Chapter 12

Chapter 12
INVESTMENTS
AACSB assurance of learning standards in accounting and business education require

documentation of outcomes assessment. Although schools, departments, and faculty may approach
assessment and its documentation differently, one approach is to provide specific questions on
exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each
question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning
skills:
Questions
AACSB Tag
Brief Exercises
AACSB Tag
121
122
123
124
125
126
127
128
129
1210
1211
1212
1213
1214
1215
1216
1217
1218
1219
1220
1221
1222
1223
1224
1225
1226
1227
1228
1229
1230
1231
1232
1233
1234
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Diversity, Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Reflective thinking
Analytic
Analytic
Reflective thinking
Analytic
126
127
128
129
1210
1211
1212
1213
1214
1215
1216
1217
1218
1219
1220
Analytic
Analytic, Communications
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Brief Exercises
121
122
123
124
Exercises
121
122
123
124
125
126
127
128
129
1210
1211
1212
1213
1214
1215
1216
1217
1218
1219
1220
1221
1222
1223
Analytic
Analytic
Communications
Analytic
Reflective thinking, Analytic
Communications
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic, Reflective thinking
Analytic
Analytic
Analytic
Analytic
Analytic
Communications
Analytic
Analytic
Analytic
The McGraw-Hill Companies, Inc., 2013

Solutions Manual, Vol. 1, Chapter 12
121
Exercises cont.
AACSB Tags
1224
1225
1226
1227
1228
1229
1230
1231
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
CPA/CMA
1
2
3
4
5
6
7
8
9
10
11
12
13
1
2
3
Reflective thinking
Reflective thinking
Analytic
Analytic
Reflective thinking
Analytic
Analytic
Analytic
Reflective thinking
Analytic
Reflective thinking
Problems
121
122
123
124
125
126
127
128
129
1210
1211
1212
1213
1214
1215
1216
1217
1218
1219
1220
1221
1222
1223
1224
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Analytic
Reflective thinking
Analytic
Analytic
Analytic
Analytic

122
Intermediate Accounting, 7e
Questions for Review of Key Topics

Question 121
Investment securities are classified as held-to-maturity, trading, or available-for-sale
securities.
Question 122
Increases and decreases in the market value between the time a debt security is acquired and the
day it matures to a prearranged maturity value are ignored for a security classified as held-tomaturity. These changes arent important if sale before maturity isnt an alternative, which is the
case if an investor has the positive intent and ability to hold the security to maturity.
Question 123
GAAP distinguishes between three levels of inputs to fair value determination, with level 1 being
readily observable fair values (for example, from a securities exchange), level 2 inputs are other
observable amounts (for example, quoted values for similar items, or important inputs like interest
rates), and level 3 inputs are unobservable, like the companys own assumptions. GAAP requires
disclosure of the amount of fair values based on each of these three classes of inputs.
Question 124
For investments to be held for an unspecified period of time, fair value information is more
relevant than for investments to be held to maturity. Changes in fair values are less relevant if the
investment is to be held to maturity because sale at that fair value is not an option. The investor
receives the same contracted interest payments for the period held to maturity and the stated
principal at maturity, regardless of movements in market values. However, when the investment is
of unspecified length, changes in fair values indicate managements success in deciding when to
acquire the investment and when to sell it, as well as the propriety of investing in fixed-rate or
variable-rate securities and long-term or short-term securities.
Question 125
The way unrealized holding gains and losses are reported in the financial statements depends on
whether the investments are classified as securities available-for-sale or as trading securities.
Securities available-for-sale are reported at fair value, and resulting holding gains and losses are not
included in the determination of income for the period. Rather, they are reported as a separate
component of shareholders equity, as part of other comprehensive income (OCI). (Available-forsale securities for which the investor has chosen the fair value option are reclassified as trading
securities.)

123
Answers to Questions (continued)

Question 126
Comprehensive income is a more expansive view of the change in shareholders equity than
traditional net income. It encompasses all changes in equity from nonowner transactions. The
nonincome part of comprehensive income is called other comprehensive income. Other
comprehensive income includes net unrealized holding gains (losses) on AFS investments, and also
the noncredit loss component of other-than-temporary impairments of HTM investments.
Question 127
Unrealized holding gains or losses on trading securities are reported in the income statement as if
they actually had been realized. Trading securities are actively managed in a trading account with the
express intent of profiting from short-term market price changes. So, any gains and losses that result
from holding securities during market price changes are suitable measures of success or lack of
success in achieving that goal.
On the other hand, unrealized holding gains or losses on securities available-for-sale are not
reported in the income statement. By definition, these securities are not acquired for the purpose of
profiting from short-term market price changes, so gains and losses from holding these securities
while prices change are less relevant performance measures to be included in earnings.
Question 128
When acquired, debt and equity securities are assigned to one of the three reporting
classifications: held-to-maturity, trading, or available-for-sale. The appropriateness of the
classification is reassessed at each reporting date. A reclassification should be accounted for as
though the security had been sold and immediately reacquired at its fair value. Any unrealized
holding gain or loss should be accounted for in a manner consistent with the classification into
which the security is being transferred. Specifically, when a security is transferred:
1. Into the trading category, any unrealized holding gain or loss should be recognized in earnings
of the reclassification period.
2. Into the available-for-sale category, any unrealized holding gain or loss should be recorded in
other comprehensive income, which will then increase accumulated other comprehensive
income in shareholders equity.
3. Into the held-to-maturity category, any unrealized holding gain or loss should be amortized
over the remaining time to maturity. This would be the case for Western Die-Castings
investment in the LGB Heating Equipment bonds.

124

Question 129
Yes. Although a company is not required to report individual amounts for the three categories of
investmentsheld-to-maturity, available-for-sale, or tradingon the face of the balance sheet, that
information should be presented in the disclosure notes. The following also should be disclosed for
each year presented: aggregate fair value, gross realized and unrealized holding gains, gross realized
and unrealized holding losses, the change in net unrealized holding gains and losses, and amortized
cost basis by major security type. Information about the level of the fair value hierarchy upon which
fair values are based should be provided, and more disclosure is necessary with respect to amounts
based on level 3 of the fair value hierarchy. In addition, information about maturities should be
reported for debt securities, by disclosing the fair value and cost for at least four maturity groupings:
(a) within 1 year, (b) after 1 year through 5 years, (c) after 5 years through 10 years, and (d) after 10
years.
Question 1210
Under IFRS No. 9, debt investments are accounted for as either amortized cost or FVTPL (fair
value through profit and loss), while equity investments are accounted for at FVTPL unless the
equity is not held for trading and the investor elects at acquisition to account for the investment at
FVTOCI (fair value through other comprehensive income).
Question 1211
According to U.S. GAAP, the fair value of an equity security is considered readily determinable
only if its selling price is currently available on particular securities exchanges or over-the-counter
markets. If the fair value of an equity security is not readily determinable, U.S. GAAP uses the cost
method. Under IFRS, equity investments typically are measured at fair value, even if they are not
listed on an exchange or over-the-counter market. Under IAS No. 39, the cost method only is used if
fair value cannot be measured reliably, which occurs when the range of reasonable fair value
estimates is significant and the probability of various estimates within the range cannot be
reasonably estimated. Under IFRS No. 9, the cost method is prohibited, although cost can
sometimes be used as an estimate of fair value. Therefore, in general, use of the cost method is less
prevalent under IFRS than under U.S. GAAP.
Question 1212
When a company elects the fair value option for held-to-maturity or available-for-sale
investments, it simply reclassifies those investments as trading securities and accounts for them in
that fashion.

125

Question 1213
U.S. GAAP allows companies complete discretion in electing the fair value option when an
investment is made. The only constraint is that the election is irrevocable. IFRS only allows
companies to elect the fair value option in specific circumstances, for example, when electing the
fair value option for an asset or liability allows a company to avoid the accounting mismatch that
occurs when some parts of a fair value risk-hedging arrangement are accounted for at fair value and
others are not.
Question 1214
The equity method is used when an investor cant control but can significantly influence the
investee. For example, if effective control is absent, the investor still might be able to exercise
significant influence over the operating and financial policies of the investee if the investor owns a
large percentage of the outstanding shares relative to other shareholders. By voting those shares as a
block, the investor often can sway decisions in the direction desired. We presume, in the absence of
evidence to the contrary, that the investor exercises significant influence over the investee when it
owns between 20% and 50% of the investee's voting shares.
Question 1215
The equity method, like consolidation, views the investor and investee as a special type of single
entity. By the equity method, though, the investor doesnt include separate financial statement items
of the investee on an item-by-item basis as in consolidation. Rather, by the equity method, the
investor reports its equity interest in the investee as a single investment account. That single
investment account is periodically adjusted to reflect the effects of consolidation, without actually
consolidating financial statements.
Question 1216
The investor should account for dividends from the investee as a reduction in the investment
account. Since investment revenue is recognized as the investee earns it, it would be inappropriate
to again recognize revenue when earnings are distributed as dividends. Rather, the dividend
distribution is considered to be a reduction of the investees net assets, indicating that the investors
ownership interest in those net assets declines proportionately.

126

Question 1217
The equity method attempts to approximate the effects of accounting for the purchase of the
investee as a consolidation. Consolidated financial statements report acquired net assets at their fair
values as of the date the investor acquired the investee. The accounting in the consolidated financial
statements subsequent to the acquisition date is based on those fair values. So, if Finest had
consolidated its acquisition of Penner, Penners depreciable assets would have been put on Finests
balance sheet in their respective asset accounts at their fair value on the date of acquisition and then
depreciated over 10 years. Under the equity method, Finests investment in Penner is shown in a
single investment account. Therefore, for the equity method to approximate consolidation, it would
reduce both investment revenue (as if depreciation expense were being recognized) and the
investment (as if the book value of the asset were being reduced) by the negative income effect of
the extra depreciation the higher fair value would cause. This would equal 40% x $12 million
10 years = $480,000 each year for 10 years.
Question 1218
The investment account was decreased by $40,000 (40% x $100,000). Cash increased by the
same amount. There is no effect in the income statement.
Question 1219
When it becomes necessary to change from the equity method to another method, no adjustment
is made to the carrying amount of the investment. The equity method is simply discontinued and the
new method is applied from then on. The investment account balance when the equity method is
discontinued would serve as the new cost basis for writing the investment up or down to fair value
in the next set of financial statements.
Question 1220
IFRS require that accounting policies of investees be adjusted to correspond to those of the
investor when applying the equity method. U.S. GAAP has no such requirement. Also, IFRS allow
investors to account for a joint venture using either the equity method or proportionate
consolidation, whereby the investor combines its proportionate share of the investees accounts
with its own accounts on an item-by-item basis. U.S. GAAP generally requires that the equity
method be used to account for joint ventures.
Question 1221
When a company elects the fair value option for a significant-influence investment, that
investment is not reclassified as a trading security. Rather, the investment still appears in the
balance sheet as a significant-influence investment, but the amount that is accounted for at fair value
is indicated in the balance sheet either parenthetically on a single line that includes the total amount
of significant-influence investment or on a separate line. As with trading securities, unrealized gains
and losses are included in earnings in the period in which they occur.

127

Question 1222
A financial instrument is: (a) cash, (b) evidence of an ownership interest in an entity, (c) a
contract that (1) imposes on one entity an obligation to deliver cash or another financial instrument
and (2) conveys to a second entity a right to receive cash or another financial instrument, or (d) a
contract that (1) imposes on one entity an obligation to exchange financial instruments on potentially
unfavorable terms and (2) conveys to a second entity a right to exchange other financial instruments
on potentially favorable terms. Accounts payable, bank loans, and investments in securities are
examples.
Question 1223
These instruments derive their values or contractually required cash flows from some other
security or index.
Question 1224
Since this money wont be used within the upcoming operating cycle, it is a noncurrent asset. It
should be reported as part of investments.
Question 1225
Part of each premium payment the company makes is not used by the insurance company to pay
for life insurance coverage, but rather is invested on behalf of the insured company in a fixedincome investment. As a result, the periodic insurance premium should not be expensed in its
entirety; an appropriate portion should be recorded instead as a noncurrent assetcash surrender
value.
Question 1226
If the investor intends to sell the investment, or thinks it will be more likely than not that it will
be required to sell the investment prior to recovering the impairment, the investor is required to
recognize the entire impairment loss in the income statement as an OTT impairment, writing down
the investment to fair value in the balance sheet.
Otherwise, the investor considers whether credit losses exist. If there are no credit losses, no
impairment loss is recognized. On the other hand, if there are some credit losses, then the
investment is written down to fair value in the balance sheet. However, only the credit loss
component is recognized in net income. Any noncredit losses are recognized in OCI. In the income
statement, the entire impairment loss is shown, and then the amount of noncredit loss is subtracted,
leaving only the credit loss reducing net income.

128
Answers to Questions (concluded)

Question 1227
If the OTT impairment relates to an equity investment, the entire amount of impairment is
recognized in net income. Any previously recorded unrealized losses are reclassified out of AOCI.
If the OTT impairment relates to a debt investment, the accounting is more complicated. First, if
the investor intends to sell the investment, or thinks it will be more likely than not that it will be
required to sell the investment prior to recovering the impairment, it is required to recognize the
entire impairment loss in the income statement as an OTT impairment, writing down the investment
to fair value in the balance sheet.
Otherwise, the investor considers whether credit losses exist. If there are no credit losses, no
impairment loss is recognized. On the other hand, if there are some credit losses, then the
investment is written down to fair value in the balance sheet. However, only the credit loss
component is recognized in net income. Any noncredit losses are recognized in OCI. In the income
statement, the entire impairment loss is shown, and then the amount of noncredit loss is subtracted,
leaving only the credit loss reducing net income.
Question 1228
Given that the decline in shares relates to a new law banning a primary approach used by the
company, it likely would be treated as an other-than-temporary impairment. So, when the
investment is written down to its fair value, the amount of the write-down should be treated as if it
were a realized loss, meaning the loss is included in income for the period. This could require a
reclassification adjustment if any unrealized losses were included previously in OCI, just as if the
investment was being sold. Subsequent to the other-than-temporary write-down, the usual treatment
of unrealized gains or losses should be resumed. Therefore, later changes in fair value will be
reported as a separate component of shareholders equity, accumulated other comprehensive income.
Question 1229
U.S. GAAP and IFRS differ somewhat. Under IFRS, OTT impairments only are recognized on
debt that is classified as HTM to the extent that credit losses exist, so there is no noncredit loss
component of OTT impairments under IFRS. OTT impairments are recognized on debt classified as
AFS in their entirety, with no distinction made between credit losses and noncredit losses. Also,
under IFRS, OTT impairments can be recovered in earnings for debt investments, but not for equity
investments. U.S. GAAP does not allow OTT impairments to be recovered in earnings for either
debt or equity investments (unless the debt investment is classified as a loan).

129
Supplement Questions for Review of Key Topics

Question 1230
Investment securities are classified as amortized cost, FV-OCI, or FV-NI.
Question 1231
To be accounted for at amortized cost, a debt investment must have the characteristics of
simple debt: (1) the debt consists primarily of payments that include interest and return of
principal, (2) the debt agreement doesnt allow the debtor to prepay or settle the debt in a manner
that provides a loss to the investor, and (3) the debt does not involve derivatives. The debt also must
be held for the purpose of collecting contractual cash flows associated with lending or customer
financing.
Question 1232
To be accounted for at FV-OCI, a debt investment must have the characteristics of simple debt
(the debt consists primarily of payments that include interest and return of principal, dont allow the
debtor to prepay or settle the debt in a manner that provides a loss to the investor, and do not involve
derivatives). The debt also must be held for the purpose of maximizing investment return by selling
it after it has appreciated in value or collecting contractual cash flows, or for managing risk.
Question 1233
First, if the debt investment is complex, it is accounted for at FV-NI. The debt investment is
complex if it lacks one or more of the characteristics of simple debt (the debt consists primarily of
payments that include interest and return of principal, dont allow the debtor to prepay or settle the
debt in a manner that provides a loss to the investor, and do not involve derivatives). The debt
investment also is accounted for at FV-NI if it is simple and either is held for sale at acquisition or
issuance or does not qualify for being accounted for at amortized cost or FV-OCI.
Question 1234
If the investor lacks the ability to significantly influence the investee, an equity investment is
accounted for at FV-NI. Nonpublic organizations have a practicability exception with respect to
nonmarketable investments, allowing them to account for the investment at cost less any
impairments and adjusted for any changes in fair value that are observed from transactions of similar
equity.

