CHAPTER 14

Investments in Debt
and Equity Securities
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Qe!tion!
1 Definition of available-for-sale securities
2 Reporting of changes in fair value of securities in the income statement
3 Reporting of changes in fair value of securities on the balance sheet
Definition of held-to-maturity securities
! "ccounting for available-for-sale securities
# "pplication of $"S% Statement &o' 11!
( "ccounting for investments in common stoc) using the cost method
* "ccounting for trading securities
+ "ccounting for good,ill amorti-ation
1. /sing the fair mar)et value of stoc) received as a basis for valuation
11 "ccounting for available-for-sale securities
12 "pplication of the equity method to account for investments in common
stoc)
13 "ccounting for good,ill amorti-ation
1 "ccounting for trading securities
1! "pplication of the equity method to account for investments in common
stoc)
1# "pplication of the equity method to account for investments in common
stoc)
1( "ccounting for available-for-sale securities
1* /se of consolidated financial statements
1+ "ccounting for trading securities
2. International vs' /'S' 0""1 for investments in securities
21 Disclosures related to investments in securities
22 /sing the cost method to account for an investment
23 Effect of using cost method ,hen equity method ,as appropriate
2 Reclassification of available-for-sale securities to trading securities
21
"" 2hapter 1 Investments in Debt and Equity Securities
Co#$tational Qe!tion!
2! 2omputation of dividend revenue
2# 2omputation of investment income on available-for-sale securities
2( 2omputation of investment income on available-for-sale securities
2* 2omputation of balance in investment account on trading securities
2+ 2omputation of carrying value of portfolio on balance sheet
3. 2omputation of unreali-ed loss related to securities transactions
31 Determine entry to record sale of a security
32 2omputation of loss transfer of securities to determine net income
33 Record corresponding charges against unreali-ed losses
3 2omputation of carrying value of investment in common stoc)
3! 2omputation of income on long-term investment
3# 2omputation of investment in common stoc) affected by good,ill
amorti-ation
3( 2omputation of 3Share of &et Income3 of investment affected by
good,ill amorti-ation
3* Determination of 4ournal entry for temporary investment
3+ 2omputation of investment loss on trading securities
. Determination of credit to 35ar)et "d4ustment--6rading Securities3
account
1 2omputation of unreali-ed loss on trading securities on income
statement
2 2omputation of loss on securities investment on income statement
3 2omputation of reali-ed loss on short-term investment of mar)etable
equity securities
2omputation of value of acquisition of bonds
PRO%LEMS
1 1repare 4ournal entries relating to investments in common stoc)
2 Determine 4ournal entries for trading and available-for-sale securities
valuations
3 1repare 4ournal entries for investment in common stoc) and computation
of carrying value of investment using cost and equity methods
2omputation of amount reported for investment using equity method
! 1repare 4ournal entries and compute good,ill for common stoc)
investment
# 1repare 4ournal entries ,ith supporting computations for long-term
investments
( Reporting of capital stoc) investments on balance sheet and income
statement
* 1repare 4ournal entries for temporary investments using asset7revenue
methods
+ "ccounting for the sale of securities
1. Recording the transfer of securities bet,een categories
11 "ccounting for changes from the equity method
12 "ccounting for changes to the equity method
13 E8planation of 9gains trading:
1 2hanges from the 9held-to-maturity: classification
1! 2hange to the equity method
1# Impairment of a loan

MULTIPLE CHOICE QUESTIONS
c 1' ;hich securities are purchased ,ith the intent of selling them in the
<=2 near future>
a' 5ar)etable equity securities
b' "vailable-for-sale securities
c' 6rading securities
d' ?eld-to-maturity securities
c 2' 2hanges in fair value of securities are reported in the income statement for
<=! ,hich type of securities>
a' 5ar)etable equity securities
b' "vailable-for-sale securities
c' 6rading securities
d' ?eld-to-maturity securities
b 3' 2hanges in fair value of securities are reported in the stoc)holders@ equity
<=! section of the balance sheet for ,hich type of securities>
a' 5ar)etable equity securities
b' "vailable-for-sale securities
c' 6rading securities
d' ?eld-to-maturity securities
d ' ;hich category includes only debt securities>
<=2 a' 5ar)etable equity securities
b' "vailable-for-sale securities
c' 6rading securities
d' ?eld-to-maturity securities
c !' " debit balance in the account 5ar)et "d4ustment--"vailable-for-Sale
<=! Securities at the end of a year should be interpreted as
a' the net unreali-ed holding gain for that year'
23
"4 2hapter 1 Investments in Debt and Equity Securities
b' the net reali-ed holding gain for that year'
c' the net unreali-ed holding gain to date'
d' the net reali-ed holding gain to date'
a #' $"S% Statement &o' 11! generally applies ,hen the level of o,nership of
<=2 another company is at ,hat percentage>
a' <ess than 2.A
b' 2.AB3.A
c' 3.AB!.A
d' 5ore than !.A
b (' ;hen an investor uses the cost method to account for investments in
common
<= stoc)C cash dividends received by the investor from the investee should
normally be recorded as
a' a deduction from the investment account'
b' dividend revenue'
c' an addition to the investorDs share of the investeeDs profit'
d' a deduction from the investorDs share of the investeeDs profit'
b *' " debit balance in the account 5ar)et "d4ustmentE6rading Securities at
the
<=! end of a year should be interpreted as
a' the net reali-ed holding gain to date'
b' the net unreali-ed holding gain to date'
c' the net reali-ed holding gain for that year'
d' the net unreali-ed holding gain for that year'
d +' /nder the cost method of accounting for unconsolidated investments in
<= common stoc)C good,ill amorti-ation
a' reduces the investment account'
b' increases the investment account'
c' reduces both investment income and the investment account'
d' is not recorded'
c 1.' $rom the follo,ingC select the most appropriate basis for the valuation of a
ne,
<=3 investment ,hen properties or services are e8changed for stoc)'
a' 6he par or stated value of the stoc) received
b' 6he boo) value of the property or services e8changed
c' 6he fair mar)et value of the stoc) received
d' Either b or cC ,hichever is more clearly determinable
b 11' $or ,hich type of investments ,ould unreali-ed increases and decreases
be
<=! recorded directly in an o,ners@ equity account>
a' Equity method securities
b' "vailable-for-sale securities
c' 6rading securities
d' ?eld-to-maturity securities
c 12' 6he equity method of accounting for an investment in the common stoc) of
<=2 another company should be used ,hen the investment
a' is composed of common stoc) and it is the investorDs intent to vote the
common stoc)'
b' ensures a source of supply such as ra, materials'
c' enables the investor to e8ercise significant influence over the investee'
d' gives the investor voting control over the investee'
c 13' /nder the equity method of accounting for unconsolidated investments in
<= common stoc)C good,ill amorti-ation
a' decreases amorti-ation e8pense and reduces the investment account'
b' reduces investment income and increases the investment account'
c' reduces investment income and reduces the investment account'
d' is not recorded'
b 1' If the combined mar)et value of trading securities at the end of the year is
less
<=! than the mar)et value of the same portfolio of trading securities at the
beginning of the yearC the difference should be accounted for by
a' reporting an unreali-ed loss in security investments in the stoc)holders@
equity section of the
balance sheet'
b' reporting an unreali-ed loss in security investments in the income
statement'
c' a footnote to the financial statements'
d' a credit to Investment in 6rading Securities'
a 1!' ;hen an investor uses the equity method to account for investments in
<= common stoc)C the investment account ,ill be increased ,hen the investor
recogni-es
a' a proportionate share of the net income of the investee'
b' a cash dividend received from the investee'
c' periodic amorti-ation of the good,ill related to the purchase'
2!
