To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER 17 INVESTMENTS TRUE-FALSE—Conceptual Answer F T F F T F T F T T F T F T F T F T F T No Description 10 11 12 13 14 15 16 17 18 19 20 Examples of debt securities Definition of trading securities Available-for-sale unrealized gains/losses Classifying held-to-maturity securities Fair value changes in AFS securities Securities Fair Value Adjustment account Accounting for trading securities Definition of significant influence Reporting Unrealized Holding Gain/Loss—Equity account Examples of significant influence Definition of controlling interest Effect of dividends on investment under equity Reporting revenue under fair value method Definition of controlling interest Classifying trading securities and AFS securities Reclassification adjustment for AFS securities Temporary declines and write downs Impaired available-for-sale securities Transfer of held-to-maturity securities Transfers from trading to available-for-sale MULTIPLE CHOICE—Conceptual Answer c b c c a a c b a d b c d c c d c a c No 21 22 23 24 P 25 S 26 S 27 S 28 S 29 30 31 32 33 34 35 36 37 38 39 Description Debt securities Valuation of debt securities Held-to-maturity securities Unrealized gain/loss recognition for securities Accounting for accrued interest Identifying securities accounted for at amortized cost Accounting for available-for-sale securities Using effective-interest method of amortization Identifying available-for-sale securities Classification as held-to-maturity Reporting held-to-maturity securities Acquisition of held-to-maturity securities Accounting for trading securities Accounting for trading debt securities Recording investments in debt securities Calculating the issue price of bonds Valuation of investments in debt securities Recording amortization of bond discount Amortization of premium/discount on investment in a debt security To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - Test Bank for Intermediate Accounting, Twelfth Edition MULTIPLE CHOICE—Conceptual (cont.) Answer d c c b a c b d a d d d d c b b d c b a c b a c No 40 41 42 S 43 S 44 P 45 46 47 48 49 50 51 52 53 54 55 P 56 *57 *58 *59 *60 *61 *62 *63 Description Effective-interest rate method Debt securities purchased between interest dates Sale of debt security prior to maturity Passive interest investment Fair value vs equity method Fair value vs equity method Conditions for using the equity method Ownership interest required for using the equity method Recording of dividends received under the equity method Recognition of earnings of investee using the equity method Effect of using the fair value method in error Classification of unrealized loss on available-for-sale securities Classification of unrealized gain on available-for-sale securities Reclassification adjustment in comprehensive income Reclassification of securities Reclassification of securities Transfer of a debt security Accounting for derivatives Characteristics of a derivative instrument Identifying companies that are arbitrageurs Accounting for fair value hedges Gains/losses on cash flow hedges Identifying an embedded derivative Requirements for financial instrument disclosures P These questions also appear in the Problem-Solving Survival Guide These questions also appear in the Study Guide *This topic is dealt with in an Appendix to the chapter S MULTIPLE CHOICE—Computational Answer c b d b a c a b c a b b c a a b a No 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 Description Recording the purchase of debt securities Computing cost of bond investment Calculation of discount amortization Calculation of revenue from HTM securities Computation of other comprehensive income Computation of gain/loss on sale of bonds Acquisition of held-to-maturity securities Carrying value of held-to-maturity securities Carrying value of available-for-sale debt securities Calculation of income from available-for-sale debt securities Calculation of income from HTM securities Determine gain on sale of debt securities Fair value for trading securities Unrealized gain on available-for-sale securities Calculation of gain on sale of equity security Determination of unrealized loss on AFS securities Calculation of unrealized loss included in comprehensive income To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments c c a c b b b c c c b c b d b 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 Computation of revenue from investment Computation of investment account balance Calculation of investment revenue Accounting for stock investments/fair value method Accounting for stock investments/equity method Accounting for stock investments/fair value method Equity method of accounting Fair value method of accounting for stock investment Equity method of accounting for stock investment Balance of investment account using the equity method Investment income recognized under the equity method Balance of investment account using the equity method Balance of investment account using the equity method Investment income recognized under the equity method Other comprehensive income