Module 7 Solutions Manual ACCT

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Module 7
Reporting and Analyzing
Intercorporate Investments

MINI EXERCISES
M7-11 (10 minutes)
a. Pfizer reports available-for-sale securities at their fair (market) value on the balance sheet. For 2007, this is equal to the original cost ($202 million) plus unrecognized gains ($127 million) and less unrealized losses ($13 million), or $316 million.
b. Pfizer reports the $114 million net unrealized gains on available-for-sale securities as a component of Accumulated Other Comprehensive
Income (AOCI) in the stockholders’ equity section of its balance sheet.
There is no effect on current-period net income from this AFS portfolio.
M7-12 (15 minutes)
a. If the investment is accounted for as available-for-sale, Wasley will
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Since the investments are available for sale, unrealized gains and losses bypass the income statement and flow directly into earned capital. The realized loss represents both the reclassification of prior year unrealized losses ($4,500) plus current year additional losses incurred ($600). Only the realized loss results in a decrease in net income and retained earnings.

©Cambridge Business Publishers, 2010
Solutions Manual, Module 7

7-3

E7-22 (15 minutes)
a. Berkshire Hathaway’s 2007 balance sheet reports the equity securities investment portfolio at the current market value of $74,999 million.

b. Because unrealized gains and losses on investments are reported in
Other Comprehensive Income (OCI), rather than in its current income, we know that the investment portfolio is accounted for as an availablefor-sale portfolio.

c. The $2,523 million is the unrealized gain on securities that arose during
2007 because stock prices increased during the year. This number is pretax. Berkshire Hathaway also discloses that it expects to pay taxes of
$872 million on those gains if and when they are realized.
Note: The reclassification adjustment of $(5,494) million represents unrealized gains on investments that were included in AOCI at the beginning of the year and were realized in 2007 because the related investments were sold during the year. Because these gains are now recognized in current income (and retained

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