"& 2hapter 1 Investments in Debt and Equity Securities
d' depreciation related to the e8cess of mar)et value over boo) value of
the investeeDs depreciable assets at the date of purchase by the
investor'
b 1#' ;hen an investor uses the equity method to account for investments in
<= common stoc)C cash dividends received by the investor from the investee
should be recorded as
a' an increase in the investment account'
b' a deduction from the investment account'
c' dividend revenue'
d' a deduction from the investorDs share of the investeeDs profits'
a 1(' If the combined mar)et value of available-for-sale securities at the end of
the
<=! year is less than the mar)et value of the same portfolio of available-for-sale
securities at the beginning of the yearC the difference should be accounted
for by
a' reporting an unreali-ed loss in security investments in the stoc)holders@
equity section of the balance sheet'
b' reporting an unreali-ed loss in security investments in the income
statement'
c' a footnote to the financial statements'
d' a credit to Investment in "vailable-for-Sale Securities'
c 1*' 2onsolidated financial statements are typically prepared ,hen one
company
<=2 has
a' accounted for its investment in another company by the equity method'
b' significant influence over the operating and financial policies of another
company'
c' the controlling financial interest in another company'
d' a substantial equity interest in the net assets of another company'
d 1+' "t the beginning of the year a company had a debit balance in the account
<=! 5ar)et "d4ustment--6rading Securities' During the year the company did
not
buy or sell any trading securitiesC but at the end of the year the related
mar)et
ad4ustment account had a credit balance' 6his change indicates that
a' a loss on the income statement ,as recogni-ed'
b' a gain on the income statement ,as recogni-ed'
c' the value of the investment account increased'
d' the value of the investment account decreased'
b 2.' 6he only significant difference bet,een the provisions of international
<=+ accounting standards as promulgated by I"S 3+ and /'S' accounting
standards under $"S% Statement &o' 11! is
a' I"S 3+ requires accounting for all investments in debt securities to be
on a fair value basis ,hile S$"S &o' 11! does not'
b' I"S 3+ allo,s all unreali-ed gains and losses on securities valued at fair
value to be reported in net income for the period ,hile S$"S &o' 11!
does not'
c' I"S 3+ requires trading securities to be reported on a fair value basis
but not securities available for sale'
d' I"S 3+ does not permit the reporting of unreali-ed gains and losses on
securities other than trading securities to be recorded as part of equity'
d 21' ;hich of the follo,ing is true>
<=* a' 6rading securities can be classified as current of noncurrent depending
on managementDs intent'
b' ?eld-to-maturity securities should not be classified as current under any
circumstance'
c' 6rading securities should not be classified as current under any
circumstance'
d' "vailable-for-sale securities can be classified as current or noncurrent
depending on managementDs intent'
b 22' =n "ugust 1C 2..1C 2olorite 2orp' acquired 1.C... of the outstanding
shares
<=2 of %ro,n 2o' =n Fanuary 2C 2..2C 2olorite acquired an additional 2.C...
shares of %ro,n 2o'C ,hich brought the total o,nership to 3.C... shares'
/sing the normal guidelines for percentages of o,nership and assuming
that %ro,n 2o' had 1..C... shares outstanding during 2..1 and 2..2C
2olorite 2orp' should account for the investment in %ro,n 2o' by
a' using the cost method in 2..1 and the equity method in 2..2'
b' using the cost method in 2..1C retroactively ad4usting the investment
account to the equity method at the beginning of 2..2C and using the
equity method in 2..2'
c' using the equity method for 2..1 and 2..2'
d' using the cost method in 2..1 and 2..2 for the 1.C... shares acquired
in 2..1C and using the equity method in 2..2 for the 2.C... shares
acquired in 2..2'
2(
"' 2hapter 1 Investments in Debt and Equity Securities
d 23' 1oster Inc' o,ns 3! percent of Elliott 2orporation' During the calendar
year
<= 2..2C Elliott had net earnings of G3..C... and paid dividends of G3#C...'
1oster mista)enly accounted for the investment in Elliott using the cost
method rather than the equity method of accounting' ;hat effect ,ould this
have on the investment account and net incomeC respectively>
a' /nderstateC overstate
b' =verstateC understate
c' =verstateC overstate
d' /nderstateC understate
c 2' If an investment in stoc) is reclassified from available-for-sale securities to
<=( trading securitiesC the stoc) should be recorded on the date it is reclassified
at the
a' mar)et value at the date of acquisition'
b' boo) value at the date of reclassification'
c' mar)et value at the date of reclassification'
d' lo,er-of-cost-or-mar)et value at the date of reclassification'
c 2!' &orth,ic) 2ompany acquired 1.C... shares of the common stoc) of
Shaver
<= 2orp' in Fuly 2..2' 6he follo,ing FanuaryC Shaver announced a G1..C...
net income for 2..2 and declared a cash dividend of G'!. per share on its
1..C... shares of outstanding common stoc)' 6he &orth,ic) 2ompany
dividend revenue from Shaver 2orp' in Fanuary 2..2 ,ould be
a' G.'
b' G2C!..'
c' G!C...'
d' G1.C...'
c 2#' =n Fanuary 2C 2..1C Reynolds 2orporation bought 1! percent of Scorpio
<= 2orporationDs capital stoc) for G#.C... and classified it as available-for-
sale securities' ScorpioDs net incomes for the years ended December 31C
2..1 and 2..2C ,ere G2.C... and G1..C...C respectively' During 2..2C
Scorpio declared a dividend of G1.C...' &o dividends ,ere declared in
2..1' =n December 31C 2..2C the fair value of the Scorpio stoc) o,ned by
Reynolds had increased to G+.C...' ?o, much should Reynolds sho, on
its 2..2 income statement as income from this investment>
a' G3C1!.
b' G1!C...
c' G21C...
d' G!1C...
a 2(' =n Fanuary 2C 2..2C "dler 2o' acquired 2C... shares of %o8,orth 2o'
<= common stoc) for G*C... and classified these shares as available-for-sale
securities' During 2..2C "dler received G#C... of cash dividends' "dlerDs
share of %o8,orthDs 2..2 earnings Hnet incomeI ,as G!C...' 6he fair value
of %o8,orth@s stoc) on December 31C 2..2C ,as G( per share' "dler should
report ,hat amount in 2..2 related to %o8,orth 2o'>
a' Revenue of G#C...
b' Revenue of G12C...
c' " G1C... decrease in the investment account
d' " G1C... increase in the investment account
2+
b 2*' =n Fanuary 1C 2..2C Joung 2o' paid G!..C... for 2.C... shares of
5ontana
<=! 2o'Ds common stoc) and classified these shares as trading securities'
Joung does not have the ability to e8ercise significant influence over
5ontana' 5ontana declared and paid a dividend of G'!. a share to its
stoc)holders during 2..2' 5ontana reported net income of G2#.C... for
the year ended December 31C 2..2' 6he fair value of 5ontana 2o'@s stoc)
at December 31C 2..2C is G2( per share' ;hat is the net asset amount
H,hich includes both investments and any related mar)et ad4ustmentsI
attributable to the investment in 5ontana that ,ill be included on Joung@s
balance sheet at December 31C 2..2>
a' G!3.C...
b' G!.C...
c' G!#+C...
d' G!(+C...
c 2+' 5artin 2o' purchased the follo,ing portfolio of trading securities during
2..2
<=! and reported the follo,ing balances at December 31C 2..2' &o sales
occurred during 2..2' "ll declines are considered to be temporary'
Security 2ost 5ar)et Kalue at 127317.2
L G *.C... G *2C...
J 1.C... 132C...
M 32C... 2*C...
6he carrying value of the portfolio at December 31C 2..2C on 5artin 2o'Ds
balance sheet ,ould be
a' G222C...'
b' G2.C...'
c' G22C...'
d' G2!2C...'
a 3.' 5artin 2o' purchased the follo,ing portfolio of available-for-sale securities
<=! during 2..2 and reported the follo,ing balances at December 31C 2..2'
&o sales occurred during 2..2' "ll declines are considered to be
temporary'
Security 2ost 5ar)et Kalue at 127317.2
L G *.C... G *2C...
J 1.C... 132C...
M 32C... 2*C...
5artin 2o' should report ,hat amount related to the securities transactions
in its 2..2 income statement>
a' G.
b' G2C... unreali-ed loss
c' G1.C... unreali-ed loss
d' G12C... unreali-ed loss
a 31' 5arino 2orporation purchased the follo,ing portfolio of trading securities
<=# during 2..2 and reported the follo,ing balances at December 31C 2..2'
&o sales occurred during 2..2' "ll declines are considered to be
temporary'
Security 2ost 5ar)et Kalue at 127317.2
L G *.C... G *2C...
J 1.C... 132C...
M 32C... 2*C...