MULTIPLE CHOICE—CPA Adapted Answer d d c d c b c a b No 96 97 98 99 100 101 102 103 104 Description Carrying value of AFS debt securities Unrealized loss on trading and AFS securities Unrealized loss on trading and AFS securities Classification of an equity security Investment income recognized under the equity method Balance of investment account using the equity method Sale of stock investment Calculate the acquisition price of a stock investment Transfer of securities from trading to AFS EXERCISES Item E17-105 E17-106 E17-107 E17-108 E17-109 E17-110 E17-111 *E17-112 *E17-113 Description Investment in debt securities at a premium Investment in debt securities at a discount Investments in equity securities (essay) Investment in equity securities Fair value and equity methods (essay) Fair value and equity methods Comprehensive income calculation Fair value hedge Cash flow hedge PROBLEMS Item P17-114 P17-115 P17-116 *P17-117 *P17-118 Description Trading equity securities Trading securities Available-for-sale securities Derivative financial instrument Free-standing derivative 17 - To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - Test Bank for Intermediate Accounting, Twelfth Edition CHAPTER LEARNING OBJECTIVES Identify the three categories of debt securities and describe the accounting and reporting treatment for each category Understand the procedures for discount and premium amortization on bond investments Identify the categories of equity securities and describe the accounting and reporting treatment for each category Explain the equity method of accounting and compare it to the fair value method for equity securities Describe the disclosure requirements for investments in debt and equity securities Discuss the accounting for impairments of debt and equity investments Describe the accounting for transfer of investment securities between categories *8 Explain who uses derivatives and why *9 Understand the basic guidelines for accounting for derivatives *10 Describe the accounting for derivative financial instruments *11 Explain how to account for a fair value hedge *12 Explain how to account for a cash flow hedge *13 Identify special reporting issues related to derivative financial instruments that cause unique accounting problems *14 Describe the disclosure requirements for traditional and derivative financial instruments To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item 21 TF MC 22 23 29 30 31 32 33 MC MC MC MC MC 34 35 36 37 38 11 43 76 TF MC MC 77 78 79 TF TF S 28 TF TF TF TF MC 10 TF TF TF 12 13 14 S 44 P 45 TF TF TF MC MC 46 47 48 49 50 MC MC MC MC MC 81 82 83 84 85 15 TF 16 TF 51 17 TF 18 TF 107 19 20 TF TF 54 55 MC MC P 57 MC S S 56 104 Type Item Type Item Learning Objective S MC 24 MC 26 P S MC 25 MC 27 Learning Objective MC 39 MC 67 MC 40 MC 68 MC 41 MC 69 MC 42 MC 70 MC 66 MC 71 Learning Objective MC 80 MC 99 MC 97 MC 107 MC 98 MC 114 Learning Objective MC 86 MC 91 MC 87 MC 92 MC 88 MC 93 MC 89 MC 94 MC 90 MC 100 Learning Objective MC 52 MC 53 Learning Objective E 115 P Learning Objective MC 107 E 115 MC 114 P Learning Objective 8* Learning Objective 9* 58 MC 59 MC 117 P 60 MC 112 E 61 MC 113 E 118 Learning Objective 10* P Learning Objective 11* Learning Objective 12* Learning Objective 13* 62 MC Learning Objective 14* 63 Note: MC TF = True-False MC = Multiple Choice E = Exercise P = Problem Type Item Type MC MC 64 65 MC MC MC MC MC MC MC 72 73 74 75 96 MC MC MC MC MC MC E P 115 116 P P MC MC MC MC MC 101 102 103 108 109 MC MC MC E E MC 95 MC P Item Type 105 106 E E 110 111 E E To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - Test Bank for Intermediate Accounting, Twelfth Edition TRUE-FALSE—Conceptual Debt securities include corporate bonds and convertible debt, but not U.S government securities Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity Companies not report changes in the fair value of available-for-sale debt securities as income until the security is sold The Securities Fair Value Adjustment account has a normal credit balance Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee The Unrealized Holding Gain/Loss—Equity account is reported as a part of other comprehensive income 10 Significant influence over an investee may be indicated by material intercompany transactions and interchange of managerial personnel 11 The accounting profession has concluded that an investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee 12 All dividends received by an investor from the investee decrease the investment’s carrying value under the equity method 13 Under the fair value method, the investor reports as revenue its share of the net income reported by the investee 14 A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation 15 Trading securities and available-for-sale securities are classified as current or noncurrent assets depending on the circumstances 16 When a company sells available-for-sale securities, a reclassification adjustment is necessary to avoid counting gains and losses twice To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 17 If a decline in a security’s value is