Investments and Fair Value Solutions

CHAPTER 15
INVESTMENTS AND FAIR VALUE ACCOUNTING
DISCUSSION QUESTIONS
1. A company may temporarily have excess cash that is not needed for use in its current
operations. Instead of letting excess cash remain idle in a checking account, most companies
invest their excess cash in temporary investments. The primary objective of investing in
temporary investments is as follows:
a. Earn interest revenue
b. Receive dividends
c. Realize gains from increases in the market price of the securities
2. A gain or loss can occur when the selling price of the bond differs from the book value (cost) of
the bond. The price of bond investments can change due to changes in the market rate of interest.
If the proceeds from the sale exceed the book value (cost) of the bonds, a gain is recorded.
3. The equity method is used for equity investments representing more than 20% and less than 50%
of the outstanding shares of the investee.
4. Under the cost method, a dividend received is treated as dividend revenue. Under the equity
method, a dividend received is not treated as dividend revenue but is treated as a reduction in
the book value of the investment.
5. An investment greater than 50% of the investee is considered to be an investment that exerts
control. Thus, the financial statements of the investee (subsidiary) are consolidated (combined)
with that of the investor (parent company).
6. Both portfolios are reported at fair value. However, changes in the fair value of trading securities
during a period are reported as an unrealized gain or loss on the income statement. For available-for-
sale securities, changes in the fair value of the securities are reported in stockholders’ equity and,
thus, are not recognized as part of net income.
7. A credit balance in Valuation Allowance for Available-for-Sale Investments is subtracted from
Available-for-Sale Investments (at cost). The net reported amount is the available-for-sale securities
at fair value.
8. A debit balance in Unrealized Gain (Loss) on Available-for-Sale Investments would be reported as a
reduction in the Stockholders’ Equity section of the balance sheet, after Retained Earnings.
9. Over the past several decades, the financial statements of companies in most industries have
included more fair value measures. This is partially due to the Financial Accounting Standards
Board’s increased willingness to apply fair value to certain assets and transactions. As the ability
to measure fair value becomes more reliable, a greater number of assets and transactions are likely to
be reported at fair value.
10. When an asset or a liability is reported at its fair value, any difference between the asset’s original
cost or prior period’s fair value must be recorded. The account Valuation Allowance for Trading
Investments is used to record fair value for trading and available-for-sale securities. For available-
for-sale securities, the unrealized gain or loss on changes in fair values is reported as part of
stockholders’ equity. For trading securities, the unrealized gain or loss is reported as part of
income.
15-1
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CHAPTER 15 Investments and Fair Value Accounting
PRACTICE EXERCISES
PE 15-1A
a. Investments—Medina City Bonds 240,000
Interest Receivable 3,600
Cash 243,600
b. Cash* 7,200
Interest Revenue 3,600
* $240,000 × 6% × 1/2
c. Cash* 118,200
Loss on Sale of Investments 2,400
Interest Revenue 600
Investments—Medina City Bonds 120,000
* Sales proceeds ($120,000 × 98%)……………………… $117,600
Accrued interest…………………………………………… 600
Total proceeds from sale………………………………… $118,200
PE 15-1B
a. Investments—Iceline Inc. Bonds 120,000
Cash 121,000
b. Cash* 3,000
* $120,000 × 5% × 1/2
c. Cash* 61,100
Gain on Sale of Investments 600
Investments—Iceline Inc. Bonds 60,000
* Sales proceeds ($60,000 × 101%)……………………… $60,600
15-2
PE 15-2A
Jan. 23 Investments—Tolle Company Stock* 300,100
Cash 300,100
*(10,000 shares × $30 per share) + $100
Apr. 12 Cash* 5,000

Dividend Revenue 5,000
*$0.50 per share × 10,000 shares
June 10 Cash* 135,900

Gain on Sale of Investments 15,860
Investments—Tolle Company Stock** 120,040
*(4,000 shares × $34) – $100
**4,000 shares × ($300,100 ÷ 10,000 shares)
PE 15-2B
Sept. 12 Investments—Aspen Company Stock* 100,200
Cash 100,200
*(2,000 shares × $50 per share) + $200
Oct. 15 Cash* 1,000

Nov. 10 Cash* 50,250

Investments—Aspen Company Stock** 60,120
*(1,200 shares × $42) – $150
**1,200 shares × ($100,200 ÷ 2,000 shares)
15-3
PE 15-3A
Jan. 2 Investment in Sanger Company Stock 500,000
Cash 500,000
Dec. 31 Investment in Sanger Company Stock 32,000