6he only transaction in 2..3 ,as the sale of security M for G3C... on
December 31C 2..3' 6he mar)et values for the other securities at
December 31C 2..3 ,ere the same as at December 31C 2..2' 5arino@s
entry to record the sale of security M ,ould include
a' a credit of G2C... to Reali-ed 0ain on Sale of 6rading Securities'
b' a debit of G2C... to Reali-ed 0ain on Sale of 6rading Securities'
c' a G2C... debit to 5ar)et "d4ustment-6rading Securities'
d' a GC... debit to 5ar)et "d4ustment-6rading Securities'
c 32' In 5arch of 2..1C 5oon 2orp' bought !C... shares of 5c5ahon 2orp'Ds
listed
<=( stoc) for G!.C... and classified the shares as available-for-sale
securities' 6he mar)et value of these shares had declined to G3..C... by
December 31C 2..1' 5oon changed the classification of these shares to
trading securities in Fune of 2..2 ,hen the mar)et value of this investment
in 5c5ahon@s stoc) had risen to G3!C...' ?o, much should 5oon
include as a loss on transfer of securities in its determination of net income
for 2..2>
a' G.
b' G!C...
c' G1.!C...
d' G1!.C...
c 33' ;alshC Inc' began business on Fanuary 1C 2..2C and at December 31C
2..2C
<=! ;alsh had the follo,ing investment portfolios of equity securitiesN
6rading "vailable-$or-Sale
"ggregate cost G1!.C... G22!C...
"ggregate mar)et value 12.C... 1*!C...
&one of the declines is 4udged to be other than temporary' /nreali-ed
losses at December 31C 2..2C should be recorded ,ith corresponding
charges against
Stoc)holdersD
Income Equity
a' G(.C... G .
b' G.C... G3.C...
c' G3.C... G.C...
d' G . G(.C...
c 3' In Fanuary 2..2C ?enry 2orporation acquired 2. percent of the outstanding
<= common stoc) of Davis 2ompany for G1C12.C...' 6his investment gave
?enry the ability to e8ercise significant influence over Davis' 6he boo)
value of the acquired shares ,as G*.C...' 6he e8cess of cost over boo)
value ,as attributed to an identifiable intangible asset that ,as
undervalued on DavisD balance sheet and that had a remaining useful life of
ten years' $or the year ended December 31C 2..2C Davis reported net
income of G2!2C... and paid cash dividends of G!#C... on its common
stoc)' ;hat is the proper carrying value of ?enryDs investment in Davis at
December 31C 2..2>
a' G1C.*.C*..
b' G1C.+2C...
c' G1C131C2..
d' G1C1*1C#..
c 3!' =n Fanuary 1C 2..2C 2apitech 2orporation acquired <ogirunC Inc' as a
<= long-term investment for G2!.C... Ha 3. percent common stoc) interest in
<ogirunI' =n that dateC <ogirun had net assets ,ith a boo) value and
current mar)et value of G*..C...' During 2..2C <ogirun reported net
income of G+.C... and declared and paid cash dividends of G2.C...'
;hat is the ma8imum amount of income that 2apitech should report from
this investment for 2..2>
a' G#C...
b' G21C...
c' G2#C(!.
d' G2(C...
b 3#' =n Fanuary 1C 2..2C 5ets Inc' purchased 3. percent of the outstanding
<= common stoc) of 1irates 2orporation for G!1#C... cash' 5ets is
accounting for this investment using the equity method' =n the date of
acquisitionC the fair value of 1irates@ net assets ,as G1C2.C...' 5ets has
determined that the e8cess of the cost of the investment over its share of
1irates@ net assets is attributable to good,illC ,hich ,ill be amorti-ed over
the ma8imum allo,able period' 1iratesD net income for the year ended
December 31C 2..2C ,as G3#.C...' During 2..2C 1irates declared and
paid cash dividends of G.C...' 6here ,ere no other transactions bet,een
the t,o companies' =n December 31C 2..2C the investment in 1irates
should be recorded as
a' G3+2C..'
b' G#.*C..'
c' G#12C...'
d' G#2C...'
b 3(' =n Fanuary 1C 2..2C 5ets Inc' purchased 3. percent of the outstanding
<= common stoc) of 1irates 2orporation for G!1#C... cash' 5ets is
accounting for this investment using the equity method' =n the date of
acquisitionC the fair value of 1irates@ net assets ,as G1C2.C...' 5ets has
determined that the e8cess of the cost of the investment over its share of
1irates@ net assets is attributable to good,illC ,hich ,ill be amorti-ed over
the ma8imum allo,able period' 1irates@ net income for the year ended
December 31C 2..2C ,as G3#.C...' During 2..2C 1irates declared and
paid cash dividends of G.C...' 6here ,ere no other transactions bet,een
the t,o companies' Ignoring income ta8esC 5etsD statement of income for
the year ended December 31C 2..2C should include 3Income $rom
Investment in 1irates 2orporation Stoc)3 in the amount of
a' G#*C...'
b' G1.C..'
c' G1.*C...'
d' G111C#..'
b 3*' =n "pril 1C 2..2C Miba Inc' purchased as a temporary investment G1..C...C
<=3 face amountC 1.A /'S' 6reasury notesO they pay interest semiannually on
Fanuary 1 and Fuly 1' 6he notes ,ere purchased at 1.2' ;hich of the
follo,ing entries correctly records this purchase>
a' 6rading Securities--1.A /'S' 6reasury &otes''''''''''' 1..C...
Interest Receivable''''''''''''''''''''''''''''''''''''''''''''''''''''' 2C!..
1remium on 6rading Securities'''''''''''''''''''''''''''''''''' 2C...
2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C!..
b' 6rading Securities--1.A /'S' 6reasury &otes''''''''''' 1.2C...
Interest Receivable''''''''''''''''''''''''''''''''''''''''''''''''''''' 2C!..
2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C!..
c' 6rading Securities--1.A /'S' 6reasury &otes''''''''''' 1..C...
Interest Receivable''''''''''''''''''''''''''''''''''''''''''''''''''''' C!..
2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C!..
d' 6rading Securities--1.A /'S' 6reasury &otes''''''''''' 1.2C...
2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.2C...
b 3+' Ed,ards 2ompany began business in $ebruary of 2..1' During the yearC
<=! Ed,ards purchased the three trading securities listed belo,' =n its
December 31C 2..1C balance sheetC Ed,ards appropriately reported a
GC... credit balance in its 5ar)et "d4ustment--6rading Securities account'
6here ,as no change during 2..2 in the composition of Ed,ardDs portfolio
of trading securities' 1ertinent data are as follo,sN
5ar)et Kalue
Security 2ost December 31C 2..2
" G12.C... G12#C...
% +.C... *.C...
2 1#.C... 1!(C...
G3(.C... G3#3C...
;hat amount of loss on these securities should be included in Ed,ardDs
income statement for the year ended December 31C 2..2>
a' G.
b' G3C...
c' G(C...
d' G11C...
d .' Ed,ards 2ompany began business in $ebruary 2..1' During the yearC
<=! Ed,ards purchased the three trading securities listed belo,' =n its
December 31C 2..1C balance sheetC Ed,ards appropriately reported a
GC... debit balance in its 5ar)et "d4ustment--6rading Securities account'
6here ,as no change in 2..2 in the composition of Ed,ardDs portfolio of
mar)etable equity securities held as a temporary investment' 1ertinent
data are as follo,sN
5ar)et Kalue
Security 2ost December 31C 2..2
" G12.C... G12#C...
% +.C... *.C...
2 1#.C... 1!(C...
G3(.C... G3#3C...
;hat amount should Ed,ards credit to the 5ar)et "d4ustment--6rading
Securities account at December 31C 2..2>
a' G.
b' G3C...
c' G(C...
d' G11C...
b 1' 6yler 2ompany began operations in 2..1' 6he company@s trading
securities
<=! portfolioC ,hich did not change in composition during 2..2C is as follo,sN
December 31C 2..2
/nreali-ed
2ost 5ar)et 0ain H<ossI
"rcherC Inc''''''''''''''''''''''' G 1..C... G 1..C... G .
Pelly 2ompany'''''''''''''''' 2..C... 1!.C... H!.C...I
1elt 2ompany'''''''''''''''''' 2!.C... 2#.C... 1.C...
G !!.C... G !1.C... G H.C...I
December 31C 2..1
/nreali-ed
2ost 5ar)et 0ain H<ossI
"rcherC Inc''''''''''''''''''''''' G 1..C... G 13!C... G 3!C...
Pelly 2ompany'''''''''''''''' 2..C... 21.C... 1.C...
1elt 2ompany'''''''''''''''''' 2!.C... 1*.C... H(.C...I
G !!.C... G !2!C... G H2!C...I
Ignoring income ta8esC ,hat amount should be reported as an unreali-ed
loss on trading securities in 6ylerDs 2..2 income statement>
a' G.
b' G1!C...
c' G2!C...
d' G.C...
b 2' =n "ugust 31C 2..2C Stiggins 2ompany purchased the follo,ing available-
for-
<=( sale securitiesN
5ar)et Kalue
Security 2ost December 31C 2..2
D G +#C... G *C...
