Test Bank 12 Edition

8/11/2019 Test Bank 12 Edition

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CHAPTER 17

INVESTMENTS

TRUE-FALSEConceptual

Answe No! "esc#pt#onF 1. Examples of debt securities.T 2. Definition of trading securities.F 3. Available-for-sale unrealized gainslosses.F !. "lassif#ing $eld-to-maturit# securities.T %. Fair value c$anges in AF& securities.F '. &ecurities Fair (alue Ad)ustment account.T *. Accounting for trading securities.F +. Definition of significant influence.T ,. eporting nrealized /olding 0ainossEuit# account.

T 14. Examples of significant influence.F 11. Definition of controlling interest.T 12. Effect of dividends on investment under euit#.F 13. eporting revenue under fair value met$od.T 1!. Definition of controlling interest.F 1%. "lassif#ing trading securities and AF& securities.T 1'. eclassification ad)ustment for AF& securities.F 1*. Temporar# declines and 5rite do5ns.T 1+. 6mpaired available-for-sale securities.F 1,. Transfer of $eld-to-maturit# securities.T 24. Transfers from trading to available-for-sale.

MULTIPLE CH$ICEConceptual

Answe No! "esc#pt#onc 21. Debt securities.b 22. (aluation of debt securities.c 23. /eld-to-maturit# securities.c 2!. nrealized gainloss recognition for securities.a 72%. Accounting for accrued interest.a &2'. 6dentif#ing securities accounted for at amortized cost.c &2*. Accounting for available-for-sale securities.b &2+. sing effective-interest met$od of amortization.a &2,. 6dentif#ing available-for-sale securities.

d 34. "lassification as $eld-to-maturit#.b 31. eporting $eld-to-maturit# securities.c 32. Acuisition of $eld-to-maturit# securities.d 33. Accounting for trading securities.c 3!. Accounting for trading debt securities.c 3%. ecording investments in debt securities.d 3'. "alculating t$e issue price of bonds.c 3*. (aluation of investments in debt securities.a 3+. ecording amortization of bond discount.c 3,. Amortization of premiumdiscount on investment in a debt securit#.


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Test %an& 'o Inte(e)#ate Account#n*+ Twel't, E)#t#on

MULTIPLE CH$ICEConceptual cont!.

Answe No! "esc#pt#ond !4. Effective-interest rate met$od.c !1. Debt securities purc$ased bet5een interest dates.c !2. &ale of debt securit# prior to maturit#.b &!3. 7assive interest investment.a &!!. Fair value vs. euit# met$od.c 7!%. Fair value vs. euit# met$od.b !'. "onditions for using t$e euit# met$od.d !*. 85ners$ip interest reuired for using t$e euit# met$od.a !+. ecording of dividends received under t$e euit# met$od.d !,. ecognition of earnings of investee using t$e euit# met$od.d %4. Effect of using t$e fair value met$od in error.d %1. "lassification of unrealized loss on available-for-sale securities.d %2. "lassification of unrealized gain on available-for-sale securities.c %3. eclassification ad)ustment in compre$ensive income.b %!. eclassification of securities.b %%. eclassification of securities.d 7%'. Transfer of a debt securit#.c 9%*. Accounting for derivatives.b 9%+. "$aracteristics of a derivative instrument.a 9%,. 6dentif#ing companies t$at are arbitrageurs.c 9'4. Accounting for fair value $edges.b 9'1. 0ainslosses on cas$ flo5 $edges.a 9'2. 6dentif#ing an embedded derivative.c 9'3. euirements for financial instrument disclosures.

7T$ese uestions also appear in t$e 7roblem-&olving &urvival 0uide.&T$ese uestions also appear in t$e &tud# 0uide.

9T$is topic is dealt 5it$ in an Appendix to t$e c$apter.

MULTIPLE CH$ICECo(putat#onal

Answe No! "esc#pt#onc '!. ecording t$e purc$ase of debt securities.b '%. "omputing cost of bond investment.d ''. "alculation of discount amortization.b '*. "alculation of revenue from /T: securities.a '+. "omputation of ot$er compre$ensive income.c ',. "omputation of gainloss on sale of bonds.a *4. Acuisition of $eld-to-maturit# securities.

b *1. "arr#ing value of $eld-to-maturit# securities.c *2. "arr#ing value of available-for-sale debt securities.a *3. "alculation of income from available-for-sale debt securities.b *!. "alculation of income from /T: securities.b *%. Determine gain on sale of debt securities.c *'. Fair value for trading securities.a **. nrealized gain on available-for-sale securities.a *+. "alculation of gain on sale of euit# securit#.b *,. Determination of unrealized loss on AF& securities.a +4. "alculation of unrealized loss included in compre$ensive income.

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6nvestments

c +1. "omputation of revenue from investment.c +2. "omputation of investment account balance.a +3. "alculation of investment revenue.c +!. Accounting for stoc; investmentsfair value met$od.b +%. Accounting for stoc; investmentseuit# met$od.b +'. Accounting for stoc; investmentsfair value met$od.b +*. Euit# met$od of accounting.c ++. Fair value met$od of accounting for stoc; investment.c +,. Euit# met$od of accounting for stoc; investment.c ,4.


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CHAPTER LEARNIN2 $%3ECTIVES

1. 6dentif# t$e t$ree categories of debt securities and describe t$e accounting and reportingtreatment for eac$ categor#.

2. nderstand t$e procedures for discount and premium amortization on bond investments.

3. 6dentif# t$e categories of euit# securities and describe t$e accounting and reportingtreatment for eac$ categor#.

!. Explain t$e euit# met$od of accounting and compare it to t$e fair value met$od for euit#securities.

%. Describe t$e disclosure reuirements for investments in debt and euit# securities.

'. Discuss t$e accounting for impairments of debt and euit# investments.

*. Describe t$e accounting for transfer of investment securities bet5een categories.

9+. Explain 5$o uses derivatives and 5$#.

9,. nderstand t$e basic guidelines for accounting for derivatives.

914. Describe t$e accounting for derivative financial instruments.

911. Explain $o5 to account for a fair value $edge.

912. Explain $o5 to account for a cas$ flo5 $edge.

913. 6dentif# special reporting issues related to derivative financial instruments t$at causeuniue accounting problems.

91!. Describe t$e disclosure reuirements for traditional and derivative financial instruments.

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6nvestments

SUMMAR5 $F LEARNIN2 $%3ECTIVES %5 6UESTI$NS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Lean#n* $8ect#9e 1

1. TF 3. TF 22. :" 2!. :" &2'. :" '!. :"

2. TF 21. :" 23. :" 72%. :" &2*. :" '%. :"Lean#n* $8ect#9e /

!. TF &2,. :" 3!. :" 3,. :" '*. :" *2. :" 14%. E%. TF 34. :" 3%. :" !4. :" '+. :" *3. :" 14'. E'. TF 31. :" 3'. :" !1. :" ',. :" *!. :"*. TF 32. :" 3*. :" !2. :" *4. :" *%. :"

&2+. :" 33. :" 3+. :" ''. :" *1. :" ,'. :"

Lean#n* $8ect#9e

+. TF 11. TF **. :" +4. :" ,,. :" 11%. 7,. TF &!3. :" *+. :" ,*. :" 14*. E 11'. 7

14. TF *'. :" *,. :" ,+. :" 11!. 7

Lean#n* $8ect#9e 412. TF !'. :" +1. :" +'. :" ,1. :" 141. :" 114. E13. TF !*. :" +2. :" +*. :" ,2. :" 142. :" 111. E1!. TF !+. :" +3. :" ++. :" ,3. :" 143. :"

&!!. :" !,. :" +!. :" +,. :" ,!. :" 14+. E7!%. :" %4. :" +%. :" ,4. :" 144. :" 14,. E

Lean#n* $8ect#9e :

1%. TF 1'. TF %1. :" %2. :" %3. :" ,%. :"

Lean#n* $8ect#9e ;

1*. TF 1+. TF 14*. E 11%. 7

Lean#n* $8ect#9e 7

1,. TF %!. :" 7%'. :" 14*. E 11%. 724. TF %%. :" 14!. :" 11!. 7

Lean#n* $8ect#9e


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TRUE-FALSEConceptual

1. Debt securities include corporate bonds and convertible debtB but not .&. governmentsecurities.

2. Trading securities are securities boug$t and $eld primaril# for sale in t$e near term togenerate income on s$ort-term price differences.