Income of Sanger Company 32,000
Recorded 40% of Sanger Company
income, 40% × $80,000.
31 Cash* 12,000
Investment in Sanger Company Stock 12,000
*40% × $30,000
PE 15-3B
Jan. 2 Investment in Fain Company Stock 600,000
Cash 600,000
Dec. 31 Investment in Fain Company Stock 56,000

Income of Fain Company 56,000
Recorded 40% of Fain Company income,
40% × $140,000.
31 Cash* 20,000
Investment in Fain Company Stock 20,000
*40% × $50,000
PE 15-4A
Dec. 31 Unrealized Loss on Trading Investments* 46,000
Valuation Allowance for Trading Investments 46,000
To record decrease in fair value of
trading investments.
* Trading investments at fair value, December 31 ……………
$214,000
Trading investments at cost, December 31 …………………… 260,000
Unrealized loss on trading investments……………………… $ (46,000)
15-4
PE 15-4B
Dec. 31 Valuation Allowance for Trading Investments* 4,800
Unrealized Gain on Trading Investments 4,800
To record increase in fair value of
trading investments.
* Trading investments at fair value, December 31 ……………………………… $46,300
Trading investments at cost, December 31 …………………………………… 41,500
Unrealized gain on trading investments………………………………………… $ 4,800
PE 15-5A
Dec. 31 Unrealized Gain (Loss) on Available-for-Sale
Investments* 2,750
Valuation Allowance for Available-for-Sale
Investments 2,750
To record decrease in fair value of
available-for-sale securities.
* Available-for-sale investments at fair value,
December 31 ……………………………………………………………………… $57,500
Available-for-sale investments at cost, December 31 ……………………… 60,250
Unrealized gain (loss) on available-for-sale investments…………………… $ (2,750)
PE 15-5B
Dec. 31 Valuation Allowance for Available-for-Sale
Investments* 2,090
Unrealized Gain (Loss) on Available-for-Sale
Investments 2,090
To record increase in fair value of
available-for-sale securities.
* Available-for-sale investments at fair value,
December 31 ……………………………………………………………………… $26,350
Available-for-sale investments at cost, December 31 ……………………… 24,260
Unrealized gain (loss) on available-for-sale investments…………………… $ 2,090
15-5
PE 15-6A
Dividends per Share of Common Stock
Dividend Yield =
Market Price per Share of Common Stock
$4.00 = 0.04, or 4%
= $100
PE 15-6B
Dividends per Share of Common Stock
Dividend Yield =
$1.20 = 0.03, or 3%
= $40
15-6
EXERCISES
Ex. 15-1
a. May 1 Investments—Walker Co. Bonds 200,000
Cash 200,000
b. Nov. 1 Cash 6,000

$200,000 × 6% × 6/12.
c. Nov. 1 Cash* 67,900

Investments—Walker Co. Bonds 70,000
*$70,000 × 97%
d. Dec. 31 Interest Receivable* 1,300

Accrued interest.
*($200,000 – $70,000) × 6% × 2/12
Ex. 15-2
a. Year 1
Oct. 1 Investments—Murphy Corp. Bonds 160,000
Cash 160,000
b. Year 1
Dec. 31 Interest Receivable 2,000
Accrued interest, $160,000 × 5%
× 3/12.
c. Year 2
Apr. 1 Cash 4,000
Interest Revenue* 2,000
*$160,000 × 5% × 3/12
d. Year 2
Apr. 1 Cash* 61,200
Investments—Murphy Corp. Bonds 60,000
*$60,000 × 102%
15-7
Ex. 15-3
a. Year 1
May 11 Investments—Sanz County Bonds 120,000
Interest Receivable* 800
Cash 120,800
* $120,000 × 6% × 40 ÷ 360
b. Oct. 1 Cash* 3,600

Interest Receivable 800
* $120,000 × 6% × 1/2
c. Oct. 31 Cash* 29,750

Loss on Sale of Investments 400
Investments—Sanz County Bonds 30,000
* Bond sale ($30,000 × 0.99)………………………………… $29,700
Less brokerage commission……………………………… (100)
Total proceeds……………………………………………… $29,750
d. Dec. 31 Interest Receivable 1,365

15-8
Ex. 15-4
a. Year 1
Jan. 31 Investments—Government Bonds 75,000
Interest Receivable* 375
Cash 75,375
* $75,000 × 6% × 30 ÷ 360
July 1 Cash* 2,250

