GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES NOTES TO FINANCIAL STATEMENTS(Continued) Investment tax credit The investment tax credit is recorded by the "deferral method." Under this method the credit is amortized as a reduction of the provision for taxes over the lives of the facilities to which the credit applies, rather than being "flowed through" to income in the year the asset is acquired. Inventories Substantially all inventories located in the United States are valued on a last-in first-out, or "LIFO" basis. Inventories outside the United States are generally valued on a first-in first-out, or "FIFO" basis. Valuations are based on the cost of material, direct labor and manufacturing overhead and do not exceed net realizable values. Some elements of manufacturing overhead formerly charged directly to operations were reflected in the cost of inventories as of January 1, 1975 to comply with new U.S. federal income tax regulations. Because these additional inventory costs were largely offset by related increases in the LIFO revaluation adjustment, the change in procedure had no material effect on net inventory balances or operating results. Certain other indirect manufacturing expenses are charged directly to operating costs during the period incurred rather than being inventoried. Plant and equipment Plant and equipment includes the original cost of land, buildings and equipment less depreciation, which is the estimated cost consumed by wear and obsolescence. An accelerated depreciation method, based principally on a sum-of-the-years digits formula, is used to record depreciation of the original cost of plant and equipment purchased and installed in the United States subsequent to 1960. Acquisitions prior to 1961, and most plant and equipment located outside the United States, are depreciated on a straight-line basis. If plant and equipment is subject to abnormal economic conditions or obsolescence, additional depreciation is provided. The accounting for retirements and dispositions varies according to the types of facility involved. Cost and accumulated depreciation on facilities valuable enough to warrant maintenance of detailed records are removed from the asset and accumulated depreciation accounts when physically retired or otherwise disposed of. Profit or loss realized from the retirement or disposition of such facilities is included in operations. Costs and accumulated depreciation of facilities for which detailed records are not maintained are removed from the asset and accumulated depreciation accounts when these facilities become fully depreciated. Proceeds realized upon disposition of such facilities are treated as reductions of current year depreciation expense. Expenditures for maintenance and repairs are charged to operations as incurred. 2. Cash and marketable securities Time deposits and certificates of deposit aggregated $595.0 million and $700.2 million at December 31, 1975 and June 30, 1976, respectively. Deposits restricted as to usage and withdrawal or used as partial compensation for short-term borrowing arrangements were not material. Marketable securities (none of which are equity securities) are carried at the lower of amortized cost or market value. Carrying value was substantially the same as market value at year-end 1975 and at June 30, 1976. 3. Inventories About 81% of total inventories were in the United States at year-end 1975. If the FIFO method of inventory accounting had been used by the Company, inventories would have been $963.7 million and $1,067.3 million higher than reported at December 31, 1975 and June 30, 1976, respectively. F-10 GENERAL ELECTRIC COMPANY AND CONSOLIDATED AFFILIATES NOTES TO FINANCIAL STATEMENTS-(Continued) The inventories used in the computation of cost of goods sold were as follows: (Amounts in millions) January 1, 1971......................................................................................... $1,555.3 December 31, 1971................................................................................... 1,611.7 December 31, 1972................................................................................... 1,759.0 December 31, 1973...................................................................1,986.2 December 31, 1974................................................................................... 2,257.0 December 31, 1975................................................................................... 2,114.9 June 30, 1975 ............................................................................... 2,245.1 1 June 30, 1976............................................................................................ 2,282.9 4. Investments Advances to nonconsolidated finance affiliates aggregated $0.7 million at December 31, 1975 and at June 30, 1976. The estimated realizable value of miscellaneous investments was $330 million and $310 million at December 31, 1975 and June 30, 1976, respectively. Marketable equity securities were valued at the lower of cost or market. Aggregate market value of marketable equity securities was $219 million and $210 million at December 31, 1975 and June 30, 1976, respectively. At December 31, 1975 gross unrealized gains on securities in the portfolio were $64 million and gross unrealized losses were $14 million. At June 30, 1976 there was a gross unrealized gain of $87 million on securities in the portfolio. In April 1976 the Company sold all of its investment in equity securities of AEG-TELEFUNKEN for a realized gain of $18.6 million (see note 13). Market value calculations include the Company's investment in Honeywell Information Systems Inc. (HIS) as being equivalent to 2,200,000 shares of Honeywell Inc. common stock at December 31, 1975 and 1,400,000 shares at June 30, 1976. Cost of the investment in Honeywell Inc. and HIS is the appraised fair value recorded on October 1, 1970, when the General Electric information systems equipment business was transferred to HIS. The recorded value is substantially less than tax cost. General Electric held an 18 1/2% ownership in HIS at December 31, 1975. An Agreement between General Electric and Honeywell provides that General Electric can require Honeywell to purchase its interest at any time during 1976 for 1,500,000 shares of Honeywell stock, at any time during 1977 for 1,800,000 shares of Honeywell stock, and at any time during 1978 for 2,200,000 shares of Honeywell stock. In addition, under certain circumstances Honeywell has the right during the 1976-77 period to require General Electric to sell its HIS interest to Honeywell in return for 2,200,000 shares of Honeywell stock. During 1978 Honeywell has an unlimited right to purchase General Electric's HIS interest for 2,200,000 shares of Honeywell stock. Also, under the Agreement, General Electric may partially exercise its option rights to cause Honeywell to acquire that number of shares of HIS which will result in General Electric receiving 800,000 Honeywell shares. In January 1976, General Electric exercised its partial options for a total of 800,000 Honeywell shares, retaining an 11.7% ownership in HIS after completing the transaction. General Electric and Honeywell retain their options with respect to the remaining HIS shares owned by General Electric. General Electric held 380,800 shares and 885,000 shares of Honeywell common stock at December 31, 1975 and June 30, 1976, respectively. General Electric sold 1,056,916 shares of Honeywell common stock in 1975 and 295,800 shares in the first six months of 1976. General Electric is committed to the U.S. Department of Justice to dispose of its year-end 1975 holding of Honeywell common stock in an orderly manner by June 30, 1978 and all other shares of Honeywell common stock that General Electric receives for its interest in HIS by December 1980. A voting trust has been established in which General Electric must deposit all shares of Honeywell common stock received as part of these transactions. 5. Other Assets Deferred income taxes included in other assets and applicable to current assets and liabilities were $87.5 million and $100.1 million at December 31, 1975 and June 30, 1976, respectively. Licenses and other intangibles acquired after October 1970 are being amortized over appropriate periods of time. F-11