E 1!2C... 1!*C...
$ 1#2C... 1#C...
=n December 31C 2..2C Stiggins reclassified its investment in security $
from available-for-sale securities to trading securities' ;hat total amount
of loss on these securities should be included in StigginsD income statement
for the year ended December 31C 2..2>
a' G.
b' G1#C...
c' G22C...
d' G2*C...
d 3' During 2..1C %arney 2ompany purchased mar)etable equity securities as a
<=# short-term investment and classified them as trading securities' 6he cost
and mar)et value at December 31C 2..1C ,ere as follo,sN
5ar)et Kalue
Security 2ost December 31C 2..1
L 2.. shares G *C.. G 1.C2..
J 2C... shares !1C... !C+..
M C... shares +C!.. **C!..
G 1!3C+.. G 1C#..
%arney sold 1C... shares of 2ompany J stoc) on 5arch 1#C 2..2C for G2!
per shareC incurring G1C2.. in bro)erage commissions and ta8es' =n the
saleC %arney should report a reali-ed loss of
a' G.'
b' G!..'
c' G*!.'
d' G1C(..'
b ' =n =ctober 1C Dennis 2ompany purchased G2..C... face value 12A
bonds
<=3 for +* plus accrued interest and bro)erage fees and classified them as
held-to-maturity securities' Interest is paid semiannually on Fanuary 1 and
Fuly 1' %ro)erage fees for this transaction ,ere G(..' "t ,hat amount
should this acquisition of bonds be recorded>
a' G1+#C...
b' G1+#C(..
c' G2.2C...
d' G2.2C(..
PRO%LEMS
Problem 1
In 2..2C PM$ Inc' purchased stoc) as follo,sN
HaI "cquired 2C... shares of 0allery "rts 2orp' common stoc) Hpar value G2.I in
e8change for 1C2.. shares of PM$ Inc' preferred stoc) Hpar value G3.I' 6he
preferred stoc) had a mar)et value of G(! per share on the date of the
e8change'
HbI 1urchased *.. shares of 2hampion 2orp' common stoc) Hpar value G1.I at
G(. per shareC plus a bro)erage fee of G*..'
"t December 31C 2..2C the mar)et values of the securities ,ere as follo,sN
Security 5ar)et Kalue
PM$ Inc' G(1
0allery "rts 2orp' 1
2hampion 2orp' (2
6he investments in common stoc) are classified by PM$ Inc' as available-for-sale
securities accounted for by the cost method' 6he fiscal year of PM$ ends on
December 31'
H1I 1repare all entries relating to the investments in common stoc) for 2..2'
H2I 1repare the entry to record the sale of 2.. shares of 2hampion 2orp' common
stoc) on Fanuary 1!C 2..3C at G( per share'
H3I 1repare the entry to reclassify the remaining #.. shares of 2hampion 2orp'
common stoc) from available-for-sale securities to trading securities on
Fanuary 31C 2..3' 6he stoc) ,as selling at G#( per share on that date'
Solution 1
<=3C <=!C <=#
H1I "vailable-for-Sale Securities--0allery 2orp'
Stoc) H1C2.. 8 G(!I''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' +.C...
1referred Stoc) H1C2.. 8 G3.I'''''''''''''''''''''''''''''''''''''' 3#C...
1aid-In 2apital in E8cess of 1ar H1C2.. 8 G!I'''''''''''' !C...
"vailable-for-Sale Securities--2hampion 2orp'
Stoc) QH*.. 8 G(.I R G*..S'''''''''''''''''''''''''''''''''''''''''''''''''''''' !#C*..
2ash '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' !#C*..
5ar)et Increase7
Security 2ost Kalue Decrease
0allery 2orp' G +.C... G *2C... GH*C...I H2C... 8 G1I
2hampion 2orp' !#C*.. !(C#.. *.. H*.. 8 G(2I
G1#C*.. G13+C#.. GH(C2..I
/nreali-ed Increase7Decrease in Kalue of "vailable-for-
Sale Securities''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' (C2..
5ar)et "d4ustmentB"vailable-for-Sale Securities' ' ' (C2..
H2I 2ash H2.. 8 G(I'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1C*..
Reali-ed 0ain on Sale of 6rading Securities
QHG(-G(1I 8 2..S'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' #..
"vailable-for-Sale Securities--2hampion 2orp' Stoc) 1C2..
H3I Investment in 6rading Securities--2hampion 2orp' Stoc)
H#.. 8 G#(I''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' .C2..
/nreali-ed Increase7Decrease in Kalue of "vailable-for-
Sale Securities--Equity'''''''''''''''''''''''''''''''''''''''''''''''''''' #..
/nreali-ed <oss on 6ransfer of Securities--Income'''''''' 2C..
5ar)et "d4ustment--"vailable-for-Sale Securities''' #..
Investment in "vailable-for-Sale Securities--2hampion
2orp' Stoc)''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 2C#..
Problem 2
;ebster Inc' carries the follo,ing mar)etable equity securities on its boo)s at
December 31C 2..1 and 2..2' "ll securities ,ere purchased during 2..1 and
there ,ere no beginning balances in any mar)et ad4ustment accounts'
6rading SecuritiesN
5ar)et 5ar)et
2ost December 31C 2..1 December 31C 2..2
K 2ompany G !.C... G 2#C... G .C...
; 2ompany 2#C... .C... .C...
L 2ompany (.C... #.C... !.C...
6otal G1#C... G12#C... G13.C...
"vailable-for-Sale SecuritiesN
J 2ompany G2.C... G3#.C... G1..C...
M 2ompany 1..C... 12.C... 1.C...
6otal G!2.C... G*.C... G2.C...
6he cost method is used in accounting for all investments in securities'
H1I 0ive the entries necessary to record the valuations for both trading and
available-for-sale securities at December 31C 2..1 and 2..2'
H2I ;hat net effect ,ould these valuations have on 2..1 and 2..2 net income>
Solution 2
<=!
H1I 2..1
Dec' 31 /nreali-ed <oss on 6rading Securities '''''''''''''''' 2.C...
5ar)et "d4ustment--6rading Securities'''''' 2.C...
/nreali-ed Increase7Decrease in Kalue of
"vailable-for-Sale Securities'''''''''''''''''''''''''''''''' .C...
5ar)et "d4ustment--"vailable-for-Sale
Securities''''''''''''''''''''''''''''''''''''''''''''''''''''''''' .C...
2..2
Dec' 31 5ar)et "d4ustment--6rading Securities''''''''''''''''' C...
/nreali-ed 0ain on 6rading Securities''''''''''' C...
Dec' 31 /nreali-ed Increase7Decrease in Kalue of
"vailable-for-Sale Securities'''''''''''''''''''''''''''''''2.C...
5ar)et "d4ustmentB"vailable-for-Sale
Securities''''''''''''''''''''''''''''''''''''''''''''''''''''''' 2.C...
H2I Effect of valuation entries on 2..1 net incomeN
Recogni-ed decline in value of trading securities'''''''' GH2.C...I
Effect of valuation entries on 2..2 net incomeN
Recogni-ed increase in value of trading securities'''''' GC...
Problem 3
=n Fanuary 1C 2..2C "lsop 2orp' acquired 3. percent H13C... sharesI of Stone
Services Inc' common stoc) for G1C3..C... as a long-term investment' Data from
StoneDs 2..2 financial statements include the follo,ingN
&et income''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G33.C...
<ess cash dividends paid'''''''''''''''''''''''''''''''''''''''''''''''''''''' 1#.C...
Increase in retained earnings'''''''''''''''''''''''''''''''''''''''''''''''' G1(.C...
6he mar)et value of Stone Services Inc' common stoc) on December 31C 2..2C
,as G+* per share' "lsop does not have any other noncurrent investments in
securities'
1repare the necessary 4ournal entries for "lsopDs investment in Stone Services Inc'
common stoc) under
H1I the cost method classified as available-for-sale securities'
H2I the equity method'
Solution 3
<=C <=!
H1I Investment in "vailable-for-Sale Securities--Stone
Services Stoc)'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''1C3..C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1C3..C...
2ash HG1#.C... 8 3.AI''''''''''''''''''''''''''''''''''''''''''''''''''''''''' *C...