1210
BRIEF EXERCISES
Brief Exercise 121
(a)
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds) ..........................................
720,000
Cash (1.5% x $720,000)..........................................

Discount on bond investment (difference) ............
Interest revenue (2% x $600,000) .......................
10,800
1,200
120,000
600,000
(b)
12,000
Brief Exercise 122

Unlike for securities available-for-sale, unrealized holding gains and losses for
trading securities are included in earnings. S&L reports its $2,000 holding loss in
2013 earnings. When the fair value rises by $7,000 in 2014, that amount is reported in
2014 earnings ($5,000 as a realized gain, and $2,000 as the reversal of the unrealized
loss that was recognized in 2013). S&Ls journal entries for these transactions would
be:
2013
December 27
Investment in Coca Cola shares .........................................
Cash .................................................................................
875,000
December 31
Net unrealized holding gains and lossesI/S .....................
Fair value adjustment ($875,000 873,000) ........................
2,000
875,000
2,000

1211
Brief Exercise 122 (concluded)

2014
January 3
Cash (selling price) ..................................................................
Gain on investments (to balance)........................................
Investment in Coca Cola shares (account balance) .............
880,000
5,000
875,000
Assuming no other trading securities, the 2014 adjusting entry to remove the fair
value adjustment associated with the sold securities would be:
December 31
Fair value adjustment (account balance) ..................................
Net unrealized holding gains and lossesI/S (to balance)
2,000
2,000

1212
Brief Exercise 123

Unlike for trading securities, unrealized holding gains and losses for securities
available-for-sale are not included in earnings. S&L reports its $2,000 holding loss in
2013 as other comprehensive income in the statement of comprehensive income.
When the fair value rises to $880,000 in 2014, the amount reported in 2014 earnings is
the $5,000 gain realized by the sale of the securities. S&Ls journal entries for these
transactions would be:
2013
December 27
Cash .................................................................................
875,000
December 31
Net unrealized holding gains and lossesOCI.....................
Fair value adjustment ($875,000 873,000) ........................
2,000
875,000
2,000
2014
January 3
Cash (selling price) .................................................................
Gain on investments (to balance) .......................................
Investment in Coca Cola shares (cost)..............................
880,000
5,000
875,000
Assuming no other transactions involving securities available-for-sale, the 2014

adjusting entry to remove the fair value adjustment associated with the sold securities
would be:
December 31
Fair value adjustment (account balance) .................................
Net unrealized holding gains and lossesOCI.................
2,000
2,000

1213
Brief Exercise 124

Securities available-for-sale are reported at fair value, and resulting holding gains
and losses are not included in the determination of net income for the period. Rather,
they are reported as other comprehensive income in the statement of comprehensive
income. The accumulated balance of net holding gains and losses is reported as a
separate component of shareholders equity, as part of accumulated other
comprehensive income. The adjusting entry needed to increase the fair value
adjustment from $110,000 to $170,000 is:
Fair value adjustment ($670,000 610,000) ...........
Net unrealized holding gains and lossesOCI
60,000
60,000
Brief Exercise 125

These are securities available-for-sale and are reported at their fair value,
$4,000,000. We know this because securities held-to-maturity are debt securities
that an investor has the positive intent and ability to hold to maturity. Actively
traded investments in debt or equity securities acquired principally for the purpose of
selling them in the near term are classified as trading securities. The FedEx shares
have been held for over a year. They are classified as available-for-sale since all
investments in debt and equity securities that dont fit the definitions of the other
reporting categories are classified this way. Of course, the equity method isnt
appropriate either because 40,000 shares of FedEx certainly dont constitute
significant influence. Investments in securities available-for-sale are reported at fair
value.

1214
Brief Exercise 126

Because S&L elected the fair value option, it would classify this investment as a
trading security and account for it in that fashion. Therefore, S&L reports its $2,000
holding loss in 2013 earnings. When the fair value rises by $7,000 in 2014, that
amount is reported in 2014 earnings ($5,000 as a realized gain, and $2,000 as the
reversal of the unrealized loss that was recognized in 2013). S&Ls journal entries for
these transactions would be:
2013
December 27
Cash .................................................................................
875,000
December 31
Fair value adjustment ($875,000 873,000)...................
2,000
875,000
2,000
2014
January 3
Investment in Coca Cola shares (account balance) .............
880,000
5,000
875,000
December 31
Fair value adjustment (account balance) .................................
Net unrealized holding gains and lossesI/S (to balance)
2,000
2,000

1215
Brief Exercise 127

An investor should account for dividends from an investment not accounted for by
the equity method as investment revenue. Since Turner holds only 10% of ICA stock,
its assumed that it does not have significant influence over the company. Turners
cash increased by $500,000 (10% x $5 million). It also reports $500,000 as
investment revenue in the income statement.
Brief Exercise 128

An investor should account for dividends from an equity method investee as a
reduction in its investment account. Since investment revenue is recognized as the
investee earns it, it would be inappropriate to again recognize revenue when earnings
are distributed as dividends. Instead, the dividend distribution is considered to be a
reduction of the investees net assets, reflecting the fact that the investors ownership
interest in those net assets declined proportionately. Turners cash increased by $2
million (40% x $5 million). Its investment account declined by the same amount.
There is no effect in the income statement.

1216
Brief Exercise 129

With the equity method we attempt to approximate the effects of accounting for the
purchase of the investee as a consolidation. Consolidated financial statements report
acquired net assets at their fair values. Both investment revenue and the investment
would be reduced by the negative income effect of the extra depreciation the higher
fair value would cause. This would equal (30% x $50 million) 15 years = $1
million each year for 15 years.
Brief Exercise 1210

Under proportionate consolidation, Park would have included its portion of
Walliss depreciable assets in the Park depreciable asset accounts on its consolidated
balance sheet. Those depreciable asset accounts would be reduced by the extra
depreciation the higher fair value would cause. This would equal (50% x $50
million) 15 years = $1.67 million each year for 15 years.
Brief Exercise 1211

The investment would be increased by $12 million. Financial statements would
be recast to reflect the equity method for each year reported for comparative
purposes. A disclosure note also should describe the change, justify the switch, and
indicate its effects on all financial statement items.
The answer would not be the same if Pioneer changes from the equity method.
Rather, no adjustment is made to the carrying amount of the investment. Instead, the
equity method is simply discontinued, and the new method is applied from then on.
The balance in the investment account when the equity method is discontinued
would serve as the new cost basis for writing the investment up or down to market
value in the next set of financial statements. There also would be no revision of
prior years, but the change should be described in a disclosure note.

1217
Brief Exercise 1212

Given Turners election of the fair value option, it would account for this
investment similar to a trading security, while still preserving its classification as a
significant-influence investment and showing it as a noncurrent asset in the balance
sheet.
2013
January 2
Investment in ICA Company .............................................. 10,000,000
Cash ..................................................................................
10,000,000
December 30
Cash (40% x $500,000) ...........................................................
Investment revenue .........................................................
200,000
200,000
December 31
Fair value adjustment ($11.5M 10M) ................................... 1,500,000
Net unrealized holding gains and lossesI/S
(may also labeled investment revenue) ........................
1,500,000
Note: A different approach to reach the same outcome would be for Turner to use
equity-method accounting throughout the year, and then at the end of the
year make whatever adjustment to fair value is necessary to adjust the
investment account to fair value. Under that approach, Turner would
recognize 40% of ICAs $750,000 income ($300,000) as investment
income, it would not recognize investment income associated with ICAs
dividend, and it would end up with an investment account containing
$10,100,000 ($10,000,000 + 300,000 200,000). Turner then would need
to make a fair value adjustment of $1,400,000 ($11,500,000 10,100,000)
to its ICA investment. So the total amount of income recognized would be
$1,700,000 ($300,000 investment income + $1,400,000 unrealized gain).
Note that this alternative produces the same total amount of investment
income as is produced above, $1,700,000 ($200,000 investment revenue +
$1,500,000 unrealized gain).

1218
Brief Exercise 1213

Because the drop in the market price of stock is considered to be other-thantemporary, LED records the impairment of $450,000 ($4.50 x 100,000 shares) and
reclassifies previously recognized unrealized losses of $100,000 ($1.00 x 100,000
shares) as follows:
Other-than-temporary impairment lossI/S ....
AFS Investment (Branch) ..............................
450,000
Fair value adjustment .........................................

100,000
100,000
450,000
In the income statement, the entire $450,000 will be shown as an OTT impairment
loss. A $100,000 reclassification adjustment will increase OCI (because the $100,000
decreased OCI and therefore AOCI in a prior period, it must be backed out of OCI and
AOCI in the current period). Therefore, the net effect on comprehensive income
during the current period will be $350,000.

1219
Brief Exercise 1214

LED believes it is more likely than not that it will have to sell the investment
before fair value recovers, so the portion of the impairment that consists of credit and
noncredit losses is not relevant. LED must recognize the entire OTT impairment in
earnings, reducing the carrying value of the LED bonds by crediting a discount on
bond investment account. LED records the impairment of $450,000 and reclassifies
previously recognized unrealized losses of $100,000 as follows:
Other-than-temporary impairment lossI/S .....
Discount on bond investment .........................
450,000
Fair value adjustment ..........................................

100,000
100,000
450,000
loss. A $100,000 reclassification adjustment will increase OCI (because the $100,000
decreased OCI and therefore AOCI in a prior period, it must be backed out of OCI and
AOCI in the current period). Therefore, the net effect on comprehensive income
during the current period will be $350,000.

1220
Brief Exercise 1215

LED does not intend to sell the investment, and it does not believe it is more likely
than not that it will have to sell the investment before fair value recovers, so the
portion of the impairment that consists of credit and noncredit losses is relevant. LED
must recognize the $200,000 credit loss component of the OTT impairment in
earnings, and the $250,000 noncredit loss component in OCI. LED records the
impairment of $450,000 and reclassifies previously recognized unrealized losses of
$100,000 as follows:
200,000
OTT impairment lossOCI ...............................

Fair value adjustment .....................................
250,000

100,000
100,000
200,000
250,000
LED still would have to include the entire $450,000 in the income statement before
backing out the $250,000 to leave a $200,000 reduction of earnings. The $100,000
reclassification adjustment will increase OCI (because the $100,000 decreased OCI
and therefore AOCI in a prior period, it must be backed out of OCI and AOCI in the
current period). Therefore, the net effect on comprehensive income will be $350,000
during the current period ($200,000 from net income, $150,000 from OCI).

1221
Brief Exercise 1216

Wickum would have recorded a journal entry previously that recognized the OTT
impairment in earnings and reduced the investment account:
Other-than-temporary impairment lossI/S ......
Discount on debt investment ..........................
500,000
500,000
Upon recovery of $300,000 of fair value, Wickum would reverse the impairment
by that amount:
Discount on debt investment ...............................
300,000
Recovery of other-than-temporary impairment lossI/S
300,000

1222
SUPPLEMENT BRIEF EXERCISES

Brief Exercise 1217
Lemp would account for the bond investment at FV-OCI because it has the
characteristics of simple debt and is held for purposes of investment. Therefore,
Lemp would report the bond in the balance sheet as an investment of $900 and include
the $100 decline in fair value in OCI as a loss.
Brief Exercise 1218

Fowler would account for the note at FV-NI because it has the characteristics of
simple debt and Fowler is holding it for sale. Therefore, Fowler would report the
note in the balance sheet as an investment of $80,000 and include the $5,000 increase
in fair value in net income as a gain.
Brief Exercise 1219

Fowler would account for the note at amortized cost, because it has the
characteristics of simple debt and Fowler intends to hold it until it matures.
Therefore, Fowler would report the note in the balance sheet as an investment of
$75,000, and would not include the $5,000 increase in fair value in either OCI or net
income.
Brief Exercise 1220

Barrett would account for the equity at FV-NI because the equity investment does
not qualify for the equity method. Therefore, Fowler would report the equity in the
balance sheet as an investment of $80,000 and would include the $20,000 decrease in
fair value in net income as a loss. The fact that Barrett expects the fair value to
recover prior to sale is not relevant.

1223
EXERCISES
Exercise 121
Requirement 1
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Requirement 2
Cash (3% x $240 million) ........................................
Interest revenue (4% x $200) .............................
($ in millions)
240.0
40.0
200.0
7.2
.8
8.0
Requirement 3
Tanner-UNF reports its investment in the December 31, 2013, balance sheet at
its amortized costthat is, its book value:
Investment in bonds ............................................
Less: Discount on bond investment ($40 0.8 million)
Amortized cost ................................................
$240.0
39.2
$200.8
If sale before maturity isnt an alternative, increases and decreases in the

market value between the time a debt security is acquired and the day it matures
to a prearranged maturity value are relatively unimportant. For this reason, if
an investor has the positive intent and ability to hold the securities to
maturity, investments in debt securities are classified as held-to-maturity and
reported at amortized cost rather than fair value in the balance sheet.
Requirement 4
Cash (proceeds from sale) .......................................
Discount on bond investment (balance, determined above)
Loss on sale of investments (to balance) ...............
Investment in bonds (face amount) ....................
($ in millions)
190.0
39.2
10.8
240.0

1224
Exercise 122
November 1
($ in millions)
Cash ................................................................
Investment revenue .....................................
2.4
2.4
December 1
Investment in Facsimile Enterprises bonds ....
Cash.............................................................
30
30
December 31
Investment in U.S. treasury bills ...................
Cash.............................................................
8.9
8.9
December 31
Investment revenue receivableConvenience
bonds ($48 million x 10% x 2/12) .......................
Investment revenue receivableFacsimile
Enterprises bonds ($30 million x 12% x 1/12) ....
Investment revenue ...................................
0.8
0.3
1.1
Note: Securities held-to-maturity are not adjusted to fair value.

1225
Exercise 123
Requirement 2
The specific citation that specifies the circumstances and conditions under which it is
appropriate to account for investments as held-to-maturity is FASB ACS 3201025
4: InvestmentsDebt and Equity SecuritiesOverallRecognition
Circumstances Not Consistent with Held-to-Maturity Classification.
Requirement 3
FASB ACS 32010254 reads as follows:
An entity shall not classify a debt security as held-to-maturity if the entity has the
intent to hold the security for only an indefinite period. Consequently, a debt security
shall not, for example, be classified as held-to-maturity if the entity anticipates that the
security would be available to be sold in response to any of the following
circumstances:
a. Changes in market interest rates and related changes in the security's
prepayment risk
b. Needs for liquidity (for example, due to the withdrawal of deposits,
increased demand for loans, surrender of insurance policies, or payment of
insurance claims)
c. Changes in the availability of and the yield on alternative investments
d. Changes in funding sources and terms
e. Changes in foreign currency risk.
Exercise 124
Investment in GM common shares ................
Cash ([800 shares x $50] + $1,200) ...................
41,200
Cash ([800 shares x $53] $1,300) .......................

