CH11

CHAPTER 11
MARKETABLE SECURITIES, DERIVATIVES, AND INVESTMENTS
Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions
11.1 See the text or the glossary at the end of the book.
11.2 Securities that a firm intends to sell within approximately one year of the
date of the balance sheet appear as current assets. All other securities
appear as noncurrent assets.
11.3 a. Debt securities that a firm intends to hold to maturity (for example, to
lock in the yield at acquisition for the full period to maturity) and has the
ability to hold to maturity (for example, the firm has adequate liquid
assets and borrowing capacity such that it need not sell the debt
securities prior to maturity to obtain cash) appear as “debt held to
maturity.” All other debt securities appear in the “available for sale”
category. The latter includes short-term investments in government
debt securities that serve as a liquid investment of excess cash and
short-and long-term investments in government and corporate debt
securities that serve either as hedges of interest rate, exchange rate, or
similar risks or as sources of cash at a later date to pay debt coming
due.
b. The classification as “trading securities” implies a firm’s active

involvement in buying and selling securities for profit. The holding period
of trading securities is typically measured in minutes or hours instead of
days. The classification as “available for sale” implies less frequent
trading and usually relates to an operating purpose other than profit
alone (for example, to generate income while a firm has temporarily
excess cash, to invest in a firm with potential new technologies). The
holding period of securities available for sale is typically measured in
days, months, or years.
c. Amortized acquisition cost equals the purchase price of debt securities

plus or minus amortization of any difference between acquisition cost
and maturity value. Amortized acquisition cost bears no necessary
relation to the market value of the debt security during the periods
subsequent to acquisition. The market value of a debt security depends
on the risk characteristics of the issuer, the provisions of the debt
security with respect to interest rate, term to maturity, and similar
factors, and the general level of interest rates in the economy.
11-1 Solutions
11.3 continued.
d. Unrealized holding gains and losses occur when the market value of a
security changes while the firm holds the security. The unrealized
holding gain or loss on trading securities appears in the income
statement each period, whereas it appears in Accumulated Other
Comprehensive Income, a separate shareholders’ equity account, each
period for securities available for sale.
e. Realized gains and losses appear in the income statement when a firm
sells a security. The realized gain or loss on trading securities equals the
selling price minus the market value of the security on the most recent
balance sheet. The realized gain or loss on securities available for sale
equals the selling price minus the acquisition cost of the security.
11.4 Firms acquire trading securities primarily for their short-term profit
potential. Including the unrealized holding gain or loss in income provides the
financial statement user with relevant information for assessing the
performance of the trading activity. Firms acquire securities available for
sale to support an operating activity (for example, investment of
temporarily excess cash) instead of primarily for their profit potential.
Deferring recognition of any gain or loss until sale treats securities available
for sale the same as inventories, equipment and other assets. Excluding the
unrealized gain or loss from earnings also reduces earnings volatility.
11.5 The realized gain or loss for a security classified as available for sale equals
the selling price minus the acquisition cost of the security. The realized gain
or loss for a trading security equals the selling price minus the market value
on the date of the most recent balance sheet. GAAP allocates all of the
income from a security classified as available for sale to the period of sale,
whereas GAAP allocates this same amount of income on a trading security
to all periods between purchase and sale.
11.6 The required accounting does appear to contain a degree of inconsistency.

One might explain this seeming inconsistency by arguing that the balance
sheet and income statement serve different purposes. The balance sheet
attempts to portray the resources of a firm and the claims on those users by
creditors and owners. Market values for securities are more relevant than
acquisition cost or lower-of-cost-or-market for assessing the adequacy of
resources to satisfy claims. The income statement reports the results of
operating performance. One might argue that operating performance from
investing in marketable securities available for sale is not complete until the
firm sells the securities. Another argument for excluding at least unrealized
gains on marketable securities from earnings is that it achieves consistency
with the delayed recognition of unrealized gains on inventories, equipment,
and other assets.
As for earnings quality and ethical issues, the unrealized holding gains
can be realized at management whim, which means management can bring
Solutions 11-2
11.6 continued.
the gains from accumulated other comprehensive income into net income.
Management cannot manipulate other comprehensive income, only net
income. When analysts become accustomed to analyzing other
comprehensive income, the manipulation of net income will be less of an
earnings quality issue.
11.7 a. These accounts are both part of accumulated other comprehensive

income, a shareholders’ equity account, and reflect the change in the
market value of securities since acquisition.
b. Dividend Revenue is an income statement account. It reflects the

revenue recognized when a firm uses the market-value method. Equity
in Earnings of Unconsolidated Affiliates is also an income statement
account. It reflects the revenue recognized when a firm uses the equity
method.
c. Equity in Earnings of Unconsolidated Affiliate is an income statement

account. It reflects the revenue earned by a minority, active investor in
an investee accounted for using the equity method. Minority Interest in
Earnings of Consolidated Subsidiary is an account appearing on the
consolidated income statement of a parent and its majority-owned,
active investee. It represents the external, minority interest in the
earnings of the investee.
d. Minority Interest in Earnings of Consolidated Subsidiary is an income

statement account. It reflects the external, minority interest in the
earnings of a majority-owned consolidated subsidiary. Minority Interest
in Net Assets of Consolidated Subsidiary is a balance sheet account. It
reflects the external, minority interest in the net assets of a consolidated
subsidiary.
11.8 Dividends represent revenues under the market-value method and a return
of capital under the equity method.
11.9 Under the equity method, the change each period in the net assets, or
shareholders' equity, of the subsidiary appears on the one line, Investment in
Subsidiary, on the balance sheet. When the parent consolidates the
subsidiary, changes in the individual assets and liabilities that comprise the
net asset change appear in the individual consolidated assets and liabilities.
Likewise, under the equity method, the investor's interest in the investee's
earnings appears in one line on the income statement, Equity in Earnings of
Unconsolidated Subsidiary. When the parent consolidates the subsidiary,
the individual revenues and expenses of the subsidiary appear in
consolidated revenues and expenses.
11-3 Solutions
11.10 A derivative is a hedge when the firm bears a risk such that the change in
the value of the derivative attempts to offset the change in the value of the
firm as time passes. We distinguish an attempt at hedging from an effective
hedge or even from a partially effective hedge. A firm attempting to hedge
by holding a derivative has a hedge, even though that hedge may be only
partially effective. When the firm acquires a derivative that is completely
ineffective, that is, zero correlated with the hedged item, then we would say
the firm does not hold a hedge, even though the firm says it attempts to
reduce risk.
Under this interpretation, a derivative is not a hedge when changes in the

fair value of the derivative do not at least partially offset other changes in
firm value occurring at the same time.
If the firm chooses not to use hedge accounting when it could, the
fluctuations in the market value of the derivative appear in income, not
offset by the changes in market value of the hedged item. We would say
that choosing not to use hedge accounting reduces opportunity for
manipulation rather than that it increases it because firms cannot offset
gains and losses on the derivative against losses and gains on the hedged
item.
11.11 A fair-value hedge is a hedge of an exposure to changes in the fair value of a

recognized asset or liability or of an unrecognized firm commitment. A cash-
flow hedge is a hedge of an exposure to variability in the cash flows of a
recognized asset or liability, such as variable interest rates, or of a
forecasted transaction, such as expected future foreign sales.
11.12 The firm has an effective cash-flow hedge. The change in value of the
derivative appears both in the balance sheet valuation of the derivative,
which is market value, and in other comprehensive income. However, the
firm does not restate to market value the hedged item, so the change in the
market value of the hedged item does not appear in income nor in other
comprehensive income.
11.13 If Company A owns less than, or equal to, 50 percent of Company B's voting
stock, it is a minority investor in Company B. If Company A owns more
than 50 percent of Company C, it is a majority investor in Company C. The
entities holding the remainder of the voting stock of Company C are
minority investors. Their minority interest appears on the consolidated
balance sheet of Company A and Company C.
11.14 When the investor uses the equity method, total assets include the
Investment in Subsidiary account. The investment account reflects the
parent's interest in the net assets (assets minus liabilities) of the subsidiary.
When the investor consolidates the subsidiary, total consolidated assets
include all of the subsidiary's assets. Consolidated liabilities include the
liabilities of the subsidiary. Thus, total assets on a consolidated basis exceed
total assets when the investor uses the equity method.
Solutions 11-4
11.15 Buildings and equipment have a determinable useful life, whereas the
expected useful life of goodwill is indefinite.
11.16 (Accounting principles for marketable securities.)
a. (4) Firm has option to use hedge accounting, deferring income effects
until realization and reporting changes in fair value in periodic other
comprehensive income, or not use hedge accounting and reporting
holding gains and losses, like trading securities gains and losses, in
current period income.
b. (1) This is a speculative position, so gains and losses appear in current

income.
c. (1) Because not both ability and intent to hold to maturity are present,
it will appear at market value. Because the firm trades securities
such as this, the classification is as a trading security. If the firm
were not a trader, then Treatment (3) would apply.
d. (3) Standard treatment for securities available for sale.
11.17 (Fischer/Black Co.; working backwards from data on marketable securities

transaction.)
a. $21,000 = $18,000 + $3,000.
b $18,000, the amount credited to Marketable Securities in the journal

entry which the student might think of as $21,000 acquisition cost,
derived above, less $3,000 of Unrealized Holding Loss.
c. $5,000 loss from the debit for Realized Loss.
11.18 (Canning/Werther; working backwards from data on marketable securities

transaction.)
a. $15,000 = $18,000 proceeds – $4,000 realized gain + $1,000 loss

previously recognized because they are trading securities.
b. $14,000 = $18,000 proceeds – $4,000 realized gain which is selling price

less acquisition cost because they are securities available for sale.
11.19 (Reconstructing events from journal entries.)
a. The market value of a marketable security is $4,000 less than its book
value and the firm increases the Unrealized Holding Loss account on the
balance sheet.
b. A firm sells marketable securities for an amount that is $200 (= $1,100

