Exercise 12-1

EXERCISES Exercise 12-2

Various Various investment
transactions related securities
to securities
available for sale LO 1-3

LO 3

Parnell Industries buys securities to be available for sale when

circumstances warrant, not to profit from short-term differences in price and
not necessarily to hold debt securities to maturity. The following selected
transactions relate to investment activities of Parnell Industries whose fiscal
year ends on December 31. No investments were held by Parnell at the
beginning of the year.
2013
March 1 Purchased 2 million Platinum Gems, Inc. common shares for
$124 million, including brokerage fees and commissions.
April 13 Purchased $200 million of 10% bonds at face value from
Oracle Wholesale Corporation.
July 20 Received cash dividends of $3 million on the investment in
Platinum Gems, Inc. common shares.
October 13 Received semiannual interest of $10 million on the investment
in Oracle bonds.
October 14 Sold the Oracle bonds for $205 million.
November 1 Purchased 500,000 SPI International preferred shares for $40
million, including brokerage fees and commissions.
December 31 Recorded the necessary adjusting entry(s) relating to the
investments. The market prices of the investments are $64 per
share for Platinum Gems, Inc. and $74 per share for SPI
International preferred shares.
2014
January 25 Sold half the Platinum Gems, Inc. shares for $65 per share.
March 1 Sold the SPI International preferred shares for $78 per share.
December 31 Recorded the necessary adjusting entry(s) relating to the
investments. The market price of the investments is $65 per
share for Platinum Gems, Inc.

Required:
1. Prepare the appropriate journal entry for each transaction or event.
2. Show the amounts that would be reported on the companys 2013 income
statement relative to these investments.

At December 31, 2013, McKnight Brothers Corp. had the following

investments that were purchased during 2000, its first year of operations:
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Alternate Exercises and Problems 12-1
13-1
Exercise 12-3
Equity method;
purchase; investee
income; dividends

LO 5

Cost Fair Value

Trading Securities:
Security A $ 700,000 $ 725,000
B 210,000 200,000
Totals $ 910,000 $ 925,000

Securities Available for Sale:

Security C $ 500,000 $ 560,000
D 850,000 865,000
Totals $1,350,000 $1,425,000

Securities to Be Held to Maturity:

Security E $ 970,000 $ 980,000
F 412,000 409,000
Totals $1,382,000 $1,389,000

No investments were sold during 2013. All securities except Security D

and Security F are considered short-term investments. None of the market
changes is considered permanent.
Required:
Determine the following amounts at December 31, 2013:
1. Investments reported as current assets.
2. Investments reported as noncurrent assets.
3. Unrealized gain (or loss) component of income before taxes.
4. Unrealized gain (or loss) component of other comprehensive income.

As a long-term investment at the beginning of the fiscal year, Paper

Products International purchased 35% of Reeds Restaurant Supplies, Inc.s 12
million shares for $73 million. The fair value and book value of the shares
were the same at that time. During the year, Reeds Restaurant Supplies
earned net income of $20 million and distributed cash dividends of $1.10 per
share. At the end of the year, the fair value of the shares is $59 million.
Required:
Prepare the appropriate journal entries from the purchase through the end of
the year.
The McGraw-Hill Companies, Inc., 2013
Alternate Exercises and Problems 12-2
13-2
Exercise 12-4Exercise
Exercise
126 125
Equity method; Accounting
Accounting
for debtfor debt
investments under the
adjustments for investments under the
proposed
proposed ASU ASU
depreciation

LO 6

J & W Leasing paid $76 million on January 4, 2013, for 5 million shares of
Conley Trucks common stock. The investment represents a 25% interest in
the net assets of Conley and gave J & W the ability to exercise significant
influence over Conleys operations. J & W received dividends of $1.20 per
share on December 27, 2013, and Conley reported net income of $60 million
for the year ended December 31, 2013. The market value of Conleys
common stock at December 31, 2013, was $22.25 per share.
The book value of Conleys net assets was $212 million.
The fair market value of Conleys depreciable assets exceeded their book
value by $40 million. These assets had an average remaining useful life
of 5 years.
The remainder of the excess of the cost of the investment over the book
value of net assets purchased was attributable to goodwill.
Required:
Prepare all appropriate journal entries related to the investment during
2013.