Loss on sale of investments ............................
Investment in GM common shares ............
41,100
100
41,200
41,200

1226
Exercise 125
Requirement 1
2013
December 17
Investment in Grocers Supply preferred shares ................
Cash .................................................................................
350,000
December 28
Cash .....................................................................................
Investment revenue ..........................................................
2,000
December 31
Fair value adjustment ..........................................................
([$4 x 100,000 shares] $350,000) .........................................
350,000
2,000
50,000
50,000
2014
January 5
Investment in Grocers Supply preferred
shares (account balance).................................................
395,000
45,000
350,000
December 31
Fair value adjustment (account balance) .............................
50,000
50,000

1227
Exercise 125 (concluded)

Requirement 2
Balance Sheet
(short-term investment):
Trading securities ....................................................
Income Statement:
Investment revenue (dividends)...........................................
Net unrealized holding gains and losses (from adjusting entry)
$400,000
$ 2,000
50,000
Note: Unlike for securities available-for-sale, unrealized holding gains and

losses for trading securities are included in income.

1228
Exercise 126
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific citation for
each of the following items is:
1. Unrealized holding gains for trading securities should be included in earnings:
FASB ACS 32010351a: InvestmentsDebt and Equity Securities
OverallSubsequent MeasurementGeneral.
2. Under the equity method, the investor accounts for its share of the earnings or
losses of the investee in the periods they are reported by the investee in its
financial statements: FASB ACS 32310354: InvestmentsEquity Method
and Joint VenturesOverallSubsequent MeasurementGeneral.
3. Transfers of securities between categories shall be accounted for at fair value:
FASB ACS 320103510: InvestmentsDebt and Equity Securities
OverallSubsequent MeasurementGeneral.
4. Disclosures for available-for-sale securities should include total losses for
securities that have net losses included in accumulated other comprehensive
income: FASB ACS 32010502: InvestmentsDebt and Equity
SecuritiesOverallDisclosureSecurities Classified as Available for Sale.

1229
Exercise 127
Requirement 1
.

Fair value adjustment ($45,000 20,000)
25,000
25,000
Requirement 2
None. Accumulated net holding gains and losses for securities available-forsale are reported as a component of shareholders equity (in accumulated
other comprehensive income), and changes in the balance are reported as
other comprehensive income or loss in the statement of comprehensive
income rather than as part of earnings. This statement can be reported either
(a) as a combined statement of comprehensive income that includes net
income and other comprehensive income, or (b) as a separate statement of
comprehensive income.

1230
Exercise 128
Requirement 1
Securities held-to-maturity are debt securities that an investor has the positive
intent and ability to hold to maturity. Actively traded investments in debt or
equity securities acquired principally for the purpose of selling them in the near
term are classified as trading securities. The IBM shares are neither. They are
classified as available-for-sale since all investments in debt and equity securities
that dont fit the definitions of the other reporting categories are classified this
way. Of course, the equity method isnt appropriate either because 10,000 shares
of IBM certainly dont constitute significant influence.
Investments in securities available-for-sale are reported at fair value, and holding
gains or losses are not included in the determination of income for the period.
Instead, they are reported as other comprehensive income or loss in the statement
of comprehensive income. This statement can be reported either (a) as a
combined statement of comprehensive income that includes net income and other
comprehensive income, or (b) as a separate statement of comprehensive income.
Accumulated net holding gains and losses for securities available-for-sale are
reported as a separate component of shareholders equity in the balance sheet.
Requirement 2
December 31, 2013
(10,000 shares x [$58 60]) .........................................................
Fair value adjustment ...........................................................
20,000
20,000

1231

Requirement 3
December 31, 2014
($ in 000s)
Available-for-Sale Securities
IBM shares Dec. 31, 2014
Cost
$600
Fair Value
$610
Accumulated
Unrealized
Gain (Loss)
$10
Moving from a negative $20 (2013) to a positive $10 (2014) requires an increase
of $30:
Balance needed in fair value adjustment
Existing balance in fair value adjustment:
Increase (decrease) needed in fair value adjustment:
Fair Value
Adjustment
$10
($20)
$30
--------------------------------------------------------20
0
+10
+30 ----------------------------->
Fair value adjustment 10,000 shares x [$61 58]) ...........................

Net unrealized holding gains and lossesOCI ( $20 10) ....
30,000
30,000

1232
Exercise 129
Requirement 1
2013
March 2
($ in millions)
Investment in Platinum Gauges, Inc., shares ..............................

Cash .........................................................................................
31
31
April 12
Investment in Zenith bonds .........................................................
Cash .........................................................................................
20
July 18
Cash .............................................................................................
Investment revenue ..................................................................
October 15
Cash .............................................................................................
Investment revenue ..................................................................
October 16
Cash .............................................................................................
Investment in Zenith bonds .....................................................
Gain on sale of investments.....................................................
November 1
Investment in LTD preferred shares ...........................................
Cash .........................................................................................
20
1
21
20
1
40
40

1233
Exercise 129(continued)
December 31
($ in millions)
Platinum Gauges, Inc., shares
LTD preferred shares
Totals
Cost
$31
40
$71
Fair Value
$32*
37**
$69
Accumulated
Unrealized
Gain (Loss)
$1
(3)
$(2)
* $32 x 1 million shares

** $74 x 500,000 shares
Adjusting entry:
Net unrealized holding gains and lossesOCI ($71 69) ..........
Fair value adjustment ($71 69) ...............................................
2
2
2014
January 23
($ in millions)
([1 million shares x 1/2] x $32)
Cash
................................................
Gain on sale of investments (difference) ...................................
Investment in Platinum Gauges
shares ($31 million cost x 1/2) ...................................................
March 1
Cash ($76 x 500,000 shares) ............................................................
Loss on sale of investments (difference) .......................................
Investment in LTD preferred (cost) .........................................
16.0
0.5
15.5
38
2
40
Note: As part of the process of recording the normal, period-end fair value adjusting
entry at 12/31/2014, Construction would debit fair value adjustment and credit net
unrealized gains and lossesOCI for the $2.5 million associated with the sold
investments to remove their effects from the financial statements. (Construction sold
only half the Platinum investments so only half of the Platinum fair value adjustment
should be removed. The 2.5 amount comes from 3.0 LTD 0.5 Platinum.)

1234

Requirement 2
2013 Income Statement
($ in millions)
Investment revenue (from July 18; Oct. 15) .....................................

Gain on sale of investments (from Oct. 16) ....................................
$3
1
Other comprehensive income:*

Net unrealized holding gains and losses on investments . **
$2
* Note: Unlike for trading securities, unrealized holding gains and losses are not included in
income for securities available-for-sale. Rather, they are included in other comprehensive
income, and accumulated in shareholders equity in accumulated other comprehensive
income.
** Assuming Construction Forms chooses to report other comprehensive income in a


1235
Exercise 1210
Requirement 1
Purchase
($ in millions)
Investment in Jackson Industry shares........................................

Cash ........................................................................................
90
90
Net income
No entry
Dividends
Cash (5% x $60 million)..................................................................
Investment revenue .................................................................
Adjusting entry
Fair value adjustment ($98 90 million) ........................................

Net unrealized holding gains and lossesOCI ......................
8
8
Requirement 2
Investment revenue ..........................
$3 million
Note: An unrealized holding gain is not included in income for securities

available-for-sale. Rather, it is included in other comprehensive income, and
accumulated in shareholders equity in accumulated other comprehensive
income.

1236
Exercise 1211
1. Investments reported as current assets.
Security A
$ 910,000
Security B
100,000
Security C
780,000
Security E
490,000
Total
$2,280,000
2. Investments reported as noncurrent assets.
Security D
$ 915,000
Security F
615,000
$1,530,000
3. Unrealized gain (or loss) component of income before taxes.

Trading Securities:
Security
A
B
Totals
Cost
Fair value
$ 900,000
105,000
$1,005,000
$ 910,000
100,000
$1,010,000
Unrealized
gain (loss)
$10,000
(5,000)
$ 5,000
4. Unrealized gain (or loss) component of AOCI in shareholders equity.

Securities Available-for-Sale:
Security
C
D
Totals
Cost
Fair value
$ 700,000
900,000
$1,600,000
$ 780,000
915,000
$1,695,000
Unrealized
gain (loss)
$80,000
15,000
$95,000

1237
Exercise 1212
Requirement 1
($ in 000s)
IBM sharesDec. 31, 2013
Cost
$1,345
Fair Value
$1,175
Accumulated
Unrealized
Gain (Loss)
$(170)
Moving from a negative $145 (Jan.1) to a negative $170 requires a reduction of

$25:
Fair Value
Adjustment
($170)
($145)
($ 25)
------------------------------------------------------- 170
145
0
<---------------- 25
Net unrealized holding gains and lossesOCI .....................

Fair value adjustment ($1,175,000 1,200,000) ..................
25,000
25,000

1238
Exercise 1212 (continued)

Requirement 2
($ in 000s)
Cost
$1,345
Fair Value
$1,275
Accumulated
Unrealized
Gain (Loss)
$(70)
Moving from a negative $145 (Jan.1) to a negative $70 requires an increase of

$75:
Fair Value
Adjustment
($ 70)
($145)
$ 75
------------------------------------------------------------------------------------------ 145
70
0
+75 ---------------------->
Fair value adjustment ($1,275,000 1,200,000) .......................

Net unrealized holding gains and lossesOCI ...............
75,000
75,000

1239

Requirement 3
($ in 000s)
Cost
$1,345
Fair Value
$1,375
Accumulated
Unrealized
Gain (Loss)
$30
Moving from a negative $145 (Jan.1) to a positive $30 requires an increase of

$175:
Fair Value
Adjustment
$ 30
($145)
$175
------------------------------------------------------------------------------------------ 145
70
0
+ 30
+175 -------------------------------------------------------->
Fair value adjustment ($1,375,000 1,200,000) .......................

Net unrealized holding gains and lossesOCI ..............
175,000
175,000

1240
Exercise 1213
Requirement 1
The sale of the A Corporation shares decreased Harlons pretax earnings by $5
million. The purchase of the C Corporation shares had no effect on Harlons 2014
earnings (because the shares are classified as available-for-sale investments, any
unrealized gains or losses occurring after purchase during 2014 would not affect 2014
earnings). Here are the entries used to record those two transactions:
June 1, 2014
Cash
Loss on sale of investments (difference)
Investment in A Corporation shares (cost)
September 12, 2014
Investment in C Corporation shares
Cash
($ in millions)
15
5
20
15
15

1241

Requirement 2
Harlons securities available-for-sale portfolio should be reported in its 2014
balance sheet at its fair value of $101 million:
December 31, 2014
($ in millions)
Cost, Dec. 31
Securities Available-for-Sale 2013 2014
A Corporation shares
B Corporation bonds
C Corporation shares
D Industries shares
Totals
$20
35
na
45
$100
na
$35
15
45
$95
Fair Value, Dec. 31

2013
2014
$14
35
na
46
$95
na
$ 37
14
50
$101
In 2013, Harlon would have had a net unrealized loss of $5 (cost of $100 fair
value of $95). Moving from a negative $5 (2013) to a positive $6 requires an
increase of $11:

Fair Value
Adjustment
Allowance
$6
(5)
$11
--------------------------------------------------------5
0
+6
+ 11 ----------------------------->
Fair value adjustment ($5 credit to $6 debit)

11
11
The adjustment has no effect on earnings. Unlike for trading securities,

unrealized holding gains and losses are not included in income for securities
available-for-sale. Rather, they are included in other comprehensive income,
and accumulated in shareholders equity in accumulated other comprehensive
income.
1242
Exercise 1214
Requirement 1
The investment would be accounted for as an available-for-sale investment:
Purchase
Investment in AMC common shares ...................................

Cash ...............................................................................
480,000
480,000
Net income
No entry
Dividends
Cash (20% x 400,000 shares x $0.25) ........................................

Investment revenue.........................................................
20,000
20,000
Adjusting entry
Fair value adjustment ($505,000 480,000)............................

Net unrealized holding gains and lossesOCI ...............
25,000
25,000
Requirement 2
The investment would be accounted for using the equity method:
Purchase
Investment in AMC common shares ...................................

Cash ...............................................................................
480,000
480,000
Net income
Investment in AMC common shares (20% x $250,000) ........

Investment revenue.........................................................
Dividends
Cash (20% x 400,000 shares x $0.25) ........................................
Investment in AMC common shares ..............................
50,000
50,000
20,000
20,000
Adjusting entry
No entry
1243
Exercise 1215
Purchase
Investment in Nursery Supplies shares ...................................

Cash ....................................................................................
($ in millions)
56
56
Net income
Investment in Nursery Supplies shares (30% x $40 million) .....

Investment revenue .............................................................
Dividends
Cash (30% x 8 million shares x $1.25) ...........................................
12
12
3
Investment in Nursery Supplies shares ...............................
Adjusting entry
No entry
Exercise 1216
Requirement 1
($ in millions)
Investment in equity securities ($48 million 31 million)...........

Retained earnings (investment revenue from the equity method)
17
17
Requirement 2
Financial statements would be recast to reflect the equity method for each year
reported for comparative purposes. A disclosure note also should describe the
change, justify the switch, and indicate its effects on all financial statement items.
Requirement 3
When a company changes from the equity method, no adjustment is made to the
carrying amount of the investment. Instead, the equity method is simply
discontinued, and the new method is applied from then on. The balance in the
investment account when the equity method is discontinued would serve as the new
cost basis for writing the investment up or down to fair value in the next set of
financial statements. There also would be no revision of prior years, but the change
should be described in a disclosure note.

1244
Exercise 1217
Requirement 1: Error discovered before the books are adjusted or closed in
2013.
The journal entry the company made is:
Cash .............................................................
Investments ..............................................
100,000
100,000
The journal entry the company should have made is:

Cash .............................................................
Investments ..............................................
Gain on sale of investments ($100,000 80,000)
100,000
80,000
20,000
Therefore, to get from what was done to what should have been done, the
following entry is needed:
Investments ($100,000 80,000) .....................
Gain on sale of investments.....................
20,000
20,000
Requirement 2: Error not discovered until early 2014.

Investments ($100,000 80,000) .....................
Retained earnings ....................................
20,000
20,000

1245
Exercise 1218
Purchase
($ in millions)
Investment in Carne Cosmetics shares ................................

Cash .................................................................................
68
68
Net income
Investment in Carne Cosmetics shares (25% x $40 million) ..

Dividends
Cash (4 million shares x $1) ......................................................
10
10
4
Investment in Carne Cosmetics shares ............................
Depreciation Adjustment
Investment revenue ($8 million [calculation below ] 8 years) ..

Investment in Carne Cosmetics shares ............................
Calculations:
Investee
Net Assets
Net Assets
Purchased
Difference
Attributed to:
Cost
1
1
$68
Fair value:
$224* x 25% = $56
Book value:
$192 x 25% = $48
Goodwill:$12
Undervaluation
of assets: $8
*[$192 + 32] = $224

Adjusting entry
No entry to adjust for changes in fair value as this investment is accounted for
under the equity method.

1246
Exercise 1219
Requirement 1
Purchase
($ in millions)
Investment in Lake Construction shares .............................

Cash ................................................................................
300
300
Net income
Investment in Lake Construction shares (20% x $150 million)

30
30
Dividends
Cash (20% x $30 million) ........................................................
Investment in Lake Construction shares .........................
Adjustment for depreciation
Investment revenue ($10 million [calculation below ] 10 years)

Investment in Lake Construction shares .........................
1
1
calculation:
Investee
Net Assets
Net Assets
Purchased
Cost
$300
Fair value:
Goodwill:
$120
$900 x 20% = $180
Book value:
Difference
Attributed to:
$800 x 20% = $160
Undervaluation
of buildings ($10) and land ($10): $20
Requirement 2
a. Investment in Lake Construction shares
________________________________________
($ in millions)
Cost
300
Share of income 30
Balance
6 Dividends
1 Depreciation adjustment
_________________
323
1247
b. As investment revenue in the income statement.