3. nrealized $olding gains and losses are recognized in net income for available-for-saledebt securities.

!. A compan# can classif# a debt securit# as $eld-to-maturit# if it $as t$e positive intent to$old t$e securities to maturit#.

%. "ompanies do not report c$anges in t$e fair value of available-for-sale debt securities asincome until t$e securit# is sold.

'. T$e &ecurities Fair (alue Ad)ustment account $as a normal credit balance.

*. "ompanies report trading securities at fair valueB 5it$ unrealized $olding gains and lossesreported in net income.

+. Euit# securit# $oldings bet5een 24 and %4 percent indicates t$at t$e investor $as acontrolling interest over t$e investee.

,. T$e nrealized /olding 0ainossEuit# account is reported as a part of ot$er compre-$ensive income.

14. &ignificant influence over an investee ma# be indicated b# material intercompan# trans-

actions and interc$ange of managerial personnel.

11. T$e accounting profession $as concluded t$at an investment of more t$an %4 percent oft$e voting stoc; of an investee s$ould lead to a presumption of significant influence overan investee.

12. All dividends received b# an investor from t$e investee decrease t$e investmentCs carr#ingvalue under t$e euit# met$od.

13. nder t$e fair value met$odB t$e investor reports as revenue its s$are of t$e net incomereported b# t$e investee.

1!. A controlling interest occurs 5$en one corporation acuires a voting interest of more t$an%4 percent in anot$er corporation.

1%. Trading securities and available-for-sale securities are classified as current or noncurrentassets depending on t$e circumstances.

1'. $en a compan# sells available-for-sale securitiesB a reclassification ad)ustment is neces-sar# to avoid counting gains and losses t5ice.

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6nvestments

1*. 6f a decline in a securit#Cs value is )udged to be temporar#B a compan# needs to 5ritedo5n t$e cost basis of t$e individual securit# to a ne5 cost basis.

1+. &ubseuent increases and decreases in t$e fair value of impaired available-for-salesecurities are included in ot$er compre$ensive income.

1,. 6f a compan# transfers $eld-to-maturit# securities to available-for-sale securitiesB t$eunrealized gain or loss is recognized in income.

24. T$e transfer of securities from trading to available-for-sale and from available-for-sale totrading $as t$e same impact on stoc;$oldersC euit# and net income.

Tue-False AnswesConceptual

Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans!1. F '. F 11. F 1'. T2. T *. T 12. T 1*. F

3. F +. F 13. F 1+. T!. F ,. T 1!. T 1,. F%. T 14. T 1%. F 24. T

MULTIPLE CH$ICEConceptual

21. $ic$ of t$e follo5ing is nota debt securit#a. "onvertible bondsb. "ommercial paperc. oans receivable

d. All of t$ese are debt securities.

22. A correct valuation isa. available-for-sale at amortized cost.b. $eld-to-maturit# at amortized cost.c. $eld-to-maturit# at fair value.d. none of t$ese.

23. &ecurities 5$ic$ could be classified as $eld-to-maturit# area. redeemable preferred stoc;.b. 5arrants.c. municipal bonds.

d. treasur# stoc;.

2!. nrealized $olding gains or losses 5$ic$ are recognized in income are from securitiesclassified asa. $eld-to-maturit#.b. available-for-sale.c. trading.d. none of t$ese.

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72%. $en an investors accounting period ends on a date t$at does not coincide 5it$ aninterest receipt date for bonds $eld as an investmentB t$e investor musta. ma;e an ad)usting entr# to debit 6nterest eceivable and to credit 6nterest evenue for

t$e amount of interest accrued since t$e last interest receipt date.b. notif# t$e issuer and reuest t$at a special pa#ment be made for t$e appropriate

portion of t$e interest period.c. ma;e an ad)usting entr# to debit 6nterest eceivable and to credit 6nterest evenue for

t$e total amount of interest to be received at t$e next interest receipt date.d. do not$ing special and ignore t$e fact t$at t$e accounting period does not coincide

5it$ t$e bonds interest period.

&2'. Debt securities t$at are accounted for at amortized costB not fair valueB area. $eld-to-maturit# debt securities.b. trading debt securities.c. available-for-sale debt securities.d. never-sell debt securities.

&2*. Debt securities acuired b# a corporation 5$ic$ are accounted for b# recognizingunrealized $olding gains or losses and are included as ot$er compre$ensive income andas a separate component of stoc;$olders euit# area. $eld-to-maturit# debt securities.b. trading debt securities.c. available-for-sale debt securities.d. never-sell debt securities.

&2+. se of t$e effective-interest met$od in amortizing bond premiums and discounts results ina. a greater amount of interest income over t$e life of t$e bond issue t$an 5ould result

from use of t$e straig$t-line met$od.b. a var#ing amount being recorded as interest income from period to period.c. a variable rate of return on t$e boo; value of t$e investment.

d. a smaller amount of interest income over t$e life of t$e bond issue t$an 5ould resultfrom use of t$e straig$t-line met$od.

&2,. Euit# securities acuired b# a corporation 5$ic$ are accounted for b# recognizingunrealized $olding gains or losses as ot$er compre$ensive income and as a separatecomponent of stoc;$olders euit# area. available-for-sale securities 5$ere a compan# $as $oldings of less t$an 24G.b. trading securities 5$ere a compan# $as $oldings of less t$an 24G.c securities 5$ere a compan# $as $oldings of bet5een 24G and %4G.d. securities 5$ere a compan# $as $oldings of more t$an %4G.

34. A reuirement for a securit# to be classified as $eld-to-maturit# is

a. abilit# to $old t$e securit# to maturit#.b. positive intent.c. t$e securit# must be a debt securit#.d. All of t$ese are reuired.

31. /eld-to-maturit# securities are reported ata. acuisition cost.b. acuisition cost plus amortization of a discount.c. acuisition cost plus amortization of a premium.d. fair value.

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32. &olo "o. purc$ased H344B444 of bonds for H31%B444. 6f &olo intends to $old t$e securitiesto maturit#B t$e entr# to record t$e investment includesa. a debit to /eld-to-:aturit# &ecurities at H344B444.b. a credit to 7remium on 6nvestments of H1%B444.c. a debit to /eld-to-:aturit# &ecurities at H31%B444.d. none of t$ese.

33. $ic$ of t$e follo5ing is notcorrect in regard to trading securitiesa. T$e# are $eld 5it$ t$e intention of selling t$em in a s$ort period of time.b. nrealized $olding gains and losses are reported as part of net income.c. An# discount or premium is not amortized.d. All of t$ese are correct.

3!. 6n accounting for investments in debt securities t$at are classified as trading securitiesBa. a discount is reported separatel#.b. a premium is reported separatel#.c. an# discount or premium is not amortized.d. none of t$ese.

3%. 6nvestments in debt securities are generall# recorded ata. cost including accrued interest.b. maturit# value.c. cost including bro;erage and ot$er fees.d. maturit# value 5it$ a separate discount or premium account.

3'. 7ippen "o. purc$ased ten-#earB 14G bonds t$at pa# interest semiannuall#. T$e bonds aresold to #ield +G. 8ne step in calculating t$e issue price of t$e bonds is to multipl# t$eprincipal b# t$e table value fora. 14 periods and 14G from t$e present value of 1 table.b. 14 periods and +G from t$e present value of 1 table.c. 24 periods and %G from t$e present value of 1 table.d. 24 periods and !G from t$e present value of 1 table.

3*. 6nvestments in debt securities s$ould be recorded on t$e date of acuisition ata. lo5er of cost or mar;et.b. mar;et value.c. mar;et value plus bro;erage fees and ot$er costs incident to t$e purc$ase.d. face value plus bro;erage fees and ot$er costs incident to t$e purc$ase.

