Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 12 Special Income and Investment Reporting Issues 577

One Internet site that has annual reports is EDGAR (Electronic Data Gathering, Analysis,

and Retrieval), the electronic archives of financial statements filed with the Securities and

Exchange Commission. SEC documents can be retrieved using the EdgarScan service from

PricewaterhouseCoopers at http://edgarscan.pwcglobal.com.

To obtain annual report information, type in a company name in the appropriate space.

EdgarScan will list the reports available to you for the company you’ve selected. Select the most

recent annual report filing, identified as a 10-K or 10-K405. EdgarScan provides an outline of the

report, including the separate financial statements. You can double click the income statement

and balance sheet for the selected company into an Excel™ spreadsheet for further analysis.

1. A Events and transactions that are distinguished by
   their unusual nature and by the infrequency of their occur-
   rence, such as a gain on condemning land for public use, are
   reported in the income statement as extraordinary items
   (answer A).


2. B The difference between the cost of temporary invest-
   ments held as available-for-sale securities and their market
   value is reported as an unrealized gain, net of applicable in-
   come taxes, as shown below.

Market value of investments $120,000
Cost of investments 100,000

$ 20,000
Applicable taxes (40%) 8,000

Unrealized gain, net of taxes $ 12,000

The unrealized gain of $12,000 (answer B) is reported on the
balance sheet as an addition to the cost of the investments and
as part of other comprehensive income.

3. C Under the equity method of accounting for invest-
   ments in stocks, Cisneros Corporation records its share of
   both net income and dividends of Harrell Inc. in Investment
   in Harrell Inc. Stock. Thus, Investment in Harrell Inc. Stock
   would increase by $82,500 [($150,000 75%)($40,000
   75%)] for the current year. $30,000 (answer B) is only Cisneros

Corporation’s share of Harrell’s dividends for the current

year, $110,000 (answer D) assumes 100% ownership of Harrell.

4. B The interest revenue is the total interest earned for
   four months (September through December), less the amount
   of amortized premium.

Interest revenue ($120,000 8%–– 124 ) $ 3,200

Premium amortization (80)

Total interest revenue $3,120

The accrued interest purchased on September 1 is not interest

revenue for the period.

5. C

Price-Earnings Ratio:Market Price per Common Share ,

Earnings per Share

or

$60

$600,000200,000

= 20

Price-Book Ratio:Market Price per Share ,

Book Value per Share

or

$60

$2,400,000200,000

= 5

ANSWERS TO SELF-STUDY QUESTIONS