– $1,300) less than was originally paid for them.
11-5 Solutions
11.19 continued.
c. The market value of marketable securities is $750 more than its book
value and the firm increases the Unrealized Holding Gain account on the
balance sheet.
d. A firm sells marketable securities for an amount that is $100 (= $1,800

– $1,700) more than was originally paid for them.
11.20 (Hanna Company; equity method entries.)
Investment in Stock of Denver Company....................... 550,000

Cash .................................................................................. 550,000
Shareholders'
Assets = Liabilities + Equity (Class.)
+550,000
–550,000
To record acquisition of common stock.
Investment in Stock of Denver Company....................... 120,000

Equity in Earnings of Denver Company.................... 120,000
Shareholders'
+120,000 +120,000 IncSt RE
To accrue 100 percent share of Denver Company’s earn-

ings.
Cash or Dividends Receivable............................................ 30,000

Investment in Stock of Denver Company................. 30,000
Shareholders'
+30,000
–30,000
To accrue dividends received or receivable.
11.21 (Laesch Company; working backwards to consolidation relations.)
a. $70,000 = ($156,000 – $100,000)/.80.
b. 72.7 percent = ($156,000 – $100,000)/$77,000.
c. $56,000 = ($156,000 – $100,000).
Solutions 11-6
11.22 (Dealco Corporation; working backwards from consolidated income
statements.) (Amounts in Millions)
a. $56/$140 = 40 percent.
b. [.40 X (1 – .25) X $140] = $42.
c. [1 – ($42/$280)] = 1 – .15 = 85 percent.
11.23 (Classifying securities.)
a. Securities available for sale; current asset.
b. Debt securities held to maturity; noncurrent asset.
c. Securities available for sale; current asset.
d. Securities available for sale; noncurrent asset.
e. Trading securities; current asset.
f. Securities available for sale; noncurrent asset (although a portion of

these bonds might appear as a current asset).
11.24 (Vermont Company; journal entries to apply the market value method to
short-term investments in securities.)
8/21
Marketable Securities ......................................................... 45,000
Cash .................................................................................. 45,000
Shareholders'
+45,000
–45,000
To record the cost of purchases in asset account: ($1,000 X

$45) = $45,000.
9/13
No entry because September 13 is not the end of an accounting period.
11-7 Solutions
11.24 continued.
9/30
Dividends Receivable ........................................................... 500
Dividend Revenue ........................................................... 500
Shareholders'
+500 +500 IncSt RE
To record declaration of dividend as revenue: 1,000 X

$0.50 = $500.
10/25
Cash ........................................................................................ 500
Dividends Receivable ..................................................... 500
Shareholders'
+500
–500
To record receipt of dividend in cash.
12/31
Marketable Securities ......................................................... 6,000
Unrealized Holding Gain on Securities Available
for Sale (Other Comprehensive Income)............... 6,000
Shareholders'
OCInc
+6,000 +6,000 AOCInc
To record increase in market price: 1,000 X ($51 – $45) =

$6,000.
1/20
Cash (= 600 X $55)............................................................... 33,000
Marketable Securities (= 600 X $45).......................... 27,000
Realized Gain on Sale of Securities Available for
Sale [= 600 X ($55 – $45)] ........................................ 6,000
Shareholders'
+33,000 +6,000 IncSt RE
–27,000
To record sale of 600 shares of Texas Instruments.
Solutions 11-8
11.24 continued.
Unrealized Holding Gain on Securities Available for

Sale [= 600 X ($51– $45)] (Other Comprehensive
Income)............................................................................. 3,600
Marketable Securities............................................... 3,600
Shareholders'
OCInc
–3,600 –3,600 AOCInc
To eliminate changes previously recorded in the market

value of Texas Instruments.
11.25 (Elston Corporation; journal entries to apply the market value method for
10/15/Year 4
Marketable Securities (Security A).................................. 28,000
Cash .................................................................................. 28,000
Shareholders'
+28,000
–28,000
To record acquisition of shares of Security A.
11/02/Year 4
Marketable Securities (Security B).................................. 49,000
Cash .................................................................................. 49,000
Shareholders'
+49,000
–49,000
To record acquisition of shares of Security B.
12/31/Year 4
Cash ........................................................................................ 1,000
Dividend Revenue ........................................................... 1,000
Shareholders'
+1,000 +1,000 IncSt RE
To record dividend received from Security B.
11-9 Solutions
11.25 continued.
12/31/Year 4
Unrealized Holding Loss on Security A Available for
Sale (Other Comprehensive Income) ......................... 3,000
Marketable Securities (Security A)........................ 3,000
Shareholders'
OCInc
–3,000 –3,000 AOCInc
To record unrealized holding loss on Security A.
12/31/Year 4
Marketable Securities (Security B).................................. 6,000
Unrealized Holding Gain on Security B Available
for Sale (Other Comprehensive Income) ............. 6,000
Shareholders'
OCInc
+6,000 +6,000 AOCInc
To record unrealized holding gain on Security B.
2/10/Year 5
Cash ........................................................................................ 24,000
Realized Loss on Sale of Securities Available for Sale
(= $24,000 – $28,000).................................................... 4,000
Marketable Securities (Security A)...................... 28,000
Shareholders'
+24,000 –4,000 IncSt RE
–28,000
To record sale of Security A.
Marketable Securities (Security A).................................. 3,000

Unrealized Holding Loss on Security A Available
for Sale (Other Comprehensive Income)............... 3,000
Shareholders'
OCInc
+3,000 +3,000 AOCInc
To eliminate the effects of changes previously recorded in

the market value of Security A.
Solutions 11-10
11.25 continued.
12/31/Year 5
Cash ........................................................................................ 1,200
Shareholders'
+1,200 +1,200 IncSt RE
To record dividend received from Security B.
12/31/Year 5
Unrealized Holding Gain on Security B Available for
Sale (Other Comprehensive Income)........................ 2,000
Marketable Securities (Security B) (= $53,000
– $55,000) .................................................................. 2,000
Shareholders'
OCInc
–2,000 –2,000 AOCInc
To revalue Security B to market value.
7/15/Year 6
Cash ........................................................................................ 57,000
Marketable Securities (Security B)............................ 49,000
Sale (= $57,000 – $49,000) ...................................... 8,000
Shareholders'
+57,000 +8,000 IncSt RE
–49,000
To record sale of Security B.
Unrealized Holding Gain on Security B Available for

Sale (= $6,000 – $2,000) (Other Comprehensive
Income)............................................................................ 4,000
Marketable Securities (Security B)...................... 4,000
Shareholders'
OCInc
–4,000 –4,000 AOCInc

the market value of Security B.
11-11 Solutions
11.26 (Simmons Corporation; journal entries to apply the market value method to
6/13/Year 6
Marketable Securities (Security S) .................................. 12,000
Marketable Securities (Security T) .................................. 29,000
Marketable Securities (Security U).................................. 43,000
Cash ................................................................................. 84,000
Shareholders'
+12,000
+29,000
+43,000
–84,000
To record acquisition of marketable equity securities as a

temporary investment.
10/11/Year 6
Cash ........................................................................................ 39,000
Realized Loss on Sale of Security U Available for
Sale.................................................................................... 4,000
Marketable Securities (Security U)...................... 43,000
Shareholders'
+39,000 –4,000 IncSt RE
–43,000
To record sale of Security U.
12/31/Year 6
Marketable Securities (Security S) (= $13,500 –
$12,000)............................................................................ 1,500
Unrealized Holding Gain on Security S Avail-
able for Sale (Other Comprehensive
Income)................................................................... 1,500
Shareholders'
OCInc
+1,500 +1,500 AOCInc
To revalue Security S to market value.
Solutions 11-12
11.26 continued.
12/31/Year 6
Unrealized Holding Loss on Security T Available for
Marketable Securities (Security T) (= $26,200
– $29,000) .................................................................. 2,800
Shareholders'
OCInc
–2,800 –2,800 AOCInc
To revalue Security T to market value.
12/31/Year 7
Marketable Securities (Security S) (= $15,200 –
$13,500)............................................................................ 1,700
Unrealized Holding Gain on Security S Avail-
Income)................................................................... 1,700
Shareholders'
OCInc
+1,700 +1,700 AOCInc
To revalue Security S to market value.
12/31/Year 7
Marketable Securities (Security T) (= $31,700 –
$26,200)............................................................................ 5,500
Unrealized Holding Loss on Security T Avail-
able for Sale (from 12/31/Year 6 Entry)
(Other Comprehensive Income)........................ 2,800
Unrealized Holding Gain on Security T Avail-
Income)................................................................... 2,700
Shareholders'
OCInc
+5,500 +2,800 AOCInc
OCInc
+2,700 AOCInc
To revalue Security T to market value.
11-13 Solutions
11.26 continued.
2/15/Year 8
Cash ........................................................................................ 14,900
Marketable Securities (Security S) ............................ 12,000
Realized Gain on Sale of Security S Available for
Sale (= $14,900 – $12,000)..................................... 2,900
Shareholders'
+14,900 +2,900 IncSt RE
–12,000
To record sale of Security S.
Unrealized Holding Gain on Security S Available for