$30 million (share of income) 1 million (depreciation adjustment) =
$29 million
c. Among investing activities in the statement of cash flows.
$300 million
[Cash dividends received ($6 million) also are reportedas part of operating
activities. If Cameron reports cash flows using the indirect method, the
operating activities section of its statement of cash flows would include an
adjustment of ($23 million) to get from the net income figure that includes
$29 million of revenue to a cash flow number that should only include $6
million of cash flow.]

1248
Exercise 1220
Requirement 1
First we need to identify the amount of difference between book value and fair value
associated with goodwill, buildings, and land:
Investee
Net Assets
Cost
Net Assets
Purchased
Difference
Attributed to:
$750
Fair value:
$300
$900 x 50% = $450
Book value:
Goodwill:
$800 x 50% = $400
Undervaluation
of buildings ($25) and land ($25): $50
a.
January 1, 2013 effect on Buildings

Because half of the fair value of Lakes individual net assets are buildings,
and Lake would be consolidated with Cameron, Camerons buildings
account would increase by 1/2 x $450 = $225 million.
b.
January 1, 2013 effect on Land

Because half of the fair value of Lakes individual net assets is land, and
Lake would be consolidated with Cameron, Camerons land account would
increase by 1/2 x $450 = $225 million.
c.
January 1, 2013 effect on Goodwill

Because Lake would be consolidated with Cameron, Camerons goodwill
account would increase by $300 million.
d.
January 1, 2013 effect on Equity method investments

Because Lake would be consolidated with Cameron, there would be no
effect of this investment on Camerons equity method investment account.

1249

Requirement 2
a. December 31, 2013 effect on Buildings
Because half of the fair value of Lakes individual net assets are buildings,
and Lake would be consolidated with Cameron, Camerons buildings
account would increase by 1/2 x $450 = $225 million. Cameron would
depreciate those buildings over their remaining 10-year life, so Lake would
recognize $22.5 million of depreciation expense per year ($225 million 10
years). Therefore, at December 31, 2013, the buildings associated with the
Lake investment would have a carrying value of $202.5 million ($225
million cost 22.5 million accumulated depreciation).
b.
December 31, 2013 effect on Land

Land is not amortized, so its carrying value would not change from its value
on January 1, 2013.
c.
December 31, 2013 effect on Goodwill

Goodwill is not amortized, so its carrying value would not change from its
value on January 1, 2013.
d.
December 31, 2013 effect on Equity method investments

Because Lake would be consolidated with Cameron, there would be no
effect of this investment on Camerons equity method investment account at
December 31, 2013.
Requirement 3
The effect of the investment on Camerons December 31, 2013, retained
earnings would not differ between the equity method and proportionate
consolidation treatments. Under the equity method, Cameron would
recognize investment revenue based on its share of Lakes net income,
while under proportionate consolidation, Cameron would include its share
of Lakes revenue and expenses on those lines of the consolidated income
statement. Regardless, the same total amount would be included in
Camerons net income and closed to Camerons retained earnings.

1250
Exercise 1221
Requirement 1
Electing the fair value option for held-to-maturity securities simply requires
reclassifying those securities as trading securities. Therefore, this investment
would be classified as a trading security on Tanner-UNFs balance sheet.
Requirement 2
($ in millions)
240
40
200
Requirement 3
Cash (3% x $240 million) .......................................
Interest revenue (4% x $200) ..................................
7.2
.8
8.0
Requirement 4
The carrying value of the bonds is $240 ($40 0.8) = $200.8. Therefore, to
adjust to fair value of $210, Tanner-UNF would need the following journal entry:
Net unrealized holding gains and lossesI/S ($210 200.8)
9.2
9.2
Requirement 5
Tanner-UNF reports its investment in the December 31, 2013, balance sheet at
fair value of $210 million.
Requirement 6
Cash (proceeds from sale) .......................................
Loss on sale of investments (to balance)...............
Discount on bond investment (account balance)....
Investment in bonds (account balance)...............
($ in millions)
190.0
10.8
39.2
240.0
Assuming no other trading securities, the 2014 adjusting entry would be:
Net unrealized holding gains and lossesI/S ....
9.2
Fair value adjustment (account balance) ...........
9.2
1251
Exercise 1222
Requirement 1
Electing the fair value option for available-for-sale securities simply requires
reclassifying those securities as trading securities. Therefore, this investment
would be classified as a trading security on Sanborns balance sheet.
Requirement 2
Purchase
Investment in Jackson Industry shares........................................

Cash ........................................................................................
($ in millions)
90
90
Net income
No entry
Dividends
Cash (5% x $60 million)..................................................................
Investment revenue .................................................................
Adjusting entry
Fair value adjustment ($98 90 million) ........................................

Net unrealized holding gains and lossesI/S ........................
8
8
Requirement 3
Investment revenue (dividends)...........................................
Net unrealized holding gains and losses (from adjusting entry)
Total effect on 2013 net income before taxes
$ 3,000
8,000
11,000

1252
Exercise 1223
Requirement 1
Electing the fair value option for significant-influence investments requires use
of the same basic accounting approach that is used for trading securities.
However, the investments will still be classified as significant-influence
investments and shown either on the same line of the balance sheet as
equitymethod investments (but with the amount at fair value indicated
parenthetically) or on a separate line of the balance sheet.
Requirement 2
Purchase
($ in millions)
Investment in Nursery Supplies shares ...................................

Cash ....................................................................................
56
56
Net income
No entry.
Dividends
Cash (30% x 8 million shares x $1.25) ...........................................
Investment revenue ..............................................................

Adjusting entry ......................................................................................
Net unrealized holding gains and lossesI/S ($56 52 million)
3
4
4
Note: A different approach to reach the same outcome would be for Florists to use
equity method accounting throughout the year, and then at the end of the year
make whatever adjustment to fair value is necessary to adjust the investment
account to fair value. Under that approach, Florists would recognize 30% of
Nurserys $40 million of income ($12 million) as investment income, it would not
recognize investment income associated with Nurserys dividend, and would end
up with an investment account containing $65 ($56 million + 12 million 3
million). The company would need to make a fair value adjustment of $13
million ($65 million 52 million). So the total amount of loss recognized would
be $1 million ($12 million investment income 13 million unrealized loss). Note
that this alternative produces the same total amount of investment loss as is
produced above: $1 million ($3 million investment revenue 4 million unrealized
loss).
1253
Exercise 1224
Requirement 1
Insurance expense (difference) ...............................................
Cash surrender value of life insurance ($27,000 21,000)......
Cash (2013 premium) ..........................................................
Requirement 2
Cash (death benefit) .........................................................
Cash surrender value of life insurance (account balance)
Gain on life insurance settlement (to balance) ...........
64,000
6,000
70,000
4,000,000
27,000
3,973,000
Exercise 1225
Requirement 1
Insurance expense (difference) .......................................
Cash surrender value of life insurance ($4,600 2,500) ..
Cash (premium) ..........................................................
22,900
2,100
25,000
Requirement 2
Cash (death benefit) .........................................................
Cash surrender value of life insurance (account balance)
Gain on life insurance settlement (to balance) ...........
250,000
16,000
234,000

1254
Exercise 1226
Requirement 1
Bloom believes it is more likely than not it will have to sell the investment before
fair value recovers, so the portion of the impairment that consists of credit and
noncredit losses is not relevant. Bloom must recognize the entire OTT impairment in
earnings as follows:
400,000
400,000
loss.
Requirement 2
Bloom does not plan to sell the investment, and does not believe it is more likely
than not that it will have to sell the investment before fair value recovers, so the
portion of the impairment that consists of credit and noncredit losses is relevant.
Bloom must recognize the $250,000 of credit losses as an OTT impairment in
earnings, and the other $150,000 as a reduction of OCI, as follows:
250,000
OTT impairment lossOCI ..............................

Fair value adjustmentNoncredit loss ..........
150,000
150,000
250,000
loss, then the amount of noncredit loss is subtracted to leave only the credit loss
reducing earnings:
OTT impairment on HTM investments
Total OTT impairment loss .......................
Less portion recognized in OCI .................
Net OTT impairment recognized in earnings
($400,000)
$150,000
($250,000)

1255

Requirement 3
Bloom does not plan to sell the investment, and does not believe it is more likely
than not that Bloom will have to sell the investment before fair value recovers, but the
entire impairment consists of noncredit losses, so Bloom does not record any OTT
impairment.

1256
Exercise 1227
Requirement 1: Assuming Bloom has not previously recorded a $100,000 loss
Scenario 1: Bloom believes it is more likely than not it will have to sell the
investment before fair value recovers, so the portion of the impairment that consists of
credit and noncredit losses is not relevant. Bloom must recognize the entire OTT
impairment in earnings. Bloom makes the following entry:
400,000
400,000
loss. There is no effect on OCI, and a $400,000 effect on comprehensive income.
Scenario 2: Bloom does not plan to sell the investment, and does not believe it is
more likely than not that it will have to sell the investment before fair value recovers,
so the portion of the impairment that consists of credit and noncredit losses is relevant.
earnings, and the other $150,000 as a reduction of OCI. Bloom makes the following
entry:
250,000
Net unrealized holding gains and lossesOCI..

Fair value adjustment ......................................
150,000
250,000
150,000
loss, then the amount of noncredit loss is subtracted to leave only the credit loss
reducing earnings:
OTT impairment on AFS investments
Total OTT impairment loss .......................
Less portion recognized in OCI .................
Net OTT impairment recognized in earnings
($400,000)
$150,000
($250,000)
So, net income will be decreased by $250,000, OCI by $150,000, and comprehensive
income by $400,000.
1257
Exercise 1227 (continued)

but the entire impairment consists of noncredit losses, so Bloom does not record any
OTT impairment.
Requirement 2: Assuming Bloom has previously recorded a $100,000 loss

Scenario 1: Bloom believes it is more likely than not it will have to sell the
investment before fair value recovers, so the portion of the impairment that consists of
credit and noncredit losses is not relevant. Bloom must recognize the entire OTT
impairment in earnings. Bloom makes the following entry:
Discount on bond investment ..........................
400,000
400,000
Assuming a previously recorded $100,000 unrealized loss, Bloom must also reclassify
that loss out of OCI and the fair value adjustment. In 2012 Bloom would have made
the following entry:
Net unrealized holding gains and lossesOCI .
100,000
100,000
So to reclassify that unrealized loss, Bloom would reverse that entry.

100,000
100,000
loss. OCI will be increased by the $100,000 reclassification, such that the net effect
on comprehensive income is $300,000.

1258

earnings, and the other $150,000 as a reduction of OCI. Bloom makes the following
entry:
Other-than-temporary impairment loss .............
250,000

150,000
250,000
150,000
Assuming a previously recorded $100,000 unrealized loss, Bloom must also reclassify
that loss out of OCI and the fair value adjustment:
100,000
100,000
Note that, when combined with the other journal entries, the net effect is that net
income is decreased by $250,000, OCI is decreased by $50,000 ($150,000 100,000),
and comprehensive income therefore is decreased by $300,000. That makes sense,
because $100,000 of decrease in OCI and comprehensive income occurred in 2012,
when the $100,000 unrealized loss was recognized.
but the entire impairment consists of noncredit losses, so Bloom does not record any
OTT impairment.

1259
Exercise 1228
December 31, 2013:
Kettle must record an unrealized loss of $10,000 to account for the fact that the fair
value of Icalcs shares has fallen from the original cost of $50,000 to $40,000.
Net unrealized holding gains and lossesOCI .....................
Fair value adjustment ($50,000 40,000) ...........................
10,000
10,000
This adjustment has no effect on net income, but it reduces OCI and
comprehensive income by $10,000.
December 31, 2014:
Kettle now must record an OTT impairment. To reduce the investment from its
original cost of $50,000 to $25,000, Kettle makes the following entry:
Other-than-temporary impairment loss ($50,000 25,000)
Investment in Icalc ..........................................
25,000
25,000
Kettle also must reclassify the 2013 unrealized loss out of OCI and remove the fair
value adjustment, making the following entry that reverses the 2013 entry:
10,000
10,000
In the income statement, the $25,000 will be shown as an OTT impairment loss. OCI
will be increased by the $10,000 reclassification, such that the net effect on
comprehensive income is $15,000.
December 31, 2015:
Subsequent to recording the OTT impairment, Kettle continues to treat the
investment as AFS, but with an amortized cost of $25,000. Given an increase in fair
value to $30,000 during 2015, Kettle records a $5,000 unrealized gain, with no effect
on net income but an increase of $5,000 to OCI and comprehensive income:
5,000
5,000

1260
Exercise 1229
Requirement 1
HTM investment, December 31, 2013
Under IFRS, only credit losses are recognized as OTT impairments with respect to
HTM investments. Therefore, Flower would make the following journal entry to
reduce the carrying value of the investment from its amortized cost of 1,000,000 to
the present value of expected future cash flows (computed at the discount rate that
applied when the investment was purchased) of 750,000:
Other-than-temporary impairment loss ..............
Investment in James bonds .............................
250,000
250,000
Requirement 2
HTM investment, December 31, 2014
Under IFRS, OTT impairments associated with debt investments can be recovered.
Therefore, Flower would record a reversal of OTT impairment to increase the carrying
value of the James investment from 750,000 to 800,000 (the present value of
expected future cash flows as of December 31, 2014, computed at the discount rate
that applied when the investment was purchased):
Investment in James bonds .................................
Recovery of other-than-temporary impairment loss
50,000
50,000
Requirement 3
AFS debt investment, December 31, 2013
Under IFRS, the entire difference between amortized cost and fair value is shown
as an OTT impairment with respect to an AFS investment. Therefore, Flower would
make the following journal entry to reduce the carrying value of the investment from
its amortized cost of 1,000,000 to fair value of 600,000:
Investment in James bonds .............................
400,000
400,000

1261

Requirement 4: AFS debt investment, December 31, 2014
Under IFRS, OTT impairments associated with debt investments can be recovered.
Therefore, Flower would record a reversal of OTT impairment to increase the carrying
value of the James investment from 600,000 to its fair value of 875,000:
Investment in James bonds .................................
Recovery of other-than-temporary impairment loss
275,000
275,000
Requirement 5: AFS equity investment, December 31, 2014

Under IFRS, OTT impairments associated with equity investments cannot be
recovered. Therefore, Flower would just view the increase in fair value as an
unrealized gain, adjusting the carrying value of the investment and OCI to reflect the
increase in fair value from 600,000 to 875,000:
275,000
275,000

1262
SUPPLEMENT EXERCISES
Exercise 1230
Requirement 1
Cash (3% x $10,000) ..............................................
Interest revenue ...............................................
300
300
Requirement 2
Watney would report the bonds at amortized cost, given that the bonds are
simple debt and Watney intends to hold the bonds to maturity. Therefore,
Watney would not record any unrealized gain or loss (but would need to
consider whether impairment recognition is appropriate).
Exercise 1231
Requirement 1
Cash (3% x $10,000) ..............................................
Interest revenue ...............................................
300
300
Requirement 2
The bonds are simple debt, so Watney would report half of the bonds at FVNI (because the bonds are held for sale) and the other half at FV-OCI (because
the bonds are held for investment purposes). Therefore, Watney would prepare
the following journal entry:
([$10,000 9,000] 2) .............................................................
([$10,000 9,000] 2) .............................................................
Fair value adjustment ($10,000 9,000) ................
500
500
1,000

1263
CPA / CMA REVIEW QUESTIONS

CPA Exam Questions
1. d.
Sales price (2,000 shares x $14)
Less: Brokerage commission
Net Proceeds
Less: Cost of investment
Realized loss on trading security
$28,000
(1,400)
$26,600
(31,500)
$(4,900)
If these securities had been categorized as available-for-sale, the total loss of

$4,900 would have been recognized in net income. The prior year's unrealized
holding loss would not have been included (recognized) in earnings (net
income), but rather would have been reported as an element of other
comprehensive income. A reclassification adjustment for the unrealized holding
loss ($2,000) would also be included in other comprehensive income to remove it
from the balance sheet and report it in income.
Note: The question asks for realized loss. This is defined as the net cash
proceeds from sale minus the original cost of the investment. That realized
loss was recognized over two accounting periods: Year 4 (unrealized loss)
and Year 5 (realized, due to sale). Be careful when answering these
questions: watch for the difference between loss realized and loss
recognized.