Dividend Revenue''''''''''''''''''''''''''''''''''''''''''''''''''' *C...
/nreali-ed Increase7Decrease in Kalue of "vailable-
for-Sale Securities--Equity H13C... shares 8 G2I'''''''''''''''''''' 2#C...
5ar)et "d4ustment--"vailable-for-Sale Securities''' 2#C...
H2I Investment in Stone Services Inc''''''''''''''''''''''''''''''''''''1C3..C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1C3..C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' *C...
Investment in Stone Services Inc' Stoc)''''''''''''''''' *C...
Investment in Stone Services Inc' Stoc)
HG33.C... 8 3.AI''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ++C...
Income from Investment in Stone Services
Inc' Stoc)''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ++C...
Problem 4
=n Fanuary 1C 2..2C 0ardner "ssociates purchased 3. percent of the outstanding
shares of stoc) of 0illen 2orp' for G1!.C... cash' 6he investment ,ill be
accounted for by the equity method' =n that dateC 0illenDs net assets Hboo) and
fair valueI ,ere G3..C...' 0ardner has determined that the e8cess of the cost of
its investment in 0illen over its share of 0illenDs net assets is attributable to
good,illC ,hich ,ill be amorti-ed over the ma8imum allo,able period'
0illenDs net income for the year ended December 31C 2..2C ,as G#.C...' During
2..2C 0ardner received G!C... cash dividends from 0illen' 6here ,ere no other
transactions bet,een the t,o companies'
2ompute the amount that ,ould be reported on 0ardner "ssociatesD boo)s for the
investment in 0illen 2orp' at December 31C 2..2'
Solution 4
<=
Investment in 0illen 2orp' stoc)N
=riginal investment''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''G1!.C...
Share of net income--3.A of G#.C...''''''''''''''''''''''''''''''''''''' 1*C...
"morti-ation of implied good,illT''''''''''''''''''''''''''''''''''''''''''''' H1C!..I
Dividends received''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' H!C...I
6otal''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''G1#1C!..
T Implied value of 0illen 2orp'N
Implied valueN G1!.C...7'3. U G!..C...
Implied good,illN G!..C... - G3..C... U G2..C...
0ardner@s share of good,illN G2..C... 8 '3 U G#.C...
"morti-ation of implied good,illN G#.C...7.-year life U G1C!..
Problem 5
=n Fuly 1C 2..2C 5ountain Systems acquired *C... shares of 1recision ServicesD
.C... outstanding common shares at a cost of G2.C...' 6he boo) value and fair
mar)et value of 1recision@s net assets on that date ,as G**.C...' 6he follo,ing
data pertain to 1recision Services for 2..2'
&et income reported in 2..2N
Fanuary 1 - Fune 3.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G2*C...
Fuly 1 - December 31''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3#C...
6otal'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G#C...
2ash dividends declared and paidN
Fanuary 1 - Fune 3.''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G3.C...
Fuly 1 - December 31''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3.C...
6otal'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G#.C...
H1I 1repare the entry to record the original investment on Fuly 1'
H2I 2ompute the good,ill Hif anyI on the purchase'
H3I 1repare the necessary entries Hother than acquisitionI for 2..2 on 5ountain
SystemsD boo)s using the cost method'
HI 1repare the necessary entries Hother than acquisitionI for 2..2 on 5ountain
SystemsD boo)s using the equity method'
Solution 5
<=C <=!
H1I Investment in 1recision Services Stoc)'''''''''''''''''''''''' 2.C...
2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 2.C...
H2I 0ood,ill computationN
1urchase price'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G2.C...
$air mar)et value of net assets''''''''''''''''''''''''''''' G**.C...
*C...7.C... shares''''''''''''''''''''''''''''''''''''''''''''' 8 2.A
$air mar)et value of 5ountainDs share of net assets'''' 1(#C...
0ood,ill''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G #C...
H3I 2ost methodN
2ash HG3.C... 8 2.AI'''''''''''''''''''''''''''''''''''''''''''''''''''''''' #C...
Dividend Revenue''''''''''''''''''''''''''''''''''''''''''''''''' #C...
2ash dividends received HFuly 1 - December 31I'
HI Equity methodN
2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' #C...
Investment in 1recision Services Stoc)'''''''''''''''' #C...
2ash dividends received HFuly 1 - December 31I'
Investment in 1recision Services Stoc) HG3#C... 8 2.AI'' (C2..
Income from Investment in 1recision Stoc)'''''''''' (C2..
2.A share of investee earnings HFuly 1 - December 31I'
Income from Investment in 1recision Stoc)
HG#C...7. yrs' 8 V yr'I''''''''''''''''''''''''''''''''''''''''''''''''''''' *..
Investment in 1recision Services Stoc)'''''''''''''''' *..
"morti-ation of good,ill for # months'
Problem 6
Foseph 2o' e8ecuted the follo,ing long-term investment transactions during the
current year'
$eb' # 1urchased 1C... shares of <arge "uto 2o' for G. per share plus
bro)erage costs of G22!' 6hese shares ,ere classified as trading
securities'
5ar' 31 1urchased #.C... of the 2..C... outstanding common shares of &e,
6ech 2orp' for G#..C...' 0ood,ill of G1#.C... ,as included in the
purchase price'
Fune 2. Received a G2'2. per share dividend on <arge "uto 2o' shares'
Fune 3. &e, 6ech 2orp' reported second quarter earnings HtotalI of G.C...'
Sept' "cquired C... shares of 5ega 2onglomerateDs stoc) for G3. per share
plus G#.. transaction costs' 6hese shares ,ere classified as available-
for-sale securities'
Dec' 31 5ar)et values of <arge "uto 2o' and 5ega 2onglomerate stoc) ,ere
G! and G2* per shareC respectively'
1repare 4ournal entries ,ith appropriate supporting computations for the yearDs
transactions'
Solution 6
<=C <=!
$eb' # Investment in 6rading Securities--
<arge "uto 2o' Stoc)'''''''''''''''''''''''''''''''''''''''''''' .C22!
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' .C22!
5ar' 31 Investment in &e, 6ech 2orp' Stoc)'''''''''''''''''''' #..C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' #..C...
Fune 2. 2ash H1C... 8 G2'2.I'''''''''''''''''''''''''''''''''''''''''''''''''' 2C2..
Dividend Revenue''''''''''''''''''''''''''''''''''''''''''' 2C2..
Fune 3. Investment in &e, 6ech 2orp' Stoc)'''''''''''''''''''' 12C...
Income from Investment in &e, 6ech 2orp'
Stoc)'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 12C...
6o record share of &e, 6ech 2orp' earnings
HG.C... 8 3.A o,nershipI'
Fune 3. Income from Investment in &e, 6ech 2orp' Stoc) 1C...
Investment in &e, 6ech' 2orp' Stoc)'''''''''''''' 1C...
6o record amorti-ation of good,ill for three
months HG1#.C...7. years 8 3712I'
Sept' Investment in "vailable-for-Sale Securities--5ega
2onglomerate Stoc) QHC... 8 G3.I R G#..S'''''''''''''''' 12.C#..
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 12.C#..
Dec' 31 5ar)et "d4ustmentB6rading Securities''''''''''''''''' C((!
/nreali-ed 0ain on 6rading Securities''''''''''' C((!
/nreali-ed Increase7Decrease in Kalue of
"vailable-for-Sale Securities'''''''''''''''''''''''''''''''' *C#..
5ar)et "d4ustment--"vailable-for-Sale Securities *C#..
2ost 5ar)et
<arge "uto 2o'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G .C22! G !C...
5ega 2onglomerate'''''''''''''''''''''''''''''''''''''''''''''''''''''''' 12.C#.. 112C...

