CH 17

CHAPTER 17
INVESTMENTS
IFRS questions are available at the end o this !ha"ter#
TR$E%FA&SE'Con!e"tual
Ans(er No# )es!ri"tion
F 1. Examples of debt securities.
T 2. Definition of trading securities.
F 3. Available-for-sale unrealized gainslosses.
F !. "lassif#ing $eld-to-maturit# securities.
T %. Fair value c$anges in AF& securities.
F '. &ecurities Fair (alue Ad)ustment account.
T *. Accounting for trading securities.
F +. Definition of significant influence.
T ,. -eporting .nrealized /olding 0ain1oss2E3uit# account.
T 14. Examples of significant influence.
F 11. Definition of controlling interest.
T 12. Effect of dividends on investment under e3uit#.
F 13. -eporting revenue under fair value met$od.
T 1!. Definition of controlling interest.
F 1%. .sing fair value option.
T 1'. Accounting for c$anges in fair value.
F 1*. Temporar# declines and 5rite do5ns.
T 1+. 6ecessar# of reclassification ad)ustment.
F 1,. Transfer of $eld-to-maturit# securities.
T 24. Transfers from trading to available-for-sale.
M$&TIP&E CH*ICE'Con!e"tual
c 21. Debt securities.
b 22. (aluation of debt securities.
c 23. /eld-to-maturit# securities.
c 2!. .nrealized gainloss recognition for securities.
a
7
2%. Accounting for accrued interest.
a
&
2'. 8dentif#ing securities accounted for at amortized cost.
c
&
2*. Accounting for available-for-sale securities.
b
&
2+. .sing effective-interest met$od of amortization.
a
&
2,. 8dentif#ing available-for-sale securities.
d 34. "lassification as $eld-to-maturit#.
b 31. -eporting $eld-to-maturit# securities.
c 32. Ac3uisition of $eld-to-maturit# securities.
d 33. Accounting for trading securities.
c 3!. Accounting for trading debt securities.
c 3%. -ecording investments in debt securities.
d 3'. "alculating t$e issue price of bonds.
c 3*. (aluation of investments in debt securities.
a 3+. -ecording amortization of bond discount.
c 3,. Amortization of premiumdiscount on investment in a debt securit#.
Test +an, or Inter-ediate A!!ountin./ Fourteenth Edition
M$&TIP&E CH*ICE'Con!e"tual 0!ont#1
d !4. Effective-interest rate met$od.
c !1. Debt securities purc$ased bet5een interest dates.
c !2. &ale of debt securit# prior to maturit#.
b
&
!3. 7assive interest investment.
a
&
!!. Fair value vs. e3uit# met$od.
c
7
!%. Fair value vs. e3uit# met$od.
b !'. "onditions for using t$e e3uit# met$od.
d !*. 95ners$ip interest re3uired for using t$e e3uit# met$od.
a !+. -ecording of dividends received under t$e e3uit# met$od.
d !,. -ecognition of earnings of investee using t$e e3uit# met$od.
d %4. Effect of using t$e fair value met$od in error.
d %1. Determine value of investment.
a %2. Fair value option.
d %3. Accounting for impairments.
c %!. -eclassification ad)ustment in compre$ensive income.
b %%. -eclassification of securities.
b %'. -eclassification of securities.
d
7
%*. Transfer of a debt securit#.
c %+. Definition of :gains trading; or :c$err# pic<ing;.
b %,. Accounting for transfers bet5een "ategories.
a ='4. Accounting for derivatives.
c ='1. "$aracteristics of a derivative instrument.
b ='2. 8dentif#ing companies t$at are arbitrageurs.
d ='3. 8dentif#ing e3uit# securities.
c ='!. Accounting for fair value $edges.
b ='%. 0ainslosses on cas$ flo5 $edges.
a =''. 8dentif#ing an embedded derivative.
c ='*. -e3uirements for financial instrument disclosures.
a ='+. (ariable-interest entit#.
d =',. -is<-and-re5ard model and voting-interest approac$.
7
T$ese 3uestions also appear in t$e 7roblem-&olving &urvival 0uide.
&
T$ese 3uestions also appear in t$e &tud# 0uide.
=T$is topic is dealt 5it$ in an Appendix to t$e c$apter.
M$&TIP&E CH*ICE'Co-"utational
c *4. -ecording t$e purc$ase of debt securities.
b *1. "omputing cost of bond investment.
d *2. "alculation of discount amortization.
b *3. "alculation of revenue from /T> securities.
a *!. "omputation of ot$er compre$ensive income.
c *%. "omputation of gainloss on sale of bonds.
a *'. Ac3uisition of $eld-to-maturit# securities.
b **. "arr#ing value of $eld-to-maturit# securities.
c *+. "arr#ing value of available-for-sale debt securities.
a *,. "alculation of income from available-for-sale debt securities.
b +4. "alculation of income from /T> securities.
17 % 2
8nvestments
M$&TIP&E CH*ICE'Co-"utational 0!ont#1
b +1. Determine gain on sale of debt securities.
d +2. "omputation of revenue from /T> securities.
a +3. "alculation of premium amortization.
d +!. "alculation of ot$er compre$ensive income.
b +%. "alculation of loss on sale of bonds.
d +'. "alculation of loss on sale of trading securit#.
b +*. Determination of unrealized loss on trading securit#.
c ++. Determination of accumulated ot$er compre$ensive income.
b +,. Entr# to record unrealized gain on AF& securities.
c ,4. Fair value for trading securities.
a ,1. .nrealized gain on available-for-sale securities.
a ,2. "alculation of gain on sale of e3uit# securit#.
b ,3. Determination of unrealized loss on AF& securities.
a ,!. "alculation of unrealized loss included in compre$ensive income.
b ,%. "omputation of purc$ase price of e3uit# met$od investment.
c ,'. "omputation of revenue from investment.
c ,*. "omputation of investment account balance.
a ,+. "alculation of investment revenue.
c ,,. Accounting for stoc< investmentsfair value met$od.
b 144. Accounting for stoc< investmentse3uit# met$od.
b 141. Accounting for stoc< investmentsfair value met$od.
b 142. E3uit# met$od of accounting.
c 143. Fair value met$od of accounting for stoc< investment.
c 14!. E3uit# met$od of accounting for stoc< investment.
c 14%. ?alance of investment account using t$e e3uit# met$od.
b 14'. 8nvestment income recognized under t$e e3uit# met$od.
c 14*. ?alance of investment account using t$e e3uit# met$od.
b 14+. ?alance of investment account using t$e e3uit# met$od.
d 14,. 8nvestment income recognized under t$e e3uit# met$od.
b 114. 9t$er compre$ensive income.
M$&TIP&E CH*ICE'CPA Ada"ted
d 111. "arr#ing value of AF& debt securities.
d 112. .nrealized loss on trading and AF& securities.
c 113. .nrealized loss on trading and AF& securities.
d 11!. "lassification of an e3uit# securit#.
c 11%. 8nvestment income recognized under t$e e3uit# met$od.
b 11'. ?alance of investment account using t$e e3uit# met$od.
c 11*. &ale of stoc< investment.
a 11+. "alculate t$e ac3uisition price of a stoc< investment.
b 11,. Transfer of securities from trading to AF&.
17 % 3
E4ERCISES
Ite- )es!ri"tion
E1*-124 8nvestment in debt securities at a premium.
E1*-121 8nvestment in debt securities at a discount.
E1*-122 8nvestments in e3uit# securities @essa#A.
E1*-123 8nvestment in e3uit# securities.
E1*-12! Fair value and e3uit# met$ods @essa#A.
E1*-12% Fair value and e3uit# met$ods.
E1*-12' "ompre$ensive income calculation.
=E1*-12* Fair value $edge.
=E1*-12+ "as$ flo5 $edge.
PR*+&EMS
Ite- )es!ri"tion
71*-12, Trading e3uit# securities.
71*-134 Trading securities.
71*-131 Available-for-sale securities.
=71*-132 Derivative financial instrument.
=71*-133 Free-standing derivative.
CHAPTER &EARNIN5 *+6ECTIVES
1. 8dentif# t$e t$ree categories of debt securities and describe t$e accounting and reporting
treatment for eac$ categor#.
2. .nderstand t$e procedures for discount and premium amortization on bond investments.
3. 8dentif# t$e categories of e3uit# securities and describe t$e accounting and reporting
treatment for eac$ categor#.
!. Explain t$e e3uit# met$od of accounting and compare it to t$e fair value met$od for e3uit#
securities.
%. Describe t$e accounting for t$e fair value option.
'. Discuss t$e accounting for impairments of debt and e3uit# investments.
*. Explain 5$# companies report reclassification ad)ustments.
+. Describe t$e accounting for transfer of investment securities bet5een categories.
=,. Explain 5$o uses derivatives and 5$#.
=14. .nderstand t$e basic guidelines for accounting for derivatives.
=11. Describe t$e accounting for derivative financial instruments.
=12. Explain $o5 to account for a fair value $edge.
=13. Explain $o5 to account for a cas$ flo5 $edge.
17 % 7
8nvestments
=1!. 8dentif# special reporting issues related to derivative financial instruments t$at cause
uni3ue accounting problems.
=1%. Describe t$e accounting for variable-interest entities.
S$MMAR8 *F &EARNIN5 *+6ECTIVES +8 9$ESTI*NS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
&earnin. *b:e!tive 1
1. TF 3. TF 22. >" 2!. >"
&
2'. >" *4. >"
2. TF 21. >" 23. >"
7
2%. >"
&
2*. >" *1. >"
!. TF 34. >" 3'. >" !2. >" **. >" +3. >"
%. TF 31. >" 3*. >" *2. >" *+. >" +!. >"
'. TF 32. >" 3+. >" *3. >" *,. >" +%. >"
*. TF 33. >" 3,. >" *!. >" +4. >" 111. >"
&
2+. >" 3!. >" !4. >" *%. >" +1. >" 124. E
&
2,. >" 3%. >" !1. >" *'. >" +2. >" 121. E
+. TF 11. TF +*. >" ,4. >" ,3. >" 113. >" 12,. 7
,. TF
&
!3. >" ++. >" ,1. >" ,!. >" 11!. >" 134. 7
14. TF +'. >" +,. >" ,2. >" 112. >" 122. E 131. 7
12. TF !'. >" ,%. >" 144. >" 14%. >" 11%. >" 12!. E
13. TF !*. >" ,'. >" 141. >" 14'. >" 11'. >" 12%. E
1!. TF !+. >" ,*. >" 142. >" 14*. >" 11*. >" 12'. E
&
!!. >" !,. >" ,+. >" 143. >" 14+. >" 11+. >"
7
!%. >" %4. >" ,,. >" 14!. >" 14,. >" 123. E
&earnin. *b:e!tive ;
1%. TF 1'. TF %1. >" %2. >" 114. >"
&earnin. *b:e!tive <
1*. TF %3. >" 122. E 134. 7
1+. TF %!. >"
&earnin. *b:e!tive =
1,. TF %%. >"
7
%*. >" %,. >" 122. E 134. 7
24. TF %'. >" %+. >" 11,. >" 12,. 7
&earnin. *b:e!tive >?
'4. >"
&earnin. *b:e!tive 1@?
'1. >"
&earnin. *b:e!tive 11?
'2. >" '3. >" 132. 7 133. 7
'!. >" 12*. E
17 % ;
S$MMAR8 *F &EARNIN5 *+6ECTIVES +8 9$ESTI*NS 0!ont#1
'%. >" 12+. E
''. >"
&earnin. *b:e!tive 1;?