Sale (= $1,500 + $1,700) (Other Comprehensive
Income)............................................................................. 3,200
Marketable Securities (Security S) ...................... 3,200
Shareholders'
OCInc
–3,200 –3,200 AOCInc

the market value of Security S.
8/22/Year 8
Cash ........................................................................................ 28,500
Realized Loss on Sale of Securities Available for Sale
(Security T) (= $28,500 – $29,000)............................. 500
Marketable Securities (Security T) ...................... 29,000
Shareholders'
+28,500 –500 IncSt RE
–29,000
To record sale of Security T.
Solutions 11-14
11.26 continued.
Unrealized Holding Gain on Security T Available for

Marketable Securities (Security T) ...................... 2,700
Shareholders'
OCInc
–2,700 –2,700 AOCInc

the market value of Security T.
11.27 (Apollo Corporation; amount of income recognized under various methods of

accounting for investments.)
a. and b.
$3.0 million = .15 X $20 million. Increase in market value has no effect
on income.
c. $24 million = .30 X $80 million.
11.28 (Trusco; balance sheet and income effects of alternative methods of

accounting for investments.)
Part Investment Net Income

a. $40 million $3 million
b. $39 million $3 million
c. $45 million $3 million
d. $126 milliona $15 millionb
e. $166 millionc $15 milliond
a$120 million + .30($50 million – $30 million) = $126 million.

b.30 X $50 million = $15 million.
c$160 million + .30($50 million – $30 million) = $166 million.
d.30 X $50 million = $15 million.
11-15 Solutions
11.29 (Randle Corporation; journal entries to apply the market value method for
long-term investments in securities.)
April 10, Year 1
Investment in Securities (M) ............................................. 37,000
Cash .................................................................................. 37,000
Shareholders'
+37,000
–37,000
July 11, Year 1

Investment in Securities (N).............................................. 31,000
Cash .................................................................................. 31,000
Shareholders'
+31,000
–31,000
September 29, Year 1

Investment in Securities (O).............................................. 94,000
Cash .................................................................................. 94,000
Shareholders'
+94,000
–94,000
December 31, Year 1

Cash ........................................................................................ 7,900
Shareholders'
+7,900 +7,900 IncSt RE
December 31, Year 1

Unrealized Holding Loss on Investments in Securities
(M) (Other Comprehensive Income)........................... 2,000
Investment in Securities (M) ................................. 2,000
Shareholders'
OCInc
–2,000 –2,000 AOCInc
Solutions 11-16
11.29 continued.
December 31, Year 1

Unrealized Holding Gain on Investment in Secur-
ities (N) (Other Comprehensive Income)............. 7,000
Shareholders'
OCInc
+7,000 +7,000 AOCInc
December 31, Year 1

Unrealized Holding Loss on Investment in Securities
(O) (Other Comprehensive Income)............................ 7,000
Investment in Securities (O).................................. 7,000
Shareholders'
OCInc
–7,000 –7,000 AOCInc
October 15, Year 2

Cash ........................................................................................ 43,000
Investment in Securities (M) ....................................... 37,000
Realized Gain on Sale of Investment in Securities.. 6,000
Shareholders'
+43,000 +6,000 IncSt RE
–37,000
October 31, Year 2 or December 31, Year 2

Investment in Securities (M) ............................................. 2,000
Unrealized Holding Loss on Investment in Secur-
ities (M) (Other Comprehensive Income) ............ 2,000
Shareholders'
OCInc
+2,000 +2,000 AOCInc
December 31, Year 2

Cash ........................................................................................ 5,600
Shareholders'
+5,600 +5,600 IncSt RE
11-17 Solutions
11.29 continued.
December 31, Year 2

ities (N) (Other Comprehensive Income)............. 7,000
Shareholders'
OCInc
+7,000 +7,000 AOCInc
December 31, Year 2

Investment in Securities (O).............................................. 2,000
ities (O) (Other Comprehensive Income)............. 2,000
Shareholders'
OCInc
+2,000 +2,000 AOCInc
11.30 (Blake Company; journal entries to apply the market value method to long-
term investments in securities.)
July 2, Year 4
Investment in Securities (G).............................................. 42,800
Cash .................................................................................. 42,800
Shareholders'
+42,800
–42,800
October 19, Year 4

Investment in Securities (H).............................................. 29,600
Cash .................................................................................. 29,600
Shareholders'
+29,600
–29,600
Solutions 11-18
11.30 continued.
October 29, Year 4

Cash ........................................................................................ 89,700
Realized Loss on Sale of Investments in Securities...... 4,000
Investment in Securities (F) ........................................ 93,700
Shareholders'
+89,700 –4,000 IncSt RE
–93,700
October 29, Year 4 or December 31, Year 4

Investment in Securities (F) .............................................. 2,500
ities (F) (Other Comprehensive Income) ............. 2,500
Shareholders'
OCInc
+2,500 +2,500 AOCInc
December 31, Year 4

(G) (Other Comprehensive Income)............................ 4,500
Investment in Securities (G).................................. 4,500
Shareholders'
OCInc
–4,500 –4,500 AOCInc
December 31, Year 4

Investment in Securities (H).............................................. 2,000
ities (H) (Other Comprehensive Income)............. 2,000
Shareholders'
OCInc
+2,000 +2,000 AOCInc
11-19 Solutions
11.30 continued.
February 9, Year 5
Investment in Securities (I) ............................................... 18,100
Cash .................................................................................. 18,100
Shareholders'
+18,100
–18,100
September 17, Year 5

Cash ........................................................................................ 32,300
Investment in Securities (H)........................................ 29,600
Realized Gain on Sale of Investment in Securities.. 2,700
Shareholders'
+32,300 +2,700 IncSt RE
–29,600
September 17, Year 5 or December 31, Year 5

Unrealized Holding Gain on Investment in Securities
(H) (Other Comprehensive Income) ........................... 2,000
Investment in Securities (H).................................. 2,000
Shareholders'
OCInc
–2,000 –2,000 AOCInc
December 31, Year 5

(G) (Other Comprehensive Income)............................ 1,400
Investment in Securities (G).................................. 1,400
Shareholders'
OCInc
–1,400 –1,400 AOCInc
December 31, Year 5

Investment in Securities (I) ............................................... 2,600
ities (I) (Other Comprehensive Income) .............. 2,600
Shareholders'
OCInc
+2,600 +2,600 AOCInc
Solutions 11-20
11.31 (Wood Corporation; journal entries to apply the equity method of accounting
for investments in securities.)
January 2
Investment in Securities (Knox)........................................ 350,000
Investment in Securities (Vachi) ...................................... 196,000
Investment in Securities (Snow)....................................... 100,000
Cash .................................................................................. 646,000
Shareholders'
+350,000
+196,000
+100,000
–646,000
December 31
Investment in Securities (Knox)........................................ 35,000
Investment in Securities (Vachi) ...................................... 12,000
Investment in Securities (Snow)................................. 4,800
Equity in Earnings of Affiliates.................................... 42,200
Shareholders'
+35,000 +42,200 IncSt RE
+12,000
–4,800
(.50 X $70,000) + (.30 X $40,000) – (.20 X $24,000) = $42,200.
December 31
Cash ........................................................................................ 19,500
Investment in Securities (Knox).................................. 15,000
Investment in Securities (Vachi) ................................ 4,500
Shareholders'
+19,500
–15,000
–4,500
(.50 X $30,000) + (.30 X $15,000) = $19,500.
11-21 Solutions
11.32 (Stebbins Corporation; journal entries to apply the equity method of
accounting for investments in securities.)
a. January 1, Year 1
Investment in Securities (R)......................................... 250,000
Investment in Securities (S)......................................... 325,000
Investment in Securities (T)......................................... 475,000
Cash .............................................................................. 1,050,000
Shareholders'
+250,000
+325,000
+475,000
–1,050,000
December 31, Year 1

