ch17 PDF

CHAPTER 17
INVESTMENTS
IFRS questions are available at the end o this !ha"ter#
TR$E%FA&SE'Con!e"tual
Ans(er
F T F F T F T F T T F T F T F T F T F T
No#
1. 2. 3. !. %. '. *. +. ,. 14. 11. 12. 13. 1!. 1%. 1'. 1*. 1+. 1,. 24.
)es!ri"tion
Examples of debt securities. Definition of trading securities. Available-for-sale unrealized gains losses. "lassif#ing $eld-to-maturit# securities. Fair value c$anges in AF& securities. &ecurities Fair (alue Ad)ustment account. Accounting for trading securities. Definition of significant influence. -eporting .nrealized /olding 0ain 1oss2E3uit# account. Examples of significant influence. Definition of controlling interest. Effect of dividends on investment under e3uit#. -eporting revenue under fair value met$od. Definition of controlling interest. .sing fair value option. Accounting for c$anges in fair value. Temporar# declines and 5rite do5ns. 6ecessar# of reclassification ad)ustment. Transfer of $eld-to-maturit# securities. Transfers from trading to available-for-sale.
M$&TIP&E CH*ICE'Con!e"tual
Ans(er
c b c c a a c b a d b c d c c d c a c
No#
21. 22. 23. 2!. 7 2%. & 2'. & 2*. & 2+. & 2,. 34. 31. 32. 33. 3!. 3%. 3'. 3*. 3+. 3,.
)es!ri"tion
Debt securities. (aluation of debt securities. /eld-to-maturit# securities. .nrealized gain loss recognition for securities. Accounting for accrued interest. 8dentif#ing securities accounted for at amortized cost. Accounting for available-for-sale securities. .sing effective-interest met$od of amortization. 8dentif#ing available-for-sale securities. "lassification as $eld-to-maturit#. -eporting $eld-to-maturit# securities. Ac3uisition of $eld-to-maturit# securities. Accounting for trading securities. Accounting for trading debt securities. -ecording investments in debt securities. "alculating t$e issue price of bonds. (aluation of investments in debt securities. -ecording amortization of bond discount. Amortization of premium discount on investment in a debt securit#.
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Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition
M$&TIP&E CH*ICE'Con!e"tual 0!ont#1

Ans(er
d c c b a c b d a d d d a d c b b d c b a c b d c b a c a d
7 &
No#
!4. !1. !2. & !3. & !!. 7 !%. !'. !*. !+. !,. %4. %1. %2. %3. %!. %%. %'. 7 %*. %+. %,. ='4. ='1. ='2. ='3. ='!. ='%. =''. ='*. ='+. =',.
)es!ri"tion
Effective-interest rate met$od. Debt securities purc$ased bet5een interest dates. &ale of debt securit# prior to maturit#. 7assive interest investment. Fair value vs. e3uit# met$od. Fair value vs. e3uit# met$od. "onditions for using t$e e3uit# met$od. 95ners$ip interest re3uired for using t$e e3uit# met$od. -ecording of dividends received under t$e e3uit# met$od. -ecognition of earnings of investee using t$e e3uit# met$od. Effect of using t$e fair value met$od in error. Determine value of investment. Fair value option. Accounting for impairments. -eclassification ad)ustment in compre$ensive income. -eclassification of securities. -eclassification of securities. Transfer of a debt securit#. Definition of :gains trading; or :c$err# pic<ing;. Accounting for transfers bet5een "ategories. Accounting for derivatives. "$aracteristics of a derivative instrument. 8dentif#ing companies t$at are arbitrageurs. 8dentif#ing e3uit# securities. Accounting for fair value $edges. 0ains losses on cas$ flo5 $edges. 8dentif#ing an embedded derivative. -e3uirements for financial instrument disclosures. (ariable-interest entit#. -is<-and-re5ard model and voting-interest approac$.
T$ese 3uestions also appear in t$e 7roblem-&olving &urvival 0uide. T$ese 3uestions also appear in t$e &tud# 0uide. =T$is topic is dealt 5it$ in an Appendix to t$e c$apter.
M$&TIP&E CH*ICE'Co-"utational
Ans(er
c b d b a c a b c a b
No#
*4. *1. *2. *3. *!. *%. *'. **. *+. *,. +4.
)es!ri"tion
-ecording t$e purc$ase of debt securities. "omputing cost of bond investment. "alculation of discount amortization. "alculation of revenue from /T> securities. "omputation of ot$er compre$ensive income. "omputation of gain loss on sale of bonds. Ac3uisition of $eld-to-maturit# securities. "arr#ing value of $eld-to-maturit# securities. "arr#ing value of available-for-sale debt securities. "alculation of income from available-for-sale debt securities. "alculation of income from /T> securities.
8nvestments
17 % 3
M$&TIP&E CH*ICE'Co-"utational 0!ont#1