1264
CPA Review Questions (continued)

2. a. Marketable equity securities (equity securities with readily determinable fair
values) are categorized as either trading securities (which are classified as
current assets) or available-for-sale securities (which are classified as current
or noncurrent assets), as appropriate. Because Larks investments are longterm, they are categorized as available-for-sale securities.
Available-for-sale securities are reported at fair value with unrealized
holding gains and losses reported in other comprehensive income and
included in the balance of accumulated other comprehensive income
reported in equity. The unrealized holding gain included in other
comprehensive income for 2013 would be $60,000 ($240,000 current fair
value vs. $180,000 prior period fair value). The net unrealized holding gain,
included in the accumulated other comprehensive income as of December
31, 2013, is $40,000 ($60,000 current period unrealized holding gain less
$20,000 prior period unrealized holding loss). Alternative calculation shown
below.
Net unrealized holding gains at December 31, 2013:
Fair value at December 31, 2013
$240,000
Cost
(200,000)
Net unrealized holding gain
$ 40,000
3. d. $116,250.
LT investments in marketable equity securities at fair value $ 96,450
Plus: Net unrealized holding gains and losses on
long-term marketable equity securities
19,800
Cost of LT investments in marketable equity securities
$116,250
Unrealized holding gains and losses on the noncurrent portfolio of
investments in marketable equity securities (categorized as available-for-sale
securities) are reported in other comprehensive income and included in the
balance of accumulated other comprehensive income reported in
stockholders' equity.

1265
CPA Review Questions (continued)

4. d. Since the decline in value occurred in 2012, the available-for-sale security
was reduced to fair value with a related unrealized holding loss reported in
other comprehensive income in 2012. In 2013, the asset continues to be
carried at the same net value but the unrealized holding loss in accumulated
other comprehensive income is removed and recognized as a loss in the
determination of net income since the decline is considered to be permanent.
The recognition of the loss (write-down to fair value) establishes a new cost
basis, which will not be changed for subsequent recoveries in fair value.
However, subsequent unrealized holding gains and losses will be reported in
other comprehensive income.
5. d. Neither a change in fair value of investee's common stock nor cash
dividends from investee affect the investor's reported investment income
(equity in earnings of investee) under the equity method. Under the equity
method, cash dividends would be charged against (reduce) the investment
account and have no effect on income. A change in the fair value of the
investee's common stock would not be recorded under the equity method
unless the change were judged a permanent and substantial decline, and then
the decline would be charged to a loss account rather than investment
income. These rules do not apply to investments accounted for under the
equity method.
6. c. The entries should have been:
Investment in affiliate (40% x 20,000)
Equity in earnings of affiliate
8,000
Cash (40% x $5,000)

Investment in affiliate
2,000
8,000
2,000
By erroneously recognizing the $2,000 dividend as revenue, retained

earnings are overstated. The dividends should have been booked as a
reduction of the investment; thus the investment is overstated.

1266
CPA Review Questions (concluded)

7. b. Under the equity method, the investor should reflect adjustments, which
would be made in consolidation, based on the investor's percentage
ownership, if such adjustment (eliminations) can be recorded between
investment income and the investment account. The fair value of the FIFO
inventory in excess of the carrying value would reduce net income of the
investee; therefore, the investor would charge investment income and credit
the investment account to reflect the decrease in income. The fair value of
the land in excess of its carrying value would not affect income as it is not a
depreciable asset. No adjustment would be made relative to the land.
8. a. $435,000. The equity method of accounting for investments in common
stock should be used if the investor has significant influence over the
operating and financial policies of the investee. Well Company's significant
influence is demonstrated by its officers being a majority of the investees'
board of directors.
Original cost of investment
Add: Share of income subsequent to
acquisition
10% x $500,000
Less: Dividend of investee
10% x $150,000
$400,000
50,000
(15,000)
$435,000
9. b. Under IFRS No. 9, debt is classified as either amortized cost or FVTPL.

10. c. Under IFRS No. 9, equity is classified as either FVTPL or FVTOCI (if not
held for trading purposes and if FVTOCI treatment is elected at acquisition
of the debt).
11. c. Under IFRS No. 9, equity is classified as FVTOCI if the equity is not held
for trading purposes and if FVTOCI treatment is elected at acquisition of the
debt. The election is irrevocable.
12. d. IAS No. 28 requires that the accounting policies of investees be adjusted to
correspond to those of the investor.
13. a. Recoveries of OTT impairments of debt investments, but not equity
investments, are shown in earnings.
1267
CMA Exam Questions

1. c. According to GAAP, available-for-sale securities are investments in debt
securities that are not classified as held-to-maturity or trading securities and
in equity securities with readily determinable fair values that are not
classified as trading securities. They are measured at fair value in the
balance sheet.
2. b. Available-for-sale securities include (1) equity securities with readily
determinable fair values that are not classified as trading securities and (2)
debt securities that are not classified as held-to-maturity or trading securities.
Unrealized holding gains and losses are measured by the difference between
the amortized cost and fair value, excluded from earnings, and reported in
other comprehensive income. The balance is reported net of the tax effect
(ignored in this question). Thus, the difference at May 31, year 3, is $8,005
($643,500 fair value 635,495 amortized cost). This unrealized gain is
reported as a credit balance in accumulated other comprehensive income.
3. d. Debt securities that the company has the positive intent and ability to hold to
maturity are classified as held-to-maturity. Held-to-maturity securities are
reported at amortized cost. Any unrealized gains or losses are not
recognized.

1268
PROBLEMS
Problem 121
Requirement 1
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million) .........................................
Interest revenue (5% x $66) ....................................
3.20
.10
Requirement 3
Cash (4% x $80 million) .........................................
Interest revenue (5% x [$66 + 0.1]) ........................
3.20
.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2013, balance sheet
at its amortized cost; that is, its book value:
Investment in bonds ............................................................
Less: Discount on bond investment ($14 0.1 0.11 million)
Amortized cost ................................................................
$80.00
13.79
$66.21
Increases and decreases in the fair value between the time a debt security is
acquired and the day it matures to a prearranged maturity value are relatively
unimportant if sale before maturity isnt an alternative. For this reason, if an
investor has the positive intent and ability to hold the securities to maturity,
investments in debt securities are classified as held-to-maturity and reported
at amortized cost rather than fair value in the balance sheet.

1269
Problem 121 (concluded)

Requirement 5
Fuzzy Monkeys 2013 statement of cash flows would be affected as follows:
Operating activities cash flows: Cash inflow from interest of $3.2
+ 3.2 = $6.4. (Note: if Fuzzy Monkey prepares an indirect
method statement of cash flows, it would have interest revenue of
$3.30 + 3.31 = $6.61 included in net income, so would have to
include an adjustment of $6.4 6.61 = ($0.21) to get from net
income to cash flow from operating activities.)
Investing activities cash flows: Cash outflow from purchasing
investments of $66.

1270
Problem 122
Requirement 1
Investment in bonds (face amount)........................
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million) .........................................
3.20
.10
Requirement 3
Cash (4% x $80 million) .........................................
3.20
.11
3.30
3.31
Requirement 4
at its fair value, $70 million in this case. For investments in trading securities,
changes in market values, and thus market returns, provide an indication of
managements success in deciding when to acquire the investment, when to sell
it, whether to invest in fixed-rate or variable-rate securities, and whether to
invest in long-term or short-term securities.
To do this, we first need to determine the investments amortized cost (or book
value) at the end of the year:
Amortized cost ................................................................
$80.00
13.79
$66.21
Then, to record it at fair value, we increase the investment by $70 66.21 =

$3.79 million:
Fair value adjustment .............................. ..........
3.79
3.79
Because these are trading securities, the unrealized holding gain of $3.79 would
be recognized in Fuzzy Monkeys 2013 income statement.

1271

Requirement 5
$3.30 + 3.31 = $6.61 and an unrealized holding gain of $3.79
included in net income, totaling $10.4, so would have to include
an adjustment of $6.4 10.4 = ($4.0) to get from net income to
cash flow from operating activities.)
Fuzzy Monkey would also be likely to treat the cash outflow
from purchasing trading securities of $66 as an operating
activities cash flow.

1272
Problem 123
Requirement 1
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million) .........................................
3.20
.10
Requirement 3
Cash (4% x $80 million) .........................................
3.20
.11
3.30
3.31
Requirement 4
at its fair value, $70 million in this case. For investments in securities
available-for-sale, changes in market values, and thus market returns, provide
an indication of managements success in deciding when to acquire the
investment, when to sell it, whether to invest in fixed-rate or variable-rate
securities, and whether to invest in long-term or short-term securities.
To do this, we first need to determine the investments amortized cost (or book
value) at the end of the year:
Amortized cost ................................................................
$80.00
13.79
$66.21

$3.79 million:
Net unrealized holding gains and lossesOCI ($70 66.21)
3.79
3.79
Because these are available-for-sale securities, the unrealized holding gain of

$3.79 would be recognized in Fuzzy Monkeys 2013 other comprehensive
income, and serve to increase the accumulated other comprehensive income
shown in shareholders equity.
1273

Requirement 5
$3.30 + 3.31 = $6.61 included in net income, so would have to
income to cash flow from operating activities.)
Investing activities cash flows: Cash outflow from purchasing
investments of $66.

1274
Problem 124
Note: Because Fuzzy Monkey elected the fair value option, these investments will be
reclassified as trading securities and accounted for under that approach. Therefore,
the answers to Requirements 15 are the same as those to Problem 122.
Requirement 1
($ in millions)
80
14
66
Requirement 2
Cash (4% x $80 million) .........................................
3.20
.10
Requirement 3
Cash (4% x $80 million) .........................................
3.20
.11
3.30
3.31
Requirement 4
at its fair value, $70 million in this case. For investments in trading securities,
changes in market values, and thus market returns, provide an indication of
managements success in deciding when to acquire the investment, when to sell
it, whether to invest in fixed-rate or variable-rate securities, and whether to
invest in long-term or short-term securities.
To determine the journal entry that Fuzzy Monkey must make, we first need to
determine the investments amortized cost (or book value) at the end of the
year:
Amortized cost ................................................................
$80.00
13.79
$66.21

1275

$3.79 million:
Fair value adjustment .............................. ...........
3.79
3.79
Because these are trading securities, the unrealized holding gain of $3.79 would
be recognized in Fuzzy Monkeys 2013 income statement.
Requirement 5
method statement of cash flows, it would have included in net
income interest revenue of $3.30 + 3.31 = $6.61 and an
unrealized holding gain of $3.79, totaling $10.4, so would have to
income to the correct operating activities cash flow.)
Fuzzy Monkey would also be likely to treat the cash outflow
from purchasing trading securities of $66 as an operating
activities cash flow. However, if Fuzzy Monkey anticipates
holding these investments for a sufficiently long period, it could
classify this cash outflow as an investing activities cash flow.
Requirement 6
The answers to requirements 15 would not differ if the investment
qualified for treatment as a held-to-maturity investment, because Fuzzy
Monkeys choice of the fair value option still requires reclassification of
the investment as trading securities.

1276
Problem 125
Requirement 1
2013
February 21
Investment in Distribution Transformers shares ........
Cash .........................................................................
400,000
400,000
March 18
Cash .............................................................................
Investment revenue ..................................................
8,000
September 1
Investment in American Instruments bonds ...............
Cash .........................................................................
900,000
October 20
Cash .............................................................................
Investment in Distribution Transformers ..............
Gain on sale of investments.....................................
November 1
Investment in M&D Corporation shares ....................
Cash .........................................................................
8,000
900,000
425,000
400,000
25,000
1,400,000
1,400,000

1277
Problem 125 (continued)

December 31
Adjusting entries:
Investment revenue receivable .....................................
Investment revenue ($900,000 x 10% x 4/12) ................
M & D Corporation shares
American Instruments bonds
TotalsDec. 31, 2013
Cost
$1,400,000
900,000
$2,300,000
30,000
Fair Value
$1,460,000
850,000
$2,310,000
Fair value adjustment (calculated above).........................

Net unrealized holding gains and lossesOCI .......
30,000
Accumulated
Unrealized
Gain (Loss)
$60,000
(50,000)
$10,000*
10,000
10,000*
* The $10,000 credit balance in the net unrealized holding gain is reported as 2013 other
comprehensive income in the statement of comprehensive income. It serves to increase
accumulated other comprehensive income, a component of shareholders equity in the 2013
balance sheet.

1278

Requirement 2
Income statement:
Investment revenue ($8,000 + 30,000)
Gain on sale of investments
38,000
25,000
Statement of comprehensive income*:

Net unrealized holding gains and losses on investments
10,000
Balance sheet:
Current Assets
Investment revenue receivable
30,000
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Securities available-for-sale
Plus: Fair value adjustment
$2,300,000
10,000 $2,310,000
Shareholders Equity
Accumulated other comprehensive income
Net unrealized holding gain (loss) ($60,000 50,000)
$ 10,000
* Can be reported either (a) as a combined statement of comprehensive income that includes net
income and other comprehensive income, or (b) as a separate statement of comprehensive
income.

1279

Requirement 3
2014
January 20
Cash ..............................................................................
Gain on sale of investments (to balance) ....................
Investment in M&D Corporation shares (cost) .........
March 1
Cash ..............................................................................
Investment revenue receivable .................................
1,485,000
85,000
1,400,000
45,000
30,000
15,000
August 12
Investment in Vast Communications shares ...............
Cash ..........................................................................
650,000
September 1
Cash ..............................................................................
45,000
650,000
45,000

1280

December 31
Adjusting entries:
Investment revenue receivable ....................................
Investment revenue ($900,000 x 10% x 4/12) ...............
Securities
Vast Communication shares
American Instruments bonds
TotalsDec. 31, 2014
Cost
$650,000
900,000
$1,550,000
30,000
30,000
Fair Value
$670,000
830,000
$1,500,000
Accumulated
Unrealized
Gain (Loss)
$20,000
(70,000)
$(50,000)*
Moving from a positive $10,000 (2013) to a negative $50,000 requires a decrease

of $60,000:
Fair Value
Adjustment
($50)
$10
($60)
------------------------------------------------------------------------------------------ $50,000
0 + $10,000
<-------------------------------------------- $60,000
Net unrealized holding gains and lossesOCI...........

Fair value adjustment (calculated above) ..................
60,000*
60,000
* The $60,000 debit balance in the net unrealized holding gains and losses is
reported as 2014 other comprehensive income in the statement of
comprehensive income. It serves to decrease accumulated other comprehensive
income, a component of shareholders equity in the 2014 balance sheet, from
the $10,000 credit balance it showed on the 2013 balance sheet to the $50,000
debit balance it shows in the 2014 balance sheet.

1281

Requirement 4
Income statement:
Investment revenue ($15,000 + 45,000 + 30,000)
Gain on sale of investments
90,000
85,000
Note: Unlike for trading securities, unrealized holding gains and losses are not
included in income for securities available-for-sale.
Statement of comprehensive income*:
Net unrealized holding gains and losses on investments
$ (60,000)
Balance sheet:
Current Assets
Investment revenue receivable
Less: Fair value adjustment
30,000
$1,550,000
(50,000) $1,500,000
Shareholders Equity
Accumulated other comprehensive income
Net unrealized holding gain (loss) ($20,000 70,000)
$ (50,000)
* Can be reported either (a) as a combined statement of comprehensive

income that includes net income and other comprehensive income, or (b) as
a separate statement of comprehensive income.

