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Advanced Accounting
Fourth Edition
SUSAN S. HAMLEN
University at Buffalo, The State University of New York
Cambridge
BUSINESS PUBLISHERS
Editor‑in‑Chief: George Werthman
Managing Editor: Katie Jones‑Aiello
Development Editor: Jocelyn Mousel
Product Developer: Jill Sternard
Digital Marketing Manager: Dana Vinyard
Compositor: T&D Graphics
Cambridge Business Publishers
ADVANCED ACCOUNTING, Fourth Edition, by Susan S. Hamlen.
COPYRIGHT © 2018 by Cambridge Business Publishers, LLC. Published by Cambridge Business
Publishers, LLC. Exclusive rights by Cambridge Business Publishers, LLC for manufacture and export.
ALL RIGHTS RESERVED. No part of this publication may be reproduced, distributed, or stored in a
database or retrieval system in any form or by any means, without prior written consent of Cambridge
Business Publishers, LLC, including, but not limited to, in any network or other electronic storage or
transmission, or broadcast for distance learning.
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Preface vii
in subsequent years. P4.3 covers subsequent year consolidation of a wholly owned subsidiary, and P5.7
addresses subsequent year consolidation of the same subsidiary, when the subsidiary has outside owner‑
ship. In P2.6, an acquisition is reported as a merger, and in P3.12 the same acquisition is reported as a
stock investment and consolidation. P3.4, P4.5, P5.4 and P5.5 use the same acquisition data to illustrate
consolidation of a bargain purchase at the date of acquisition, subsequent years, and with a noncontrol‑
ling interest. Each of these problems can also be assigned separately. In working through these prob‑
lems, students gain a clearer understanding of accounting for business combinations, and how concepts
In the state and local government chapters, three problems for the same county take the student
proprietary funds (P11.17), and culminating in preparation of the county’s government‑wide statements,
with reconciliations (P12.17). These problems can be assigned individually or as a class project.
STUDENT-FRIENDLY FEATURES OF THIS TEXT
• In the consolidation chapters, color is used pedagogically to identify eliminating entries, both in
journal form and in the consolidation working papers, making it easier for students to navigate the
complexities of consolidation procedures.
• statement of income and comprehen-
sive income. Because in practice companies use a variety of formats to present consolidated operat‑
ing results, the working paper consolidates the trial balances of the parent and subsidiary, which
• controlled entities, and
shows how FASB updates on consolidation policy illustrate this goal.
• Measurement issues in identifying and valuing acquired assets and liabilities and consideration
paid are discussed in detail. Cost, market, and income approaches are explained and illustrated.
Common reporting issues in practice, including , deferred taxes, and stock
options, are covered, with examples from practice.
•
statements
which the information provided by these entities differs from regular businesses, reasons why this
information is required, and the judgments and choices involved.
• The commonality of reporting issues for different types of entities—businesses, NFPs, govern‑
reporting, and hedge accounting.
NEW TO THIS EDITION
The text is completely updated for new standards, proposals, and other relevant events as of 2018.
• ASU 2016‑01 and ASU 2016‑13, investments in debt securities and equity securities
of GAAP and IFRS for these investments.
• (ASU 2017‑01) determining when ASC Topic 805 require‑
effects of measurement period changes on subsequent income (ASU
2015‑16).
• goodwill impairment test (ASU 2017‑04) and updated comparison of GAAP
• New hedging model (ASU 2017‑12).
viii Preface
• GAAP hierarchy (SGAS 76), component unit display (SGAS 80), accounting for
(SGAS 84), leases (SGAS 87), (SGAS 68
and SGAS 75).
• NFP reporting model (ASU 2016‑14), including
examples and illustrations from practice.
• All illustrations, current practices, and reporting perspectives are completely updated, and
include new issues and examples.
• There are over 130 new exercises and problems, and a net increase of over 65 exercises and
• The number of questions included in myBusinessCourse has been more than doubled with this new
edition, as well.
In addition, new material has been added, based primarily on suggestions from adopters, including
Mergers and acquisitions
• Consolidation procedures for VIEs
• Step acquisitions
• Expanded explanation of the differences in reporting acquisition of a business versus an asset
• Pushdown accounting for subsidiaries (ASU 2014‑17) and implications for consolidation
procedures
• Expanded explanation of intercompany transaction eliminations
• Expanded explanation of
Hedge accounting
• Rewritten explanation of swap accounting and hedging with options
State and local governments
• Reporting for asset retirement obligations
• Expanded coverage of
• Comprehensive problem combining concepts of general fund reporting, reporting for other funds,
NFP organizations
• Expanded coverage of health care NFPs and intermediate performance measures
Bankruptcy and reorganization
• Liquidation basis of accounting (ASU 2013‑07)
SEC
(https://cambridgepub.com) Page Fit viii
viii Preface
• GAAP hierarchy (SGAS 76), component unit display (SGAS 80), accounting for
(SGAS 84), leases (SGAS 87), (SGAS 68
and SGAS 75).
• NFP reporting model (ASU 2016‑14), including
examples and illustrations from practice.
• All illustrations, current practices, and reporting perspectives are completely updated, and
include new issues and examples.
• There are over 130 new exercises and problems, and a net increase of over 65 exercises and
• The number of questions included in myBusinessCourse has been more than doubled with this new
edition, as well.
In addition, new material has been added, based primarily on suggestions from adopters, including
Mergers and acquisitions
• Consolidation procedures for VIEs
• Step acquisitions
• Expanded explanation of the differences in reporting acquisition of a business versus an asset
• Pushdown accounting for subsidiaries (ASU 2014‑17) and implications for consolidation
procedures
• Expanded explanation of intercompany transaction eliminations
• Expanded explanation of
Hedge accounting
• Rewritten explanation of swap accounting and hedging with options
State and local governments
• Reporting for asset retirement obligations
• Expanded coverage of
• Comprehensive problem combining concepts of general fund reporting, reporting for other funds,
NFP organizations
• Expanded coverage of health care NFPs and intermediate performance measures
Bankruptcy and reorganization
• Liquidation basis of accounting (ASU 2013‑07)
SEC
• Comment letters
SUPPLEMENT PACKAGE
For Instructors
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traditional face‑to‑face courses for which you want to offer students more resources to succeed.
Preface ix
ewo eLectures
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Solutions Manual: Created by the textbook author, the Solutions Manual contains complete solu‑
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Test Bank: Written by the textbook author, the test bank includes a variety of multiple‑choice ques‑
Excel Templates: Excel spreadsheets for select assignments are provided on the book’s
Website. These spreadsheets will save time in data entry and allow students to dedicate addi‑
PowerPoint: Edited by the textbook author, the PowerPoint slides outline key elements of each
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Website: All instructor materials are accessible via the book’s website (password protected).
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Website:
charge on the book’s Website.
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x Preface
Andy Borchers, Lipscomb University Myungsun Kim, University at Buffalo
Gary Braun, California State University, Chico Gordon Klein, University of California—Los Angeles
Kimberly Brickler‑Ulrich, Lindenwood University Lisa Koonce, University of Texas—Austin
Richard Brown, Concordia University Wisconsin Stanley Kratchman, Texas A&M University
Gene Bryson, University of Alabama—Huntsville Sudha Krishnan, CSU—Long Beach
Kerry Calnan, Nichols College Steve LaFever, Wichita State University
Tina Carpenter, University of Georgia Robert Larson, University of Dayton
Charles Carslaw, University of Nevada, Reno Karen Lin, University of Massachusetts Lowell
Lynn Clements, Florida Southern College Wade Lindenberger, University of California San Diego
Jacklyn Collins, University of Miami Louisiana Tech University
Laurie Corradino, Colorado State University‑Pueblo Cathy Margolin, Brandman University
Chris Cowles, Central Connecticut State University Maureen Mascha, Purdue University Calumet
Jean Crawford, Alabama State University Dawn Massey,
Donald Danner, Aurora University University of Pittsburgh—Bradford
Patricia Davis, Keystone College Katie Maxwell, University of Arizona
Michael Davis, University of Alaska Reed McKnight, University of New Mexico
Dennis Debrecht, Carroll University Allison McLeod, University of North Texas
Hemang Desai, Southern Methodist University Greg Merrill, St. Mary’s College
John Dexter, Northwood University Scott Miller, Edinboro University
David Diehl, Aurora University Ramin Mirsaidi, University of Washington—Tacoma
Emporia State University Maria Mitchell, Thomas More College
Cynthia Dittmer, Coe College Adam Myers, Texas A&M University
Nina Dorata, St. John’s University Hugo Nurnberg, CUNY—Baruch
David Doyon, Southern New Hampshire University Bruce Oliver, Rochester Institute of Technology
Joseph Dulin, University of Oklahoma Gary Olsen, Carroll University
Reed Easton, Seton Hall University Michael Owens, University of Tennessee—Chattanooga
Jack Elfrink, Western Illinois University Kevin Packard, Brigham Young University, Idaho
Robert Elya, Golden Gate University Cheryl Prachyl, University of Dallas
Michael Ettredge, University of Kansas Tina Quinn, Arkansas State University
Mary Fischer, University of Texas at Tyler Kathy Rankin, Duquesne/Chatham Universities
Linda Flaming, Monmouth University Sara Reiter, Binghamton University
Sheila Foster, The Citadel Susan Riffe, Southern Methodist University
Carl Gabrini, College of Coastal Georgia Jane Romal, College at Brockport
George Gardner, Bemidji State University John Rossi, Moravian College
Earl Godfrey, Gardner‑Webb University Kenneth Shaw, University of Missouri
Angela Gore, George Washington University Margaret Shelton, University of St. Thomas
Tony Grieg, University of Wisconsin, Madison Andreas Simon, Pepperdine University
Ronald Guidry, Illinois State University Richard Simpson, University of Massachusetts
Montgomery College Sheldon Smith, Utah Valley University
Judith Harris, NOVA Southeastern University Liang Song, Michigan Technological University
Ling Harris, University of South Carolina Molloy College
Anthony Herron, University of Oklahoma Randall Stone, East Central University
Arlene Hibschweiler, University at Buffalo William Stout, University of Louisville
Kenneth Hiltebeitel, Villanova University Gina Sturgill,
Joan Hollister, SUNY at New Paltz Inho Suk, SUNY Buffalo
Don Holmes, University of Houston Downtown John Surdick, Xavier University
Yongtao Hong, North Dakota State University Margaret Tanner, University of Arkansas—Fort Smith
Peter Hosker, Southern New Hampshire University Diane Tanner, University of North Florida
Huichi Huang, Oregon State University Randy Thomas, Upper Iowa University
Jodi Hunter, Lake Superior State University Carmelita Troy, Andrews University
Teresa Iannaconi, KPMG LLP Kenton B. Walker, University of Wyoming
Marianne L. James, CSU—Los Angeles David Wallin, Ohio State University
Patricia Johnson, Canisius College Larry Walther, Utah State University
Bill Joyce, Bemidji State University Jamie Wang, University of Wisconsin—Parkside
Roger Kerkenbush, Loras College Christine Wayne, Harper College
Penn State University Donna Whitten, Purdue University North Central
Preface xi
Latasha Williams, Keiser University Zhaohui Xu, University of Houston, Clear Lake
Debbie Williams, West Virginia State University Bruce Zeedik, California Lutheran University
Jan Williams, University of Baltimore Stephen Zeff, Rice University
Sung Wook Yoon, CSU—Northridge Jian Zhou, University of Hawaii at Manoa
Penn State University Ling Zhou, Tulane University
Jia Wu, University of Massachusetts—Dartmouth
The School of Management, University at Buffalo is also acknowledged. In addition, thank you to
George Werthman, Lorraine Gleeson, Beth Nodus, Katie Jones‑Aiello, Dana Vinyard, Jill Sternard, Joc‑
elyn Mousel, Debbie McQuade, Terry McQuade, and the entire team at Cambridge Business Publishers
for their encouragement, enthusiasm, and guidance. Comments are invited and encouraged from all
instructors, students, and readers.
Susan S. Hamlen (hamlen@buffalo.edu)
(https://cambridgepub.com) Page Fit xi
Preface xi
Latasha Williams, Keiser University Zhaohui Xu, University of Houston, Clear Lake
Debbie Williams, West Virginia State University Bruce Zeedik, California Lutheran University
Jan Williams, University of Baltimore Stephen Zeff, Rice University
Sung Wook Yoon, CSU—Northridge Jian Zhou, University of Hawaii at Manoa
Penn State University Ling Zhou, Tulane University
Jia Wu, University of Massachusetts—Dartmouth
The School of Management, University at Buffalo is also acknowledged. In addition, thank you to
George Werthman, Lorraine Gleeson, Beth Nodus, Katie Jones‑Aiello, Dana Vinyard, Jill Sternard, Joc‑
elyn Mousel, Debbie McQuade, Terry McQuade, and the entire team at Cambridge Business Publishers
for their encouragement, enthusiasm, and guidance. Comments are invited and encouraged from all
instructors, students, and readers.