* $75,000 × 6% × 1/2
Aug. 30 Cash* 34,650

Loss on Sale of Investments 700
Investments—Government Bonds 35,000
* Bond sale ($35,000 × 98%)………………………………… $34,300
b. Year 1
Accrued interest, $40,000 ×
6% × 1/2.
Ex. 15-5
1
Interest earned (February 1 to July 1) …………………………………………… $2,500
2
Interest earned on sold bonds (July 1 to October 1) ………………………… 500
3
Interest earned on remaining bonds (July 1 to December 31) ……………… 2,000
Total interest earned during the year……………………………………………… $5,000
1
$120,000 × 5% × 5/12
2
$40,000 × 5% × 3/12
3
$80,000 × 5% × 6/12
15-9
Ex. 15-6
a. Feb. 22 Investments—Edwards Co. Stock* 600,120
Cash 600,120
*(12,000 shares × $50) + $120
b. June 1 Cash* 16,800

*$1.40 × 12,000 shares
c. Nov. 12 Cash* 247,900

Investments—Edwards Co. Stock** 200,040
*(4,000 shares × $62) – $100
**($600,120 ÷ 12,000 shares) × 4,000 shares
Ex. 15-7
Apr. 10 Investments—Dixon Company Stock* 125,075
Cash 125,075
*(5,000 shares × $25) + $75
July 8 Cash* 3,000

Sept. 10 Cash* 43,880

Investments—Dixon Company Stock** 50,030
*(2,000 shares × $22) – $120
**2,000 shares × ($125,075 ÷ 5,000 shares)
15-10
Ex. 15-8
Feb. 2 Investments—Wong Inc. Stock* 106,110
Cash 106,110
* (5,300 shares × $20) + $110
Mar. 6 Cash* 1,590

* 5,300 shares × $0.30
June 7 Investments—Wong Inc. Stock* 52,120

Cash 52,120
* (2,000 shares × $26) + $120
July 26 Cash* 209,900
Investments—Wong Inc. Stock** 124,352
* (6,000 shares × $35) – $100
** 5,300 shares purchased…………………………… $106,110
700 shares × ($52,120 ÷ 2,000 shares)…………… 18,242
Total cost……………………………………………… $124,352
Sept. 25 Cash* 520

Dividend Revenue 520
* 1,300 shares × $0.40
15-11
Ex. 15-9
Feb. 24 Investments—Tett Co. Stock* 85,150
Cash 85,150
*(1,000 shares × $85) + $150
May 16 Investments—Issacson Co. Stock* 90,100

Cash 90,100
*(2,500 shares × $36) + $100
July 14 Cash* 39,925

Investments—Tett Co. Stock** 34,060
*(400 shares × $100) – $75
**400 shares × ($85,150 ÷ 1,000 shares)
Aug. 12 Cash* 24,295

Investments—Issacson Co. Stock** 27,030
*(750 shares × $32.50) – $80
**750 shares × ($90,100 ÷ 2,500 shares)
Oct. 31 Cash* 240

Dividend Revenue 240
*(1,000 shares – 400 shares) × $0.40
Ex. 15-10
a. 1. Investment in Tran Corp. Stock 210,000
Income of Tran Corp. 210,000
Record 35% share of Tran Corp.
net income, $600,000 × (280,000 shares ÷
800,000 shares).
2. Cash* 140,000
Investment in Tran Corp. Stock 140,000
*280,000 shares × $0.50
b. Herrera’s investment in Tran Corp. represents 35% of the outstanding shares

of Tran Corp. An investment amount between 20% and 50% of the outstanding
common stock of the investee is presumed to represent significant influence.
The equity method is appropriate when the investor can exercise significant
influence over the investee.
15-12
Ex. 15-11
a. Year 1
Jan. 4 Investment in Silva Company Stock* 14,400,000
Cash 14,400,000
*480,000 shares × $30 per share

Investment in Silva Company Stock 300,000
*$750,000 × (480,000 ÷ 1,200,000 shares)
Dec. 31 Investment in Silva Company Stock 800,000

Income of Silva Company 800,000
Record 40% share of Silva
Company net income,
$2,000,000 × (480,000 shares ÷
1,200,000 shares).
b. Initial acquisition cost………………………………………………………… $14,400,000