3+. An available-for-sale debt securit# is purc$ased at a discount. T$e entr# to record t$eamortization of t$e discount includes aa. debit to Available-for-&ale &ecurities.b. debit to t$e discount account.

c. debit to 6nterest evenue.d. none of t$ese.

3,. APB Opinion No. 21specifies t$atB regarding t$e amortization of a premium or discount ona debt securit#B t$ea. effective-interest met$od of allocation must be used.b. straig$t-line met$od of allocation must be used.c. effective-interest met$od of allocation s$ould be used but ot$er met$ods can be

applied if t$ere is no material difference in t$e results obtained.d. par value met$od must be used and t$erefore no allocation is necessar#.

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!4. $ic$ of t$e follo5ing is correct about t$e effective-interest met$od of amortizationa. T$e effective interest met$od applied to investments in debt securities is different from

t$at applied to bonds pa#able.b. Amortization of a discount decreases from period to period.c. Amortization of a premium decreases from period to period.d. T$e effective-interest met$od produces a constant rate of return on t$e boo; value of

t$e investment from period to period.

!1. $en investments in debt securities are purc$ased bet5een interest pa#ment datesBpreferabl# t$ea. securities account s$ould include accrued interest.b. accrued interest is debited to 6nterest Expense.c. accrued interest is debited to 6nterest evenue.d. accrued interest is debited to 6nterest eceivable.

!2. $ic$ of t$e follo5ing is not generall# correct about recording a sale of a debt securit#before maturit# datea. Accrued interest 5ill be received b# t$e seller even t$oug$ it is not an interest

pa#ment date.b. An entr# must be made to amortize a discount to t$e date of sale.c. T$e entr# to amortize a premium to t$e date of sale includes a credit to t$e 7remium

on 6nvestments in Debt &ecurities.d. A gain or loss on t$e sale is not extraordinar#.

&!3. $en a compan# $as acuired a Ipassive interestI in anot$er corporationB t$e acuiringcompan# s$ould account for t$e investmenta. b# using t$e euit# met$od.b. b# using t$e fair value met$od.c. b# using t$e effective interest met$od.d. b# consolidation.

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6nvestments

!'. $en a compan# $olds bet5een 24G and %4G of t$e outstanding stoc; of an investeeB5$ic$ of t$e follo5ing statements appliesa. T$e investor s$ould al5a#s use t$e euit# met$od to account for its investment.b. T$e investor s$ould use t$e euit# met$od to account for its investment unless circum-

stances indicate t$at it is unable to exercise Isignificant influenceI over t$e investee.c. T$e investor must use t$e fair value met$od unless it can clearl# demonstrate t$e

abilit# to exercise Isignificant influenceI over t$e investee.d. T$e investor s$ould al5a#s use t$e fair value met$od to account for its investment.

!*. 6f t$e parent compan# o5ns ,4G of t$e subsidiar# compan#s outstanding common stoc;Bt$e compan# s$ould generall# account for t$e income of t$e subsidiar# under t$ea. cost met$od.b. fair value met$od.c. divesture met$od.d. euit# met$od.

!+.


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%2. An unrealized $olding gain on a compan#s available-for-sale securities s$ould bereflected in t$e current financial statements asa. an extraordinar# item s$o5n as a direct increase to retained earnings.b. a current gain resulting from $olding securities.c. a note or parent$etical disclosure onl#.d. ot$er compre$ensive income and included in t$e euit# section of t$e balance s$eet.

%3. A reclassification ad)ustment is reported in t$ea. income statement as an 8t$er evenue or Expense.b. stoc;$oldersC euit# section of t$e balance s$eet.c. statement of compre$ensive income as ot$er compre$ensive income.d. statement of stoc;$oldersC euit#.

%!. $en an investment in a $eld-to-maturit# securit# is transferred to an available-for-salesecurit#B t$e carr#ing value assigned to t$e available-for-sale securit# s$ould bea. its original cost.b. its fair value at t$e date of t$e transfer.c. t$e lo5er of its original cost or its fair value at t$e date of t$e transfer.d. t$e $ig$er of its original cost or its fair value at t$e date of t$e transfer.

%%. $en an investment in an available-for-sale securit# is transferred to trading because t$ecompan# anticipates selling t$e stoc; in t$e near futureB t$e carr#ing value assigned to t$einvestment upon entering it in t$e trading portfolio s$ould bea. its original cost.b. its fair value at t$e date of t$e transfer.c. t$e $ig$er of its original cost or its fair value at t$e date of t$e transfer.d. t$e lo5er of its original cost or its fair value at t$e date of t$e transfer.

7%'. A debt securit# is transferred from one categor# to anot$er. 0enerall# acceptableaccounting principles reuire t$at for t$is particular reclassification =1> t$e securit# be

transferred at fair value at t$e date of transferB and =2> t$e unrealized gain or loss at t$edate of transfer currentl# carried as a separate component of stoc;$olders euit# beamortized over t$e remaining life of t$e securit#. $at t#pe of transfer is being describeda. Transfer from trading to available-for-saleb. Transfer from available-for-sale to tradingc. Transfer from $eld-to-maturit# to available-for-saled. Transfer from available-for-sale to $eld-to-maturit#

9%*. "ompanies t$at attempt to exploit inefficiencies in various derivative mar;ets b#attempting to loc; in profits b# simultaneousl# entering into transactions in t5o or moremar;ets are calleda. arbitrageurs.

b. gamblers.c. $edgers.d. speculators.

9%+. All of t$e follo5ing statements regarding accounting for derivatives are correct exceptt$ata. t$e# s$ould be recognized in t$e financial statements as assets and liabilities.b. t$e# s$ould be reported at fair value.c. gains and losses resulting from speculation s$ould be deferred.d. gains and losses resulting from $edge transactions are reported in different 5a#sB

depending upon t$e t#pe of $edge.

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6nvestments

9%,. All of t$e follo5ing are c$aracteristics of a derivative financial instrument except t$einstrumenta. $as one or more underl#ings and an identified pa#ment provision.b. reuires a large investment at t$e inception of t$e contract.c. reuires or permits net settlement.d. All of t$ese are c$aracteristics.

9'4. T$e accounting for fair value $edges records t$e derivative at itsa. amortized cost.b. carr#ing value.c. fair value.d. $istorical cost.

9'1. 0ains or losses on cas$ flo5 $edges area. ignored completel#.b. recorded in euit#B as part of ot$er compre$ensive income.c. reported directl# in net income.d. reported directl# in retained earnings.

9'2. An option to convert a convertible bond into s$ares of common stoc; is a=n>a. embedded derivative.b. $ost securit#.c. $#brid securit#.d. fair value $edge.

9'3. All of t$e follo5ing are reuirements for disclosures related to financial instruments excepta. disclosing t$e fair value and related carr#ing value of t$e instruments.b. distinguis$ing bet5een financial instruments $eld or issued for purposes ot$er t$an

trading.c. combining or netting t$e fair value of separate financial instruments.

d. displa#ing as a separate classification of ot$er compre$ensive income t$e netgainloss on derivative instruments designated in cas$ flo5 $edges.

Mult#ple C,o#ce AnswesConceptual

Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans!