1282
Problem 126
Requirement 1
2013
December 12
Investment in FF&G Corporation bonds .....................................
Cash ..........................................................................................
December 13
Investment in Ferry common shares ...........................................
Cash ..........................................................................................
December 15
Cash ..............................................................................................
Investment in FF&G Corporation bonds .................................
Gain on sale of investments ($12.1 12) ....................................
($ in millions)
12
12
22
22
12.1
12.0
0.1
December 22
Investment in U.S. treasury bills .................................................
Investment in U.S. treasury bonds ...............................................
Cash ..........................................................................................
56
65
December 23
Cash ..............................................................................................
Loss on sale of investments ($10 11)...........................................
Investment in Ferry common shares ($22 x 1/2) .........................
10
1
December 26
Cash (selling price) ..........................................................................
Gain on sale of investments ($57 56) ......................................
Investment in U.S. treasury bills (account balance) .....................
December 27
Loss on sale of investments ($63 65)...........................................
Investment in U.S. treasury bonds (account balance) ..................
121
11
57
1
56
63
2
65

1283

December 28
Cash ...............................................................................................
Investment revenue ...................................................................
0.2
0.2
December 31
($ in millions)
Adjusting entry:
($10 million [$22 million x 1/2]) ....................................................
Fair value adjustment ................................................................
Closing entry:
Income summary (to balance)..........................................................
Investment revenue ($5 + 0.2 million) ..............................................
Gain on sale of investments ($8 + 0.1 + 1 million) ...........................
Loss on sale of investments ($11 + 1 + 2 million) ........................
Net unrealized holding gains and lossesI/S (adjusting entry)...
1.0
1.0
.7
5.2
9.1
14.0
1.0
Note: Unlike for securities available-for-sale, unrealized holding gains and

losses are included in income for trading securities.
Requirement 2
($ in millions)
Balance sheet (short-term investment):

Trading Securities ..............................
Less: Fair value adjustment ................
Total ....................................................
11
(1)
10
Income statement:
Investment revenue (closing entry)
5.2
Gain on sale of investments (closing entry)
9.1
Loss on sale of investments (closing entry)
(14.0)
Net unrealized holding gains and losses on investments (closing entry) (1.0)

1284

Requirement 3
2014
January 2
($ in millions)

Loss on sale of investments (to balance) ........................................
Investment in Ferry common (account balance) ..........................
10.2
0.8
11.0
Assuming no other transactions involving trading securities, the 2014 adjusting

entry to remove the fair value adjustment associated with the sold securities would be:
December 31
Fair value adjustment (account balance) ......................................
Net unrealized holding gains and lossesI/S ..........................
January 5
Investment in Warehouse Designs bonds ....................................
Cash ..........................................................................................
1.0
1.0
34
34

1285
Problem 127
($ in millions)
2013
October 18
Investment in Millwork Ventures preferred shares .....................
58
Cash ...........................................................................................
58
October 31
Cash ...............................................................................................
1.5
1.5
November 1
Investment in Holistic Entertainment bonds .................................
Cash ...........................................................................................
18
November 1
Cash ...............................................................................................
Loss on sale of investments ($28 30) ...........................................
Investment in Kansas Abstractors bonds .................................
28
2
December 1
Investment in Household Plastics bonds ......................................
Cash ...........................................................................................
60
December 20
Investment in U.S. treasury bonds ...............................................
Cash ...........................................................................................
December 21
Investment in NXS common shares .............................................
Cash ...........................................................................................
December 23
Cash ...............................................................................................
Investment in U.S. treasury bonds ...........................................
Gain on sale of investments ($5.7 5.6) .....................................
18
30
60
5.6
5.6
44
44
5.7
5.6
.1

1286

($ in millions)
December 29
Cash ..............................................................................................
Investment revenue ................................................................
December 31
Accrued interest:
Investment revenue receivable - Holistic
Entertainment ($18 million x 10% x 2/12) ........................................
Investment revenue receivableHousehold
Plastics ($60 million x 12% x 1/12) ..................................................
Investment revenue ...............................................................
0.3
0.6
0.9
Revaluations:
([2 million shares of Millwork Ventures x $27.50] $58 million) .........
Fair value adjustment ............................................................

Fair value adjustment ..................................................................
([4 million shares of NXS x $11.50] $44 million) .......................
3
2
2
Note: Securities held-to-maturity are not adjusted to fair value.

Closing entry:
Net unrealized holding gains and lossesI/S (NXS) ....................
Investment revenue ($3.0 + 1.5 + 0.9) .............................................
Gain on sale of investments (U.S. treasury bonds) ...........................
Loss on sale of investments (Kansas Abstractors) .....................
Income summary (to balance) ..................................................
2.0
5.4
.1
2.0
5.5
Note: Unlike for securities available-for-sale, unrealized holding gains

and losses are included in income for trading securities.

1287

2014
January 7
Cash ...............................................................................................
Loss on sale of investments (to balance) .........................................
Investment in NXS common shares (account balance) ................
43
1
44
Assuming no other transactions involving trading securities, the 2014 adjusting

entry to remove the fair value adjustment associated with the sold securities would be:
December 31
Net unrealized holding gains and lossesI/S ..............................
Fair value adjustment (account balance) ..................................
2.0
2.0

1288
Problem 128
Requirement 1
Beale should report its securities available-for-sale in its December 31, 2014,
balance sheet at their fair value, $54 million.
Requirement 2
The journal entry needed to enable the investment to be reported at fair value is:
($ in millions)
Fair value adjustment ($4 debit to $5 debit)

1
Net unrealized holding gains and lossesOCI ($4 credit to $5 credit)
Requirement 3
As of December 31, 2013, the cost of the Schwab Pharmaceuticals investment was
$25 million and its fair value was $27 million. Therefore, in the year-end 2013
adjustment process, Beale must have made whatever adjustment was necessary to
produce a debit balance of $2 in the fair value adjustment valuation allowance for
Schwab Pharmaceuticals and a credit balance of that amount in accumulated other
comprehensive income. Because the Schwab Pharmaceuticals investment was sold
during 2014, the reclassification adjustment would have to remove that amount in
2014. Beales statement of comprehensive income can be provided (a) as a
comprehensive income, or (b) as a separate statement of comprehensive income in
a manner similar to this:
STATEMENT OF COMPREHENSIVE INCOME
($ in millions)
Net income ...............................................

Other comprehensive income:
Unrealized holding gains (losses) on investments
Reclassification adjustment of prior years unrealized
gain included in 2014 net income
Net unrealized holding gains (losses)
Comprehensive income
$xxx
$3
(2)
1
$xxx

1289

Comprehensive income includes both net income and other comprehensive
income. Net income in 2014 includes the $3 million gain realized from selling the
Schwab shares. However, $2 million of that gain already has been reported in
comprehensive incomeas an unrealized holding gain in a prior year or years when
the shares value increased from $25 million to $27 million. To avoid doublecounting, Beale must compensate by reducing comprehensive income by the $2
million portion of the 2014 realized gain that already has been reported. Thats what
the reclassification adjustment does; it reduces this years comprehensive income by
the amount that was reported previously to keep it from being reported twice. For
there to be a total increase in AOCI of $1 million (from $4 million to $5 million), and
the reclassification serving to reduce AOCI by $2 million, $3 million of unrealized
holding gains must have occurred during 2014.

1290
Problem 129
Requirement 1
Purchase
Investment in Lavery Labeling shares..........................................
Cash .........................................................................................
($ in millions)
324
324
Net income
Investment in Lavery Labeling shares (30% x $160 million) ..........
48
Dividends
Cash (10 million shares x $2) ............................................................
Investment in Lavery Labeling shares......................................
20
Depreciation adjustment
Investment revenue ([$80 million x 30%] 6 years) .......................

48
20
Calculations:
Investee
Net Assets
Net Assets
Purchased
Cost
$324
Fair value:
Goodwill:
$60
Undervaluation
of depr. assets:
$24
$880* x 30% = $264
Book value:
Difference
Attributed to:
$800 x 30% = $240
*[$800 + 80] = $880

Adjusting entry
No entry to recognize changes in the fair value of the Lavery investment, as
Runyan is accounting for its investment under the equity method.

1291

Requirement 2
Purchase
Investment in Lavery Labeling shares ..........................................
Cash ..........................................................................................
($ in millions)
324
324
Net income
No entry
Dividends
Cash (10 million shares x $2) .............................................................
20
20
Adjusting entry
([10 million shares x $31] $324 million) ................................................
14
14

1292
Problem 1210
Requirement 1
Purchase
Cash .........................................................................................
($ in millions)
324
324
Net income
No entry
Dividends
20
20
Adjusting entry
([10 million shares x $31] $324 million) ..................................................
Fair value adjustment ...............................................................
14
14
Requirement 2
Because Runyan is accounting for the Lavery investment under the fair value
option, the unrealized holding loss would be included in 2013 net income.
Therefore, total effect on net income would be $20 million 14 million, or $6
million.

1293
Problem 1211
Requirement 1 (note: requirement 1 has the same answer as does P 1210)
Purchase
Investment in Lavery Labeling shares ..........................................
Cash ..........................................................................................
($ in millions)
324
324
Net income
No entry
Dividends
Cash (10 million shares x $2) .............................................................
20
20
Adjusting entry
14
14
Therefore, total effect on net income would be $20 of dividend $14 of
unrealized holding loss, or $6. The investment would be shown in the balance
sheet at its fair value of $310.

1294

Requirement 2
Purchase
Cash .........................................................................................
($ in millions)
324
324
Net income
Investment in Lavery Labeling shares (30% x $160 million) ..........
48
Dividends
20
Investment revenue ([$80 million x 30%] 6 years) ........................

48
20
Calculations:
Investee
Net Assets
Net Assets
Purchased
Cost
$324
Fair value:
Goodwill:
$60
Undervaluation
of depr. assets:
$24
$880* x 30% = $264
Book value:
Difference
Attributed to:
$800 x 30% = $240
*[$800 + 80] = $880

1295

Note: After the preceding journal entries are recorded, the balance in the
Lavery Labeling investment account would be:
Investment in Lavery Labeling shares
________________________________________
($ in millions)
Cost
324
Share of income 48
Balance
20 Dividends
4 Depreciation adjustment
_________________
348
At December 31, 2013, the fair value of that investment is $310 (= 10 million
shares x $31/share), implying need for the following adjusting entry to adjust
the carrying value of the investment to fair value:
38
38
Therefore, total effect on net income would be $48 million for Runyans share of
Lavery income minus $4 million of depreciation adjustment and minus the $38
million unrealized holding loss, yielding a total of $6 of income. The
investment would be shown in the balance sheet at its fair value of $310 million.
Note that the income effect and the carrying value in the balance sheet are the
same in requirements 1 and 2.

1296
Problem 1212
Requirement 1
Purchase
Investment in Vancouver T&M shares ........................................
Cash .........................................................................................
($ in millions)
400.0
400.0
Net income
Investment in Vancouver T&M shares (40% x $140 million) .........
56.0
Dividends
Cash (40% x $30 million) .................................................................
Investment in Vancouver T&M shares ....................................
12.0
Inventory adjustment
Investment revenue ($5 million x 40%: all sold in 2013) ....................
2.0
Investment revenue ([$20 million x 40%] 16 years) ......................

.5
56.0
12.0
2.0
.5
Calculations:
Investee
Net Assets
Net Assets
Purchased
Cost
$400
Fair value:
inventory
plant facilities
Book value:
Difference
Attributed to:
Goodwill:
$80 [plug]
$800* x 40% = $320

(5) x 40%
(20) x 40%
$775
Undervaluation
of inventory:
$2
Undervaluation
of plant:
$8
x 40% = $310
* $775 + 5 + 20

1297

Requirement 2
Investment Revenue
($ in millions)
56.0 Share of income
Inventory
2.0
Depreciation
.5
_________________
Balance
53.5
Requirement 3
Investment in Vancouver T&M shares
($ in millions)
Cost
Share of income
Balance
400.0
56.0
12.0 Dividends
2.0 Inventory
.5 Depreciation
_________________
441.5
Requirement 4
$400 million cash outflow from investing activities
$12 million cash inflow (dividends) among operating activities
(Note: If Northwest uses the indirect method to report its cash flows from
operating activities, it would need an adjustment of ($41.5) to get from the
$53.5 included as investment revenue in net income to the $12 of cash actually
received in dividends and needing to be shown in cash flow from operating
activities.)

1298
Problem 1213
Requirement 1
Millers management should decide whether it has the ability to exercise significant
influence over operating and financial policies of the Marlon Company. Ability to
exercise significant influence is presumed for investments of 20 percent or more of
voting stock and presumed not to exist for investments of less than 20 percent, other
things being equal. Evidence to the contrary should be considered, including
participation on the board of directors, technological dependency, material
intercompany transactions, or interchange of managerial personnel.
Requirement 2
a. Income statement:
Investment revenue ($12 million x 1/6)
Patent amortization adjustment ($4 million* 10)
($ in millions)
$2.0
(.4)
*([$24 million] x 1/6])
$1.6
b. Balance sheet:
Investment in Marlon Company
($19 million + 2 million 1 million 0.4 million)
$19.6*

1299

*Investment in Marlon Company
($ in millions)
Cost
Share of income
Balance
19.0
2.0
1.0 Dividends ($6 million x 1/6)
.4 Amortization adjustment
_________________
19.6
c. Statement of cash flows:

$19 million cash outflow from investing activities
$1 million cash inflow (dividends) among operating activities
(Note: If Marlon uses the indirect method to report its cash flows from
operating activities, it would need an adjustment of ($0.6) to get from the $1.6
included as investment revenue in net income to the $1 of cash actually
received in dividends and needing to be shown in cash flows from operating
activities.)

12100
Problem 1214
Item
__A_ 1. 35% of the nonvoting preferred stock
of American Aircraft Company.
__M_ 2. Treasury bills to be held-to-maturity.
__M_ 3. Two-year note receivable from affiliate.
__N_ 4. Accounts receivable.
__M_ 5. Treasury bond maturing in one week.
Reporting Category
T.
M.
A.
E.
C.
N.
Trading securities
Securities held-to-maturity
Equity method
Consolidation
None of these
__T_ 6. Common stock held in trading account

for immediate resale.
__T_ 7. Bonds acquired to profit from short-term differences in price.
__E_ 8. 35% of the voting common stock of Computer Storage Devices Company.
__C_ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.
__A_10. Corporate bonds of Primary Smelting Company to be sold if interest rates
fall 1/2%.
__A_11. 25% of the voting common stock of Smith Foundries Corporation: 51%
family owned by Smith family; fair value determinable.
__E_ 12. 17% of the voting common stock of Shipping Barrels Corporation:
Investors CEO on the board of directors of Shipping Barrels Corporation.

12101
Problem 1215
Requirement 1
Bond Fair Value at 1/1/2013:
Interest [($150,000 x 6%) 2] x 14.21240 *
Principal
$150,000 x 0.50257 ** =
Present value of the receivable
$ 63,956
75,386
$139,342
* Present value of an ordinary annuity of $1: n = 20, i = 3.5% (= 7% 2) (from Table 4)

** Present value of $1: n = 20, i = 3.5% (= 7% 2) (from Table 2)
January 1, 2013
150,000
10,658
139,342
Requirement 2
January 1, 2013
150,000
10,658
139,342
June 30, 2013

Cash [(150,000 x 6%) 2] ......................................
Interest revenue [($150,000 10,658) x 7%] 2
4,500
377
December 31, 2013

Cash (6% 2 x $150,000) .......................................
Interest revenue [{$150,000 ($10,658 377)} x 7%] 2
4,500
390
4,877
4,890
Note: For held-to-maturity investments, there are no adjustments to fair value.