Equity earnings for Year 1……………………………………………………… 800,000
Cash dividends received……………………………………………………… (300,000)
Investment in Silva Company Stock balance,
December 31, Year 1……………………………………….………………… $14,900,000
Ex. 15-12
a. Year 1
Jan. 6 Investment in Gator Co. Stock 212,000
Cash 212,000
June 30 Cash* 8,160

Investment in Gator Co. Stock 8,160
*$24,000 × 34%
Dec. 31 Loss of Gator Co. 19,040

Investment in Gator Co. Stock 19,040
Record 34% share of Gator Co.
net loss, $56,000 × 34%.
b. Initial acquisition cost………………………………………………………… $212,000

Equity loss for Year 1…………………………………………………………… (19,040)
Cash dividends received……………………………………………………… (8,160)
Investment in Gator Co. Stock balance, December 31, Year 1………… $184,800
15-13
Ex. 15-12 (Concluded)

c. Under the equity method, the investor will record its proportionate share of
the net increase (or decrease) of the book value of the investee resulting from
earnings and dividend distributions. The fair value method uses market price
information to value the investment in the investee. These two methods result
in different valuations because the equity method is based on book accounting
while the fair value approach uses market information. The two methods need
not be related to each other over time. While changes in book value can
influence market prices, many other variables can influence the market price
of a stock.
Ex. 15-13
(in millions)
Investment in Raven Company stock, December 31, Year 1…………………… $264
Plus equity earnings in Raven Company…………………………………………… 25
Less dividends received*……………………………………………………………… (8)
Investment in Raven Company stock, December 31, Year 2…………………… $281
* The Raven Company investment is accounted for under the equity method. Because
there were no purchases or sales of Raven Company stock, a dividend must have
been received. This would explain how the ending balance of the investment
account went from $264 to $281, with $25 million in equity earnings. Because the
investment is accounted for under the equity method, the fair value is not used
for valuation purposes.
Ex. 15-14
a. $6,000 {$35,000 [from (c)] – $29,000 [from (b)]}
b. $29,000 [$17,000 – $(12,000)]
c. $35,000 ($245,000 – $210,000)
d. $132,000 ($144,000 – $12,000)
e. $39,000 ($28,000 + $11,000)
f. $185,000 ($168,000 + $17,000)
g. $6,000 ($17,000 – $11,000)
h. $211,000 ($205,000 + $6,000)
i. $273,000 ($245,000 + $28,000)
15-14
Ex. 15-15
a. Year 1
Feb. 24 Investments—Raiders Inc. Stock 551,000
Cash 551,000
14,500 shares × $38 per share.
Dec. 31 Valuation Allowance for Trading

Investments 58,000
Unrealized Gain (Loss) on Trading
Investments 58,000
To record increase in fair value
of trading investments, 14,500
shares × ($42 per share – $38
per share).
b. The unrealized gain or unrealized loss for trading investments is disclosed

on the income statement as Other revenue (or a separate item if significant).
Unrealized losses would be deducted in determining net income, while
unrealized gains would be added in determining net income.
Ex. 15-16
a. Year 1
Dec. 31 Unrealized Gain (Loss) on Trading
Investments 1,950
Valuation Allowance for Trading
Investments 1,950
To record decrease in fair
value of trading investments,
$115,550 – $117,500.
b. Year 2
May 10 Investments—Carroll Inc.* 34,900
Cash 34,900
*(1,200 shares × $29 per share) + $100
15-15
Ex. 15-17
a. Year 1
Dec. 31 Valuation Allowance for Trading
Investments* 17,500
Unrealized Gain on Trading
Investments 17,500
* $337,500 – $320,000, as determined from the following schedule:

Fair Value
Cost (Dec. 31, Year 1)
1
Arden Enterprises Inc. ………………………………………………………… $150,000 $170,000
French Broad Industries Inc. ………………………………………………… 66,000 71,5002
Pisgah Construction Inc. ……………………………………………………… 104,000 96,0003
Total………………………………………………………………………….. $320,000 $337,500
1
5,000 shares × $34 per share
2
3
b. There would be no adjusting entry for December 31, Year 2, if the market prices
remained unchanged from December 31, Year 1. This is because the unrealized
gain from the difference between the cost and market has already been
recognized on December 31, Year 1. Only changes in market prices would be
recognized subsequent to December 31, Year 1.
Ex. 15-18
a. Retained earnings, December 31, Year 1…………………………………… $ 825,000
Plus net income………………………………………………………………… 245,000
Less dividends…………………………………………………………………… (65,000)
Retained earnings, December 31, Year 2…………………………………… $1,005,000
b. Trading investments (at cost)*………………………………… $280,000

