, it is a current asset.

2. Fair Value Adjustment entry at December 31, 2015

Dec. 31 Fair Value Adjustment—AFS (LT) 10,825

Unrealized GainEquity 10,825
Record fair value of securities ($255,800 - $266,625).

Long-term AFS securities Cost Fair Value

Buffa common stock $165,500 $178,000
Newton common stock 90,300 88,625
Totals $255,800 $266,625
 Chapter 15 - Investments and International Operations

Exercise 15-12 (30 minutes)

2015

Jan. 2 Long-Term Investments—Grecco* 411,000

Cash 411,000
Record purchase of investment ($408,000 + $3,000).
*Kodax’s investment equals 33 1/3% of Grecco’s stock (30,000/90,000).
Kodax should use the equity method to account for its investment.

Sept. 1 Cash 45,000

Long-Term Investments—Grecco 45,000
Record receipt of cash dividend (30,000 x $1.50).

Dec. 31 Long-Term Investments—Grecco 162,300

Earnings from Long-Term Investment 162,300
Record equity in investee earnings ($486,900/3).
2016

June 1 Cash 63,000

Long-Term Investments—Grecco 63,000
Record receipt of cash dividend (30,000 x $2.10).

Dec. 31 Long-Term Investments—Grecco 234,250

Earnings from Long-Term Investment 234,250
Record equity in investee earnings ($702,750/3).

Dec. 31 Cash 320,000

Gain on Sale of Investments 86,817
Long-Term Investments—Grecco* 233,183
Record sale of investment.

* Book value (Grecco stock) at 12/31/2016:

Original cost $411,000
Less 2015 dividends (45,000)
Plus share of 2015 earnings 162,300
Less 2016 dividends (63,000)
Plus share of 2016 earnings 234,250
Book value at date of sale $699,550
Book value of shares sold ($699,550 x [10,000/30,000]) $233,183†
†
Rounded to nearest dollar.
 Chapter 15 - Investments and International Operations

Exercise 15-13 (10 minutes)

1. Consolidated financial statements show the financial position, results of

operations, and cash flows of all entities under the parent’s control,
including all subsidiaries.

2. The equity method with consolidation is used to account for long-term

investments in equity securities with controlling influence.

Exercise 15-14 (15 minutes)

2015 return on total assets 2016 return on total assets

$38,400 $60,300
($210,000 + $340,000)/2 = 14.0% ($340,000 + $770,000)/2 = 10.9%

Regae Industries appears to be less efficient in the use of its total assets in
2016 than in 2015 as suggested by the decline in return on total assets
from 14.0% to 10.9%. However, without additional information, it is not
possible to determine whether Regae is within the normal range as
compared to similar companies. In addition, conditions may exist that
explain the apparent decline in efficiency between 2015 and 2016. For
example, Regae may have increased its investment in plant assets in 2016
in anticipation of increased production and sales in 2017. Or, its
competitors’ returns may have fallen even more than that of Regae’s
returns.
 Chapter 15 - Investments and International Operations

Exercise 15-15A (25 minutes)

2015
Dec. 16 Accounts ReceivableBronson Ltd. 24,791
Sales 24,791
Record credit sales (17,000 x $1.4583).

Dec. 31 Foreign Exchange Loss* 342

Accounts ReceivableBronson Ltd 342
Record year-end adjustment.
*Original measure = (17,000 x $1.4583) = $24,791
Year-end measure = (17,000 x $1.4382) = 24,449
Loss for the period = $ 342

2016
Jan. 15 Cash (17,000 x $1.4482) 24,619
Accounts ReceivableBronson Ltd. 24,449
Foreign Exchange Gain* 170
Record cash receipt on account.
*Year-end measure = (17,000 x $1.4382) = $24,449
Final measure = (17,000 x $1.4482) = 24,619
Gain for the period = $ 170
 Chapter 15 - Investments and International Operations

Exercise 15-16A (25 minutes)

Quarter ended June 30, 2015

May 8 recorded amount (800,000 x $0.1323) $105,840
June 30 balance sheet amount (800,000 x $0.1352) 108,160
Foreign exchange gain $ 2,320

Quarter ended September 30, 2015

June 30 balance sheet amount $108,160
Sept. 30 balance sheet amount (800,000 x $0.1368) 109,440
Foreign exchange gain $ 1,280

Quarter ended December 31, 2015

Sept. 30 balance sheet amount $109,440
Dec. 31 balance sheet amount (800,000 x $0.1335) 106,800
Foreign exchange loss $ 2,640