Susan S. Hamlen (hamlen@buffalo.edu)
Brief Contents
Preface iii
Chapter 1 Intercorporate Investments: An Overview 2
Chapter 2 Mergers and Acquisitions 36
Chapter 3 Consolidated Financial Statements: Date of Acquisition 84
Chapter 4 Consolidated Financial Statements Subsequent to Acquisition 128
Chapter 5 Consolidated Financial Statements: Outside Interests 186
Chapter 6 Consolidated Financial Statements: Intercompany Transactions 242
Chapter 7 Consolidating Foreign Currency Financial Statements 290
Chapter 8 Foreign Currency Transactions and Hedging 346
Chapter 9 Futures, Options and Interest Rate Swaps 396
Chapter 10 State and Local Governments: Introduction and General Fund Transactions 438
Chapter 11 State and Local Governments: Other Transactions 494
Chapter 12 State and Local Governments: External Financial Reporting 546
Chapter 13 Private Not-For-Profit Organizations 592
Chapter 14 Partnership Accounting and Reporting 642
Chapter 15 Bankruptcy and Reorganization 698
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Brief Contents
Preface iii
Chapter 1 Intercorporate Investments: An Overview 2
Chapter 2 Mergers and Acquisitions 36
Chapter 3 Consolidated Financial Statements: Date of Acquisition 84
Chapter 4 Consolidated Financial Statements Subsequent to Acquisition 128
Chapter 5 Consolidated Financial Statements: Outside Interests 186
Chapter 6 Consolidated Financial Statements: Intercompany Transactions 242
Chapter 7 Consolidating Foreign Currency Financial Statements 290
Chapter 8 Foreign Currency Transactions and Hedging 346
Chapter 9 Futures, Options and Interest Rate Swaps 396
Chapter 10 State and Local Governments: Introduction and General Fund Transactions 438
Chapter 11 State and Local Governments: Other Transactions 494
Chapter 12 State and Local Governments: External Financial Reporting 546
Chapter 13 Private Not-For-Profit Organizations 592
Chapter 14 Partnership Accounting and Reporting 642
Chapter 15 Bankruptcy and Reorganization 698
Chapter 16 The SEC and Financial Reporting 744
Index 778
xii
Contents
Chapter 1 Chapter 2
Intercorporate Investments: An Overview 2 Mergers and Acquisitions 36
INTRODUCTION 3 INTRODUCTION 37
Motivations for Intercorporate Investments 3 Motivations for Mergers and Acquisitions 37
Types of Investments 4 Types of Combinations 38
INTERCORPORATE DEBT INVESTMENTS AND EQUITY Overview of Reporting for Combinations 39
INVESTMENTS WITH NO SIGNIFICANT INFLUENCE 5 Standards of Reporting for Business Combinations 41
Trading Investments 5 VALUATION OF ASSETS ACQUIRED AND
Available-for-Sale Investments 6 LIABILITIES ASSUMED 43
Held-to-Maturity Investments 7 Acquisition Date 43
Equity Investments 8 Identifying the Acquiring Company 43
REVIEW 1 • Trading, AFS, and HTM Debt Investments 9 Measurement of Previously Reported Assets and Liabilities 44
INVESTMENTS WITH SIGNIFICANT INFLUENCE 9 Identification and Measurement of Previously
Accounting Using the Equity Method 9 Unreported Intangibles 45
Equity in Net Income Calculation 10 Illustration of Reporting Assets Acquired and Liabilities
Assumed 49
Other Comprehensive Income and the Equity Method 12
Investee Losses and the Equity Method 12
REVIEW 1 • Reporting Assets Acquired and Liabilities
Assumed 51
Impairment Testing 12
MEASUREMENT OF ACQUISITION COST 51
Change to Significant Influence 13
Contingent Consideration 52
Joint Ventures 13
Employee Compensation 53
REVIEW 2 • Reporting for Equity Method Investments 14
Acquisition-Related Costs 53
CONTROLLING INVESTMENTS 15
Illustration of Reporting Consideration Given in an
Mergers, Consolidations, and Asset Acquisitions 15 Acquisition 54
Stock Acquisitions 16
SUBSEQUENT CHANGES IN ASSET, LIABILITY, OR
Change to Controlling Interest 16 CONTINGENT CONSIDERATION VALUES 55
Variable Interest Entities 17 Measurement Period 55
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Contents
Chapter 1 Chapter 2
Intercorporate Investments: An Overview 2 Mergers and Acquisitions 36
INTRODUCTION 3 INTRODUCTION 37
Motivations for Intercorporate Investments 3 Motivations for Mergers and Acquisitions 37
Types of Investments 4 Types of Combinations 38
INTERCORPORATE DEBT INVESTMENTS AND EQUITY Overview of Reporting for Combinations 39
INVESTMENTS WITH NO SIGNIFICANT INFLUENCE 5 Standards of Reporting for Business Combinations 41
Trading Investments 5 VALUATION OF ASSETS ACQUIRED AND
Available-for-Sale Investments 6 LIABILITIES ASSUMED 43
Held-to-Maturity Investments 7 Acquisition Date 43
Equity Investments 8 Identifying the Acquiring Company 43
REVIEW 1 • Trading, AFS, and HTM Debt Investments 9 Measurement of Previously Reported Assets and Liabilities 44
INVESTMENTS WITH SIGNIFICANT INFLUENCE 9 Identification and Measurement of Previously
Accounting Using the Equity Method 9 Unreported Intangibles 45
Equity in Net Income Calculation 10 Illustration of Reporting Assets Acquired and Liabilities
Assumed 49
Other Comprehensive Income and the Equity Method 12
Investee Losses and the Equity Method 12
REVIEW 1 • Reporting Assets Acquired and Liabilities
Assumed 51
Impairment Testing 12
MEASUREMENT OF ACQUISITION COST 51
Change to Significant Influence 13
Contingent Consideration 52
Joint Ventures 13
Employee Compensation 53
REVIEW 2 • Reporting for Equity Method Investments 14
Acquisition-Related Costs 53
CONTROLLING INVESTMENTS 15
Illustration of Reporting Consideration Given in an
Mergers, Consolidations, and Asset Acquisitions 15 Acquisition 54
Stock Acquisitions 16
SUBSEQUENT CHANGES IN ASSET, LIABILITY, OR
Change to Controlling Interest 16 CONTINGENT CONSIDERATION VALUES 55
Variable Interest Entities 17 Measurement Period 55
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR Reporting Subsequent Changes in Asset and Liability
INTERCORPORATE INVESTMENTS 17 Values 55
Intercorporate Debt Investments and Equity Investments with Reporting Subsequent Changes in Contingent Consideration
No Significant Influence 17 Value 56
Investments with Significant Influence 18 REVIEW 2 • Reporting Assets and Liabilities Acquired,
Joint Ventures 18 Consideration Paid, and Subsequent Events 57
Controlling Investments 19 BARGAIN PURCHASES 57
REVIEW OF KEY CONCEPTS 19 SPECIAL ISSUES: IN-PROCESS RESEARCH AND
DEVELOPMENT, PREACQUISITION CONTINGENCIES,
MULTIPLE CHOICE QUESTIONS 20
DEFERRED TAX LIABILITIES, AND STEP ACQUISITIONS 59
EXERCISES 22
In-Process Research and Development 59
PROBLEMS 26
Preacquisition Contingencies 59
REVIEW SOLUTIONS 34 Acquired Deferred Tax Liabilities 60
xiii
xiv Contents
Step Acquisitions 61 REPORTING REVALUATIONS OF SUBSIDIARY ASSETS AND
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR LIABILITIES IN SUBSEQUENT YEARS 135
BUSINESS COMBINATIONS 62 Previously Reported Assets and Liabilities 135
REVIEW OF KEY CONCEPTS 63 Previously Unreported Identifiable Intangibles 137
MULTIPLE CHOICE QUESTIONS 64 Goodwill 138
Amortization and Impairment of Identifiable Intangibles and
EXERCISES 65
Goodwill: An Illustration 143
PROBLEMS 72
REVIEW 1 • Intangibles Impairment Testing 145
REVIEW SOLUTIONS 83
COMPREHENSIVE ILLUSTRATION: CONSOLIDATION IN
SUBSEQUENT YEARS 146
Chapter 3 Consolidation After One Year 146
Consolidation After Two Years 149
Consolidated Financial Statements: REVIEW 2 • Consolidation in a Subsequent Year with
Identifiable Intangibles 153
Date of Acquisition 84
IFRS FOR ACQUIRED INTANGIBLES 154
INTRODUCTION 85 Identifiable Intangibles 154
CRITERIA FOR CONSOLIDATION 86 Goodwill 155
Motivations for Off-Balance-Sheet Entities 86 APPENDIX TO CHAPTER 4 157
Standards for Consolidation 88 Consolidation Eliminating Entries When the Parent Uses the
Control and Consolidation of Equity Investments 88 Cost Method 157
Control and Consolidation of Non-Equity Investments 89 REVIEW OF KEY CONCEPTS 162
REVIEW 1 • Identifying Consolidated Entities 94 MULTIPLE CHOICE QUESTIONS 163
CONSOLIDATION AT DATE OF ACQUISITION 94 EXERCISES 165
Consolidation of Financial Statements: Preliminary Issues 94 PROBLEMS 172
Objectives of Consolidation 95
REVIEW SOLUTIONS 184
Consolidation Working Paper 95
Pushdown Accounting 103
REVIEW 2 • Consolidation with Identifiable Intangibles 106
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR
Chapter 5
CONSOLIDATIONS 106 Consolidated Financial Statements:
The Concept of Control 106 Outside Interests 186
IFRS and U.S. GAAP Compared 107
INTRODUCTION 187
REVIEW OF KEY CONCEPTS 108
NONCONTROLLING INTERESTS AT ACQUISITION DATE 188
MULTIPLE CHOICE QUESTIONS 108 Valuation of Noncontrolling Interests and Goodwill at
EXERCISES 110 Acquisition 188
PROBLEMS 117 Measuring the Fair Value of Noncontrolling Interests 189
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xiv Contents
Step Acquisitions 61 REPORTING REVALUATIONS OF SUBSIDIARY ASSETS AND
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR LIABILITIES IN SUBSEQUENT YEARS 135
BUSINESS COMBINATIONS 62 Previously Reported Assets and Liabilities 135
REVIEW OF KEY CONCEPTS 63 Previously Unreported Identifiable Intangibles 137
MULTIPLE CHOICE QUESTIONS 64 Goodwill 138
Amortization and Impairment of Identifiable Intangibles and
EXERCISES 65
Goodwill: An Illustration 143
PROBLEMS 72
REVIEW 1 • Intangibles Impairment Testing 145
REVIEW SOLUTIONS 83
COMPREHENSIVE ILLUSTRATION: CONSOLIDATION IN
SUBSEQUENT YEARS 146
Chapter 3 Consolidation After One Year 146
Consolidation After Two Years 149
Consolidated Financial Statements: REVIEW 2 • Consolidation in a Subsequent Year with
Identifiable Intangibles 153
Date of Acquisition 84
IFRS FOR ACQUIRED INTANGIBLES 154
INTRODUCTION 85 Identifiable Intangibles 154
CRITERIA FOR CONSOLIDATION 86 Goodwill 155
Motivations for Off-Balance-Sheet Entities 86 APPENDIX TO CHAPTER 4 157
Standards for Consolidation 88 Consolidation Eliminating Entries When the Parent Uses the
Control and Consolidation of Equity Investments 88 Cost Method 157
Control and Consolidation of Non-Equity Investments 89 REVIEW OF KEY CONCEPTS 162
REVIEW 1 • Identifying Consolidated Entities 94 MULTIPLE CHOICE QUESTIONS 163
CONSOLIDATION AT DATE OF ACQUISITION 94 EXERCISES 165
Consolidation of Financial Statements: Preliminary Issues 94 PROBLEMS 172
Objectives of Consolidation 95
REVIEW SOLUTIONS 184
Consolidation Working Paper 95
Pushdown Accounting 103
REVIEW 2 • Consolidation with Identifiable Intangibles 106
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR
Chapter 5
CONSOLIDATIONS 106 Consolidated Financial Statements:
The Concept of Control 106 Outside Interests 186
IFRS and U.S. GAAP Compared 107
INTRODUCTION 187
REVIEW OF KEY CONCEPTS 108
NONCONTROLLING INTERESTS AT ACQUISITION DATE 188
MULTIPLE CHOICE QUESTIONS 108 Valuation of Noncontrolling Interests and Goodwill at
EXERCISES 110 Acquisition 188
PROBLEMS 117 Measuring the Fair Value of Noncontrolling Interests 189
REVIEW SOLUTIONS 127 Consolidation Eliminating Entries at Acquisition Date 190
Noncontrolling Interests in the Consolidated Balance
Sheet 191
Chapter 4 Consolidating Variable Interest Entities 192
NONCONTROLLING INTERESTS IN SUBSEQUENT YEARS 193
Consolidated Financial Statements Consolidation at End of the First Year 193
Subsequent to Acquisition 128 Noncontrolling Interests in the Consolidated Statement of
INTRODUCTION 129 Income and Comprehensive Income 196
Consolidation at End of the Second Year 198
INTRODUCTION TO CONSOLIDATION PROCEDURES 129
Consolidation of VIEs in Subsequent Years 201
Consolidation Eliminating Entries 130
Illustration of Consolidation Process 131
REVIEW 1 • Consolidation with Noncontrolling Interest at
End of Third Year, U.S. GAAP 204
Consolidated Financial Statements 133
Complete Equity Method as One-Line Consolidation 134
Contents xv
NONCONTROLLING INTERESTS AND BARGAIN REVIEW OF KEY CONCEPTS 267
PURCHASES 204 MULTIPLE CHOICE QUESTIONS 268
Bargain Purchase Consolidation at Date of Acquisition 205
EXERCISES 270
Bargain Purchase Consolidation at End of the First Year 206
PROBLEMS 276
Bargain Purchase Consolidation at End of the Second
REVIEW SOLUTIONS 288
Year 208
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR
NONCONTROLLING INTERESTS 209
REVIEW 2 • Consolidation with Noncontrolling Interest at End
of the Third Year, IFRS 213
Chapter 7
Consolidating Foreign Currency
CONSOLIDATED STATEMENT OF CASH FLOWS 213
Financial Statements 290
Preparation of Consolidated Statement of Cash Flows 214
Consolidated Statement of Cash Flows: An Illustration 214 INTRODUCTION 291
REVIEW OF KEY CONCEPTS 216 CONVERTING A SUBSIDIARY’S FOREIGN CURRENCY
ACCOUNTS TO THE PARENT’S CURRENCY 291
MULTIPLE CHOICE QUESTIONS 217
The Conversion Process 292
EXERCISES 219
The Functional Currency 294
PROBLEMS 226
TRANSLATION AND REMEASUREMENT PROCEDURES 295
REVIEW SOLUTIONS 239
Translation Procedures 295
Remeasurement Procedures 296
Chapter 6 Comparing Translation and Remeasurement 296
Translation and Remeasurement Gains and Losses 296
Consolidated Financial Statements: Translation and Remeasurement Illustrated 302
Intercompany Transactions 242 REVIEW 1 • Calculation of Remeasurement and Translation
Gain or Loss 304
INTRODUCTION 243 REVIEW 2 • Translation and Remeasurement of Foreign
INTERCOMPANY SERVICE AND FINANCING Currency Financial Statements 305
TRANSACTIONS 244 Highly Inflationary Economies 306
INTERCOMPANY PROFITS 245 Changing the Functional Currency 307
Equity in Net Income and Noncontrolling Interest in Net Translation and Remeasurement of an Existing Entity 307
Income 246 Converting the Statement of Cash Flows to the Reporting
INTERCOMPANY TRANSFERS OF LAND 247 Currency 311
Eliminations in the Year of Transfer 247 Disclosures 311
Eliminations in Subsequent Years 248 FINANCIAL ANALYSIS USING TRANSLATED AND
Eliminations in Year of Sale to Outside Party 251 REMEASURED INFORMATION 313
Effects on Profitability: The “DuPont Analysis” 313
INTERCOMPANY TRANSFERS OF INVENTORY 251
Effects on Analysis of Short-Term Liquidity and Long-Term
Unconfirmed Profit in Ending Inventory 253
Solvency 314
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Contents xix
Legal Process of Chapter 7 Liquidation 701 Securities Legislation and the SEC 746
Legal Process of Chapter 11 Reorganization 701 Definition of a Security 748
FINANCIAL REPORTING FOR CHAPTER 7 LIQUIDATION 701 ORGANIZATION AND STRUCTURE OF THE SEC 748
Liquidation Basis of Accounting 701 SEC Pronouncements on Accounting and Auditing 750
Statement of Affairs 704 REVIEW 1 • Mission and Organization of the SEC 750
REVIEW 1 • Chapter 7 Liquidation 709 REGISTRATION OF NEW SECURITIES 750
Statement of Realization and Liquidation 709 PERIODIC REPORTING REQUIREMENTS 752
FINANCIAL REPORTING FOR CHAPTER 11 EDGAR 752
REORGANIZATION 713 The Annual Report: Form 10-K 752
Reporting During the Reorganization Process 713 Regulation S-X 757
Reporting After Reorganization 716 The Quarterly Report: Form 10-Q 759
REVIEW 2 • Chapter 11 Reorganization 721 Special Reports: Form 8-K 760
OTHER FORMS OF RESTRUCTURING 721 REVIEW 2 • Registration and Periodic Reporting
Quasi-Reorganization 721 Requirements 762
Troubled Debt Restructuring 722 CORPORATE ACCOUNTABILITY AND GOVERNANCE 762
REVIEW OF KEY CONCEPTS 723 Audit Committees 763
MULTIPLE CHOICE QUESTIONS 724 Antifraud Provisions and Insider Trading 763
Proxy Statements 764
EXERCISES 726
The Dodd-Frank Act 764
PROBLEMS 732
THE SEC AND ACCOUNTING STANDARDS 765
REVIEW SOLUTIONS 742
REVIEW 3 • Corporate Accountability and Governance, SEC
Intervention in Standard-Setting 766
Chapter 16 REVIEW OF KEY CONCEPTS 766
MULTIPLE CHOICE QUESTIONS 767
The SEC and Financial Reporting 744 EXERCISES 768
PROBLEMS 773
ESTABLISHMENT OF THE SEC AND KEY SECURITIES
LEGISLATION 746 REVIEW SOLUTIONS 776
Establishment of the SEC 746 INDEX 778
1
CHAPTER
Intercorporate
Investments: An
Overview
LEARNING OBJECTIVES
LO1 Describe the reporting for intercorporate debt investments and intercorporate equity investments
with no significant influence. (p. 5)
LO2 Explain the reporting for equity method intercorporate investments. (p. 9)
LO3 Describe the reporting for controlling interests in other companies. (p. 15)
LO4 Discuss International Financial Reporting Standards (IFRS) for intercorporate investments. (p. 17)
THE COCA-COLA COMPANY
www.coca-cola.com
The Coca-Cola Company is the world’s largest beverage company. In addition to Coca-Cola, its brands
include Sprite, Dasani, and Minute Maid. Coca-Cola produces beverage syrup in concentrated form, and
sells it to bottlers. The bottlers mix the syrup with water and other ingredients, and bottle or can the finished
beverages for delivery to retailers, restaurants, and food distributors.