Less valuation allowance for trading investments…… 72,500
Trading investments (at fair value)…………………………… $ 207,500
* $346,000 – $66,000
15-16
Ex. 15-19
a. $37,100 ($44,600 – $7,500)
b. $44,600 ($220,000 – $175,400)
c. $102,000 ($90,000 + $12,000)
d. $12,000 (Same as valuation allowance for available-for-sale investments)
e. $75,000 ($86,000 – $11,000)
f. $(11,000) (Same as valuation allowance for available-for-sale investments)
g. $(9,000) [$(21,000) + $12,000]
h. $(16,400) [Same as unrealized gain (loss) from available-for-sale investments]
i. $85,600 ($102,000 – $16,400)
j. $199,000 ($220,000 – $21,000)
Ex. 15-20
a.
Year 1
Sept. 12 Investments—Bengals Inc. Stock 430,300
Cash 430,300
33,100 shares × $13 per share.
Dec. 31 Unrealized Gain (Loss) on Available-for-

Sale Investments 66,200
Valuation Allowance for Available-for-Sale
Investments 66,200
33,100 shares × ($11 per share –
$13 per share
b. Unrealized Gain (Loss) on Available-for-Sale Investments is reported in the

Stockholders’ Equity section of the balance sheet, separately from the retained
earnings or paid-in capital accounts. On December 31, Year 1, the account would
show a debit balance of $66,200, which would be subtracted from stockholders’
equity.
15-17
Ex. 15-21
a. 1.
Year 1
Dec. 31 Valuation Allowance for Available-for-
Unrealized Gain (Loss) on Available-
for-Sale Investments 4,280
$93,400 – $89,120.
2.
Year 2
June 12 Investments—Rogue Wave Inc.* 65,350
Cash 65,350
*(1,450 shares × $45 per share) + $100
b. Unrealized gains and losses for available-for-sale securities are accumulated

over time and reported as a credit (positive) or debit (negative) balance in the
Stockholders’ Equity section. As a result, the changes in fair value are not reflected
on the income statement, as is the case with trading securities. Bypassing
the income statement is supported on the grounds that available-for-sale
securities will be held for a longer time than trading securities; thus, fluctuations
in market prices have a greater opportunity to “cancel out” over time.
15-18
Ex. 15-22
a. Year 1
Dec. 31 Unrealized Gain (Loss) on Available-for-
Valuation Allowance for Available-for-
Sale Investments* 4,250
* $259,450 – $263,700, as determined from the following schedule:

Fair Value
Cost (Dec. 31, Year 1)
Dust Devil, Inc. ………………………………………………………………… $ 81,700 $ 76,0001

Gale Co. ………………………………………………………………………… 68,000 63,7502
Whirlwind Co. ………………………………………………………………… 114,000 119,7003
Total…………………………………………………………………………. $263,700 $259,450
1
2
850 shares × $75 per share
3
b. There is no income statement impact from the December 31, Year 1, adjusting
entry. Unrealized Gain (Loss) on Available-for-Sale Investments is reported
in the Stockholders’ Equity section of the balance sheet. On December 31,
Year 1, Unrealized Gain or Loss on Available-for-Sale Investments would be
disclosed as follows:
Unrealized gain (loss) on available-for-sale investments………………… $(4,250)
15-19
Ex. 15-23
a. GALILEO COMPANY
Balance Sheet (selected items)
December 31, Year 1
Assets
Current assets:
Available-for-sale investments, at cost $82,000
Plus valuation allowance for available-for-sale
investments* 5,720 $87,720
* Computation:
Market:
Hawking Inc.: 900 shares × $50…………………………………………… $45,000
Pavlov Co.: 1,780 shares × $24…………………………………………… 42,720
Total market value…………………………………………………………… $87,720
Cost ($44,000 + $38,000)………………………………………………………… 82,000
Unrealized gain…………………………………………………………………… $ 5,720
b. GALILEO COMPANY
December 31, Year 1
Stockholders’ Equity
Retained earnings $300,000
Unrealized gain (loss) on available-for-sale investments 5,720
Ex. 15-24
COPERNICUS CORPORATION
Balance Sheet (selected Stockholders’ Equity items)
December 31, Year 2
Common stock $ 50,000
Excess of issue price over par 250,000
Retained earnings* 520,000
Unrealized gain (loss) on available-for-sale investments** (25,000)
Total stockholders’ equity $795,000
* $340,000 + $180,000
** $40,000 + ($160,000 – $225,000), or $160,000 – $185,000
15-20
Ex. 15-25
Cash Dividends per Share of Common Stock
Dividend Yield =
$3.56 = 2.7%
= $129.51
Ex. 15-26
a. Current: Dividend Yield = $1.24 ÷ $55.48 = 2.24%
Previous: Dividend Yield = $1.12 ÷ $46.45 = 2.41%
b. Dividends per share increased in the current year from the previous year.
The dividend yield, however, decreased from 2.41% in the previous year to 2.24%
in the current year. This decrease is a result of a decrease in the dividend relative
to stock price. Microsoft provides a small return to the shareholder in terms of a
dividend yield and an additional return in terms of price appreciation of the
stock.
Ex. 15-27
Investors would receive a return on the investment through share price
appreciation as internally generated funds are used to fund growth and earnings
opportunities. Thus, investors in eBay would likely approve of this policy
because the company is able to earn superior returns with internally generated
earnings beyond what investors could likely earn on their own by investing
dividend distributions.
15-21
Appendix Ex. 15-28