21. c 2+. b 3%. c !2. c !,. d %'. d 9'3. c22. b 2,. a 3'. d !3. b %4. d 9%*. a

23. c 34. d 3*. c !!. a %1. d 9%+. c

2!. c 31. b 3+. a !%. c %2. d 9%,. b

2%. a 32. c 3,. c !'. b %3. c 9'4. c

2'. a 33. d !4. d !*. d %!. b 9'1. b

2*. c 3!. c !1. c !+. a %%. b 9'2. a

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MULTIPLE CH$ICECo(putat#onal

'!. 8n August 1B 244*B itten "o. acuired 244B H1B444B ,G bonds at ,* plus accruedinterest. T$e bonds 5ere dated :a# 1B 244*B and mature on April 34B 2413B 5it$ interestpaid eac$ 8ctober 31 and April 34. T$e bonds 5ill be added to ittenCs available-for-sale

portfolio. T$e preferred entr# to record t$e purc$ase of t$e bonds on August 1B 244* isa. Available-for-&ale &ecurities................................................ 1,+B%44

"as$......................................................................... 1,+B%44

b. Available-for-&ale &ecurities................................................ 1,!B4446nterest eceivable.............................................................. !B%44

"as$......................................................................... 1,+B%44

c. Available-for-&ale &ecurities................................................ 1,!B4446nterest evenue................................................................. !B%44

"as$......................................................................... 1,+B%44

d. Available-for-&ale &ecurities................................................ 244B4446nterest evenue................................................................. !B%44

Discount on Debt &ecurities..................................... 'B444"as$ ........................................................................ 1,+B%44

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6nvestments

se t$e follo5ing information for uestions '+ and ',.

:arten "o. purc$ased H%44B444 of +GB %-#ear bonds from DugganB 6nc. on Kanuar# 1B 244+B 5it$interest pa#able on Kul# 1 and Kanuar# 1. T$e bonds sold for H%24B*,4 at an effective interestrate of *G. sing t$e effective-interest met$odB :arten "o. decreased t$e Available-for-&ale Debt&ecurities account for t$e DugganB 6nc. bonds on Kul# 1B 244+ and December 31B 244+ b# t$e

amortized premiums of H1B**4 and H1B+34B respectivel#.

'+. At December 31B 244+B t$e fair value of t$e DugganB 6nc. bonds 5as H%34B444. $ats$ould :arten "o. report as ot$er compre$ensive income and as a separate componentof stoc;$olders euit#a. H12B+14.b. H,B214.c. H3B'44.d. ?o entr# s$ould be made.

',. At April 1B 244,B :arten "o. sold t$e Duggan bonds for H%1%B444. After accruing forinterestB t$e carr#ing value of t$e Duggan bonds on April 1B 244, 5as H%1'B+*%.

Assuming :arten "o. $as a portfolio of Available-for-&ale Debt &ecuritiesB 5$at s$ould:arten "o. report as a gain or loss on t$e bondsa. =H1!B'+%>.b. =H14B,3%>.c. =H1B+*%>.d. H 4.

*4. 8n August 1B 244*B


16/37


*2. 8n ?ovember 1B 244*B ittle "ompan# purc$ased '44 of t$e H1B444 face valueB ,G bondsof 7la#erB 6ncorporatedB for H'32B444B 5$ic$ includes accrued interest of H,B444. T$ebondsB 5$ic$ mature on Kanuar# 1B 2412B pa# interest semiannuall# on :arc$ 1 and&eptember 1. Assuming t$at ittle uses t$e straig$t-line met$od of amortization and t$att$e bonds are appropriatel# classified as available-for-saleB t$e net carr#ing value of t$ebonds s$ould be s$o5n on ittles December 31B 244*B balance s$eet ata. H'44B444.b. H'23B444.c. H'22B4+4.d. H'32B444.

*3. 8n ?ovember 1B 244*B :orton "o. purc$ased 0omezB 6nc.B 14-#earB ,GB bonds 5it$ aface value of H2%4B444B for H22%B444. An additional H*B%44 5as paid for t$e accruedinterest. 6nterest is pa#able semiannuall# on Kanuar# 1 and Kul# 1. T$e bonds mature onKul# 1B 241!. :orton uses t$e straig$t-line met$od of amortization. 6gnoring income taxesBt$e amount reported in :ortons 244* income statement as a result of :ortons available-for-sale investment in 0omez 5asa. H!B3*%.b. H!B1'*.c. H3B*%4.d. H3B333.

*!. 8n 8ctober 1B 244*B #man "o. purc$ased to $old to maturit#B 244B H1B444B ,G bonds forH24+B444. An additional H'B444 5as paid for accrued interest. 6nterest is paidsemiannuall# on December 1 and Kune 1 and t$e bonds mature on December 1B 2411.#man uses straig$t-line amortization. 6gnoring income taxesB t$e amount reported in#mans 244* income statement from t$is investment s$ould bea. H!B%44.b. H!B424.c. H!B,+4.

d. H%B!'4.

*%. During 244%B 7lano "o. purc$ased 2B444B H1B444B ,G bonds. T$e carr#ing value of t$ebonds at December 31B 244* 5as H1B,'4B444. T$e bonds mature on :arc$ 1B 2412B andpa# interest on :arc$ 1 and &eptember 1. 7lano sells 1B444 bonds on &eptember 1B244+B for H,++B444B after t$e interest $as been received. 7lano uses straig$t-lineamortization. T$e gain on t$e sale isa. H4.b. H!B+44.c. H+B444.d. H11B244.

*'. edman "ompan#s trading securities portfolio 5$ic$ is appropriatel# included in currentassets is as follo5s@

December 31B 244*Fair nrealized

"ost (alue 0ain =oss>Arlington "orp. 2%4B444 244B444 H=%4B444>Do5nsB 6nc. 2!%B444 2'%B444 24B444

H!,%B444 H!'%B444 H=34B444>

17 - 1;


17/37

6nvestments

6gnoring income taxesB 5$at amount s$ould be reported as a c$arge against income inedmans 244* income statement if 244* is edmans first #ear of operationa. H4.b. H24B444.c. H34B444.d. H%4B444.

**. 8n its December 31B 244'B balance s$eetB Muinn "o. reported its investment in available-for-sale securitiesB 5$ic$ $ad cost H'44B444B at fair value of H%%4B444. At December 31B244*B t$e fair value of t$e securities 5as H%+%B444. $at s$ould Muinn report on its 244*income statement as a result of t$e increase in fair value of t$e investments in 244*a. H4.b. nrealized loss of H1%B444.c. ealized gain of H3%B444.d. nrealized gain of H3%B444.

*+. During 244*B Ellis "ompan# purc$ased 24B444 s$ares of /iller "orp. common stoc; forH31%B444 as an available-for-sale investment. T$e fair value of t$ese s$ares 5asH344B444 at December 31B 244*. Ellis sold all of t$e /iller stoc; for H1* per s$are onDecember 3B 244+B incurring H1!B444 in bro;erage commissions. Ellis "ompan# s$ouldreport a realized gain on t$e sale of stoc; in 244+ ofa. H11B444.b. H2%B444.c. H2'B444.d. H!4B444.

se t$e follo5ing information for uestions *, and +4.

8n its December 31B 244* balance s$eetB Nlugman "ompan# appropriatel# reported a H14B444debit balance in its &ecurities Fair (alue Ad)ustment =Available-for-&ale> account. T$ere 5as no

c$ange during 244+ in t$e composition of NlugmanCs portfolio of mar;etable euit# securities $eldas available-for-sale securities. T$e follo5ing information pertains to t$at portfolio@

&ecurit# "ost Fair value at 12314+O H12%B444 H1'4B444J 144B444 ,%B444P 1*%B444 12%B444

H!44B444 H3+4B444

*,. $at amount of unrealized loss on t$ese securities s$ould be included in Nlugmansstoc;$olders euit# section of t$e balance s$eet at December 31B 244+a. H34B444.

b. H24B444.c. H14B444.d. H4.

+4. T$e amount of unrealized loss to appear as a component of compre$ensive income fort$e #ear ending December 31B 244+ isa. H34B444.b. H24B444.c. H14B444.d. H4.

17 - 17


18/37


+1. Nennett "orporation purc$ased 2%B444 s$ares of common stoc; of t$e &5enson"orporation for H!4 per s$are on Kanuar# 2B 244+. &5enson "orporation $ad 144B444s$ares of common stoc; outstanding during 244+B paid cas$ dividends of H'4B444 during244+B and reported net income of H244B444 for 244+. Nennett "orporation s$ould reportrevenue from investment for 244+ in t$e amount ofa. H1%B444.b. H3%B444.c. H%4B444.d. H%%B444.

se t$e follo5ing information for uestions +2 and +3.

