CHAPTER 14
Investments in Debt and Equity Securities MULTIPLE CHOICE QUESTIONS Theory/Definitional Qe!tion!
1 2 3 ! # ( * + 1. 11 12 13 1 1! 1# 1( 1* 1+ 2. 21 22 23 2
Definition of available- for-sale securities Reporting of changes in fair air value of securities in the income statement Reporting of of changes in in fa fair va value of of securities on on the balance sh sheet Definition of of held-to-maturity securities "ccounting for available- for-sale securities "pplication of $"S% Statement &o' 11! "ccounting for investments in common stoc) using the cost method "ccounting for trading securities "ccounting for good,ill amortiation /sing th the fa fair ma mar)et value of of stoc) re received as as a basis fo for va valuation "ccounting fo for av available- for-sale se securities "pplication of of th the eq equity me method to to ac account fo for in investments in in co common stoc) "ccounting for good,ill amortiation "ccounting for trading securities "pplication of of th the eq equity me method to to ac account fo for in investments in in co common stoc) "pplication of of th the eq equity me method to to ac account fo for in investments in in co common stoc) "ccounting fo for av available- for-sale se securities /se of consolidated financial statements "ccounting for trading securities International vs vs' /' /'S' 0"" for in investments in in se securities Disclosures related to investments in securities /sing the cost method to account for an investment Effect of using cost method ,hen equity method ,as appropriate Reclassification of of availabl able-fo -for-sa -sale se securities to to tradin ding se securities
21
""
hapter 1
Investments in in Debt and Equity Securities
Co#$tational Qe!tion!
2! 2# 2( 2* 2+ 3. 31 32 33 3 3! 3# 3( 3* 3+ . 1 2 3
omputation of dividend revenue omputation of investment income on available-fo -for-sa -sale securities omputation of investment income on available-fo -for-sa -sale securities omputation of of ba balance in in in investment account on on tr trading se securities omputation of of carrying va value of of portfolio on on balance sh sheet omputation of of un unrealied lo loss re related to to se securities tr transactions Determine entry to record sale of a security omputation of of lo loss tr transfer of of se securities to to de determine ne net in income Record corresponding charges against unrealied losses omputation of carrying value of investment in common stoc) omputation of income on long-term investment omputation of investment in common stoc) affected by good,ill amortiation omputation of Share of &et Income of investment affected by good,ill amortiation Determination of of 4ournal en entry for te temporary investment omputation of investment loss on trading securities Determination of credit to 5ar)et "d4ustment--6rading Securities account omputation of unrealied loss on trading securities on income statement omputation of of lo loss on on se securities in investment on in income statement omputation o f re realied loss o n sh short-term in investment of o f ma mar)etable equity securities omputation of value of acquisition of bonds
PRO%LEMS 1 2 3 ! # (
repare 4ournal entries re relating to to investments in common stoc) Determine 4o 4ournal en entries fo for tr trading an and av available-for-sale se securities valuations repare 4ournal entries fo for in investment in common stoc) and computation of carrying value of investment using cost and equity methods omputation of of am amount reported fo for in investment using eq equity me method repare 4ournal entries and compute good,ill for common stoc) investment repare 4ournal entries ,ith supporting computations for long-term investments Reporting of of ca capital st stoc) in investments on on ba balance sh sheet an and in income statement
* + 1. 11 12 13 1 1! 1#
repare 4o 4ournal en entries fo for te temporary in investments us using as asset7revenue methods "cco "ccoun unti ting ng for for the the sale sale of secu securi riti ties es Recor cordin ding the tran ransfer of securit uritiies bet,een een cate ategor gories ies "ccounting for changes from the equity method "ccounting for changes to the equity method E8planation of 9gains trading: hang anges from the 9heldeld-tto-ma -maturit rity: classi ssificat cation ion hange to the equity method Impairment of a loan
MULTIPLE CHOICE QUESTIONS c <=2
1' ;hich ;hich secu securi riti ties es are are pur purch chas ased ed ,ith ,ith the the int inten entt of of sel selliling ng the them m in the the near future> a' 5ar)et 5ar)etable able equity equity securiti securities es b' "vaila "vailable-f ble-for-s or-sale ale securiti securities es c' 6radi rading ng sec secur urit itie ies s d' ?eld-to ?eld-to-mat -maturit urity y securit securities ies
c <=!
2' han hange ges s in fai fairr valu value e of sec secur urit itie ies s are are repo report rted ed in in the the inco income me stat statem emen entt for for ,hich type of securities> a' 5ar)et 5ar)etable able equity equity securiti securities es b' "vaila "vailable-f ble-for-s or-sale ale securiti securities es c' 6radi rading ng sec secur urit itie ies s d' ?eld-to ?eld-to-mat -maturit urity y securit securities ies
b <=!
3' han hange ges s in fair fair val value ue of of sec secur urit itie ies s are are repo report rted ed in in the the sto stoc) c)ho hold lder ers@ s@ equ equit ity y sect ection of the balan lance sh sheet for ,h ,hich ty type of secu ecurit rities> ies> a' 5ar)et 5ar)etable able equity equity securiti securities es b' "vaila "vailable-f ble-for-s or-sale ale securiti securities es c' 6radi rading ng sec secur urit itie ies s d' ?eld-to ?eld-to-mat -maturit urity y securit securities ies
d <=2
' ;hic ;hich h ca category gory includ cludes es only debt se securi urities ies> a' 5ar)etable equity securities b' "vaila "vailable-f ble-for-s or-sale ale securiti securities es c' 6radi rading ng sec secur urit itie ies s d' ?eld-to ?eld-to-mat -maturit urity y securit securities ies
c <=!
!' " debi debitt balan balance ce in in the the acco accoun untt 5ar) 5ar)et et "d4us d4usttment ment---" "vaila ailabl ble-f e-for or-S -Sal ale e Securities at at th the en end of of a year sh should be be in interpreted as as a' the net unrealied holding gain for that year'
23
"4
hapter 1
a <=2
b <=
b <=!
d <=
c <=3 <=3
Investments in in Debt and Equity Securities
b' the net realied holding gain for that year' c' the net unrealied holding gain to date' d' the net realied holding holding gain to date' date' #' $"S% Stat Statem emen entt &o' &o' 11 11! gene genera ralllly y appl applie ies s ,hen ,hen the the lev level el of of o,ne o,ners rshi hip p of another co company is at ,hat percentage> a'
b <=!
11' $or $or ,hich ,hich type type of inves investtment ments s ,oul ,ould d unrea unrealilie ed d incr increa ease ses s and decr decrea ease ses s be recorded directly in an o,ners@ equity account> a' Equity method securities b' "vaila "vailable-f ble-for-s or-sale ale securiti securities es c' 6rading securities d' ?eld-to ?eld-to-mat -maturit urity y securit securities ies
c <=2
12' 12' 6he equi equity ty met method hod of acc accoun ounti ting ng for for an inves investm tmen entt in the the com commo mon n sto stoc) c) of of another co company sh should be be us used ,h ,hen th the in invest estment a' is compose composed d of common common stoc) stoc) and it is the investo investors rs intent intent to vote the common stoc)' b' ensures ensures a source source of supply supply such such as ra, mat materia erials' ls' c' enables the investor investor to to e8ercise e8ercise significant significant influence over the the investee' investee' d' gives gives the invest investor or voting voting control control over over the investe investee' e'
c <=
13' 13' /nder /nder the the equit equity y meth method od of of acco account unting ing for for unco unconso nsolid lidate ated d inve invest stme ment nts s in common stoc)C go good,ill am amortiation a' decreases amortiation amortiation e8pense e8pense and reduces reduces the investment investment account' account' b' reduces investment investment income income and increases increases the the investment investment account' account' c' reduces investment investment income and reduces reduces the the investmen investmentt account' account' d' is not not reco record rded ed''
b
1' 1' If the the comb combin ined ed mar mar)e )ett valu value e of trad tradin ing g secur securit itie ies s at the the end end of the the yea yearr is less <=! than the the mar mar)et val value of th the sam same por portfolio of tra trading securities at the the beginning of the yearC the difference should be accounted for by a' reporting an unrealied unrealied loss in security investments investments in the stoc)holders@ stoc)holders@ equity section of the balance sheet' b' report reporting ing an unrea unreali lied ed loss loss in securi security ty invest investme ment nts s in the the inco income me statement' c' a footnote to the financial statements' d' a credit to Investment in 6rading 6rading Securities' a <= <=
1!' 1!' ;hen an inve invest stor or use uses s the the equit equity y met metho hod d to to acco accoun untt for for inv invest estme ment nts s in com common mon st stoc)C oc)C the the inv inves esttment ment acco accoun untt ,i ,ill be be inc incre reas ased ed ,hen hen the the inve invest stor or recognies a' a proporti proportionat onate e share of the the net incom income e of the invest investee' ee' b' a cash divi dividend dend receiv received ed from from the the investee investee'' c' periodic amortiation amortiation of the the good,ill good,ill related to the purchase' purchase'
2!