CHEWCO CO.
For the Year Ended December 31, Year 1
Net income $50,000
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments* 24,000
Comprehensive income $74,000
* 2,000 shares × ($124 per share – $112 per share)
Appendix Ex. 15-29

VALUR CO.
For the Year Ended December 31, Year 2
Net income $210,000
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments* 15,000
Comprehensive income $225,000
* $200,000 – $185,000
15-22
PROBLEMS
Prob. 15-1A
1. Year 1
Apr. 1 Investments—Welch Co. Bonds 100,000
Cash 100,500
June 1 Investments—Bailey Bonds 210,000

Cash 210,700
Sept. 1 Cash* 3,000

*$100,000 × 6% × 1/2
30 Cash* 39,000
Loss on Sale of Investment 1,200
Investments—Welch Co. Bonds 40,000
*($40,000 × 0.97) + $200
Nov. 1 Cash* 4,200

*$210,000 × 4% × 1/2

31 Interest Receivable 1,400

15-23
Prob. 15-1A (Concluded)

Year 2
Mar. 1 Cash* 1,800
*$60,000 × 6% × 1/2
May 1 Cash* 4,200

*$210,000 × 4% × 1/2
2. If the bonds are classified as available-for-sale securities, then the portfolio

of bonds would need to be adjusted to fair value. This would be accomplished
by using a valuation allowance account and an unrealized gain (loss) account
as part of stockholders’ equity. If the fair value were greater than the cost of the
bond portfolio, the two accounts would be positive and, thus, added to investments
and stockholders’ equity, respectively. If the fair value were less than the cost of the
bond portfolio, the two accounts would be negative and, thus, subtracted from
investments and stockholders’ equity, respectively.
15-24
Prob. 15-2A
1.
Year 1
Feb. 1 Investments—Caldwell Inc.* 375,075
Cash 375,075
*(7,500 shares × $50 per share) + $75
May 1 Investments—Holland Inc.* 126,090

Cash 126,090
*(3,000 shares × $42 per share) + $90

Investments—Caldwell Inc.** 225,045
*(4,500 shares × $46 per share) – $110
**4,500 shares × ($375,075 ÷ 7,500 shares)
31 Cash* 1,500
*(7,500 shares – 4,500 shares) × $0.50
Dec. 31 Unrealized Loss on Trading Investments 15,120

Valuation Allowance for Trading
Investments* 15,120
* $261,000 – $276,120, in table below
Number Cost
of per Fair Value Fair
Shares Share per Share Cost Value
Caldwell Inc. ………………… 3,000 $50.011 $47 $150,030 $141,000

Holland Inc. ………………… 3,000 $42.032 $40 126,090 120,000
Total……………………… $276,120 $261,000
1
$375,075 ÷ 7,500 shares = $50.01 per share
2
$126,090 ÷ 3,000 shares = $42.03 per share
15-25

Year 2
Apr. 1 Investments—Fuller Inc.* 125,100
Cash 125,100
*(5,000 shares × $25 per share) + $100
July 31 Cash* 1,560

*3,000 shares × $0.52 per share
Oct. 14 Cash* 27,890

Investments Fuller Inc.** 25,020
*(1,000 shares × $28 per share) – $110
**1,000 shares × ($125,100 ÷ 5,000 shares)
Dec. 31 Valuation Allowance for Trading Investments* 58,920

Unrealized Gain (Loss) on Trading
Investments 58,920
*$15,120 + $43,800
2. RIOS FINANCIAL CO.