0arrison "o. o5ns 24B444 of t$e %4B444 outstanding s$ares of &teeleB 6nc. common stoc;.During 244+B &teele earns H+44B444 and pa#s cas$ dividends of H'!4B444.

+2. 6f t$e beginning balance in t$e investment account 5as H%44B444B t$e balance atDecember 31B 244+ s$ould bea. H+24B444.b. H''4B444.c. H%'!B444.d. H%44B444.

+3. 0arrison s$ould report investment revenue for 244+ ofa. H324B444.b. H2%'B444.c. H'!B444.d. H4.

se t$e follo5ing information for uestions +! t$roug$ +*.

T$e summarized balance s$eets of Elston "ompan# and Alle# "ompan# as of December 31B244* are as follo5s@

Elston "ompan#


19/37

6nvestments

+!. 6f Elston "ompan# acuired a 24G interest in Alle# "ompan# on December 31B 244* forH1,%B444 and t$e fair value met$od of accounting for t$e investment 5ere usedB t$eamount of t$e debit to 6nvestment in Alle# "ompan# &toc; 5ould $ave beena. H13%B444.b. H111B444.c. H1,%B444.d. H1+4B444.

+%. 6f Elston "ompan# acuired a 34G interest in Alle# "ompan# on December 31B 244* forH22%B444 and t$e euit# met$od of accounting for t$e investment 5ere usedB t$e amountof t$e debit to 6nvestment in Alle# "ompan# &toc; 5ould $ave beena. H2+%B444.b. H22%B444.c. H1+4B444.d. H242B%44.

+'. 6f Elston "ompan# acuired a 24G interest in Alle# "ompan# on December 31B 244' forH13%B444 and during 244+ Alle# "ompan# $ad net income of H*%B444 and paid a cas$

dividend of H34B444B appl#ing t$e fair value met$od 5ould give a debit balance in t$e6nvestment in Alle# "ompan# &toc; account at t$e end of 244+ ofa. H111B444.b. H13%B444.c. H1%4B444.d. H1!!B444.

+*. 6f Elston "ompan# acuired a 34G interest in Alle# "ompan# on December 31B 244* forH242B%44 and during 244+ Alle# "ompan# $ad net income of H*%B444 and paid a cas$dividend of H34B444B appl#ing t$e euit# met$od 5ould give a debit balance in t$e6nvestment in Alle# "ompan# &toc; account at t$e end of 244+ ofa. H242B%44.

b. H21'B444.c. H22%B444.d. H21*B%44.

se t$e follo5ing information for uestions ++ and +,.

Narter "ompan# purc$ased 244 of t$e 1B444 outstanding s$ares of Fl#nn "ompan#s commonstoc; for H344B444 on Kanuar# 2B 244*. During 244*B Fl#nn "ompan# declared dividends ofH%4B444 and reported earnings for t$e #ear of H244B444.

++. 6f Narter "ompan# used t$e fair value met$od of accounting for its investment in Fl#nn"ompan#B its 6nvestment in Fl#nn "ompan# account on December 31B 244* s$ould bea. H2,4B444.

b. H334B444.c. H344B444.d. H3!4B444.

+,. 6f Narter "ompan# uses t$e euit# met$od of accounting for its investment in Fl#nn"ompan#B its 6nvestment in Fl#nn "ompan# account at December 31B 244* s$ould bea. H2,4B444.b. H344B444.c. H334B444.d. H3!4B444.

17 - 1>


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se t$e follo5ing information for uestions ,4 and ,1.


21/37

6nvestments

(ernonCs 244* ot$er compre$ensive income isa. H2%B444.b. H!4B444.c. H%4B444.d. H'4B444.

Mult#ple C,o#ce AnswesCo(putat#onal

Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans!

'!. c ',. c *!. b *,. b +!. c +,. c ,!. d'%. b *4. a *%. b +4. a +%. b ,4. c ,%. b

''. d *1. b *'. c +1. c +'. b ,1. b

'*. b *2. c **. a +2. c +*. b ,2. c

'+. a *3. a *+. a +3. a ++. c ,3. b

MULTIPLE CH$ICECPA A)apte)

,'. 8n 8ctober 1B 244'B :ing "o. purc$ased '44 of t$e H1B444 face valueB +G bonds of o#B6nc.B for H*42B444B including accrued interest of H12B444. T$e bondsB 5$ic$ mature onKanuar# 1B 2413B pa# interest semiannuall# on Kanuar# 1 and Kul# 1. :ing used t$estraig$t-line met$od of amortization and appropriatel# recorded t$e bonds as available-for-sale. 8n :ings December 31B 244* balance s$eetB t$e carr#ing value of t$e bonds isa. H',4B444.b. H'+!B444.

c. H'+1B'44.d. H'*2B444.

,*. nru$ "orp. began operations in 244*. An anal#sis of nru$Cs euit# securities portfolioacuired in 244* s$o5s t$e follo5ing totals at December 31B 244* for trading andavailable-for-sale securities@

Trading Available-for-&ale&ecurities &ecurities

Aggregate cost H,4B444 H114B444Aggregate fair value '%B444 ,%B444

$at amount s$ould nru$ report in its 244* income statement for unrealized $oldinglossa. H!4B444.b. H14B444.c. H1%B444.d. H2%B444.

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22/37


,+. At December 31B 244*B :alle "orp. $ad t$e follo5ing euit# securities t$at 5erepurc$ased during 244*B its first #ear of operation@

Fair nrealized "ost (alue 0ain =oss>

Trading &ecurities@&ecurit# A H ,4B444 H '4B444 H=34B444>

< 1%B444 24B444 %B444Totals H14%B444 H +4B444 H=2%B444>

Available-for-&ale &ecurities@&ecurit# J H *4B444 H +4B444 H 14B444

P +%B444 %%B444 =34B444>Totals H1%%B444 H13%B444 H=24B444>

All mar;et declines are considered temporar#. Fair value ad)ustments at December 31B244* s$ould be establis$ed 5it$ a corresponding c$arge against

6ncome &toc;$oldersC Euit#

a. H!%B444 H 4b. H34B444 H34B444c. H2%B444 H24B444d. H2%B444 H 4

,,. 8n December 2,B 244+B 0reer "o. sold an euit# securit# t$at $ad been purc$ased onKanuar# !B 244*. 0reer o5ned no ot$er euit# securities. An unrealized $olding loss 5asreported in t$e 244* income statement. A realized gain 5as reported in t$e 244+ incomestatement. as t$e euit# securit# classified as available-for-sale and did its 244* mar;etprice decline exceed its 244+ mar;et price recover#

244* :ar;et 7riceDecline Exceeded 244+

Available-for-&ale :ar;et 7rice ecover#a. Jes Jesb. Jes ?oc. ?o Jesd. ?o ?o

se t$e follo5ing information for uestions 144 t$roug$ 142.

NimmB 6nc. acuired 34G of "arne "orp.s voting stoc; on Kanuar# 1B 244* for H!44B444. During244*B "arne earned H1'4B444 and paid dividends of H144B444. Nimms 34G interest in "arnegives Nimm t$e abilit# to exercise significant influence over "arnes operating and financialpolicies. During 244+B "arne earned H244B444 and paid dividends of H'4B444 on April 1 and

H'4B444 on 8ctober 1. 8n Kul# 1B 244+B Nimm sold $alf of its stoc; in "arne for H2'!B444 cas$.

144.


23/37

6nvestments

141. T$e carr#ing amount of t$is investment in Nimms December 31B 244* balance s$eets$ould bea. H!44B444.b. H!1+B444.c. H!!+B444.d. H!'4B444.

142. $at s$ould be t$e gain on sale of t$is investment in Nimms 244+ income statementa. H'!B444.b. H%%B444.c. H!,B444.d. H!4B444.