Coca-Cola’s investments in its bottlers and other companies take a variety of forms. At the end of 2016,
(https://cambridgepub.com) Page Fit xv
Contents xv
NONCONTROLLING INTERESTS AND BARGAIN REVIEW OF KEY CONCEPTS 267
PURCHASES 204 MULTIPLE CHOICE QUESTIONS 268
Bargain Purchase Consolidation at Date of Acquisition 205
EXERCISES 270
Bargain Purchase Consolidation at End of the First Year 206
PROBLEMS 276
Bargain Purchase Consolidation at End of the Second
REVIEW SOLUTIONS 288
Year 208
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR
NONCONTROLLING INTERESTS 209
REVIEW 2 • Consolidation with Noncontrolling Interest at End
of the Third Year, IFRS 213
Chapter 7
Consolidating Foreign Currency
CONSOLIDATED STATEMENT OF CASH FLOWS 213
Financial Statements 290
Preparation of Consolidated Statement of Cash Flows 214
Consolidated Statement of Cash Flows: An Illustration 214 INTRODUCTION 291
REVIEW OF KEY CONCEPTS 216 CONVERTING A SUBSIDIARY’S FOREIGN CURRENCY
ACCOUNTS TO THE PARENT’S CURRENCY 291
MULTIPLE CHOICE QUESTIONS 217
The Conversion Process 292
EXERCISES 219
The Functional Currency 294
PROBLEMS 226
TRANSLATION AND REMEASUREMENT PROCEDURES 295
REVIEW SOLUTIONS 239
Translation Procedures 295
Remeasurement Procedures 296
Chapter 6 Comparing Translation and Remeasurement 296
Translation and Remeasurement Gains and Losses 296
Consolidated Financial Statements: Translation and Remeasurement Illustrated 302
Intercompany Transactions 242 REVIEW 1 • Calculation of Remeasurement and Translation
Gain or Loss 304
INTRODUCTION 243 REVIEW 2 • Translation and Remeasurement of Foreign
INTERCOMPANY SERVICE AND FINANCING Currency Financial Statements 305
TRANSACTIONS 244 Highly Inflationary Economies 306
INTERCOMPANY PROFITS 245 Changing the Functional Currency 307
Equity in Net Income and Noncontrolling Interest in Net Translation and Remeasurement of an Existing Entity 307
Income 246 Converting the Statement of Cash Flows to the Reporting
INTERCOMPANY TRANSFERS OF LAND 247 Currency 311
Eliminations in the Year of Transfer 247 Disclosures 311
Eliminations in Subsequent Years 248 FINANCIAL ANALYSIS USING TRANSLATED AND
Eliminations in Year of Sale to Outside Party 251 REMEASURED INFORMATION 313
Effects on Profitability: The “DuPont Analysis” 313
INTERCOMPANY TRANSFERS OF INVENTORY 251
Effects on Analysis of Short-Term Liquidity and Long-Term
Unconfirmed Profit in Ending Inventory 253
Solvency 314
Unconfirmed Profit in Beginning Inventory 254
CONSOLIDATION OF INTERNATIONAL SUBSIDIARIES 315
REVIEW 1 • Intercompany Eliminations: Land and
Equity Method Reporting 315
Merchandise Transfers 256
INTERCOMPANY TRANSFERS OF DEPRECIABLE ASSETS 256 The Consolidation Process 316
Objectives of the Eliminations 257 REVIEW 3 • Consolidation of an International
Subsidiary 320
Eliminations in Year of Transfer 257
IFRS FOR TRANSLATING AND CONSOLIDATING FOREIGN
Eliminations in Subsequent Years 258
CURRENCY FINANCIAL STATEMENTS 320
Eliminations in Year of Sale to Outside Party 260
Translation and Remeasurement 320
REVIEW 2 • Intercompany Eliminations: Depreciable Asset
Subsidiaries in Hyperinflationary Economies 320
Transfers 261
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR REVIEW OF KEY CONCEPTS 322
INTERCOMPANY TRANSACTIONS 261 MULTIPLE CHOICE QUESTIONS 322
COMPREHENSIVE ILLUSTRATION 262 EXERCISES 324
xvi Contents
PROBLEMS 331 Transacting in Futures Contracts 401
REVIEW SOLUTIONS 342 Accounting Events in Futures Trading 402
T-Account Analysis of Futures Contracts 402
Illustrations of Accounting for Futures Contracts 403
Chapter 8 REVIEW 1 •
OPTION CONTRACTS 407
Accounting for Futures Contracts 407
Foreign Currency Transactions
Definitions 407
and Hedging 346
Effects of Price Changes of Optioned Items 408
FOREIGN CURRENCY TRANSACTIONS AND RISK 347 Accounting Events in Options Trading 408
FOREIGN CURRENCY TRANSACTIONS 348 Illustrations of Accounting for Options 409
Import and Export Transactions 348 REVIEW 2 • Accounting for Option Contracts 413
REVIEW 1 • Foreign-Currency-Denominated Import and INTEREST RATE SWAPS 414
Export Transactions 352 Accounting for Interest Rate Swaps 415
Foreign Borrowing and Lending Transactions 352
Assessing Hedge Effectiveness 416
HEDGING FOREIGN EXCHANGE EXPOSURES 353 Accounting Events and Entries for Interest Rate Swaps 417
Types of Foreign Exchange Risk 353 REVIEW 3 • Accounting for Interest Rate Swaps 419
Derivative Instruments Used in Hedging 354 DISCLOSURE REQUIREMENTS 420
Reporting Investments in Foreign Currency Derivatives 356 Derivatives and Hedging Disclosures 420
REVIEW 2 • Using Forward Contracts to Hedge
DERIVATIVES AND HEDGING UNDER IFRS 422
Foreign-Currency-Denominated Import
Transactions 362 IFRS 9 Hedge Accounting Requirements 422
REVIEW 3 • Using Forward Contracts to Hedge REVIEW OF KEY CONCEPTS 423
Foreign-Currency-Denominated Firm
Commitments 367 MULTIPLE CHOICE QUESTIONS 423
REVIEW 4 • Using Forward Contracts to Hedge Foreign- EXERCISES 425
Currency-Denominated Forecasted PROBLEMS 429
Transactions 369
REVIEW SOLUTIONS 434
Improvements in Hedge Accounting Requirements 374
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR
FOREIGN CURRENCY TRANSACTIONS AND HEDGING 375
Qualifications for Hedge Accounting 375 Chapter 10
Comparison of IFRS and U.S. GAAP Hedge Accounting 376 State and Local Governments: Introduction
Financial Instruments Disclosures 378 and General Fund Transactions 438
REVIEW OF KEY CONCEPTS 378
NATURE OF GOVERNMENT ACTIVITIES 439
MULTIPLE CHOICE QUESTIONS 379
External Users of Governmental Financial Statements 441
EXERCISES 381
SOURCES OF GAAP FOR STATE AND LOCAL
PROBLEMS 386 GOVERNMENTS 441
REVIEW SOLUTIONS 393 GAAP Hierarchy in Government Accounting 442
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xvi Contents
PROBLEMS 331 Transacting in Futures Contracts 401
REVIEW SOLUTIONS 342 Accounting Events in Futures Trading 402
T-Account Analysis of Futures Contracts 402
Illustrations of Accounting for Futures Contracts 403
Chapter 8 REVIEW 1 • Accounting for Futures Contracts 407
OPTION CONTRACTS 407
Foreign Currency Transactions
Definitions 407
and Hedging 346
Effects of Price Changes of Optioned Items 408
FOREIGN CURRENCY TRANSACTIONS AND RISK 347 Accounting Events in Options Trading 408
FOREIGN CURRENCY TRANSACTIONS 348 Illustrations of Accounting for Options 409
Import and Export Transactions 348 REVIEW 2 • Accounting for Option Contracts 413
REVIEW 1 • Foreign-Currency-Denominated Import and INTEREST RATE SWAPS 414
Export Transactions 352 Accounting for Interest Rate Swaps 415
Foreign Borrowing and Lending Transactions 352
Assessing Hedge Effectiveness 416
HEDGING FOREIGN EXCHANGE EXPOSURES 353 Accounting Events and Entries for Interest Rate Swaps 417
Types of Foreign Exchange Risk 353 REVIEW 3 • Accounting for Interest Rate Swaps 419
Derivative Instruments Used in Hedging 354 DISCLOSURE REQUIREMENTS 420
Reporting Investments in Foreign Currency Derivatives 356 Derivatives and Hedging Disclosures 420
REVIEW 2 • Using Forward Contracts to Hedge
DERIVATIVES AND HEDGING UNDER IFRS 422
Foreign-Currency-Denominated Import
Transactions 362 IFRS 9 Hedge Accounting Requirements 422
REVIEW 3 • Using Forward Contracts to Hedge REVIEW OF KEY CONCEPTS 423
Foreign-Currency-Denominated Firm
Commitments 367 MULTIPLE CHOICE QUESTIONS 423
REVIEW 4 • Using Forward Contracts to Hedge Foreign- EXERCISES 425
Currency-Denominated Forecasted PROBLEMS 429
Transactions 369
REVIEW SOLUTIONS 434
Improvements in Hedge Accounting Requirements 374
INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR
FOREIGN CURRENCY TRANSACTIONS AND HEDGING 375
Qualifications for Hedge Accounting 375 Chapter 10
Comparison of IFRS and U.S. GAAP Hedge Accounting 376 State and Local Governments: Introduction
Financial Instruments Disclosures 378 and General Fund Transactions 438
REVIEW OF KEY CONCEPTS 378
NATURE OF GOVERNMENT ACTIVITIES 439
MULTIPLE CHOICE QUESTIONS 379
External Users of Governmental Financial Statements 441
EXERCISES 381
SOURCES OF GAAP FOR STATE AND LOCAL
PROBLEMS 386 GOVERNMENTS 441
REVIEW SOLUTIONS 393 GAAP Hierarchy in Government Accounting 442
OBJECTIVES OF FINANCIAL REPORTING 442
Chapter 9 Identifying the Reporting Entity 443
FUND STRUCTURE 444
Futures, Options and Interest Fund Types 446
Rate Swaps 396 REVIEW 1 • Identifying Funds 447
ACCOUNTING AND REPORTING BY FUNDS 448
DERIVATIVES AND HEDGE ACCOUNTING 397
Accounting for Governmental Funds 448
Accounting for Derivatives and Hedging Transactions 398
Accounting for Proprietary Funds 449
Hedge Accounting Qualifications 398
Accounting for Fiduciary Funds 449
2017 FASB Accounting Standards Update 400
ACCOUNTING FOR THE GENERAL FUND 449
FUTURES CONTRACTS 400
Budgetary Accounts 451
Introduction to Futures Contracts 401
Contents xvii
Recording Property Tax Revenue 453 Debt Refundings 523
Purchase of Goods and Services 454 REVIEW OF KEY CONCEPTS 524
Supplies Inventories 456 MULTIPLE CHOICE QUESTIONS 525
Interfund Transactions 458 EXERCISES 527
Capital Assets and Long-Term Debt 459
PROBLEMS 531
Closing Entries 460
REVIEW SOLUTIONS 542
Outstanding Encumbrances at Year-End 461
COMPREHENSIVE ILLUSTRATION OF GENERAL FUND
ACCOUNTING AND REPORTING 463
Transactions During the Year 463
Chapter 12
Closing Entries 466 State and Local Governments:
Financial Statements 467 External Financial Reporting 546
REVIEW 2 • General Fund Budget and Closing Entries,
EXTERNAL REPORTING MODEL 547
Financial Statements 470
Management’s Discussion and Analysis 548
REVIEW OF KEY CONCEPTS 470
GOVERNMENT-WIDE FINANCIAL STATEMENTS 549
MULTIPLE CHOICE QUESTIONS 471
Statement of Net Position 549
EXERCISES 473
Statement of Activities 550
PROBLEMS 479
Discussion of Government-Wide Statements 550
REVIEW SOLUTIONS 491
REVIEW 1 • Prepare a Statement of Activities 553
FUND FINANCIAL STATEMENTS 553
Chapter 11 Major Funds 554
Governmental Funds Financial Statements 554
State and Local Governments: Financial Reporting Model Improvements 561
Other Transactions 494 REVIEW 2 • Reconcile the Change in Fund Balances to
Change in Net Position 561
ACCOUNTING FOR SPECIAL PURPOSE ACTIVITIES 496 Proprietary Funds Financial Statements 562
Special Revenue Funds 496 Fiduciary Funds Financial Statements 566
Permanent Funds 496 COMPARISON OF GOVERNMENT-WIDE AND FUNDS
ACCOUNTING FOR CAPITAL PROJECTS 498 INFORMATION 567
Capital Projects 498 Governmental Activities 567
Accounting for the Capital Projects Fund 499 Business-Type Activities 568
ACCOUNTING FOR GENERAL OBLIGATION DEBT 504 NOTES AND REQUIRED SUPPLEMENTARY
General Obligation Debt 505 INFORMATION 569
Accounting for the Debt Service Fund 505 Budgetary Comparison Schedules 569
REVIEW 1 • Capital Projects and Debt Service Fund CAPITAL ASSETS, INFRASTRUCTURE, INVESTMENTS, AND
Transactions and Financial Statements 508 DEFINED BENEFIT PENSION PLANS 571