12102

Requirement 3
January 1, 2013
150,000
10,658
139,342
June 30, 2013

Cash ($150,000 x 6%) 2 .....................................
Interest revenue [($150,000 10,658) x 7%] 2
Bond Fair Value at June 30, 2013:
Interest [($150,000 x 6%) 2] x 13.13394 *
Principal $150,000 x 0.47464 ** =
4,500
377
4,877
$ 59,103
71,196
$130,299
*Present value of an ordinary annuity of $1: n = 19, i = 4% (= 8% 2) (from Table 4)

**present value of $1: n = 19, i = 4% (= 8% 2) (from Table 2)
January 1 initial cost

Increase from discount amortization
June 30 amortized initial cost
$139,342
377
$139,719
Comparing the amortized initial cost with the fair value of the bonds on that date
provides the amount needed to adjust the investment to its fair value.
June 30 fair value
Fair value adjustment needed
$139,719
130,299
$ 9,420
Net unrealized holding gains and lossesI/S ...........................

9,420
9,420

12103

December 31, 2013
Cash ($150,000 x 6%) 2......................................
Interest revenue [{$150,000 ($10,658 377)} x 7%] 2
4,500
390
4,890
Bond Fair Value at December 31, 2013:

Interest [($150,000 x 6%) 2] x 12.15999 * = $ 54,720
67,920
Principal $150,000 x 0.45280 ** =
$122,640
* Present value of an ordinary annuity of $1: n = 18, i = 4.5% (= 9% 2) (from Table 4)
** Present value of $1: n = 18, i = 4.5% (= 9% 2) (from Table 2)

Increase from discount amortization
Dec. 31 amortized initial cost
$139,719
390
$140,109
Comparing the amortized initial cost with the fair value of the bonds on that date
provides the amount needed to adjust the investment to its fair value.
Dec. 31 amortized initial cost
Dec. 31 fair value
Fair value adjustment balance needed: debit/(credit)
Less: Current fair value adjustment debit/(credit)
Change in fair value adjustment needed
Net unrealized holding gains and lossesI/S ...........................
Fair value adjustment ...........................................................
$140,109
122,640
$ 17,469
(9,420)
$ 8,049
8,049
8,049

12104
Problem 1216
Bee Company Investment
2013: Stewart does not plan to sell the Bee investment, and does not believe it is more
likely than not that it will have to sell the investment before fair value recovers, so the
portion of the impairment that consists of credit and noncredit losses is relevant.
Stewart must recognize the $240,000 of credit losses as an OTT impairment in
240,000
OTT impairment lossOCI ..............................

Fair value adjustmentNoncredit loss ..........
260,000
260,000
240,000
2014: Stewart ignores the change in Bees fair value during 2014, as the Bee
investment is accounted for as an HTM investment and fair value changes are not
relevant unless viewed as OTT impairments. GAAP does not allow recovery of prior
OTT impairments when fair value increases. Over the remaining life of the bonds,
Stewart would amortize the bonds as if they had a $240,000 discount. Stewart also
would amortize the $260,000 of Fair value adjustmentNoncredit loss in AOCI
over the remaining life of the bonds by crediting that account and debiting Fair value
adjustmentNoncredit loss for a portion each period, thus gradually decreasing the
amount shown in AOCI and increasing the carrying amount of the bonds.
Oliver Corporation Investment
2013: Stewart accounts for the Oliver investment as a trading security, so OTT
impairment accounting is not relevant. Stewart simply continues to recognize in
earnings any unrealized gains and losses associated with fair value changes. Given
that the bonds already have a negative fair value adjustment of $200,000, and need a
negative fair value adjustment of $300,000 to adjust from amortized cost of
$2,500,000 to fair value of $2,200,000, Stewart must recognize additional unrealized
losses of $100,000 for 2013.
Net unrealized holding gains and lossesI/S ........
Fair value adjustment .............................. .............
100,000
100,000

12105

2014: Fair value increased to $2,700,000 during 2014, so Stewart needs to have a
positive fair value adjustment of $200,000 in the balance sheet to adjust from
amortized cost of $2,500,000 to fair value of $2,700,000. Therefore, Stewart must
recognize an unrealized gain $500,000 for 2014, moving the fair value adjustment
from a negative $300,000 to a positive $200,000. Note that this is not a recovery of
the OTT impairment, but just normal ongoing accounting for a TS investment.
Fair value adjustment .............................. ...........
500,000
500,000
Jones, Inc Investment

2013: Stewart does not plan to sell the Jones investment, and does not believe it is
Stewart must recognize the $225,000 of credit losses as an OTT impairment in
Investment in Jones bonds...............................
225,000
Net unrealized holding gains and lossesOCI ..

575,000
225,000
575,000
Stewart also must reclassify the previously recognized $400,000 unrealized loss out of
OCI and the fair value adjustment:
400,000
400,000
Note that Stewart could net the latter two journal entries together to be:
175,000
175,000

12106

However, Stewart still would need to show on the face of the income statement the
total OTT impairment of $800,000 less the $575,000 in OCI, yielding a $225,000
reduction in earnings.
2014: Stewart continues to treat the Jones investment as AFS. Therefore, Stewart
would show an unrealized gain associated with an increase of fair value from
$2,700,000 to $2,900,000. Note that this is not a recovery of the OTT impairment, but
just normal ongoing accounting for an AFS investment. The amount of credit loss and
noncredit loss is not relevant to this subsequent accounting.
200,000
200,000
Helms Corp. Investment

2013: Because the Helms Corp. investment is equity, Stewart bases the OTT
impairment on the entire difference between cost and fair value.
Investment in Helms equity ............................
400,000
400,000
Stewart also must reclassify the previously recognized $120,000 unrealized gain out
of OCI and the fair value adjustment:
120,000
120,000
2014: Stewart continues to treat the Helms investment as AFS. Therefore, Stewart
would show an unrealized gain associated with an increase of fair value from
$600,000 to $700,000. Note that this is not a recovery of the OTT impairment, but
just normal ongoing accounting for an AFS investment.
100,000
100,000

12107
Problem 1217
Bee Company Investment
2013: Under IFRS only the credit loss component is relevant for debt impairments.
Therefore, Stewart recognizes the $240,000 of credit losses as an OTT impairment in
earnings, as follows:
Discount on bond investment ..........................
240,000
240,000
2014: IFRS allows recovery of OTT impairments on debt investments. Therefore,

Stewart would record a reversal of OTT impairment in earnings to increase the
carrying value of the Bee investment to the level indicated by a $140,000 credit loss.
Discount on bond investment..............................
100,000
100,000
Oliver Corporation Investment
2013: Stewart accounts for the Oliver investment as a trading security, which under
IFRS would be called Fair value through profit and loss, so OTT impairment
accounting is not relevant. Stewart simply continues to recognize in earnings any
unrealized gains and losses associated with fair value changes. Given that the bonds
already have a negative fair value adjustment of $200,000, and need a negative fair
value adjustment of $300,000 to adjust from amortized cost of $2,500,000 to fair
value of $2,200,000, Stewart must recognize additional unrealized losses of $100,000
for 2013.
Net unrealized holding gains and lossesI/S ........
Fair value adjustment .............................. .............
100,000
100,000

12108

2014: Fair value increased to $2,700,000 during 2014, so Stewart needs to have a
positive fair value adjustment of $200,000 in the balance sheet to adjust from
amortized cost of $2,500,000 to fair value of $2,700,000. Therefore, Stewart must
recognize an unrealized gain of $500,000 for 2014, moving the fair value adjustment
from a negative $300,000 to a positive $200,000. Note that this is not a recovery of
the OTT impairment, but just normal ongoing accounting for a Fair value through
profit and loss investment.
500,000
500,000
Jones Inc. Investment

2013: Given that this debt investment is AFS, IFRS bases the OTT impairment on fair
value rather than on credit losses. Therefore, Stewart recognizes the entire $800,000
difference between amortized cost and fair value as an OTT impairment in earnings,
as follows:
Other-than-temporary impairment loss .............
Investment in Jones bonds ..............................
800,000
800,000
Stewart also must reclassify the previously recognized $400,000 unrealized loss out of
OCI and the fair value adjustment:
400,000
400,000
2014: IFRS allows recovery of OTT impairments on debt investments. Therefore,

Stewart would record a reversal of OTT impairment in earnings to increase the
carrying value of the Jones investment to the fair value of $2,900,000.
Investment in Jones bonds ..................................
200,000
200,000

12109

Helms Corp. Investment
2013: Because the Helms Corp. investment is classified as AFS, Stewart bases the
OTT impairment on the entire difference between cost and fair value.
Other-than-temporary impairment loss ...............
Investment in Helms equity ............................
400,000
400,000
Stewart also must reclassify the previously recognized $120,000 unrealized gain out
of OCI and the fair value adjustment:
120,000
120,000
2014: IFRS does not allow recovery of OTT impairments for equity investment.
However, Stewart continues to treat the Helms investment as AFS, so Stewart would
show an unrealized gain associated with an increase of fair value from $600,000 to
$700,000. This is not a recovery of the OTT impairment, but just normal ongoing
accounting for an AFS investment.
100,000
100,000

12110
SUPPLEMENT PROBLEM
Problem 1218
Requirement 1
The Donald Company bonds are simple debt, so Fehertys business purpose
is relevant for the purpose of classification and reporting. Ten bonds are to be
held to collect contractual cash flows over the life of the debt, so they would be
accounted for at amortized cost. Ten of the bonds are held for investment
purposes, so they would be accounted for at FV-OCI. Thirty of the bonds are
held for immediate resale, so they would be accounted for at FV-NI.
The Watson company stock would be accounted for at FV-NI because it does
not qualify for the equity method, and equity investments for which significant
influence is absent are accounted for at FV-NI.
Requirement 2
The Donald Company bonds would be reported as follows:
Ten bonds are accounted for at amortized cost. No unrealized gain or loss
would be recognized in OCI or net income, but five of the bonds were sold
at a price of $1,040 per bond, yielding a gain on sale of 5 x ($1,040 1,000)
= $200. That gain would be included in net income. Ten bonds are
accounted for at FV-OCI. Five of the bonds were sold at a price of $1,040
per bond, yielding a gain on sale of 5 x ($1,040 1,000) = $200. If there is
an unrealized gain or loss already recorded in OCI associated with these
bonds, that amount would be reclassified out of OCI, but in this case no
such amount exists. Therefore, that gain would be included in net income
and, therefore, in comprehensive income.
For the other five of the bonds accounted for at FV-OCI and not sold as of
the end of the period, 5 x ($1,040 1,000) = $200 of unrealized gains and
losses would be included in OCI and, therefore, in comprehensive income.
Thirty bonds are accounted for at FV-NI. Fifteen of the bonds were sold at
a price of $1,040 per bond, yielding a gain on sale of 15 x ($1,040 1,000)
= $600. That gain would be included in net income and, therefore, in
For the other 15 of the bonds accounted for at FV-NI, unrealized gains of
15 x ($1,040 1,000) = $600 would be included in net income and,
therefore, in comprehensive income.

12111
Problem 1218(concluded)
The Watson Company common stock investment is accounted for at FV-NI, so
an unrealized loss of $5,000 ($25,000 20,000) would be included in net
income and, therefore, in comprehensive income.
Total effects are as follows:
Net income: $200 (sold amortized cost) + 200 (sold FV-OCI) + 600 (sold FVNI) + 600 (retained FV-NI) 5,000 (retained equity) = ($3,400) net loss.
OCI: $200 (retained FV-OCI)
Comprehensive income = Net income + OCI = ($3,400) + 200 = ($3,200)
Note: You might expect the total amount shown in comprehensive income to
equal the total change in fair value for the investments ($2,000 5,000 =
($3,000)), but that does not have to be the case because unrealized gains
and losses on investments accounted for at amortized cost do not affect
net income, OCI, or comprehensive income. In this case, $200 of
unrealized gains associated with the five unsold amortized cost bonds is
not recognized, which explains the difference between the change in fair
value of ($3,000) and the amount of change recognize in comprehensive
income of ($3,200).

12112
CASES
Real World Case 121
Requirement 1
Fair Value Adjustment, AFS Investments
$648 gain 19 loss on 12/25/2012
$582 gain 25 loss on 7/2/2013
629
72 reduction over first half of 2011
____________
557
Requirement 2
Intel needs to record unrealized holding gains and losses associated with its AFS
investments during the first half of 2013:
Fair value adjustment, AFS investment .................
24
24
Requirement 3
Fair Value Adjustment, AFS Investments
$648 gain 19 loss on 12/25/2012
unrealized gains
$582 gain 25 loss on 7/2/2013
629
24
96 to balance
____________
557

12113
Case 121 (concluded)

What could account for the unaccounted for credit of $96? The most likely
explanation is that there are reclassification adjustments for AFS investments
that have been sold or for which OTT impairments have been recognized. As
shown in Table 2, Intel recognized net gains of $88 on AFS investments.
Recognizing those gains would necessitate booking a reclassification entry that
reduces (credits) the fair value adjustment and OCI to remove those effects.
While $88 doesnt exactly equal the $96 plug necessary to balance the account,
it gets us very close.

12114
Research Case 122

[Note:
This case encourages the student to reference actual annual reports.]
The note that describes an investment in securities available-for-sale may be

headed by any one of a variety of captions or subsumed within another disclosure
note. Likewise, the caption by which the investments are reported in the balance sheet
can be reported separately as one of several asset titles or included within another
asset caption.
Investments in securities available-for-sale will be reported as current or noncurrent
assets depending on the intent of management regarding the timing of their eventual
sale. Realized gains or losses are reported in the income statement if any of these
securities were sold during any year reported.
Investments in securities available-for-sale are reported at fair value. Unrealized
holding gains and losses from retaining securities during periods of price change are
not included in the determination of income for the period. Rather, they are
accumulated and reported as accumulated other comprehensive income, a separate
component of shareholders equity. This means an unrealized holding gain would
increase shareholders equity and an unrealized holding loss would decrease
shareholders equity. The amounts of unrealized gains and losses will be shown on a
comprehensive income, or as a separate statement of comprehensive income, or
summarized in the statement and detailed in the notes to the financial statements.
By definition, securities available-for-sale are not acquired for the purpose of
profiting from short-term market price changes, so gains and losses from holding
these securities while prices change are not considered relevant performance measures
to be included in earnings.
Cash outflows from acquiring these investments or inflows from selling them are
reported as investing activities in the companys comparative statements of cash flows
unless trading securities are included in the operating activities section. Whether they
are specifically identifiable depends on the degree of detail the company uses in
reporting its cash flows. Information on investing activities assists investors and
creditors by indicating the direction the company is directing its funds.
A disclosure note may provide information not available in the financial statements,
in part dependent on how much information the financial statements provide. Often,
the note will indicate the cost of the securities.
12115
International Case 123

Requirement 1
Satisfied by going to http://www.iasplus.com/standard/ias28.htm.
Requirement 2
Renaults decision appears appropriate, as the company has significant influence,
but not control. Significant influence is indicated by a greater-than-20% equity
stake and seats on the Nissan board. Lack of control is indicated by Renault not
owning a majority of voting rights or board seats and not having full rights to use
assets or the obligations with respect to liabilities.
Requirement 3
It is not surprising that Renault makes adjustments that take into account the fair
value of Nissans assets and liabilities at the time Renault invested in Nissan. For
example, if the fair value of Nissans fixed assets was greater than the book value
of those assets on the date of Renaults purchase, Renault would need to recognize
additional depreciation over the life of those assets when applying the equity
method. This is consistent with IFRS and also with U.S. GAAP.
Requirement 4
Renaults harmonization adjustments are required by IFRS, which requires that, if
the associate uses accounting policies that differ from those of the investor, the
associate's financial statements should be adjusted to reflect the investor's
accounting policies for the purpose of applying the equity method. [IAS 28.27].
U.S. GAAP has no such requirement.