Problem 7
=n Fuly 1C 2..2C 6he ;ood,ard 0roup purchased for cash 3! percent of the
outstanding capital stoc) of 5assey Studios' %oth 6he ;ood,ard 0roup and
5assey Studios have a December 31 year-end' 5assey StudiosC ,hose common
stoc) is actively traded in the over-the-counter mar)etC reported its total net income
for the year to 6he ;ood,ard 0roup and also paid cash dividends on &ovember
1!C 2..2C to 6he ;ood,ard 0roup and its other stoc)holders'
?o, should 6he ;ood,ard 0roup report the above facts in its December 31C
2..2C balance sheet and its income statement for the year then ended> Discuss
the rationale for your ans,er'
Solution 7
<=
6he ;ood,ard 0roup should follo, the equity method of accounting for its
investment in 5assey Studios because 6he ;ood,ard 0roup is presumedC
because of the si-e of its investmentC to be able to e8ercise significant influence
over the operating and financial policies of 5assey Studios'
In 2..2C 6he ;ood,ard 0roup should report its interest in 5assey StudiosD
outstanding capital stoc) as a long-term investment' $ollo,ing the equity method
of accountingC 6he ;ood,ard 0roup should record the cash purchase of 3!
percent of 5assey Studios at costC ,hich is the amount paid'
6hirty-five percent of 5assey StudiosD total net income from Fuly 1C 2..2C to
December 31C 2..2C should be added to the carrying amount of the investment in
6he ;ood,ard 0roupDs balance sheet and sho,n as revenue in its income
statement to recogni-e 6he ;ood,ard 0roupDs share of the net income of 5assey
Studios after the date of acquisition' 6his amount should reflect ad4ustments
similar to those made in preparing consolidated statementsC including ad4ustments
to eliminate intercompany gains and lossesC and to amorti-eC if appropriateC any
difference bet,een 6he ;ood,ard 0roupDs cost and the underlying equity in net
assets of 5assey Studios on Fuly 1C 2..2'
6he cash dividends paid by 5assey Studios to 6he ;ood,ard 0roup should
reduce the carrying amount of the investment in 6he ;ood,ard 0roupDs balance
sheet and have no effect on 6he ;ood,ard 0roupDs income statement'
Problem 8
=n $ebruary 1C 2..2C 1yle Inc' had e8cess cash on hand' 6he controller
suggested to management that the company buy G2..C... of /'S' 6reasury bonds
selling at 1.2 and paying * percent interest' Interest payments on these bonds are
made semiannually on Fanuary 1 and Fuly 1'
H1I 1repare entries to record the $ebruary purchase of /'S' 6reasury bonds and
the subsequent collection of interest on Fuly 1C using
HaI the asset approach'
HbI the revenue approach'
H2I "ssuming that these bonds ,ere acquired as an investment in trading
securitiesC e8plain ,hether the premium or discount should be amorti-ed'
Solution 8
<=2C <=
H1I HaI Investment--6rading Securities'''''''''''''''''''''''''''''''' 2.C...
Interest Receivable H2..C... 8 *A 8 1712I''''''''''''''''''''' 1C333
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 2.!C333
2ash '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' *C...
Interest Receivable'''''''''''''''''''''''''''''''''''''''''''' 1C333
Interest Revenue'''''''''''''''''''''''''''''''''''''''''''''''' #C##(
HbI Investment--6rading Securities'''''''''''''''''''''''''''''''' 2.C...
Interest Revenue''''''''''''''''''''''''''''''''''''''''''''''''''''' 1C333
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 2.!C333
2ash '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' *C...
Interest Revenue'''''''''''''''''''''''''''''''''''''''''''''''' *C...
H2I 1eriodic amorti-ation of the premium or discount is used ,hen bonds are
acquired at a higher or lo,er price than their maturity value and it is e8pected
that they ,ill be held until maturity' ?o,everC ,hen bonds are acquired as a
temporary investment and it is not li)ely that the bonds ,ill be held until
maturityC such procedures are normally not applied'
Problem 9
6he follo,ing transactions of the Snyder 2ompany ,ere completed during the fiscal
year 4ust endedN
HaI 1urchased G1..C... of /'S' 6reasury (A bondsC paying 1.2'! plus
accrued interest of G1C(!.' In additionC the company paid bro)erage fees
of G!..'
Snyder 2ompany uses the revenue approach to record accrued interest'
Snyder classified these bonds as a trading security'
HbI 1urchased 1C... shares of $erris 2ompany common stoc) at G12! per
share plus bro)erage fees of G+!.' Snyder classifies this stoc) as and
available-for-sale security'
HcI Received semiannual interest on the /'S' 6reasury %onds'
HdI Sold 1!. shares of $erris at G132 per share'
HeI Sold G1#C... of /'S' 6reasury (A bonds at 1.2 plus accrued interest of
G+3'
HfI 1urchased a G12C...C #-month certificate of deposit' 6he certificate is
classified as a trading security'
1repare the entries necessary to record the above transactions'
Solution 9
<=#
HaI Investment in 6rading Securities--6reasury %onds''''''''''''''''1.3C...
Interest Revenue'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1C(!.
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1.C(!.
1'.2! 8 1..C... U G1.2C!..O G1.2C!.. R !.. bro)erage fee U G1.3C...
HbI Investment in "vailable-for-Sale Securities''''''''''''''''''''''''''''12!C+!.
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 12!C+!.
HcI 2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3C!..
Interest Revenue'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3C!..
HdI 2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''1+C*..
Investment in "vailable-for-Sale Securities''''''''''''''''''''' 1*C*+3
0ain on Sale'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' +.(
G132 8 1!. shares U G1+C*..O 1!.71C... 8 G12!C+!. U G1*C*+3O
G1+C*.. - G1*C*+3 U G+.('
HeI 2ash'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1#C13
Reali-ed <oss on Sale of Securities''''''''''''''''''''''''''''''''''''''' 1#.
Investment in 6rading Securities--6reasury %onds''''''''' 1#C*.
Interest Revenue'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' +3
HG1#C... 8 1'.2I R HG1#C... 8 '.3! 8 17#I U G1#C13'
G1#C...7G1..C... 8 1.3C... U G1#C*.'
HfI Investment in 6rading Securities--2ertificate of Deposit'''''''' 12C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 12C...
Problem 10
<ee 2ompany had the follo,ing portfolio of securities at the end of its first year of
operationsN
(ear)En*
Se+rity Cla!!ifi+ation Co!t Mar,et -ale
" 6rading G1*C... G23C...
% 6rading G2!C... G2(C...
H1I 1rovide the entry necessary to ad4ust the portfolio of securities to mar)et value'
H2I "fter ad4usting the securities to mar)etC <ee elects to reclassify Security % as an
available-for-sale security' =n the date of the transferC Security %Ds mar)et value is
G2#C!..' 1rovide the 4ournal entry to reclassify Security %'
Solution 10
<=(
H1I 5ar)et "d4ustment--6rading Securities'''''''''''''''''''''''''''' (C...
/nreali-ed 0ain on 6rading Securities''''''''''''''''''' (C...
H2I Investment in "vailable-for Sale Securities--Security %' ' 2#C!..
/nreali-ed <oss on 6ransfer of Securities'''''''''''''''''''''' !..
5ar)et "d4ustment--6rading Securities''''''''''''''''''' 2C...
Investment in 6rading Securities--Security %'''''''''' 2!C...
Entry reclassifies security as available-for-sale at current fair value of G2#C!..
and removes historical cost of trading security of G2!C...'
/nreali-ed loss represents the difference bet,een fair value at the beginning
of
the period and fair value on date of transfer'
Problem 11
=n Fanuary 1C 2..1C 1a8man 2ompany purchased !.A of 5onroe 2ompany for cash
of G##.C...' =n that date the net assets of 5onroe 2ompany had a boo) value of
G1C2..C...' 6he difference bet,een fair value and boo) value is attributed to good,ill
and is amorti-ed over 2. years' =n Fanuary 1C 2..2C 1a8man sold (.A of its
o,nership in 5onroe for G!2!C... and reclassified the remaining stoc) as available-
for-sale' &et income and dividends for 2..1 and 2..2 for 5onroe are given belo,N
2..1 2..2
&et income '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G*.C... G+.C...
Dividends''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1*C... 2!C...
1repare the required 4ournal entries made by 1a8man 2ompany relating to its
investment in 5onroe for the years 2..1 and 2..2 assuming no change in mar)et
value during the 2-year period'
Solution 11
<=1.
2..1
Investment in 5onroe 2ompany'''''''''''''''''''''''''''''''''''''' ##.C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' ##.C...
Investment in 5onroe 2ompany'''''''''''''''''''''''''''''''''''''' .C...
Income from Investment in 5onroe Stoc)''''''''''''''' .C...
HG*.C... 8 !.A U .C...I
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' +C...
Investment in 5onroe 2ompany'''''''''''''''''''''''''''''' +C...
HG1*C... 8 !.A U +C...I
Income from Investment in 5onroe Stoc)''''''''''''''''''''''' 3C...
Investment in 5onroe 2ompany'''''''''''''''''''''''''''''' 3C...
QG##.C... - HG1C2..C... 8 !.AI U G#.C...S
HG#.C... 2. U G3C...S
2..2
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' !2!C...