Investment in Securities (T) .................................... 75,000
Equity in Earnings of Affiliates................................ 23,000
Shareholders'
+50,000 +23,000 IncSt RE
+48,000
–75,000
(.25 X $200,000) + (.40 X $120,000) – (.50 X $150,000) =

$23,000.
December 31, Year 1

Cash................................................................................... 63,250
Investment in Securities (R).................................... 31,250
Investment in Securities (S) .................................... 32,000
Shareholders'
+63,250
–31,250
–32,000
(.25 X $125,000) + (.40 X $80,000) = $63,250.
Solutions 11-22
11.32 a. continued.
December 31, Year 1

Depreciation Expense..................................................... 4,000
Shareholders'
–4,000 –4,000 IncSt RE
The cost of the investment in Company R exceeds the book value of the
net assets acquired by $50,000 [= $250,000 – (.25 X $800,000)].
Stebbins Corporation attributes $40,000 of the excess to buildings and
must depreciate $4,000 (= $40,000/10) each year. The firm attributes
the remaining excess to goodwill, which it need not depreciate.
The cost of the investment in Company S exceeds its book value by
$25,000 [= $325,000 – (.40 X $750,000)]. Stebbins Corporation
attributes this excess to goodwill. The acquisition cost of the investment
in Security T equals the book value of the net assets acquired.
December 31, Year 2

Investment in Securities (T)......................................... 25,000
Equity in Earnings of Affiliates................................ 111,250
Shareholders'
+56,250 +111,250 IncSt RE
+30,000
+25,000
(.25 X $225,000) + (.40 X $75,000) + (.50 X $50,000) =

$111,250.
December 31, Year 2

Cash................................................................................... 64,500
Investment in Securities (S) .................................... 32,000
Shareholders'
+64,500
–32,500
–32,000
(.25 X $130,000) + (.40 X $80,000).
11-23 Solutions
11.32 a. continued.
December 31, Year 2

Depreciation Expense..................................................... 4,000
Shareholders'
–4,000 –4,000 IncSt RE
b. Cash................................................................................... 275,000
Loss on Sale of Investments......................................... 9,500
Shareholders'
+275,000 –9,500 IncSt RE
–284,500
$250,000 + $50,000 – $31,250 – $4,000 + $56,250 –

$32,500 – $4,000 = $284,500.
11.33 (Mulherin Corporation; journal entries under various methods of accounting

for investments.)
January 2
Investment in Hanson...................................................... 320,000
Investment in Maloney .................................................... 680,000
Investment in Quinn......................................................... 2,800,000
Cash ............................................................................... 3,800,000
Shareholders'
+320,000
+680,000
+2,800,000
–3,800,000
To record acquisition of investments.
Solutions 11-24
11.33 continued.
December 31
Cash ........................................................................................ 6,000
Shareholders'
+6,000 +6,000 IncSt RE
To record dividend from Hanson: .15 X $40,000 = $6,000.
December 31
ities (Other Comprehensive Income).......................... 15,000
Investment in Hanson .............................................. 15,000
Shareholders'
OCInc
–15,000 –15,000 AOCInc
To apply the market value method to the investment in

Hanson.
December 31
Investment in Maloney ....................................................... 150,000
Equity in Earnings of Maloney..................................... 150,000
Shareholders'
+150,000 +150,000 IncSt RE
To recognize share of Maloney’s earnings; .30 X $500,000

= $150,000.
December 31
Cash ........................................................................................ 54,000
Investment in Maloney ................................................. 54,000
Shareholders'
+54,000
–54,000
To recognize share of Maloney’s dividends; .30 X $180,000

= $54,000.
11-25 Solutions
11.33 continued.
December 31
Amortization Expense......................................................... 8,000
Investment in Maloney ................................................. 8,000
Shareholders'
–8,000 –8,000 IncSt RE
To amortize excess acquisition cost for Maloney; $680,000

– (.30 X $2,000,000) = $80,000; $80,000/10 = $8,000.
December 31
Investment in Quinn............................................................ 600,000
Equity in Earnings of Quinn ......................................... 600,000
Shareholders'
+600,000 +600,000 IncSt RE
To recognize share of Quinn’s earnings.
December 31
Cash ........................................................................................ 310,000
Investment in Quinn...................................................... 310,000
Shareholders'
+310,000
–310,000
To recognize share of Quinn’s dividends.
11.34 (CAR Corporation; consolidation policy and principal consolidation concepts.)
a. CAR Corporation should consolidate Alexandre du France Software

Systems and R Credit Corporation or, under exceptional circumstances,
use the market value method.
b. Charles Electronics........................................ (.75 X $120,000) = $ 90,000

Alexandre du France Software Systems... (.80 X 60,000) = 48,000
R Credit Corporation ..................................... (.90 X 144,000) = 129,600
Total Income from Subsidiaries............................................... $ 267,600
Solutions 11-26
11.34 continued.
c. Minority Interest shown under accounting assumed in problem:
Charles Electronics........................................ (.25 X $120,000) = $ 30,000

Alexandre du France Software Systems... (None) = --
R Credit Corporation ..................................... (None) = --
$ 30,000
CAR Corporation subtracts the minority interest in computing net

income.
d. Charles Electronics, no increase because already consolidated.
Alexandre du France Software Systems increase by 80 percent of net

income less dividends:
.80 X ($96,000 – $60,000) = $28,800.
R Credit Corporation, no increase because equity method results in the
same income statement effects as do consolidated statements. Net
income of CAR Corporation would be:
$1,228,800 = $1,200,000 (as reported) + $28,800 (increase).
e. Minority Interest shown if CAR Corporation consolidated all companies:
Charles Electronics....................................... (.25 X $120,000) = $ 30,000

Alexandre du France Software Systems.. (.20 X 96,000) = 19,200
R Credit Corporation .................................... (.10 X 144,000) = 14,400
$ 63,600
11.35 (Bush Corporation; equity method entries, earnings quality, and ethics.)
(Amounts in Millions.)
a. Investment in Stock of Cheney Computer................ 100

Cash .............................................................................. 100
Shareholders'
+100
–100
To record acquisition of shares of common stock.
11-27 Solutions
11.35 a. continued.
Investment in Stock of Cheney Computer................ 20

Equity in Earnings of Cheney Computer............... 20
Shareholders'
+20 +20 IncSt RE
To accrue Cheney Computer's earnings for the year.
Cash (or Dividends Receivable).................................... 6

Investment in Stock of Cheney Computer ........... 6
Shareholders'
+6
–6
To recognize dividends received or receivable.
Amortization Expense.................................................... 1.6

Investment in Stock of Cheney Computer ........... 1.6
Shareholders'
–1.6 –1.6 IncSt RE
To amortize patent; $1.6 = [.20 X ($500 – $420)/10].

Investment is now $112.4 = $100 + $20 – $6 – $1.6.
b. GAAP provides a rebuttable presumption that less than 20 percent

ownership means no need to use the equity method, but the primary
test is that of significant influence. Firms should not be able to
manipulate their use, or not, of the equity method by small changes in
ownership percentage because small changes likely do not alter the
ability, or not, to exert influence. Still, companies toy with the
percentage and auditors seem to acquiesce.
Solutions 11-28
11.36 (Joyce Company and Vogel Company; equity method entries.)
Joyce Company's Books
(1) Investment in Stock of Vogel Company..................... 420,000

Cash .............................................................................. 420,000
Shareholders'
+420,000
–420,000
To record acquisition of common stock.
(2) Accounts Receivable ...................................................... 29,000

Sales Revenue............................................................. 29,000
Shareholders'
+29,000 +29,000 IncSt RE
To record intercompany sales on account.
(2) Cost of Goods Sold........................................................... 29,000

Inventories................................................................... 29,000
Shareholders'
–29,000 –29,000 IncSt RE
To record cost of intercompany sales.
(3) Advance to Vogel Company.......................................... 6,000

Cash .............................................................................. 6,000
Shareholders'
+6,000
–6,000
To record advance to Vogel Company.
11-29 Solutions
11.36 continued.
(4) Cash................................................................................... 16,000

Accounts Receivable.................................................. 16,000
Shareholders'
+16,000
–16,000
To record collections on account from Vogel Company.
(5) Cash................................................................................... 4,000

Advance to Vogel Company ..................................... 4,000
Shareholders'
+4,000
–4,000
To record collection of advance from Vogel Company.
(6) Cash................................................................................... 20,000

Investment in Stock of Vogel Company................ 20,000
Shareholders'
+20,000
–20,000
To record dividend from Vogel Company.
(7) Investment in Stock of Vogel Company..................... 30,000