'*. >" '+. >" ',. >"
6oteB TF C True-False E C Exercise
>" C >ultiple "$oice 7 C 7roblem
TR$E%FA&SE'Con!e"tual
1. Debt securities include corporate bonds and convertible debtD but not ..&. government
securities. f
2. Trading securities are securities boug$t and $eld primaril# for sale in t$e near term to
generate income on s$ort-term price differences. t
3. .nrealized $olding gains and losses are recognized in net income for available-for-sale
debt securities. f
!. A compan# can classif# a debt securit# as $eld-to-maturit# if it $as t$e positive intent to
$old t$e securities to maturit#. f
%. "ompanies do not report c$anges in t$e fair value of available-for-sale debt securities as
income until t$e securit# is sold. t
'. T$e &ecurities Fair (alue Ad)ustment account $as a normal credit balance. f
*. "ompanies report trading securities at fair valueD 5it$ unrealized $olding gains and losses
reported in net income. t
+. E3uit# securit# $oldings bet5een 24 and %4 percent indicates t$at t$e investor $as a
controlling interest over t$e investee. f
,. T$e .nrealized /olding 0ain1oss2E3uit# account is reported as a part of ot$er compre-
$ensive income. t
14. &ignificant influence over an investee ma# be indicated b# material intercompan# trans-
actions and interc$ange of managerial personnel. t
11. T$e accounting profession $as concluded t$at an investment of more t$an %4 percent of
t$e voting stoc< of an investee s$ould lead to a presumption of significant influence over
an investee. f
17 % <
8nvestments
12. All dividends received b# an investor from t$e investee decrease t$e investmentEs carr#ing
value under t$e e3uit# met$od. t
13. .nder t$e fair value met$odD t$e investor reports as revenue its s$are of t$e net income
reported b# t$e investee. f
1!. A controlling interest occurs 5$en one corporation ac3uires a voting interest of more t$an
%4 percent in anot$er corporation. t
1%. "ompanies ma# not use t$e fair value option for investments t$at follo5 t$e e3uit# met$od
of accounting. f
1'. "$anges in t$e fair value of a compan#Fs debt instruments are included as part of
earnings in an# given period. t
1*. 8f a decline in a securit#Es value is )udged to be temporar#D a compan# needs to 5rite
do5n t$e cost basis of t$e individual securit# to a ne5 cost basis. f
1+. A reclassification ad)ustment is necessar# 5$en a compan# reports realized gainslosses
as part of net income but also s$o5s unrealized gainslosses as part of ot$er
compre$ensive income. t
1,. 8f a compan# transfers $eld-to-maturit# securities to available-for-sale securitiesD t$e
unrealized gain or loss is recognized in income. f
24. T$e transfer of securities from trading to available-for-sale and from available-for-sale to
trading $as t$e same impact on stoc<$oldersE e3uit# and net income. t
True%False Ans(ers'Con!e"tual
Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans#
1. F '. F 11. F 1'. T
2. T *. T 12. T 1*. F
3. F +. F 13. F 1+. T
!. F ,. T 1!. T 1,. F
%. T 14. T 1%. F 24. T
M$&TIP&E CH*ICE'Con!e"tual
21. G$ic$ of t$e follo5ing is not a debt securit#H
a. "onvertible bonds
b. "ommercial paper
!# &oans re!eivable
d. All of t$ese are debt securities.
22. A correct valuation is
a. available-for-sale at amortized cost.
b# held%to%-aturitA at a-ortiBed !ost#
c. $eld-to-maturit# at fair value.
d. none of t$ese.
17 % 7
23. &ecurities 5$ic$ could be classified as $eld-to-maturit# are
a. redeemable preferred stoc<.
b. 5arrants.
!# -uni!i"al bonds#
d. treasur# stoc<.
2!. .nrealized $olding gains or losses 5$ic$ are recognized in income are from securities
classified as
a. $eld-to-maturit#.
b. available-for-sale.
!# tradin.#
d. none of t$ese.
7
2%. G$en an investorFs accounting period ends on a date t$at does not coincide 5it$ an
interest receipt date for bonds $eld as an investmentD t$e investor must
a# -a,e an ad:ustin. entrA to debit Interest Re!eivable and to !redit Interest
Revenue or the a-ount o interest a!!rued sin!e the last interest re!ei"t date#
b. notif# t$e issuer and re3uest t$at a special pa#ment be made for t$e appropriate
portion of t$e interest period.
c. ma<e an ad)usting entr# to debit 8nterest -eceivable and to credit 8nterest -evenue for
t$e total amount of interest to be received at t$e next interest receipt date.
d. do not$ing special and ignore t$e fact t$at t$e accounting period does not coincide
5it$ t$e bondFs interest period.
&
2'. Debt securities t$at are accounted for at amortized costD not fair valueD are
a# held%to%-aturitA debt se!urities#
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
&
2*. Debt securities ac3uired b# a corporation 5$ic$ are accounted for b# recognizing
unrealized $olding gains or losses and are included as ot$er compre$ensive income and
as a separate component of stoc<$oldersF e3uit# are
a. $eld-to-maturit# debt securities.
b. trading debt securities.
!# available%or%sale debt se!urities#
d. never-sell debt securities.
&
2+. .se of t$e effective-interest met$od in amortizing bond premiums and discounts results in
a. a greater amount of interest income over t$e life of t$e bond issue t$an 5ould result
from use of t$e straig$t-line met$od.
b# a varAin. a-ount bein. re!orded as interest in!o-e ro- "eriod to "eriod#
c. a variable rate of return on t$e boo< value of t$e investment.
d. a smaller amount of interest income over t$e life of t$e bond issue t$an 5ould result
from use of t$e straig$t-line met$od.
&
2,. E3uit# securities ac3uired b# a corporation 5$ic$ are accounted for b# recognizing
unrealized $olding gains or losses as ot$er compre$ensive income and as a separate
component of stoc<$oldersF e3uit# are
a# available%or%sale se!urities (here a !o-"anA has holdin.s o less than 2@C#
b. trading securities 5$ere a compan# $as $oldings of less t$an 24I.
c securities 5$ere a compan# $as $oldings of bet5een 24I and %4I.
d. securities 5$ere a compan# $as $oldings of more t$an %4I.
17 % =
8nvestments
34. A re3uirement for a securit# to be classified as $eld-to-maturit# is
a. abilit# to $old t$e securit# to maturit#.
b. positive intent.
c. t$e securit# must be a debt securit#.
d# All o these are required#
31. /eld-to-maturit# securities are reported at
a. ac3uisition cost.
b# a!quisition !ost "lus a-ortiBation o a dis!ount#
c. ac3uisition cost plus amortization of a premium.
d. fair value.
32. Gatt "o. purc$ased J344D444 of bonds for J31%D444. 8f Gatt intends to $old t$e securities
to maturit#D t$e entr# to record t$e investment includes
a. a debit to /eld-to->aturit# &ecurities at J344D444.
b. a credit to 7remium on 8nvestments of J1%D444.
!# a debit to Held%to%MaturitA Se!urities at D31;/@@@#
d. none of t$ese.
33. G$ic$ of t$e follo5ing is not correct in regard to trading securitiesH
a. T$e# are $eld 5it$ t$e intention of selling t$em in a s$ort period of time.
b. .nrealized $olding gains and losses are reported as part of net income.
c. An# discount or premium is not amortized.
d# All o these are !orre!t#
3!. 8n accounting for investments in debt securities t$at are classified as trading securitiesD
a. a discount is reported separatel#.
b. a premium is reported separatel#.
!# anA dis!ount or "re-iu- is not a-ortiBed#
d. none of t$ese.
3%. 8nvestments in debt securities are generall# recorded at
a. cost including accrued interest.
b. maturit# value.
!# !ost in!ludin. bro,era.e and other ees#
d. maturit# value 5it$ a separate discount or premium account.
3'. Kordan "o. purc$ased ten-#earD 14I bonds t$at pa# interest semiannuall#. T$e bonds are
sold to #ield +I. 9ne step in calculating t$e issue price of t$e bonds is to multipl# t$e
principal b# t$e table value for
a. 14 periods and 14I from t$e present value of 1 table.
b. 14 periods and +I from t$e present value of 1 table.
c. 24 periods and %I from t$e present value of 1 table.
d# 2@ "eriods and 7C ro- the "resent value o 1 table#
3*. 8nvestments in debt securities s$ould be recorded on t$e date of ac3uisition at
a. lo5er of cost or mar<et.
b. mar<et value.
!# -ar,et value "lus bro,era.e ees and other !osts in!ident to the "ur!hase#
d. face value plus bro<erage fees and ot$er costs incident to t$e purc$ase.
17 % >
3+. An available-for-sale debt securit# is purc$ased at a discount. T$e entr# to record t$e
amortization of t$e discount includes a
a# debit to Available%or%Sale Se!urities#
b. debit to t$e discount account.
c. debit to 8nterest -evenue.
d. none of t$ese.
3,. APB Opinion No. 21 specifies t$atD regarding t$e amortization of a premium or discount on
a debt securit#D t$e
a. effective-interest met$od of allocation must be used.
b. straig$t-line met$od of allocation must be used.
!# ee!tive%interest -ethod o allo!ation should be used but other -ethods !an be
a""lied i there is no -aterial dieren!e in the results obtained#
d. par value met$od must be used and t$erefore no allocation is necessar#.
!4. G$ic$ of t$e follo5ing is correct about t$e effective-interest met$od of amortizationH
a. T$e effective interest met$od applied to investments in debt securities is different from
t$at applied to bonds pa#able.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d# The ee!tive%interest -ethod "rodu!es a !onstant rate o return on the boo,
value o the invest-ent ro- "eriod to "eriod#
!1. G$en investments in debt securities are purc$ased bet5een interest pa#ment datesD
preferabl# t$e
a. securities account s$ould include accrued interest.
b. accrued interest is debited to 8nterest Expense.
!# a!!rued interest is debited to Interest Revenue#
d. accrued interest is debited to 8nterest -eceivable.
!2. G$ic$ of t$e follo5ing is not generall# correct about recording a sale of a debt securit#
before maturit# dateH
a. Accrued interest 5ill be received b# t$e seller even t$oug$ it is not an interest
pa#ment date.
b. An entr# must be made to amortize a discount to t$e date of sale.
!# The entrA to a-ortiBe a "re-iu- to the date o sale in!ludes a !redit to the
Pre-iu- on Invest-ents in )ebt Se!urities#
d. A gain or loss on t$e sale is not extraordinar#.
&
!3. G$en a compan# $as ac3uired a Lpassive interestL in anot$er corporationD t$e ac3uiring
compan# s$ould account for t$e investment
a. b# using t$e e3uit# met$od.
b# bA usin. the air value -ethod#
c. b# using t$e effective interest met$od.
d. b# consolidation.
17 % 1@
8nvestments
&
!!. &anto "orporation declares and distributes a cas$ dividend t$at is a result of current
earnings. /o5 5ill t$e receipt of t$ose dividends affect t$e investment account of t$e
investor under eac$ of t$e follo5ing accounting met$odsH
Fair (alue >et$od E3uit# >et$od
a# No Ee!t )e!rease
b. 8ncrease Decrease
c. 6o Effect 6o Effect
d. Decrease 6o Effect
7
!%. An investor $as a long-term investment in stoc<s. -egular cas$ dividends received b# t$e
investor are recorded as
Fair (alue >et$od E3uit# >et$od
a. 8ncome 8ncome
b. A reduction of t$e investment A reduction of t$e investment
!# In!o-e A redu!tion o the invest-ent
d. A reduction of t$e investment 8ncome
!'. G$en a compan# $olds bet5een 24I and %4I of t$e outstanding stoc< of an investeeD
5$ic$ of t$e follo5ing statements appliesH
a. T$e investor s$ould al5a#s use t$e e3uit# met$od to account for its investment.
b# The investor should use the equitA -ethod to a!!ount or its invest-ent unless
!ir!u-%stan!es indi!ate that it is unable to eEer!ise Fsi.nii!ant inluen!eF over
the investee#
c. T$e investor must use t$e fair value met$od unless it can clearl# demonstrate t$e
abilit# to exercise Lsignificant influenceL over t$e investee.
d. T$e investor s$ould al5a#s use t$e fair value met$od to account for its investment.
!*. 8f t$e parent compan# o5ns ,4I of t$e subsidiar# compan#Fs outstanding common stoc<D
t$e compan# s$ould generall# account for t$e income of t$e subsidiar# under t$e
a. cost met$od.
b. fair value met$od.
c. divesture met$od.
d# equitA -ethod#
!+. Moe$n "orporation accounts for its investment in t$e common stoc< of &ells "ompan#
under t$e e3uit# met$od. Moe$n "orporation s$ould ordinaril# record a cas$ dividend
received from &ells as
a# a redu!tion o the !arrAin. value o the invest-ent#
b. additional paid-in capital.
c. an addition to t$e carr#ing value of t$e investment.
d. dividend income.