Quarter ended March 31, 2016

Dec. 31 balance sheet amount $106,800
Feb. 10, 2016, amount received (800,000 x $0.1386) 110,880
Foreign exchange gain $ 4,080

Note — The combined net gain for all four quarters equals:
$5,040 ($2,320 + $1,280 - $2,640 + $4,080).
This amount also equals the difference between the number of dollars finally
received ($110,880) and the initial measure of the account receivable ($105,840).
In addition, this amount equals the number of pesos (800,000) owed by the
customer times the change in the exchange rate ($0.0063) between the beginning
rate ($0.1323) and the ending rate ($0.1386).
 Chapter 15 - Investments and International Operations

Exercise 15-17 (15 minutes)

1. Accounting for available-for-sale securities (and as explained in

Carrefour’s description of these securities), implies that any
“unrealized… gains or losses are recorded as shareholders’ equity until
they are sold.” Thus, none of the € 18 million net unrealized losses are
reported in Carrefour’s income statement.

2. The entirety of the € 18 million net unrealized losses on available-for-

sale securities are reported in Carrefour’s balance sheet as part of its
shareholders’ equity—specifically, Carrefour included them within
“consolidated reserves” (under U.S. GAAP, it would be titled
“accumulated other comprehensive income”).
 Chapter 15 - Investments and International Operations

PROBLEM SET A
Problem 15-1A (60 minutes)
Part 1
2015
Jan. 20 Short-Term Investments—Trading (Ford) 20,925
Cash 20,925
Purchased Ford Motor Co.
shares [(800 x $26.00) + $125].

Feb. 9 Short-Term Investments—Trading (Lucent) 97,928

Cash 97,928
Purchased Lucent shares
[(2,200 x $44.25) + $578].

Oct. 12 Short-Term Investments—Trading (Z-Seven) 5,825

Cash 5,825
Purchased Z-Seven shares
[(750 x $7.50) + $200].

Dec. 31 Fair Value Adjustment—Trading (ST) 5,322

Unrealized Gain—Income 5,322
Record fair value of securities.
$130,000 fair value - $124,678 cost; thus,
FVA—Trading s/b $5,322 Dr.
Note: Unadjusted FVA is $0; Ending bal. FVA s/b $5,322 Dr;
thus, entry must $5,322 Dr FVA.

We could also use a T-account to determine the needed adjustment to fair value:
F.V. Adj—Trading
12/31/2015—

Unadj 0
.
Adj. 5,322
End. 5,322
 Chapter 15 - Investments and International Operations

Problem 15-1A (Continued)

2016
Apr. 15 Cash 22,915
Gain on Sale of Short-Term Investments 1,990
Short-Term Investments—Trading (Ford) 20,925
Sold Ford Motor shares
[(800 x $29.00) - $285].

July 5 Cash 7,585

Gain on Sale of Short-Term Investments 1,760
Short-Term Investments—Trading (Z-Seven) 5,825
Sold Z-Seven shares
[(750 x $10.25) - $102.50].

July 22 Short-Term Investments—Trading (Hunt) 48,444

Cash 48,444
Purchased Hunt shares
[(1,600 x $30.00) + $444].

Aug. 19 Short-Term Investments—Trading (D.Karan) 33,140

Cash 33,140
Purchased Donna Karan shares
[(1,800 x $18.25) + $290].

Dec. 31 Unrealized Loss—Income 24,834

Fair Value Adjustment—Trading (ST) 24,834
Record fair value of securities.
$160,000 fair value - $179,512 cost*; thus,
FVA—Trading s/b $19,512 Cr.
Note: Unadjusted FVA is $5,322 Dr; Ending bal. FVA s/b
$19,512 Cr; thus, entry must be $24,834 Cr FVA.
*$124,678 - $20,925 - $5,825 + $48,444 + $33,140

We could also use a T-account to determine the needed adjustment to fair value:
F.V. Adj—Trading
12/31/2016—

Unadj 5,322
.
Adj. 24,83
4
End. 19,51
2
 Chapter 15 - Investments and International Operations

Problem 15-1A (Concluded)

2017
Feb. 27 Short-Term Investments—Trading (HCA) 116,020
Cash 116,020
Purchased HCA shares
[(3,400 x $34.00) + $420].

Mar. 3 Cash 39,750

Loss on Sale of Short-Term Investments 8,694
Short-Term Investments—Trading (Hunt) 48,444
Sold Hunt shares [(1,600 x $25.00) - $250].