Equity in Earnings of Vogel Company ................... 30,000
Shareholders'
+30,000 +30,000 IncSt RE
To accrue 100 percent share of Vogel Company’s net

income.
Solutions 11-30
11.36 continued.
(8) Amortization Expense.................................................... 4,000

Investment in Stock of Vogel Company................ 4,000
Shareholders'
–4,000 –4,000 IncSt RE
To record amortization of patent; $4,000 = ($20,000 –

$380,000)/10.
Vogel Company's Books
(1) No entry.
(2) Inventories........................................................................ 29,000

Accounts Payable....................................................... 29,000
Shareholders'
+29,000 +29,000
To record intercompany purchase of materials on

account.
(3) Cash................................................................................... 6,000

Advance from Joyce Company................................ 6,000
Shareholders'
+6,000 +6,000
To record advance from Joyce Company.
(4) Accounts Payable ........................................................... 16,000

Cash .............................................................................. 16,000
Shareholders'
–16,000 –16,000
To record payment for purchases on account.
11-31 Solutions
11.36 continued.
(5) Advance from Joyce Company .................................... 4,000

Cash .............................................................................. 4,000
Shareholders'
–4,000 –4,000
To record repayment of advance.
(6) Retained Earnings........................................................... 20,000

Cash .............................................................................. 20,000
Shareholders'
–20,000 –20,000 RE
To record declaration and payment of dividend.
11.37 (Alpha/Omega; working backwards from data which has eliminated

intercompany transactions.)
a. $80,000 = $450,000 + $250,000 – $620,000.
b. $30,000 is Omega’s cost; $20,000 is Alpha’s cost; $20,000 original cost

to Alpha.
Markup on the goods sold from Alpha to Omega, which remain in

Omega’s inventory, is $10,000 (= $60,000 + $50,000 – $100,000).
Because Alpha priced the goods with markup 50 percent over its
costs, the cost to Alpha to produce goods with markup of $10,000 is
$20,000 and the total sales price from Alpha to Omega is $30,000 (=
$10,000 + $20,000).
11.38 (Homer/Tonga; working backwards from purchase data.)
a. $1,060,000 = $80,000 + $980,000.
b. Book Value of Total Assets (from Part a.).............................. $ 1,060,000

Less Book Value of Current Assets ......................................... (210,000)
Less Book Value of Goodwill....................................................... 0
Book Value of Depreciable Assets............................................ $ 850,000
Solutions 11-32
11.39 (Bristol-Myers and Squibb; financial statement effects of the revaluations
required by the purchase method.)
a. (Amounts in Millions)
Purchase
Method
Assets, Except Goodwill.......................................................... $ 17,173c
Goodwill....................................................................................... 2,569d
Total Assets.......................................................................... $ 19,742
Liabilities.................................................................................... $ 3,325b
Shareholders’ Equity................................................................ 16,417a
Total Equities ....................................................................... $ 19,742
a$3,547 + $12,870 = $16,417.

b$1,643 + $1,682 = $3,325.
c$5,190 + $3,083 + $2,500 + $6,400 = $17,173.
d$12,870 – $1,401 – $2,500 – $6,400 = $2,569.
b. (Amounts in Millions)
Purchase
Method
Precombination Projected Consolidated Net Income...... $ 1,748
Building and Equipment Depreciation: $2,500/10 .......... (250)
Patent Amortization: $6,400/5........................................... (1,280)
Revised Projected Net Income............................................. $ 218
11.40 (Effects of transactions involving the market value methods on the

statement of cash flows.)
a. The journal entry to record this transaction is as follows:
Marketable Securities.................................................... 59,800

Cash .............................................................................. 59,800
Shareholders'
+59,800
–59,800
Because this entry involves a credit to the Cash account, Line (11)
decreases by $59,800. The purchase of marketable securities (whether
trading or, as here, securities available for sale) is an Investing activity,
so Line (7) increases by $59,800. Note that Line (7) carries a negative
sign, so increasing it reduces cash.
11-33 Solutions
11.40 continued.
b. The journal entries to record this transaction are as follows:
Cash................................................................................... 47,900
Marketable Securities ............................................... 42,200
Sale............................................................................ 5,700
Shareholders'
+47,900 +5,700 IncSt RE
–42,200

for Sale (Other Comprehensive Income) ............... 1,800
Marketable Securities (= $44,000 –
$42,200)............................................................... 1,800
Shareholders'
OCInc
–1,800 –1,800 AOCInc
Because the first entry involves a debit to the Cash account, Line (11)
increases by $47,900. The sale of securities available for sale is an
Investing activity, so Line (6) increases by $47,900 and there is no
effect on Cash Flow from Operations. Because the realized gain is an
income statement account, Line (3) increases by $5,700. We show all of
the cash proceeds of sale ($47,900) on Line (6). Under the indirect
method, we double count cash in the amount of the gain if we do not
eliminate $5,700 from the Operations section of the statement of cash
flows. Thus, Line (5) increases by $5,700 to offset the realized gain. The
net effect of the entries on Line (3) and Line (5) is zero. The second
entry does not involve an income statement account or the Cash
account and therefore would not appear on the statement of cash flows.
c. The journal entries to record this transaction are as follows:
Cash................................................................................... 18,700
Realized Loss on Sale of Securities Available for
Sale................................................................................ 6,400
Marketable Securities........................................... 25,100
Shareholders'
+18,700 –6,400 IncSt RE
–25,100
Solutions 11-34
11.40 c. continued.
Marketable Securities (= $25,100 – $19,600)........... 5,500

Unrealized Holding Loss on Securities Available
for Sale (Other Comprehensive Income)........... 5,500
Shareholders'
OCInc
+5,500 +5,500 AOCInc
Because the first entry involves a debit to the Cash account, Line (11)
increases by $18,700. The sale of securities available for sale is an
Investing activity, so Line (6) increases by $18,700 and there is no
effect on Cash Flow from Operations. Because the realized loss is an
income statement account, Line (3) decreases by $6,400. The loss used
no cash so Line (4) shows an addback of $6,400. The second entry does
not involve the Cash account, nor any income statement account, so it
does not affect the statement of cash flows.
d. The journal entry is as follows:

Marketable Securities (= $220,500 –
$201,500)............................................................. 19,000
Shareholders'
OCInc
–19,000 –19,000 AOCInc
This entry does not involve a debit or credit to the Cash account, so Line
(11) is not affected. This entry also does not affect an income statement
account (the Unrealized Holding Loss on Securities Available for Sale
account is part of other comprehensive income), so Line (3) is not
affected. Thus, this entry does not appear on the statement of cash
flows. The firm would disclose this event in a supplementary schedule or
note if the amount were material.
11-35 Solutions
11.40 continued.
e. The journal entry is as follows:
Marketable Securities.................................................... 7,400

for Sale (Other Comprehensive Income)........... 7,400
Shareholders'
OCInc
+7,400 +7,400 AOCInc
For the same reasons given in Part d. above, this entry does not appear
on the statement of cash flows. The firm would disclose this event in a
supplementary schedule or note if the amount were material.
f. The journal entry to record this transaction is:
Cash................................................................................... 8,000
Dividend Revenue ....................................................... 8,000
Shareholders'
+8,000 +8,000 IncSt RE
The Cash account increases, so Line (11) increases by $8,000. Line (1)
increases by $8,000. Net income increases, so Line (3) increases by
$8,000.
g. The journal entry to record this event is:

Investments in Securities...................................... 2,000
Shareholders'
OCInc
–2,000 –2,000 AOCInc
The Cash account does not change so there is no effect on Line (11). Net
income does not change so there is no effect on Line (3). The firm would
disclose this event in a supplementary schedule or note if the amount
were material.
Solutions 11-36
11.41 (Effects of transactions involving the equity method on the statement of
cash flows.)
a. The journal entry to record this transaction is:
Cash (= .40 X $10,000)................................................... 4,000

Investment in Affiliate [= .40 X ($25,000 –
$10,000)] ...................................................................... 6,000
Equity in Earnings of Affiliate (= .40 X
$25,000)............................................................... 10,000
Shareholders'
+4,000 +10,000 IncSt RE
+6,000
The Cash account increases in the amount of the dividend, so Lines (1)
and (11) increase $4,000. Net income on Line (3) increases by $10,000
for the equity in earnings. Because the firm recognizes more revenue
($10,000) than the cash received ($4,000), it must increase Line (5) by
$6,000 to convert net income to cash flow from operations.
b. The journal entry to record this event is:
Equity in Loss of Affiliate (= .40 X $12,500) .............. 5,000

Investment in Affiliate .............................................. 5,000
Shareholders'
–5,000 –5,000 IncSt RE
There is no effect on the Cash account so Line (11) does not change. Net
income decreases for the share of the loss so Line (3) decreases by
$5,000. Because the loss does not use cash, Line (4) increases by
$5,000 when converting net income to cash flow from operations.
c. The journal entry to record this event is:
Amortization Expense.................................................... 3,000

