pg. 2 notes:

Question 4: Berkshire Passive Equity Investments Berkshire owns less than 20% of the stock in these investments and/or does not have significant influence over management. Note from the footnote on pg. 9 that USG is considered a passive investment even though Berkshire owns 30% of the stock; Knauf Group, a German company, owns the rest of the stock. Berkshire's runner-up grove by value is its collection of equities, typically involving a 5% to 10% ownership position in a very large company. As noted earlier, our equity investments were worth nearly $173 billion at yearend, an amount far above their cost. If the portfolio had been sold at its yearend valuation, federal income tax of about $14.7 billion would have been payable on the gain. In all likelihood, we will hold most of these stocks for a long time. Eventually, however, gains generate taxes at whatever rate prevails at the time of sale. Our investees paid us dividends of $3.8 billion last year, a sum that will increase in 2019 . Far more important than the dividends, though, are the huge earnings that are annually retained by these companies. Consider, as an indicator, these figures that cover only our five largest holdings. (1) Based on current annual rate. (e) Investments in equity securities We carry substantially all of our investments in equity securities at fair value and record the subsequent changes in fair values in the Consolidated Statement of Eamings as a component of investment gains/losses. Prior to January 1, 2018, substantially all of our equity security investments were classified as available-for-sale and were also carried at fair value. However, we recorded the periodic changes in fair value of these securities as components of other comprehensive income and we recorded gains and losses in the Consolidated Statements of Earnings when equity securities were sold (on a specific identification basis) or were other-than-temporarily impaired. (4) Investments in equity securities Investments in equity securities as of December 31, 2018 and 2017 are summarized based on the primary industry of the investee in the table below (in millions). a. According to the footnotes above, how much dividend income did Berkshire receive and how do those dividends affect the financial statements? b. What $ amount is reported on the balance sheet for these passive equity investments? Identify this amount on Berkshire's balance sheet. c. How is the net unrealized gain on these investments shown in the footnote calculated? Assuming that current GAAP rules have been in place throughout the lives of these investments, what accounts have been affected by these unrealized gains? (20) Fair value measurements Our financial assets and liabilities are summarized below as of December 31, 2018 and December 31, 2017, with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values. Refer to pg. 2 of your Module 4 notes. How much confidence can investors have in the measurement of the fair value reported on the balance sheet for these passive equity investments? Why? Firms (Alphabet, Inc.) invests in another entity's equity (e.g., Nest stock) to generate a return, gain influence, and/or gain control. - Alphabet, Inc. pays out cash to purchase Nest stock. - If Nest pays dividends, Alphabet will earn dividend income and receive cash as long as they hold the investment. - Alphabet receives cash if they sell the Nest stock and recognizes a gain or loss. Question 4: Berkshire Passive Equity Investments Berkshire owns less than 20% of the stock in these investments and/or does not have significant influence over management. Note from the footnote on pg. 9 that USG is considered a passive investment even though Berkshire owns 30% of the stock; Knauf Group, a German company, owns the rest of the stock. Berkshire's runner-up grove by value is its collection of equities, typically involving a 5% to 10% ownership position in a very large company. As noted earlier, our equity investments were worth nearly $173 billion at yearend, an amount far above their cost. If the portfolio had been sold at its yearend valuation, federal income tax of about $14.7 billion would have been payable on the gain. In all likelihood, we will hold most of these stocks for a long time. Eventually, however, gains generate taxes at whatever rate prevails at the time of sale. Our investees paid us dividends of $3.8 billion last year, a sum that will increase in 2019 . Far more important than the dividends, though, are the huge earnings that are annually retained by these companies. Consider, as an indicator, these figures that cover only our five largest holdings. (1) Based on current annual rate. (e) Investments in equity securities We carry substantially all of our investments in equity securities at fair value and record the subsequent changes in fair values in the Consolidated Statement of Eamings as a component of investment gains/losses. Prior to January 1, 2018, substantially all of our equity security investments were classified as available-for-sale and were also carried at fair value. However, we recorded the periodic changes in fair value of these securities as components of other comprehensive income and we recorded gains and losses in the Consolidated Statements of Earnings when equity securities were sold (on a specific identification basis) or were other-than-temporarily impaired. (4) Investments in equity securities Investments in equity securities as of December 31, 2018 and 2017 are summarized based on the primary industry of the investee in the table below (in millions). a. According to the footnotes above, how much dividend income did Berkshire receive and how do those dividends affect the financial statements? b. What $ amount is reported on the balance sheet for these passive equity investments? Identify this amount on Berkshire's balance sheet. c. How is the net unrealized gain on these investments shown in the footnote calculated? Assuming that current GAAP rules have been in place throughout the lives of these investments, what accounts have been affected by these unrealized gains? (20) Fair value measurements Our financial assets and liabilities are summarized below as of December 31, 2018 and December 31, 2017, with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values. Refer to pg. 2 of your Module 4 notes. How much confidence can investors have in the measurement of the fair value reported on the balance sheet for these passive equity investments? Why? Firms (Alphabet, Inc.) invests in another entity's equity (e.g., Nest stock) to generate a return, gain influence, and/or gain control. - Alphabet, Inc. pays out cash to purchase Nest stock. - If Nest pays dividends, Alphabet will earn dividend income and receive cash as long as they hold the investment. - Alphabet receives cash if they sell the Nest stock and recognizes a gain or loss