Question

Available For Sale and Trading Securities

The investment operations group for FM Global buys and sells equity securities regularly. On December 5, 2012, the company purchased class 1 shares of Disney common stock for $5,500,000 cash and later sold the shares for $5,600,000 on January 10, 2013.   On December 31, 2012, the company received a cash dividend from Disney of $10,000. Also on December 31, 2012, it became known that the fair value of those Disney shares appreciated to a value of $5,550,000.

Provide the journal entries required if these investments are categorized as trading? Don’t forget to include any necessary December 31 adjustments.

What would be the difference if these investments are categorized as available for sale?

Equity Method

FM Global paid $68 million on January 2, 2012 for 4 million shares of a private equity partnership. The investment represents a 25% interest in the net assets of the partnership and gives FM Global’s management the ability to exercise significant influence over the partnership’s operations. FM Global received dividends of $1 per share on December 31, 2012 and the partnership reported net income of $40 million for the year ended December 31, 2012. The market value of the partnership’s common stock was 18.50 per share on December 31, 2012 (as determined by an inquiry as to the selling price for additional shares).          

Additional information on the date of purchase is as follows:

The book value of the partnership’s net assets was $192 million on January 2.

The fair value of the partnership’s depreciable assets exceeded their book value by $32 million. These assets had an average remaining life of 10 years.

The remainder of the excess of the cost of the investment over the book value of the net assets purchased was attributable to goodwill.

Provide the journal entries required if these investments are accounted for under the equity method?

Equity Method vs. FV Method Problem: Fill in the dollar changes caused in the Investment in Hudson account and in the revenue accounts (Unrealized Gain/Loss, Dividend Revenue or Equity Investment Income) account by each of the following transactions, assuming Crane Company uses (a) the fair value method - trading and (b) the equity method for accounting for its investments in Hudson Company.

                                                                                    Fair Value Method                                      Equity Method

                                                                                              Investment             Inc. Stmt                 Investment             Inc. Stmt

                Transaction                                               in Hudson              Revenue                   in Hudson            Revenue       

At the beginning of Year 1, Crane bought 25% of Hudson’s common stock at its book value. Total book value of all Hudson’s common stock was $800,000 on this date.
During Year 1, Hudson reported $60,000 of net income and paid $30,000 of dividends. Also, the fair value of Hudson’s stock increased by a total of $50,000.
During Year 2, Hudson reported $30,000 of net income and paid $40,000 of dividends. Also, the fair value of Hudson’s stock increased by a total of $20,000.
During Year 3, Hudson reported a net loss of $10,000 but still paid $5,000 of dividends. Also, the fair value of Hudson’s stock decreased by a total of $40,000.
Indicate the Year 3 ending and/or cumulative balances.

Consolidations

About ten years ago, FM Global acquired TSB Loss Consultants for $7 million cash. It was determined that the fair value the capital assets (PPE) of TSB was $1 million higher than book value and that they had a useful life of 10 years. Total book value of TSB was $4.5 million. FM Global's plan was for TSB to continue to operate and remain legally incorporated in the state of Georgia as is.

Using the balance sheets below, prepare consolidated financials immediately following the consolidation. What additional step(s) would be required to consolidate after a year of operations had passed?

Account Description	FM Global	TSB
Current Assets	$10,993,000	$3,200
Investment in TSB	7,000
PPE	800,000	2,500
Liabilities	4,500,000	1,200
Common Stock	50,000	200
APIC	1,250,000	800
Retained Earnings	6,000,000	3,500

Answer 1

Investment Classified as Trading
Date	Particulars	Debit	Credit
05/12/2012	Trading Security A/C…… Dr.	5,500,000
	To Cash		5,500,000
	(Shares purchased for trading purposes)
31/12/2012	Cash A/C …… Dr.	10000
	To Dividend Income		10000
	(Dividend received on trading security recorded)
31/12/2012	Trading Security A/C …… Dr.	50000
	To Unreaslized gain on trading securities		50000
	(Effect of fair value at year end recorded)
10/01/2013	Cash A/C ….. Dr.	5600000
	To Realized gain on trading security		50000
	To Trading Security		5550000
	(Sales of trading security recorded)
Investment Classified as Available for sale
Date	Particulars	Debit	Credit
05/12/2012	Available for sale security A/C…… Dr.	5,500,000
	To Cash		5,500,000
	(Shares purchased and considered as available fo sale security)
31/12/2012	Cash A/C …… Dr.	10000
	To Dividend Income		10000
	(Dividend received on available fo sale security recorded)
31/12/2012	Available for sale security A/C …… Dr.	50000
	To Unrealized gain - Other Comprehensive Income		50000
	(Effect of fair value at year end recorded)
10/01/2013	Cash A/C ….. Dr.	5600000
	Unrealized gain - Other Comprehensive Income A/C …. Dr	50000
	To Available for sale security		5550000
	To Realized Gain		100000
	(Sales of available fo sale security recorded ) Note - In case any investment is classified as trading investment then all realised and unrealised gain/loss recorded in profit and loss account i.e. in income statement. However, when any income classified as available for sale then unrealized gain/loss is recorded as a balance sheet item and the same is adjusted at the time of sale of investment.