"&
hapter 1
Investments in in Debt and Equity Securities
d' deprecia depreciation tion related related to the the e8cess e8cess of mar)et mar)et value value over boo) boo) value of the the invest investee ees s depre deprecia ciable ble asset assets s at the the date date of purcha purchase se by the the investor' b <=
1#' 1#' ;hen an inve invest stor or use uses s the the equit equity y met metho hod d to to acco accoun untt for for inv invest estme ment nts s in common st stoc)C cas cash div dividen dends re received ived by by th the inv invest estor fro from th the inv investee should be recorded as a' an increa increase se in the the invest investmen mentt account account'' b' a deducti deduction on from from the invest investment ment account' account' c' divi divide dend nd reve revenu nue' e' d' a deduction deduction from from the the investors investors share share of the the investees investees profits'
a
1(' 1(' If the the comb combin ined ed mar) mar)et et val value ue of avai availa labl ble-f e-for or-s -sal ale e secur securit itie ies s at the end end of the <=! <=! year ear is is les less s tha than n the the mar mar)et )et val value ue of the the sa same por porttfoli folio o of avai availa labl blee-ffor-s or-sal ale e securities at the beginning of the yearC the difference should be accounted for by a' reporting an unrealied unrealied loss in security investments investments in the stoc)holders@ stoc)holders@ equity section of the balance sheet' b' report reporting ing an unrea unreali lied ed loss loss in securi security ty invest investme ment nts s in the the inco income me statement' c' a footnote to the financial statements' d' a credit to Investment in "vailable"vailable-for-Sale for-Sale Securities' c <=2
1*' onso nsolida lidatted financi ancial al statements are are typica picallly prepar epared ed ,hen one company has a' accounted accounted for its investm investment ent in another another company company by the equity equity method' method' b' signific significant ant influence influence over the operati operating ng and financial financial policies policies of another another company' c' the control controlling ling financia financiall interest interest in another another compan company y' d' a substantial substantial equity equity interest in the net assets of of another another company company''
d 1+' 1+' "t the the begi beginni nning ng of of the the year year a comp compan any y had had a debit debit balanc balance e in the the acco account unt <=! <=! 5ar)e ar)ett "d "d4ust 4ustme ment nt---6 6radin ading g Secu Securi riti ties es'' Duri During ng the the yea yearr the the com company pany did did not buy or sell any trading securitiesC securitiesC but at the end of the year the related mar)et ad4ustment account had a credit balance' 6his change indicates that a' a loss on the income statement ,as ,as recognied' b' a gain on the income statement ,as ,as recognied'
c' the value value of the inves investme tment nt accoun accountt increase increased' d' d' the value of the investment account decreased' b <=+
2.' 2.' 6he only only sig signif nifica icant nt dif diffe feren rence ce bet bet,e ,een en the the prov provisi isions ons of of inter internat natio ional nal accounting standards as promulgated by I"S 3+ and /'S' accounting standards under un der $"S% Statement &o' 11! 11! is a' I"S 3+ require requires s accountin accounting g for all investmen investments ts in debt securit securities ies to be on a fair value basis ,hile S$"S &o' 11! does not' b' I"S 3+ allo,s allo,s all unrealied unrealied gains and and losses on securities securities valued valued at fair fair value to be reported in net income for the period ,hile S$"S &o' 11! does not' c' I"S I"S 3+ requi requires res tradi trading ng securit securities ies to be repor reporte ted d on a fair fair value value basis basis but not securities available for sale' d' I"S 3+ does not permit permit the the reporting reporting of unrealied unrealied gains gains and losses losses on securities other than trading securities to be recorded as part of equity'
d <=* on
21' ;hic ;hich h of the foll ollo,ing is true rue> a' 6radin ading g sec secu uriti ities can can be be cla clas ssifi ified as cu curre rrent of non nonc curre rrent dep dependi nding managements intent' b' ?eld-to-maturit ?eld-to-maturity y securities securities should should not be be classified classified as current current under under any circumstance' c' 6radin ading g secu securi riti ties es shou should ld not not be clas classi sifi fied ed as curr curren entt unde underr any any circumstance' d' "vaila "vailable-f ble-for-s or-sale ale securitie securities s can be classifi classified ed as current current or noncurrent noncurrent depending on managements intent'
b
22' 22' =n "ug "ugus ustt 1C 2..1 2..1CC olo olori rite te orp' orp' acqu acquir ired ed 1.C.. 1.C... . of the the out outstan standi ding ng shares of %r %ro,n o,n o' o' =n Fan Fanu uary 2C 2. 2..2C .2C ol olor orit ite e ac acqui quired red an an ad addit ditional onal 2.C. .C... shares of %ro,n o'C ,hich brought the total o,nership to 3.C... shares' /sing the normal guidelines for percentages of o,nership and assuming that %ro,n o' had 1..C... shares outstanding during 2..1 and 2..2C olorite orp' should account for the investment in %ro,n o' by a' using the the cost method method in 2..1 2..1 and the the equity method method in 2..2' 2..2' b' using using the cost metho method d in 2..1C 2..1C retroactiv retroactively ely ad4ustin ad4usting g the investm investment ent account to the equity method at the beginning of 2..2C and using the equity method in 2..2' c' using using the equit equity y metho method d for 2..1 2..1 and and 2..2' 2..2' d' using using the cost metho method d in 2..1 and 2..2 for the 1.C... 1.C... shares shares acquired acquired in 2..1C and using the equity method in 2..2 for the 2.C... shares acquired in 2..2'
<=2
2(
"'
hapter 1
d <=
c <=( <=(
c <= <=
Investments in in Debt and Equity Securities
23' 23' ost oster er Inc Inc'' o,ns o,ns 3! 3! perc percen entt of Ell Ellio iott tt or orpo pora rati tion on'' Duri During ng the the cal calen enda dar r year 2..2 ..2C Ell Elliott ott had had net net ear earnings ings of of G3. G3..C.. .C... . and and pai paid divi divide dend nds s of G3# G3#CC... ...' oster mista)enly accounted for the investment in Elliott using the cost method rather than the equity method of accounting' ;hat effect ,ould this have on the investment account and net incomeC respectively> a' /nderstateC overstate b' =verstateC understate c' =verstateC overstate d' /nderstateC understate 2' 2' If an an inve invest stme ment nt in in stoc stoc) ) is recl reclass assif ified ied fro from m avai availab lable-fo le-for-s r-sale ale sec securi uritie ties s to tradi rading ng secu securi rittiesC iesC the the sto stoc) c) shou should ld be reco record rded ed on the dat date itit is is rec recla lass ssif ifie ied d at the a' mar)et mar)et value value at at the the date date of acqui acquisit sition' ion' b' boo) value at the the date of reclassification' c' mar)et value value at the date of reclassification' reclassification ' d' lo,er-of-cost-or-mar)et lo,er-of-cost- or-mar)et value at the date of reclassification' 2!' &orth rth,ic) ic) ompany acqu cquired ired 1.C 1.C... share ares of the common stoc) of Shaver orp orp'' in Fuly Fuly 2..2 2..2'' 6he foll follo, o,in ing g Fanu Fanuar ary yC Shav Shaver er anno announ unce ced d a G1.. G1..C. C... .. net income for 2..2 and declared a cash dividend of G'!. per share on its 1..C... shares shares of outstanding outstanding common common stoc)' stoc)' 6he &orth,ic) &orth,ic) ompany ompany dividend revenue from Shaver orp' in Fanuary 2..2 ,ould be a' G.' b' G2C!..' c' G!C...' d' G1.C...'
c <=
2#' 2#' =n Fan Fanuar uary y 2C 2C 2.. 2..1C 1C Rey Reynol nolds ds orp orpora orati tion on boug bought ht 1! perc percent ent of Scorp Scorpio io orpo rporat ration ons cap capital st stoc) oc) for for G#. G#.C... ... and and cla classif sified it as as avai availlabl able-for -for-sale securities' securities' Scorpios Scorpios net incomes for for the years ended December December 31C 2..1 and 2..2C ,ere ,ere G2.C... and and G1..C...C respectiv respectively' ely' During 2..2C Scorpio declared declared a dividend dividend of G1.C...' G1.C...' &o dividends dividends ,ere declared declared in 2..1' =n December 31C 2..2C the fair value of the Scorpio Scorpio stoc) o,ned by Reynolds had increased to G+.C...' ?o, much should Reynolds sho, on its 2..2 income statement as income from this investment> a' G3C1!. b' G1!C... c' G21C... d' G!1C...
a <= <=
2(' 2(' =n Fan Fanuar uary y 2C 2..2C 2..2C "dler dler o' o' acquir acquired ed 2C. 2C... .. sha shares res of %o8 %o8,o ,ort rth h o' o' com common mon sto stoc) c) for G*C. G*C... .. and and cla class ssif ifie ied d the these se shar shares es as avai availa labl blee-fo forr-sa salle securities' securities' During 2..2C 2..2C "dler "dler received received G#C... of cash dividends' "dlers "dlers share of %o8,orths %o8,orths 2..2 earnings Hnet income ,as G!C...' 6he fair value of %o8,orth@s stoc) stoc) on December 31C 2..2C ,as G( per share' "dler should report ,hat amount in 2..2 related to %o8,orth o'> a' Reve Revenu nue e of G#C. G#C... .. b' Reve Revenu nue e of G12 G12C. C... .. c' " G1C... G1C... decreas decrease e in the invest investmen mentt account account d' " G1C... G1C... increase increase in the the investm investment ent accou account nt
2+
b <=!
c <=!
2*' =n Fanua nuary 1C 2..2C Jo Joung o' paid aid G!. G!..C... ... for 2.C 2.C... shar hares of 5ontana o's com common sto stoc) and classified these shares as trading securities' Joung does does not have have the the abilit ability y to e8er e8ercis cise e signi signifi fican cantt influe influence nce over over 5ontan 5ontana' a' 5ontan 5ontana a declared declared and paid a dividend dividend of G'!. a share to its stoc)holders stoc)holders during 2..2' 5ontana 5ontana reported net income income of G2#.C... G2#.C... for the year ended December December 31C 2..2' 6he fair value of 5ontana 5ontana o'@s stoc) at Decembe Decemberr 31C 2..2C is G2( per share' share' ;hat is the net asset amoun amountt H,hich H,hich includes includes both both invest investment ments s and any related related mar)et mar)et ad4ust ad4ustmen ments ts attributable to the investment in 5ontana that ,ill be included on Joung@s balance sheet at December 31C 2..2> a' G!3.C... b' G!.C... c' G!#+C... d' G!(+C... 2+' 2+' 5art 5artin in o' o' purch purchas ased ed the the follo follo,i ,ing ng portf portfol olio io of tradi trading ng secur securit itie ies s duri during ng 2..2 and re reported th the fo follo,ing ba balances at at De December 31 31C 2. 2..2' &o sa sales occurred during 2..2' "ll declines are considered to be temporary' temporary' Security ost 5ar)et Kalue at 127317.2 L G *.C... G *2C... J 1.C... 132C... M 32C... 2*C... 6he carrying value of the portfolio at December 31C 2..2C on 5artin o's balance sheet ,ould be a' G222C. 2C...' ..' b' G2.C .C...' ...' c' G22C...' d' G2!2C !2C...' ...'
a <=!
3.' 3.' 5art 5artin in o' o' purch purchase ased d the foll follo, o,ing ing port portfo folio lio of of avai availab lable-f le-for or-sal -sale e securi securitie ties s duri uring 2.. 2..2 2 and and rep report orted the the fo follo llo,ing ing bal balance nces at De December 31C 31C 2. 2..2' &o sale sales s occu occurr rred ed duri during ng 2..2 2..2'' "ll decl declin ines es are are cons consid ider ered ed to be temporary' Security ost 5ar)et Kalue at 127317.2 L G *.C... G *2C... J 1.C... 132C... M 32C... 2*C...