143. 8n Kanuar# 1B 244*B &loane "o. purc$ased 2%G of 8rr "orp.s common stoc;L nogood5ill resulted from t$e purc$ase. &loane appropriatel# carries t$is investment at euit#and t$e balance in &loaneCs investment account 5as H*24B444 at December 31B 244*. 8rrreported net income of H!%4B444 for t$e #ear ended December 31B 244*B and paidcommon stoc; dividends totaling H1+4B444 during 244*. /o5 muc$ did &loane pa# for its2%G interest in 8rra. H'%2B%44.b. H*'%B444.c. H*+*B%44.d. H+**B%44.

14!. 8n December 31B 244'B ?ance "o. purc$ased euit# securities as trading securities.7ertinent data are as follo5s@

Fair (alue&ecurit# "ost At 12314*

A H132B444 H11*B444< 1'+B444 1+'B444

" 2++B444 2%+B444

8n December 31B 244*B ?ance transferred its investment in securit# " from trading toavailable-for-sale because ?ance intends to retain securit# " as a long-term investment.$at total amount of gain or loss on its securities s$ould be included in ?ances incomestatement for t$e #ear ended December 31B 244*a. H3B444 gain.b. H2*B444 loss.c. H34B444 loss.d. H!%B444 loss.

Mult#ple C,o#ce AnswesCPA A)apte)

Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans! Ite( Ans!

,'. d ,+. c 144. c 142. c 14!. b,*. d ,,. d 141. b 143. a

17 - /


24/37


"ERIVATI$NS Co(putat#onal

No! Answe "e#9at#on'!. c Dr. Available-for-&ale &ecurities@ 244 Q H1B444 Q .,* H1,!B444

Dr. 6nterest evenue@ H244B444 Q .4!% Q 3' H!B%44"r. "as$@ H1,!B444 R H!B%44 H1,+B%44.

'%. b =H!44B444 Q 1.42> R H'B444 H!1!B444.

''. d =H3*'B144 Q .4%%> S =H!44B444 Q .4%> H'+'.

'*. b H3*'B144 Q .4%% H24B'+'=H3*'B144 R H'+'> Q .4%% - H24B*23L H24B'+' R H24B*23 H!1B!4,.

'+. a H%34B444 S =H%24B*,4 S H1B**4 S H1B+34> H12B+14.

',. c H%1'B+*% S H%1%B444 H1B+*%.

*4. a Dr. /eld-to-:aturit# &ecurities@ H244B444 Q 1.4! H24+B444Dr. 6nterest evenue@ H244B444 Q .4% Q 3' H%B444"r. "as$@ H24+B444 R H%B444 H213B444.

*1. b H,*%B444 R =H2%B444 Q 3144> H,*%B*%4.

*2. c H'32B444 S H,B444 H'23B444H'23B444 S =H23B444 Q 2%4> H'22B4+4.

*3. a =H2%4B444 Q .4!%> R =H2%B444 Q 2+4> S H*B%44 H!B3*%.

*!. b =H244B444 Q .4, Q 312> S =H+B444 Q 3%4> H!B424.

*%. b Discount amortization@ H!4B444 Q +%4 H'B!44=H1B,'4B444 R H'B!44> 2 H,+3B244L H,++B444 S H,+3B244 H!B+44 gain.

*'. c H34B444 =unrealized loss>.

**. a H4 =available-for-sale securities>.

*+. a U=24B444 Q H1*> S H1!B444V S H31%B444 H11B444.

*,. b =H!44B444 S H3+4B444> H24B444.

+4. a H14B444 R H24B444 H34B444.

+1. c H244B444 Q =2%B444 144B444> H%4B444.

+2. c H%44B444 R U=H+44B444 S H'!4B444> Q =24B444 %4B444>V H%'!B444.

+3. a H+44B444 Q =24B444 %4B444> H324B444.

+!. c H1,%B444B acuisition cost.

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6nvestments

"ERIVATI$NS Co(putat#onal cont!.

No! Answe "e#9at#on+%. b H22%B444B acuisition cost.

+'. b H13%B444B acuisition cost.

+*. b H242B%44 R =H*%B444 Q .3> S =H34B444 Q .3> H21'B444.

++. c H344B444B acuisition cost.

+,. c H344B444 R =H244B444 Q .2> S =H%4B444 Q .2> H334B444.

,4. c H324B444 R =H2!4B444 Q .3> S =H+4B444 Q .3> H3'+B444.

,1. b H2!4B444 Q .3 H*2B444.

,2. c H,!%B444 R =H'44B444 Q .'> S =H1%4B444 Q .'> H1B21%B444.

,3. b H2!4B444 R =H124B444 Q .!> S =H!4B444 Q .!> H2*2B444.

,!. d H124B444 Q .! H!+B444.

,%. b H1%B444 R H3%B444 S H14B444 H!4B444.

"ERIVATI$NS CPA A)apte)

No! Answe "e#9at#on,'. d H*42B444 S H12B444 H',4B444

1%H',4B444 S =H,4B444 Q > H'*2B444.

*%

,*. d H,4B444 S H'%B444 H2%B444.

,+. c

,,. d "onceptual.

144. c H1'4B444 Q 34G H!+B444.

141. b H!44B444 R H!+B444 S =H144B444 Q 34G> H!1+B444.

142. c H!1+B444 S =H'4B444 Q 34G> R =H244B444 Q %4G Q 34G> H!34B444.H2'!B444 S =H!34B444 2> H!,B444.

143. a H*24B444 S =H!%4B444 Q 2%G> R =H1+4B444 Q 2%G> H'%2B%44.

14!. b H1+B444 S H1%B444 S H34B444 H2*B444 loss.

17 - /:


26/37


E0ERCISES

E@! 17-1?:6nvestment in debt securities at premium.

8n April 1B 244*B &ean "o. purc$ased H1'4B444 of 'G bonds for H1''B344 plus accrued interestas an available-for-sale securit#. 6nterest is paid on Kul# 1 and Kanuar# 1 and t$e bonds matureon Kul# 1B 2412.

Instuct#ons=a> 7repare t$e )ournal entr# on April 1B 244*.

=b> T$e bonds are sold on ?ovember 1B 244+ at 143 plus accrued interest. Amortization 5asrecorded 5$en interest 5as received b# t$e straig$t-line met$od =b# mont$s and round to t$enearest dollar>. 7repare all entries reuired to properl# record t$e sale.

Solut#on 17-1?:

=a> Available-for-&ale &ecurities.......................................................... 1''B3446nterest evenue =H1'4B444 Q .4' Q 1!>....................................... 2B!44

"as$................................................................................. 1'+B*44

=b> 6nterest evenue =H'B344 Q ! '3>............................................... !44Available-for-&ale &ecurities............................................. !44

"as$ =H1'4B444 Q .4' Q 13>.......................................................... 3B2446nterest evenue.............................................................. 3B244

"as$.............................................................................................. 1'!B+440ain on &ale of &ecurities................................................ !44

Available-for-&ale &ecurities ............................................ 1'!B!44H1''B344 S U=H'B344 '3> Q 1,V

E@! 17-1?;6nvestment in debt securities at a discount.

8n :a# 1B 244*B 0ipson "orp. purc$ased H!%4B444 of 12G bondsB interest pa#able on Kanuar# 1and Kul# 1B for H!22B+44 plus accrued interest. T$e bonds mature on Kanuar# 1B 2413.

Amortization is recorded 5$en interest is received b# t$e straig$t-line met$od =b# mont$s andround to t$e nearest dollar>. =Assume bonds are available for sale.>

Instuct#ons=a> 7repare t$e entr# for :a# 1B 244*.

=b> T$e bonds are sold on August 1B 244+ for H!2%B444 plus accrued interest. 7repare all entriesreuired to properl# record t$e sale.

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6nvestments

Solut#on 17-1?;

=a> Available-for-&ale &ecurities......................................................... !22B+446nterest evenue =H!%4B444 Q .12 Q !12>.................................... 1+B444

"as$................................................................................. !!4B+44

=b> Available-for-&ale &ecurities =H2*B244 '+ Q 1>........................... !446nterest evenue.............................................................. !44

"as$ =H!%4B444 Q .12 Q 112>....................................................... !B%446nterest evenue.............................................................. !B%44

"as$............................................................................................. !2%B444oss on &ale of &ecurities............................................................ 3B+44

Available-for-&ale &ecurities............................................. !2+B+44

H!22B+44 R U=H2*B244 '+> 1%V

E@! 17-1?76nvestments in euit# securities.