Investment in 5onroe 2ompany'''''''''''''''''''''''''''''' *1C#..
0ain on Sale of 5onroe Stoc)''''''''''''''''''''''''''''''''' 3C..
%oo) value at end of 2..1 U G##.C... R G.C... - G+C... - G3C... U
G#**C...'
G#**C... 8 (.A U G*1C#..'
G!2!C... - G*1C#.. U G3C..'
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3C(!.
Dividend Revenue''''''''''''''''''''''''''''''''''''''''''''''''''' 3C(!.
Problem 12
1ar) 2ompany purchased 1*A of the outstanding common stoc) of Ray 2ompany on
Fanuary 1C 2..1C ,hen the net assets of Ray 2ompany had a boo) value and fair value
of G..C...' 1ar) 2ompany paid G(2C... for this investment' =n Fanuary 1C 2..2C
1ar) purchased an additional 1.A of the outstanding stoc) of Ray 2ompanyC paying
another G1C...' H"ssume the boo) and fair values of the net assets is G1.C...I'
Ray 2ompany reported income and dividends for 2..1 and 2..2 are given belo,N
2..1 2..2
&et income '''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G.C... G!.C...
Dividends''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 3.C... 3.C...
1repare the 4ournal entries made by 1ar) during 2..1 and 2..2 related to its
investment in Ray 2ompanyC including the ad4usting entries needed to reflect the
change from an available-for-sale security to the equity method'
Solution 12
<=1.
2..1
Fan' 1 Investment in "vailable-for-Sale Securities
Ray 2ompany''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' (2C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' (2C...
Dec' 31 2ash H'1* 8 G3.C...I''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' !C..
Dividend Revenue''''''''''''''''''''''''''''''''''''''''''''''''''' !C..
6est %an)C Intermediate AccountingC 1
th
ed' .1
2..2
Fan' 1 Investment in Ray 2ompany'''''''''''''''''''''''''''''''''''''''''''' 11C*..
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 1C...
Retained Earnings''''''''''''''''''''''''''''''''''''''''''''''''''' 1C*..
Investment in "vailable-for-Sale Securities--
Ray 2ompany'''''''''''''''''''''''''''''''''''''''''''''''''''''''''' (2C...
2omputation of ad4ustment to retained earningsN
Equity in Ray 2o' earnings H1*A 8 G.C...I''''''''''''''''' G(C2..
Dividends received'''''''''''''''''''''''''''''''''''''''''''''''''' H!C..I
Retroactive ad4ustment to change from cost to
equity method'''''''''''''''''''''''''''''''''''''''''''''''''''''''''' G1C*..
Dec' 31 Investment in Ray 2ompany H'2* 8 G!.C...I'''''''''''''''''''''''' 1C...
Income from Investment in Ray 2ompany''''''''''''''' 1C...
2ash''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' *C..
Investment in Ray 2ompany'''''''''''''''''''''''''''''''''''' *C..
Problem 13
6he $inancial "ccounting Standards %oard had several goals in issuing Statement of
$inancial "ccounting Standards &o' 11!, 9"ccounting for 2ertain Investments in Debt
and Equity SecuritiesC: and changing the accounting for certain debt and equity
securities from a lo,er-of-cost-or-mar)et basis to a fair value basis' "mong these
goals ,as the elimination of ,hat is termed 9gains trading':
E8plain the meaning of the term 9gains trading':
Solution 13
<=!
6he term 9gains trading: refers to the practice of management of selectively selling
securities the prices of ,hich have appreciated and including the reali-ed gains in
earnings' 0ains trading results from the use of amorti-ed cost accounting and the
available-for-sale classification'
6he use of amorti-ed cost permits recognition of holding gains through selected sales
of appreciated securities and the inclusion of these reali-ed holding gains in earnings'
"t the same timeC use of amorti-ed cost does not provide for the recognition of
unreali-ed losses' 5anagers thus can selectively manage earnings by choosing to sell
those securities that have appreciated ,hile selectively e8cluding unreali-ed losses
from earnings' Debt and equity securities classified as available-for-sale are reported
at fair value but unreali-ed changes in fair value are e8cluded from earnings'
." 2hapter 1 Investments in Debt and Equity Securities
5anagers again can selectively sell securities the prices of ,hich have appreciated
and include the reali-ed gains in earnings' Securities for ,hich prices have dropped
are held' 6he available-for-sale treatment thus permits unreali-ed gains and losses to
be e8cluded from earnings since these unreali-ed gains and losses are reported in a
separate component of stoc)holdersD equity'
Problem 14
Investments in debt securities currently are permitted to be classified as held-to-
maturity and accounted for at amorti-ed cost if an enterprise has the positive intent and
ability to hold these securities to maturity' 6he held-to-maturity classification is the
most restrictive of the three classifications specified in accounting standards' Despite
the restrictiveness of the held-to-maturity classificationC certain changes in
circumstances may occur that ,ould necessitate transferring an investment in a debt
security from the held-to-maturity classification ,ithout calling into question the
investorDs general intention to hold other similarly classified investments to maturity'
;hat types of circumstances ,ould cause an investor in debt securities classified as
held-to-maturity to change that classification ,ithout calling into question the intent of
the investor to hold other similarly classified investments to maturity>
Solution 14
<=2
6he follo,ing changes in circumstances may cause an investor to change its intent to
hold a certain security to maturity ,ithout calling into question its intent to hold other
debt securities to maturity in the futureN
1' Evidence of a significant deterioration in the issuerDs credit,orthiness' 6he
deterioration must be actual and not based on speculation'
2' " change in ta8 la, eliminates or reduces the ta8-e8empt status of interest
on the debt security' 6his provision does not include a change in ta8 la,
that revises the marginal ta8 rates applicable to interest income'
3' " ma4or business combination or ma4or disposition Hsuch as the sale of a
segmentI necessitates the sale or transfer of held-to-maturity securities to
maintain the enterpriseDs e8isting interest rate ris) position or credit ris) policy'
' " change in statutory or regulatory requirements significantly modifying
either ,hat constitutes a permissible investment or the ma8imum level of
investments in certain )inds of securitiesC thereby causing an enterprise to
dispose of a held-to-maturity security'
6est %an)C Intermediate AccountingC 1
th
ed' ./
!' " significant increase by the regulator in the industryDs capital requirements
that causes the enterprise to do,nsi-e by selling held-to-maturity securities'
#' " significant increase in the ris) ,eights of debt securities used for
regulatory ris)-based capital purposes'
Problem 15
=n Fanuary 1C 2..1C "rthur 2ompany paid G!.C... for 1.C... shares of D;
2ompany voting common stoc)C ,hich represented a 1!A interest in D;' "t this dateC
the net assets of D; 2ompany totaled G2'! million' 6he fair values of D; 2ompanyDs
identifiable assets and liabilities ,ere equal to their boo) values' "rthur did not have
the ability to e8ercise significant influence over the operating and financial policies of
D; as a result of this investment' "rthur received dividends of G.'*. per share from
D; on =ctober 1C 2..1' D; reported net income of G3..C... for the year ended
December 31C 2..1' 6he stoc) ,as classified as available-for-sale' 5ar)et prices for
the 1.C... shares ,as G!.C...'
=n Fuly 1C 2..2C "rthur paid G1C!!.C... for 3.C... shares of D; 2ompanyDs voting
common stoc)C ,hich represents a 2!A interest in D;' 6he fair value of the
identifiable assetsC net of liabilities of D; ,as equal to their boo) values of GC#!.C...'
"s a result of this transactionC "rthur acquired the ability to e8ercise significant
influence over the operating and financial policies of D;' "rthur received a dividend of
G.'*! per share from D; on "pril 1C 2..2C and G1'. per share on =ctober 1C 2..2'
D; reported net income of G3!.C... for the year ended December 31C 2..2C and
G1!.C... for the si8 months ended December 31C 2..2' "rthur amorti-es good,ill over
2. years'
Determine the amount of income from the investment in D; common stoc) that should
be reported on "rthurDs income statement for the year ended December 31C 2..2C and
December 31C 2..1 HrestatedI'
Solution 15
<=1. 2..2 2..1
Income from investment in D; 2ompany''''''''''''''''''''''''''''''''''''' G+.C...
G!C...
<essN 0ood,ill amorti-ation''''''''''''''''''''''''''''''''''''''''''''''''''''''''' 13C3*
3C(!.
Income from investment''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''' (#C!#2 G1C2!.