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Contents xvii
Recording Property Tax Revenue 453 Debt Refundings 523
Purchase of Goods and Services 454 REVIEW OF KEY CONCEPTS 524
Supplies Inventories 456 MULTIPLE CHOICE QUESTIONS 525
Interfund Transactions 458 EXERCISES 527
Capital Assets and Long-Term Debt 459
PROBLEMS 531
Closing Entries 460
REVIEW SOLUTIONS 542
Outstanding Encumbrances at Year-End 461
COMPREHENSIVE ILLUSTRATION OF GENERAL FUND
ACCOUNTING AND REPORTING 463
Transactions During the Year 463
Chapter 12
Closing Entries 466 State and Local Governments:
Financial Statements 467 External Financial Reporting 546
REVIEW 2 • General Fund Budget and Closing Entries,
EXTERNAL REPORTING MODEL 547
Financial Statements 470
Management’s Discussion and Analysis 548
REVIEW OF KEY CONCEPTS 470
GOVERNMENT-WIDE FINANCIAL STATEMENTS 549
MULTIPLE CHOICE QUESTIONS 471
Statement of Net Position 549
EXERCISES 473
Statement of Activities 550
PROBLEMS 479
Discussion of Government-Wide Statements 550
REVIEW SOLUTIONS 491
REVIEW 1 • Prepare a Statement of Activities 553
FUND FINANCIAL STATEMENTS 553
Chapter 11 Major Funds 554
Governmental Funds Financial Statements 554
State and Local Governments: Financial Reporting Model Improvements 561
Other Transactions 494 REVIEW 2 • Reconcile the Change in Fund Balances to
Change in Net Position 561
ACCOUNTING FOR SPECIAL PURPOSE ACTIVITIES 496 Proprietary Funds Financial Statements 562
Special Revenue Funds 496 Fiduciary Funds Financial Statements 566
Permanent Funds 496 COMPARISON OF GOVERNMENT-WIDE AND FUNDS
ACCOUNTING FOR CAPITAL PROJECTS 498 INFORMATION 567
Capital Projects 498 Governmental Activities 567
Accounting for the Capital Projects Fund 499 Business-Type Activities 568
ACCOUNTING FOR GENERAL OBLIGATION DEBT 504 NOTES AND REQUIRED SUPPLEMENTARY
General Obligation Debt 505 INFORMATION 569
Accounting for the Debt Service Fund 505 Budgetary Comparison Schedules 569
REVIEW 1 • Capital Projects and Debt Service Fund CAPITAL ASSETS, INFRASTRUCTURE, INVESTMENTS, AND
Transactions and Financial Statements 508 DEFINED BENEFIT PENSION PLANS 571
ACCOUNTING FOR PROPRIETARY ACTIVITIES 509 Capital Assets and Infrastructure 571
Accounting for Enterprise and Internal Service Funds 509 Investments 571
REVIEW 2 • Enterprise Fund Transactions and Financial Defined Benefit Pension Plans 572
Statements 513
REVIEW OF KEY CONCEPTS 573
ACCOUNTING FOR FIDUCIARY ACTIVITIES 513
MULTIPLE CHOICE QUESTIONS 574
Accounting for Fiduciary Funds 514
EXERCISES 576
ACCOUNTING FOR INVESTMENTS 517
PROBLEMS 583
Derivatives Investments 518
REVIEW SOLUTIONS 591
ACCOUNTING FOR OTHER LIABILITIES AND DEBT
REFUNDINGS 520
Compensated Absences 520
Landfills and Asset Retirement Obligations 520
Accounting for Leased Assets 522
xviii Contents
Relations Among Partners 644
Chapter 13 Partners’ Property Rights 645
Contractual Provisions: The Partnership Agreement 645
Private
Limited Partnerships 645
Not-For-Profit Organizations 592
Comparison of Corporate and Partnership Forms of
CHARACTERISTICS OF PRIVATE NOT-FOR-PROFIT (NFP) Organization 646
ORGANIZATIONS 593 Partnership Reporting Issues 647
NFP REPORTING ENVIRONMENT 594 FORMATION OF THE PARTNERSHIP 649
External Financial Reporting Requirements: General Bonus and Goodwill Approaches 649
Concepts 594 REVIEW 1 • Formation of a Partnership 650
PRESENTATION OF FINANCIAL STATEMENTS 596 ALLOCATION OF PARTNERSHIP INCOME TO PARTNERS 650
Statement of Financial Position 596 Salaries to Partners 651
Statement of Activities 597 Bonus to Partners 651
Statement of Cash Flows 601 Interest on Partners’ Capital Accounts 652
Liquidity Disclosures 602 Percentage Allocation by Income-Sharing Ratio 652
ACCOUNTING FOR CONTRIBUTIONS RECEIVED 603 Comprehensive Illustration of Partnership Income
Unconditional and Unrestricted Cash Contributions 603 Allocation 652
Unconditional and Unrestricted Contributions of Goods and Schedule of Changes in Capital Accounts 653
Services 603 REVIEW 2 • Income Allocation 654
Donor-Imposed Time and Use Restrictions 605 ADMISSION OF A NEW PARTNER 654
Donor-Imposed Conditions 607 Admission by Purchase of an Existing Partnership
Donor-Imposed Restrictions in Perpetuity 607 Interest 654
Contributions of Long-Lived Assets 608 Admission by Investment of New Capital 656
Split-Interest Agreements 609 Effects of Bonus and Goodwill Methods on Partners’
Contributions Received on Behalf of Others 610 Capital 659
REVIEW 1 • Accounting for Contributions 611 Evaluation of Bonus and Goodwill Methods 659
ACCOUNTING FOR INVESTMENTS 611 RETIREMENT OF A PARTNER 660
REVIEW 2 • Reporting for Investments 612 Purchase with Personal Assets 660
COMPREHENSIVE ILLUSTRATION OF NFP ACCOUNTING: Purchase with Partnership Assets 660
NORTHEASTERN HEART SOCIETY 613 REVIEW 3 • Retirement of a Partner and Admission of a New
Partner 663
REPORTING ISSUES FOR SPECIFIC NOT-FOR-PROFIT
ORGANIZATIONS 618 PARTNERSHIP LIQUIDATIONS 663
Voluntary Health and Welfare Organizations 618 Priorities for Payments 663
Colleges and Universities 619 Rights of Creditors 664
Health Care Organizations 619 Simple Versus Installment Liquidations 665
Simple Liquidations 665
REVIEW OF KEY CONCEPTS 621
Installment Liquidations 667
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xviii Contents
Relations Among Partners 644
Chapter 13 Partners’ Property Rights 645
Contractual Provisions: The Partnership Agreement 645
Private
Limited Partnerships 645
Not-For-Profit Organizations 592
Comparison of Corporate and Partnership Forms of
CHARACTERISTICS OF PRIVATE NOT-FOR-PROFIT (NFP) Organization 646
ORGANIZATIONS 593 Partnership Reporting Issues 647
NFP REPORTING ENVIRONMENT 594 FORMATION OF THE PARTNERSHIP 649
External Financial Reporting Requirements: General Bonus and Goodwill Approaches 649
Concepts 594 REVIEW 1 • Formation of a Partnership 650
PRESENTATION OF FINANCIAL STATEMENTS 596 ALLOCATION OF PARTNERSHIP INCOME TO PARTNERS 650
Statement of Financial Position 596 Salaries to Partners 651
Statement of Activities 597 Bonus to Partners 651
Statement of Cash Flows 601 Interest on Partners’ Capital Accounts 652
Liquidity Disclosures 602 Percentage Allocation by Income-Sharing Ratio 652
ACCOUNTING FOR CONTRIBUTIONS RECEIVED 603 Comprehensive Illustration of Partnership Income
Unconditional and Unrestricted Cash Contributions 603 Allocation 652
Unconditional and Unrestricted Contributions of Goods and Schedule of Changes in Capital Accounts 653
Services 603 REVIEW 2 • Income Allocation 654
Donor-Imposed Time and Use Restrictions 605 ADMISSION OF A NEW PARTNER 654
Donor-Imposed Conditions 607 Admission by Purchase of an Existing Partnership
Donor-Imposed Restrictions in Perpetuity 607 Interest 654
Contributions of Long-Lived Assets 608 Admission by Investment of New Capital 656
Split-Interest Agreements 609 Effects of Bonus and Goodwill Methods on Partners’
Contributions Received on Behalf of Others 610 Capital 659
REVIEW 1 • Accounting for Contributions 611 Evaluation of Bonus and Goodwill Methods 659
ACCOUNTING FOR INVESTMENTS 611 RETIREMENT OF A PARTNER 660
REVIEW 2 • Reporting for Investments 612 Purchase with Personal Assets 660
COMPREHENSIVE ILLUSTRATION OF NFP ACCOUNTING: Purchase with Partnership Assets 660
NORTHEASTERN HEART SOCIETY 613 REVIEW 3 • Retirement of a Partner and Admission of a New
Partner 663
REPORTING ISSUES FOR SPECIFIC NOT-FOR-PROFIT
ORGANIZATIONS 618 PARTNERSHIP LIQUIDATIONS 663
Voluntary Health and Welfare Organizations 618 Priorities for Payments 663
Colleges and Universities 619 Rights of Creditors 664
Health Care Organizations 619 Simple Versus Installment Liquidations 665
Simple Liquidations 665
REVIEW OF KEY CONCEPTS 621
Installment Liquidations 667
MULTIPLE CHOICE QUESTIONS 622
EXERCISES 624
REVIEW 4 • Termination of the Partnership 677
REVIEW OF KEY CONCEPTS 677
PROBLEMS 628
MULTIPLE CHOICE QUESTIONS 678
REVIEW SOLUTIONS 640
EXERCISES 680
PROBLEMS 685
Chapter 14 REVIEW SOLUTIONS 693
Partnership Accounting and Reporting 642
INTRODUCTION 643 Chapter 15
CHARACTERISTICS OF A PARTNERSHIP 643 Bankruptcy and Reorganization 698
Relations of Partners to Others 644
LEGAL ASPECTS OF BANKRUPTCY 700
Contents xix
Legal Process of Chapter 7 Liquidation 701 Securities Legislation and the SEC 746
Legal Process of Chapter 11 Reorganization 701 Definition of a Security 748
FINANCIAL REPORTING FOR CHAPTER 7 LIQUIDATION 701 ORGANIZATION AND STRUCTURE OF THE SEC 748
Liquidation Basis of Accounting 701 SEC Pronouncements on Accounting and Auditing 750
Statement of Affairs 704 REVIEW 1 • Mission and Organization of the SEC 750
REVIEW 1 • Chapter 7 Liquidation 709 REGISTRATION OF NEW SECURITIES 750
Statement of Realization and Liquidation 709 PERIODIC REPORTING REQUIREMENTS 752
FINANCIAL REPORTING FOR CHAPTER 11 EDGAR 752
REORGANIZATION 713 The Annual Report: Form 10-K 752
Reporting During the Reorganization Process 713 Regulation S-X 757
Reporting After Reorganization 716 The Quarterly Report: Form 10-Q 759
REVIEW 2 • Chapter 11 Reorganization 721 Special Reports: Form 8-K 760
OTHER FORMS OF RESTRUCTURING 721 REVIEW 2 • Registration and Periodic Reporting
Quasi-Reorganization 721 Requirements 762
Troubled Debt Restructuring 722 CORPORATE ACCOUNTABILITY AND GOVERNANCE 762
REVIEW OF KEY CONCEPTS 723 Audit Committees 763
MULTIPLE CHOICE QUESTIONS 724 Antifraud Provisions and Insider Trading 763
Proxy Statements 764
EXERCISES 726
The Dodd-Frank Act 764
PROBLEMS 732
THE SEC AND ACCOUNTING STANDARDS 765
REVIEW SOLUTIONS 742
REVIEW 3 • Corporate Accountability and Governance, SEC
Intervention in Standard-Setting 766
Chapter 16 REVIEW OF KEY CONCEPTS 766
MULTIPLE CHOICE QUESTIONS 767
The SEC and Financial Reporting 744 EXERCISES 768
PROBLEMS 773
ESTABLISHMENT OF THE SEC AND KEY SECURITIES
LEGISLATION 746 REVIEW SOLUTIONS 776
Establishment of the SEC 746 INDEX 778
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1
CHAPTER
Intercorporate
Investments: An
Overview
LEARNING OBJECTIVES
LO1 Describe the reporting for intercorporate debt investments and intercorporate equity investments
with no significant influence. (p. 5)
LO2 Explain the reporting for equity method intercorporate investments. (p. 9)
LO3 Describe the reporting for controlling interests in other companies. (p. 15)
LO4 Discuss International Financial Reporting Standards (IFRS) for intercorporate investments. (p. 17)
THE COCA-COLA COMPANY
www.coca-cola.com
The Coca-Cola Company is the world’s largest beverage company. In addition to Coca-Cola, its brands
include Sprite, Dasani, and Minute Maid. Coca-Cola produces beverage syrup in concentrated form, and
sells it to bottlers. The bottlers mix the syrup with water and other ingredients, and bottle or can the finished
beverages for delivery to retailers, restaurants, and food distributors.