5artin o' should report ,hat amount related to the securities transactions in its 2..2 income statement> a' G. b' G2C. G2C... .. unreal unrealie ied d loss loss c' G1.C G1.C... ... unreal unrealie ied d loss loss d' G12C G12C... ... unreal unrealie ied d loss loss a <=#
31' 31' 5arin 5arino o orpo orpora rati tion on purch purchase ased d the the follo follo,i ,ing ng portf portfoli olio o of trad trading ing secu securit ritie ies s duri uring 2.. 2..2 2 and and rep report orted the the fo follo llo,ing ing bal balance nces at De December 31C 31C 2. 2..2' &o sale sales s occu occurr rred ed duri during ng 2..2 2..2'' "ll decl declin ines es are are cons consid ider ered ed to be temporary' Security ost 5ar)et Kalue at 127317.2 L G *.C... G *2C... J 1.C... 132C... M 32C... 2*C... 6he only transaction in 2..3 ,as the sale of security M for G3C... on Dece Decemb mber er 31C 31C 2..3 2..3'' 6he 6he mar) mar)et et valu values es for for the the othe otherr secu securi riti ties es at Decembe Decemberr 31C 2..3 ,ere the same as at December December 31C 2..2' 2..2' 5arino@ 5arino@s s entry to record the sale of security M ,ould include a' a credit of G2C... G2C... to Realied Realied 0ain 0ain on Sale Sale of 6rading 6rading Securities' Securities' b' a debit of G2C... G2C... to Realied Realied 0ain 0ain on Sale Sale of 6rading 6rading Securities' Securities' c' a G2C... G2C... debit debit to 5ar)et "d4ust "d4ustmentment-6radi 6rading ng Securities' Securities' d' a GC... GC... debit to 5ar)et 5ar)et "d4ust "d4ustmentment-6radi 6rading ng Securities' Securities'
c <=(
32' 32' In 5ar 5arch ch of 2.. 2..1C 1C 5oo 5oon n orp orp'' boug bought ht !C !C.. ... . share shares s of 5c5a 5c5aho hon n orp orp' 's s listed stoc) for G!.C... and classified the shares as available- for-sale securities' 6he mar)et value of these shares had declined to G3..C... by December December 31C 2..1' 5oon changed changed the classification classification of these shares shares to trading securities securities in Fune of 2..2 ,hen the mar)et value of this investment in 5c5ah 5c5ahon@ on@s s stoc) stoc) had risen risen to G3!C. G3!C...' ..' ?o, ?o, much should should 5oon 5oon include as a loss on transfer of securities in its determination determination of net income for 2..2> a' G. b' G!C... c' G1.!C... d' G1!.C...
c <=! <=!
33' 33' ;als ;alshC hC Inc' Inc' bega began n busin busines ess s on Fanu Fanuar ary y 1C 2..2C 2..2C and and at Dece December mber 31C 31C 2..2C ;als ;alsh h had had the fol follo,i lo,ing ng inve invest stme ment nt port portffolio olios s of of equ equit ity y sec secur urit itiiesN esN 6rading "vailable-$or-Sale "ggregate cost G1!.C... G22!C... "ggregate mar)et value 12.C... 1*!C... &one of the declines declines is 4udged 4udged to be other other than temporary temporary'' /nreali /nrealied ed losses losses at Decemb December er 31C 2..2C should should be recorded recorded ,ith ,ith correspo correspondin nding g charges against Stoc)holders Income Equity a' G(.C. .C... G . b' G.C G.C.. ... . G3. G3.C. C... .. c' G3.C G3.C.. ... . G.C G.C.. ... . d' G . G(. G(.C... ...
c <=
3' 3' In Fan Fanuar uary y 2..2C 2..2C ?enry ?enry orpo orporat ration ion acq acquir uired ed 2. 2. perce percent nt of of the the out outst stand anding ing common st stoc) of of Dav Daviis o ompany pany for G1 G1C12.C 2.C...' ..' 6his his inv inves esttment ga gave ?enry ?enry the ability to e8ercise e8ercise signifi significant cant influenc influence e over Davis' 6he boo) value of the acquired shares ,as ,as G*.C...' G*.C...' 6he e8cess e8cess of cost over boo) val value ,as attr attrib ibut uted ed to an iden identtifia ifiabl ble e int intangi angibl ble e asse assett that that ,as undervalued on Davis balance sheet and that had a remaining useful life of ten years' years' $or the year year ended Decembe Decemberr 31C 2..2C Davis Davis reported reported net income of G2!2C... and paid cash dividends of G!#C... on its common stoc)' ;hat is the proper carrying value of ?enrys ?enrys investment investment in Davis Davis at December 31C 2..2> a' G1C.*.C*. .C*.. . b' G1C.+2C.. 2C... . c' G1C131C2. 1C2.. . d' G1C1*1C#. 1C#.. .
c <= <=
3!' 3!' =n Fan Fanuar uary y 1C 1C 2.. 2..2C 2C ap apit itech ech orpo orpora rati tion on acqu acquire ired d
a' G#C... b' G21C... c' G2#C(!. d' G2(C...
b <=
3#' 3#' =n Fan Fanuar uary y 1C 1C 2.. 2..2C 2C 5et 5ets s Inc Inc'' purc purchas hased ed 3. 3. perce percent nt of the the outs outsta tandi nding ng common st s toc) of ir irates orporation for G!1#C... cash' 5ets i s account accounting ing for this investmen investmentt using the equity method method'' =n the date of acquisitionC acquisitionC the fair value of irates@ irates@ net assets ,as G1C2.C...' G1C2.C...' 5ets has determined that the e8cess of the cost of the investment over its share of irates@ net assets is attributable to good,illC ,hich ,ill be amortied over the ma8im ma8imum um allo,a allo,able ble period' irates irates net income income for the year ended Decembe Decemberr 31C 2..2C 2..2C ,as G3#.C...' G3#.C...' During During 2..2C irates irates declared declared and paid cash dividends of G.C...' 6here ,ere no other transactions transactions bet,een the t,o t,o companies companies'' =n Decembe Decemberr 31C 2..2C the investmen investmentt in irate irates s should be recorded as a' G3+2C +2C..' ..' b' G#.*C .*C..' ..' c' G#12C...' d' G#2C 2C...' ...'
b <=
3(' 3(' =n Fan Fanuar uary y 1C 1C 2.. 2..2C 2C 5et 5ets s Inc Inc'' purc purchas hased ed 3. 3. perce percent nt of the the outs outsta tandi nding ng common st s toc) of ir irates orporation for G!1#C... cash' 5ets i s account accounting ing for this investmen investmentt using the equity method method'' =n the date of acquisitionC acquisitionC the fair value of irates@ irates@ net assets ,as G1C2.C...' G1C2.C...' 5ets has determined that the e8cess of the cost of the investment over its share of irates@ net assets is attributable to good,illC ,hich ,ill be amortied over the ma8imu ma8imum m allo,ab allo,able le period' irates irates@@ net income income for the year ended ended Decembe Decemberr 31C 2..2C 2..2C ,as G3#.C...' G3#.C...' During During 2..2C irates irates declared declared and paid cash dividends of G.C...' 6here ,ere no other transactions transactions bet,een the t,o companies' companies' Ignoring income ta8esC ta8esC 5ets 5ets statement statement of income income for the the year year ende ended d Dece Decemb mber er 31C 31C 2..2 2..2CC shou should ld incl includ ude e Inc Incom ome e $rom $rom Investment in irates orporation Stoc) in the amount of a' G#*C...' b' G1.C .C..' ..' c' G1.*C...' d' G11 G111C#..' #..'
b <=3 <=3
3*' 3*' =n "pril pril 1C 2..2 2..2CC Miba Miba Inc' Inc' purch purchase ased d as a tem tempo porar rary y inves investm tment ent G1..C G1..C... ...CC face ace am amount ountCC 1.A 1.A /'S' /'S' 6reasu easury ry note notesO sO they hey pay pay int interes erestt se semia miannua nnuall lly y on on Fanuary Fanuary 1 and and Fuly 1' 1' 6he note notes s ,ere ,ere purchas purchased ed at 1.2' 1.2' ;hich of the the follo,ing entries correctly records this purchase> a' 6radi 6rading ng Securit Securitie ies--1 s--1.A .A /'S' /'S' 6re 6reas asury ury &otes' &otes''' '''' ''''' '''''' ''' 1..C 1..C... ... Interes Interestt Receiv Receivable' able''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''' 2C!.. 2C!.. rem remiu ium m on 6radin rading g Secu Securit rities' ies''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' 2C.. 2C... . ash ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C!.. b' 6radi 6rading ng Securit Securitie ies--1 s--1.A .A /'S' /'S' 6re 6reas asury ury &otes' &otes''' '''' ''''' '''''' ''' 1.2C 1.2C... ... Interes Interestt Receiv Receivable' able''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''' 2C!.. 2C!.. ash ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C!.. c' 6radi 6rading ng Securi Securiti tieses--1. -1.A A /'S' /'S' 6rea 6reasur sury y &otes' &otes''' '''' ''''' '''''' ''' 1..C 1..C... ... Interes Interestt Receiv Receivable' able''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''' C!.. C!.. ash ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C!.. d' 6radi 6rading ng Securit Securitie ies--1 s--1.A .A /'S' /'S' 6re 6reas asury ury &otes' &otes''' '''' ''''' '''''' ''' 1.2C 1.2C... ... ash ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.2C...
b <=!
3+' 3+' Ed,a Ed,ards rds omp ompany any began began busin business ess in $ebru $ebruary ary of 2..1' 2..1' Durin During g the the year yearCC Ed,ards purchased the three trading securities listed belo,' =n its Decembe Decemberr 31C 2..1C 2..1C balance balance sheetC sheetC Ed,ards Ed,ards appropri appropriately ately reported reported a GC... credit balance in its 5ar)et "d4ustment--6rading Securities account' 6here ,as no change during 2..2 in the composition composition of Ed,ards Ed,ards portfolio portfolio of trading securities' ertinent data are as follo,sN 5ar)et Kalue Security ost December 31C 2..2 " G12.C... G12#C... % +.C... *.C... 1#.C... 1!(C... G3(.C... G3#3C... ;hat amount of loss on these securities should be included in Ed,ards income statement for the year ended December 31C 2..2> a' G. b' G3C... c' G(C... d' G11C...
d <=!
.' .' Ed,a Ed,ards rds omp ompany any began began busin business ess in $ebru $ebruary ary 2..1' 2..1' Durin During g the the year yearCC Ed,ards purchased the three trading securities listed belo,' =n its Decembe Decemberr 31C 2..1C 2..1C balance balance sheetC sheetC Ed,ards Ed,ards appropri appropriately ately reported reported a GC... debit balance in its 5ar)et "d4us "d4ustmen tment--6r t--6rading ading Securities Securities account' 6here ,as no change in 2..2 in the composition of Ed,ards portfolio of mar)etable mar)etable equity securities securities held as a temporary temporary investmen investment' t' ertinent ertinent data are as follo,sN 5ar)et Kalue Security ost December 31C 2..2 " G12.C... G12#C... % +.C... *.C... 1#.C... 1!(C... G3(.C... G3#3C... ;hat amount amount should should Ed,ards Ed,ards credit credit to the 5ar)et 5ar)et "d4ust "d4ustmen ment--6 t--6radi rading ng Securities account at December 31C 2..2> a' G. b' G3C... c' G(C... d' G11C...
b <=! <=!