!,. .nder t$e e3uit# met$od of accounting for investmentsD an investor recognizes its s$are
of t$e earnings in t$e period in 5$ic$ t$e
a. investor sells t$e investment.
b. investee declares a dividend.
c. investee pa#s a dividend.
d# earnin.s are re"orted bA the investee in its inan!ial state-ents#
17 % 11
%4. KuddD 8nc.D o5ns 3%I of "osb# "orporation. During t$e calendar #ear 2412D "osb# $ad
net earnings of J344D444 and paid dividends of J34D444. Kudd mista<enl# recorded t$ese
transactions using t$e fair value met$od rat$er t$an t$e e3uit# met$od of accounting.
G$at effect 5ould t$is $ave on t$e investment accountD net incomeD and retained
earningsD respectivel#H
a. .nderstateD overstateD overstate
b. 9verstateD understateD understate
c. 9verstateD overstateD overstate
d# $nderstate/ understate/ understate
%1. Dublin "o. $olds a 34I sta<e in "lub "o. 5$ic$ 5as purc$ased in 2413 at a cost of
J3D444D444. After appl#ing t$e e3uit# met$odD t$e 8nvestment in "lub "o. account $as a
balance of J3D4!4D444. At December 31D 2413 t$e fair value of t$e investment is
J3D124D444. G$ic$ of t$e follo5ing values is acceptable for Dublin to use in its balance
s$eet at December 31D 2413H
8. J3D444D444
88. J3D4!4D444
888. J3D124D444
a. 8D 88D or 888.
b. 8 or 88 onl#.
c. 88 onl#.
d# II or III onlA#
%2. T$e fair value option allo5s a compan# to
a# value its o(n liabilities at air value#
b. record income 5$en t$e fair value of its bonds increases.
c. report most financial instruments at fair value b# recording gains and losses as a
separate component of stoc<$oldersE e3uit#.
d. All of t$e above are true of t$e fair value option.
%3. 8mpairments are
a. based on discounted cas$ flo5s for securities.
b. recognized as a realized loss if t$e impairment is )udged to be temporar#.
c. based on fair value for available-for-sale investments and on negotiated values for
$eld-to-maturit# investments.
d# evaluated at ea!h re"ortin. date or everA invest-ent#
%!. A reclassification ad)ustment is reported in t$e
a. income statement as an 9t$er revenue or expense.
b. stoc<$oldersE e3uit# section of t$e balance s$eet.
!# state-ent o !o-"rehensive in!o-e as other !o-"rehensive in!o-e#
d. statement of stoc<$oldersE e3uit#.
%%. G$en an investment in a $eld-to-maturit# securit# is transferred to an available-for-sale
securit#D t$e carr#ing value assigned to t$e available-for-sale securit# s$ould be
a. its original cost.
b# its air value at the date o the transer#
c. t$e lo5er of its original cost or its fair value at t$e date of t$e transfer.
d. t$e $ig$er of its original cost or its fair value at t$e date of t$e transfer.
17 % 12
8nvestments
%'. G$en an investment in an available-for-sale securit# is transferred to trading because t$e
compan# anticipates selling t$e stoc< in t$e near futureD t$e carr#ing value assigned to t$e
investment upon entering it in t$e trading portfolio s$ould be
a. its original cost.
b# its air value at the date o the transer#
c. t$e $ig$er of its original cost or its fair value at t$e date of t$e transfer.
d. t$e lo5er of its original cost or its fair value at t$e date of t$e transfer.
7
%*. A debt securit# is transferred from one categor# to anot$er. 0enerall# acceptable
accounting principles re3uire t$at for t$is particular reclassification @1A t$e securit# be
transferred at fair value at t$e date of transferD and @2A t$e unrealized gain or loss at t$e
date of transfer currentl# carried as a separate component of stoc<$oldersF e3uit# be
amortized over t$e remaining life of t$e securit#. G$at t#pe of transfer is being describedH
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from $eld-to-maturit# to available-for-sale
d# Transer ro- available%or%sale to held%to%-aturitA
%+. :0ains trading; or :c$err# pic<ing; involves
a. moving securities 5$ose value $as decreased since ac3uisition from available-for-sale
to $eld-to-maturit# in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
!# sellin. se!urities (hose value has in!reased sin!e a!quisition (hile holdin.
those (hose value has de!reased sin!e a!quisition#
d. All of t$e above are considered met$ods of :gains trading; or :c$err# pic<ing.;
%,. Transfers bet5een categories
a. result in companies omitting recognition of fair value in t$e #ear of t$e transfer.
b# are a!!ounted or at air value or all transers#
c. are considered unrealized and unrecognized if transferred out of $eld-to-maturit# into
trading.
d. 5ill al5a#s result in an impact on net income.
='4. "ompanies t$at attempt to exploit inefficiencies in various derivative mar<ets b#
attempting to loc< in profits b# simultaneousl# entering into transactions in t5o or more
mar<ets are called
a# arbitra.eurs#
b. gamblers.
c. $edgers.
d. speculators.
='1. All of t$e follo5ing statements regarding accounting for derivatives are correct except t$at
a. t$e# s$ould be recognized in t$e financial statements as assets and liabilities.
b. t$e# s$ould be reported at fair value.
!# .ains and losses resultin. ro- s"e!ulation should be deerred#
d. gains and losses resulting from $edge transactions are reported in different 5a#sD
depending upon t$e t#pe of $edge.
17 % 13
='2. All of t$e follo5ing are c$aracteristics of a derivative financial instrument except t$e
instrument
a. $as one or more underl#ings and an identified pa#ment provision.
b# requires a lar.e invest-ent at the in!e"tion o the !ontra!t#
c. re3uires or permits net settlement.
d. All of t$ese are c$aracteristics.
='3. G$ic$ of t$e follo5ing are considered e3uit# securitiesH
8. "onvertible debt.
88. -edeemable preferred stoc<.
888. "all or put options.
a. 8 and 88 onl#.
b. 8 and 888 onl#.
c. 88 onl#.
d# III onlA#
='!. T$e accounting for fair value $edges records t$e derivative at its
a. amortized cost.
b. carr#ing value.
!# air value#
d. $istorical cost.
='%. 0ains or losses on cas$ flo5 $edges are
a. ignored completel#.
b# re!orded in equitA/ as "art o other !o-"rehensive in!o-e#
c. reported directl# in net income.
d. reported directl# in retained earnings.
=''. An option to convert a convertible bond into s$ares of common stoc< is a@nA
a# e-bedded derivative#
b. $ost securit#.
c. $#brid securit#.
d. fair value $edge.
='*. All of t$e follo5ing are re3uirements for disclosures related to financial instruments except
a. disclosing t$e fair value and related carr#ing value of t$e instruments.
b. distinguis$ing bet5een financial instruments $eld or issued for purposes ot$er t$an
trading.
!# !o-binin. or nettin. the air value o se"arate inan!ial instru-ents#
d. displa#ing as a separate classification of ot$er compre$ensive income t$e net
gainloss on derivative instruments designated in cas$ flo5 $edges.
='+. A variable-interest entit# $as
a# insui!ient equitA invest-ent at ris,#
b. stoc<$olders 5$o $ave decision-ma<ing rig$ts.
c. stoc<$olders 5$o absorb t$e losses or receive t$e benefits of a normal stoc<$older.
d. All of t$e above are c$aracteristics of a variable-interest entit#.
17 % 17
8nvestments
=',. .nder ..&. 0AA7D 5$ic$ of t$e follo5ing models ma# be used to determine if an
investment is consolidatedH
-is<-and-re5ard model (oting-interest approac$
a. Nes 6o
b. 6o Nes
c. 6o 6o
d# 8es 8es
Multi"le Choi!e Ans(ers'Con!e"tual
Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans#
21. c 2+. b 3%. c !2. c !,. d %'. b ='3. d
22. b 2,. a 3'. d !3. b %4. d %*. d ='!. c
23. c 34. d 3*. c !!. a %1. d %+. c ='%. b
2!. c 31. b 3+. a !%. c %2. a %,. b =''. a
2%. a 32. c 3,. c !'. b %3. d ='4. a ='*. c
2'. a 33. d !4. d !*. d %!. c ='1. c ='+. a
2*. c 3!. c !1. c !+. a %%. b ='2. b =',. d
M$&TIP&E CH*ICE'Co-"utational
*4. 9n August 1D 2412D Dambro "o. ac3uired !44D J1D444D ,I bonds at ,* plus accrued
interest. T$e bonds 5ere dated >a# 1D 2412D and mature on April 34D 241+D 5it$ interest
paid eac$ 9ctober 31 and April 34. T$e bonds 5ill be added to DambroEs available-for-
sale portfolio. T$e preferred entr# to record t$e purc$ase of t$e bonds on
August 1D 2412 is
a. Debt 8nvestments................................................................. 3,*D444
"as$......................................................................... 3,*D444
b. Debt 8nvestments................................................................. 3++D444
8nterest -eceivable.............................................................. ,D444
"as$......................................................................... 3,*D444
c. Debt 8nvestments................................................................. 3++D444
8nterest -evenue................................................................. ,D444
"as$......................................................................... 3,*D444
d. Debt 8nvestments................................................................. !44D444
8nterest -evenue................................................................. ,D444
Discount on Debt 8nvestments................................. 12D444
"as$ ........................................................................ 3,*D444
*1. Mern "ompan# purc$ased bonds 5it$ a face amount of J'44D444 bet5een interest
pa#ment dates. Mern purc$ased t$e bonds at 142D paid bro<erage costs of J,D444D and
paid accrued interest for t$ree mont$s of J1%D444. T$e amount to record as t$e cost of
t$is long-term investment in bonds is
a. J'3'D444.
b. J'21D444.
c. J'12D444.
d. J'44D444.
17 % 1;
.se t$e follo5ing information for 3uestions *2 and *3.
7atton "ompan# purc$ased J'44D444 of 14I bonds of &cott "o. on Kanuar# 1D 2413D pa#ing
J%'!D1%4. T$e bonds mature Kanuar# 1D 2423O interest is pa#able eac$ Kul# 1 and Kanuar# 1. T$e
discount of J3%D+%4 provides an effective #ield of 11I. 7atton "ompan# uses t$e effective-
interest met$od and plans to $old t$ese bonds to maturit#.
*2. 9n Kul# 1D 2413D 7atton "ompan# s$ould increase its Debt 8nvestments account for t$e
&cott "o. bonds b#
a. J3D%++.
b. J2D4%'.
c. J1D*,!.
d. J1D42+.
*3. For t$e #ear ended December 31D 2413D 7atton "ompan# s$ould report interest revenue
from t$e &cott "o. bonds ofB
a. J'3D%++.
b. J'2D113.
c. J'2D4%2.
d. J'4D444.
.se t$e follo5ing information for 3uestions *! and *%.
1andis "o. purc$ased J1D444D444 of +ID %-#ear bonds from -itterD 8nc. on Kanuar# 1D 2412D 5it$
interest pa#able on Kul# 1 and Kanuar# 1. T$e bonds sold for J1D4!1D%+4 at an effective interest
rate of *I. .sing t$e effective-interest met$odD 1andis "o. decreased t$e Available-for-&ale Debt
&ecurities account for t$e -itterD 8nc. bonds on Kul# 1D 2412 and December 31D 2412 b# t$e
amortized premiums of J3D%!4 and J3D''4D respectivel#.
*!. At December 31D 2412D t$e fair value of t$e -itterD 8nc. bonds 5as J1D4'4D444. G$at
s$ould 1andis "o. report as ot$er compre$ensive income and as a separate component
of stoc<$oldersF e3uit#H
a. J2%D'24.
b. J1+D!24.
c. J*D244.
d. 6o entr# s$ould be made.
*%. At April 1D 2413D 1andis "o. sold t$e -itter bonds for J1D434D444. After accruing for
interestD t$e carr#ing value of t$e -itter bonds on April 1D 2413 5as J1D433D*%4. Assuming
1andis "o. $as a portfolio of Available-for-&ale Debt &ecuritiesD 5$at s$ould 1andis "o.
report as a gain or loss on t$e bondsH
a. @J2,D3*4A.
b. @J21D+*4A.
c. @J3D*%4A.
d. J 4.