"rthurDs share of D; incomeN 2..2 2..1
Income for 2..1 H3..C... 8 '1!I''''''''''''''''''''''''''''''''''''''''''''''''''' G!C...
Income for 2..2N
$irst half H2..C... 8 '1!IWWWWWWW''WWWWWWWW' G3.C...
.4 2hapter 1 Investments in Debt and Equity Securities
Second half H1!.C... 8 '.I''''''''''''''''''''''''''''''''''''''''''''''''''' #.C...
G+.C... G!C...
0ood,ill amorti-ationN
0ood,ill on 2..1 acquisitionN
QG!.C... B H'1! 8 G2C!..C...I U G(!C... 2.S'''''''''''''''''''''''''''G 3C(!. G 3C(!.
0ood,ill on 2..2 acquisitionN
QG1C!!.C... B H'2! 8 GC#!.C...I U G3*(C!.. 2. 8 VS''''''''''''''' +C#**
G13C3* G 3C(!.
Problem 16
E5D 2orp' loaned G2..C... to "lco 2orp' on Fanuary 1C 2..1' 6he terms of the loan
require principal payments of G.C... each year for five years plus interest at *A' 6he
first principal and interest payment is due on Fanuary 1C 2..2' "lco made the required
payments during 2..2 and 2..3' "lco began to e8perience financial difficulties in
2..3C ho,everC ,hich made it necessary for E5D to reassess the li)elihood of the loan
being collected' =n December 31C 2..3C E5D determines that the principal payments
,ill be collectedC but that the collection of interest is unli)ely'
H1I 2ompute the present value of the e8pected future cash flo,s as of December 31C
2..3'
H2I 1rovide the 4ournal entry to record the loan impairment as of December 31C 2..3'
H3I 1rovide the 4ournal entries for 2.. to record receipt of the principal payment on
Fanuary 1 and the recognition of interest revenue as of December 31C assuming that
E5DDs assessment of the li)elihood of collecting the loan has not changed'
Solution 16
<=11
H1I 1resent value of e8pected future cash flo,sN
Date 1ayment 6ime of Discount 6able Kalue 1resent Kalue at *A
Fan' 1C 2.. G.C... no, 1'... G .C...
Fan' 1C 2..! G.C... 1 year '+2!+ 3(C.3#
Fan' 1C 2..# G.C... 2 years '*!(3 3C2+2
1resent value at December 31C 2..3 G111C32*
6est %an)C Intermediate AccountingC 1
th
ed' ..
H2I Fournal entry to record impairmentN
1273172..3 %ad Debt E8penseWWWWWWWWWWWWW *C#(2
"llo,ance for <oan Impairment''''''''''''''''''''' *C#(2
H3I Fournal entries made during 2..N
17.172.. 2ashWWWWWWWWWWWWWWWWWWW .C...
<oan ReceivableWWWWWWW'WWWWW .C...
1273172.. "llo,ance for <oan Impairment''''''''''''''''''''''''''' !C(.#
Interest RevenueWWWWWWWWWWWW !C(.#
QHG111C32* - G.C...I 8 '.* U !C(.#S
.& 2hapter 1 Investments in Debt and Equity Securities
CHAPTER 14 )) QUI0 A
&ame XXXXXXXXXXXXXXXXXXXXXXXXX
Section XXXXXXXXXXXXXXXXXXXXXXXX
6 $ 1' "n investment in stoc) is initially recorded at cost and all commissionsC ta8esC
and other fees are e8pensed as incurredC under both the cost and equity
methods'
6 $ 2' /nder some circumstancesC consolidated financial statements are appropriate
even though the parent company o,ns less than !. percent of the voting
stoc) of the subsidiary'
6 $ 3' "ccounting practice allo,s companies not to consolidate certain
ma4ority-o,ned subsidiaries if these subsidiaries have 9nonhomogeneous:
operationsC a large minority interestC or a foreign location'
6 $ ' 6he cost method of accounting should al,ays be used ,hen the investor does
not e8ercise significant influence over the investee'
6 $ !' 6he equity method may not be appropriate in some cases even though the
investor o,ns more than 2. percent of the voting stoc) of the investee'
6 $ #' "s a general ruleC consolidated financial statements should be prepared only
,hen the parent corporation o,ns *. percent or more of the outstanding
common stoc) of the subsidiary'
6 $ (' /nder the cost methodC the investment account is periodically ad4usted to
reflect changes in the underlying net assets of the investee'
6 $ *' ;hen an investment in equity securities has been accounted for under the
equity methodC but circumstances dictate a change to the cost methodC
retroactive application of the cost method is required'
6 $ +' ;hen the purchase price of stoc) is greater or less than the underlying boo)
value of the investeeDs net assetsC an ad4ustment is made by the investor to
the income reported by the investee in applying the equity method'
6 $1.' &o ad4ustment is made to the investment account ,hen changing from the
equity method to the cost method'
CHAPTER 14 )) QUI0 %
&ame XXXXXXXXXXXXXXXXXXXXXXXXX
Section XXXXXXXXXXXXXXXXXXXXXXXX
6 $ 1' /nreali-ed holding gains and losses on investments in trading securities are
recogni-ed on the income statement'
6 $ 2' /nreali-ed gains and losses on investments in available-for-sale securities
are recogni-ed on the income statement'
6 $ 3' " debit balance in the account 5ar)et "d4ustmentE"vailable-for-Sale
Securities implies a corresponding o,ners@ equity account ,ith a credit
balance of the same amount'
6 $ ' $or balance sheet classificationC securities are classified as short -term or
long-term investments based on managementDs intended holding period'
6 $ !' 6he net reported balance in the available-for-sale securities investment
account is the original cost plus a credit balance in the mar)et ad4ustment
account or minus a debit balance in the mar)et ad4ustment account'
6 $ #' ;hen investments in trading securities are soldC the reali-ed gain or loss is
the difference in the mar)et value since acquisition'
6 $ (' /nreali-ed holding gains on investments in held-to-maturity securities are
recogni-ed as a direct increase to o,ners@ equity'
6 $ *' Increases in the mar)et value of trading securities and available-for-sale
securities investments cause the related mar)et ad4ustment account to
decrease'
6 $ +' Investments in trading securities may be classified as current or long-term'
6 $1.' If an investor does not have a controlling interest in another companyC the
investor may choose to use either the cost method or the equity method to
account for that investment in equity securities'
!(
CHAPTER 14 )) QUI0 C
&ame XXXXXXXXXXXXXXXXXXXXXXXXX
Section XXXXXXXXXXXXXXXXXXXXXXXX
"' 2ost method
%' Significant influence
2' 1arent company
D' <ong-term investments
E' Subsidiary company
$' 5ar)et method
0' 2ontrol
?' Equity method
I' 5erger
F' 2onsolidation
P' &onconvertible investments
<' E8ecutory contract
5' "vailable-for-sale securities
&' 6rading securities
Select the term that best fits each of the follo,ing definitions and descriptions' Indicate
your ans,er by placing the appropriate letter in the space provided'
XXXX 1' " company that is o,ned or controlled by another company'
XXXX 2' 6he ability of an investor to impact the operatingC investingC and financing
decisions of an investee but not absolutely determine those decisions'
XXXX 3' 6he ability of an investor to decisively influence the operatingC investingC
and financial decisions made by an investee'
XXXX ' "n accounting method under ,hich the initial investment is recorded and
maintained at cost ,ith dividends being recogni-ed as revenue ,hen
received'
XXXX !' "n accounting method that combines the financial statement balances of
the parent and subsidiary companies as if they ,ere one total economic
unit'
XXXX #' " company that e8ercises control over other companies through ma4ority
o,nership of voting stoc)'
XXXX (' "n accounting method under ,hich the initial investment is recorded at
cost and subsequently is increased by a proportionate share of earnings
and decreased by dividends'
XXXX *' Investments that are either not readily mar)etable or not e8pected to be
converted to cash ,ithin a year'
XXXX +' Securities purchased ,ith the intent of selling them in the near future'
XXXX 1.' Securities purchased ,ithout the intent of selling them in the near future'
!*
CHAPTER 14 )) QUI0 SOLUTIONS
Yui- "
1' $
2' $
3' $
' 6
!' 6
#' $
(' $
*' $
+' 6
1.' 6
Yui- %
1' 6
2' $
3' 6
' 6
!' $
#' $
(' $
*' $
+' $
1.' $
Yui- 2
1' E
2' %
3' 0
' "
!' F
#' 2
(' ?
*' D
+' &
1.' 5