December 31, Year 2
Current assets:
Trading investments (at cost) $376,200
Plus valuation allowance for trading investments 43,800
Trading investments (at fair value) $420,000
3. Unrealized gains or losses are reported on the income statement, often as

“Other Income (Losses).” For Year 1, Rios Financial Co. would have
reported an unrealized loss of $15,120 as “Other Losses.” For Year 2, Rios
Financial Co. would have reported an unrealized gain of $58,920 as “Other
Income.” If unrealized gains and losses were significant for Rios Financial,
then they would be disclosed separately on the income statement.
15-26
Prob. 15-3A
1.
Year 1
Jan. 22 Investments—Sankal Inc.* 396,000
Cash 396,000
*22,000 shares × $18 per share
Mar. 8 Cash* 4,840

Sept. 8 Cash* 5,500

Oct. 17 Cash* 47,925

Investments—Sankal Inc.** 54,000
*(3,000 shares × $16.00) – $75
**3,000 shares × $18 per share
Dec. 31 Valuation Allowance for Available-for-

Unrealized Gain (Loss) on Available-for-
19,000 shares × ($25 – $18).
Year 2
Jan. 10 Investment in Imboden Inc. Stock 720,000
Cash 720,000
Mar. 10 Cash* 5,700

*(22,000 shares – 3,000 shares) × $0.30 per share
15-27

Sept. 12 Cash* 5,700
*19,000 shares × ($0.25 + $0.05)
Dec. 31 Cash 57,600

Investment in Imboden Inc. Stock 57,600
31 Investment in Imboden Inc. Stock 144,000

Income of Imboden Inc. 144,000
To record 32% of Imboden Inc.
income $450,000 × (96,000 shares ÷
300,000 shares).
31 Unrealized Gain (Loss) on Available-for-

Valuation Allowance for Available-for-
Sale Investments* 57,000
*($22 – $25) × 19,000 shares
2. FORTE INC.
December 31, Year 2
Current assets:
1
Available-for-sale investments (at cost) $342,000
Plus valuation allowance for available-for-
sale investments 76,000
2
Available-for-sale investments (at fair value) $418,000
Investments:
3
Investment in Imboden Inc. stock $806,400
Stockholders’ equity:
Retained earnings $389,000
Unrealized gain (loss) on available-for-sale
investments 76,000
1
2
3
$720,000 + $144,000 – $57,600
15-28
Prob. 15-4A
a. $236,170 (see table below)
b. $(5,800) ($230,370 – $236,170, from table)
c. $230,370 (from table)
Market
Cost per Value per
No. of Share (or Share (or
Shares (or $100 of $100 of Total Fair
Investments face amount) face amount) face amount) Cost Value
Bernard Co. stock…… 2,250 $17.00 $15.40 $ 38,250 $ 34,650
Chadwick Co. stock… 1,260 52.00 46.00 65,520 57,960
Gozar Inc. stock……… 3,080 30.00 32.00 92,400 98,560
Nightline Co. bonds… $40,000 100 98 40,000 39,200
$236,170 $230,370
d. $600 ($40,000 × 6% × 3/12)
e. $98,100 [$77,000 + ($112,000 × 30%) – $12,500]
f. $813,600 ($233,000 + $136,530 + $230,370 + $600 + $98,100 + $115,000)
g. $455,000 ($308,770 + $146,230)
h. $(5,800) [same as (b)]
i. $813,600 ($69,400 + $70,000 + $225,000 + $455,000 – $5,800)
15-29
Prob. 15-4A (Continued)

The completed comparative unclassified balance sheets are as follows:
O'BRIEN INDUSTRIES INC.

