Module 9
Reporting and Analyzing Intercorporate
Investments
DISCUSSION QUESTIONS
Q9-1. (a) Trading securities are reported at their fair value in the balance sheet. (b)
Available-for-sale securities are reported at their fair value in the balance sheet. (c)
Held-to-maturity securities are reported at their amortized cost in the balance sheet. For
marketable securities, fair value and market value are usually synonymous. Thus,
trading and available-for-sale securities are recorded on the balance sheet at market
value.
Q9-2. An unrealized holding gain (loss) is an increase (decrease) in the fair value of an
investment security that is still owned.
Q9-3. Unrealized holding gains and losses related to trading securities are reported in the
current-year income statement (which flows to retained earnings). Unrealized holding
gains and losses related to available-for-sale securities are reported as part of a
separate component of stockholders' equity called Accumulated Other Comprehensive
Income (AOCI).
Q9-4. Significant influence gives the owner of the stock the ability to significantly influence
the operating and financing activities of the company whose stock is owned.
Normally, a 20% through 50% ownership of the company's voting stock provides
evidence of significant influence.
The equity method is used to account for investments with significant influence. Such
an investment is initially recorded at cost; the investment is increased by the
proportionate share of the investee company's net income, and equity income is
reported in the income statement. The investment account is decreased by dividends
received on the investment, and is reported in the balance sheet at its book value.
Unrealized gains or losses on the investment are not recognized in the financial
statements.
©Cambridge Business Publishers, 2015
Solutions Manual, Module 9 9-1
,Q9-5. Because Yetman Company's investment in Livnat Company is an investment with
significant influence, it should be accounted for using the equity method. At year-end,
the investment should be reported in the balance sheet at $516,000 [$500,000 + (40%
$160,000) - (40% $120,000)].
Q9-6. A stock investment representing more than 50% of the investee company's voting stock
is generally viewed as conferring “control” over the investee company. The investor and
investee companies must be consolidated for financial reporting purposes.
Q9-7. Consolidated financial statements portray the financial position, operating results, and
cash flows of affiliated companies as a single economic unit so that the scope of the
entire (whole) entity is more realistically conveyed.
Q9-8. The $375,000 investment in Murray Company appearing in Finn Company's balance
sheet, the $150,000 common stock and the $225,000 retained earnings appearing on
Murray Company's balance sheet are all eliminated. The assets and liabilities on the
two balance sheets are then summed to yield the consolidated balance sheet.
Q9-9. The $150,000 accounts payable on Dee's balance sheet and the $150,000 accounts
receivable on Bradshaw's balance sheet are eliminated in the consolidated balance
sheet. In a consolidation, all intercompany items are eliminated so that the consolidated
statements show only the interests of outsiders.
Q9-10. Limitations of consolidated statements include the possibility that consolidation “masks”
the performances of poor companies. Likewise, rates of return, other ratios, and
percentages calculated from consolidated statements might prove deceptive because
they are composites (weighted averages). Consolidated statements also eliminate
detail about product lines, divisional operations, and the relative profitability of various
business segments. (Some of this information may be available in the footnote
disclosures relating to the business segments of certain public firms, but these
disclosures are limited in scope.) Finally, shareholders and creditors of subsidiary
companies find it difficult to isolate amounts related to their legal rights by inspecting
only consolidated statements.
©Cambridge Business Publishers, 2015
9-2 Financial& Managerial Accounting for MBAs, 4th Edition
, MINI EXERCISES
M9-11. (10 minutes)
a. Intel reports available-for-sale (AFS) securities at their fair (market) value on the balance
sheet. For 2012, this is equal to the original cost ($12,927 million) plus unrealized gains
($1,079 million) and less unrealized losses ($5 million), or $14,001 million.
b. Intel reports the $1,074 million net unrealized gains on available-for-sale securities as a
component of Accumulated Other Comprehensive Income (AOCI) in the stockholders’ equity
section of its balance sheet.
M9-12. (15 minutes)
a. If the investment is accounted for as available-for-sale, Wasley will report the dividends
received of $13,200 (12,000 shares $1.10 per share) as income. The increase in the
market price of the stock will not be recognized as income until the stock is sold. The
unrealized gain of $12,000 is included in Accumulated Other Comprehensive Income in the
stockholders’ equity section of the balance sheet.
b. If the investment is accounted for as trading, Wasley will report $25,200 as income: $13,200
of dividend income plus $12,000 of unrealized gain income relating to the increase in the
stock’s market price [($13 –$12) 12,000 shares].
