Intermediate accounting solution of c18.docx

Intermediate accounting solution of c18.docx

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Intermediateaccountingsolutionofc18

Chapter18Shareholders’Equity

EXERCISES

Exercise18-1

Requirement1

Comprehensiveincomeisamoreexpansiveviewofthechangeinshareholders’equitythantraditionalnetincome.Itisthetotalnonownerchangeinequityforareportingperiod.Infact,itencompassesallchangesinequityotherthanfromtransactionswithowners.Transactionsbetweenthecorporationanditsshareholdersprimarilyincludedividendsandthesaleorpurchaseofsharesofthecompany’sstock.Mostnonownerchangesarereportedintheincomestatement.So,thechangesotherthanthosethatarepartofnetincomearetheonesreportedas“othercomprehensiveincome.”

Requirement2

Twoattributesofothercomprehensiveincomearereported:

（1）componentsofcomprehensiveincomecreatedduringthereportingperiodand

（2）thecomprehensiveincomeaccumulatedoverthecurrentandpriorperiods.

Thesecondmeasure-thecomprehensiveincomeaccumulatedoverthecurrentandpriorperiods–isreportedinthebalancesheetasaseparatecomponentofshareholders’equity.ThisiswhatKaufmanreportedinitsbalancesheet（$107millionin2011）.Besuretorealizethisamountrepresentsthecumulativesumofthechangesineachcomponentcreatedduringeachreportingperiod（thedisclosurenote）throughoutallprioryears.

Exercise18-1（continued）

Requirement3

Kaufman's2011balancesheetamount（$107million）differsfromthe2011amountreportedinthedisclosurenote.Ontheotherhand,thecomprehensiveincomecreatedduringthereportingperiodcanbereportedeither（a）asanadditionalsectionoftheincomestatement,（b）aspartofthestatementofshareholders’equity,or（c）inadisclosurenote.ThisisthemeasureofcomprehensiveincomeKaufmanreportedinthedisclosurenote.Regardlessoftheplacementacompanychooses,thepresentationissimilar.Itwillreportnetincome,othercomponentsofcomprehensiveincome,andtotalcomprehensiveincome,similartothefollowing:

（$inmillions）

Netincome$xxx

Othercomprehensiveincome:

Netunrealizedholdinggains（losses）oninvestments（netoftax）†$x

Gains（losses）fromandamendmentstopostretirementplans（netoftax）‡（x）

Deferredgains（losses）fromderivatives（netoftax）§x

Gains（losses）fromforeigncurrencytranslation（netoftax）*xxx

Comprehensiveincome$xxx

†Changesinthefairvalueofsecuritiesavailable-for-sale.（Anunrealizedlossalsomightoccurfromrecordingan“otherthantemporary”impairmentofaninvestmentindebtsecurities. AsdescribedinChapter12,ifthefairvalueofadebtsecurityinvestmentfallsbelowitsamortizedcost,andthatdeclineifviewedasotherthantemporary,thecurrentperiodcreditlossisincludedinnetincome,butanyamountthatexceedsthecurrentperiodcreditlossisrecordedasalossinOCI.）

‡Gainsandlossesduetorevisingassumptionsormarketreturnsdifferingfromexpectationsandpriorservicecostfromamendingtheplan（describedinChapter17）.

§Whenaderivativedesignatedasacashflowhedgeisadjustedtofairvalue,thegainorlossisdeferredasacomponentofcomprehensiveincomeandincludedinearningslater,atthesametimeasearningsareaffectedbythehedgedtransaction（describedintheDerivativesAppendixtothetext）.

*Gainsorlossesfromchangesinforeigncurrencyexchangeratesfromthetranslationofforeignsubsidiaryfinancialstatements.Theamountcouldbeanadditiontoorreductioninshareholders’equity.（Thisitemisdiscussedelsewhereinyouraccountingcurriculum.）

Noticethateachcomponentisreportednetofitsrelatedincometaxexpenseorincometaxbenefit.

Exercise18-1（concluded）

Requirement4

FromtheinformationKaufman'sfinancialstatementsprovide,wecandeterminehowthecompanycalculatedthe$107millionaccumulatedothercomprehensiveincomein2011:

（$inmillions）

Accumulatedothercomprehensiveincome,2010$75

Changeinnetunrealizedgainsoninvestments34

Changein“other”

（2）

Accumulatedothercomprehensiveincome,2011$107

Exercise18-2

Requirement1

Thespecificcitationthatdescribestheguidelinesforpresentingaccumulatedothercomprehensiveincomeonthestatementofshareholders’equityisFASBACS220–10–45–14:

“ComprehensiveIncome–Overall–OtherPresentationMatters–ReportingOtherComprehensiveIncomeintheEquitySectionofaStatementofFinancialPosition.”