June 21 Cash 91,980

Loss on Sale of Short-Term Investments 5,948
Short-Term Investments—Trading (Lucent) 97,928
Sold Lucent shares [(2,200 x $42.00) - $420].

June 30 Short-Term Investments—Trading (B&D) 57,595

Cash 57,595
Purchased Black & Decker shares
[(1,200 x $47.50) + $595].

Nov. 1 Cash 32,541

Loss on Sale of Short-Term Investments 599
Short-Term Investments—Trading (D.Karan) 33,140
Sold Donna Karan shares
[(1,800 x $18.25) - $309].

Dec. 31 Fair Value Adjustment—Trading (ST) 25,897

Unrealized Gain—Income 25,897
Record fair value of securities.
$180,000 fair value - $173,615 cost*; thus,
FVA—Trading s/b $6,385 Dr.
Note: Unadjusted FVA is $19,512 Cr; Ending bal. FVA s/b
$6,385 Dr; thus, entry must $25,897 Dr FVA.
*$179,512 +$116,020 - $48,444 - $97,928 +$57,595 -$33,140

We could also use a T-account to determine the needed adjustment to fair value:
F.V. Adj—Trading
12/31/2017—

Unadj. 19,51
2
Adj. 25,897
End. 6,385
 Chapter 15 - Investments and International Operations

Problem 15-2A (40 minutes)

Part 1
2015
Apr. 16 Short-Term Investments—AFS (Gem) 97,180
Cash 97,180
Purchased 4,000 shares of Gem
[(4,000 x $24.25) + $180].

May. 1 Short-Term Investments—AFS (T-bills) 100,000

Cash 100,000
Purchased U.S. Treasury bills.

July 7 Short-Term Investments—AFS (Pepsi) 98,675

Cash 98,675
Purchased 2,000 shares of PepsiCo
[(2,000 x $49.25) + $175].

20 Short-Term Investments—AFS (Xerox) 16,955

Cash 16,955
Purchased 1,000 shares of Xerox
[(1,000 x $16.75) + $205].

Aug. 3 Cash 101,500

Short-Term Investments—AFS (T-bills) 100,000
Interest Revenue 1,500
Proceeds of U.S. Treasury bills
($100,000 x .06 x 3/12).

15 Cash 3,400
Dividend Revenue 3,400
Received dividends on Gem (4,000 x $0.85).

28 Cash* 59,775
Short-Term Investments—AFS (Gem)** 48,590
Gain on Sale of Short-Term Investments 11,185
Sold 2,000 shares of Gem.
*(2,000 x $30) - $225 **($97,180 x 2,000/4,000)

Oct. 1 Cash 3,800

Dividend Revenue 3,800
Received dividends on PepsiCo (2,000 x $1.90).

Dec. 15 Cash 2,100

Dividend Revenue 2,100
Received dividends on Gem (2,000 x $1.05).
Chapter 15 - Investments and International Operations

31 Cash 2,600
Dividend Revenue 2,600
Received dividends on PepsiCo (2,000 x $1.30).
 Chapter 15 - Investments and International Operations

Problem 15-2A (Continued)

Part 2
Comparison of Cost and Fair Values for AFS Portfolio
Unrealized
Cost Fair Value Gain (Loss)
a
Gem Co. (2,000 x $24.25) + 90 ............... $ 48,590
2,000 x $26.50.......................... $ 53,000
PepsiCo (2,000 x $49.25) + 175b............. 98,675
2,000 x $46.50.......................... 93,000
Xerox (1,000 x $16.75) + 205c............. 16,955
1,000 x $13.75......... 13,750
$164,220 $159,750 $(4,470)
a
Brokerage fee attached to remaining 2,000 shares: $180 x (4,000 sh –2,000 sh.)/ 4,000 sh.= $90.
b
Brokerage fee attached to remaining 2,000 shares: Entire $175 (none sold).
c
Brokerage fee attached to remaining 1,000 shares: Entire $205 (none sold).

Part 3

Dec. 31 Unrealized LossEquity 4,470

Fair Value Adjustment—AFS (ST) 4,470
To reflect an unrealized loss in fair values of
available-for-sale securities.

Part 4
The balance sheet would report the cost of these short-term investments in
available-for-sale securities at $164,220 and show a subtraction of $4,470
for the fair value adjustment. This yields $159,750 as the net fair value for
these securities reported in the current assets section. An alternative
presentation is to list these securities at the fair value of $159,750 with a
note disclosure of the cost.

