SOLUTIONS – WEEK FOUR – ACCT 305

Exercise 12­1

Requirement 1  ($ in millions)
Investment in bonds (face amount)........................................ .... .240
Discount on bond investment (difference)................................... 40
Cash (price of bonds)................................... ............................... 200

Requirement 2 
Cash (3% x $240 million)...................................... ......................7.2
Discount on bond investment (difference).......................... ............8
Interest revenue (4% x $200)..................................... .................. 8.0

Requirement 3 
Tanner­UNF reports its investment in the December 31, 2006, balance sheet at its amortized cost – that is, its book 
value:

Investment in bonds....................................... .........................$240.0
Less: Discount on bond investment ($40 ­ .8 million)...   39.2
Amortized cost................................................. ..................$200.8

If sale before maturity isn’t an alternative, increases and decreases in the market value between the time a debt
security is acquired and the day it matures to a prearranged maturity value are relatively unimportant. For this
reason, if an investor has the “positive intent and ability” to hold the securities to maturity, investments in debt
securities are classified as “held-to-maturity” and reported at amortized cost rather than fair value in the balance
sheet.

Requirement 4  ($ in millions)
Cash (proceeds from sale)............................................. ...........190.0
Discount on bond investment (balance, determined above)39.2
Loss on sale of investments (to balance).................................. .10.8
Investment in bonds (face amount)......................... ..................... 240.0

Exercise 12­3
Investment in GM common shares ....................... ........................41,200
Cash ([800 shares x $50] + $1,200)............................................. 41,200

Cash ([800 shares x $53] – $1,300)........................... ....................41,100
Loss on sale of investments....................................... .................100
Investment in GM common shares ............................................. 41,200
Problem 12­9

Requirement 1 

Miller’s management should decide whether it has the ability to exercise significant influence
over operating and financial policies of the Marlon Company. Ability to exercise significant
influence is presumed for investments of 20 percent or more of voting stock and presumed not to
exist for investments of less than 20 percent, other things being equal. Evidence to the contrary
should be considered, including participation on the board of directors, technological
dependency, material intercompany transactions, or interchange of managerial personnel.

Requirement 2 

a. Income statement: ($ in millions)

Investment revenue ($12 million x 1/6) $2.0

Patent amortization adjustment ($4 million* ÷ 10) (.4)

*([$24 million] x 1/6])

$1.6

b. Balance sheet:

Investment in Marlon Company

($19 million + 2 million - 1 million - .4 million) $19.6*

 
                    
 *Investment in Marlon Company
                             
   
($ in millions)
Cost 19.0
Share of income 2.0
1.0Dividends ($6 million x 1/6)

.4Amortization adjustment 

_________________

Balance 19.6

c. Statement of cash flows:  
$19 million cash outflow from investing activities 

$1 million cash inflow (dividends) among operating activities