Ans(er
b d a d b d b c b c a a b a b c c a c b b b c c c b c b d b
No#
+1. +2. +3. +!. +%. +'. +*. ++. +,. ,4. ,1. ,2. ,3. ,!. ,%. ,'. ,*. ,+. ,,. 144. 141. 142. 143. 14!. 14%. 14'. 14*. 14+. 14,. 114.
)es!ri"tion
Determine gain on sale of debt securities. "omputation of revenue from /T> securities. "alculation of premium amortization. "alculation of ot$er compre$ensive income. "alculation of loss on sale of bonds. "alculation of loss on sale of trading securit#. Determination of unrealized loss on trading securit#. Determination of accumulated ot$er compre$ensive income. Entr# to record unrealized gain on AF& securities. Fair value for trading securities. .nrealized gain on available-for-sale securities. "alculation of gain on sale of e3uit# securit#. Determination of unrealized loss on AF& securities. "alculation of unrealized loss included in compre$ensive income. "omputation of purc$ase price of e3uit# met$od investment. "omputation of revenue from investment. "omputation of investment account balance. "alculation of investment revenue. Accounting for stoc< investments fair value met$od. Accounting for stoc< investments e3uit# met$od. Accounting for stoc< investments fair value met$od. E3uit# met$od of accounting. Fair value met$od of accounting for stoc< investment. E3uit# met$od of accounting for stoc< investment. ?alance of investment account using t$e e3uit# met$od. 8nvestment income recognized under t$e e3uit# met$od. ?alance of investment account using t$e e3uit# met$od. ?alance of investment account using t$e e3uit# met$od. 8nvestment income recognized under t$e e3uit# met$od. 9t$er compre$ensive income.
M$&TIP&E CH*ICE'CPA Ada"ted

Ans(er
d d c d c b c a b
No#
111. 112. 113. 11!. 11%. 11'. 11*. 11+. 11,.
)es!ri"tion
"arr#ing value of AF& debt securities. .nrealized loss on trading and AF& securities. .nrealized loss on trading and AF& securities. "lassification of an e3uit# securit#. 8nvestment income recognized under t$e e3uit# met$od. ?alance of investment account using t$e e3uit# met$od. &ale of stoc< investment. "alculate t$e ac3uisition price of a stoc< investment. Transfer of securities from trading to AF&.
17 % 7
E4ERCISES
IteE1*-124 E1*-121 E1*-122 E1*-123 E1*-12! E1*-12% E1*-12' =E1*-12* =E1*-12+
)es!ri"tion
8nvestment in debt securities at a premium. 8nvestment in debt securities at a discount. 8nvestments in e3uit# securities @essa#A. 8nvestment in e3uit# securities. Fair value and e3uit# met$ods @essa#A. Fair value and e3uit# met$ods. "ompre$ensive income calculation. Fair value $edge. "as$ flo5 $edge.
PR*+&EMS
Ite71*-12, 71*-134 71*-131 =71*-132 =71*-133
)es!ri"tion
Trading e3uit# securities. Trading securities. Available-for-sale securities. Derivative financial instrument. Free-standing derivative.
CHAPTER &EARNIN5 *+6ECTIVES

1. 2. 3. !. %. '. *. +. =,. =14. =11. =12. =13. 8dentif# t$e t$ree categories of debt securities and describe t$e accounting and reporting treatment for eac$ categor#. .nderstand t$e procedures for discount and premium amortization on bond investments. 8dentif# t$e categories of e3uit# securities and describe t$e accounting and reporting treatment for eac$ categor#. Explain t$e e3uit# met$od of accounting and compare it to t$e fair value met$od for e3uit# securities. Describe t$e accounting for t$e fair value option. Discuss t$e accounting for impairments of debt and e3uit# investments. Explain 5$# companies report reclassification ad)ustments. Describe t$e accounting for transfer of investment securities bet5een categories. Explain 5$o uses derivatives and 5$#. .nderstand t$e basic guidelines for accounting for derivatives. Describe t$e accounting for derivative financial instruments. Explain $o5 to account for a fair value $edge. Explain $o5 to account for a cas$ flo5 $edge.
8nvestments =1!. =1%.
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8dentif# special reporting issues related to derivative financial instruments t$at cause uni3ue accounting problems. Describe t$e accounting for variable-interest entities.
S$MMAR8 *F &EARNIN5 *+6ECTIVES +8 9$ESTI*NS