1' 6yler om ompany beg began oper perati ations ons in 2..1 ..1' 6he company@ ny@s trad rading ing securities port portffolio olioCC ,hi ,hich ch did did not not chan change ge in co compos mposit itio ion n dur durin ing g 2.. 2..2C 2C is as foll follo, o,sN sN December 31C 2..2 /nrealied ost 5ar)et 0ain H
ost G 1..C... 2..C... 2!.C... G !!.C...
5ar)et G 13!C... 21.C... 1*.C... G !2!C...
/nrealied 0ain H
Ignoring income ta8esC ,hat amount should be reported as an unrealied loss on trading securities in 6ylers 2..2 income statement> a' G. b' G1!C... c' G2!C... d' G.C... b <=(
2' 2' =n "ugust ugust 31C 31C 2..2C 2..2C Stig Stiggin gins s omp ompany any purch purchase ased d the the follo follo,i ,ing ng avail availabl ableeforsale securitiesN 5ar)et Kalue Security ost December 31C 2..2 D G +#C... G *C... E 1!2C... 1!*C... $ 1#2C... 1#C... =n December 31C 2..2C Stiggins reclassified its investment in security $ from available-for-sa available-for-sale le securities securities to trading securities' securities' ;hat total amount amount of loss on these securities should be included in Stiggins income statement for the year ended December 31C 2..2> a' G. b' G1#C... c' G22C... d' G2*C...
d <=# <=#
3' 3' Durin During g 2..1C 2..1C %arne %arney y om ompa pany ny purcha purchase sed d mar) mar)et etabl able e equit equity y secur securit ities ies as as a shor shortt-tterm erm inv invest estment ment and and cla class ssif ifie ied d the them m as tradi rading ng secu securi riti ties es'' 6he cost cost and mar)et value at December 31C 2..1C ,ere as follo,sN 5ar)et Kalue Security ost December 31C 2..1 L 2.. shares G *C.. G 1.C2.. J 2C... shares !1C... !C+.. M C... shares +C!.. **C!.. G1!3C+.. G1C#.. %arney sold 1C... shares of ompany J stoc) on 5arch 1#C 2..2C for G2! per shareC incurring incurring G1C2.. in bro)erage commissio commissions ns and ta8es' =n the saleC %arney should report a realied loss of a' G.' b' G!..' c' G*!.' d' G1C(..'
b <=3
' =n =ctober 1C Den Dennis nis ompany any pur purcha chased G2. G2..C... face ace value alue 12A 12A bonds for +* plu plus acc accrued int interest and and bro bro)erage fee fees and and cla classified them as held-to-maturity held-to-maturity securities' securities' Interest Interest is paid semiannually on Fanuary 1 and Fuly 1' %ro)erag %ro)erage e fees for for this transac transaction tion ,ere ,ere G(..' G(..' "t ,hat ,hat amount amount should this acquisition of bonds be recorded> a' G1+#C... b' G1+#C(.. c' G2.2C... d' G2.2C(..
PRO%LEMS Problem 1
In 2..2C PM$ Inc' purchased stoc) as follo,sN Ha "cquired "cquired 2C... 2C... shares of 0allery 0allery "rts "rts orp' orp' common common stoc) stoc) Hpar value G2. in e8change e8change for 1C2.. shares shares of PM$ Inc' preferred preferred stoc) Hpar Hpar value G3.' 6he preferred stoc) had a mar)et value of G(! per share on the date of the e8change' Hb urchase urchased d *.. shares shares of hampion hampion orp' orp' common common stoc) stoc) Hpar value G1. at G(. per shareC plus a bro)erage fee of G*..' "t December 31C 2..2C the mar)et values of the securities ,ere as follo,sN Security PM$ Inc' 0allery "rts orp' hampion orp'
5ar)et Kalue Kalue G(1 1 (2
6he investments in common stoc) are classified by PM$ Inc' as available-for-sale securit securities ies accounte accounted d for by the cost method method'' 6he fiscal fiscal year of PM$ ends on December 31' H1 repare all entries entries relating relating to the investm investments ents in comm common on stoc) stoc) for 2..2' 2..2' H2 repare the the entry to record record the sale of 2.. shares of hampion hampion orp' comm common on stoc) on Fanuary 1!C 2..3C at G( per share' H3 repare repare the entry to reclassif reclassify y the remaining remaining #.. shares shares of hampi hampion on orp' comm common on stoc stoc) ) from from avail availabl able-f e-foror-sa sale le securi securitie ties s to tradi trading ng secur securiti ities es on Fanuary 31C 2..3' 6he stoc) ,as selling at G#( per share on that date'
Solution 1
<=3C <=!C <=# H1 "vail "vailable able-for-S -for-Sale ale Securiti Securities--0 es--0alle allery ry orp' Stoc) H1C2.. 8 G(!'''''''' '''''''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' ''''''' ''' referred Stoc) H1C2.. 8 G3.'''''''''''''''''''''''''''''''''''''' aid-In apital in E8cess of ar H1C2.. 8 G!''''''''''''
+.C...
"vailable-for-Sale Securities--hampion Securities--h ampion orp' Stoc) QH*.. 8 G(. G*..'''''' ''''''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' ash ash '''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' ''
!#C*.. !#C*..
Security 0allery orp' ham hampi pion on orp orp''
ost G +.C... !#C* !#C*.. .. G1#C*..
5ar)et Kalue G *2C... !(C# !(C#.. .. G13+C#..
3#C... !C...
!#C* !#C*.. ..
Increase7 Decrease GH*C... H2C... 8 G1 *.. *.. H*.. 8 G(2 GH(C2..
/nrealied Increase7Decrease in Kalue of "vailable-forSale Sale Securiti Securities'' es'''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' '' 5ar)et "d4ustmentB"vailable-for-Sale Securities ' '' ''
(C2.. (C2..
H2 ash H2.. 8 G('''''''' '''''''''''' '''''''' '''''''' '''''''' ''''''' ''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' ''''''' ''' 1C*.. Realied 0ain on Sale of 6rading Securities QHG(-G(1 8 2..'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' "vailable-for-Sale Securities--hampion Securities--h ampion orp' Stoc) H3 Investment Investment in 6rading 6rading Securities--hamp Securities--hampion ion orp' orp' Stoc) Stoc) H#.. 8 G#('''''''' '''''''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' ''''''''' '''''''''' ''''''''''' ''''''''''' ''''' .C2.. /nrealied Increase7Decrease in Kalue of "vailable-forSale Sale Securi Securiti ties-es--Eq Equit uity'' y'''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' #.. #.. /nre /nreal ali ied ed
(C2..
#.. 1C2..
#.. 2C#..
Problem 2
;ebster Inc' carries the follo,ing mar)etable equity securities on its boo)s at Decemb December er 31C 2..1 and 2..2' 2..2' "ll "ll securiti securities es ,ere purchased purchased during 2..1 and there ,ere no beginning balances in any mar)et ad4ustment accounts' 6rading SecuritiesN ost ost K ompany G !.C... ; ompany 2#C... L ompany (.C... 6otal G1#C...
5ar)et Dece Decemb mbe er 31C 31C 2..1 2..1 G 2#C... .C... #.C... G12#C...
5ar)et Dece Decemb mber er 31C 31C 2..2 2..2 G .C... .C... !.C... G13.C...
G3#.C... 12.C... G*.C...
G1..C... 1.C... G2.C...
"vailable-for-Sale SecuritiesN Secur itiesN J ompany G2.C... M ompany 1. 1..C... 6otal G!2.C...
6he cost method is used in accounting for all investments in securities' H1 H1 0ive 0ive the the entr entrie ies s nece necess ssar ary y to reco record rd the the valu valuat atio ions ns for for both both trad tradin ing g and and available-for-sale securities at December 31C 2..1 and 2..2' H2 ;hat net effect effect ,ould these these valuations valuations have on on 2..1 and 2..2 2..2 net income> income> Solution 2
<=! H1 2..1 Dec' 31
/nreali /nrealied ed
2..2 Dec' 31 Dec' 31
5ar)et "d4ust "d4ustment--6 ment--6rading rading Securities'''' Securities'''''''' ''''''''' ''''''''' '''' /nre /nreal ali ied ed 0ain 0ain on 6radin ading g Secur ecuriities' ties''' '''' '''' '''' '''' ''
C... C.. C... .
/nreali /nrealied ed Incre Increase7 ase7Dec Decreas rease e in Kalue alue of "vailable"vailable-for-Sale for-Sale Securities'''''''''''''''''''' Securities'''''''''''''''''''''''''''''''2.C... '''''''''''2.C... 5ar)et "d4ustmentB"vailable-for "d4ustmentB"vailable-for-Sale -Sale Secur Securiti ities' es''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' 2.C. 2.C... ..
H2 Effe Effect ct of valuat valuation ion entries entries on 2..1 2..1 net incom incomeN eN Reco Recogn gni ied ed decl declin ine e in valu value e of trad tradin ing g secu securi riti ties'' es'''' ''''' ''''' Effect of valuation entries on 2..2 net incomeN Reco Recogn gni ied ed incr increa ease se in valu value e of trad tradin ing g secu securi riti ties'' es'''' '''' ''
GH2. GH2.C. C... .. GC. GC... ..
Problem 3
=n Fanuary 1C 2..2C "lsop orp' acquired 3. percent H13C... shares of Stone Services Services Inc' common stoc) stoc) for G1C3..C... G1C3..C... as a long-term investment' investment' Data from Stones 2..2 financial statements include the follo,ingN &et income'''' income'''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' ''''''
G33.C... 1#.C... 1#.C... G1(.C... G1(.C...
6he mar)et value of Stone Services Inc' common stoc) on December 31C 2..2C ,as ,as G+* per share' share' "lsop "lsop does not have any other other noncurre noncurrent nt investme investments nts in securities' repare the necessary 4ournal entries for "lsops investment in Stone Services Inc' common stoc) under H1 the cost cost method method classified classified as available-for-sale available-for-sale securities' securities' H2 the the equi equity ty meth method od''
Solution 3
<=C <=! H1 Investment Investment in "vailable-for-S "vailable-for-Sale ale Securities--S Securities--Stone tone Services Stoc)''''''''''''''''' Stoc)'''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''''1C3..C... ''''''''''''''''''''''''''''''1C3..C... ash ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ash HG1#.C... 8 3.A ''''' '''''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' Dividend Revenue''''''''''''''''''''''''''''''''''''''''''''''''''' /nrealied Increase7Decrease in Kalue of "vailablefor-Sale Securities--Equity H13C... shares 8 G2'''' '''''' '''''' ''''''' '''''' '''' '''' '' 5ar)et "d4ustment--"vailable-for-Sale Securities ' ' '
*C... *C... *C... 2#C 2#C... ... 2#C...