12116
International Case 124

Requirement 1
Note 13, Investments in joint ventures, describes Vodafones accounting for their
participation in joint ventures. Per Note 2, A joint venture is a contractual
arrangement whereby the Group and other parties undertake an economic activity that
is subject to joint control; that is, when the strategic financial and operating policy
decisions relating to the activities require the unanimous consent of the parties sharing
control. The Group reports its interests in jointly controlled entities using
proportionate consolidation. The Groups share of the assets, liabilities, income,
expenses and cash flows of jointly controlled entities are combined with the
equivalent items in the results on a line-by-line basis. Any goodwill arising on the
acquisition of the Groups interest in a jointly controlled entity is accounted for in
accordance with the Groups accounting policy for goodwill arising on the acquisition
of a subsidiary.
Note 14, Investments in associated undertakings, describes Vodafones accounting
for their significant-influence investments. Per Note 2, An associate is an entity over
which the Group has significant influence and that is neither a subsidiary nor an
interest in a joint venture. Significant influence is the power to participate in the
financial and operating policy decisions of the investee but is not control or joint
control over those policies. The results and assets and liabilities of associates are
incorporated in the consolidated financial statements using the equity method of
accounting. Under the equity method, investments in associates are carried in the
consolidated statement of financial position at cost as adjusted for post-acquisition
changes in the Groups share of the net assets of the associate, less any impairment in
the value of the investment. Any excess of the cost of acquisition over the Groups
share of the net fair value of the identifiable assets, liabilities and contingent liabilities
of the associate recognised at the date of acquisition is recognised as goodwill. The
goodwill is included within the carrying amount of the investment.
Thus, joint ventures are accounted for under proportionate consolidation with their
effects included in each of the relevant accounts in the balance sheet and income
statement, while investments in associates are accounted for under the equity method
with their effects shown on a single line.

12117

Requirement 2
After Vodafone implements IFRS No. 11, it will change from accounting for joint
ventures using proportionate consolidation to accounting for joint ventures using the
equity method.
Research Case 125

Answers to the questions will, of course, vary because students will research
financial statements of different companies.
The responses should identify securities held that are classified as trading
securities, available-for-sale, or held-to-maturity. Although a company is not
required to report individual amounts for the three categories of investmentsheldto-maturity, available-for-sale, or tradingon the face of the balance sheet, that
information should be presented in the disclosure notes. If securities available-forsale are held, there may be unrealized gains or losses reported in the shareholders
equity section of the balance sheet. Investments in securities available-for-sale are
reported at fair value, and holding gains or losses are not included in the
determination of income for the period. Instead, they are reported as a separate
component of shareholders equity.
Unlike the treatment of securities available-for-sale, unrealized holding gains and
losses are included in income for trading securities. There may also be gains or
losses from the sale of investments during the year. There also will likely be
investment revenue (dividends or interest) in the income statement.
The statement of cash flows will report acquisitions or disposals of investments as
investing activities. Investment revenue is an operating activity.

12118
Real World Case 126

Requirement 1
The 2010 balance sheet reports the following two current and one
noncurrent asset categories ($ in millions):
2010
2009
Cash and cash equivalents
$10,900
$9,311
Short-term investments
$ 1,301
$293
$ 2,175
$432
CURRENT ASSETS:
NONCURRENT ASSETS:
Investments
In the summary of critical accounting policies (Note 2), Merck describes

its policy regarding investments classified as "cash equivalents." It is
consistent with the way most companies classify "cash equivalents."
Cash EquivalentsCash equivalents are comprised of certain highly liquid
investments with original maturities of less than three months.

12119
Case 126 (continued)

Requirement 2
Merck (in the summary of critical accounting policies) describes its
policy regarding accounting for its investments:
Accounting for unrealized gains and losses (both temporary and OTT):
Investments in marketable debt and equity securities classified as availablefor-sale are reported at fair value. Fair value of the Companys investments is
determined using quoted market prices in active markets for identical assets or
liabilities or quoted prices for similar assets or liabilities or other inputs that are
observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities. Changes in fair value that are considered
temporary are reported net of tax in AOCI. For declines in the fair value of
equity securities that are considered other-than-temporary, impairment losses
are charged to Other (income) expense, net. The Company considers available
evidence in evaluating potential impairments of its investments, including the
duration and extent to which fair value is less than cost, and for equity
securities, the Companys ability and intent to hold the investment. For debt
securities, an other-than-temporary impairment has occurred if the Company
does not expect to recover the entire amortized cost basis of the debt security. If
the Company does not intend to sell the impaired debt security, and it is not
more likely than not it will be required to sell the debt security before the
recovery of its amortized cost basis, the amount of the other-than-temporary
impairment recognized in earnings, recorded in Other (income) expense, net, is
limited to the portion attributed to credit loss. The remaining portion of the
other-than-temporary impairment related to other factors is recognized in
AOCI.
Accounting for realized gains and losses: Realized gains and losses for both
debt and equity securities are included in Other (income) expense, net.

12120

Requirement 3
Investments accounted for using the equity method are described in note 10 (Joint
Ventures and Other Equity Method Affiliates). The company has ongoing joint
ventures and other equity-method investments with Merck/Schering-Plough,
AstraZeneca LP, and several others.
Requirement 4
As indicated in the income statement and in note 10, equity income recognized by
Merck during 2010 was $587.
Requirement 5
Operating activities section: Cash inflows from dividends are shown in operations
on the statement of cash flows, and equal $324 million for 2010. Cash flows from
interest income are included in net income, and given that Merck prepares an
indirect-method statement of cash flows that starts the operating activities section
with net income, interest income is included in operations via that number.
Investing section: Cash outflows from acquiring investments or inflows from
selling them are reported as investing activities in the companys comparative
statements of cash flows. Whether they are specifically identifiable depends on the
degree of disaggregation the company uses in reporting its cash flows. Merck
shows 2010 cash spent on purchases of securities and other investments of
($7,197) million, and cash received from proceeds from sales of securities and
other investments of $4,561 million. The company also lists a distribution from
AstraZeneca LP of $647.Information on investing activities assists investors and
creditors by indicating the direction the company is directing its funds.

12121
Real World Case 127

Requirement 1
The note indicates unrealized holding losses during 2011 in the amount of $1,349
million. This amount is included in other comprehensive income. It is not the
amount Microsoft would include as a separate component of shareholders equity
that amount is accumulated other comprehensive income. The 2011 amount in the
disclosure note is the 2011 addition to the accumulated amount, not the accumulated
amount.
Requirement 2
Reclassification adjustment for losses (gains) included in net income refers to
unrealized holding gains and losses that occurred in periods prior to the period in
which the securities are sold. Holding gains and losses from securities available-forsale are included in earnings when they are realized by selling the securities. When
Microsoft sold securities in 2011, the entire increase in the fair value of the shares
since the investment was acquired was included in earnings. The portion of that
increase that occurred prior to 2011, but wasnt recognized in prior earnings because it
wasnt yet realized by selling the investment, is what Microsoft refers to as its
reclassification adjustment.
Net income in 2011 includes the $295 million of realized gains on an after-tax basis
(or $295 + 159 = $454 of realized losses on a before-tax basis). However, that $295
gain already has been reported in comprehensive incomeas unrealized holding gains
that were included in other comprehensive income in periods when price increases
occurred. To avoid double-counting when those same gains are realized and included
in comprehensive income via net income when the securities are actually sold,
Microsoft compensates by decreasing other comprehensive income by the $295
million in that period. The basic idea is that the company only gets to report the gain
in comprehensive income one time, so if the company includes it later in income, it
must offset that by reducing other comprehensive income by the same amount.
Thats what the reclassification adjustment does; it adjusts this years other
comprehensive income by the amount that was reported previously to keep it from
being reported twice.

12122
Trueblood Accounting Case 128

A solution and extensive discussion materials accompany each case in the
Deloitte & Touche Trueblood Case Study Series. These are available to instructors at:
www.deloitte.com/more/DTF/cases_subj.htm.

12123
Research Case 129

From Recognition and Presentation of Other-Than-Temporary Impairments,
FASB Staff Position (FSP) No. 115-2 and 124-2 (Norwalk, Conn.: FASB April 9,
2009), pp. 1719,
1. Need to reduce net income for the full difference between amortized cost
and fair value for debt investments, rather than only for credit losses,
because that better suits the needs of investors: Messrs. Linsmeier and
Siegel believe that to the extent there is an other-than-temporary impairment,
it should be measured as the entire difference between the fair value and the
carrying value of the impaired item with that change fully reflected in net
income as an unrealized loss.
a. Messrs. Linsmeier and Siegel believe that investors generally have
opined that their preference is for the fair value of financial instruments
to be reflected in net income. Messrs. Linsmeier and Siegel believe
that the primary purpose of financial reporting is to serve investors;
therefore, if a bifurcation of the full fair value change into credit and
noncredit components is needed to facilitate bank regulators in their
regulatory capital decisions, that bifurcation should be provided on the
face of the income statement with both components recognized in
earnings consistent with investors preferences.
b. Messrs. Linsmeier and Siegel also object to bifurcating (dividing) the
impairment loss into credit and noncredit components because they do
not believe the expected loss approach (as prescribed in this FSP) can
isolate the credit loss from other losses.
2. Likely that there will be fewer OTT impairments given the new recognition
criteria: Second, Messrs. Linsmeier and Siegel object to the change in the
trigger for the nonrecognition of the full impairment loss in net income. The
previous GAAP requirements permitted nonrecognition of the full impairment
loss when an entity could assert its intent and ability to hold the instrument to
recovery of its amortized cost basis. Instead, this FSP permits nonrecognition of
the noncredit portion of the full impairment loss in net income if the entity can
assert that it does not intend to sell the security and it is not more likely than not
that the entity will be required to sell the security before recovery to its
amortized cost basis. While Messrs. Linsmeier and Siegel understand that the
12124

primary objective of this change is to make the held-to-recovery concept more
operational, they also recognize that a likely result of this change is a
reduction in the amount of impairment losses recognized in net income. A 1991
U.S. Treasury report cited delayed recognition of impairment losses as having
an exacerbating effect on the length and ultimate cost of the savings and loan
crisis. There also are potential parallels to the experience in Japan when delays
in recognition of losses resulted in the so-called lost decade in the 1990s.
Similarly, Messrs Linsmeier and Siegel are concerned that to the extent the
proposed FSP results in delayed recognition of impairment losses in net
income, there also may be a negative effect on investor confidence.
3. Lack of convergence with the IASB: Finally, Messrs. Linsmeier and Siegel
believe that there potentially may be other standard-setting issues that need to
be addressed within the current other-than-temporary impairment model.
However, they would prefer to address those concerns in the joint medium term
project with the International Accounting Standards Board (IASB). Messrs.
Linsmeier and Siegel believe that there is a high risk that the unilateral change
to the recognition and presentation of other-than-temporary impairments could
create the opportunity for an accounting arbitrage with pressure for FASB
and IASB standards to converge to the standard perceived most lenient. In
addition, when one standard setter enacts changes on its own, there is a failure
to achieve convergence of accounting standards, which continues the challenges
faced by investors in comparing global financial institutions reporting under
two different accounting models.
Note: This dissent offers interesting opportunities for classroom discussion. Points
that might come up include:
1. Political pressures on the FASB (banks were pushing hard for flexibility in
recognizing OTT impairments and relegating noncredit losses to OCI, and
Congress pushed as well).
2. Potential effects of unilateral standard setting on progress towards convergence.
3. The fact that even very good accountants dont always agree on which
accounting approach is most correct.

12125
Air France-KLM Case

Requirement 1
a. Per note 22, the balance of investments accounted for at FVTPL is $574 as of
March 31, 2011. From note 22 we know the $574 is included in the total of
$751 that is shown for other short-term financial assets in the balance sheet.
b. Per notes 3.10.5 and 22, and the balance sheet, all of that balance is classified
as current.
c. Per note 32.3, the entire balance is at fair value because the note indicates that
net book value = estimated market value = $574. We also know that
investments accounted for at FVTPL are carried at fair value in the balance
sheet.
d. Per note 32.4, $7 of the $574 is estimated using level 1 inputs, and the other
$567 is estimated using level 2 inputs. Level 2 inputs to fair value estimates
are less reliable than level 1 inputs, but still use market-based inputs to
calculate fair value. Still, this fair-value estimate isnt as reliable as it would
be if based on level 1 of the fair value hierarchy.
Requirement 2
a. Per note 22, the balance of investments accounted for as available for sale is
$977 as of March 31, 2011. From note 22 we know the $977 is included in
the total of $1,654 that is shown for other financial assets in the balance
sheet.
b. Per note 22 and the balance sheet, all of that balance is classified as current.
c. Per note 32.3, the entire balance is at fair value, because the note indicates
that net book value = estimated market value = $977. We also know that
investments accounted for as available-for-sale are carried at fair value in the
balance sheet.
d. Per note 32.4, $941 of the $977 is estimated using level 1 inputs, and the other
$36 is estimated using level 2 inputs. Level 1 inputs to fair value estimates
are the most reliable of the three levels of inputs, so these fair value estimates
should be very reliable.

12126
Air France-KLM Case (concluded)

Requirement 3
a. If AF has the ability to exercise significant influence over the investee, it uses
the equity method to account for the investment. AF assumes that it has the
ability to exercise significant influence if it owns more than 20% of the voting
rights of the investee.
b. AF uses the equity method to account for joint ventures. Given that we are
evaluating the 2011 annual report, AF could instead have accounted for the
investment using proportionate consolidation. IFRS No. 11 removes that
option.
c. AF used the equity method to account for its investment in WAM (Amadeus),
because it owned 22% of voting rights. However, subsequent to an initial
public offering (IPO) by WAM, AFs holding decreased to 15%, and AF
concluded it no longer could exercise significant influence. Therefore, AF
changed to accounting for the WAM investment as an available-for-sale
investment.
d. Per note 20 and the balance sheet, the carrying value of AFs equity-method
investments on its March 31, 2011, balance sheet is $422.
e. Per note 20 and the income statement, AFs equity-method investments
reduced its net income from continuing operations by $21 during 2011.

12127

Chapter 12

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 12

Uploaded by

Copyright:

Available Formats

Chapter 12

AACSB assurance of learning standards in accounting and business education require

The McGraw-Hill Companies, Inc., 2013

The McGraw-Hill Companies, Inc., 2013

Questions for Review of Key Topics

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (continued)

The McGraw-Hill Companies, Inc., 2013

Answers to Questions (concluded)

The McGraw-Hill Companies, Inc., 2013

Supplement Questions for Review of Key Topics

The McGraw-Hill Companies, Inc., 2013

Cash (1.5% x $720,000)..........................................

Brief Exercise 122

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 122 (concluded)

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 123

Assuming no other transactions involving securities available-for-sale, the 2014

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 124

Brief Exercise 125

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 126

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 127

Brief Exercise 128

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 129

Brief Exercise 1210

Brief Exercise 1211

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 1212

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 1213

Fair value adjustment .........................................

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 1214

Fair value adjustment ..........................................

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 1215

OTT impairment lossOCI ...............................

Fair value adjustment .........................................

The McGraw-Hill Companies, Inc., 2013

Brief Exercise 1216

The McGraw-Hill Companies, Inc., 2013

SUPPLEMENT BRIEF EXERCISES

Brief Exercise 1218

Brief Exercise 1219

Brief Exercise 1220

The McGraw-Hill Companies, Inc., 2013

If sale before maturity isnt an alternative, increases and decreases in the

The McGraw-Hill Companies, Inc., 2013

Note: Securities held-to-maturity are not adjusted to fair value.

The McGraw-Hill Companies, Inc., 2013

Cash ([800 shares x $53] $1,300) .......................