Ite Typ Ite Typ Ite Typ Ite Typ Item Typ Ite Typ Ite Typ
1. 2. !. %. '. *. & 2+. & 2,. +. ,. 14. 12. 13. 1!. & !!. 7 !%. 1%. 1*. 1+. 1,. 24. '4. '1. '2. '!.
TF TF TF TF TF TF >" >" TF TF TF TF TF TF >" >" TF TF TF TF TF >"
3. 21. 34. 31. 32. 33. 3!. 3%. 11. !3. +'. !'. !*. !+. !,. %4. 1'. %3. %!. %%. %'.
TF >" >" >" >" >" >" >" TF >" >" >" >" >" >" >" TF >" >" >" >"
22. 23. 3'. 3*. 3+. 3,. !4. !1. +*. ++. +,. ,%. ,'. ,*. ,+. ,,. %1. 122.
&
&earnin. *b:e!tive 1 & >" 2!. >" 2'. 7 & >" 2%. >" 2*. &earnin. *b:e!tive 2 >" !2. >" **. >" *2. >" *+. >" *3. >" *,. >" *!. >" +4. >" *%. >" +1. >" *'. >" +2. &earnin. *b:e!tive 3 >" ,4. >" ,3. >" ,1. >" ,!. >" ,2. >" 112. &earnin. *b:e!tive 7 >" 144. >" 14%. >" 141. >" 14'. >" 142. >" 14*. >" 143. >" 14+. >" 14!. >" 14,. &earnin. *b:e!tive ; >" %2. >" 114. &earnin. *b:e!tive < E 134. 7 &earnin. *b:e!tive 7 &earnin. *b:e!tive = >" %,. >" 122. >" 11,. >" 12,. &earnin. *b:e!tive >? &earnin. *b:e!tive 1@?
>" >" >" >" >" >" >" >" >" >" >" >" >" >" >" >" >"
*4. *1. +3. +!. +%. 111. 124. 121. 113. 11!. 122. 11%. 11'. 11*. 11+. 123.
>" >" >" >" >" >" E E >" >" E >" >" >" >" E 12,. 134. 131. 12!. 12%. 12'. 7 7 7 E E E
%*. %+.
E 7
134.
>" >" >" '3. 12*. >" E 132. &earnin. *b:e!tive 11? 7 133. 7 &earnin. *b:e!tive 12?
17 % <
S$MMAR8 *F &EARNIN5 *+6ECTIVES +8 9$ESTI*NS 0!ont#1