Coca-Cola’s investments in its bottlers and other companies take a variety of forms. At the end of 2016,
Coca-Cola owned several legally separate bottling companies, including Coca-Cola Refreshments Canada
and BCI Coca-Cola Bottling Company of Los Angeles. These companies are subsidiaries of Coca-Cola
Company. Coca-Cola has a significant interest in some of its bottlers through equity ownership. It is in-
volved in several joint ventures, where Coca-Cola shares decision-making authority with another company,
and has certain financial relationships with other companies, called variable interests, which must be dis-
closed in its financial statements. Coca-Cola also holds debt investments in other companies, and equity
interests with no significant influence. These accounts appear as current and noncurrent assets on Coca-
Cola’s balance sheet.
Coca-Cola’s financial statements illustrate the variety of intercorporate investments held by companies.
Each investment type involves a different set of reporting requirements. This chapter presents an overview of
reporting for the major types of investments in other companies. Source: The Coca-Cola Company 2016 annual
report.
CHAPTER ORGANIZATION
Intercorporate debt
investments and
equity investments Investments International
with no significant with significant Controlling Financial Reporting
Introduction influence influence investments Standards
• Motivations for • Trading debt • Equity method • Mergers, • Debt investments
intercorporate investments investments consolidations, and equity
investments • Available-for-sale • Joint ventures and asset investments with
• Types of debt investments acquisitions no significant
investments • Stock acquisitions influence
• Held-to-maturity
debt investments • Variable interest • Investments
entities with significant
• Equity investments
influence
• Joint ventures
• Controlling
investments
INTRODUCTION
‑
ating relationships and legal structures. Intercorporate investments are pervasive business activities,
Motivations for Intercorporate Investments
Intercorporate investments achieve a variety of business purposes.
• A company purchases debt or equity securities of another company as a temporary investment of
excess cash or as part of a longer‑term risk‑adjusted portfolio, expecting to receive dividends and
capital gains.
• A company makes strategic investments to develop relationships with suppliers or customers or to
gain access to new product or geographic markets.
• A company obtains a controlling interest in another company to facilitate activity along its supply chain.
(https://cambridgepub.com) Page Fit 3
CHAPTER ORGANIZATION
Intercorporate debt
investments and
equity investments Investments International
with no significant with significant Controlling Financial Reporting
Introduction influence influence investments Standards
• Motivations for • Trading debt • Equity method • Mergers, • Debt investments
intercorporate investments investments consolidations, and equity
investments • Available-for-sale • Joint ventures and asset investments with
• Types of debt investments acquisitions no significant
investments • Stock acquisitions influence
• Held-to-maturity
debt investments • Variable interest • Investments
entities with significant
• Equity investments
influence
• Joint ventures
• Controlling
investments
INTRODUCTION
‑
ating relationships and legal structures. Intercorporate investments are pervasive business activities,
Motivations for Intercorporate Investments
Intercorporate investments achieve a variety of business purposes.
• A company purchases debt or equity securities of another company as a temporary investment of
excess cash or as part of a longer‑term risk‑adjusted portfolio, expecting to receive dividends and
capital gains.
• A company makes strategic investments to develop relationships with suppliers or customers or to
gain access to new product or geographic markets.
• A company obtains a controlling interest in another company to facilitate activity along its supply chain.
The Coca-Cola Company holds investments in the securities of other companies for the purpose of
generating investment income and capital gains. In its December 31, 2016, balance sheet, investments
in debt securities totaled close to $5 trillion, and investments in equity securities totaled over $2 trillion.
These investments are reported in various asset lines on its balance sheet.
Coca‑Cola uses the equity method‑
ence. In 2016, Coca‑Cola had a 29 percent ownership interest in Coca‑Cola Amatil, one of the largest
‑
ing in Latin America, and a 23 percent interest in Coca‑Cola Hellenic, operating in 28 established,
developing, and emerging European markets. Coca‑Cola holds these investments for strategic reasons
making authority in joint ventures with other companies. In 2016, Beverage Partners Worldwide was
a 50/50 joint venture between Coca‑Cola and Nestlé S.A., distributing Nestea products primarily in
Europe and Canada. This investment was also reported using the equity method.
4 Chapter 1 • Intercorporate Investments: An Overview
Coca‑Cola has controlling interests in close to 60 companies worldwide. It acquires other com‑
panies to increase market share, expand its presence in new markets, and improve the functioning of
its supply chain. For example, a major acquisition in 2016 was the purchase of Xiamen Culiangwang
Beverage Technology Company, Ltd., a company that produces protein beverages in China. Most of
these companies are controlled through stock investments. However, in some cases Coca‑Cola has
achieving control, the individual assets and liabilities of all these companies are included with Coca‑
Cola’s assets and liabilities on its balance sheet, through a process known as consolidation. There is
no separate investment line for these companies.
Types of Investments
• Trading
Investors typically buy and sell these securities frequently.
• Held‑to‑maturity debt investments are intended to be held to maturity. Companies hold these
investments for the interest and principal payments.
• Available‑for‑sale investments are debt securities held for income or gains in value that are not
• Investments in equity securities, where the investor has no are held for income
and capital gains.
• Equity method‑
ence over the investee. This category includes joint ventures, where the investor shares joint control
of an entity.
• Debt or equity securities can be held as hedges
investing in euro‑denominated debt securities, which gain in value to offset the loss on the payables
if the U.S. dollar weakens.
• A company can acquire some or all of the assets and liabilities of another business to expand into
new markets, develop new products or services, or for other strategic purposes. These transactions
are mergers, consolidations, or asset acquisitions depending on the acquisition structure.
• A company can gain a controlling interest in another legally separate company, either through
ownership of all or the majority of its voting stock—termed a stock acquisition—or through a legal
agreement that gives the investor the right to the majority of the investee’s risks and rewards. These
acquired companies are called subsidiaries. Entities controlled through a legal agreement rather
than equity ownership are also known as variable interest entities.
FASB ASC Topic 825 allows companies to elect fair value reporting (the “fair value option”) for
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4 Chapter 1 • Intercorporate Investments: An Overview
Coca‑Cola has controlling interests in close to 60 companies worldwide. It acquires other com‑
panies to increase market share, expand its presence in new markets, and improve the functioning of
its supply chain. For example, a major acquisition in 2016 was the purchase of Xiamen Culiangwang
Beverage Technology Company, Ltd., a company that produces protein beverages in China. Most of
these companies are controlled through stock investments. However, in some cases Coca‑Cola has
achieving control, the individual assets and liabilities of all these companies are included with Coca‑
Cola’s assets and liabilities on its balance sheet, through a process known as consolidation. There is
no separate investment line for these companies.
Types of Investments
• Trading
Investors typically buy and sell these securities frequently.
• Held‑to‑maturity debt investments are intended to be held to maturity. Companies hold these
investments for the interest and principal payments.
• Available‑for‑sale investments are debt securities held for income or gains in value that are not
• Investments in equity securities, where the investor has no are held for income
and capital gains.
• Equity method‑
ence over the investee. This category includes joint ventures, where the investor shares joint control
of an entity.
• Debt or equity securities can be held as hedges
investing in euro‑denominated debt securities, which gain in value to offset the loss on the payables
if the U.S. dollar weakens.
• A company can acquire some or all of the assets and liabilities of another business to expand into
new markets, develop new products or services, or for other strategic purposes. These transactions
are mergers, consolidations, or asset acquisitions depending on the acquisition structure.
• A company can gain a controlling interest in another legally separate company, either through
ownership of all or the majority of its voting stock—termed a stock acquisition—or through a legal
agreement that gives the investor the right to the majority of the investee’s risks and rewards. These
acquired companies are called subsidiaries. Entities controlled through a legal agreement rather
than equity ownership are also known as variable interest entities.
FASB ASC Topic 825 allows companies to elect fair value reporting (the “fair value option”) for
eligible intercorporate investments. These include all investments in debt or equity securities, except
investment in equity securities where the investor has a controlling interest in the investee. Controlling
equity investments require consolidation of the investee’s accounts with that of the investor, a topic
introduced later in this chapter and covered in detail in Chapters 2 through 7 of this text. Investments
for which the fair value option is chosen are reported at fair value, with all value changes reported in
income as incurred. The discussion that follows assumes the investor does not elect the fair value option
where appropriate.
Chapter 1 • Intercorporate Investments: An Overview 5
INTERCORPORATE DEBT INVESTMENTS AND EQUITY
INVESTMENTS WITH NO SIGNIFICANT INFLUENCE
Many businesses invest in the debt securities of other companies to generate investment income and LO1 Describe
capital gains. Examples include commercial paper, corporate bonds, and redeemable preferred stock. the reporting for
Equity investments held for income and gains typically take the form of shares of a company’s common intercorporate
debt invest-
or preferred stock, but can also be put or call options on the shares, allowing the investor to sell or buy ments and inter-
corporate equity
ASC Topic 320 describes the reporting requirements for investments in debt securities. It divides investments with
no significant
and held‑to‑maturity investments. ASC Topic 321 describes reporting requirements for investments influence.
reporting for these investments, we provide only a brief discussion.
Trading Investments
Trading investments appear on the balance sheet as current assets reported at fair value, with gains and
losses reported on the income statement as market prices change. Interest income is reported in income
as earned. An illustration is based on the information in Exhibit 1.1.
EXHIBIT 1.1 Debt Securities Portfolio
Security Date Acquired Cost Dec. 31, 2018 Fair Value Date Sold Selling Price
A. . . . . . . . . 10/15/18 $100,000 $125,000 1/15/19 $120,000
B. . . . . . . . . 10/15/18 500,000 485,000 1/15/19 496,000
C. . . . . . . . . 10/15/18 200,000 N/A 12/5/18 214,000
2018
Oct. 15 Investment in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
To record investment in trading securities costing a total of $800,000
in cash.
2018
Dec. 5 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,000
Investment in trading securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Gain on trading securities (income) . . . . . . . . . . . . . . . . . . . . . . . 14,000
To record sale of trading security C.
2018
Dec. 31 Investment in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
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Chapter 1 • Intercorporate Investments: An Overview 5
INTERCORPORATE DEBT INVESTMENTS AND EQUITY
INVESTMENTS WITH NO SIGNIFICANT INFLUENCE
Many businesses invest in the debt securities of other companies to generate investment income and LO1 Describe
capital gains. Examples include commercial paper, corporate bonds, and redeemable preferred stock. the reporting for
Equity investments held for income and gains typically take the form of shares of a company’s common intercorporate
debt invest-
or preferred stock, but can also be put or call options on the shares, allowing the investor to sell or buy ments and inter-
corporate equity
ASC Topic 320 describes the reporting requirements for investments in debt securities. It divides investments with
no significant
and held‑to‑maturity investments. ASC Topic 321 describes reporting requirements for investments influence.
reporting for these investments, we provide only a brief discussion.
Trading Investments
Trading investments appear on the balance sheet as current assets reported at fair value, with gains and
losses reported on the income statement as market prices change. Interest income is reported in income
as earned. An illustration is based on the information in Exhibit 1.1.
EXHIBIT 1.1 Debt Securities Portfolio
Security Date Acquired Cost Dec. 31, 2018 Fair Value Date Sold Selling Price
A. . . . . . . . . 10/15/18 $100,000 $125,000 1/15/19 $120,000
B. . . . . . . . . 10/15/18 500,000 485,000 1/15/19 496,000
C. . . . . . . . . 10/15/18 200,000 N/A 12/5/18 214,000
2018
Oct. 15 Investment in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
To record investment in trading securities costing a total of $800,000
in cash.
2018
Dec. 5 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,000
Investment in trading securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Gain on trading securities (income) . . . . . . . . . . . . . . . . . . . . . . . 14,000
To record sale of trading security C.
2018
Dec. 31 Investment in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Gain on trading securities (income) . . . . . . . . . . . . . . . . . . . . . . . 10,000
To record unrealized value change in securities A and B; unrealized
gain of $25,000 on security A and unrealized loss of $15,000 on
security B.
2019
Jan. 15 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616,000
Investment in trading securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 610,000
Gain on trading securities (income) . . . . . . . . . . . . . . . . . . . . . . . 6,000
To record sale of trading securities A and B; cash received 5
$120,000 1 $496,000, credit to Investment 5 $125,000 1 $485,000.
6 Chapter 1 • Intercorporate Investments: An Overview
Available-for-Sale Investments
Investments in available‑for‑sale (AFS) securities are debt securities reported at fair value as current or
securities are reported in other comprehensive income (OCI), which is closed to accumulated other com‑
prehensive income (AOCI) in the equity section of the balance sheet. When AFS securities are sold, the
gain or loss appears in income when the securities are sold. Interest income is reported in income as earned.
2018
Oct. 15 Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
To record investment in AFS securities A, B and C.
2018
Dec. 5 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,000
Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Gain on AFS securities (income). . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
To record the sale of AFS security C. When AFS securities are
purchased and sold in the same reporting period, gains and losses
can be reported directly in income without going through OCI.
2018
Dec. 31 Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Gain on AFS securities (OCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
To record unrealized value changes for AFS securities A and B in OCI;
OCI is closed to AOCI on the balance sheet.
2019
Jan. 15 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616,000
. . . . . . . . . . . . . . . . . . . 10,000
Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610,000
Gain on AFS securities (income). . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
To record sale of AFS securities A and B.
Note that the effect of the January 15, 2019 entry is to reduce OCI by $10,000. To put this in perspective,
look at Coca‑Cola’s 2016 Statement of Comprehensive Income.
The Coca-Cola Company and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended December 31, (In millions) 2016 2015 2014
Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,550 $7,366 $7,124
Other comprehensive income:
Net foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . (626) (3,959) (2,382)
Net gain (loss) on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (382) 142 357
Net unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . . . 17 (684) 714
Net change in pension and other benefit liabilities. . . . . . . . . . . . . . . . . . . . . (53) 86 (1,039)
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6 Chapter 1 • Intercorporate Investments: An Overview
Available-for-Sale Investments
Investments in available‑for‑sale (AFS) securities are debt securities reported at fair value as current or
securities are reported in other comprehensive income (OCI), which is closed to accumulated other com‑
prehensive income (AOCI) in the equity section of the balance sheet. When AFS securities are sold, the
gain or loss appears in income when the securities are sold. Interest income is reported in income as earned.
2018
Oct. 15 Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
To record investment in AFS securities A, B and C.
2018
Dec. 5 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,000
Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Gain on AFS securities (income). . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
To record the sale of AFS security C. When AFS securities are
purchased and sold in the same reporting period, gains and losses
can be reported directly in income without going through OCI.
2018
Dec. 31 Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Gain on AFS securities (OCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
To record unrealized value changes for AFS securities A and B in OCI;
OCI is closed to AOCI on the balance sheet.
2019
Jan. 15 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616,000
. . . . . . . . . . . . . . . . . . . 10,000
Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610,000
Gain on AFS securities (income). . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
To record sale of AFS securities A and B.