17 % 1<
8nvestments
*'. 9n August 1D 2412D Fo5ler "ompan# ac3uired J'44D444 face value 14I bonds of Masnic
"orporation at 14! plus accrued interest. T$e bonds 5ere dated >a# 1D 2412D and mature
on April 34D 241*D 5it$ interest pa#able eac$ 9ctober 31 and April 34. T$e bonds 5ill be
$eld to maturit#. G$at entr# s$ould Fo5ler ma<e to record t$e purc$ase of t$e bonds on
August 1D 2412H
a. Debt 8nvestments................................................................. '2!D444
8nterest -evenue................................................................. 1%D444
"as$......................................................................... '3,D444
b. Debt 8nvestments................................................................. '3,D444
"as$......................................................................... '3,D444
c. Debt 8nvestments................................................................. '3,D444
8nterest -evenue...................................................... 1%D444
"as$......................................................................... '2!D444
d. Debt 8nvestments................................................................. '44D444
7remium on ?onds.............................................................. 3,D444
"as$......................................................................... '3,D444
**. 9n 9ctober 1D 2412D -enfro "o. purc$ased to $old to maturit#D 2D444D J1D444D ,I bonds
for J1D,+4D444 5$ic$ includes J34D444 accrued interest. T$e bondsD 5$ic$ mature on
Februar# 1D 2421D pa# interest semiannuall# on Februar# 1 and August 1. -enfro uses t$e
straig$t-line met$od of amortization. T$e bonds s$ould be reported in t$e December 31D
2412 balance s$eet at a carr#ing value of
a. J1D,%4D444.
b. J1D,%1D%44.
c. J1D,+4D444.
d. J1D,+4D%44.
*+. 9n 6ovember 1D 2412D /o5ell "ompan# purc$ased ,44 of t$e J1D444 face valueD ,I
bonds of -amse#D 8ncorporatedD for J,!+D444D 5$ic$ includes accrued interest of J13D%44.
T$e bondsD 5$ic$ mature on Kanuar# 1D 241*D pa# interest semiannuall# on >arc$ 1 and
&eptember 1. Assuming t$at /o5ell uses t$e straig$t-line met$od of amortization and t$at
t$e bonds are appropriatel# classified as available-for-saleD t$e net carr#ing value of t$e
bonds s$ould be s$o5n on /o5ellFs December 31D 2412D balance s$eet at
a. J,44D444.
b. J,3!D%44.
c. J,33D124.
d. J,!+D444.
*,. 9n 6ovember 1D 2412D /orton "o. purc$ased 1opezD 8nc.D 14-#earD ,ID bonds 5it$ a face
value of J%44D444D for J!%4D444. An additional J1%D444 5as paid for t$e accrued interest.
8nterest is pa#able semiannuall# on Kanuar# 1 and Kul# 1. T$e bonds mature on Kul# 1D
241,. /orton uses t$e straig$t-line met$od of amortization. 8gnoring income taxesD t$e
amount reported in /ortonFs 2412 income statement as a result of /ortonFs available-for-
sale investment in 1opez 5as
a. J+D*%4.
b. J+D333.
c. J*D%44.
d. J'D'''.
17 % 17
+4. 9n 9ctober 1D 2412D >en<e "o. purc$ased to $old to maturit#D %44D J1D444D ,I bonds for
J%24D444. An additional J1%D444 5as paid for accrued interest. 8nterest is paid
semiannuall# on December 1 and Kune 1 and t$e bonds mature on December 1D 241'.
>en<e uses straig$t-line amortization. 8gnoring income taxesD t$e amount reported in
>en<eFs 2412 income statement from t$is investment s$ould be
a. J11D2%4.
b. J14D4%4.
c. J12D!%4.
d. J13D'%4.
+1. During 2414D /au<e "o. purc$ased 3D444D J1D444D ,I bonds. T$e carr#ing value of t$e
bonds at December 31D 2412 5as J2D,!4D444. T$e bonds mature on >arc$ 1D 241*D and
pa# interest on >arc$ 1 and &eptember 1. /au<e sells 1D%44 bonds on &eptember 1D
241!D for J1D!+2D444D after t$e interest $as been received. /au<e uses straig$t-line
amortization. T$e gain on t$e sale is
a. J4.
b. J*D244.
c. J12D444.
d. J1'D+44.
.se t$e follo5ing information for +2 and +3.
9n Kanuar# 3D 2412D >oss "o. ac3uires J!44D444 of Adam "ompan#Es 14-#earD 14I bonds at a
price of J!2%D'*2 to #ield ,I. 8nterest is pa#able eac$ December 31. T$e bonds are classified as
$eld-to-maturit#.
+2. Assuming t$at >oss "o. uses t$e effective-interest met$odD 5$at is t$e amount of interest
revenue t$at 5ould be recognized in 2413 related to t$ese bondsH
a. J!4D444
b. J!2D%'+
c. J3+D312
=d. J3+D1'4
+3. Assuming t$at >oss "o. uses t$e straig$t-line met$odD 5$at is t$e amount of premium
amortization t$at 5ould be recognized in 241! related to t$ese bondsH
a. J2D%'+
b. J1D'++
c. J1D+!4
d. J2D44+
Puestions +! and +% are based on t$e follo5ing informationB
-ic$man "o. purc$ased J'44D444 of +ID %-#ear bonds from "arlinD 8nc. on Kanuar# 1D 2412D 5it$
interest pa#able on Kul# 1 and Kanuar# 1. T$e bonds sold for J'2!D,!+ at an effective interest
rate of *I. .sing t$e effective interest met$odD -ic$man "o. decreased t$e Available-for-&ale
Debt &ecurities account for t$e "arlinD 8nc. bonds on Kul# 1D 2412 and December 31D 2412 b# t$e
amortized premiums of J2D12! and J2D1,'D respectivel#.
17 % 1=
8nvestments
+!. At December 31D 2412D t$e fair value of t$e "arlinD 8nc. bonds 5as J'3'D444. G$at s$ould
-ic$man "o. report as ot$er compre$ensive income and as a separate component of
stoc<$oldersE e3uit#H
a. J4
b. J!D324
c. J11D4%2
d. J1%D3*2
+%. At Februar# 1D 2413D -ic$man "o. sold t$e "arlin bonds for J'1+D444. After accruing for
interestD t$e carr#ing value of t$e "arlin bonds on Februar# 1D 2413 5as J'24D2%4.
Assuming -ic$man "o. $as a portfolio of available-for-sale debt investmentsD 5$at s$ould
-ic$man "o. report as a gain @or lossA on t$e bondsH
a. J4.
b. @J2D2%4A.
c. @J13D122A.
d. @J1*D'22A.
+'. During 2412 1ogic "ompan# purc$ased 'D444 s$ares of >idiD 8nc. for J34 per s$are. T$e
investment 5as classified as a trading securit#. During t$e #ear 1ogic "ompan# sold
1D%44 s$ares of >idiD 8nc. for J3% per s$are. At December 31D 2412 t$e mar<et price of
>idiD 8nc.Es stoc< 5as J2+ per s$are. G$at is t$e total amount of gain@lossA t$at 1ogic
"ompan# 5ill report in its income statement for t$e #ear ended December 31D 2412
related to its investment in >idiD 8nc. stoc<H
a. @J12D444A
b. J*D%44
c. @J!D%44A
d. @J1D%44A
.se t$e follo5ing information for 3uestions +* and ++.
8nstrument "orp. $as t$e follo5ing investments 5$ic$ 5ere $eld t$roug$out 2412Q2413B
Fair (alue
"ost 123112 123113
Trading J!%4D444 J'44D444 J%*4D444
Available-for-sale !%4D444 !+4D444 %!4D444
+*. G$at amount of gain or loss 5ould 8nstrument "orp. report in its income statement for t$e
#ear ended December 31D 2413 related to its investmentsH
a. J34D444 gain.
b. J34D444 loss.
c. J214D444 gain.
d. J124D444 gain.
++. G$at amount 5ould be reported as accumulated ot$er compre$ensive income related to
investments in 8nstrument "orp.Es balance s$eet at December 31D 2412H
a. J'4D444 gain.
b. J,4D444 gain.
c. J34D444 gain.
d. J1+4D444 gain.
17 % 1>
+,. At December 31D 2413D Atlanta "o. $as a stoc< portfolio valued at J124D444. 8ts cost 5as
J,,D444. 8f t$e &ecurities Fair (alue Ad)ustment @Available-for-&aleA $as a debit balance
of J'D444D 5$ic$ of t$e follo5ing )ournal entries is re3uired at December 31D 2413H
a. Fair (alue Ad)ustment 21D444
@available-for-saleA
.nrealized /olding 0ain or 1oss-E3uit# 21D444
b. Fair (alue Ad)ustment 1%D444
.nrealized /olding 0ain or 1oss-E3uit# 1%D444
c. .nrealized /olding 0ain or 1oss-E3uit# 21D444
Fair (alue Ad)ustment 21D444
d. .nrealized /olding 0ain or 1oss-E3uit# 1%D444
Fair (alue Ad)ustment 1%D444
,4. Mramer "ompan#Fs trading securities portfolio 5$ic$ is appropriatel# included in current
assets is as follo5sB
December 31D 2412
Fair .nrealized
"ost (alue 0ain @1ossA
"atlett "orp. J2%4D444 J24%D444 J@!%D444A
1#manD 8nc. 2!%D444 2'%D444 24D444
J!,%D444 J!*4D444 J@2%D444A
8gnoring income taxesD 5$at amount s$ould be reported as a c$arge against income in
MramerFs 2412 income statement if 2412 is MramerFs first #ear of operationH
a. J4.
b. J24D444.
c. J2%D444.
d. J!%D444.
,1. 9n its December 31D 2412D balance s$eetD Trump "o. reported its investment in available-
for-sale securitiesD 5$ic$ $ad cost J'44D444D at fair value of J%%4D444. At December 31D
2413D t$e fair value of t$e securities 5as J%+%D444. G$at s$ould Trump report on its 2413
income statement as a result of t$e increase in fair value of t$e investments in 2413H
a. J4.
b. .nrealized loss of J1%D444.
c. -ealized gain of J3%D444.
d. .nrealized gain of J3%D444.
,2. During 2412D Goods "ompan# purc$ased !4D444 s$ares of /olmes "orp. common stoc<
for J'34D444 as an available-for-sale investment. T$e fair value of t$ese s$ares 5as
J'44D444 at December 31D 2412. Goods sold all of t$e /olmes stoc< for J1* per s$are on
December 3D 2413D incurring J2+D444 in bro<erage commissions. Goods "ompan# s$ould
report a realized gain on t$e sale of stoc< in 2413 of
a. J22D444.
b. J%4D444.
c. J%2D444.
d. J+4D444.
17 % 2@
8nvestments
.se t$e follo5ing information for 3uestions ,3 and ,!.
9n its December 31D 2412 balance s$eetD "al$oun "ompan# appropriatel# reported a J14D444
debit balance in its Fair (alue Ad)ustment @available-for-saleA account. T$ere 5as no c$ange
during 2413 in t$e composition of "al$ounEs portfolio of e3uit# investments $eld as available-for-
sale securities. T$e follo5ing information pertains to t$at portfolioB
&ecurit# "ost Fair value at 123113
R J12%D444 J1'4D444
N 144D444 +%D444
S 1*%D444 12%D444
J!44D444 J3*4D444
,3. G$at amount of unrealized loss on t$ese securities s$ould be included in "al$ounFs
stoc<$oldersF e3uit# section of t$e balance s$eet at December 31D 2413H
a. J!4D444.
b. J34D444.
c. J14D444.
d. J4.
,!. T$e amount of unrealized loss to appear as a component of compre$ensive income for
t$e #ear ending December 31D 2413 is
a. J!4D444.
b. J34D444.
c. J14D444.
d. J4.