Investment in Affiliate .............................................. 3,000
Shareholders'
–3,000 –3,000 IncSt RE
There is no effect on the Cash account so Line (11) does not change. Net
income on Line (3) decreases for amortization expense. Because the
amortization expense does not reduce cash, Line (4) increases by $3,000
when converting net income to cash flow from operations.
11-37 Solutions
11.42 (Effect of errors involving securities available for sale on financial statement ratios.)
Rate of Debt
Return on Equity
Assets Ratio
a . Unrealized Holding Loss on Securities Available for Sale

(Other Comprehensive Income). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X NO NO
= U/S = U/S
Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X O/S O/S
Shareholders’
Assets = Liabilities + Equity (Class)
–Amount –Amount IncSt RE
b. Investment in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X NO NO
= O/S
Unrealized Holding Gain on Securities Available for U/S U/S = O/S
Sale (Other Comprehensive Income) . . . . . . . . . . . . . . . . . . . . . . X
Shareholders’
OCInc
+Amount +Amount AOCInc
c . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X U/S NO
= U/S
Dividend Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X U/S U/S = O/S
Shareholders’
+Amount +Amount IncSt RE
Solutions 11-38
11.42 continued.
d . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X O/S NO
= O/S = U/S
Investment Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X O/S O/S
Shareholders’
–Amount –Amount
e . Depreciation Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X O/S NO

= O/S = U/S
Investment Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X O/S O/S
Shareholders’
–Amount –Amount IncSt RE
Note: This problem asks only for the net effect of each error on the two financial ratios. The journal entries and the
numerator and denominator effects appear to show the reason for the net effect.
11-39 Solutions
11.43 (Effect of errors on financial statements.)
Shareholders'
Assets Liabilities Equity Net Income
a. U/S No U/S U/S
b. O/S No O/S No
c. O/S No O/S O/S
d. O/S No O/S O/S
e. No No No No
f. O/S O/S No No
g. No U/S O/S O/S
11.44 (Dostal Corporation; journal entries and financial statement presentation of

short-term securities available for sale.)
a. 2/05/Year 1
Marketable Securities (Security A)............................. 60,000
Cash .............................................................................. 60,000
Shareholders'
+60,000
–60,000
8/12/Year 1
Marketable Securities (Security B)............................. 25,000
Cash .............................................................................. 25,000
Shareholders'
+25,000
–25,000
12/31/Year 1
Marketable Securities (Security A) (= $66,000 –
$60,000)........................................................................ 6,000
Unrealized Holding Gain on Security A
Available for Sale (Other Comprehensive
Income)................................................................ 6,000
Shareholders'
OCInc
+6,000 +6,000 AOCInc
Solutions 11-40
11.44 a. continued.
Unrealized Holding Loss on Security B Available

Marketable Securities (Security B)
(= $20,000 – $25,000)....................................... 5,000
Shareholders'
OCInc
–5,000 –5,000 AOCInc
1/22/Year 2
Marketable Securities (Security C)............................. 82,000
Cash .............................................................................. 82,000
Shareholders'
+82,000
–82,000
2/25/Year 2
Marketable Securities (Security D)............................. 42,000
Cash .............................................................................. 42,000
Shareholders'
+42,000
–42,000
3/25/Year 2
Marketable Securities (Security E)............................. 75,000
Cash .............................................................................. 75,000
Shareholders'
+75,000
–75,000
11-41 Solutions
11.44 a. continued.
6/05/Year 2
Cash................................................................................... 72,000
Marketable Securities (Security A)........................ 60,000
Sale............................................................................ 12,000
Shareholders'
+72,000 +12,000 IncSt RE
–60,000
Unrealized Holding Gain on Security A Available

Marketable Securities (Security A).................... 6,000
Shareholders'
OCInc
–6,000 –6,000 AOCInc
6/05/Year 2
Cash................................................................................... 39,000
Sale................................................................................ 3,000
Marketable Securities (Security D).................... 42,000
Shareholders'
+39,000 –3,000 IncSt RE
–42,000
12/31/Year 2
Marketable Securities (Security B) (= $23,000 –
$20,000)........................................................................ 3,000
Unrealized Holding Loss on Security B
Available for Sale (Other Comprehensive
Income)................................................................ 3,000
Shareholders'
OCInc
+3,000 +3,000 AOCInc
Solutions 11-42
11.44 a. continued.
12/31/Year 2
Unrealized Holding Loss on Security C Available
Marketable Securities (Security C)
(= $79,000 – $82,000)....................................... 3,000
Shareholders'
OCInc
–3,000 –3,000 AOCInc
12/31/Year 2
Marketable Securities (Security E) (= $80,000 –
$75,000)........................................................................ 5,000
Unrealized Holding Gain on Security E Avail-
Income)................................................................ 5,000
Shareholders'
OCInc
+5,000 +5,000 AOCInc
b. Balance Sheet on December 31, Year 1

Marketable Securities at Market Value.................................... $ 86,000
Net Unrealized Holding Gain on Securities Available for
Sale ($6,000 – $5,000).............................................................. $ 1,000
Footnote
Marketable Securities on December 31, Year 1 had an acquisition cost of
$85,000 and a market value of $86,000. Gross unrealized gains total
$6,000 and gross unrealized losses total $5,000.
c. Balance Sheet on December 31, Year 2

Marketable Securities at Market Value.................................... $ 182,000
Net Unrealized Holding Loss on Securities Available for
Sale............................................................................................... -0-
Footnote
Marketable Securities on December 31, Year 2 had an acquisition cost of
$182,000 and a market value of $182,000. Gross unrealized gains total
$5,000 and gross unrealized losses total $5,000. Proceeds from sales of
marketable securities totaled $111,000 during Year 2. These sales
resulted in gross realized gains of $12,000 and gross realized losses of
$3,000. The net unrealized holding loss on securities available for sale
changed as follows during Year 2:
11-43 Solutions
11.44 c. continued.
Balance, December 31, Year 1 ............................................. $ 1,000 Cr.

Accumulated Other Comprehensive Income (Unre-
alized Holding Gain on Securities Sold)............................ (6,000) Dr.
Change in Net Unrealized Loss on Securities Held at
Year End ($3,000 – $3,000 + $5,000).............................. 5,000 Cr.
Balance, December 31, Year 2 ............................................. $ --
11.45 (Rice Corporation; journal entries and financial statement presentation of

long-term securities available for sale.)
a. 3/05/Year 1
Investments in Securities (Security A)...................... 40,000
Cash .............................................................................. 40,000
Shareholders'
+40,000
–40,000
5/12/Year 1
Investments in Securities (Security B)...................... 80,000
Cash .............................................................................. 80,000
Shareholders'
+80,000
–80,000
12/31/Year 1
Investments in Securities (Security A) (= $45,000
– $40,000) .................................................................... 5,000
Unrealized Holding Gain on Security A Avail-
Income)................................................................ 5,000
Shareholders'
OCInc
+5,000 +5,000 AOCInc
Solutions 11-44
11.45 a. continued.
12/31/Year 1
Unrealized Holding Loss on Security B Available
Investments in Securities (Security B)
(= $70,000 – $80,000)...................................... 10,000
Shareholders'
OCInc
–10,000 –10,000 AOCInc
3/22/Year 2
Investments in Securities (Security C)...................... 32,000
Cash .............................................................................. 32,000
Shareholders'
+32,000
–32,000
5/25/Year 2
Investments in Securities (Security D)...................... 17,000
Cash .............................................................................. 17,000
Shareholders'
+17,000
–17,000
5/25/Year 2
Investments in Securities (Security E)...................... 63,000
Cash .............................................................................. 63,000
Shareholders'
+63,000
–63,000
11-45 Solutions
11.45 a. continued.
10/05/Year 2
Cash................................................................................... 52,000
Investments in Securities (Security A) ................. 40,000
Sale............................................................................ 12,000
Shareholders'
+52,000 +12,000 IncSt RE
–40,000
Unrealized Holding Gain on Security A Available

Investments in Securities (Security A)........... 5,000
Shareholders'
OCInc
–5,000 –5,000 AOCInc
10/05/Year 2
Cash................................................................................... 16,000
Sale................................................................................ 1,000
Investments in Securities (Security D)............. 17,000
Shareholders'
+16,000 –1,000 IncSt RE
–17,000
12/31/Year 2
Investments in Securities (Security B) (= $83,000
– $70,000) ................................................................... 13,000
Unrealized Holding Loss on Security B Avail-
Income)................................................................ 10,000
Unrealized Holding Gain on Security B Avail-
Income)................................................................ 3,000
Shareholders'
OCInc
+13,000 +10,000 AOCInc
OCInc
+3,000 AOCInc
Solutions 11-46
11.45 a. continued.
12/31/Year 2
Unrealized Holding Loss on Security C Available
for Sale (Other Comprehensive Income)
(= $27,000 – $32,000)................................................ 5,000
Investments in Securities (Security C)............. 5,000
Shareholders'
OCInc
–5,000 –5,000 AOCInc
12/31/Year 2
Investments in Securities (Security E) (= $67,000
– $63,000) .................................................................... 4,000
Unrealized Holding Gain on Security E Avail-
Income)................................................................ 4,000
Shareholders'
OCInc
+4,000 +4,000 AOCInc
b. Balance Sheet on December 31, Year 1