7resented belo5 are unrelated cases involving investments in euit# securities.

"ase 6. T$e fair value of t$e trading securities at t$e end of last #ear 5as 34G belo5 originalcostB and t$is 5as properl# reflected in t$e accounts. At t$e end of t$e current #earB t$e fair value$as increased to 24G above cost.

"ase 66. T$e fair value of an available-for-sale securit# $as declined to less t$an fort# percent oft$e original cost. T$e decline in value is considered to be ot$er t$an temporar#.

"ase 666. An euit# securit#B 5$ose fair value is no5 less t$an costB is classified as trading but isreclassified as available-for-sale.

Instuct#ons

6ndicate t$e accounting reuired for eac$ case separatel#.

Solut#on 17-1?7

"ase 6. At t$e end of last #earB t$e compan# 5ould $ave recognized an unrealized $olding lossand recorded a &ecurities Fair (alue Ad)ustment =Trading>. At t$e end of t$e current #earB t$ecompan# 5ould record an unrealized $olding gain t$at 5ould be reported in t$e ot$er revenue

and gains section. T$e ad)ustment account 5ould no5 $ave a debit balance.

"ase 66. $en t$e decline in value is considered to be ot$er t$an temporar#B t$e loss s$ould berecognized as if it 5ere realized and earnings 5ill be reduced. T$e fair value becomes a ne5 costbasis.

"ase 666. T$e securit# is transferred at fair valueB 5$ic$ is t$e ne5 cost basis of t$e securit#. T$eAvailable-for-&ale &ecurities account is recorded at fair valueB and t$e nrealized /olding oss6ncome account is debited for t$e unrealized loss. T$e Trading &ecurities account is credited forcost.

17 - /7


28/37


E@! 17-1?

nder t$e fair value met$odB investments are originall# recorded at cost and are reported at fairvalue. Dividends are reported as ot$er revenues and gains. nder t$e euit# met$odBinvestments are originall# recorded at cost. &ubseuentl#B t$e investment account is ad)usted fort$e investors s$are of t$e investees net income or loss and t$is amount is recognized in t$e

income of t$e investor. Dividends received from t$e investee are reductions in t$e investmentaccount.

17 - /


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6nvestments

E@! 17-11?Fair value and euit# met$ods.

Fill in t$e dollar c$anges caused in t$e 6nvestment account and Dividend evenue or 6nvestmentevenue account b# eac$ of t$e follo5ing transactionsB assuming :axe# "ompan# uses =a> t$efair value met$od and =b> t$e euit# met$od for accounting for its investments in inden"ompan#.

=a> Fair (alue :et$od =b> Euit# :et$od6nvestment Dividend 6nvestment 6nvestment

Transaction Account evenue Account evenue1. At t$e beginning of Jear 1B :axe# boug$t

34G of indens common stoc; at its boo;value. Total boo; value of all indenscommon stoc; 5as H+44B444 on t$isdate.

2. During Jear 1B inden reported H'4B444 of

net income and paid H34B444 of

dividends.3. During Jear 2B inden reported H34B444 of

net income and paid H!4B444 of dividends.

!. During Jear 3B inden reported a net loss

of H14B444 and paid H%B444 of dividends.%. 6ndicate t$e Jear 3 ending balance in t$e

6nvestment accountB and cumulative totalsfor Jears 1B 2B and 3 for dividend revenue

and investment revenue.

Solut#on 17-11?=a> Fair (alue :et$od =b> Euit# :et$od6nvestment Dividend 6nvestment 6nvestment

Transaction Account evenue Account evenue

1. 2!4B444 2!4B444

2. 1+B444 1+B444

,B444 =,B444>

3. ,B444 ,B44412B444 =12B444>

!. =3B444> =3B444>1B%44 =1B%44>

%. 2!4B444 22B%44 2!1B%44 2!B444

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E@! 17-111"ompre$ensive income calculation.

T$e follo5ing information is available for 0riner "ompan# for 244*@

?et 6ncome H124B444ealized gain on sale of available-for-sale securities 14B444nrealized $olding gain arising during t$e period on

available-for-sale securities 2!B444eclassification ad)ustment for gains included in net

income +B444

Instuct#ons=1> Determine ot$er compre$ensive income for 244*.

=2> "ompute compre$ensive income for 244*.

Solut#on 17-111

=1> 244* ot$er compre$ensive income H2'B444 =H14B444 realized gain R H2!B444 unrealized

$olding gain S H+B444 reclassification ad)ustment>.

=2> 244* compre$ensive income H1!'B444 =H124B444 R H2'B444>.

=E@! 17-11/Fair value $edge.

8n Kanuar# 2B 244*B ?olan "o. issued a !-#earB H%44B444 note at 'G fixed interestB interestpa#able semiannuall#. ?olan no5 5ants to c$ange t$e note to a variable rate note. As a resultB onKanuar# 2B 244*B ?olan "o. enters into an interest rate s5ap 5$ere it agrees to receive 'G fixedand pa# 6


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6nvestments

=E@! 17-11"as$ flo5 $edge.

8n Kanuar# 2B 244*B eese "ompan# issued a %-#earB H+B444B444 note at 6 and =b>

12314* 12314+(ariable-rate debt H+B444B444 H+B444B444(ariable rate '.+G *.!GDebt pa#ment H %!!B444 H %,2B444

Debt pa#ment H %!!B444 H %,2B444&5ap receive variable =%!!B444> =%,2B444>

?et income effect H 4 H 4&5ap pa#ablefixed %'4B444 %'4B444

?et interest expense H %'4B444 H %'4B444

PR$%LEMS

P! 17-114Trading euit# securities.

0ordon "ompan# $as t$e follo5ing securities in its portfolio of trading euit# securities onDecember 31B 244*@

"ost Fair (alue%B444 s$ares of :ilner "orp.B "ommon H1%%B444 H13,B444

14B444 s$ares of Edd#B "ommon 1+2B444 1,4B444H33*B444 H32,B444

All of t$e securities $ad been purc$ased in 244*. 6n 244+B 0ordon completed t$e follo5ingsecurities transactions@

:arc$ 1 &old %B444 s$ares of :ilner "orp.B "ommon X H31 less fees of H1B%44.April 1


32/37


P! 17-114 =cont.>

"ost Fair (alue14B444 s$ares of Edd#B "ommon H1+2B444 H1,%B%44'44 s$ares of Jount &toresB "ommon 2*B%%4 2%B%44

H24,B%%4 H221B444

Instuct#ons7repare t$e general )ournal entries for 0ordon "ompan# for@=a> t$e 244* ad)usting entr#.=b> t$e sale of t$e :ilner "orp. stoc;.=c> t$e purc$ase of t$e Jount &tores stoc;.=d> t$e 244+ ad)usting entr#.