Note that the effect of the January 15, 2019 entry is to reduce OCI by $10,000. To put this in perspective,
look at Coca‑Cola’s 2016 Statement of Comprehensive Income.
The Coca-Cola Company and Subsidiaries
Consolidated Statements of Comprehensive Income
Year Ended December 31, (In millions) 2016 2015 2014
Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,550 $7,366 $7,124
Other comprehensive income:
Net foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . (626) (3,959) (2,382)
Net gain (loss) on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (382) 142 357
Net unrealized gain (loss) on available-for-sale securities . . . . . . . . . . . . . . . 17 (684) 714
Net change in pension and other benefit liabilities. . . . . . . . . . . . . . . . . . . . . (53) 86 (1,039)
Total Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,506 2,951 4,774
Less: Comprehensive income (loss) attributable to noncontrolling interests. . . 10 (3) 21
Total Comprehensive Income Attributable to Shareowners of
the Coca-Cola Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,496 $2,954 $4,753
reduces other comprehensive income.
gains on AFS securities held at year‑end must be $118 million. In our exam‑
gain of $10,000 for AFS secu‑
reduction in other comprehensive income.
Chapter 1 • Intercorporate Investments: An Overview 7
The principal difference in reporting for trading and available‑for‑sale investments is the timing of
gain and loss recognition on the income statement. For trading securities, gains and losses affect net
income as prices change. For AFS securities, gains and losses affect net income when they are sold.
Note that in the previous illustration, the gain reported in 2019 income is the difference between the
selling price and the original cost of the investment ($16,000 5 $616,000 2 $600,000).
Impairment Testing for AFS Securities Although available‑for‑sale debt securities are carried at
fair value on the balance sheet, we need to identify any declines in value meeting the conditions for impair‑
ment. Impairment losses caused by deterioration of the investee’s ability to pay principal and interest
(credit losses) are reported on the income statement, not in other comprehensive income. Accumulated
expected credit losses are reported in an allowance account, which reduces the investment balance. The
details of the impairment testing process are complex and beyond the scope of this overview chapter. The
major points, found in ASC Topic 326, are described here.
• The investment is impaired if its fair value is below its cost.
• An impairment loss, equal to the difference between cost and fair value, is reported in income when the
investor intends to sell the security, or it is more likely than not that the security will be sold before the
loss is recovered. This loss directly reduces the investment balance.
• If the investor intends to hold the security and not sell it before the loss is recovered, the impair‑
ment loss is still recorded, but it is divided into two parts. The loss attributable to a decline in
income and reduces the investment through an allowance account. Reversals of credit losses also
go through income. Any market‑related loss, for example a decline in fair value caused by a rise in
market interest rates, is reported in other comprehensive income and is a direct write‑down of the
investment balance.
Suppose the $15,000 decline in value of AFS security B at December 31, 2018, is determined to be a
2018
Dec. 31 Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Impairment loss on security B (income). . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Gain on security A (OCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
. . . . . . . . . . . . . . . . . . . . 15,000
To record unrealized gain on security A and impairment loss on
security B.
Note that the amount of the impairment loss reported on the income statement is the decline in value
below cost
‑
ate. Suppose an AFS investment, carried at $200,000, was originally acquired for $160,000. Therefore
The $70,000 loss (5 $160,000 2 $90,000) is determined to be a credit loss. The entry to record the
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Chapter 1 • Intercorporate Investments: An Overview 7
The principal difference in reporting for trading and available‑for‑sale investments is the timing of
gain and loss recognition on the income statement. For trading securities, gains and losses affect net
income as prices change. For AFS securities, gains and losses affect net income when they are sold.
Note that in the previous illustration, the gain reported in 2019 income is the difference between the
selling price and the original cost of the investment ($16,000 5 $616,000 2 $600,000).
Impairment Testing for AFS Securities Although available‑for‑sale debt securities are carried at
fair value on the balance sheet, we need to identify any declines in value meeting the conditions for impair‑
ment. Impairment losses caused by deterioration of the investee’s ability to pay principal and interest
(credit losses) are reported on the income statement, not in other comprehensive income. Accumulated
expected credit losses are reported in an allowance account, which reduces the investment balance. The
details of the impairment testing process are complex and beyond the scope of this overview chapter. The
major points, found in ASC Topic 326, are described here.
• The investment is impaired if its fair value is below its cost.
• An impairment loss, equal to the difference between cost and fair value, is reported in income when the
investor intends to sell the security, or it is more likely than not that the security will be sold before the
loss is recovered. This loss directly reduces the investment balance.
• If the investor intends to hold the security and not sell it before the loss is recovered, the impair‑
ment loss is still recorded, but it is divided into two parts. The loss attributable to a decline in
income and reduces the investment through an allowance account. Reversals of credit losses also
go through income. Any market‑related loss, for example a decline in fair value caused by a rise in
market interest rates, is reported in other comprehensive income and is a direct write‑down of the
investment balance.
Suppose the $15,000 decline in value of AFS security B at December 31, 2018, is determined to be a
2018
Dec. 31 Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Impairment loss on security B (income). . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Gain on security A (OCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
. . . . . . . . . . . . . . . . . . . . 15,000
To record unrealized gain on security A and impairment loss on
security B.
Note that the amount of the impairment loss reported on the income statement is the decline in value
below cost
‑
ate. Suppose an AFS investment, carried at $200,000, was originally acquired for $160,000. Therefore
The $70,000 loss (5 $160,000 2 $90,000) is determined to be a credit loss. The entry to record the
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Impairment loss on AFS securities (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Investment in AFS securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
To record impairment loss on AFS securities.
The investment is reported at a net amount of $90,000, consisting of $160,000 cost less an allowance
for credit losses of $70,000.
Held-to-Maturity Investments
reported unless the securities are not held to maturity as intended, and this only occurs under limited
8 Chapter 1 • Intercorporate Investments: An Overview
Assume investment of $965,349 in a $1,000,000 face value corporate bond on January 1, 2018, a
price producing a 6 percent yield to maturity. The bond pays 5 percent interest annually on December 31,
2018
Jan. 1 Investment in HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965,349
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965,349
To record investment in HTM securities.
2018
Dec. 31 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Investment in HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,921
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,921
To record interest income for 2018; $50,000 5 5% 3 $1,000,000;
$57,921 5 6% 3 $965,349.
2019
Dec. 31 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Investment in HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,396
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,396
To record interest income for 2019; $58,396 5 6% 3 $973,270
($965,349 1 $7,921).
2020
Dec. 31 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Investment in HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,900
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,900
To record interest income for 2020; $58,900 5 6% 3 $981,666
(5 $973,270 1 $8,396).
2021
Dec. 31 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Investment in HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,434
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,434
To record interest income for 2021; $59,434 5 6% 3 $990,566
(5 $981,666 1 $8,900).
2021
Dec. 31 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
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burden to you.”—Tenderness was next tried, my ruin involved his;
the fate of a child who though yet unborn, was urged with many
tears; Miss Flint’s generosity to me, her attachment to him were not
omitted. I was conquered. “Do with me what you will,” said I
mournfully, “only remember, Philip, who it was, that spread the toils
with which my soul is encompassed; I cannot live to see you
miserable.” He employed much sophistry to convince me that I was
engaged in the performance of a meritorious work, inasmuch as it
secured innocence from shame, and saved the reputation of Mr.
Flint’s daughter: a woman who had respected my secret, and whose
gratitude would bind her to me for life.
CHAP. III.
I will pass over the means of deceit and imposition now employed. I
became a nominal mother to Philip Flint, and the measures which
had been adopted by removing me to London, in order for my
confinement, appeared to have secured Miss Flint’s reputation. Thus
betrayed by others, I had some palliations to offer to my upbraiding
conscience. The innocent being I had adopted as my own, pleaded
still more powerfully. I loved him with a parent’s love, and I
sheltered him from unjust reproach and scorn. In this temper of
mind I became acquainted with Sir Murdoch Maclairn. Alas! in the
society of truth and honour I was a dissembler! How often have I
forgotten, whilst listening to his tale of woe, in which all was
faithfulness, that I was a deceiver! and whilst my heart and tongue
spoke his language, that my life had been for months a falsehood, my
affections now betrayed me: I loved, and I rashly hazarded the peace
and the honour of the man for whom I would have died. I became his
wife, and to his noble heart do I appeal: he has found me his faithful
wife. May I not say yet more? If to have emulated Sir Murdoch
Maclairn in his virtues; if to have loved him supremely; if to have
known no joy in which he has not shared; if to have shared with
courage his sorrows which were aggravated to me; by the bitter
conviction that I alone deserved to be wretched; if to have thus acted
is to be a wife; then will Sir Murdoch Maclairn pronounce me his
faithful, though erring wife. Witness for me, my beloved son. To my
Malcolm do I appeal; to my support, my only hope in this world! you
have seen your mother’s conflicts; you have shared in her sorrows.
Witness for me that I have lived for no other purpose, but to soothe,
to watch, to sustain the father whom you love and venerate. One
incident which occurred in your early life must be mentioned here.
You are no stranger, my son, to the difficulties we had to surmount,
in consequence of your father’s resolution to leave the Hall, and to
reside in France. I have frequently lamented before you this period of
my life. We had, however, so far conquered the opposition to our
removal; the time was fixed for our journey, and even our trunks
were preparing. Miss Flint saw these preparations with unfeigned
grief; for let me be just, she knew me, and she loved me. I left your
dear father busily engaged in examining some papers, contained in a
cabinet which had been recently sent him from Scotland, and with
my work bag, sought the dejected Lucretia. She was alone, in the bow
parlour, and weeping; I was employed in consoling her by those
arguments which had been a thousand times repeated, when Philip,
your uncle, entered, and sullenly took up a book without noticing me.
In a few minutes after, your father entered the room, and with a
placid air said, “I have brought you something to see, and admire;”
and placing a small ebony box richly inlaid with silver on the table
before us, he succeeded in exciting our curiosity. “The casket is
nothing to its contents,” said he, smiling at our admiration of the
box, and taking from it a shagreen picture-case which he opened.
“What say you to this portrait?” said he shewing us a pretty large
miniature of a gentleman in a Spanish habit; “did you ever see a
more manly, gracious countenance?” We examined it, and to the
praise due to the artist, and the noble lineaments he had preserved,
was added our admiration of the rich diamonds which encircled it.
“It ought to have a companion,” observed your father, taking up
another shagreen case, similar to the one before us; but it might have
been as well if the picture of the lady had never reached my hand; for
Harriet may be jealous of its superlative beauty. He added, that the
story of the lovers was long and disastrous; and might be the ground
work of a tragedy not unlike in many particulars to “the Fatal
Marriage.” “I remember,” continued he, “that when my father many
years since shewed me the two pictures, he briefly mentioned some
circumstances, which touched me to the soul. He was the friend
intrusted with these portraits, and with the care of seeking out an
infant son, who had been conveyed from Madrid when no more than
three days old; and who had unaccountably eluded all the enquiries
which my father had, at that time, been able to make. My absence
from Scotland, and my father’s death with other events,” he sighed
—“obliterated from my memory this box and the particulars I have
mentioned. About a month since, it was sent me, having been
deposited by my father previously to his death in the hands of a
minister of the Kirk of Scotland, He on his death-bed sent it, to me,
with many injunctions to be careful of it. Amongst several letters
written in Spanish, from which I can only discover the writers to be
of high rank, I found also a deposition made by my father, and
addressed to myself. He informs me, that having traced, as he
believes, the invaluable child of his noble friends, he had sent his
mother’s picture to the faithful woman who had been the only person
privy to his birth, and who passed for his mother. This I was
instructed to do, added my father; and the test of the boy’s identity,
rested on the woman’s returning the picture, with the name of her
lady annexed to it. She received it from faithful hands; for I was
already on that bed of death, from which I am permitted to write
this. She said she should write to me from London, having in her
turn instructions to follow; and that with the witnesses of her
integrity she should present herself before me with her precious
charge, and with transports of joy make over to my care a youth
worthy of the Duke and Dutchess; she signed herself S. Duncan.
Philip advanced to the table; he examined the picture attentively.”
“Does your romance finish here?” asked he, “So it appears,” replied
my husband, “otherwise that picture, and the letters would have been
reclaimed.” “I should think no one will at present be found to claim
them,” observed Mr. Flamall. “I fear so also,” answered Sir Murdoch;
“but when I am on the continent, I shall lose no opportunity of giving
up my important trust to the family.” “I would be d—d,” cried my
brother laughing, “if I went a league out of my road on such an
errand!” “Perhaps not,” answered my husband coldly; “you may not
think it necessary.” He folded up the portrait, and, replacing it,
withdrew. “What a pity it is,” cried Flamall, as he followed him with
his eye, “that Maclairn is not a Spanish Grandee! His gravity would
have suited admirably with their dignity; and his honour with their
pride; some people, and honest ones too, would think the diamonds
at least a lawful prize in this case; and without a doubt, they have
long been considered as lost. They would pay for your journey,
Harriet, or usefully decorate the poor Baronet’s lady.” I made no
answer, for I was nearly fainting with emotion and surprise; but
finding Miss Flint well disposed to reply for me, I left the room, and
retreated from the scene of altercation which ensued, and which was
but too familiar to my ears. Your father’s illness succeeded to this
occurrence, my dear Malcolm. I will hasten to inform you, and him of
the reasons which led me to give this incident a place in my
narrative.
It is now something more than five years since, that I was called
upon to feel the full weight of the penalty affixed by eternal justice, to
the violation of truth and rectitude of conduct. In the duties before
me, the remembrance of the unfortunate Duncan had been softened
down into the placid hope of his being at peace. Miss Flint had
apparently forgotten that such a being had ever existed. A more
immediate concern engaged her mind, and from her excessive
fondness of her son, grew up a dislike to you, and a jealousy of your
mother, which harassed me and rendered her unhappy. Several
circumstances, which I need not recall to your memory, proved to
her, that the slave of Mr. Flamall, and her own sheltered dependent,
was not without the animal instinct of defending her offspring; and
even in these contests, the name of Duncan never escaped her lips.
This generosity was not lost upon me, who had to sustain the cruel
and barbarous hints, not unfrequently dropped by my brother, in
regard to a subject, too painful to be enlarged upon; and which
produced no other effect, than that of making me, more and more,
the inmate of your father’s apartment.
I had, as usual, seen my beloved patient quietly tasting that repose
which his agitated mind required; and I left him, to take my
accustomed walk in the avenue. A radiant moon, with the soft
evening breeze, which had succeeded to a sultry day, cheered me,
and I sauntered until you met me on your return from your friends at
the farm. We enjoyed the scene around us; and, for some time,
conversed at our ease, on the seat round the oak, but hearing the
turret clock chiming the three quarters after ten, I rose to return to
the house; when suddenly, a wretched looking man, sprang from the
covert near us, and ran with swiftness down the avenue. You
instantly dissipated my alarm, by telling me it was a sick sailor,
whom you had met and relieved that afternoon, on your way to Mr.