Investments in Securities at Market Value............................. $ 115,000
Net Unrealized Holding Loss on Securities Available for
Sale ($5,000 – $10,000) ........................................................... $ (5,000)
Footnote
Investments in Securities on December 31, Year 1 had an acquisition
cost of $120,000 and a market value of $115,000. Gross unrealized
gains total $5,000 and gross unrealized losses total $10,000.
c. Balance Sheet on December 31, Year 2

Investments in Securities at Market Value............................. $ 177,000
Net Unrealized Holding Gain on Securities Available for
Sale............................................................................................... $ 2,000
Footnote
Investments in Securities on December 31, Year 2 had an acquisition
cost of $175,000 and a market value of $177,000. Gross unrealized
gains total $7,000 (= $3,000 + $4,000) and gross unrealized losses total
$5,000. Proceeds from sales of investments in securities totaled
$68,000 during Year 2. These sales resulted in gross realized gains of
$12,000 and gross realized losses of $1,000. The net unrealized holding
loss on securities available for sale changed as follows during Year 2:
11-47 Solutions
11.45 c. continued.
Balance, December 31, Year 1 .............................................. $ (5,000) Dr.

Unrealized Holding Gain on Securities Sold ........................ (5,000) Dr.
Change in Net Unrealized Loss on Securities Held at
Year End ($13,000 – $5,000 + $4,000) ........................... 12,000 Cr.
Balance, December 31, Year 2 ............................................. $ 2,000 Cr.
11.46 (Zeff Corporation; reconstructing transactions involving short-term

securities available for sale.)
a. Sale of marketable securities during Year 2: Proceeds of $14,000; gain

on sale is $4,000 = $14,000 – $10,000, so original cost was $10,000.
b. Book value at time of sale was $13,000, so unrealized holding gain at

time of sale was $3,000 = $13,000 – $10,000.
c. The ending balance of Net Unrealized holding Gains was $2,000 less at
the end of Year 2 than at the beginning, while the unrealized holding gain
on the securities sold was $3,000. The sale reduced the balance by
$3,000. Since the ending balance declined by only $2,000, the securities
on hand must have increased during the year by $1,000, so the net
decline is $2,000 = $3,000 – $1,000.
d. The Marketable Securities account increased by $8,000 = $195,000 –

$187,000 during Year 2. The sale reduced the account by $13,000 and
the unrealized holding gain on the securities held at the end of the year
increased the balance by $1,000; see Part c. A net increase of $9,000
after a reduction of $12,000 means the cost of new securities is $20,000
= $8,000 + $12,000.
11.47 (Sunshine Mining Company; analysis of financial statement disclosures for

securities available for sale.) (Amounts in Thousands)
a. $10,267 loss = $11,418 – $21,685.
b. $2,649 gain = $8,807 – $6,158.
c. $12,459 = $21,685 – $6,158 – $3,068.
d. None. The unrealized holding loss on current marketable securities of

$2,466 (= $4,601 – $7,067) and the unrealized holding gain on
noncurrent marketable securities of $2,649 (= $8,807 – $6,158) appear
in the shareholders’ equity section of the balance sheet.
Solutions 11-48
11.48 (Callahan Corporation; effect of various methods of accounting for
marketable equity securities.)
a. Trading Securities
Year 1 Year 2
Income Statement:
Dividend Revenue ................................................. $ 3,300 $ 2,200
Unrealized Holding Gain (Loss):
($54,000 – $55,000)......................................... (1,000) --
($17,000 – $14,000)......................................... -- 3,000
Realized Holding Gain (Loss) ($14,500 +
$26,000) – ($16,000 + $24,000).................... -- 500
Total ............................................................... $ 2,300 $ 5,700
Balance Sheet:
Current Assets:
Marketable Securities at Market Value...... $54,000 $ 17,000
b. Securities Available for Sale (Current Asset)

Year 1 Year 2
Income Statement:
Dividend Revenue ................................................. $ 3,300 $ 2,200
Realized Holding Gain (Loss): [= $40,500 –
($18,000 + $25,000)] ....................................... -- (2,500)
Total ............................................................... $ 3,300 $ (300)
Balance Sheet:
Current Assets:
Marketable Securities at Market Value...... $54,000 $ 17,000
Shareholders’ Equity:
Net Unrealized Holding Gain (Loss) on Se-
curities Available for Sale (Part of Accu-
mulated Other Comprehensive Income):
($54,000 – $55,000).................................... (1,000) --
($17,000 – $12,000).................................... -- 5,000
c. Same as Part b. except that the securities appear as Investments in

Securities in the noncurrent assets section of the balance sheet.
d. Trading Securities Available for Sale

Securities Current Assets Noncurrent
Assets
Year 1 .................................. $ 2,300 $ 3,300 $ 3,300
Year 2 .................................. 5,700 (300) (300)
Total ................................. $ 8,000 $ 3,000 $ 3,000
The unrealized gain on Security I of $5,000 (= $17,000 – $12,000) at the

end of Year 2 appears in income if these securities are trading securities
but in a separate shareholders’ equity account if these securities are
securities available for sale (either a current asset or a noncurrent
asset). Total shareholders’ equity is the same. Retained earnings (pre-
11-49 Solutions
11.48 d. continued.
tax) are $5,000 larger if these securities are trading securities and the
unrealized holding gain account is $5,000 larger if these securities are
classified as securities available for sale.
11.49 (Citibank; analysis of financial statement disclosures related to marketable

securities and quality of earnings.) (Amounts in Millions)
a. Cash................................................................................... 37,600
Sale................................................................................ 113
Realized Gain on Securities Available for
Sale....................................................................... 443
Marketable Securities........................................... 37,270a
Shareholders'
+37,600 –113 IncSt RE
–37,270a +443 IncSt RE
a$14,075 + $37,163 – $13,968 = $37,270.
Marketable Securities.................................................... 262

for Sale (= $37,270 – $37,008) (Other Com-
prehensive Income)................................................ 262
Shareholders'
OCInc
+262 +262 AOCInc
b. Balance, December 31, Year 10 (= $957 – $510).............. $ 447 Cr.

Net Unrealized Holding Loss on Securities Sold (from
Part a.).................................................................................. 262 Cr.
Increase in Net Unrealized Holding Gain on Securities
Held on December 31, Year 11 (Plug).............................. 518 Cr.
Balance, December 31, Year 11 (= $1,445 – $218)........... $ 1,227 Cr.
c. Interest and Dividend Revenue ............................................ $ 1,081

Net Realized Gain on Securities Sold from Market
Price Changes Occurring During Year 11:
(= $37,600 – $37,008)......................................................... 592
Net Unrealized Holding Gain on Securities Held on
December 31, Year 11 (from Part b.) .............................. 518
Total Income ............................................................................. $ 2,191
Solutions 11-50
11.49 continued.
d. Citibank sold marketable securities during Year 11, which had net
unrealized holding losses of $262 million as of December 31, Year 10.
The sale of these securities at a gain suggests that market prices
increased substantially ($592 million) during Year 11. The substantial
increase in the net unrealized holding gain of $518 lends support to this
conclusion about market price increases. Citibank could have increased
its income still further by selecting securities for sale that had
unrealized holding gains as of December 31, Year 10. If prices continued
to increase on such securities during Year 11 prior to sale, the realized
gain would have been even larger than the reported net realized gain of
$330 million (= $443 – $113). Firms with securities available for sale
with unrealized holding gains can manage income by choosing which
items to sell. This will not affect Comprehensive Income, but until
analysts focus on Comprehensive Income, rather than Net Income,
managements will be tempted to manage the Net Income figure. Most
would not consider such earnings management a breach of ethics.
11.50 (Rockwell Corporation; journal entries for various methods of accounting for
intercorporate investments.)
a. Investment in Stock of Company R............................ 648,000

Cash .............................................................................. 648,000
Shareholders'
+648,000
–648,000
To record acquisitions of shares of Company R.
Cash and Dividends Receivable.................................... 48,000

Dividend Revenue ....................................................... 48,000
Shareholders'
+48,000 +48,000 IncSt RE
To record dividends received or receivable.
11-51 Solutions
11.50 a. continued.

ities (Other Comprehensive Income)...................... 24,000
Investment in Stock of Company R................... 24,000
Shareholders'
OCInc
–24,000 –24,000 AOCInc
To write down investment in stock of Company R

account to market value; $24,000 = $648,000 –
$624,000.
b. Investment in Stock of Company S............................ 2,040,000

Cash .............................................................................. 2,040,000
Shareholders'
+2,040,000
–2,040,000
To record acquisitions of shares of Company S.
Investment in Stock of Company S............................ 360,000

Equity in Earnings of Company S........................... 360,000
Shareholders'
+360,000 +360,000 IncSt RE
To accrue share of Company S’s earnings; $360,000 =

.30 X $1,200,000.