Solut#on 17-114

=a> 12-31-4*nrealized /olding 0ain or oss6ncome................................... +B444

&ecurities Fair (alue Ad)ustment =Trading>....................... +B444=H33*B444 S H32,B444>

=b> 3-1-4+

"as$ U=%B444 H31> S H1B%44V...................................................... 1%3B%44oss on &ale of &ecurities............................................................ 1B%44

Trading &ecurities............................................................. 1%%B444

=c> !-1-4+Trading &ecurities......................................................................... 2*B%%4

"as$ U='44 H!%> R H%%4V................................................ 2*B%%4

=d> 12-31-4+&ecurities Fair (alue Ad)ustment =Trading>................................... 1,B!%4

nrealized /olding 0ain or oss6ncome....................... 1,B!%4

P! 17-11:Trading euit# securities.

opez "ompan# began operations in 244'. &ince t$enB it $as reported t$e follo5ing gains andlosses for its investments in trading securities on t$e income statement@

244' 244* 244+

0ains =losses> from sale of trading securities H 1%B444 H=24B444> H 1!B444nrealized $olding losses on valuation of trading securities =2%B444> =34B444>nrealized $olding gain on valuation of trading securities 14B444

At Kanuar# 1B 244,B opez o5ned t$e follo5ing trading securities@ "ost

A0/ "ommon =1%B444 s$ares> H!%4B444DE 7referred =2B444 s$ares> 214B4447ratt "onvertible bonds =144 bonds> 11%B444

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6nvestments

P! 17-11: =cont.>

During 244,B t$e follo5ing events occurred@1. &old %B444 s$ares of A0/ for H1*4B444.2. Acuired 1B444 s$ares of ?orton "ommon for H!4 per s$are. 7repare a sc$edule 5$ic$ s$o5s t$e balance in t$e &ecurities Fair (alue Ad)ustment

=Trading> at December 31B 244+ =after t$e ad)usting entr# for 244+ is made>.=b> 7repare a sc$edule 5$ic$ s$o5s t$e aggregate cost and fair values for opezs trading

securities portfolio at 12314,.

=c> 7repare t$e necessar# ad)usting entr# based upon #our anal#sis in =b> above.

Solut#on 17-11:

=a>


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P! 17-11;Available-for-sale euit# securities.

During t$e course of #our examination of t$e financial statements of &impson "orporation for t$e#ear ended December 31B 244*B #ou found a ne5 accountB I6nvestments.I Jour examinationrevealed t$at during 244*B &impson began a program of investmentsB and all investment-relatedtransactions 5ere entered in t$is account. Jour anal#sis of t$is account for 244* follo5s@

&impson "orporationAnal#sis of 6nvestments

For t$e Jear Ended December 31B 244*Date244* Debit "redit

=a>7inson "ompan# "ommon &toc;

Feb. 1! 7urc$ased !B444 s$ares X H%% per s$are. H224B444Kul# 2' eceived !44 s$ares of 7inson "ompan# common stoc;

as a stoc; dividend. =:emorandum entr# in general ledger.>&ept. 2+ &old t$e !44 s$ares of 7inson "ompan# common stoc;

received Kul# 2' X H*4 per s$are. H2+B444

=b> Debit "reditatts 6nc.B "ommon &toc;

Apr. 34 7urc$ased 24B444 s$ares X H!4 per s$are. H+44B4448ct. 2+ eceived dividend of H1.24 per s$are. H2!B444

Additional information@1. T$e fair value for eac$ securit# as of t$e 244* date of eac$ transaction follo5@

&ecurit# Feb. 1! Apr. 34 Kul# 2' &ept. 2+ Dec. 317inson "o. H%% H'2 H*4 H*!atts 6nc. H!4 32&impson "orp. 2% 2+ 34 33 3%

2. All of t$e investments of &impson are nominal in respect to percentage of o5ners$ip =%G orless>.

3. Eac$ investment is considered b# &impsonCs management to be available-for-sale.

Instuct#ons=1> 7repare an# necessar# correcting )ournal entries related to investments =a> and =b>.

=2> 7repare t$e entr#B if necessar#B to record t$e proper valuation of t$e available-for-sale euit#securit# portfolio as of December 31B 244*.

Solut#on 17-11;

=1> =a> 7inson original purc$ase !B444 s$aresstoc; dividend !44 s$arestotal $olding !B!44 s$ares

Total cost of H224B444 Total s$ares of !B!44 H%4 cost per s$are

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6nvestments

Solut#on 17-11; =cont.>

&old 144 s$ares"orrect entr#@"as$ =!44 Q H*4>....................................................................... 2+B444

Available-for-&ale &ecurities.......................................... 24B444

0ain on &ale of &ecurities.............................................. +B444

Entr# made@"as$.......................................................................................... 2+B444

Available-for-&ale &ecurities.......................................... 2+B444

"orrection@Available-for-&ale &ecurities...................................................... +B444

0ain on &ale of &ecurities.............................................. +B444

=b> attss$ould record cas$ dividend as dividend income.

"orrect entr#@"as$.......................................................................................... 2!B444

Dividend evenue.......................................................... 2!B444

Entr# made@

"as$.......................................................................................... 2!B444Available-for-&ale &ecurities.......................................... 2!B444

"orrection@

Available-for-&ale &ecurities...................................................... 2!B444Dividend evenue.......................................................... 2!B444

=To properl# record dividends under fair valuemet$od>

=2> (aluation at End of Jear@ 6ncrease

Muantit# "ost Fair (alue =Decrease>7inson !B444 s$ares H 244B444 H2,'B444 H ,'B444atts 24B444 s$ares +44B444 '!4B444 =1'4B444>

H1B444B444 H,3'B444 H '!B444

Jear-end Ad)ustment@

&ecurities Fair (alue Ad)ustment =Available-for-&ale>...................... '!B444nrealized /olding 0ain or ossEuit#......................... '!B444

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=P! 17-117Derivative financial instrument.

Nelle# "o. purc$ased a put option on Fl#nn common s$ares on Kul# *B 244*B for H144. T$e putoption is for 244 s$aresB and t$e stri;e price is H34. T$e option expires on Kanuar# 31B 244+. T$efollo5ing data are available 5it$ respect to t$e put option@

Date :ar;et 7rice of Fl#nn &$ares Time (alue of 7ut 8ption&eptember 34B 244* H32 per s$are H%3December 31B 244* H31 per s$are 21Kanuar# 31B 244+ H33 per s$are 4

Instuct#ons7repare t$e )ournal entries for Nelle# "o. for t$e follo5ing dates@

=a> Kul# *B 244*6nvestment in put option on Fl#nn s$ares.

=b> &eptember 34B 244*Nelle# prepares financial statements.

=c> December 31B 244*Nelle# prepares financial statements.

=d> Kanuar# 31B 244+7ut option expires.

=Solut#on 17-117Kul# *B 244*

=a> 7ut 8ption.................................................................................... 144"as$................................................................................. 144

&eptember 34B 244*=b> nrealized /olding 0ain or oss6ncome................................... !*

7ut 8ption =H144 S H%3>.................................................... !*

December 31B 244*=c> nrealized /olding 0ain or oss6ncome................................... 32

7ut 8ption =H%3 S H21>...................................................... 32

Kanuar# 31B 244+=d> oss on &ettlement of 7ut 8ption................................................. 21

7ut 8ption =H21 S H4>........................................................ 21

=P! 17-11


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6nvestments

=P! 17-11

Instuct#ons7repare t$e )ournal entries for Jates "o. for t$e follo5ing dates@

=a> Kanuar# *B 244*6nvestment in put option on Dixon s$ares.

=c> :arc$ 31B 244*Jates prepares financial statements.

=d> Kune 34B 244*Jates prepares financial statements.

=e> Kul# 'B 244*Jates settles t$e call option on t$e Dixon s$ares.

=Solut#on 17-11 7ut 8ption.................................................................................... 21%"as$................................................................................. 21%

:arc$ 31B 244*=b> 7ut 8ption.................................................................................... ,44

nrealized /olding 0ain or oss6ncome =H3 Q 344>...... ,44

nrealized /olding 0ain or oss6ncome................................... ,%7ut 8ption =H21% S H124>.................................................. ,%

Kune 34B 244*=c> nrealized /olding 0ain or oss6ncome................................... '44

7ut 8ption =H2 Q 344>....................................................... '44

nrealized /olding 0ain or oss6ncome................................... ''

7ut 8ption =H124 S H%!>.................................................... ''

Kul# 'B 244*=d> nrealized /olding 0ain or oss6ncome................................... 3+

7ut 8ption =H%! S H1'>...................................................... 3+

"as$ =344 Q H%>............................................................................ 1B%440ain on &ettlement of 7ut 8ption..................................... 1B1+!7ut 8ption9....................................................................... 31'

9(alue of 7ut 8ption settlement@

7ut 8ption21%,44 ,%

'44''

3+31'

17 - 7

Documents

Test Bank 12 Edition