©Cambridge Business Publishers, 2015
Solutions Manual, Module 9 9-3
, M9-13. (10 minutes)
a. Amgen is accounting for its investment in marketable equity securities as available-for-sale.
We know this because the unrealized gains and losses on these marketable equity
securities are reported in comprehensive income (not reported in net income as with trading
securities).
b. Amgen’s unrealized gains of $233 million in 2012 are not recognized in net income. Instead,
they are reported as an increase in Accumulated Other Comprehensive Income (AOCI), net
of estimated deferred taxes. Amgen’s stockholders’ equity (Accumulated Other
Comprehensive Income) is increased by these net unrealized gains for 2012. However, net
income and retained earnings are not impacted by these unrealized gains.
c. The reclassification adjustments to income of $132 million represent unrealized gains on
investments that were included in AOCI at the beginning of the year and were realized in
2012 because the related investments were sold during the year. Because these gains are
now recognized in current income (and retained earnings), they need to be removed from
AOCI to avoid double counting the gain in stockholders’ equity (that is, in both AOCI and
retained earnings).
M9-14. (20 minutes)
a. Given the 30% ownership, “significant influence” is presumed and the investment must
be accounted for using the equity method. The year-end balance of the investment account
is computed as follows:
Beginning balance...................................................... $2,000,000
% Lang income earned.............................................. 60,000($200,000 0.3)
% Dividends received................................................. (24,000)($80,000 0.3)
Ending balance.......................................................... $2,036,000
b. Stober reports income from investments of $60,000 ($200,000 0.3). Equity-method
earnings are computed as the reported net income of the investee (Lang Company)
multiplied by the percentage of the outstanding common stock owned by the investor (30%).
c. (1) In contrast to the fair-value method of accounting for investments, the equity method
does not report investments at fair (or market) value. Neither the balance sheet nor the
income statement reflects the unrealized gain of $364,000.
©Cambridge Business Publishers, 2015
9-4 Financial& Managerial Accounting for MBAs, 4th Edition
Reporting and Analyzing Intercorporate
Investments
DISCUSSION QUESTIONS
Q9-1. (a) Trading securities are reported at their fair value in the balance sheet. (b)
Available-for-sale securities are reported at their fair value in the balance sheet. (c)
Held-to-maturity securities are reported at their amortized cost in the balance sheet. For
marketable securities, fair value and market value are usually synonymous. Thus,
trading and available-for-sale securities are recorded on the balance sheet at market
value.
Q9-2. An unrealized holding gain (loss) is an increase (decrease) in the fair value of an
investment security that is still owned.
Q9-3. Unrealized holding gains and losses related to trading securities are reported in the
current-year income statement (which flows to retained earnings). Unrealized holding
gains and losses related to available-for-sale securities are reported as part of a
separate component of stockholders' equity called Accumulated Other Comprehensive
Income (AOCI).
Q9-4. Significant influence gives the owner of the stock the ability to significantly influence
the operating and financing activities of the company whose stock is owned.
Normally, a 20% through 50% ownership of the company's voting stock provides
evidence of significant influence.
The equity method is used to account for investments with significant influence. Such
an investment is initially recorded at cost; the investment is increased by the
proportionate share of the investee company's net income, and equity income is
reported in the income statement. The investment account is decreased by dividends
received on the investment, and is reported in the balance sheet at its book value.
Unrealized gains or losses on the investment are not recognized in the financial
statements.
©Cambridge Business Publishers, 2015
Solutions Manual, Module 9 9-1
,Q9-5. Because Yetman Company's investment in Livnat Company is an investment with
significant influence, it should be accounted for using the equity method. At year-end,
the investment should be reported in the balance sheet at $516,000 [$500,000 + (40%
$160,000) - (40% $120,000)].
Q9-6. A stock investment representing more than 50% of the investee company's voting stock
is generally viewed as conferring “control” over the investee company. The investor and
investee companies must be consolidated for financial reporting purposes.
Q9-7. Consolidated financial statements portray the financial position, operating results, and
cash flows of affiliated companies as a single economic unit so that the scope of the
entire (whole) entity is more realistically conveyed.