Investment in Stock of Company S ....................... 144,000
Shareholders'
+144,000
–144,000
Solutions 11-52
11.50 continued.
c. Investment in Stock of Company T............................ 6,000,000

Cash .............................................................................. 6,000,000
Shareholders'
+6,000,000
–6,000,000
To record acquisitions of shares of Company T.
Investment in Stock of Company T............................ 1,200,000

Equity in Earnings of Company T........................... 1,200,000
Shareholders'
+1,200,000 +1,200,000 IncSt RE
To accrue earnings of Company T; $1,200,000 = 100%

X $1,200,000.

Investment in Stock of Company T ....................... 480,000
Shareholders'
+480,000
–480,000
11.51 (Coke and Pepsi; effect of intercorporate investment policies on financial

statements.)
a. Coke as Reported: [$1,364 + (1 – .34)($231)]/$9,280 = 16.3%.

Coke’s Bottlers: [$290 + (1 – .34)($452)]/$11,110 = 5.3%.
Coke and Bottlers
Consolidated: [$1,364 + (1 – .34)($231 + $452) +
.51($290)]/$18,675 = 10.5%.
Pepsi as Reported: [$1,091 + (1 – .34)($689)/$15,637 = 9.9%.
11-53 Solutions
11.51 continued.
b. Coke as Reported: ($4,296 + $1,133)/$9,280 = 58.5%.

Coke’s Bottlers: ($2,752 + $4,858)/$11,110 = 68.5%.
Coke and Bottlers
Consolidated: ($7,048 + $5,991)/$18,675 = 69.8%.
Pepsi as Reported: ($3,264 + $7,469)/$15,637 = 68.6%.
c. The rate of return on assets using reported amounts suggests that Coke
is considerably more profitable than Pepsi. This measure of the rate of
return on assets includes Coke’s 49 percent interest in the earnings of
its bottlers but does not include Coke’s 49 percent interest in the assets
of these bottlers. Coke’s rate of return on assets with its bottlers
consolidated includes 100 percent of the net income and assets of these
bottlers. Thus, Coke appears only slightly more profitable than Pepsi
during Year 11.
Coke’s liabilities to assets ratio is less than the corresponding ratio
for its bottlers. On a comparable measurement basis with Pepsi, Coke
has slightly more debt in its capital structure instead of approximately
14.7 percent less debt as indicated by the reported amounts [14.7% =
(68.6% – 58.5%)/68.6%].
d. Coke’s intercorporate investment policy permits it to report higher

profitability and lower debt ratios than if it held a sufficient ownership
percentage to consolidate its bottlers. Coke’s 49 percent ownership
probably permits it to exert control over its bottlers because (1) the
remaining 51 percent is widely-held by many individuals and
institutions, and (2) Coke maintains exclusive contracts with its bottlers
that tie their success to Coke’s success. Thus, one might argue that
consolidation reflects the economic reality of the relationship better
than use of the equity method.
Solutions 11-54
11.52 (Interaction of regulation and accounting rules for financial institutions, particularly banks.)
Effects of Changing Market Value of Assets on a Bank's Activities

Bank Has Capital Ratio of 5 Percent
Step [1]: Market Value of Assets Increases, Also Increasing Owners' Equity
Step [2]: Bank Increases Lending to Maintain Capital (Leverage) Ratio at 5 Percent
Step [3]: Market Value of Original Bank Decreases, Decreasing Owners' Equity
Step [4]: Bank Decreases Lending to Maintain Capital (Leverage) Ratio at 5 Percent
Operating Income Excludes Gains and Losses in Market Value of Assets Held
Partial
Balance Sheet Income Statement Rate of Return On:
Original Bank, Before Market
Value Changes
Assets Equities Revenues as
Liabilities: % of Assets
$1,000 Original Borrowings…………. $950 7.0% $70.0
Interest Expense
5.5% (52.3)
Owners' Equity Operating Expense
Contributed Capital ... 50 % of Assets
Retained Earnings…. 0 0.4% (4.0)
Total Owners' Equity. $50 Fixed Costs….. (1.0) Assets… 1.3%
Owners'
$1,000 Totals $1,000 Operating Income $12.8 Equity… 25.5%
Market Value of Assets

Increases 4.0%
$1,000 Original Original Borrowings.. $950 7.0% $126.0
Interest Expense
[1] 40 Market Value Increase 5.5% (94.1)
[2] 760 New Lending [2] New Borrowing……. 760 Operating Expense
% of Assets
Owners' Equity: 0.4% (7.2)
Contributed Capital… 50 Fixed Costs….. (1.0)
[1] Retained Earnings…. 40
Total Owners' Equity. $90 Assets…. 1.3%
Owners'
$1,800 Totals $1,800 Operating Income $23.8 Equity… 26.4%
Market Value of Assets

Decreases -4.0%
$1,000 Original Original Borrowings.. $950 7.0% $14.0
Interest Expense
[3] (40) Market Value Decline 5.5% (10.5)
[4] (760) Reduce Lending [4] Reduce Borrowing.... (760) Operating Expense
% of Assets
Owners' Equity: 0.4% (0.8)
Contributed Capital… 50 Fixed Costs….... (1.0)
[3] Retained Earnings…. (40)
Total Owners' Equity. $10 Assets…. 0.9%
Owners'
$200 Totals $200 Operating Income $1.8 Equity… 17.5%
11-55 Solutions
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Solutions 11-56

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CHAPTER 11

MARKETABLE SECURITIES, DERIVATIVES, AND INVESTMENTS

b. The classification as “trading securities” implies a firm’s active

c. Amortized acquisition cost equals the purchase price of debt securities

11.6 The required accounting does appear to contain a degree of inconsistency.

11.7 a. These accounts are both part of accumulated other comprehensive

b. Dividend Revenue is an income statement account. It reflects the

c. Equity in Earnings of Unconsolidated Affiliate is an income statement

d. Minority Interest in Earnings of Consolidated Subsidiary is an income

Under this interpretation, a derivative is not a hedge when changes in the

11.11 A fair-value hedge is a hedge of an exposure to changes in the fair value of a

11.16 (Accounting principles for marketable securities.)

b. (1) This is a speculative position, so gains and losses appear in current

d. (3) Standard treatment for securities available for sale.

11.17 (Fischer/Black Co.; working backwards from data on marketable securities

a. $21,000 = $18,000 + $3,000.

b $18,000, the amount credited to Marketable Securities in the journal

c. $5,000 loss from the debit for Realized Loss.

11.18 (Canning/Werther; working backwards from data on marketable securities

a. $15,000 = $18,000 proceeds – $4,000 realized gain + $1,000 loss

b. $14,000 = $18,000 proceeds – $4,000 realized gain which is selling price

11.19 (Reconstructing events from journal entries.)

b. A firm sells marketable securities for an amount that is $200 (= $1,100

d. A firm sells marketable securities for an amount that is $100 (= $1,800

11.20 (Hanna Company; equity method entries.)

Investment in Stock of Denver Company....................... 550,000

To record acquisition of common stock.

Investment in Stock of Denver Company....................... 120,000

To accrue 100 percent share of Denver Company’s earn-

Cash or Dividends Receivable............................................ 30,000

To accrue dividends received or receivable.

11.21 (Laesch Company; working backwards to consolidation relations.)

a. $70,000 = ($156,000 – $100,000)/.80.

b. 72.7 percent = ($156,000 – $100,000)/$77,000.

c. $56,000 = ($156,000 – $100,000).

b. [.40 X (1 – .25) X $140] = $42.

c. [1 – ($42/$280)] = 1 – .15 = 85 percent.

11.23 (Classifying securities.)

a. Securities available for sale; current asset.

b. Debt securities held to maturity; noncurrent asset.

c. Securities available for sale; current asset.

d. Securities available for sale; noncurrent asset.

e. Trading securities; current asset.

f. Securities available for sale; noncurrent asset (although a portion of

To record the cost of purchases in asset account: ($1,000 X

To record declaration of dividend as revenue: 1,000 X

To record receipt of dividend in cash.

To record increase in market price: 1,000 X ($51 – $45) =

To record sale of 600 shares of Texas Instruments.

Unrealized Holding Gain on Securities Available for

To eliminate changes previously recorded in the market

To record acquisition of shares of Security A.

To record acquisition of shares of Security B.

To record dividend received from Security B.

To record unrealized holding loss on Security A.

To record unrealized holding gain on Security B.

To record sale of Security A.

Marketable Securities (Security A).................................. 3,000

To eliminate the effects of changes previously recorded in

To record dividend received from Security B.