Balance Sheet
December 31, Year 2 and Year 1
Dec. 31, Dec. 31,
Year 2 Year 1
Cash $233,000 $220,000
Accounts receivable (net) 136,530 138,000
Available-for-sale investments (at cost)—Note 1 $236,170 $103,770

Less valuation allowance for available-for-sale
investments 5,800 2,500
Available-for-sale investments (fair value) $230,370 $101,270
Interest receivable $ 600 —

Investment in Jolly Roger Co. stock—Note 2 98,100 $ 77,000
Office equipment (net) 115,000 130,000
Total assets $813,600 $666,270
Accounts payable $ 69,400 $ 65,000

Common stock 70,000 70,000
Excess of issue price over par 225,000 225,000
Retained earnings 455,000 308,770
Unrealized gain (loss) on available-for-sale
investments (5,800) (2,500)
Total liabilities and stockholders’ equity $813,600 $666,270
Note 1. Investments are classified as available for sale. The investments at cost
and fair value on December 31, Year 1, are as follows:
No. of Cost per Total Total Fair
Shares Share Cost Value
Bernard Co. stock……………………… 2,250 $17 $ 38,250 $ 37,500
Chadwick Co. stock……………………… 1,260 52 65,520 63,770
$103,770 $101,270
15-30

For December 31, Year 2:
Market
Cost per Value per
No. of Share (or Share (or
Shares (or $100 of $100 of Total Fair
face amount) face amount) face amount) Cost Value
Bernard Co. stock… 2,250 $17.00 $15.40 $ 38,250 $ 34,650
Chadwick Co. stock 1,260 52.00 46.00 65,520 57,960
Gozar Inc. stock…… 3,080 30.00 32.00 92,400 98,560
Nightline Co. bonds $40,000 100 98 40,000 39,200
$236,170 $230,370
Note 2. The investment in Jolly Roger Co. stock is an equity method investment
representing 30% of the outstanding shares of Jolly Roger Co
15-31

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CHAPTER 15

INVESTMENTS AND FAIR VALUE ACCOUNTING

Apr. 12 Cash* 5,000

June 10 Cash* 135,900

Oct. 15 Cash* 1,000

Nov. 10 Cash* 50,250

Dec. 31 Investment in Sanger Company Stock 32,000

Dec. 31 Investment in Fain Company Stock 56,000

b. Nov. 1 Cash 6,000

c. Nov. 1 Cash* 67,900

d. Dec. 31 Interest Receivable* 1,300

b. Oct. 1 Cash* 3,600

c. Oct. 31 Cash* 29,750

d. Dec. 31 Interest Receivable 1,365

July 1 Cash* 2,250

Aug. 30 Cash* 34,650

b. June 1 Cash* 16,800

c. Nov. 12 Cash* 247,900

July 8 Cash* 3,000

Sept. 10 Cash* 43,880

Mar. 6 Cash* 1,590

June 7 Investments—Wong Inc. Stock* 52,120

Sept. 25 Cash* 520

May 16 Investments—Issacson Co. Stock* 90,100

July 14 Cash* 39,925

Aug. 12 Cash* 24,295

Oct. 31 Cash* 240

b. Herrera’s investment in Tran Corp. represents 35% of the outstanding shares

July 2 Cash* 300,000

Dec. 31 Investment in Silva Company Stock 800,000

b. Initial acquisition cost………………………………………………………… $14,400,000

June 30 Cash* 8,160

Dec. 31 Loss of Gator Co. 19,040

b. Initial acquisition cost………………………………………………………… $212,000

Ex. 15-12 (Concluded)

Dec. 31 Valuation Allowance for Trading

b. The unrealized gain or unrealized loss for trading investments is disclosed

* $337,500 – $320,000, as determined from the following schedule:

b. Trading investments (at cost)*………………………………… $280,000

Dec. 31 Unrealized Gain (Loss) on Available-for-

b. Unrealized Gain (Loss) on Available-for-Sale Investments is reported in the

b. Unrealized gains and losses for available-for-sale securities are accumulated

* $259,450 – $263,700, as determined from the following schedule:

Dust Devil, Inc. ………………………………………………………………… $ 81,700 $ 76,0001

Unrealized gain (loss) on available-for-sale investments………………… $(4,250)

Appendix Ex. 15-28

* 2,000 shares × ($124 per share – $112 per share)

Appendix Ex. 15-29

June 1 Investments—Bailey Bonds 210,000

Sept. 1 Cash* 3,000

Nov. 1 Cash* 4,200

Dec. 31 Interest Receivable 1,200

31 Interest Receivable 1,400

Prob. 15-1A (Concluded)

May 1 Cash* 4,200

2. If the bonds are classified as available-for-sale securities, then the portfolio

May 1 Investments—Holland Inc.* 126,090

July 1 Cash* 206,890

Dec. 31 Unrealized Loss on Trading Investments 15,120

Caldwell Inc. ………………… 3,000 $50.011 $47 $150,030 $141,000

Prob. 15-2A (Concluded)

July 31 Cash* 1,560

Oct. 14 Cash* 27,890