Q9-8. The $375,000 investment in Murray Company appearing in Finn Company's balance
sheet, the $150,000 common stock and the $225,000 retained earnings appearing on
Murray Company's balance sheet are all eliminated. The assets and liabilities on the
two balance sheets are then summed to yield the consolidated balance sheet.
Q9-9. The $150,000 accounts payable on Dee's balance sheet and the $150,000 accounts
receivable on Bradshaw's balance sheet are eliminated in the consolidated balance
sheet. In a consolidation, all intercompany items are eliminated so that the consolidated
statements show only the interests of outsiders.
Q9-10. Limitations of consolidated statements include the possibility that consolidation “masks”
the performances of poor companies. Likewise, rates of return, other ratios, and
percentages calculated from consolidated statements might prove deceptive because
they are composites (weighted averages). Consolidated statements also eliminate
detail about product lines, divisional operations, and the relative profitability of various
business segments. (Some of this information may be available in the footnote
disclosures relating to the business segments of certain public firms, but these
disclosures are limited in scope.) Finally, shareholders and creditors of subsidiary
companies find it difficult to isolate amounts related to their legal rights by inspecting
only consolidated statements.
©Cambridge Business Publishers, 2015
9-2 Financial& Managerial Accounting for MBAs, 4th Edition
, MINI EXERCISES
M9-11. (10 minutes)
a. Intel reports available-for-sale (AFS) securities at their fair (market) value on the balance
sheet. For 2012, this is equal to the original cost ($12,927 million) plus unrealized gains
($1,079 million) and less unrealized losses ($5 million), or $14,001 million.
b. Intel reports the $1,074 million net unrealized gains on available-for-sale securities as a
component of Accumulated Other Comprehensive Income (AOCI) in the stockholders’ equity
section of its balance sheet.
M9-12. (15 minutes)
a. If the investment is accounted for as available-for-sale, Wasley will report the dividends
received of $13,200 (12,000 shares $1.10 per share) as income. The increase in the
market price of the stock will not be recognized as income until the stock is sold. The
unrealized gain of $12,000 is included in Accumulated Other Comprehensive Income in the
stockholders’ equity section of the balance sheet.
b. If the investment is accounted for as trading, Wasley will report $25,200 as income: $13,200
of dividend income plus $12,000 of unrealized gain income relating to the increase in the
stock’s market price [($13 –$12) 12,000 shares].
©Cambridge Business Publishers, 2015
Solutions Manual, Module 9 9-3
, M9-13. (10 minutes)
a. Amgen is accounting for its investment in marketable equity securities as available-for-sale.
We know this because the unrealized gains and losses on these marketable equity
securities are reported in comprehensive income (not reported in net income as with trading
securities).
b. Amgen’s unrealized gains of $233 million in 2012 are not recognized in net income. Instead,
they are reported as an increase in Accumulated Other Comprehensive Income (AOCI), net
of estimated deferred taxes. Amgen’s stockholders’ equity (Accumulated Other
Comprehensive Income) is increased by these net unrealized gains for 2012. However, net
income and retained earnings are not impacted by these unrealized gains.
c. The reclassification adjustments to income of $132 million represent unrealized gains on
investments that were included in AOCI at the beginning of the year and were realized in
2012 because the related investments were sold during the year. Because these gains are
now recognized in current income (and retained earnings), they need to be removed from
AOCI to avoid double counting the gain in stockholders’ equity (that is, in both AOCI and
retained earnings).
M9-14. (20 minutes)
a. Given the 30% ownership, “significant influence” is presumed and the investment must
be accounted for using the equity method. The year-end balance of the investment account
is computed as follows:
Beginning balance...................................................... $2,000,000
% Lang income earned.............................................. 60,000($200,000 0.3)
% Dividends received................................................. (24,000)($80,000 0.3)
Ending balance.......................................................... $2,036,000
b. Stober reports income from investments of $60,000 ($200,000 0.3). Equity-method
earnings are computed as the reported net income of the investee (Lang Company)
multiplied by the percentage of the outstanding common stock owned by the investor (30%).
c. (1) In contrast to the fair-value method of accounting for investments, the equity method
does not report investments at fair (or market) value. Neither the balance sheet nor the
income statement reflects the unrealized gain of $364,000.
©Cambridge Business Publishers, 2015
9-4 Financial& Managerial Accounting for MBAs, 4th Edition
