Financial
Reporting Problem
The Procter & Gamble Company (P&G)
The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a) What investments does P&G report in 2014, and how are these investments accounted for in its financial statements?
(b) How are P&G’s investments valued? How does P&G determine fair value?
(c) How does P&G use derivative financial instruments?
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
The financial statements of Coca-Cola and PepsiCo are presented in Appendices C and D, respectively. The companies’ complete annual reports, including the notes to the financial statements, are available online.
Instructions
Use the companies’ financial information to answer the following questions.
(a) Based on the information contained in these financial statements, determine each of the following for each company.
(1) Cash used in (for) investing activities during 2014 (from the statement of cash flows).
(2) What was the total other comprehensive income for the year 2014?
(3) What was the unrealized gains or losses reported as part of other comprehensive income?
(b) Identify from Coca-Cola’s December 31, 2014, balance sheet the investments it reported as being accounted for under the equity method.
(c) In Note 3, what is Coca-Cola’s policy regarding its cost method investments?
Financial Statement Analysis Case
Union Planters
Union Planters is a Tennessee bank holding company (that is, a corporation that owns banks). (Union Planters is now part of Regions Bank.) Union Planters manages $32 billion in assets, the largest of which is its loan portfolio of $19 billion. In addition to its loan portfolio, however, like other banks it has significant debt investments. The nature of these investments varies from short-term to long-term. As a consequence, consistent with the requirements of accounting rules, Union Planters reports its investments in two different categories—trading and available-for-sale. The following facts were found in a recent Union Planters’ annual report.
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Instructions
(a) Why do you suppose Union Planters purchases investments, rather than simply making loans? Why does it purchase investments that vary in nature both in terms of their maturities and in type (debt versus stock)?
(b) How must Union Planters account for its investments in each of the two categories?
(c) In what ways does classifying investments into two different categories assist investors in evaluating the profitability of a company like Union Planters?
(d) Suppose that the management of Union Planters was not happy with its net income for the year. What step could it have taken with its investment portfolio that would have definitely increased reported profit? How much could it have increased reported profit? Why do you suppose it chose not to do this?
Accounting, Analysis, and Principles
Instar Company has several investments in the securities of other companies. The following information regarding these investments is available at December 31, 2017.
1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of $320,000 and their fair value at December 31, 2017, is $400,000. Instar intends to hold the bonds until they mature on December 31, 2025.
2. Instar has invested idle cash in the equity securities of several publicly traded companies. Instar intends to sell these securities during the first quarter of 2018, when it will need the cash to acquire seasonal inventory. These equity securities have a cost basis of $800,000 and a fair value of $920,000 at December 31, 2017.
3. Instar has a significant ownership stake in one of the companies that supplies Instar with various components Instar uses in its products. Instar owns 6% of the common stock of the supplier, does not have any representation on the supplier’s board of directors, does not exchange any personnel with the supplier, and does not consult with the supplier on any of the supplier’s operating, financial, or strategic decisions. The cost basis of the investment in the supplier is $1,200,000 and the fair value of the investment at December 31, 2017, is $1,550,000. Instar does not intend to sell the investment in the foreseeable future. The supplier reported net income of $80,000 for 2017 and paid no dividends.
4. Instar owns some common stock of Forter Corp. The cost basis of the investment in Forter is $200,000 and the fair value at December 31, 2017, is $50,000. Instar believes the decline in the value of its investment in Forter is permanent and therefore impaired, but Instar does not intend to sell its investment in Forter in the foreseeable future.
5. Instar purchased 25% of the stock of Slobbaer Co. for $900,000. Instar has significant influence over the operating activities of Slobbaer Co. During 2017, Slobbaer Co. reported net income of $300,000 and paid a dividend of $100,000.
Accounting
(a) Determine how each of the investments described above should be classified and accounted far.
(b) Prepare any December 31, 2017, journal entries needed for Instar relating to Instar’s various investments in other companies. Assume 2017 is Instar’s first year of operations.
Analysis
What is the effect on Instar’s 2017 net income (as reported on Instar’s income statement) of Instar’s investments in other companies?
Principles
Briefly explain the different rationales for the different accounting and reporting rules for different types of investments in the securities of other companies.