Part 5
(a) Income statement
(i) Interest Revenue, $1,500
(ii) Dividend Revenue, $11,900 [$3,400 + $3,800 + $2,100 + $2,600]
(iii) Gain on Sale of Short-Term Investments, $11,185
(iv) Net effect on income is $24,585

(b) Equity section of Balance sheet

(i) Subtraction from equity due to the Unrealized Loss, $4,470
(ii) Increase to equity from the $24,585 increase in income
(iii) Net effect on equity is $20,115
 Chapter 15 - Investments and International Operations

Problem 15-3A (60 minutes)

Part 1

2015

Jan. 20 Long-Term Investments—AFS (J&J) 20,740

Cash 20,740
Purchased Johnson & Johnson
shares [(1,000 x $20.50) + $240].

Feb. 9 Long-Term Investments—AFS (Sony) 55,665

Cash 55,665
Purchased Sony shares
[(1,200 x $46.20) + $225].

June 12 Long-Term Investments—AFS (Mattel) 40,695

Cash 40,695
Purchased Mattel shares
[(1,500 x $27.00) + $195].

Dec. 31 Unrealized LossEquity 3,650

Fair Value Adjustment—AFS (LT)* 3,650
Annual adjustment to fair values.

* Cost Fair Value

J&J $ 20,740 $ 21,500
Sony 55,665 45,600
Mattel 40,695 46,350
Total $117,100 $113,450

J & J: 1,000 x $21.50 = $21,500

Sony: 1,200 x $38.00 = $45,600
Mattel: 1,500 x $30.90 = $46,350
Fair Adj.: $117,100 - $113,450 = $3,650
 Chapter 15 - Investments and International Operations

Problem 15-3A (Continued)

2016
Apr. 15 Cash 22,975
Gain on Sale of Investments 2,235
Long-Term Investments—AFS (J&J) 20,740
Sold Johnson & Johnson shares
[(1,000 x $23.50) - $525].

July 5 Cash 35,615

Loss on Sale of Investments 5,080
Long-Term Investments—AFS (Mattel) 40,695
Sold Mattel shares [(1,500 x $23.90) - $235].

July 22 Long-Term Investments—AFS (Sara Lee) 13,980

Cash 13,980
Purchased Sara Lee shares
[(600 x $22.50) + $480].

Aug. 19 Long-Term Investments—AFS (Eastman Kodak) 15,498

Cash 15,498
Purchased Eastman Kodak shares
[(900 x $17.00) + $198].

Dec. 31 Unrealized LossEquity 10,168

Fair Value Adjustment—AFS (LT)* 10,168
Annual adjustment to fair values.
* Cost Fair Value
Kodak $15,498 $17,325
Sara Lee 13,980 12,000
Sony 55,665 42,000
Total $85,143 $71,325

Kodak: 900 x $19.25 = $17,325

Sara Lee: 600 x $20.00 = $12,000
Sony: 1,200 x $35.00 = $42,000

$85,143 - $71,325 = $13,818

Fair Value Adjustment account:

Required balance ..... $13,818 Cr.
Unadjusted balance.. 3,650 Cr.
Required change...… $10,168 Cr.
 Chapter 15 - Investments and International Operations

Problem 15-3A (Continued)

2017
Feb. 27 Long-Term Investments—AFS (Microsoft) 161,325
Cash 161,325
Purchased Microsoft shares
[(2,400 x $67.00) + $525].

June 21 Cash 56,720

Gain on Sale of Investments 1,055
Long-Term Investments—AFS (Sony) 55,665
Sold Sony shares [(1,200 x $48.00) - $880].

June 30 Long-Term Investments—AFS (Black & Decker) 50,835

Cash 50,835
Purchased Black & Decker shares
[(1,400 x $36.00) + $435].

Aug. 3 Cash 9,315

Loss on Sale of Investments 4,665
Long-Term Investments—AFS (Sara Lee) 13,980
Sold Sara Lee shares
[(600 x $16.25) - $435].

Nov. 1 Cash 19,850

Gain on Sale of Investments 4,352
Long-Term Investments—AFS (E. Kodak) 15,498
Sold Eastman Kodak shares
[(900 x $22.75) - $625].

Dec. 31 Fair Value Adjustment—AFS (LT)* 21,858

Unrealized Loss—Equity 13,818
Unrealized Gain—Equity 8,040
Annual adjustment to fair values.
* Cost Fair Value
Black & Decker $ 50,835 $ 54,600
Microsoft 161,325 165,600
Total $212,160 $220,200

Black & Decker: 1,400 x $39.00 = $ 54,600

Microsoft: 2,400 x $69.00 = $165,600

$212,160 - $220,200 = $8,040 (fair value exceeds cost)

Fair Value Adjustment account:

Required balance............ $ 8,040 Dr.
Unadjusted balance......... 13,818 Cr.
Chapter 15 - Investments and International Operations

Required change............ $21,858 Dr.