H2 Investment Investment in Stone Services Inc''''''' Inc'''''''''''' ''''''''''' '''''''''''' ''''''''''' ''''''''''' '''''''1C3..C... '1C3..C... ash ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ash'''''' ash'''''''''' '''''''' '''''''' ''''''' ''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''''' ''''''''''' '''''''''' ''''' Investment in Stone Services Inc' Stoc)''''''''''''''''' Investment in Stone Services Inc' Stoc) '''''''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' ''''''''' ''''''''''' '''''''''' '''' HG33.C... 8 3.A'''''''' Income from Investment in Stone Services Inc' Stoc)'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
1C3.. 3..C... ...
1C3.. 3..C... ...
*C... *C... ++C... ++C...
Problem 4
=n Fanuary 1C 2..2C 0ardner "ssociate "ssociates s purchased 3. percent of the outstanding share shares s of stoc) stoc) of 0illen 0illen orp' orp' for G1!.C G1!.C.. ... . cash' cash' 6he 6he invest investme ment nt ,ill be accounted accounted for by the equity method' method' =n that dateC 0illens 0illens net assets assets Hboo) and fair value ,ere G3..C...' G3..C...' 0ardner has determined determined that that the e8cess e8cess of the cost of its its invest investme ment nt in 0ille 0illen n over over its its share share of 0illen 0illens s net asset assets s is attr attribu ibuta table ble to good,illC ,hich ,ill be amortied over the ma8imum allo,able period' 0illens 0illens net income for the year ended December December 31C 2..2C ,as G#.C...' G#.C...' During 2..2C 0ardner 0ardner received G!C... G!C... cash dividends from from 0illen' 0illen' 6here ,ere ,ere no other transactions bet,een the t,o companies' ompute ompute the amount amount that ,ould be reported on 0ardner "ssociat "ssociates es boo)s for the investment in 0illen orp' at December 31C 2..2'
Solution 4
<= Investment in 0illen orp' stoc)N =riginal investment''''''''''''''''' investment'''''''''''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''''''''''''''''G1!.C... ''''''''''''''''''''''''''''''''G1!.C... Share of net income--3.A of G#.C...''''''''''''''''''''''''''''''''''''' G#.C...''''''''''''''''''''''''''''''''''''' 1*C... "mortiation of implied good,illT'''''''' good,illT ''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''' ''''''''''''''''''' H1C!.. Dividends received'''''''''''''''''''''''' received''''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''' ''''''' H!C... 6otal'''''''''''''' otal'''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''''''''''''''''''G1#1C!.. '''''''''''''''''''''''''''''''''''G1#1C!.. T Impl Implied ied valu value e of 0ill 0illen en orp' orp'NN Implied valueN G1!.C...7'3. U G!..C... Implied good,illN G!..C... - G3..C... U G2..C... 0ardner@s share of good,illN G2..C... 8 '3 U G#.C... "mortiation of implied good,illN G#.C...7.-year G#.C...7. -year life U G1C!.. Problem 5
=n Fuly 1C 2..2C 5ountain Systems acquired *C... shares of recision Services .C... outstanding common shares at a cost of G2.C...' 6he boo) value and fair mar)et mar)et value of recision@s net assets on that date ,as G**.C...' G**.C...' 6he follo,ing follo,ing data pertain to recision Services for 2..2' &et income reported in 2..2N Fanuary 1 - Fune 3.'''''''''''''''''' 3.''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' G2*C... Fuly 1 - December 31'''''''''''''''' 31''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''' 3#C... 6otal'''''''''''''' otal'''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''''' G#C... ash dividends declared and paidN Fanuary 1 - Fune 3.'''''''''''''''''' 3.''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''' G3.C... Fuly 1 - December 31'''''''''''''''' 31''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''''' '''''''''''''''''''' 3.C... 6otal'''''''''''''' otal'''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''''' G#.C... H1 H2 H3 H
repa repare re the the entry entry to to record record the the origi original nal inve invest stme ment nt on on Fuly Fuly 1' omp omput ute e the the good, good,ill ill Hif any any on the the purc purchas hase' e' repa repare re the neces necessa sary ry entrie entries s Hother Hother than than acquis acquisiti ition on for for 2..2 on 5oun 5ounta tain in Systems boo)s using the cost method' repa repare re the neces necessa sary ry entrie entries s Hother Hother than than acquis acquisiti ition on for for 2..2 on 5oun 5ounta tain in Systems boo)s using the equity method'
Solution 5
<=C <=! H1 Invest Investme ment nt in re recis cision ion Serv Service ices s Stoc Stoc)'' )'''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
2.C. 2.C... .. 2.C...
H2 0ood, 0ood,ililll comput computat ation ionNN urchase price'' e'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G2.C... $air mar)et mar)et value of net assets'''''' assets'''''''''' ''''''' ''''''' '''''''' '''''''' '''''''' '''' G**.C... G**.C... *C...7.C... shares''''''''''''''''''''''''''''''''''''''''''''' shares''''''''''''''''''''''''''''''''''''''''''''' 8 2.A $air mar)et value of 5ountains share of net assets ' ' ' ' 1(#C... 0ood,ill'' l''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G #C... H3 H3 ost ost meth method odNN ash HG3.C... 8 2.A'''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' #C.. #C... . Dividend Revenue''''''''''''''''''''''''''''''''''''''''''''''''' ash dividends received HFuly 1 - December 31' H H Equi Equity ty meth method odNN ash'' ash''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''' '' #C... #C... Investment in recision Services Stoc) '''''''''''''''' ash dividends received HFuly 1 - December 31' Investment in recision Services Stoc) HG3#C... 8 2.A ' ' (C2.. Income from Investment in recision Stoc)'''''''''' 2.A share of investee earnings HFuly 1 - December 31' Income from Investment in recision Stoc) HG#C...7. yrs' 8 V yr' ''''' '''''' '''''' ''''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''''' '''''' '''' '''' '''' '''' '''' '''' '''' Investment in recision Services Stoc) '''''''''''''''' "mortiation of good,ill for # months'
#C...
#C...
(C2..
*.. *.. *..
Problem 6
Foseph o' e8ecuted the follo,ing long-term investment transactions during the current year' $eb' eb' #
urcha chased 1C. 1C... sha shares res of
5ar 5ar' 31
urch urchas ased ed #.C... #.C... of the the 2..C... 2..C... outs outsta tandi nding ng commo common n share shares s of &e, 6ech orp' for G#..C...' G#..C...' 0ood,i 0ood,illll of G1#.C... G1#.C... ,as included included in the purchase price'
Fune Fune 2.
Receive Received d a G2'2 G2'2. . per per share share divid dividend end on on
Fune Fune 3.
&e, 6ech orp' orp' repor reported ted second second quart quarter er earnings earnings Htot Htotal al of G.C...' G.C...'
Sept' Sept'
"cquire "cquired d C... C... shares shares of of 5ega 5ega onglom onglomerat erates es stoc) stoc) for G3. per share share plus G#.. transaction transaction costs' 6hese shares shares ,ere classified classified as availablefor-sale securities'
Dec' Dec' 31
5ar)e 5ar)ett values values of
repare repare 4ournal 4ournal entries entries ,ith ,ith appropri appropriate ate supporti supporting ng comput computati ations ons for the years years transactions' Solution 6
<=C <=! $eb' $eb' # Inve Invest stme ment nt in 6radi rading ng Secu Securi riti ties es--
Fune Fune 3.
Sept Sept''
.C22! .C22! .C22!
Inve Invest stme ment nt in &e, &e, 6ech orp' orp' Stoc) Stoc)'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' #..C. #..C... .. ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ash H1C... 8 G2'2.'''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' Dividend Revenue'''''''''''''''''''''''''''''''''''''''''''
2C2.. 2C2..
Inve Invest stme ment nt in &e, &e, 6ech orp orp'' Sto Stoc) c)'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' Income from Investment in &e, 6ech orp' Stoc)'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 6o record share of &e, 6ech orp' earnings HG.C... 8 3.A o,nership'
12C. 12C... ..
Inco ncome from rom Inv Invest estment ment in &e, &e, 6ech orp orp'' Stoc Stoc) ) Investment in &e, 6ech' orp' Stoc)'''''''''''''' 6o record amortiation of good,ill for three months HG1#.C...7. years 8 3712'
1C.. 1C... .
#..C... 2C2..
12C...
Inve Invest stme ment nt in "vail vailabl able-f e-foror-Sa Sale le Sec Securi uritie ties--5 s--5eg ega a onglomerate Stoc) QHC... 8 G3. G#..'''' '''''' '''' '''' '''' '''' '''' '' 12.C 12.C#. #.. . ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
1C...
12.C#..
Dec' Dec' 31
5ar)e ar)ett "d4us d4usttmentB entB6 6radi ading Secu Securi riti ties es'' '''' '''' '''' '''' '''' '''' '''' '''' C(( C((! ! /nrealied 0ain on 6rading Securities ''''''''''' /nrealied Increase7Decrease in Kalue of "vailable-for-Sale Securities'''''''''''''''''''''''''''''''' Secur ities'''''''''''''''''''''''''''''''' *C#.. 5ar)et "d4ustment--"vailable-for-Sale Securities
ost
C((! *C#.. 5ar)et G !C... !C... 112C... 2C...