Fredpurchased$10,000of8%BlakelybondsatparonJuly1,2013. The
bondspayinterestsemiannually.FredintendstoholdtheBlakelybondsfor
thelifeofthebonds.Duringthesecondhalfof2013,andecreaseininterest
rates increased the fair value of the bonds to $12,000. Fred reports
investmentsundertheproposedASU.

Required:
1. Prepare a journal entry to record Freds receipt of six months of interest
revenue.
2. Prepare a journal entry (if any is required) to record any unrealized gains
or losses on the Blakely bonds during 2013.

AssumethesamefactsasinE126,butthatFredintendstosellhalfofthe
Blakelybondsimmediatelyandtoholdtheotherhalfofthebondstosellonce

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Alternate Exercises and Problems 12-3
13-3
thepriceofthebondsappreciatessufficiently.Fredreportsinvestmentsunder
theproposedASU.

Required:
1. Prepare a journal entry to record Freds receipt of six months of interest
revenue.
2. Prepare a journal entry (if any is required) to record any unrealized gains
or losses on the Blakely bonds during 2013.

The McGraw-Hill Companies, Inc., 2013

Alternate Exercises and Problems 12-4
13-4
 Problem 12-1
Investment
securities and
PROBLEMS
equity method
investments
compared

LO 3, 4, 5

On January 4, 2013, RTN Industries paid $648,000 for 20,000 shares of

Austin Cattle Company common stock. The investment represents a 30%
interest in the net assets of Austin and gave RTN the ability to exercise
significant influence over Austins operations. RTN received dividends of
$3.00 per share on December 6, 2013, and Austin reported net income of
$320,000 for the year ended December 31, 2013. The market value of
Austins common stock at December 31, 2013, was $32 per share. The book
value of Austins net assets was $1,600,000 and:
a. The fair market value of Austins depreciable assets, with an average
remaining useful life of 8 years, exceeded their book value by $160,000.
b. The remainder of the excess of the cost of the investment over the book
value of net assets purchased was attributable to goodwill.
Required:
1. Prepare all appropriate journal entries related to the investment during
2013, assuming RTN accounts for this investment by the equity method.
2. Prepare the journal entries required by RTN, assuming that the 20,000
shares represent a 10% interest in the net assets of Austin rather than a 30%
interest, and that RTN anticipates holding their investment in Austin for the
foreseeable future.

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Alternate Exercises and Problems 12-5
13-5
Problem 12-2 Southeast Pulp and Paper, a paper and allied products
Equity method manufacturer, was seeking to gain a foothold in Mexico.
Toward that end, the company bought 40% of the
LO 4, 5
outstanding common shares of Monterrey Milling, Inc. on
January 3, 2013, for $80 million.

At the date of purchase, the book value of Monterreys net assets was $155
million. The book values and fair values for all balance sheet items were the
same except for inventory and plant facilities. The fair value exceeded book
value by $1 million for the inventory and by $4 million for the plant facilities.
The estimated useful life of the plant facilities is 8 years. All inventory
acquired was sold during 2013.
Monterrey reported net income of $28 million for the year ended
December 31, 2013. Monterrey paid a cash dividend of $6 million.
Required:
1. Prepare all appropriate journal entries related to the investment during
2013.
2. What amount should Southeast report as its income from its investment in
Monterrey for the year ended December 31, 2013?
3. What amount should Southeast report on its balance sheet as its investment
in Monterrey?
4. What should Southeast report on its statement of cash flows regarding its
investment in Monterrey?

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Alternate Exercises and Problems 12-6
13-6