judged to be temporary, a company needs to write down the cost basis of the individual security to a new cost basis 18 Subsequent increases and decreases in the fair value of impaired available-for-sale securities are included in other comprehensive income 19 If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income 20 The transfer of securities from trading to available-for-sale and from available-for-sale to trading has the same impact on stockholders’ equity and net income True-False Answers—Conceptual Item Ans F T F F T Item 10 Ans F T F T T Item 11 12 13 14 15 Ans F T F T F Item 16 17 18 19 20 Ans T F T F T MULTIPLE CHOICE—Conceptual 21 Which of the following is not a debt security? a Convertible bonds b Commercial paper c Loans receivable d All of these are debt securities 22 A correct valuation is a available-for-sale at amortized cost b held-to-maturity at amortized cost c held-to-maturity at fair value d none of these 23 Securities which could be classified as held-to-maturity are a redeemable preferred stock b warrants c municipal bonds d treasury stock 24 Unrealized holding gains or losses which are recognized in income are from securities classified as a held-to-maturity b available-for-sale c trading d none of these To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - Test Bank for Intermediate Accounting, Twelfth Edition P 25 When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must a make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date b notify the issuer and request that a special payment be made for the appropriate portion of the interest period c make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date d nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period S 26 Debt securities that are accounted for at amortized cost, not fair value, are a held-to-maturity debt securities b trading debt securities c available-for-sale debt securities d never-sell debt securities S 27 Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are a held-to-maturity debt securities b trading debt securities c available-for-sale debt securities d never-sell debt securities S 28 Use of the effective-interest method in amortizing bond premiums and discounts results in a a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method b a varying amount being recorded as interest income from period to period c a variable rate of return on the book value of the investment d a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method S 29 Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a available-for-sale securities where a company has holdings of less than 20% b trading securities where a company has holdings of less than 20% c securities where a company has holdings of between 20% and 50% d securities where a company has holdings of more than 50% 30 A requirement for a security to be classified as held-to-maturity is a ability to hold the security to maturity b positive intent c the security must be a debt security d All of these are required 31 Held-to-maturity securities are reported at a acquisition cost b acquisition cost plus amortization of a discount c acquisition cost plus amortization of a premium d fair value To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 32 Solo Co purchased $300,000 of bonds for $315,000 If Solo intends to hold the securities to maturity, the entry to record the investment includes a a debit to Held-to-Maturity Securities at $300,000 b a credit to Premium on Investments of $15,000 c a debit to Held-to-Maturity Securities at $315,000 d none of these 33 Which of the following is not correct in regard to trading securities? a They are held with the intention of selling them in a short period of time b Unrealized holding gains and losses are reported as part of net income c Any discount or premium is not amortized d All of these are correct 34 In accounting for investments in debt securities that are classified as trading securities, a a discount is reported separately b a premium is reported separately c any discount or premium is not amortized d none of these 35 Investments in debt securities are generally recorded at a cost including accrued interest b maturity value c cost including brokerage and other fees d maturity value with a separate discount or premium account 36 Pippen Co purchased ten-year, 10% bonds that pay interest semiannually The bonds are sold to yield 8% One step in calculating the issue price of the bonds is to multiply the principal by the table value for a 10 periods and 10% from the present value of table b 10 periods and 8% from the present value of table c 20 periods and 5% from the present value of table d 20 periods and 4% from the present value of table 37 Investments in debt securities should be recorded on the date of acquisition at a lower of cost or market b market value c market value plus brokerage fees and other costs incident to the purchase d face value plus brokerage fees and other costs incident to the purchase 38 An available-for-sale debt security is purchased at a discount The entry to record the amortization of the discount includes a