Wilson’s. He had, it appeared, been shipwrecked, and was begging
his way to his friends in London. You finished your little story, by
adding, that you supposed he had strolled into the avenue, and had
fallen asleep. We parted for the night, and I thought no more of the
mendicant sailor. The following evening I again repaired to the
avenue, it was about eight o’clock, and again I took my seat at the
oak. Again, did I see this miserable object slowly advancing towards
me; his ghastly countenance excited my compassion, not my fears,
and I rose to meet him, with some silver in my hand. He stopped,
leaning himself against a tree; and wiping his face, as though faint
with hunger, gazed upon me. “Do not advance,” cried I, quickening
my pace, “honest friend I am coming to give you a trifle.” He
groaned, dropped a sealed packet, and darted from me with speed.
Terrors too powerful for language assailed me! I gasped for breath,
and, for some minutes, stood motionless, gazing at the fleet and
dreadful spectre; for such he seemed. At the stile he turned; and
from its elevation still saw me, he struck his breast and head; then
vanished. A sudden conviction, shot through my confounded senses;
I seized the parcel; it was addressed to Lady Maclairn, and in the well
remembered characters of Charles Duncan. I placed it in my bosom;
and was, I believe, indebted to the air for the preservation of life; for
I did not faint, although unconscious of time. Your cheerful voice,
Malcolm, as you approached me singing, roused me, and I attempted
to rise; but again I sunk on the seat I had quitted, and burst into
tears. You saw my emotion, my dear son, and in reply to your
enquiries I made the usual answer, for the dejection of my spirits,
adding, that I had again seen the vagabond in the avenue, at a
distance, and not chusing to advance, had kept near the house, not
altogether without fear. “I met him,” returned you, “and told him
that he was trespassing, and that he must not be seen in the avenue.
He said, he hoped he should be many miles from it in twenty-four
hours, meaning to pursue his route before sun-rise the next morning.
He begged my pardon; he had been induced to seek the relief his
miseries needed, but finding the lady was alarmed had retreated. I
commended him for his attention, and rewarded him with some
silver.” “He has done me no harm,” replied I, “for I was not much
disposed to ramble, feeling languid before I left the house.” I was no
sooner arrived there, than I retired to my room; and with agonies,
which it is beyond my power to describe, I read as follows,
“To Lady Maclairn.”
“The poor, the outraged, the vilified Charles Duncan lives to
proclaim his wrongs! to pour forth his sorrows before the only being
on earth who will pity him! He lives to redeem his honour from the
disgrace and eternal infamy, of having deserted the woman, whom in
the presence of his Maker, he vowed to cherish and protect. He lives
to take vengeance on his oppressors! He lives to behold thee once
more! and then death will close his account here! The grave will be
his bed of repose! Heaven will, in its own time, explain to him,
wherefore he existed; and to what purpose he has suffered!!!
“I am composed, my Harriet. I have seen thee, I have heard thy
gentle voice! listened, in breathless silence, to the pure effusions of
thy spotless mind; heard my Harriet, my wife, my all that Heaven
has given me! speak to her son, praise his filial duty to his father;
heard that that parent had been smitten, stricken by the hand of
adversity! Heard her call him, “her dear Maclairn,” her helpless, her
unfortunate husband! Was this the language to heal my broken
spirit? No: but it was that which has fettered every tumultuous
passion of my soul! I would not for worlds speak to you, Harriet; I
would not for worlds approach you! No: I would refuse your offered
love! What! brand with infamy thy spotless name! Sink the
honourable wife, the virtuous mother to be the sharer of my
wretched condition! The companion of a reputed robber, a worthless
vagabond; of a being who can claim no affinity but to the earth he
treads! No; Harriet, thy Duncan is not yet so poor, so abject!
Scorned, and sunk as he may be in your eyes, he yet proudly
maintains his claims to the recompense of long suffering and
patience. This is not Duncan’s theatre of glory! But he has before him
an inheritance, and a home; and he has only to press forward to
attain it.”
“The wife of Sir Murdoch Maclairn; the mother of his children; the
prop and comfort of his life is in my eyes, encompassed by an host of
angels. Shall the wretched Duncan invade the blessings of another?
No, Harriet. He has beheld you for the last time. Live and die a
suitable inhabitant for a better world! Live to be reverenced by your
children’s children! Live to be called the Matron’s pride, and your
sex’s boast. Only think of me, as a man who was once thy love; as one
incapable of forgetting you. Think of me as one, who would sooner
have been what he has been cruelly believed to be, than have basely
left thee to the tortures of doubt and suspense, and abandoned to an
insulting world. Think of me only as an unfortunate man, as one
whom you may pity, as one who will soon be removed: as one whose
heart——
“Again I take up my pen. Again the tumult of my senses is calmed.
I can now weep. I can thank God that your brother is absent. I can
pray, my Harriet! I can see the God of mercy allaying the storm, and
smoothing my passage to himself. Farewell: I have only to see, that
you are in possession of my justification; and then shall seas again
separate us, whilst my soul still fondly clings to thee. Farewell!
Farewell!
“Charles Duncan.”
“You have not forgotten the hour of our separation, Harriet! You
cannot have obliterated from your memory my agonies, on trusting
to the winds and waves my wife, my hopes, my all! You cannot have
forgotten my vows of love, of fidelity, of truth. What must have been
the artifices, the machinations employed to beguile you of your
confidence in Charles Duncan! But have I not before me an evidence
of that subtle mischief which man, when lost to all that is manly, can
effect? Was thy innocence a match for villany? Thy weakness an
armour against cruelty? What have not been the means employed to
ruin thee as well as myself! Oh Being of infinite justice! to thee do I
look up for a solution of all my doubts! Let me still hold fast my only
consolation; my Harriet, my wife stands blameless in thy sight, and
in my bosom. She is still cherished as the faithful, but deluded,
perhaps fatally deluded, victim of baseness and cruelty.
“Again farewell!”
This letter had evidently been written after my alarm in the avenue
by the wretched writer’s sudden disappearance. His narrative was
detached from it, and bore several dates, as will appear; may heaven
in its mercy lend a portion of its never-failing compassion to those to
whom the miserable Harriet now consigns it! May they pause from
time to time, and contemplate the noble ruin thus exhibited to their
view! For Maclairn’s justice will acknowledge it to be such; and he
will applaud the woman, who, although shrinking from the
consciousness of guilt, dares to avow her veneration, and love for
virtue. She must indeed be sunk, who could erase from her memory a
man like Charles Duncan; and Maclairn will understand and fret,
that the heart would be unworthy of his, which should not have room
for suffering and oppressed innocence, and a memory faithful in its
tribute of sorrow and sympathy, gratitude and admiration, for a man,
who not only loved her, but also her fame, better than himself. Yes:
he will acknowledge that his Harriet, even in these tears, which she
gives to suffering and departed worth—but let me hasten to the
conclusion of a task which duty prescribes, before my sinking spirits
faint.
CHAP. IV.
Charles Duncan’s Narrative.
London.
I will be calm. Is it fit for a wretch like me to flinch at the sight of
inanimate objects? To tremble, and faint in a street, because once
trodden by my feet, when youth and health glowed in my cheek, and
hope in my bosom? Is it for me, familiar with misery, to droop at the
view of that abode in which I once for a moment grasped the fleeting
form of happiness, gazed on her image, and fixed her lineaments on
my heart, and then I saw her vanish? No: Duncan ought to have a
soul braced, an arm nerved for the work before him. His Maker has
not forgotten the work of his hand. He will triumph, even in this
world! Oh memory, unfold thy tablets! Show to my injured wife the
man she loved, the man she has wept as worthless!——and then!!—
Is it needful for me to recall to my Harriet’s recollection, our
mutual doubts of Flamall’s honour and principles; as these appeared
in his conduct to me, they were grounded on his evading every
enquiry I made relative to the deceased Mrs. Duncan’s effects and
papers. But I had still more convincing proofs of his real character
than I discovered to his sister. I saw, that in his professional line, he
had few clients of respectability, and that he was a rascal.
Determined on my conduct as soon as I could legally call on him to
account for his, I simply declared to you my purpose of quitting his
house the day I should come of age; and you concurred in this plan.
Is it necessary to remind you of those tender fears and
apprehensions which resulted from our union! Oh no! you cannot
have forgotten them, nor my arguments for your immediately leaving
a house, in which you were subjected to perpetual alarms. You will
also recollect, that we both believed our liberality to the Keiths had
bound them to our interest; particularly Mrs. Keith, who had
gratefully acknowledged my gift of Mrs. Duncan’s apparel, and the
little advantages which her slender purse derived from her being my
laundress.
Passing near her house one morning, just before you left London
with your friends, the Hatchways, a dray-man so completely
bespattered me, that, in order to shun the laughter of the diverted
witnesses of this mischance, I took refuge at Mrs. Keith’s: knowing
that I could there change my linen, &c. During her kind offices about
me, I observed, that she had been weeping; and, whilst waiting for
my coat to dry, her dejection led me to ask her what had disturbed
her. “Only the old story,” answered she, weeping anew, “I am weary
of my life; my husband was never good; but of late he is a brute, and
beats me, because I cannot go to market without money. God help
me, I am too honest for Patrick!” “He ought to husband his money
better,” replied I, “he is in constant employment with Mr. Flamall I
find, and he is a good copier.” “He will never find that any thing he
gains from that quarter will thrive,” answered she, colouring with
resentment; “the good old proverb is against him. What is got by the
devil’s means will go as it came.” “You ought not to blame Mr.
Flamall,” observed I, prolonging my toilet, “that he cannot teach your
husband to take care of the money he earns: Flamall is not a
spendthrift.” “He is too cunning for you to understand,” replied she,
nodding her head significantly, “but he will soon show the cloven
foot; what is to become of you, when your wife wants a cradle for her
poor babe? Patrick swears that I shall not take her in: the Lord help
you both; there will be such doings, and no Mrs. Duncan to stand by
you with her purse!” “I defy Mr. Flamall,” answered I, “and will soon
let him know that I can protect my wife; in less than four months I
shall be master of my dear mother’s little provision, and with that,
and industry, my Harriet shall have a cradle for our infant.” She
shook her head despondingly, “Poor soul!” said she; “it is perhaps
happy for her that she is removed, she loved you better than many
real mothers do their children; it would have grieved her to see you
set fast so young.” “How came you to know this secret?” asked I,
without betraying my emotions. “Because I heard Mrs. Duncan say,
that she was not your mother,” answered she, “when she gave her
dying instructions to your honest guardian with the pocket book for
you, in case you outlived her: besides this, I could say more if I
pleased; but I do not wish to bring Patrick to the gallows, he will find
the road without my help! see his tender marks,” added she,
weeping, and uncovering her bosom. It was bruised. My compassion
soothed her; but she became more guarded; and only confessed that
I had not been well used, adding, “I have said enough to you, and
should my husband know it, he would murder me. But the time may
come, when you will be able to take care of me. I have not forgotten
the black pocket book, nor the letters on it, studded with silver, nor
what is more, the bank notes it contained. I know that ten hundred
make a thousand, as well as the lawyer. Betty Keith is neither deaf
nor blind.” In vain did I urge her to be more explicit. “So I will, when
I am upon oath,” answered she; “but you can do nothing at present,
and you must be gone. My husband may return, and he will suspect I
have been prating, as he calls it, when I do but turn the tongue in my
head.” I took the hint, and giving her a guinea, left the room. You
were on the eve of your little voyage, ill and dejected, and I forbore to
add to your inquietude. Your departure followed, and Duncan’s fate
advanced to the crisis which terminated his hopes and prospects in
this world. A few days passed. My bosom was relieved of its fears for
your safety; you wrote in spirits; and you concurred in your second
letter, in my plan of removing you from Y——th to the north; and
from thence declaring your marriage to your brother. At this juncture
I received an anonymous letter; it was dated from Helvoetsluys, the
language English, with foreign idioms. The writer signified that he
was deputed by my parents to inform me, that the mystery in which
my birth had been involved was removed; but for many cogent
reasons, which should be explained, he was commissioned to meet
me at Harwich; that he should perhaps be there as soon as his letter;
but at all hazards in a few days, and should wait my arrival at the
Ship inn. “Be only anxious,” added he, “to be punctual to this
rendezvous. Measures for your future destination in the world will
result from this interview. Be on the reserve with those about you,
and above all, trust not the man who calls himself your guardian; he
has an eye over him which he little suspects, and he will have an
account to settle, not with the obscure and friendless Charles
Duncan, but with an arm of power, which shall crush him, as the
spoiler of the widow and the orphan.”
You will imagine that my whole soul was fixed on accomplishing
the journey to Harwich. It so entirely engaged my thoughts, that I
spoke of my intention to Simons, saying I should ask Mr. Flamall for
a week or ten days holiday, in order to meet a friend at Harwich. “He
will refuse you,” replied he, “for he wants you in the office to supply
his own absence. He can find leisure for his own jaunts, but he thinks
not of us.” “I will not be refused,” replied I eagerly, “then do as I do
in such cases,” said he; “Send your trunk off before you, and take a
French leave when you can, in order to bring home your
portmanteau: there will be no end of his objections!”
I availed myself of Simons’s counsel, and sent a small portmanteau
to the Harwich coach that evening. On the following morning I civilly
requested your brother to spare me ten days or a fortnight,
explaining to him my wishes in part, by saying, that I expected to
meet a friend at Harwich, and we should probably make a little
excursion together. Good God, how delightful were my prospects! for
these were bounded by seeing you and announcing my parents to
you! Some questions, for which I was prepared, followed: reluctance
gradually yielded. “He thought it but an idle expence; but I had been
frugal, and therefore he should not refuse me;” and, opening his
desk, he paid me my quarterly stipend of twenty guineas, which had
been due nearly a month. He soon after told Simons, that he was
going with a party of friends to Windsor, and should not return for a
day or two; then carelessly asking me, when and how I intended to
journey, he left us; shaking me by the hand, and with a Judas’s smile,
he bade me “remember that my purse had not the virtue of
Fortunatus’s.” Simons boasted much of a horse which a friend of his
let out; and so strongly pointed out to me the advantages of
travelling in this mode, that I went with him to the livery stable, in
order to see the animal thus recommended. It had been a fine one;
but had been ridden down, and I should have given up my project of
riding on horseback but for his persuasions. He was certain the beast
would travel well with me, and return better than when he set out;
the terms were easy, and to please Simons, I consented to please his
friend, the proprietor of the horse. Amongst the various arguments
he used was one, which had probably turned the scale. I could run
down to Rumford that night; the horse had been at the manger the
whole day, and the remainder of the road to Harwich was light work.
