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Unformatted text preview: Kelly Legner Acct 815 Chapter 5 Homework Problem 2. 1. Since the aggregate market value of the portfolio exceeds cost, there is no write down of the individual security whose market value declined to less than one-half of its cost. Stockholders' equity will be increased (decreased) to the extent that the excess of market over cost has increased (decreased) over the period. There is no effect on the income statement. 2. This situation is similar to 1 above. The only difference is that the firm in question does not use the classified balance sheet format. In this case, the analyst must be sure to review note disclosures regarding the classification of investments (if not provided on the face of the balance sheet). 3. This is not a reclassification between categories as the securities remain in the available-for-sale category. However, the analyst should note that management is contemplating a sale in the near future. 4. The increase in fair value of the security should be credited to shareholders' equity. (Since the security is classified as noncurrent, it cannot be a trading security). 5. a. For Year 6: No effect on sales. Net income effect equals the dividend income of $10 (1% of $1,000, or $1 per share) since the investment is accounted for under the market method. Also, assuming the shares are classified as available-for-sale (a reasonable assumption given subsequent purchases), the price appreciation of $1 per share will bypass the income statement. Cash flow effect equals the dividend income of $10. If the outflow due to the stock purchase is included: Net cash flow = dividend income less purchase price = $10 - $100 = $(90). For Year 7 (the equity method applies): No effect on sales. Net income effect equals the percentage share of Francisco earnings for Year 7, or 30% of $2,200 = $660. Cash flow effect equals the dividend income of $360 (computed as 30% of $1,200). If the outflow due to the stock purchase is included: Net cash flow = dividend income less purchase price = $360 - $3,190 = $(2,830). b. As of December 31, Year 6: At December 31, Year 6, the carrying value of the investment in Francisco is $110 (computed as 10 shares x $11 per share). The $11 per share figure is the fair value at Jan. 1, Year 7. Kelly Legner Acct 815 Chapter 5 Homework As of December 31, Year 7 (the equity method applies):...
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This note was uploaded on 05/23/2011 for the course ACCT 815 taught by Professor Fontana during the Summer '09 term at Governors State University.
- Summer '09