 Chapter 15 - Investments and International Operations

Problem 15-3A (Concluded)

Part 2
12/31/2015 12/31/2016 12/31/2017
Long-Term AFS Securities (cost) $117,100 $85,143 $212,160

Fair Value Adjustment (3,650) (13,818) 8,040

Long-Term AFS Securities (fair value) $113,450 $71,325 $220,200

Part 3
2015 2016 2017
Realized gains (losses)
Sale of Johnson & Johnson shares $ 2,235
Sale of Mattel shares (5,080)
Sale of Sara Lee shares $(4,665)
Sale of Sony shares 1,055
Sale of Eastman Kodak shares ______ _______ 4,352
Total realized gain (loss) $ 0 $ (2,845) $ 742

Unrealized gains (losses) at year-end* $(3,650) $(13,818) $ 8,040

* Equals the balance of the Fair Value Adjustment account.
 Chapter 15 - Investments and International Operations

Problem 15-4A (30 minutes)

Part 1
1. Journal entries (assuming significant influence)
2015
Jan. 5 Long-Term Investments—Kildaire 1,560,000
Cash 1,560,000
Purchased Kildaire shares.

Oct. 23 Cash 192,000

Long-Term Investments—Kildaire 192,000
Received cash dividend (60,000 x $3.20).

Dec. 31 Long-Term Investments—Kildaire 232,800

Earnings from Long-Term Investment 232,800
Record equity in investee earnings
($1,164,000 x 20%).

2016
Oct. 15 Cash 156,000
Long-Term Investments—Kildaire 156,000
Record cash dividend (60,000 x $2.60).

Dec. 31 Long-Term Investments—Kildaire 295,200

Earnings from Long-Term Investment 295,200
Record equity in investee earnings
($1,476,000 x 20%).

2017
Jan. 2 Cash 1,894,000
Gain on Sale of Investments 154,000
Long-Term Investments—Kildaire* 1,740,000
Sold Kildaire shares.
* Investment carrying value, January 2, 2017
Original cost $1,560,000
Less 2015 dividends (192,000)
Plus 2015 earnings 232,800
Less 2016 dividends (156,000)
Plus 2016 earnings 295,200
Carrying value at date of sale $1,740,000
 Chapter 15 - Investments and International Operations

Problem 15-4A (Continued)

2. Carrying value per share, January 1, 2017 (see computations in part 1)

$1,740,000 / 60,000 shares = $29

3. Change in Selk's equity due to stock investment

Earnings from Kildaire (2015) $232,800
Earnings from Kildaire (2016) 295,200
Gain on sale of investments 154,000
Net increase $682,000

Part 2

1. Journal entries (assuming NO significant influence)

2015
Jan. 5 Long-Term Investments—AFS (Kildaire) 1,560,000
Cash 1,560,000
Purchased Kildaire shares.

Oct. 23 Cash 192,000

Dividend Revenue 192,000
Received cash dividend (60,000 x $3.20).

Dec. 31 Fair Value Adjustment—AFS (LT)* 240,000

Unrealized Gain—Equity 240,000
Record fair value adjustment.
*60,000 x $30.00 = $1,800,000
$1,800,000 - $1,560,000 = $240,000

2016
Oct. 15 Cash 156,000
Dividend Revenue 156,000
Received cash dividends (60,000 x $2.60).

Dec. 31 Fair Value Adjustment—AFS (LT)* 120,000

Unrealized Gain—Equity 120,000
Record fair value adjustment.
*60,000 x $32.00 = $1,920,000
$1,920,000 - $1,560,000 = $360,000
$360,000 - $240,000 = $120,000
 Chapter 15 - Investments and International Operations

Problem 15-4A (Concluded)

2017

Jan. 2 Cash 1,894,000

Long-Term Investments—AFS (Kildaire) 1,560,000
Gain on Sale of Investments 334,000
Sold Kildaire shares.

Jan. 2 Unrealized Gain—Equity 360,000

Fair Value Adjustment—AFS (LT) 360,000
To remove fair value adjustment and related
accounts ($240,000 + $120,000 = $360,000).