a debit to Available-for-Sale Securities b debit to the discount account c debit to Interest Revenue d none of these 39 APB Opinion No 21 specifies that, regarding the amortization of a premium or discount on a debt security, the a effective-interest method of allocation must be used b straight-line method of allocation must be used c effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained d par value method must be used and therefore no allocation is necessary To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 10 Test Bank for Intermediate Accounting, Twelfth Edition 40 Which of the following is correct about the effective-interest method of amortization? a The effective interest method applied to investments in debt securities is different from that applied to bonds payable b Amortization of a discount decreases from period to period c Amortization of a premium decreases from period to period d The effective-interest method produces a constant rate of return on the book value of the investment from period to period 41 When investments in debt securities are purchased between interest payment dates, preferably the a securities account should include accrued interest b accrued interest is debited to Interest Expense c accrued interest is debited to Interest Revenue d accrued interest is debited to Interest Receivable 42 Which of the following is not generally correct about recording a sale of a debt security before maturity date? a Accrued interest will be received by the seller even though it is not an interest payment date b An entry must be made to amortize a discount to the date of sale c The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities d A gain or loss on the sale is not extraordinary S 43 When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a by using the equity method b by using the fair value method c by using the effective interest method d by consolidation S 44 Bista Corporation declares and distributes a cash dividend that is a result of current earnings How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a b c d Fair Value Method No Effect Increase No Effect Decrease Equity Method Decrease Decrease No Effect No Effect P 45 An investor has a long-term investment in stocks Regular cash dividends received by the investor are recorded as Fair Value Method a Income b A reduction of the investment c Income d A reduction of the investment Equity Method Income A reduction of the investment A reduction of the investment Income To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 23 101 The carrying amount of this investment in Kimm's December 31, 2007 balance sheet should be a $400,000 b $418,000 c $448,000 d $460,000 102 What should be the gain on sale of this investment in Kimm's 2008 income statement? a $64,000 b $55,000 c $49,000 d $40,000 103 On January 1, 2007, Sloane Co purchased 25% of Orr Corp.'s common stock; no goodwill resulted from the purchase Sloane appropriately carries this investment at equity and the balance in Sloane’s investment account was $720,000 at December 31, 2007 Orr reported net income of $450,000 for the year ended December 31, 2007, and paid common stock dividends totaling $180,000 during 2007 How much did Sloane pay for its 25% interest in Orr? a $652,500 b $765,000 c $787,500 d $877,500 104 On December 31, 2006, Nance Co purchased equity securities as trading securities Pertinent data are as follows: Fair Value Security Cost At 12/31/07 A $132,000 $117,000 B 168,000 186,000 C 288,000 258,000 On December 31, 2007, Nance transferred its investment in security C from trading to available-for-sale because Nance intends to retain security C as a long-term investment What total amount of gain or loss on its securities should be included in Nance's income statement for the year ended December 31, 2007? a $3,000 gain b $27,000 loss c $30,000 loss d $45,000 loss Multiple Choice Answers—CPA Adapted Item 96 97 Ans d d Item 98 99 Ans Item Ans Item Ans Item Ans c d 100 101 c b 102 103 c a 104 b To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 24 Test Bank for Intermediate Accounting, Twelfth Edition DERIVATIONS — Computational No Answer Derivation 64 c Dr Available-for-Sale Securities: 200 × $1,000 × 97 = $194,000 Dr Interest Revenue: $200,000 × 045 × 3/6 = $4,500 Cr Cash: $194,000 + $4,500 = $198,500 65 b ($400,000 × 1.02) + $6,000 = $414,000 66 d ($376,100 × 055) – ($400,000 × 05) = $686 67 b $376,100 × 055 = $20,686 ($376,100 + $686) × 055 - $20,723; $20,686 + $20,723 = $41,409 68 a $530,000 – ($520,790 – $1,770 – $1,830) = $12,810 69 c $516,875 – $515,000 = $1,875 70 a Dr Held-to-Maturity Securities: $200,000 × 1.04 = $208,000 Dr Interest Revenue: $200,000 × 05 × 3/6 = $5,000 Cr Cash: $208,000 + $5,000 = $213,000 71 b $975,000 + ($25,000 × 3/100) = $975,750 72 c $632,000 – $9,000 = $623,000 $623,000 – ($23,000 × 2/50) = $622,080 73 a ($250,000 × 045) + ($25,000 × 2/80) – $7,500 = $4,375 74 b ($200,000 × 09 × 3/12) – ($8,000 × 3/50) = $4,020 75 b Discount amortization: $40,000 × 8/50 = $6,400 ($1,960,000 + $6,400) ÷ = $983,200; $988,000 – $983,200 = $4,800 gain 76 c $30,000 (unrealized loss) 77 a $0 (available-for-sale securities) 78 a [(20,000 × $17) – $14,000] – $315,000 = $11,000 79 b ($400,000 – $380,000) = $20,000 80 a $10,000 + $20,000 = $30,000 81 c $200,000 × (25,000 ÷ 100,000) = $50,000 82 c $500,000 + [($800,000 – $640,000) × (20,000 ÷ 50,000)] = $564,000 83 a $800,000 × (20,000 ÷ 50,000) = $320,000 84 c $195,000, acquisition cost To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments DERIVATIONS — Computational (cont.) No Answer Derivation 85 b $225,000, acquisition cost 86 b $135,000, acquisition cost 87 b $202,500 + ($75,000 × 3) – ($30,000 × 3) = $216,000 88 c $300,000, acquisition cost 89 c $300,000 + ($200,000 × 2) – ($50,000 × 2) = $330,000 90 c $320,000 + ($240,000 × 3) – ($80,000 × 3) = $368,000 91 b $240,000 × = $72,000 92 c $945,000 + ($600,000 × 6) – ($150,000 × 6) = $1,215,000 93 b $240,000 + ($120,000 × 4) – ($40,000 × 4) = $272,000 94 d $120,000 × = $48,000 95 b $15,000 + $35,000 – $10,000 = $40,000 DERIVATIONS — CPA Adapted No 96 Answer Derivation d $702,000 – $12,000 = $690,000 15 $690,000 – $90,000 × — 75 ( ) = $672,000 97 d $90,000 – $65,000 = $25,000 98 c 99 d Conceptual 100 c $160,000 × 30% = $48,000 101 b $400,000 + $48,000 – ($100,000 × 30%) = $418,000 102 c $418,000 – ($60,000 × 30%) + ($200,000 × 50% × 30%) = $430,000 $264,000 – ($430,000 ÷ 2) = $49,000 103 a $720,000 – ($450,000 × 25%) + ($180,000 × 25%) = $652,500 104 b $18,000 – $15,000 – $30,000 = $27,000 loss 17 - 25 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 26 Test Bank for Intermediate Accounting, Twelfth Edition EXERCISES Ex 17-105—Investment in debt securities at premium On April 1, 2007, Sean Co purchased $160,000 of 6% bonds for $166,300 plus accrued interest as an available-for-sale security Interest is paid on July and January and the bonds mature on July 1, 2012 Instructions (a) Prepare the journal entry on April 1, 2007 (b) The bonds are sold on November 1, 2008 at 103 plus accrued interest Amortization was recorded when interest was received by the straight-line method (by months and round to the nearest dollar) Prepare all entries required to properly record the sale Solution 17-105 (a) Available-for-Sale Securities Interest Revenue ($160,000 × 06 × 1/4) Cash 166,300 2,400 (b) Interest Revenue ($6,300 × ÷ 63) Available-for-Sale Securities 400 Cash ($160,000 × 06 × 1/3) Interest Revenue 3,200 Cash Gain on Sale of Securities Available-for-Sale Securities $166,300 – [($6,300 ÷ 63) × 19] 164,800 168,700 400 3,200 400 164,400 Ex 17-106—Investment in debt securities at a discount On May 1, 2007, Gipson Corp purchased $450,000 of 12% bonds, interest payable on January and July 1, for $422,800 plus accrued interest The bonds mature on January 1, 2013 Amortization is recorded when interest is received by the straight-line method (by months and round to the nearest dollar) (Assume bonds are available for sale.) Instructions (a) Prepare the entry for May 1, 2007 (b) The bonds are sold on August 1, 2008 for $425,000 plus accrued interest Prepare all entries required to properly record the sale To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 27 Solution 17-106 (a) (b) Available-for-Sale Securities Interest Revenue ($450,000 × 12 × 4/12) Cash 422,800 18,000 Available-for-Sale Securities ($27,200 ÷ 68 × 1) Interest Revenue 400 Cash ($450,000 × 12 × 1/12) Interest Revenue 4,500 Cash Loss on Sale of Securities Available-for-Sale Securities $422,800 + [($27,200 ÷ 68) × 15] 425,000 3,800 440,800 400 4,500 428,800 Ex 17-107—Investments in equity securities Presented below are unrelated cases involving investments in equity securities Case I The fair value of the trading securities at the end of last year was 30% below original cost, and this was properly reflected in the accounts At the end of the current year, the fair value has increased to 20% above cost Case II The fair value of an available-for-sale security has declined to less than forty percent of the original cost The decline in value is considered to be other than temporary Case III An equity security, whose fair value is now less than cost, is classified as trading but is reclassified as available-for-sale Instructions Indicate the accounting required for each case separately Solution 17-107 Case I At the end of last year, the company would have recognized an unrealized holding loss and recorded a Securities Fair Value Adjustment (Trading) At the end of the current year, the company would record an unrealized holding gain that would be reported in the other revenue and gains section The adjustment account would now have a debit balance Case II When the decline in value is considered to be other than temporary, the loss should be recognized as if it were realized and earnings will be reduced The fair value becomes a new cost basis Case III The security is transferred at fair value, which is the new cost basis of the security The Available-for-Sale Securities account is recorded at fair value, and the Unrealized Holding Loss— Income account is debited for the unrealized loss The Trading Securities account is credited for cost