Problem 7
=n Fuly 1C 2..2C 6he ;ood,ard 0roup purchased for cash 3! percent of the outstan outstanding ding capital capital stoc) stoc) of 5assey 5assey Studios' Studios' %oth %oth 6he ;ood,ard ;ood,ard 0roup and 5assey Studios Studios have a December 31 year-end' 5assey StudiosC StudiosC ,hose ,hose common common stoc) is actively traded in the over-the-counter mar)etC reported its total net income for the year to 6he ;ood,ard 0roup and also paid cash dividends on &ovember 1!C 2..2C to 6he ;ood,ard 0roup and its other stoc)holders' ?o, should 6he ;ood,ard 0roup report the above facts in its December 31C 2..2C balance balance sheet and its income stateme statement nt for the year then ended> Discuss the rationale for your ans,er' Solution 7
<= 6he 6he ;ood ;ood,a ,ard rd 0roup 0roup should should foll follo, o, the the equit equity y meth method od of acco account unting ing for for its its inves investm tmen entt in 5ass 5assey ey Studi Studios os becau because se 6he 6he ;ood, ;ood,ard ard 0roup 0roup is presu presume medC dC because of the sie of its investmentC to be able to e8ercise significant influence over the operating and financial policies of 5assey Studios' In 2..2C 2..2C 6he ;ood, ;ood,ar ard d 0roup 0roup should should report report its its intere interest st in 5asse 5assey y Stud Studios ios outstanding outstanding capital stoc) as a long-term investment' investment' $ollo,ing $ollo,ing the equity method of accou account nting ingCC 6he 6he ;ood, ;ood,ar ard d 0rou 0roup p shoul should d record record the the cash cash purch purchase ase of 3! percent of 5assey Studios at costC ,hich is the amount paid' 6hirt 6hirty-f y-fiv ive e percen percentt of 5asse 5assey y Stud Studios ios total total net incom income e from from Fuly Fuly 1C 2..2C 2..2C to December 31C 2..2C should be added to the carrying amount of the investment in 6he 6he ;ood, ;ood,ard ard 0roup 0roups s balanc balance e sheet sheet and and sho, sho,n n as reven revenue ue in its its inco income me statement to recognie 6he ;ood,ard 0roups share of the net income of 5assey Studios Studios after after the date of acquisi acquisition tion'' 6his 6his amount amount should should reflect reflect ad4ustm ad4ustment ents s similar similar to those made in preparing consolidated statementsC statementsC including ad4ustments ad4ustments to eliminate intercompany gains and lossesC and to amortieC if appropriateC any difference bet,een 6he ;ood,ard 0roups cost and the underlying equity in net assets of 5assey Studios on Fuly 1C 2..2'
6he 6he cash cash divid dividend ends s paid paid by 5ass 5assey ey Studi Studios os to 6he 6he ;ood, ;ood,ard ard 0roup 0roup shoul should d reduce the carrying amount of the investment in 6he ;ood,ard 0roups balance sheet and have no effect on 6he ;ood,ard 0roups income statement' Problem 8
=n $ebr $ebrua uary ry 1C 2..2 2..2CC yle yle Inc' Inc' had had e8ce e8cess ss cash cash on hand hand'' 6he 6he cont contro rollller er suggested to management that the company buy G2..C... of /'S' 6reasury bonds selling at 1.2 and paying * percent interest' Interest payments on these bonds are made semiannually on Fanuary 1 and Fuly 1' H1 repare repare entries entries to record record the $ebruary purchas purchase e of /'S' /'S' 6reasu 6reasury ry bonds and the subsequent collection of interest on Fuly 1C using Ha Ha the the ass asset et appr approa oach ch'' Hb Hb the the rev reven enue ue app appro roac ach' h' H2 H2 "ssu "ssumi ming ng that that thes these e bond bonds s ,ere ere acqu acquir ired ed as an inve invest stme ment nt in trad tradin ing g securitiesC e8plain ,hether the premium or discount should be amortied' Solution 8
<=2C <= H1 Ha Invest Investme ment nt--6 --6ra radin ding g Securi Securiti ties' es''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' 2.C. 2.C... .. Interest Receivable H2..C... 8 *A 8 1712''''''''''''''''''''' 1C333 ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ash ash '''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' Interest Receivable '''''''''''''''''''''''''''''''''''''''''''' Interest Revenue''''''''''''''''''''''''''''''''''''''''''''''''
*C... *C... 1C333 #C##(
Hb Invest Investment ment--6 --6rad rading ing Securit Securities'' ies''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''' 2.C... 2.C... Interest Interest Revenu Revenue''' e'''''' ''''' ''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' '''''' ''' 1C333 1C333 ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ash ash '''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '' Interest Revenue''''''''''''''''''''''''''''''''''''''''''''''''
2.!C333
2.!C333
*C... *C... *C...
H2 eriod eriodic ic amor amorti tiat ation ion of the the premi premium um or disc discoun ountt is used used ,hen ,hen bonds bonds are acquired at a higher or lo,er price than their maturity value and it is e8pected that they ,ill be held until maturity maturity'' ?o,ever ?o,everCC ,hen bonds bonds are acquired as a temp tempor orary ary invest investme ment nt and and it is not li)ely li)ely that that the the bonds bonds ,ill ,ill be held held until until maturityC such procedures are normally not applied' Problem 9
6he follo,ing transactions of the Snyder ompany ,ere completed during the fiscal year 4ust endedN
Ha Ha
urc urcha hase sed d G1.. G1..C. C... .. of /'S' /'S' 6rea 6reasu sury ry (A bonds bondsCC payi paying ng 1.2' 1.2'! ! plus plus accrued interest of G1C(!.' In additionC the company paid bro)erage fees of G!..' Snyder ompany uses the revenue approach to record accrued interest' Snyder classified these bonds as a trading security'
Hb urch urchase ased d 1C... 1C... share shares s of $erris $erris ompa ompany ny commo common n stoc) stoc) at G12! per share plus bro)erage bro)erage fees of G+!.' G+!.' Snyder classifies classifies this stoc) stoc) as and available-for-sale security' Hc
Received Received semi semiannu annual al interes interestt on the the /'S' /'S' 6rea 6reasury sury %onds %onds''
Hd Sold Sold 1!. 1!. share shares s of $erri $erris s at G132 G132 per per share share'' He Sold Sold G1#C G1#C... ... of /'S' /'S' 6rea 6reasur sury y (A bonds bonds at 1.2 plus plus accrue accrued d inter interes estt of G+3' Hf
urch urchase ased d a G12C. G12C... ..CC #-mon #-month th cert certifi ificat cate e of depos deposit it'' 6he 6he certi certifi ficat cate e is classified as a trading security'
repare the entries necessary to record the above transactions' Solution 9
<=# Ha Investment Investment in 6rading 6rading Securities--6 Securities--6reasury reasury %onds''''' %onds'''''''''''' '''''''''''1.3C... ''''1.3C... Interest Revenue''''''''''''''''''''' Revenue''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''''''''''' '''' 1C(!. ash ash'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' 1.C 1.C(! (!. . 1'.2! 8 1..C... U G1.2C!..O G1.2C!.. !.. bro)erage fee U G1.3C... Hb Investment Investment in "vailable-for-Sa "vailable-for-Sale le Securities''''' Securities''''''''' '''''''' '''''''' '''''''' '''''''''' '''''''12!C+!. '12!C+!. ash ash'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' 12!C 12!C+! +!. . Hc ash''''''''''''''''' ash'''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' 3C!.. Inte Intere rest st Reve Revenu nue' e''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' Hd ash''''''''''''''''' ash'''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''' '''''''''''''''''''''''''''1+C*.. ''''''''''''''''''1+C*.. Inves nvesttment ment in "vaila ailabl ble e-fo -for-S r-Sale ale Secu ecurit rities' es''''''''''''''''''''' 0ain 0ain on Sale' ale''''''' '''''' ''''''' '''''' '''''' '''''' '''''' '''''' '''''' ''''''' '''''' '''''' ''''''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' G132 8 1!. shares U G1+C*..O 1!.71C... 8 G12!C+!. U G1*C*+3O G1+C*.. - G1*C*+3 U G+.(' He ash''''''''''''''''' ash'''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''' ''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' 1#C13 Realied
3C!. 3C!.. . 1*C 1*C*+3 +.( +.(
1#C*. +3
G1#C...7G1..C... 8 1.3C... U G1#C*.' Hf Investment Investment in 6rading 6rading Securities--ertif Securities--ertificate icate of Deposit'''''''' Deposit'''''''' 12C... ash ash'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' ''''
12C. 12C... ..
Problem 10
Cla!!ifi+ation
Co!t
(ear)En* (ear)En* Mar,et -ale
" %
6rading 6rading
G1*C... G2!C...
G23C... G2(C...
H1 rovide the entry necessary to to ad4ust the portfolio of securities to mar)et value' H2 "fter ad4usting the securities to mar)etC
<=( H1 H2 H2
5ar) ar)et "d4 "d4ustm stment--6 --6radi ading Securi curitties' es'''''''''''''''''''''''''''' /nrealied 0ain on 6rading Securities'' s'''''''''''''''''''
(C...
Inve Invest stme ment nt in "vaila ailabl ble-f e-for or Sale Sale Secu Securi riti ties es--S --Sec ecur urit ity y %' ' /nrealied
2#C! 2#C!.. .. !..
(C...
2C... 2!C...
Entry reclassifies reclassifies security as available-for-sale available-for-sale at current fair value of G2#C!.. and removes historical cost of trading security of G2!C...' /nrealied loss represents the difference bet,een fair value at the beginning of the period and fair value on date of transfer'
Problem 11
=n Fanuary 1C 2..1C a8man ompany purchased !.A of 5onroe ompany for cash of G##.C...' G##.C...' =n that date date the net assets of 5onroe 5onroe ompany ompany had had a boo) value of G1C2..C...' G1C2..C...' 6he difference difference bet,een bet,een fair value and boo) value is attributed to good,ill good,ill and and is amorti amortied ed over over 2. years' years' =n Fanuary Fanuary 1C 2..2C 2..2C a8m a8man an sold sold (.A of its o,nership in 5onroe for G!2!C... and reclassified the remaining stoc) as availablefor-sale' &et income and dividends for 2..1 and 2..2 for 5onroe 5onroe are given belo,N 2..1 2..2 &et income '''''''' ''''''''''' ''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''''' '''''''''''' ''''''''''' ''''''''''' '''''''''''' '''''''' '' G*.C... G+.C... Dividends'''''''''''''''''''''''' Dividends''''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''' 1*C... 2!C... repa repare re the the requir required ed 4our 4ournal nal entrie entries s made made by a8m a8man an omp ompany any relat relating ing to its its investment in 5onroe for the years 2..1 and 2..2 assuming no change in mar)et value during the 2-year period' Solution 11
<=1. 2..1 Investment in 5onroe ompany'''''''''''''''''''''''''''''' ompany'''''''''''''''''''''''''''''''''''''' '''''''' ##.C... ## .C... ash ash'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' ##.C ##.C.. ... . Investment in 5onroe ompany'''''''''''''''' ompany'''''''''''''''''''''''''''''''''''''' '''''''''''''''''''''' .C... Income from Investment in 5onroe Stoc)''''''''''''''' HG*.C... 8 !.A U .C...
.C...
ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' +C... Investment in 5onroe ompany'''''''''''''''''''''''''''''' HG1*C... 8 !.A U +C...
+C...