,%. 9n Kanuar# 2D 2413 7od "ompan# purc$ased 2%I of t$e outstanding common stoc< of
KobsD 8nc. and subse3uentl# used t$e e3uit# met$od to account for t$e investment. During
2413 KobsD 8nc. reported net income of J'34D444 and distributed dividends of J2*4D444.
T$e ending balance in t$e 8nvestment in 7od "ompan# account at December 31D 2413
5as J!+4D444 after appl#ing t$e e3uit# met$od during 2413. G$at 5as t$e purc$ase price
7od "ompan# paid for its investment in KobsD 8ncH
a. J2%%D444
b. J3,4D444
c. J%*4D444
d. J*4%D444
,'. Siegler "orporation purc$ased 2%D444 s$ares of common stoc< of t$e &$erman
"orporation for J!4 per s$are on Kanuar# 2D 2414. &$erman "orporation $ad 144D444
s$ares of common stoc< outstanding during 2413D paid cas$ dividends of J124D444 during
2413D and reported net income of J!44D444 for 2413. Siegler "orporation s$ould report
revenue from investment for 2413 in t$e amount of
a. J34D444.
b. J*4D444.
c. J144D444.
d. J114D444.
.se t$e follo5ing information for 3uestions ,* and ,+.
/arrison "o. o5ns 24D444 of t$e %4D444 outstanding s$ares of Ta#lorD 8nc. common stoc<. During
2413D Ta#lor earns J1D244D444 and pa#s cas$ dividends of J,'4D444.
17 % 21
,*. 8f t$e beginning balance in t$e investment account 5as J*%4D444D t$e balance at
December 31D 2413 s$ould be
a. J1D234D444.
b. J,,4D444.
c. J+!'D444.
d. J*%4D444.
,+. /arrison s$ould report investment revenue for 2413 of
a. J!+4D444.
b. J3+!D444.
c. J,'D444.
d. J4.
.se t$e follo5ing information for 3uestions ,, t$roug$ 142.
T$e summarized balance s$eets of 0oebel "ompan# and Dobbs "ompan# as of December 31D
2412 are as follo5sB
0oebel "ompan#
?alance &$eet
December 31D 2412
Assets J1D244D444
1iabilities J 1%4D444
"apital stoc< '44D444
-etained earnings !%4D444
Total e3uities J1D244D444
Dobbs "ompan#
?alance &$eet
December 31D 2412
Assets J,44D444
1iabilities J22%D444
"apital stoc< %%%D444
-etained earnings 124D444
Total e3uities J,44D444
,,. 8f 0oebel "ompan# ac3uired a 24I interest in Dobbs "ompan# on December 31D 2412
for J1,%D444 and t$e fair value met$od of accounting for t$e investment 5ere usedD t$e
amount of t$e debit to E3uit# 8nvestments @DobbsA 5ould $ave been
a. J13%D444.
b. J111D444.
c. J1,%D444.
d. J1+4D444.
144. 8f 0oebel "ompan# ac3uired a 34I interest in Dobbs "ompan# on December 31D 2412
for J22%D444 and t$e e3uit# met$od of accounting for t$e investment 5ere usedD t$e
amount of t$e debit to E3uit# 8nvestments @DobbsA 5ould $ave been
a. J2+%D444.
b. J22%D444.
c. J1+4D444.
d. J242D%44.
17 % 22
8nvestments
for J13%D444 and during 2413 Dobbs "ompan# $ad net income of J*%D444 and paid a
cas$ dividend of J34D444D appl#ing t$e fair value met$od 5ould give a debit balance in t$e
E3uit# 8nvestments @DobbsA account at t$e end of 2413 of
a. J111D444.
b. J13%D444.
c. J1%4D444.
d. J1!!D444.
for J214D444 and during 2413 Dobbs "ompan# $ad net income of J*%D444 and paid a
cas$ dividend of J34D444D appl#ing t$e e3uit# met$od 5ould give a debit balance in t$e
E3uit# 8nvestments @DobbsA account at t$e end of 2413 of
a. J214D444.
b. J223D%44.
c. J232D%44.
d. J241D444.
.se t$e follo5ing information for 3uestions 143 and 14!.
?lanco "ompan# purc$ased 244 of t$e 1D444 outstanding s$ares of Darb# "ompan#Fs common
stoc< for J'44D444 on Kanuar# 2D 2413. During 2413D Darb# "ompan# declared dividends of
J144D444 and reported earnings for t$e #ear of J!44D444.
143. 8f ?lanco "ompan# used t$e fair value met$od of accounting for its investment in Darb#
"ompan#D its E3uit# 8nvestment @Darb#A account on December 31D 2413 s$ould be
a. J%+4D444.
b. J''4D444.
c. J'44D444.
d. J'+4D444.
14!. 8f ?lanco "ompan# uses t$e e3uit# met$od of accounting for its investment in Darb#
"ompan#D its E3uit# 8nvestment @Darb#A account at December 31D 2413 s$ould be
a. J%+4D444.
b. J'44D444.
c. J''4D444.
d. J'+4D444.
.se t$e follo5ing information for 3uestions 14% and 14'.
?ro5n "orporation earns J'44D444 and pa#s cas$ dividends of J244D444 during 2412. Dexter
"orporation o5ns 3D444 of t$e 14D444 outstanding s$ares of ?ro5n.
14%. G$at amount s$ould Dexter s$o5 in t$e investment account at December 31D 2412 if t$e
beginning of t$e #ear balance in t$e account 5as J+44D444H
a. J,+4D444.
b. J+44D444.
c. J,24D444.
d. J1D244D444.
17 % 23
14'. /o5 muc$ investment income s$ould Dexter report in 2412H
a. J244D444.
b. J1+4D444.
c. J124D444.
d. J'44D444.
14*. >#ers "o. ac3uired a '4I interest in 0annon "orp. on December 31D 2412 for
J1D2'4D444. During 2413D 0annon $ad net income of J+44D444 and paid cas$ dividends of
J244D444. At December 31D 2413D t$e balance in t$e investment account s$ould be
a. J1D2'4D444.
b. J1D*!4D444.
c. J1D'24D444.
d. J1D+'4D444.
.se t$e follo5ing information for 3uestions 14+ and 14,.
Trac# "o. o5ns !D444 of t$e 14D444 outstanding s$ares of 7enn "orp. common stoc<. During
2413D 7enn earns J3'4D444 and pa#s cas$ dividends of J124D444.
14+. 8f t$e beginning balance in t$e investment account 5as J*24D444D t$e balance at
December 31D 2413 s$ould be
a. J*24D444.
b. J+1'D444.
c. J+'!D444.
d. J,'4D444.
14,. Trac# s$ould report investment revenue for 2413 of
a. J!+D444.
b. J,'D444.
c. J124D444.
d. J1!!D444.
114. T$e follo5ing information relates to Gindom "ompan# for 2413B
-ealized gain on sale of available-for-sale securities J34D444
.nrealized $olding gains arising during t$e period on
available-for-sale securities *4D444
-eclassification ad)ustment for gains included in net income 24D444
GindomEs 2413 ot$er compre$ensive income is
a. J%4D444.
b. J+4D444.
c. J144D444.
d. J124D444.
17 % 27
8nvestments
Multi"le Choi!e Ans(ers'Co-"utational
Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans#
*4. c *'. a +2. d ++. c ,!. a 144. b 14'. b
*1. b **. b +3. a +,. b ,%. b 141. b 14*. c
*2. d *+. c +!. d ,4. c ,'. c 142. b 14+. b
*3. b *,. a +%. b ,1. a ,*. c 143. c 14,. d
*!. a +4. b +'. d ,2. a ,+. a 14!. c 114. b
*%. c +1. b +*. b ,3. b ,,. c 14%. c
M$&TIP&E CH*ICE'CPA Ada"ted
111. 9n 9ctober 1D 2412D Genn "o. purc$ased +44 of t$e J1D444 face valueD +I bonds of 1o#D
8nc.D for J,3'D444D including accrued interest of J1'D444. T$e bondsD 5$ic$ mature on
Kanuar# 1D 241,D pa# interest semiannuall# on Kanuar# 1 and Kul# 1. Genn used t$e
straig$t-line met$od of amortization and appropriatel# recorded t$e bonds as available-for-
sale. 9n GennFs December 31D 2413 balance s$eetD t$e carr#ing value of t$e bonds is
a. J,24D444.
b. J,12D444.
c. J,4+D+44.
d. J+,'D444.
112. (alet "orp. began operations in 2413. An anal#sis of (aletEs e3uit# securities portfolio
ac3uired in 2413 s$o5s t$e follo5ing totals at December 31D 2413 for trading and
available-for-sale securitiesB
Trading Available-for-&ale
&ecurities &ecurities
Aggregate cost J,4D444 J114D444
Aggregate fair value *4D444 ,%D444
G$at amount s$ould (alet report in its 2413 income statement for unrealized $olding
lossH
a. J3%D444.
b. J%D444.
c. J1%D444.
d. J24D444.
113. At December 31D 2413D Keter "orp. $ad t$e follo5ing e3uit# securities t$at 5ere
purc$ased during 2413D its first #ear of operationB
Fair .nrealized
"ost (alue 0ain @1ossA
Trading &ecuritiesB
&ecurit# A J ,%D444 J '4D444 J@3%D444A
? 1%D444 24D444 %D444
Totals J114D444 J +4D444 J@34D444A
Available-for-&ale &ecuritiesB
&ecurit# N J *4D444 J +4D444 J 14D444
S +%D444 %%D444 @34D444A
Totals J1%%D444 J13%D444 J@24D444A
17 % 2;
All mar<et declines are considered temporar#. Fair value ad)ustments at December 31D
2413 s$ould be establis$ed 5it$ a corresponding c$arge against
8ncome &toc<$oldersE E3uit#
a. J%4D444 J 4
b. J3%D444 J34D444
c. J34D444 J24D444
d. J34D444 J 4
11!. 9n December 2,D 2413D Kames "o. sold an e3uit# securit# t$at $ad been purc$ased on
Kanuar# !D 2412. Kames o5ned no ot$er e3uit# securities. An unrealized $olding loss 5as
reported in t$e 2412 income statement. A realized gain 5as reported in t$e 2413 income
statement. Gas t$e e3uit# securit# classified as available-for-sale and did its 2412 mar<et
price decline exceed its 2413 mar<et price recover#H
2412 >ar<et 7rice
Decline Exceeded 2413
Available-for-&ale >ar<et 7rice -ecover#
a. Nes Nes
b. Nes 6o
c. 6o Nes
d. 6o 6o
.se t$e follo5ing information for 3uestions 11% t$roug$ 11*.
-ic$D 8nc. ac3uired 34I of Doane "orp.Fs voting stoc< on Kanuar# 1D 2412 for J'44D444. During
2412D Doane earned J2!4D444 and paid dividends of J1%4D444. -ic$Fs 34I interest in Doane
gives -ic$ t$e abilit# to exercise significant influence over DoaneFs operating and financial
policies. During 2413D Doane earned J344D444 and paid dividends of J,4D444 on April 1 and
J,4D444 on 9ctober 1. 9n Kul# 1D 2413D -ic$ sold $alf of its stoc< in Doane for J3,'D444 cas$.
11%. ?efore income taxesD 5$at amount s$ould -ic$ include in its 2412 income statement as a
result of t$e investmentH
a. J2!4D444.
b. J1%4D444.
c. J*2D444.
d. J!%D444.
11'. T$e carr#ing amount of t$is investment in -ic$Fs December 31D 2412 balance s$eet
s$ould be
a. J'44D444.
b. J'2*D444.
c. J'*2D444.
d. J',4D444.
11*. G$at s$ould be t$e gain on sale of t$is investment in -ic$Fs 2413 income statementH
a. J,'D444.
b. J+2D%44.
c. J*3D%44.
d. J'4D444.
17 % 2<
8nvestments
11+. 9n Kanuar# 1D 2413D -eston "o. purc$ased 2%I of Ace "orp.Fs common stoc<O no
good5ill resulted from t$e purc$ase. -eston appropriatel# carries t$is investment at e3uit#
and t$e balance in -estonEs investment account 5as J,'4D444 at December 31D 2413.
Ace reported net income of J'44D444 for t$e #ear ended December 31D 2413D and paid
common stoc< dividends totaling J2!4D444 during 2413. /o5 muc$ did -eston pa# for its
2%I interest in AceH
a. J+*4D444.
b. J1D424D444.
c. J1D4%4D444.
d. J1D1*4D444.
11,. 9n December 31D 2412D 7atel "o. purc$ased e3uit# securities as trading securities.