2. Investment cost per share, January 1, 2017

$1,560,000 / 60,000 shares = $26

3. Change in Selk’s equity due to stock investment

Dividend Revenue (2015) $192,000

Dividend Revenue (2016) 156,000
Gain on sale of investments 334,000
Net increase $682,000
 Chapter 15 - Investments and International Operations

Problem 15-5A (40 minutes)

Part 1
Available-for-sale securities on December 31, 2015
Security Cost Fair Value
3,500 shares of Company B common stock $ 79,690 $ 81,375
17,500 shares of Company C common stock 662,750 610,312
4,500 shares of Company X common stock 128,312 118,125
8,500 shares of Company Z common stock 270,350 278,800
$1,141,102 $1,088,612

Disclosure
The portfolio of available-for-sale securities would be reported on the
December 31, 2015, balance sheet at its fair value of $1,088,612.

Part 2

Dec. 31 Fair Value Adjustment—AFS* 20,002

Unrealized Loss—Equity 20,002
Adjustment to fair value for AFS securities..

* December 31, 2014, available-for-sale securities

Cost _ Fair Value
$ 535,300 $ 490,000
159,380 154,000
662,750 640,938
$1,357,430 $1,284,938

December 31, 2015, adjustment to the Fair Value Adjustment account:

$1,357,430 - $1,284,938 = $ 72,492 Cr. balance on Dec. 31, 2014

$1,141,102 - $1,088,612 = 52,490 Cr. balance required on Dec. 31, 2015
$ 20,002 Dr. to adjust cost to fair value

Part 3

Only gains or losses realized on the sale of available-for-sale securities

appear on the 2015 income statement. Unrealized gains or losses appear
in the equity section of the balance sheet.

Year 2015 realized gains (losses)

Stock Sold Cost Sale Gain (Loss)
3,500 shares of Company B stock $ 79,690 $ 77,688 $ (2,002)
40,000 shares of Company A stock 535,300 510,900 (24,400)
 Chapter 15 - Investments and International Operations

Realized gain (loss) $(26,402)

 Chapter 15 - Investments and International Operations

Problem 15-6AA (60 minutes)

Part 1
2015
Apr. 8 Cash 5,938
Sales 5,938
July 21 Accounts ReceivableSumito 14,100
Sales 14,100
(1,500,000 yen x $0.0094/yen)

Oct. 14 Accounts ReceivableSmithers 27,675

Sales 27,675
(19,000£ x $1.4566/£)
Nov. 18 Cash 13,800
Foreign Exchange Loss 300
Accounts ReceivableSumito 14,100
(1,500,000 yen x $0.0092/yen)

Dec. 20 Accounts ReceivableHamid Albar 7,652

Sales 7,652
(17,000 ringgits x $0.4501/ringgits)

Dec. 31 Accounts ReceivableSmithers. 103

Foreign Exchange Gain * 103
*Original measure = (19,000£ x $1.4566/£) = $27,675
Year-end measure = (19,000£ x $1.4620/£) = 27,778
Gain for the period ……………………... = $ 103

Dec. 31 Foreign Exchange Loss* 77

Accounts ReceivableHamid Albar 77

*Original measure = (17,000 ringgits x $0.4501/ ringgits) = $7,652

Year-end measure = (17,000 ringgits x $0.4456/ ringgits) = 7,575
Loss for the period ............................................. = $ 77
2016
Jan. 12 Cash* 27,928
Accounts ReceivableSmithers** 27,778
Foreign Exchange Gain 150
*(19,000£ x $1.4699/£) **($27,675 + $103)
Jan. 19 Cash* 7,514
Foreign Exchange Loss 61
Accounts ReceivableHamid Albar** 7,575
*(17,000 ringgits x $0.4420/ ringgits) **($7,652 - $77)
 Chapter 15 - Investments and International Operations

Problem 15-6AA (Continued)

Part 2

Foreign exchange loss reported on the 2015 income statement

November 18 $(300)
December 31 103
December 31 (77)
Total $(274)

Part 3

To reduce the risk of foreign exchange gain or loss, Doering could attempt
to negotiate foreign customer sales that are denominated in U.S. dollars.
To accomplish this, Doering might be willing to offer favorable terms, such
as price discounts or longer credit terms. Another possibility that may be
of limited potential is for Doering to make credit purchases denominated in
foreign currencies, planning the purchases so that the payables in foreign
currencies match the foreign currency receivables in time and amount.

NOTE: A few students may also understand Doering's opportunity for hedging.
This involves selling foreign currency futures to be delivered at the time the
receivables from foreign customers will be collected.