Income from Investment in 5onroe Stoc)''''''''''''''''''''''' Investment in 5onroe ompany'''''''''''''''''''''''''''''' QG##.C... - HG1C2..C... 8 !.A U G#.C... HG#.C... ÷ 2. U G3C...
3C... 3C...
2..2 ash''''''''''''''''''' ash''''''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' !2!C... Inves nvesttment ment in 5onroe roe ompany any'''''''''''''''''''''''''''''' 0ain ain on Sale of 5onr onroe Stoc)' c)'''''''''''''''''''''''''''''''''
*1 *1C#.. #.. 3C 3C..
%oo) %oo) valu value e at end end of 2..1 2..1 U G##. G##.C. C... .. G.C G.C.. ... . - G+C. G+C... .. - G3C. G3C... .. U G#**C...' G#**C... 8 (.A U G*1C#..' G!2!C... - G*1C#.. U G3C..' ash''''''''''''''''''' ash''''''''''''''''''''''''''' ''''''''''''''''' '''''''''''''''''' '''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''''''''' '''''''''''''''''' 3C(!. Divid ividen end d Revenue enue''''''''''''''''''''''''''''''''''''''''''''''''''''
3C( 3C(!.
Problem 12
ar) ompany purchased 1*A of the outstanding common stoc) of Ray ompany on Fanuary 1C 2..1C ,hen the net assets of Ray ompany had a boo) value and fair value of G..C...' G..C...' ar) ompany ompany paid G(2C... G(2C... for this investment' investment' =n Fanuary Fanuary 1C 2..2C 2..2C ar) purchased an additional 1.A of the outstanding stoc) of Ray ompanyC paying another another G1C...' G1C...' H"ssum H"ssume e the boo) and fair values of the net assets assets is G1.C... G1.C...' ' Ray ompany reported income and dividends for 2..1 and 2..2 are given belo,N 2..1 2..2 &et income '''''''' ''''''''''' ''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''''' '''''''''''' ''''''''''' ''''''''''' '''''''''''' '''''''' '' G.C... G!.C... Dividends'''''''''''''''''''''''' Dividends''''''''''''''''''''''''''''''''' '''''''''''''''''' '''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''''''''''' 3.C... 3.C... rep repar are e the the 4our 4ourna nall entr entrie ies s made made by ar) ar) duri during ng 2..1 2..1 and and 2..2 2..2 rela relate ted d to its its investm investment ent in Ray ompan ompany yC includin including g the ad4ust ad4usting ing entries entries needed needed to reflect reflect the change from an available-for-sale security to the equity method' Solution 12
<=1. 2..1 Fan' 1
Invest Investment ment in "vaila "vailable-f ble-for-S or-Sale ale Secur Securiti ities es Ray ompany''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' (2C... ash ash'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' ''''
Dec' Dec' 31 31 ash ash H'1* 8 G3.C...''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' !C.. Divid ividen end d Revenue enue''''''''''''''''''''''''''''''''''''''''''''''''''''
(2C. (2C... .. !C..
6est %an)C Intermediate Accounting C 1th ed'
2..2 Fan' 1
Investment Investment in Ray ompany''''' ompany''''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''' '''''''''' ''''''''''' ''''' 11C*.. 11C*.. ash ash'' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' Ret Retaine ained d Earni arning ngs' s'''''' '''''' '''''' ''''''' '''''' '''''' '''''' '''''' ''''''' '''''' '''' '''''''' '''''' '''' '''' '''' '''' '''' Investment in "vailable-for-Sale Securities-Ray Ray omp ompan any y'''' '''''' '''''' '''''' ''''''' '''''' '''''' '''''' '''''' ''''''' '''''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' '''' ''''
.1
1C. 1C... .. 1C*. 1C*.. . (2C (2C... ...
omputation of ad4ustment to retained earningsN Equity in Ray o' earnings H1*A 8 G.C...''''''''''''''''' ''''''''''''''''' G(C2.. Dividends received''''''''''''''''''''''''''' received'''''''''''''''''''''''''''''''''''''''''''''''''' ''''''''''''''''''''''' H!C.. Retroactive ad4ustment to change from cost to equity method'''''''''''''''' method'''''''''''''''''''''''' '''''''''''''''''''''''''''''''''''''''''' '''''''''''''''''''''''''''''''''' G1C*.. Dec' 31 Investment Investment in Ray ompa ompany ny H'2* 8 G!.C...'''''''''''''''''''''''' 1C... Income from Investment in Ray ompany'''''''''''''''
1C...
ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' *C.. Investment in Ray ompany''''''''''''''' ompany'''''''''''''''''''''''' ''''''''''''''''''''' ''''''''''''
*C..
Problem 13
6he $inancial "ccounting Standards %oard had several goals in issuing Statement of $inancial "ccounting "ccounting Standards Standards &o' 11! 11!, 9"ccounting for ertain Investments in Debt and and Equit Equity y Secur Securit ities iesC: C: and and changi changing ng the the accou account nting ing for for cert certain ain debt debt and and equit equity y securiti securities es from from a lo,er-of lo,er-of-cos -cost-or t-or-ma -mar)et r)et basis basis to a fair fair value value basis' basis' "mong mong these goals ,as the elimination of ,hat is termed 9gains trading': E8plain the meaning of the term 9gains trading': Solution 13
<=! 6he term 9gains trading: refers to the practice of management of selectively selling securities the prices of ,hich have appreciated and including the realied gains in earnings' 0ains trading results from the use of amortied cost accounting and the available-for-sale available-for-sale classification' classification' 6he use of amortied cost permits recognition of holding gains through selected sales of appreciated securities and the inclusion of these realied holding gains in earnings' "t the same timeC use of amortied cost does not provide for the recognition of unrealied losses' 5anagers 5anagers thus can selectively selectively manage earnings by choosing to sell those securities that have appreciated ,hile selectively e8cluding unrealied losses from earnings' Debt and equity securities classified as available-for-sale are reported at fair fair valu value e but but unre unreal ali ied ed chan change ges s in fair fair valu value e are are e8cl e8clud uded ed from from earn earnin ings gs''
."
hapter 1
Investments in Debt and Equity Securities
5anagers again can selectively sell securities the prices of ,hich have appreciated and include the realied gains in earnings' Securities for ,hich prices have dropped are held' 6he available-for-sale available-for-sale treatment treatment thus permits permits unrealied gains and losses to be e8cluded from earnings since these unrealied gains and losses are reported in a separate component of stoc)holders equity' Problem 14
Invest Investmen ments ts in debt securities securities current currently ly are permit permitted ted to be classif classified ied as held-toheld-tomaturity and accounted for at amortied cost if an enterprise has the positive intent and ability to hold these securities securities to maturity' maturity' 6he held-to-maturit held-to-maturity y classification classification is the most restrictiv restrictive e of the three classifications classifications specified in accounting standards' standards' Despite the the rest restri rict ctiv iven enes ess s of the the held held-t -too-ma matu turi rity ty clas classi sifi fica cati tion onCC cert certai ain n chan change ges s in circumstances may occur that ,ould necessitate transferring an investment in a debt secur securit ity y from from the the held-t held-to-m o-mat aturi urity ty clas classif sifica icati tion on ,ith ,ithout out calli calling ng into into quest question ion the the investors general intention to hold other similarly classified investments to maturity' ;hat types of circumstances ,ould cause an investor in debt securities classified as held-to-maturity to change that classification ,ithout calling into question the intent of the investor to hold other similarly classified investments to maturity> Solution 14
<=2 6he follo,ing changes in circumstances may cause an investor to change its intent to hold a certain security to maturity ,ithout calling into question its intent to hold other debt securities to maturity in the futureN 1' Evidence of a significant deterioration in the issuers credit,orthiness' 6he deterioration must be actual and not based on speculation' on that
2' " change in ta8 la, eliminates eliminates or reduces the ta8-e8empt ta8-e8empt status of interest the debt security' security' 6his provision does not include a change in ta8 la, revises the marginal ta8 rates applicable to interest income'
3' " ma4or ma4or business combinati combination on or ma4or disposition disposition Hsuch as the sale of a segm segmen ent t nece necess ssit itat ates es the the sale sale or tran transf sfer er of held held-t -too-ma matu turi rity ty secu securi riti ties es to maintain the enterprises e8isting interest rate ris) position or credit ris) policy' ' " change change in statut statutory ory or regulat regulatory ory requirem requirement ents s signifi significant cantly ly modify modifying ing either ,hat constitutes a permissible investment or the ma8imum level of investments in certain )inds of securitiesC thereby causing an enterprise to dispose of a held-to-maturity security'
6est %an)C Intermediate Accounting C 1th ed'
.
!' " significant significant increase by the regulator regulator in the industrys industrys capital requirements requirements that causes the enterprise to do,nsie by selling held-to-maturity securities' #' regulatory
" signi signific ficant ant increas increase e in the the ris) ris) ,eight eights s of debt securit securities ies used for ris)-based capital purposes'
Problem 15
=n Fanuary Fanuary 1C 2..1C 2..1C "rt "rthu hurr omp ompan any y paid paid G!.C. G!.C... .. for 1.C. 1.C... .. shares shares of D; ompany ompany voting common common stoc)C ,hich represented a 1!A interest in D;' "t "t this dateC the net assets assets of D; ompany ompany totaled totaled G2'! million' 6he fair values of D; ompanys ompanys identifiable identifiable assets and liabilities liabilities ,ere equal to their boo) values' "rthur "rthur did not have the ability to e8ercise significant influence over the operating and financial policies of D; as a result of this investment' investment' "rthur "rthur received dividends dividends of G.'*. per share from from D; on =ctober 1C 2..1' D; reported net income of G3..C... for the year ended December December 31C 2..1' 2..1' 6he stoc) stoc) ,as classifie classified d as available-for-sale' available-for-sale' 5ar)et prices for the 1.C... shares ,as G!.C...' =n Fuly 1C 2..2C "rthur paid G1C!!.C... for 3.C... shares of D; ompanys voting comm common on stoc) stoc)CC ,hic ,hich h repre represen sents ts a 2!A 2!A intere interest st in D;' D;' 6he 6he fair fair value value of the the identifiable assetsC net of liabilities of D; ,as equal to their boo) values of GC#!.C...' "s a result of this transactionC "rthur acquired the ability to e8ercise significant influence over the operating and financial policies of D;' "rthur received a dividend of G.'*! per share from D; on "pril 1C 2..2C and G1'. per share on =ctober 1C 2..2' D; reported net income of G3!.C... for the year ended December 31C 2..2C and G1!.C... for the si8 months months ended December 31C 2..2' "rthur amorties amorties good,ill over 2. years' Determine the amount of income from the investment in D; common stoc) that should be reported on "rthurs "rthurs income statement for the year ended December 31C 2..2C and December 31C 2..1 Hrestated' Solution 15
<=1. 2..2 Income from investment in D; ompany''''''''''''''' ompany'''''''''''''''''''''''' '''''''''''''''''''''' ''''''''''''' G!C...