7ertinent data are as follo5sB
Fair (alue
&ecurit# "ost At 123113
A J132D444 J11*D444
? 1'+D444 1+'D444
" 2++D444 2'+D444
9n December 31D 2413D 7atel transferred its investment in securit# " from trading to
available-for-sale because 7atel intends to retain securit# " as a long-term investment.
G$at total amount of gain or loss on its securities s$ould be included in 7atelFs income
statement for t$e #ear ended December 31D 2413H
a. J3D444 gain.
b. J1*D444 loss.
c. J24D444 loss.
d. J3%D444 loss.
Multi"le Choi!e Ans(ers'CPA Ada"ted
Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans# Ite- Ans#
111. d 113. c 11%. c 11*. c 11,. b
112. d 11!. d 11'. b 11+. a
)ERIVATI*NS ' Co-"utational
No# Ans(er )erivation
*4. c Dr. Debt 8nvestmentsB !44 T J1D444 T .,* C J3++D444
Dr. 8nterest -evenueB J!44D444 T .4!% T 3' C J,D444
"r. "as$B J3++D444 U J,D444 C J3,*D444.
*1. b @J'44D444 T 1.42A U J,D444 C J'21D444.
*2. d @J%'!D1%4 T .4%%A Q @J'44D444 T .4%A C J1D42+.
*3. b J%'!D1%4 T .4%% C J31D42+
@J%'!D1%4 U J1D42+A T .4%% - J31D4+%O J31D42+ U J31D4+% C J'2D113.
*!. a J1D4'4D444 Q @J1D4!1D%+4 Q J3D%!4 Q J3D''4A C J2%D'24.
*%. c J1D433D*%4 Q J1D434D444 C J3D*%4.
17 % 27
)ERIVATI*NS ' Co-"utational 0!ont#1
*'. a Dr. Debt 8nvestmentsB J'44D444 T 1.4! C J'2!D444
Dr. 8nterest -evenueB J'44D444 T .4% T 3' C J1%D444
"r. "as$B J'2!D444 U J1%D444 C J'3,D444.
**. b J1D,%4D444 U @J%4D444 T 3144A C J1D,%1D%44.
*+. c J,!+D444 Q J13D%44 C J,3!D%44
J,3!D%44 Q @J3!D%44 T 2%4A C J,33D124.
*,. a @J%44D444 T .4!%A U @J%4D444 T 2+4A Q J1%D444 C J+D*%4.
+4. b @J%44D444 T .4, T 312A Q @J24D444 T 3%4A C J14D4%4.
+1. b Discount amortizationB J'4D444 T +%4 C J,D'44
@J2D,!4D444 U J,D'44A V 2 C J1D!*!D+44O J1D!+2D444 Q J1D!*!D+44 C J*D244
gain.
+2. d @J!2%D'*2 .4,A Q @J!44D444 .14A C @J1D'++A
@J!2%D'*2 Q J!22A .4, C J3+D1'4.
+3. a @J!2%D'*2 Q J!44D444A V 14 C J2D%'+.
+!. d J'3'D444 Q @J'2!D,!+ Q J2D12! Q J2D1,'A C J1%D3*2.
+%. b J'24D2%4 Q J'1+D444 C J2D2%4.
+'. d W@J3% Q J34A 1D%44X Q W@J34 Q J2+A !D%44X C @J1D%44A.
+*. b J'44D444 Q J%*4D444 C J34D444 loss.
++. c J!+4D444 Q J!%4D444 C J34D444 gain.
+,. b @J124D444 Q J,,D444A Q J'D444 C J1%D444 unrealized gain.
,4. c J2%D444 @unrealized lossA.
,1. a J4 @available-for-sale securitiesA.
,2. a W@!4D444 T J1*A Q J2+D444X Q J'34D444 C J22D444.
,3. b @J!44D444 Q J3*4D444A C J34D444.
,!. a J14D444 U J34D444 C J!4D444.
,%. b R U W@J'34D444 Q J2*4D444A .2%X C J!+4D444
R U J,4D444 C J!+4D444
R C J3,4D444.
,'. c J!44D444 T @2%D444 V 144D444A C J144D444.
17 % 2=
8nvestments
)ERIVATI*NS ' Co-"utational 0!ont#1
,*. c J*%4D444 U W@J1D244D444 Q J,'4D444A T @24D444 V %4D444AX C J+!'D444.
,+. a J1D244D444 T @24D444 V %4D444A C J!+4D444.
,,. c J1,%D444D ac3uisition cost.
144. b J22%D444D ac3uisition cost.
141. b J13%D444D ac3uisition cost.
142. b J214D444 U @J*%D444 T .3A Q @J34D444 T .3A C J223D%44.
143. c J'44D444D ac3uisition cost.
14!. c J'44D444 U @J!44D444 T .2A Q @J144D444 T .2A C J''4D444.
14%. c J+44D444 U @J'44D444 T .3A Q @J244D444 T .3A C J,24D444.
14'. b J'44D444 T .3 C J1+4D444.
14*. c J1D2'4D444 U @J+44D444 T .'A Q @J244D444 T .'A C J1D'24D444.
14+. b J*24D444 U @J3'4D444 T .!A Q @J124D444 T .!A C J+1'D444.
14,. d J3'4D444 T .! C J1!!D444.
114. b J34D444 U J*4D444 Q J24D444 C J+4D444.
)ERIVATI*NS ' CPA Ada"ted
111. d J,3'D444 Q J1'D444 C J,34D444
1%
J,34D444 Q @J124D444 T2 A C J+,'D444.
*%
112. d J,4D444 Q J*4D444 C J24D444.
113. c
11!. d "onceptual.
11%. c J2!4D444 T 34I C J*2D444.
11'. b J'44D444 U J*2D444 Q @J1%4D444 T 34IA C J'2*D444.
17 % 2>
)ERIVATI*NS ' CPA Ada"ted 0!ont#1
11*. c J'2*D444 Q @J,4D444 T 34IA U @J344D444 T %4I T 34IA C J'!%D444.
J3,'D444 Q @J'!%D444 V 2A C J*3D%44.
11+. a J,'4D444 Q @J'44D444 T 2%IA U @J2!4D444 T 2%IA C J+*4D444.
11,. b J1+D444 Q J1%D444 Q J24D444 C J1*D444 loss.
E4ERCISES
EE# 17%12@28nvestment in debt securities at premium.
9n April 1D 2412D Gest "o. purc$ased J324D444 of 'I bonds for J332D'44 plus accrued interest
as an available-for-sale securit#. 8nterest is paid on Kul# 1 and Kanuar# 1 and t$e bonds mature
on Kul# 1D 241*.
Instru!tions
@aA 7repare t$e )ournal entr# on April 1D 2412.
@bA T$e bonds are sold on 6ovember 1D 2413 at 143 plus accrued interest. Amortization 5as
recorded 5$en interest 5as received b# t$e straig$t-line met$od @b# mont$s and round to t$e
nearest dollarA. 7repare all entries re3uired to properl# record t$e sale.
Solution 17%12@
@aA Debt 8nvestments........................................................................... 332D'44
8nterest -evenue @J324D444 T .4' T 1!A....................................... !D+44
"as$................................................................................. 33*D!44
@bA 8nterest -evenue @J'D344 T ! V '3A............................................... +44
Debt 8nvestments.............................................................. +44
"as$ @J324D444 T .4' T 13A.......................................................... 'D!44
8nterest -evenue.............................................................. 'D!44
"as$.............................................................................................. 32,D'44
0ain on &ale of 8nvestments............................................. +44
Debt 8nvestments ............................................................. 32+D+44
J332D'44 Q W@J12D'44 V '3A T 1,X
17 % 3@
8nvestments
EE# 17%12128nvestment in debt securities at a discount.
9n >a# 1D 2412D Mirmer "orp. purc$ased J'44D444 of 12I bondsD interest pa#able on Kanuar# 1
and Kul# 1D for J%'2D'44 plus accrued interest. T$e bonds mature on Kanuar# 1D 241+.
Amortization is recorded 5$en interest is received b# t$e straig$t-line met$od @b# mont$s and
round to t$e nearest dollarA. @Assume bonds are available for sale.A
Instru!tions
@aA 7repare t$e entr# for >a# 1D 2412.
@bA T$e bonds are sold on August 1D 2413 for J%'%D444 plus accrued interest. 7repare all entries
re3uired to properl# record t$e sale.
Solution 17%121
@aA Debt 8nvestments.......................................................................... %'2D'44
8nterest -evenue @J'44D444 T .12 T !12A.................................... 2!D444
"as$................................................................................. %+'D'44
@bA Debt 8nvestments @J3*D!44 V '+ T 1A........................................... %%4
8nterest -evenue.............................................................. %%4
"as$ @J'44D444 T .12 T 112A....................................................... 'D444
8nterest -evenue.............................................................. 'D444
"as$............................................................................................. %'%D444
1oss on &ale of 8nvestments......................................................... %D+%4
Debt 8nvestments.............................................................. %*4D+%4
J%'2D'44 U W@J3*D!44 V '+A 1%X
EE# 17%12228nvestments in e3uit# securities.
7resented belo5 are unrelated cases involving investments in e3uit# securities.
"ase 8. T$e fair value of t$e trading securities at t$e end of last #ear 5as 34I belo5 original
costD and t$is 5as properl# reflected in t$e accounts. At t$e end of t$e current #earD t$e fair value
$as increased to 24I above cost.
"ase 88. T$e fair value of an available-for-sale securit# $as declined to less t$an fort# percent of
t$e original cost. T$e decline in value is considered to be ot$er t$an temporar#.
"ase 888. An e3uit# securit#D 5$ose fair value is no5 less t$an costD is classified as trading but is
reclassified as available-for-sale.
Instru!tions
8ndicate t$e accounting re3uired for eac$ case separatel#.
17 % 31
Solution 17%122
"ase 8. At t$e end of last #earD t$e compan# 5ould $ave recognized an unrealized $olding loss
and recorded a Fair (alue Ad)ustment @tradingA. At t$e end of t$e current #earD t$e compan#
5ould record an unrealized $olding gain t$at 5ould be reported in t$e ot$er revenue and gains
section. T$e ad)ustment account 5ould no5 $ave a debit balance.
Solution 17%122 @cont.A
"ase 88. G$en t$e decline in value is considered to be ot$er t$an temporar#D t$e loss s$ould be
recognized as if it 5ere realized and earnings 5ill be reduced. T$e fair value becomes a ne5 cost
basis.
"ase 888. T$e securit# is transferred at fair valueD 5$ic$ is t$e ne5 cost basis of t$e securit#. T$e
E3uit# 8nvestments @available-for-saleA account is recorded at fair valueD and t$e .nrealized
/olding 1oss28ncome account is debited for t$e unrealized loss. T$e E3uit# 8nvestments
@tradingA account is credited for cost.
EE# 17%12328nvestment in e3uit# securities.
Agee "orp. ac3uired a 34I interest in Trent "o. on Kanuar# 1D 2413D for J%44D444. At t$at timeD
Trent $ad 1D444D444 s$ares of its J1 par common stoc< issued and outstanding. During 2413D
Trent paid cas$ dividends of J1'4D444 and t$ereafter declared and issued a %I common stoc<
dividend 5$en t$e fair value 5as J2 per s$are. TrentFs net income for 2413 5as J3'4D444. G$at
is t$e balance in AgeeEs e3uit# investment account at t$e end of 2413H
Solution 17%123
"ost J%44D444
&$are of net income @.34 T J3'4D444A 14+D444
&$are of dividends @.34 T J1'4D444A @!+D444A
?alance in e3uit# investment account J%'4D444
EE# 17%1272Fair value and e3uit# met$ods. @Essa#A
"ompare t$e fair value and e3uit# met$ods of accounting for investments in stoc<s subse3uent to
ac3uisition.
Solution 17%127
.nder t$e fair value met$odD investments are originall# recorded at cost and are reported at fair
value. Dividends are reported as ot$er revenues and gains. .nder t$e e3uit# met$odD
investments are originall# recorded at cost. &ubse3uentl#D t$e investment account is ad)usted for
t$e investorFs s$are of t$e investeeFs net income or loss and t$is amount is recognized in t$e
income of t$e investor. Dividends received from t$e investee are reductions in t$e investment
account.