This project was adopted; but a heavy rain stopped me for some
hours; and it was nine o’clock in the evening when I mounted and
parted with my officious friend at the livery stable. The clouds were
dispersed, and the moon, though not in her zenith, favouring me, I
proceeded on gently. The horse was stiff with fatigue, and I found
that Simons had “taken me in,” to use his own quaint language, I was
within half a mile of Woodford, a village on the Epping road, when I
was accosted by name, by a man whom I recollected having seen
once or twice in your brother’s office. He checked the bridle, and
civility obliged me to stop. Enquiries after Mr. Flamall’s health, were
followed by wondering to meet me so late on such a road. “I may
wonder in my turn,” answered I, “for you have more to apprehend
from this damp evening than I have. But you will excuse me, I am
hastening to Stretham, still some miles from hence.” I spurred my
horse and bowing, wished him a good night. He shouting after me,
“Look to your pistols, young man.” I had pistols with me, but I
needed them not. I proceeded unmolested in my journey till within a
mile of Rumford; when the miserable beast I rode making a trip, fell;
and I received a contusion on my knee, that, for a time, prevented my
rising, and totally disabled me from mounting again. With much
difficulty I reached an inn at Rumford, leading the horse, and in my
wish to find shelter, I became indifferent to accommodations. I took
the first house that was open, and found, with civility, a bed, to which
I instantly repaired. The next morning I found the injury I had
received too serious to allow me to prosecute my journey, without
hazard, on Simons’s vaunted horse. I therefore sent the beast home,
with a note to Simons, mentioning my accident, and the necessity I
was under of pursuing my journey in a post chaise, as it was
absolutely my purpose to be at Harwich on the Saturday. My hostess,
had, in the mean time, with much humanity applied her infallible
nostrum to my knee; and, on my quitting her the following day, she
generously insisted on my taking some of the ointment with me,
assuring me, that by being repeated, it would relieve not only the
tumour, but the pain. In this point, she was however mistaken, and,
on reaching the appointed inn at Harwich, I could not stand on my
legs. The waiter, who assisted me into the house, asked me, whether
my name was Duncan; and being answered in the affirmative, he
proceeded to tell me, that a person had called twice, within the hour,
to enquire for me. Not doubting but this was my incognito friend,
and that he would return to the house, I ordered him to be conducted
to me, and dismissed the man for some coffee. During this interval of
suspense and curiosity my knee solicited my attention; it was
extremely painful, and I had recourse to my Rumford landlady’s
specific for a bruise. Whilst employed in applying most assuredly
what most assuredly augmented the evil, the door of the apartment
was suddenly opened; and to my inconceivable surprise Simons
hastily entered. “You are come at last,” said he with an oath, “I have
been on the rack these two hours.” “And I for near four and twenty,”
replied I, interrupting him, and directing his attention to my
employment; “but what brings you hither?” He grasped my hand
with eagerness, and in a low voice told me, that he came to save my
life. I laughed, I believe, for he swore most horridly, and concluded
by saying, that he had not time to see me play the fool. “The person,”
added he, “commissioned by your father to meet you here, is no
stranger to me. Let it suffice, I am in his secret. He is, it may be, at
this instant dying at Helvoetsluys of a fever, and I am ordered to
conduct you there to him; all is prepared; and you must go this
instant on board the packet. There is not a moment to lose.” I
hesitated, for I thought of my Harriet; but he urged me with a
vehemence that confounded my deliberations; and concluded by
saying, that my honour, and even my life, depended on my following
him. With his help and a porter’s I was conveyed to the water-side,
and there found the boat, in which we reached the packet, then,
getting under sail, I threw myself on the bed reserved for me,
subdued by the pain in my knee, and soon after was seized with the
sea sickness. I saw no more of my companion that night: and learned
that, fearing to share in the common malady, he preferred being on
deck. It was with difficulty that I supported myself to the public
house at the Sluys; but overcome, as I was, with pain, I failed not to
remark, that Simons spoke the Dutch language fluently. “It is well I
can,” answered he roughly to my observation, “for your friend is not
here; we must proceed to Rotterdam; and you must bear up as well
as you can; the passage-boat is an easy conveyance for you. This boat
was shared by others as well as ourselves; and with an irritation of
mind, as great as my bodily sufferings, we proceeded to Rotterdam;
and on reaching the hotel, I fainted. On recovering my senses, which
had been suspended for some time, I saw a well dressed man
engaged in giving me succour, and I concluded that this was the
person I was to meet. On asking Simons whether he was the dying
man I had been led to expect, he answered, that he was a surgeon,
and that my knee required some better remedy than I had applied. I
submitted to his orders, and was carried to bed. At length Simons
was at leisure to satisfy my curiosity. He began the subject himself,
by observing with some ill-humour that it was unlucky—I omit the
epithets, my Harriet, with which he interlarded even his expressions
of kindness, that, what with the indisposition of my friend, and my
accident, which he found from the surgeon would unavoidably detain
me some days in my bed, he should be forced to prolong his stay. I
have written to Amsterdam,” continued he, “where I find the sick
man was advised to remain; to-morrow or the next day, we shall have
letters.” Need, I say, in what manner this interval was filled up by
me! I wrote you a circumstantial account of these various events; and
the fond wish of making my Harriet easy under a separation so
unexpected, imparted to my bosom a portion of those hopes which
were necessary for her support as well as mine. This letter I intrusted
to the surgeon’s care, not chusing to employ Simons. I made him
comprehend, that it was of importance to me; and, with a good-
natured smile, he satisfied me, that he would faithfully discharge his
trust. It was under cover to Mrs. Keith. Too fatally certain is it, that
you never saw this letter! In the mean time, my soul was on the rack,
from having no intelligence of you. Again, and again, I wrote to Mrs.
Keith, and to you. I had no letters, and I began to suspect the
surgeon had given Simons my letters, instead of putting them into
the post-office. In the mean time his attention to my
accommodations and health had nothing in them to surprise me; for
he constantly talked of his being commissioned by the gentleman at
Amsterdam, to be careful of his “precious charge,” and sometimes he
translated passages from his letters expressive of the importance of
my person, and his anxiety in not being in a state to attend me
himself. I was now on crutches, and free from pain; and I was told
that it was proper for me to proceed to Amsterdam. I decidedly
refused, saying that I was determined to return to England; and he
might inform his correspondent of my resolution, it being
indispensibly necessary for my peace, to have news from thence. “I
will furnish you with a newspaper,” said he gravely; “that will, I trust,
make you change your mind; but it may not be amiss to prepare you
for news that will surprise you more than you are aware.” He began
his narrative of the highway robbery charged on me, and finished by
placing before me the article in the day’s paper, which, with a detail
of the particulars, included a description of my person, situation, and
even the initials of my name, and of the master with whom I served
as clerk. You will judge, my Harriet, of the effect which this
intelligence produced. I solemnly swore that no power on earth
should prevent my immediately appearing and confronting the base
and false accuser. “You know best,” replied Simons, “the proofs with
which you can invalidate this man’s positive oath.” But I would
advise you rather to secure such a condition of fortune, as will of
itself, with nine hundred and ninety-nine out of a thousand, prove
that you are slandered. “In a word,” continued he, with a serious air,
“I have had my instructions from those, who will take care of your
honour better than you are able to do yourself. Your parents are rich
and powerful, and, trust me, more than one will be called to a strict
account for their conduct in regard to you.” I was still resolved on my
measures; for my wife’s deplorable condition solely engaged me. “It
is well, Sir,” observed he, with a tone of authority, “I shall proceed
without you, and even if it be necessary to Cadiz, and inform your
noble parents, that you preferred a gibbet to them. But you are a
simpleton, Duncan,” added he, with more kindness, “I know your
motive for this headstrong folly. Will your appearance, and the
charge which will be brought against you, lessen the distress of the
girl you love?” I started. “I know more than you think of that
business also,” continued he; “and I advise you to write to her, and
instantly make your way to your parents. You will then be able to
offer her the protection she needs.” I burst into tears, and
reproached him with having stopped my letters. He vehemently
denied the charge; adding, “that he pitied Miss Flamall, and was
better pleased to serve her than to injure her.”
Unable to extract more from a man who hourly assumed with me
more of respect as well as of authority, I yielded to his control. I was
still lame and helpless; and except the diminished sum with which
your brother had furnished me, I had no resources for my
premeditated plan. Simons soothed me, by conducting me to the
post-office, where I deposited a letter for you, and his orders taken,
to forward all letters to our address at Cadiz, to a house of business
sufficiently ostensible to gain him attention with the people at the
office. We prepared immediately for our departure for Amsterdam,
when he entered the apartment with an opened letter in his hand. “I
thought how it would be,” said he, “your cursed accident, and the
delay it has occasioned will oblige me to go the whole voyage with
you. Your father’s agent is too ill for the voyage; he has sent me bills
of “exchange;” he displayed the notes, and urged me to lose no time.
He is, I find, in the country; and dangerously ill. However, I am
embarked, and will not desert you. At Amsterdam I was again
surprised. This Proteus spoke the Spanish tongue well, and in his
conversation with the captain of a Spanish ship bound for Cadiz, I
perceived that he assumed the gravity and stateliness of a Spanish
grandee. On the man’s leaving us, after having settled the terms for
our accommodation, I mentioned my surprise, on finding him so
qualified for a traveller.” “I lived on the continent some time in my
young days,” answered he. “I was private secretary to an ambassador,
who in his lack of brains, forgot to pay me for the five years use he
made of mine; he taught me a lesson however which I wanted,”
continued he with a malicious grin, “namely, to live by my own wit;
and to regard every man either as a fool or a knave.” It required very
little judgment, my dear Harriet, to determine the class to which
Simons belonged; yet in spite of his habitual vulgarity, and coarse
language, I hourly perceived that he had moved in a different sphere,
and could at his pleasure assume the gentleman. He spoke of me as a
Spaniard by birth, and by the respect he showed me, taught those
about me to consider me as of importance; performing the part of my
governor; and making no secret of my having been a stranger to my
rank, parents, and country, from nearly the hour I was born. These
hints were needless, to stimulate a curiosity constantly on the fullest
stretch. To my questions I received only one answer: “I am bound to
secresy, and it is for my interest to be faithful. Have patience, time
will discover all to you.” Thus goaded on, and convinced of my
inability of securing him in my interest; having exhausted my own
little stock of money, and depending, in a strange country upon
Simons for pecuniary assistance, I left Amsterdam without having
received letters from you; and in the anguish of my soul I sought
relief from the hope of meeting with protection, and being placed in a
situation to succour you; for I made no doubt of your brother’s
interference with your wishes to write to me. Our navigation was for
a time pleasant. The gentle breezes which filled our sails soon
exempted me from sea sickness; rest restored my knee, and my
hours were beguiled by my assiduously studying the Spanish
language; for which, Simons having proposed it for my amusement, I
had purchased a few needful books.
At this period, however, one incidental cause of sorrow was added
to my oppressive burden. Two or three days after your departure
from town, I had began to bathe, trusting to its relieving me from a
portion, at least, of that languor which I experienced; and, cautiously
guarded in all that related to my Harriet, had taken your picture
from my bosom, and placed it in my port-folio with your letters,
which I carefully kept locked in a large trunk, with articles that were
not of every day’s use. I had seen on reaching Helvoetsluys that this
trunk made the greatest part of our baggage; and on noticing it to
Simons, he replied, that he expected my thanks for his zeal in my
service in bringing it, as he supposed it was kept as lumber in my
room, and that I should have no objection to a change of linen. To
this necessity I had been hitherto a stranger, and the trunk remained
corded till I was settled in my cabin on board the Spanish ship. The
treasure it contained was too precious to be forgotten. I searched for
it in vain. Neither your letters nor your portrait were to be found. I
did not conceal my suspicions, nor my distress from Simons, who as
usual, with the most horrid imprecations affirmed that he had not
opened the trunk; nor had any other motive in removing it, but that
of contributing to my comforts and amusement, knowing that I had
some books in it. To contest with Simons was a vain attempt. I was
silenced, and bore this trial, to use my master’s words like a “whining
puppy.” Yet in spite of himself I perceived that he had an interest in
preserving my health and tranquillity, and that he never ceased to
recommend to me patience; hinting continually that I should soon be
in a condition to take ample vengeance on those who had injured me,
and to protect you, who had been so unjustly dealt with. These
conversations with his avowed good will for you, and pity for me had
their effect.
We were within thirty or forty leagues of our post when we were
boarded by a large, well-armed Algerine corsair, and taken without
resistance; for such was the inferiority of our force, that it was not
possible for us to escape. Surprised and confounded by an event for
which I was altogether unprepared, my compassion was
notwithstanding exerted in comforting my terrified companion. I
strove to encourage him by the same hopes which had calmed my
own spirits; and with confidence I assured him, that as subjects of
Great Britain we should be enlarged at Algiers; and that we had only
to apply to the British consul resident there, in order to be protected.
In this expectation we were cruelly disappointed, by the measures
which the pirate pursued; who from motives we could not fathom,
after having treated me with extraordinary lenity, and Simons
without rigour, landed us with great circumspection during the night
at some distance from the harbour; and to our amazement and
consternation we were, with our chests, placed in a covered vehicle
not unlike a waggon, and without loss of time conducted up the
country. We were manacled and vigilantly concealed from every eye
by those who were charged with us; who still maintained their claims
to our gratitude, by offering us no violence or harshness. I had not
been much surprised at seeing Simons relapsing into the
pusillanimity he had betrayed in the first moments of our capture;
but I was astonished to find that, with his grief for himself and the
most bitter execrations on his folly, he bemoaned my hard fate in
terms which I little expected from him. “Take courage,” said I, willing
to relieve his sorrow, “you have nothing to reproach yourself with in
this misfortune, and I am sorry, that your good intentions and zeal
for my service have led you into this difficulty; but we may yet find
the means of applying to the consul, or purchasing our freedom. Do
not despair.” “I must,” replied he with a look of horror. “I have been
a d——d rascal, and your destruction, my poor boy. If you were to
forgive me, God never will; and this is only the beginning of my
punishment.” He wept in agonies, and I was alarmed. “I can neither
be useful to you, nor yet forgive you,” observed I, desisting from my
ineffectual attempts to soothe his agitations, “’till I am more in your
confidence. Tell me what have you done to injure me, and trust to my
principles, which command me to forgive an offending brother.” “By
G—d,” exclaimed he, “this is too much! I cannot bear it, villain as I
am! But you shall know all; and you shall see that at least I never
intended to harm you, though it is but too true that my business in
your concerns was to serve myself.”
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