To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 28 Test Bank for Intermediate Accounting, Twelfth Edition Ex 17-108—Investment in equity securities Watt Corp acquired a 25% interest in Sauer Co on January 1, 2007, for $500,000 At that time, Sauer had 1,000,000 shares of its $1 par common stock issued and outstanding During 2007, Sauer paid cash dividends of $160,000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share Sauer's net income for 2007 was $360,000 What is the balance in Watt’s investment account at the end of 2007? Solution 17-108 Cost Share of net income (.25 × $360,000) Share of dividends (.25 × $160,000) Balance in investment account $500,000 90,000 (40,000) $550,000 Ex 17-109—Fair value and equity methods (Essay) Compare the fair value and equity methods of accounting for investments in stocks subsequent to acquisition Solution 17-109 Under the fair value method, investments are originally recorded at cost and are reported at fair value Dividends are reported as other revenues and gains Under the equity method, investments are originally recorded at cost Subsequently, the investment account is adjusted for the investor's share of the investee's net income or loss and this amount is recognized in the income of the investor Dividends received from the investee are reductions in the investment account To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 29 Ex 17-110—Fair value and equity methods Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Maxey Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Linden Company (a) Fair Value Method (b) Equity Method Investment Dividend Investment Investment Transaction Account Revenue Account Revenue ——————————————————————————————————————————— At the beginning of Year 1, Maxey bought 30% of Linden's common stock at its book value Total book value of all Linden's common stock was $800,000 on this date ——————————————————————————————————————————— During Year 1, Linden reported $60,000 of net income and paid $30,000 of dividends ——————————————————————————————————————————— During Year 2, Linden reported $30,000 of net income and paid $40,000 of dividends ——————————————————————————————————————————— During Year 3, Linden reported a net loss of $10,000 and paid $5,000 of dividends ——————————————————————————————————————————— Indicate the Year ending balance in the Investment account, and cumulative totals for Years 1, 2, and for dividend revenue and investment revenue ——————————————————————————————————————————— Solution 17-110 Transaction (a) Fair Value Method (b) Equity Method Investment Dividend Investment Investment Account Revenue Account Revenue ——————————————————————————————————————————————— 240,000 240,000 ——————————————————————————————————————————————— 9,000 18,000 (9,000) 18,000 ——————————————————————————————————————————————— 12,000 9,000 (12,000) 9,000 ——————————————————————————————————————————————— 1,500 (3,000) (1,500) (3,000) ——————————————————————————————————————————————— 240,000 22,500 241,500 24,000 ——————————————————————————————————————————————— To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 30 Test Bank for Intermediate Accounting, Twelfth Edition Ex 17-111—Comprehensive income calculation The following information is available for Griner Company for 2007: Net Income Realized gain on sale of available-for-sale securities Unrealized holding gain arising during the period on available-for-sale securities Reclassification adjustment for gains included in net income $120,000 10,000 24,000 8,000 Instructions (1) Determine other comprehensive income for 2007 (2) Compute comprehensive income for 2007 Solution 17-111 (1) 2007 other comprehensive income = $26,000 ($10,000 realized gain + $24,000 unrealized holding gain – $8,000 reclassification adjustment) (2) 2007 comprehensive income = $146,000 ($120,000 + $26,000) *Ex 17-112—Fair value hedge On January 2, 2007, Nolan Co issued a 4-year, $500,000 note at 6% fixed interest, interest payable semiannually Nolan now wants to change the note to a variable rate note As a result, on January 2, 2007, Nolan Co enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.6% for the first months on $500,000 At each 6-month period, the variable interest rate will be reset The variable rate is reset to 6.6% on June 30, 2007 Instructions (a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2007 (b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2007 *Solution 17-112 (a) and (b) Fixed-rate debt Fixed rate (6% ÷ 2) Semiannual debt payment Swap fixed receipt Net income effect Swap variable rate 5.6% × ½ × $500,000 6.6% × ½ × $500,000 Net interest expense 6/30/07 $500,000 3% $ 15,000 15,000 $ 12/31/07 $500,000 3% $ 15,000 15,000 $ $ 14,000 $ 14,000 $ 16,500 $ 16,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 31 *Ex 17-113—Cash flow hedge On January 2, 2007, Reese Company issued a 5-year, $8,000,000 note at LIBOR with interest paid annually The variable rate is reset at the end of each year The LIBOR rate for the first year is 6.8% Reese Company decides it prefers fixed-rate financing and wants to lock in a rate of 6% As