17 % 32
8nvestments
EE# 17%12;2Fair value and e3uit# met$ods.
Fill in t$e dollar c$anges caused in t$e 8nvestment account and Dividend -evenue or 8nvestment
-evenue account b# eac$ of t$e follo5ing transactionsD assuming "rane "ompan# uses @aA t$e
fair value met$od and @bA t$e e3uit# met$od for accounting for its investments in /udson
"ompan#.
@aA Fair (alue >et$od @bA E3uit# >et$od
8nvestment Dividend 8nvestment 8nvestment
Transaction Account -evenue Account -evenue
2222222222222222222222222222222222222222222
1. At t$e beginning of Near 1D "rane boug$t
!4I of /udsonFs common stoc< at its
boo< value. Total boo< value of all
/udsonFs common stoc< 5as J+44D444
on t$is date.
2222222222222222222222222222222222222222222
2. During Near 1D /udson reported J'4D444
of net income and paid J34D444 of
dividends.
2222222222222222222222222222222222222222222
3. During Near 2D /udson reported J34D444
of net income and paid J!4D444 of
dividends.
2222222222222222222222222222222222222222222
!. During Near 3D /udson reported a net loss
of J14D444 and paid J%D444 of dividends.
2222222222222222222222222222222222222222222
%. 8ndicate t$e Near 3 ending balance in t$e
8nvestment accountD and cumulative totals
for Nears 1D 2D and 3 for dividend revenue
and investment revenue.
2222222222222222222222222222222222222222222
Solution 17%12;
@aA Fair (alue >et$od @bA E3uit# >et$od
8nvestment Dividend 8nvestment 8nvestment
Transaction Account -evenue Account -evenue
22222222222222222222222222222222222222222222222
1. 324D444 324D444
22222222222222222222222222222222222222222222222
2. 2!D444 2!D444
12D444 @12D444A
22222222222222222222222222222222222222222222222
3. 12D444 12D444
1'D444 @1'D444A
22222222222222222222222222222222222222222222222
!. @!D444A @!D444A
2D444 @2D444A
22222222222222222222222222222222222222222222222
%. 324D444 34D444 322D444 32D444
22222222222222222222222222222222222222222222222
17 % 33
EE# 17%12<2"ompre$ensive income calculation.
T$e follo5ing information is available for 8r5in "ompan# for 2413B
6et 8ncome J124D444
-ealized gain on sale of available-for-sale securities 14D444
.nrealized $olding gain arising during t$e period on
available-for-sale securities 2,D444
-eclassification ad)ustment for gains included in net
income +D444
Instru!tions
@1A Determine ot$er compre$ensive income for 2413.
@2A "ompute compre$ensive income for 2413.
Solution 17%12<
@1A 2413 ot$er compre$ensive income C J31D444 @J14D444 realized gain U J2,D444 unrealized
$olding gain Q J+D444 reclassification ad)ustmentA.
@2A 2413 compre$ensive income C J1%1D444 @J124D444 U J31D444A.
?EE# 17%1272Fair value $edge.
9n Kanuar# 2D 2413D T#lor "o. issued a !-#earD J*%4D444 note at 'I fixed interestD interest
pa#able semiannuall#. T#lor no5 5ants to c$ange t$e note to a variable rate note. As a resultD on
Kanuar# 2D 2413D T#lor "o. enters into an interest rate s5ap 5$ere it agrees to receive 'I fixed
and pa# 18?9- of %.'I for t$e first ' mont$s on J*%4D444. At eac$ '-mont$ periodD t$e variable
interest rate 5ill be reset. T$e variable rate is reset to '.'I on Kune 34D 2413.
Instru!tions
@aA "ompute t$e net interest expense to be reported for t$is note and related s5ap transaction
as of Kune 34D 2413.
@bA "ompute t$e net interest expense to be reported for t$is note and related s5ap transaction
as of December 31D 2413.
?Solution 17%127
@aA and @bA
'3413 123113
Fixed-rate debt J*%4D444 J*%4D444
Fixed rate @'I V 2A 3I 3I
&emiannual debt pa#ment J 22D%44 J 22D%44
&5ap fixed receipt 22D%44 22D%44
6et income effect J 4 J 4
&5ap variable rate
%.'I T Y T J*%4D444 J 21D444
'.'I T Y T J*%4D444 4 J 2!D*%4
6et interest expense J 21 D444 J 2!D*%4
17 % 37
8nvestments
?EE# 17%12=2"as$ flo5 $edge.
9n Kanuar# 2D 2412D &loan "ompan# issued a %-#earD J'D444D444 note at 18?9- 5it$ interest
paid annuall#. T$e variable rate is reset at t$e end of eac$ #ear. T$e 18?9- rate for t$e first #ear
is '.+I
&loan "ompan# decides it prefers fixed-rate financing and 5ants to loc< in a rate of 'I. As a
resultD &loan enters into an interest rate s5ap to pa# *I fixed and receive 18?9- based on J+
million. T$e variable rate is reset to *.!I on Kanuar# 2D 2413.
Instru!tions
@aA "ompute t$e net interest expense to be reported for t$is note and related s5ap transactions
@bA "ompute t$e net interest expense to be reported for t$is note and related s5ap transactions
?Solution 17%12=
@aA and @bA
123112 123113
(ariable-rate debt J'D444D444 J'D444D444
(ariable rate '.+I *.!I
Debt pa#ment J !4+D444 J !!!D444
Debt pa#ment J !4+D444 J !!!D444
&5ap receive variable @!4+D444A @!!!D444A
6et income effect J 4 J 4
&5ap pa#able2fixed !24D444 !24D444
6et interest expense J !2 4D444 J !2 4D444
PR*+&EMS
Pr# 17%12>2Trading e3uit# securities.
Morman "ompan# $as t$e follo5ing securities in its portfolio of trading securities on December
31D 2412B
"ost Fair (alue
%D444 s$ares of T$omas "orp.D "ommon J1%,D444 J13,D444
14D444 s$ares of 0antD "ommon 1+2D444 1,4D444
J3!1D444 J32,D444
All of t$e securities $ad been purc$ased in 2412. 8n 2413D Morman completed t$e follo5ing
securities transactionsB
>arc$ 1 &old %D444 s$ares of T$omas "orp.D "ommon Z J31 less fees of J1D%44.
April 1 ?oug$t '44 s$ares of Gert$ &toresD "ommon Z J!% plus fees of J%%4.
17 % 3;
Pr# 17%12> @cont.A
T$e Morman "ompan# portfolio of trading securities appeared as follo5s on December 31D 2413B
"ost Fair (alue
14D444 s$ares of 0antD "ommon J1+2D444 J1,%D%44
'44 s$ares of Gert$ &toresD "ommon 2*D%%4 2%D%44
J24,D%%4 J221D444
Instru!tions
7repare t$e general )ournal entries for Morman "ompan# forB
@aA t$e 2412 ad)usting entr#.
@bA t$e sale of t$e T$omas "orp. stoc<.
@cA t$e purc$ase of t$e Gert$ &toresF stoc<.
@dA t$e 2413 ad)usting entr#.
Solution 17%12>
@aA 12-31-12
.nrealized /olding 0ain or 1oss28ncome................................... 12D444
Fair (alue Ad)ustment @tradingA......................................... 12D444
@J3!1D444 Q J32,D444A
@bA 3-1-13
"as$ W@%D444 J31A Q J1D%44X...................................................... 1%3D%44
1oss on &ale of 8nvestments......................................................... %D%44
E3uit# 8nvestments............................................................ 1%,D444
@cA !-1-13
E3uit# 8nvestments....................................................................... 2*D%%4
"as$ W@'44 J!%A U J%%4X................................................ 2*D%%4
@dA 12-31-13
Fair (alue Ad)ustment @tradingA.................................................... 23D!%4
.nrealized /olding 0ain or 1oss28ncome....................... 23D!%4
Pr# 17%13@2Trading e3uit# securities.
7erez "ompan# began operations in 2411. &ince t$enD it $as reported t$e follo5ing gains and
losses for its investments in trading securities on t$e income statementB
2411 2412 2413
0ains @lossesA from sale of trading securities J 1%D444 J@24D444A J 1!D444
.nrealized $olding losses on valuation of trading securities @2%D444A 2 @24D444A
.nrealized $olding gain on valuation of trading securities 2 14D444 2
At Kanuar# 1D 241!D 7erez o5ned t$e follo5ing trading securitiesB
"ost
?MD "ommon @1%D444 s$aresA J!%4D444
1-F 7referred @2D444 s$aresA 214D444
Dra<e "onvertible bonds @144 bondsA 11%D444
17 % 3<
8nvestments
Pr# 17%13@ @cont.A
During 241!D t$e follo5ing events occurredB
1. &old %D444 s$ares of ?MD for J1*4D444.
2. Ac3uired 1D444 s$ares of /orton "ommon for J!4 per s$are. ?ro<erage commissions totaled
J1D444.
At 12311!D t$e fair values for 7erezFs trading securities 5ereB
?MD "ommonD J2+ per s$are
1-F 7referredD J114 per s$are
Dra<e ?ondsD J1D424 per bond
/orton "ommonD J!% per s$are
Instru!tions
@aA 7repare a sc$edule 5$ic$ s$o5s t$e balance in t$e Fair (alue Ad)ustment @tradingA account
at December 31D 2413 @after t$e ad)usting entr# for 2413 is madeA.
@bA 7repare a sc$edule 5$ic$ s$o5s t$e aggregate cost and fair values for 7erezFs trading
securities portfolio at 12311!.
@cA 7repare t$e necessar# ad)usting entr# based upon #our anal#sis in @bA above.
Solution 17%13@
@aA ?alance 123111 @result of t$at #earFs ad)usting entr#A J@2%D444A
Deduct unrealized gain for 2412 14D444
AddB .nrealized loss for 2413 @24D444A
?alance at 123113 J@3%D444A
@bA Aggregate cost and fair value for trading securities at 12311!
"ost Fair (alue
?MD "ommon 14D444 s$ares J344D444 J2+4D444
1-F 7referred 2D444 s$ares 214D444 224D444
/orton "ommonD 1D444 s$ares !1D444 !%D444
Dra<e ?ondsD 144 bonds 11%D444 142D444
Total J'''D444 J'!*D444
@cA Ad)usting entr# at 12311!B
Fair (alue Ad)ustment @tradingA.................................................... 1'D444
.nrealized /olding 0ain or 1oss28ncome....................... 1'D444
@?alance at 111! J3%D444
?alance needed at 12311! 1,D444
-ecover# J1'D444A
17 % 37
Pr# 17%1312Available-for-sale e3uit# securities.
During t$e course of #our examination of t$e financial statements of Doppler "orporation for t$e
#ear ended December 31D 2413D #ou found a ne5 accountD L8nvestments.L Nour examination
revealed t$at during 2413D Doppler began a program of investmentsD and all investment-related
transactions 5ere entered in t$is account. Nour anal#sis of t$is account for 2413 follo5sB
Doppler "orporation
Anal#sis of 8nvestments
For t$e Near Ended December 31D 2413
Date22413 Debit "redit
@aA
/armon "ompan# "ommon &toc<
Feb. 1! 7urc$ased !D444 s$ares Z J%% per s$are. J224D444
Kul# 2' -eceived !44 s$ares of /armon "ompan# common stoc<
as a stoc< dividend. @>emorandum entr# in general ledger.A
&ept. 2+ &old t$e !44 s$ares of /armon "ompan# common stoc<
received Kul# 2' Z J'% per s$are. J2+D444
@bA
Debit "redit
Taber 8nc.D "ommon &toc<
Apr. 34 7urc$ased 24D444 s$ares Z J!4 per s$are. J+44D444
9ct. 2+ -eceived dividend of J1.24 per s$are. J2!D444
Additional informationB
1. T$e fair value for eac$ securit# as of t$e 2413 date of eac$ transaction follo5B
&ecurit# Feb. 1! Apr. 34 Kul# 2' &ept. 2+ Dec. 31
/armon "o. J%% J'2 J*4 J*!
Taber 8nc. J!4 33
Doppler "orp. 2% 2+ 34 33 3%
2. All of t$e investments of Doppler are nominal in respect to percentage of o5ners$ip @%I or
lessA.