Requirement2

CurrentlyViewing:

220 ComprehensiveIncome

10 Overall

45 OtherPresentationMatters

General

>ClassificationswithinOtherComprehensiveIncome

>>ReportingOtherComprehensiveIncomeintheEquitySectionofaStatementofFinancialPosition

45-14   Thetotalofothercomprehensiveincomeforaperiodshallbetransferredtoacomponentofequitythatisdisplayedseparatelyfromretainedearningsandadditionalpaid-incapitalinastatementoffinancialpositionattheendofanaccountingperiod.Adescriptivetitlesuchasaccumulatedothercomprehensiveincomeshallbeusedforthatcomponentofequity.Anentityshalldiscloseaccumulatedbalancesforeachclassificationinthatseparatecomponentofequityonthefaceofastatementoffinancialposition,inastatementofchangesinequity,orinnotestothefinancialstatements.Theclassificationsshallcorrespondtoclassificationsusedelsewhereinthesamesetoffinancialstatementsforcomponentsofothercomprehensiveincome.

Exercise18-3

IndicatebyletterwhethereachoftheitemslistedbelowmostlikelyisreportedintheincomestatementasNetIncome（NI）orinthestatementofcomprehensiveincomeasOtherComprehensiveIncome（OCI）.

Items

OCI1.Increaseinthefairvalueofsecuritiesavailable-for-sale

NI2.Gainonsaleofland

OCI3.Lossonpensionplanassets（actualreturnlessthanexpected）

OCI4.Gainfromforeigncurrencytranslation

NI5.Increaseinthefairvalueoftradingsecurities

OCI6.Lossfromrevisinganassumptionrelatedtoapensionplan

NI7.Lossonsaleofpatent

OCI8.Priorservicecost

NI9.Increaseinthefairvalueofbondsoutstanding;fairvalueoption

OCI10.Gainonpostretirementplanassets（actualreturnmorethanexpected）

Exercise18-4

Cash（3millionsharesx$17.15pershare）51,450,000

Commonstock（3millionsharesx$.01parpershare）30,000

Paid-incapital–excessofpar（remainder）51,420,000

Exercise18-5

February12

Cash（2millionsharesx$9pershare）18,000,000

Commonstock（2millionsharesx$1par）2,000,000

Paid-incapital–excessofpar（difference）16,000,000

February13

Legalexpenses（40,000sharesx$9pershare）360,000

Commonstock（40,000sharesx$1par）40,000

Paid-incapital–excessofpar（difference）320,000

Note:

Because2millionsharessoldthepreviousdayfor$9pershare,it’sreasonabletoassumea$9persharefairvalue.

February13

Cash945,000

Commonstock（80,000sharesx$1par）80,000

Paid-incapital–excessofpar,common*640,000

Preferredstock（4,000sharesx$50par）200,000

Paid-incapital–excessofpar,preferred**25,000

*80,000sharesx[$9marketvalue-$1par]

**Sincethevalueofthecommonsharesisknown（$720,000）,themarketvalueofthepreferred（$225,000）isassumedfromthetotalsellingprice（$945,000）.

November15

Property,plant,andequipment（cashvalue）3,688,000

Commonstock（380,000sharesat$1parpershare）380,000

Paid-incapital–excessofpar（difference）3,308,000

Exercise18-6

WilliamsIndustriesmustreportthe20millionClassBsharesamongitslong-termliabilitiesinitsbalancesheet,notaspartofshareholders’equity.The“triggeringevent,”thedeathofJ.PWilliams,iscertaintooccureventhoughitstimingmaynotbe.Ashareorotherfinancialinstrumentisconsideredtobemandatorilyredeemableifitembodiesanunconditionalobligationthatrequirestheissuertoredeemtheinstrumentwithcashorotherassetsataspecifiedordeterminabledateoruponaneventcertaintooccur.Eventscertaintooccurincludethedeathorterminationofemploymentofanindividual,sincebothevents,liketaxes,areinevitable.

BecauseWilliamshastherightbutnottheobligationtorepurchasetheClassAsharesifachangeinownershipofthevotingcommonshareschanges,thereisnounconditionalobligationtorepurchasetheClassBshares.Theyareclassifiedasequity.

Exercise18-7

Requirement1（$inmillions）

Cash（$424million–$2million）422

Commonstock（15millionsharesat$1parpershare）15

Paid-incapital–excessofpar（difference）407

Requirement2

Inrecordingthesaleofsharesabove,thecostofservicesrelatedtothesalereducedthenetproceedsfromsellingtheshares.Sincepaid-incapital–excessofpariscreditedfortheexcessoftheproceedsovertheparamountofthesharessold,theeffectofshareissuecostsistoreducetheamountcreditedtothataccount.Ontheotherhand,thecostsassociatedwithadebtissuearerecordedinaseparate“debtissuecosts”accountandamortizedtoexpenseoverthelifeofthedebt（Chapter14）.

Somearguethatshareissuecostsanddebtissuecostsarefundamentallydifferent.Thisviewisthatadebtissuehasafixedmaturityso,likeinterestexpense,debtissuecostsarepartoftheexpenseofborrowingfundsforthatperiodoftime（recordedinaseparateexpenseaccount–“debtissueexpense”.）Ontheotherhand,sellingsharesrepresentsaperpetualequityinterest.Justasdividendspaidonthatcapitalinvestmentarenotanexpense,neitheraretheshareissuecostsofobtainingthatcapitalinvestment.

ExpensingdebtissuecostspresentlyisrequiredbyGAAP.However