a result, Reese enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $8 million The variable rate is reset to 7.4% on January 2, 2008 Instructions (a) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2007 (b) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2008 *Solution 17-113 (a) and (b) Variable-rate debt Variable rate Debt payment 12/31/07 $8,000,000 6.8% $ 544,000 12/31/08 $8,000,000 7.4% $ 592,000 Debt payment Swap receive variable Net income effect Swap payable—fixed Net interest expense $ 544,000 (544,000) $ 560,000 $ 560,000 $ 592,000 (592,000) $ 560,000 $ 560,000 PROBLEMS Pr 17-114—Trading equity securities Gordon Company has the following securities in its portfolio of trading equity securities on December 31, 2007: Cost Fair Value 5,000 shares of Milner Corp., Common $155,000 $139,000 10,000 shares of Eddy, Common 182,000 190,000 $337,000 $329,000 All of the securities had been purchased in 2007 In 2008, Gordon completed the following securities transactions: March April Sold 5,000 shares of Milner Corp., Common @ $31 less fees of $1,500 Bought 600 shares of Yount Stores, Common @ $45 plus fees of $550 The Gordon Company portfolio of trading equity securities appeared as follows on December 31, 2008: To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 32 Test Bank for Intermediate Accounting, Twelfth Edition Pr 17-114 (cont.) 10,000 shares of Eddy, Common 600 shares of Yount Stores, Common Fair Value $195,500 25,500 $221,000 Cost $182,000 27,550 $209,550 Instructions Prepare the general journal entries for Gordon Company for: (a) the 2007 adjusting entry (b) the sale of the Milner Corp stock (c) the purchase of the Yount Stores' stock (d) the 2008 adjusting entry Solution 17-114 (a) (b) (c) (d) 12-31-07 Unrealized Holding Gain or Loss—Income Securities Fair Value Adjustment (Trading) ($337,000 – $329,000) 8,000 8,000 3-1-08 Cash [(5,000 × $31) – $1,500] Loss on Sale of Securities Trading Securities 153,500 1,500 4-1-08 Trading Securities Cash [(600 × $45) + $550] 27,550 12-31-08 Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income 19,450 155,000 27,550 19,450 Pr 17-115—Trading equity securities Lopez Company began operations in 2006 Since then, it has reported the following gains and losses for its investments in trading securities on the income statement: Gains (losses) from sale of trading securities Unrealized holding losses on valuation of trading securities Unrealized holding gain on valuation of trading securities 2006 $ 15,000 (25,000) — At January 1, 2009, Lopez owned the following trading securities: AGH Common (15,000 shares) DEL Preferred (2,000 shares) Pratt Convertible bonds (100 bonds) Cost $450,000 210,000 115,000 2007 $(20,000) — 10,000 2008 $ 14,000 (30,000) — To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 33 Pr 17-115 (cont.) During 2009, the following events occurred: Sold 5,000 shares of AGH for $170,000 Acquired 1,000 shares of Norton Common for $40 per share Brokerage commissions totaled $1,000 At 12/31/09, the fair values for Lopez's trading securities were: AGH Common, $28 per share DEL Preferred, $110 per share Pratt Bonds, $1,020 per bond Norton Common, $42 per share Instructions (a) Prepare a schedule which shows the balance in the Securities Fair Value Adjustment (Trading) at December 31, 2008 (after the adjusting entry for 2008 is made) (b) Prepare a schedule which shows the aggregate cost and fair values for Lopez's trading securities portfolio at 12/31/09 (c) Prepare the necessary adjusting entry based upon your analysis in (b) above Solution 17-115 (a) Balance 12/31/06 (result of that year's adjusting entry) Deduct unrealized gain for 2007 Add: Unrealized loss for 2008 Balance at 12/31/08 (b) Aggregate cost and fair value for trading securities at 12/31/09: AGH Common 10,000 shares DEL Preferred 2,000 shares Norton Common, 1,000 shares Pratt Bonds, 100 bonds Total (c) $(25,000) 10,000 (30,000) $(45,000) Cost $300,000 210,000 41,000 115,000 $666,000 Adjusting entry at 12/31/09: Securities Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income (Balance at 1/1/09 $45,000 Balance needed at 12/31/09 22,000 Recovery $23,000) Fair Value $280,000 220,000 42,000 102,000 $644,000 23,000 23,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 34 Test Bank for Intermediate Accounting, Twelfth Edition Pr 17-116—Available-for-sale equity securities During the course of your examination of the financial statements of Simpson Corporation for the year ended December 31, 2007, you found a new account, "Investments." Your examination revealed that during 2007, Simpson began a program of investments, and all investment-related transactions were entered in this account Your analysis of this account for 2007 follows: Simpson Corporation Analysis of Investments For the Year Ended December 31, 2007 Date—2007 Debit Credit (a) Pinson Company Common Stock Feb 14 Purchased 4,000 shares @ $55 per share $220,000 July 26 Received 400 shares of Pinson Company common stock as a stock dividend (Memorandum entry in general ledger.) Sept 28 Sold the 400 shares of Pinson Company common stock