3. Eac$ investment is considered b# DopplerEs management to be available-for-sale.
Instru!tions
@1A 7repare an# necessar# correcting )ournal entries related to investments @aA and @bA.
@2A 7repare t$e entr#D if necessar#D to record t$e proper valuation of t$e available-for-sale e3uit#
securit# portfolio as of December 31D 2413.
Solution 17%131
@1A @aA /armon 2 original purc$ase !D444 s$ares
stoc< dividend !44 s$ares
total $olding !D!44 s$ares
Total cost of J224D444 V Total s$ares of !D!44 C J%4 cost per s$are
17 % 3=
8nvestments
Solution 17%131 @cont.A
&old 144 s$ares
"orrect entr#B
"as$ @!44 T J'%A....................................................................... 2'D444
E3uit# 8nvestments......................................................... 24D444
0ain on &ale of 8nvestments.......................................... 'D444
Entr# madeB
"as$.......................................................................................... 2'D444
E3uit# 8nvestments......................................................... 2'D444
"orrectionB
E3uit# 8nvestments.................................................................... 'D444
0ain on &ale of 8nvestments.......................................... 'D444
@bA Taber2s$ould record cas$ dividend as dividend income.
"orrect entr#B
"as$.......................................................................................... 2!D444
Dividend -evenue.......................................................... 2!D444
Entr# madeB
"as$.......................................................................................... 2!D444
E3uit# 8nvestments......................................................... 2!D444
"orrectionB
E3uit# 8nvestments.................................................................... 2!D444
Dividend -evenue.......................................................... 2!D444
@To properl# record dividends under fair value
met$odA
@2A (aluation at End of NearB
8ncrease
Puantit# "ost Fair (alue @DecreaseA
/armon !D444 s$ares J 244D444 J2,'D444 J ,'D444
Taber 24D444 s$ares +44D444 ''4D444 @1!4D444A
J1D444D444 J,%'D444 J !!D444
Near-end Ad)ustmentB
.nrealized /olding 0ain or 1oss2E3uit#........................................ !!D444
Fair (alue Ad)ustment @available-for-saleA......................... !!D444
17 % 3>
?Pr# 17%1322Derivative financial instrument.
/ummel "o. purc$ased a put option on 9lne# common s$ares on Kul# *D 2412D for J144. T$e put
option is for 244 s$aresD and t$e stri<e price is J34. T$e option expires on Kanuar# 31D 2413. T$e
follo5ing data are available 5it$ respect to t$e put optionB
Date >ar<et 7rice of 9lne# &$ares Time (alue of 7ut 9ption
&eptember 34D 2412 J32 per s$are J%%
December 31D 2412 J31 per s$are 21
Kanuar# 31D 2413 J33 per s$are 4
Instru!tions
7repare t$e )ournal entries for /ummel "o. for t$e follo5ing datesB
@aA Kul# *D 241228nvestment in put option on 9lne# s$ares.
@bA &eptember 34D 24122 /ummel prepares financial statements.
@cA December 31D 24122 /ummel prepares financial statements.
@dA Kanuar# 31D 241327ut option expires.
?Solution 17%132
Kul# *D 2412
@aA 7ut 9ption.................................................................................... 144
"as$................................................................................. 144
&eptember 34D 2412
@bA .nrealized /olding 0ain or 1oss28ncome................................... !%
7ut 9ption @J144 Q J%%A.................................................... !%
December 31D 2412
@cA .nrealized /olding 0ain or 1oss28ncome................................... 3!
7ut 9ption @J%% Q J21A...................................................... 3!
Kanuar# 31D 2413
@dA 1oss on &ettlement of 7ut 9ption................................................. 21
7ut 9ption @J21 Q J4A........................................................ 21
?Pr# 17%1332Free-standing derivative.
Gelc$ "o. purc$ased a put option on -eese common s$ares on Kul# *D 2413D for J21%. T$e put
option is for 344 s$aresD and t$e stri<e price is J%1. T$e option expires on Kul# 31D 2413. T$e
follo5ing data are available 5it$ respect to t$e put optionB
Date >ar<et 7rice of -eese &$ares Time (alue of 7ut 9ption
>arc$ 31D 2413 J!* per s$are J124
Kune 34D 2413 J%4 per s$are %'
Kul# 'D 2413 J!' per s$are 1'
17 % 7@
8nvestments
?Pr# 17%133 @cont.A
Instru!tions
7repare t$e )ournal entries for Gelc$ "o. for t$e follo5ing datesB
@aA Kanuar# *D 241328nvestment in put option on -eese s$ares.
@cA >arc$ 31D 24132 Gelc$ prepares financial statements.
@dA Kune 34D 24132 Gelc$ prepares financial statements.
@eA Kul# 'D 24132 Gelc$ settles t$e call option on t$e -eese s$ares.
?Solution 17%133
Kanuar# *D 2413
@aA 7ut 9ption.................................................................................... 21%
"as$................................................................................. 21%
>arc$ 31D 2413
@bA 7ut 9ption.................................................................................... 1D244
.nrealized /olding 0ain or 1oss28ncome @J! T 344A...... 1D244
.nrealized /olding 0ain or 1oss28ncome................................... ,%
7ut 9ption @J21% Q J124A.................................................. ,%
Kune 34D 2413
@cA .nrealized /olding 0ain or 1oss28ncome................................... ,44
7ut 9ption @J3 T 344A....................................................... ,44
.nrealized /olding 0ain or 1oss28ncome................................... '!
7ut 9ption @J124 Q J%'A.................................................... '!
Kul# 'D 2413
@dA .nrealized /olding 0ain or 1oss28ncome................................... !4
7ut 9ption @J%' Q J1'A...................................................... !4
"as$ @344 T J%A............................................................................ 1D%44
0ain on &ettlement of 7ut 9ption..................................... 1D1+!
7ut 9ption=....................................................................... 31'
=(alue of 7ut 9ption settlementB
7ut 9ption
21%
1D244 ,%
,44
'!
!4
31'
17 % 71
IFRS 9$ESTI*NS
TrueGFalse
1. 8F-& re3uires t$at gains and losses on available-for-sale securities be reported directl# in
e3uit#.
2. .nder 8F-&D impairment c$arges related to available-for-sale debt securities ma# be
reversedD but impairment c$arges related to available-for-sale e3uit# securities ma# not be
reversed.
3. -eclassification in and out of trading securities is permitted under 8F-&D alt$oug$ t$is t#pe of
reclassification s$ould be rare.
!. 8F-& re3uires t$at "ompan# A consolidate "ompan# ? 5$en it controls and o5ns at least
%4I of "ompan# ?.
%. .nder 8F-&D bot$ t$e investor and t$e associate compan# s$ould follo5 t$e same accounting
practicesD re3uiring ad)ustments be made to t$e investorEs boo<s in order to prepare financial
information.
Ans(ers to TrueGFalse
1. True
2. True
3. False
!. True
%. False
Multi"le Choi!e
1. >atc$ t$e approac$ and location 5$ere gains and losses from available-for-sale securities
are reportedB
1ocation 5$ere gains
Approac$ losses reported[ [[
a. 0AA7 E3uit#
b. 8F-& E3uit#
c. 0AA7 8ncome
d. 8F-& "ompre$ensive income
17 % 72
8nvestments
.se t$e follo5ing information for 3uestions 2 and 3
-us$ia "ompan# $as an available-for-sale investment in t$e 14ID 14-#ear bonds of 7ear "o.
T$e investmentEs carr#ing value is J3D244D444 at December 31D 2412. 9n Kanuar# ,D 2413D
-us$ia learns t$at 7ear "o. $as lost its primar# manufacturing facilit# in an uninsured fire. As a
resultD -us$ia determines t$at t$e investment is impaired and no5 $as a fair value of J2D344D444.
8n KuneD 241!D 7ear "o. $as succeeded in rebuilding its manufacturing facilit#D and its prospects
$ave improved as a result.
2. 8f -us$ia "ompan# determines t$at t$e fair value of t$e investment is no5 J3D,44D444 and
is using ..&. 0AA7 for its external financial reportingD 5$ic$ of t$e follo5ing is trueH
a. -us$ia is pro$ibited from recording t$e recover# in value of t$e impaired investment.
b. -us$ia ma# record a recover# of J,44D444.
c. -us$ia ma# record a recover# of J*44D444.
d. -us$ia ma# record a recover# of J1D'44D444.
3. 8f -us$ia "ompan# determines t$at t$e fair value of t$e investment is no5 J2D,44D444 and
is using 8F-& for its external financial reportingD 5$ic$ of t$e follo5ing is trueH
a. -us$ia is pro$ibited from recording t$e recover# in value of t$e impaired investment.
b. -us$ia ma# record a recover# of J'44D444.
c. -us$ia ma# record a recover# of J,44D444.
d. -us$ia ma# record a recover#D but is limited to +4I of t$e value of t$e recover#.
Ans(ers to -ulti"le !hoi!e
1. b
2. a
3. b
Short Ans(erH
1. ?riefl# describe some of t$e similarities and differences bet5een ..&. 0AA7 and 8F-&
5it$ respect to t$e accounting for investments.
1. T$e accounting and reporting under 8F-& and ..&. 0AA7 are for t$e most part ver#
similarD alt$oug$ t$e criteria used to determine t$e accounting is often different. For
exampleD among t$e notable similarities areB @1A t$e accounting for tradingD available-
for-saleD and $eld-to-maturit# securities is essentiall# t$e same bet5een 8F-& and
..&. 0AA7O @2A bot$ 8F-& and ..&. 0AA7 use t$e same test to determine 5$et$er t$e
e3uit# met$od of accounting s$ould be used Q t$at isD significant influence 5it$ a
general guide of over 24I o5ners$ip. 8F-& uses t$e term associate investment rat$er
t$an e3uit# investment to describe its investment under t$e e3uit# met$odO @3A
reclassifications of securities from one categor# to anot$er generall# follo5 t$e same
accounting under t$e t5o 0AA7 s#stems. -eclassification in and out of trading
securities is pro$ibited under 8F-&. 8t is not pro$ibited under ..&. 0AA7D but t$is t#pe
of reclassification s$ould be rare.
17 % 73
Differences includeB @1A 0ains and losses related to available-for-sale securities are
reported in ot$er compre$ensive income under ..&. 0AA7. .nder 8F-&D t$ese gains
and losses are reported directl# in e3uit#O @2A under 8F-&D bot$ t$e investor and an
associate compan# s$ould follo5 t$e same accounting policies. As a resultD in order to
prepare financial informationD ad)ustments are made to t$e associateEs policies to
conform to t$e investorEs boo<sO @3A t$e basis for consolidation under 8F-& is control.
.nder ..&. 0AA7D a bipolar approac$ is used 5$ic$ is a ris<-and-re5ard model @often
referred to as a variable-entit# approac$A and a voting-interest approac$. /o5everD
under bot$ s#stemsD for consolidation to occurD t$e investor compan# must generall#
o5n %4I of anot$er compan#O @!A ..&. 0AA7 does not permit t$e reversal of an
impairment c$arge related to available-for-sale debt and e3uit# investments. 8F-&
follo5s t$e same approac$ for available-for-sale e3uit# investments but permits
reversal for available-for-sale debt securities and $eld-to-maturit# securities.
2. -amirez "ompan# $as an available-for-sale investment in t$e 'ID 24-#ear bonds of &oto
"ompan#. T$e investment 5as originall# purc$ased for J1D244D444 in 244,. Earl# in 2412D
-amirez recorded an impairment of J244D444 on t$e &oto investmentD due to &otoEs
financial distress. 8n 2413D &oto returned to profitabilit# and t$e &oto investment 5as no
longer impaired. G$at entr# does -amirez ma<e in 2413 under @aA ..&. 0AA7 and @bA
8F-&H
2. .nder ..&. 0AA7D -amirez ma<es no entr#D because impaired investments ma# not
be 5ritten up if t$e# recover in value. .nder 8F-&D -amirez ma<es t$e follo5ing entr#B
Debt 8nvestments\\\\\\\\\\\\\\ 244D444
-ecover# of 8mpairment 1oss \\\\\\\\\.. 244D444
17 % 77

CH 17

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CHAPTER 17

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