2..1 G+.C... 13C3* G1C2!. 2..1 G!C...
.4
hapter 1
Investments in Debt and Equity Securities
Second half H1!.C... 8 '.''''''''''''''''''''' '.'''''''''''''''''''''''''''''' '''''''''''''''''' ''''''''''''''''''''' '''''''''''' #.C... G+.C... 0ood,ill amortiationN 0ood,ill on 2..1 acquisitionN QG!.C... B H'1! 8 G2C!..C... U G(!C... ÷ 2.'''''''''''''''''' 2.'''''''''''''''''''''''''''G '''''''''G 3C(!. 0ood,ill on 2..2 acquisitionN QG1C!!.C... B H'2! 8 GC#!.C... U G3*(C!.. ÷ 2. 8 V''''''''''''''' V''''''''''''''' +C#** G13C3*
G!C...
G 3C(!.
G 3C(!.
Problem 16
E5D orp' orp' loaned G2..C... to "lco "lco orp' on Fanuary 1C 2..1' 6he terms terms of the loan require principal principa l payments of G.C... each year for five years years plus interest at *A' 6he first principal and interest payment payment is due on Fanuary 1C 2..2' "lco "lco made the required payment payments s during during 2..2 and 2..3' "lco "lco began to e8perie e8perience nce financial financial difficult difficulties ies in 2..3C ho,everC ,hich made it necessary for E5D to reassess the li)elihood of the loan being collected' =n December December 31C 2..3C E5D determines determines that the principal payments payments ,ill be collectedC but that the collection of interest is unli)ely' H1 ompute ompute the present value of the e8pected e8pected future cash flo,s flo,s as of December December 31C 2..3' H2 rovide the 4ournal entry to record the loan impairment impairment as of December 31C 2..3' H3 rovide the 4ournal 4ournal entries for 2.. 2.. to record receipt of the principal principal payment on on Fanuary 1 and the recognition of interest revenue as of December 31C assuming that E5Ds assessment of the li)elihood of collecting the loan has not changed' Solution 16
<=11 H1 resent value of e8pected future cash flo,sN Date Fan' 1C 2.. Fan' 1C 2..! Fan' 1C 2..# resent value
ayment 6ime of Discount G.C... no, G.C... 1 year G.C... 2 years at December 31C 2..3
6able Kalue Kalue 1'... '+2!+ '*!(3
resent Kalue Kalue at *A G .C... 3(C.3# 3C2+2 G111C32* G111C32*
6est %an)C Intermediate Accounting C 1th ed'
..
H2 Fournal entry to record impairmentN 1273172..3 %ad Debt E8penseWWWWWWWWWWWWW "llo,ance for
*C#(2 *C#(2
H3 Fournal entries made during 2..N 17.172.. ashWWWWWWWWWWWWWWWWWWW ashWWWWWWWWWWWWWWWWWWW
.C...
1273172.. "llo,ance for
!C(.#
.C... !C(.#
.&
hapter 1
Investments in Debt and Equity Securities
CHAPTER 14 )) QUI0 A &ame XXXXXXXXXXXXXXXXXXXXXXXXX Section XXXXXXXXXXXXXXXXXXXXXXXX 6 $ 1' "n inv inves estm tmen entt in sto stoc) c) is is initi initiall ally y record recorded ed at at cost cost and and all all comm commis issi sion onsC sC ta8 ta8es esCC and other fees are e8pensed as incurredC under both the cost and equity methods' 6 $ 2' /nde /nderr some some circu circums msta tance ncesC sC cons consoli olidat dated ed finan financia ciall state stateme ment nts s are appr approp opria riate te even though the parent company o,ns less than !. percent of the voting stoc) of the subsidiary' 6 $ 3' "ccounting practice allo,s companies not to consolidate certain ma4or ma4orityity-o, o,ned ned subsidi subsidiaries aries if these these subsidia subsidiaries ries have have 9nonhom 9nonhomoge ogeneou neous: s: operationsC a large minority interestC or a foreign location' 6 $ ' 6he 6he cost cost meth method od of of acc accou ounti nting ng shou should ld al, al,ay ays s be used used ,hen ,hen the the inves investo torr does does not e8ercise significant influence over the investee' 6 $ !' 6he 6he equi equity ty met metho hod d may may not not be app appro ropr pria iate te in in some some cas cases es eve even n thou though gh the the investor o,ns more than 2. percent of the voting stoc) of the investee' 6 $ #' "s a gene general ral rule ruleCC conso consolilidat dated ed fin financ ancial ial sta state teme ment nts s shoul should d be prepar prepared ed only only ,hen the parent corporation o,ns *. percent or more of the outstanding common stoc) of the subsidiary' subsidi ary' 6 $ (' /nde /nderr the cost cost meth method odCC the the inves investm tmen entt accou account nt is peri period odic ical ally ly ad4u ad4ust sted ed to reflect changes in the underlying net assets of the investee' 6 $ *' ;hen ;hen an inve invest stme ment nt in in equi equity ty secu securi riti ties es has has been been accou account nted ed for for under under the the equit equity y meth methodC odC but circu circums msta tance nces s dict dictat ate e a chang change e to the the cost cost meth method odCC retroactive application of the cost method is required' 6 $ +' ;hen ;hen the the purch purchas ase e price price of sto stoc) c) is is great greater er or les less s than than the the und under erly lyin ing g boo) boo) value of the investees net assetsC an ad4ustment is made by the investor to the income reported by the investee in applying the equity method' 6 $ 1.' &o ad4u ad4ust stme ment nt is made made to the the invest investme ment nt accou account nt ,hen ,hen changi changing ng from from the equity method to the cost method'
CHAPTER 14 )) QUI0 % &ame XXXXXXXXXXXXXXXXXXXXXXXXX Section XXXXXXXXXXXXXXXXXXXXXXXX 6 $ 1' /nre /nreal ali ied ed holdi holding ng gains gains and and losse losses s on inves investtment ments s in tradi trading ng secur securit itie ies s are are recognied on the income statement' 6 $ 2' /nre /nreal ali ied ed gains gains and loss losses es on inves investtment ments s in avail availab able le-f -for or-s -sal ale e secu securi riti ties es are recognied on the income statement' 6 $ 3' " debi debitt bala alance in the accou count 5ar)et )et "d4ustment"vailable able-f -for or-S -Sal ale e Secu Securit rities ies impl implie ies s a corres correspon pondi ding ng o,ne o,ners@ rs@ equit equity y accou account nt ,ith ,ith a credit credit balance of the same amount' 6 $ ' $or bal balance ance shee sheett clas classi sifi fica cati tion onCC secu securi riti ties es are are clas classi sifi fied ed as shor short-te t-term rm or long-term investments based on managements intended holding period' 6 $ !' 6he net net repo report rted ed bala balanc nce e in the the avai availa labl blee-ffor-s or-sal ale e secu securi riti ties es inve invest stme ment nt account is the original cost plus a credit balance in the mar)et ad4ustment account or minus a debit balance in the mar)et ad4ustment account' 6 $ #' ;hen ;hen inves investm tmen ents ts in in tradi trading ng secu securi riti ties es are are soldC soldC the the real reali ied ed gain gain or los loss s is the difference in the mar)et value since acquisition' 6 $ (' /nre /nreal ali ied ed holdi holding ng gains gains on inves investm tmen ents ts in heldheld-to to-m -mat atur urit ity y secur securit itie ies s are are recognied as a direct increase to o,ners@ equity' 6 $ *' Incre ncreas ases es in the mar mar)et )et valu value e of tradi trading ng secu securi riti ties es and and avai availa labl blee-ffor-s or-sal ale e secur securit ities ies inves investm tment ents s cause cause the the relat related ed mar) mar)et et ad4u ad4ust stme ment nt accoun accountt to decrease' 6 $ +' Inve Invest stme ment nts s in tradi trading ng secur securiti ities es may may be cla classi ssifi fied ed as curren currentt or long-te long-term rm'' 6 $1.' If an inves investo torr does does not have have a cont contro rollllin ing g inte intere rest st in anot anothe herr comp compan any yC the investor may choose to use either the cost method or the equity method to account for that investment in equity securities'
!(
CHAPTER 14 )) QUI0 C &ame XXXXXXXXXXXXXXXXXXXXXXXXX Section XXXXXXXXXXXXXXXXXXXXXXXX "' %' ' D' E' $' 0'
ost method Sign Signif ific ican antt infl influe uenc nce e arent ent com company pany
?' I' F' P' <' 5' &'
Equit uity me method 5erger onsolidation &onco &onconv nvert ertibl ible e inves investm tmen ents ts E8ec E8ecut utor ory y cont contra ract ct "vailable"vailable-for-sale for-sale securities 6rading securities
Select the term term that best fits each of the follo,ing definitions and descriptions' Indicate your ans,er by placing the appropriate letter in the space provided' XXXX 1'
" company that is o,ned or controlled by b y another company'
XXXX 2'
6he ability of an investor to impact the operatingC investingC and financing decisions of an investee but not absolutely determine those decisions'
XXXX 3'
6he ability of an investor to decisively influence the operatingC investingC and financial decisions made by an investee'
XXXX '
"n accounting method under ,hich the initial investment is recorded and mainta maintained ined at cost cost ,ith ,ith dividend dividends s being being recogni recognied ed as revenue revenue ,hen ,hen received'
XXXX !'
"n accounting method that combines the financial statement balances of the parent and subsidiary companies as if they ,ere one total economic unit'
XXXX #'
" company that e8ercises control over other companies through ma4ority o,nership of voting stoc)'
XXXX ('
"n accounting method under ,hich the initial investment is recorded at cost and subsequently is increased by a proportionate share of earnings and decreased by dividends'
XXXX *'
Investments that are either not readily mar)etable or not e8pected to be converted to cash ,ithin a year'
XXXX +'
Securities purchased purch ased ,ith the intent of selling them in the near future'
XXXX 1.'
Securities purchased purch ased ,ithout the intent of selling them in the near future' !*
CHAPTER 14 )) QUI0 SOLUTIONS Yui " 1' 2' 3' ' !' #' (' *' +' 1.'
$ $ $ 6 6 $ $ $ 6 6
Yui % 1' 2' 3' ' !' #' (' *' +' 1.'
6 $ 6 6 $ $ $ $ $ $
Yui 1' 2' 3' ' !' #' (' *' +' 1.'
E % 0 " F ? D & 5