received July 26 @ $70 per share $28,000 (b) Debit Apr Oct Watts Inc., Common Stock 30 Purchased 20,000 shares @ $40 per share 28 Received dividend of $1.20 per share Credit $800,000 $24,000 Additional information: The fair value for each security as of the 2007 date of each transaction follow: Security Feb 14 Apr 30 July 26 Sept 28 Pinson Co $55 $62 $70 Watts Inc $40 Simpson Corp 25 28 30 33 Dec 31 $74 32 35 All of the investments of Simpson are nominal in respect to percentage of ownership (5% or less) Each investment is considered by Simpson’s management to be available-for-sale Instructions (1) Prepare any necessary correcting journal entries related to investments (a) and (b) (2) Prepare the entry, if necessary, to record the proper valuation of the available-for-sale equity security portfolio as of December 31, 2007 Solution 17-116 (1) (a) Pinson — original purchase stock dividend total holding 4,000 shares 400 shares 4,400 shares Total cost of $220,000 ÷ Total shares of 4,400 = $50 cost per share To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 35 Solution 17-116 (cont.) Sold 100 shares Correct entry: Cash (400 × $70) Available-for-Sale Securities Gain on Sale of Securities 28,000 Entry made: Cash Available-for-Sale Securities 28,000 Correction: Available-for-Sale Securities Gain on Sale of Securities 8,000 20,000 8,000 28,000 8,000 (b) Watts—should record cash dividend as dividend income Correct entry: Cash Dividend Revenue 24,000 Entry made: Cash Available-for-Sale Securities 24,000 Correction: Available-for-Sale Securities Dividend Revenue (To properly record dividends under fair value method) 24,000 24,000 24,000 24,000 (2) Valuation at End of Year: Pinson Watts Quantity 4,000 shares 20,000 shares Cost $ 200,000 800,000 $1,000,000 Increase (Decrease) $ 96,000 (160,000) $ 64,000 Fair Value $296,000 640,000 $936,000 Year-end Adjustment: Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss—Equity 64,000 64,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 36 Test Bank for Intermediate Accounting, Twelfth Edition *Pr 17-117—Derivative financial instrument Kelley Co purchased a put option on Flynn common shares on July 7, 2007, for $100 The put option is for 200 shares, and the strike price is $30 The option expires on January 31, 2008 The following data are available with respect to the put option: Date September 30, 2007 December 31, 2007 January 31, 2008 Market Price of Flynn Shares $32 per share $31 per share $33 per share Time Value of Put Option $53 21 Instructions Prepare the journal entries for Kelley Co for the following dates: (a) July 7, 2007—Investment in put option on Flynn shares (b) September 30, 2007—Kelley prepares financial statements (c) December 31, 2007—Kelley prepares financial statements (d) January 31, 2008—Put option expires *Solution 17-117 (a) (b) (c) (d) July 7, 2007 Put Option Cash 100 September 30, 2007 Unrealized Holding Gain or Loss—Income Put Option ($100 – $53) 47 December 31, 2007 Unrealized Holding Gain or Loss—Income Put Option ($53 – $21) 32 January 31, 2008 Loss on Settlement of Put Option Put Option ($21 – $0) 21 100 47 32 21 *Pr 17-118—Free-standing derivative Yates Co purchased a put option on Dixon common shares on July 7, 2007, for $215 The put option is for 300 shares, and the strike price is $51 The option expires on July 31, 2007 The following data are available with respect to the put option: Date March 31, 2007 June 30, 2007 July 6, 2007 Market Price of Dixon Shares $48 per share $50 per share $46 per share Time Value of Put Option $120 54 16 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Investments 17 - 37 *Pr 17-118 (cont.) Instructions Prepare the journal entries for Yates Co for the following dates: (a) January 7, 2007—Investment in put option on Dixon shares (c) March 31, 2007—Yates prepares financial statements (d) June 30, 2007—Yates prepares financial statements (e) July 6, 2007—Yates settles the call option on the Dixon shares *Solution 17-118 (a) (b) January 7, 2007 Put Option Cash 215 March 31, 2007 Put Option Unrealized Holding Gain or Loss—Income ($3 × 300) 900 Unrealized Holding Gain or Loss—Income Put Option ($215 – $120) (c) June 30, 2007 Unrealized Holding Gain or Loss—Income Put Option ($2 × 300) Unrealized Holding Gain or Loss—Income Put Option ($120 – $54) (d) July 6, 2007 Unrealized Holding Gain or Loss—Income Put Option ($54 – $16) Cash (300 × $5) Gain on Settlement of Put Option Put Option* *Value of Put Option settlement: Put Option 215 900 316 95 600 66 38 215 900 95 95 600 600 66 66 38 38 1,500 1,184 316 ... investment Transfer of securities from trading to AFS EXERCISES Item E17-105 E17-106 E17-107 E17-108 E17-109 E17-110 E17-111 *E17-112 *E17-113 Description Investment in debt securities at a premium Investment... loss 17 - 25 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - 26 Test Bank for Intermediate Accounting, Twelfth Edition EXERCISES Ex 17- 105—Investment... slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 17 - Test Bank for Intermediate Accounting, Twelfth Edition P 25 When an investor's accounting period ends on a