&earnin. *b:e!tive 13? '%. ''. '*. 6oteB >" >" >" '+. >" ',. &earnin. *b:e!tive 1;? >" E C Exercise 7 C 7roblem 12+. E &earnin. *b:e!tive 17?
TF C True-False >" C >ultiple "$oice
TR$E%FA&SE'Con!e"tual
1. 2. 3. !. %. '. *. +. ,. Debt securities include corporate bonds and convertible debtD but not ..&. government securities. Trading securities are securities boug$t and $eld primaril# for sale in t$e near term to generate income on s$ort-term price differences. .nrealized $olding gains and losses are recognized in net income for available-for-sale debt securities. A compan# can classif# a debt securit# as $eld-to-maturit# if it $as t$e positive intent to $old t$e securities to maturit#. "ompanies do not report c$anges in t$e fair value of available-for-sale debt securities as income until t$e securit# is sold. T$e &ecurities Fair (alue Ad)ustment account $as a normal credit balance. "ompanies report trading securities at fair valueD 5it$ unrealized $olding gains and losses reported in net income. E3uit# securit# $oldings bet5een 24 and %4 percent indicates t$at t$e investor $as a controlling interest over t$e investee. T$e .nrealized /olding 0ain 1oss2E3uit# account is reported as a part of ot$er compre$ensive income.
14. &ignificant influence over an investee ma# be indicated b# material intercompan# transactions and interc$ange of managerial personnel. 11. T$e accounting profession $as concluded t$at an investment of more t$an %4 percent of t$e voting stoc< of an investee s$ould lead to a presumption of significant influence over an investee.
8nvestments
17 % 7
12. All dividends received b# an investor from t$e investee decrease t$e investmentEs carr#ing value under t$e e3uit# met$od. 13. .nder t$e fair value met$odD t$e investor reports as revenue its s$are of t$e net income reported b# t$e investee. 1!. A controlling interest occurs 5$en one corporation ac3uires a voting interest of more t$an %4 percent in anot$er corporation. 1%. "ompanies ma# not use t$e fair value option for investments t$at follo5 t$e e3uit# met$od of accounting. 1'. "$anges in t$e fair value of a compan#Fs debt instruments are included as part of earnings in an# given period. 1*. 8f a decline in a securit#Es value is )udged to be temporar#D a compan# needs to 5rite do5n t$e cost basis of t$e individual securit# to a ne5 cost basis. 1+. A reclassification ad)ustment is necessar# 5$en a compan# reports realized gains losses as part of net income but also s$o5s unrealized gains losses as part of ot$er compre$ensive income. 1,. 8f a compan# transfers $eld-to-maturit# securities to available-for-sale securitiesD t$e unrealized gain or loss is recognized in income. 24. T$e transfer of securities from trading to available-for-sale and from available-for-sale to trading $as t$e same impact on stoc<$oldersE e3uit# and net income.
True%False Ans(ers'Con!e"tual
Ite1. 2. 3. !. %. Ans# F T F F T Ite'. *. +. ,. 14. Ans# F T F T T Ite11. 12. 13. 1!. 1%. Ans# F T F T F Ite1'. 1*. 1+. 1,. 24. Ans# T F T F T
M$&TIP&E CH*ICE'Con!e"tual
21. G$ic$ of t$e follo5ing is not a debt securit#H a. "onvertible bonds b. "ommercial paper c. 1oans receivable d. All of t$ese are debt securities. A correct valuation is a. available-for-sale at amortized cost. b. $eld-to-maturit# at amortized cost. c. $eld-to-maturit# at fair value. d. none of t$ese.
22.
17 % = 23.
Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition &ecurities 5$ic$ could be classified as $eld-to-maturit# are a. redeemable preferred stoc<. b. 5arrants. c. municipal bonds. d. treasur# stoc<. .nrealized $olding gains or losses 5$ic$ are recognized in income are from securities classified as a. $eld-to-maturit#. b. available-for-sale. c. trading. d. none of t$ese.
2!.
2%. G$en an investorFs accounting period ends on a date t$at does not coincide 5it$ an interest receipt date for bonds $eld as an investmentD t$e investor must a. ma<e an ad)usting entr# to debit 8nterest -eceivable and to credit 8nterest -evenue for t$e amount of interest accrued since t$e last interest receipt date. b. notif# t$e issuer and re3uest t$at a special pa#ment be made for t$e appropriate portion of t$e interest period. c. ma<e an ad)usting entr# to debit 8nterest -eceivable and to credit 8nterest -evenue for t$e total amount of interest to be received at t$e next interest receipt date. d. do not$ing special and ignore t$e fact t$at t$e accounting period does not coincide 5it$ t$e bondFs interest period. 2'. Debt securities t$at are accounted for at amortized costD not fair valueD are a. $eld-to-maturit# debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities. 2*. Debt securities ac3uired b# a corporation 5$ic$ are accounted for b# recognizing unrealized $olding gains or losses and are included as ot$er compre$ensive income and as a separate component of stoc<$oldersF e3uit# are a. $eld-to-maturit# debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities. 2+. .se of t$e effective-interest met$od in amortizing bond premiums and discounts results in a. a greater amount of interest income over t$e life of t$e bond issue t$an 5ould result from use of t$e straig$t-line met$od. b. a var#ing amount being recorded as interest income from period to period. c. a variable rate of return on t$e boo< value of t$e investment. d. a smaller amount of interest income over t$e life of t$e bond issue t$an 5ould result from use of t$e straig$t-line met$od. 2,. E3uit# securities ac3uired b# a corporation 5$ic$ are accounted for b# recognizing unrealized $olding gains or losses as ot$er compre$ensive income and as a separate component of stoc<$oldersF e3uit# are a. available-for-sale securities 5$ere a compan# $as $oldings of less t$an 24I. b. trading securities 5$ere a compan# $as $oldings of less t$an 24I. c securities 5$ere a compan# $as $oldings of bet5een 24I and %4I. d. securities 5$ere a compan# $as $oldings of more t$an %4I.
&
&
&
&
8nvestments 34. A re3uirement for a securit# to be classified as $eld-to-maturit# is a. abilit# to $old t$e securit# to maturit#. b. positive intent. c. t$e securit# must be a debt securit#. d. All of t$ese are re3uired. /eld-to-maturit# securities are reported at a. ac3uisition cost. b. ac3uisition cost plus amortization of a discount. c. ac3uisition cost plus amortization of a premium. d. fair value.
17 % >
31.
32.
Gatt "o. purc$ased J344D444 of bonds for J31%D444. 8f Gatt intends to $old t$e securities to maturit#D t$e entr# to record t$e investment includes a. a debit to /eld-to->aturit# &ecurities at J344D444. b. a credit to 7remium on 8nvestments of J1%D444. c. a debit to /eld-to->aturit# &ecurities at J31%D444. d. none of t$ese. G$ic$ of t$e follo5ing is not correct in regard to trading securitiesH a. T$e# are $eld 5it$ t$e intention of selling t$em in a s$ort period of time. b. .nrealized $olding gains and losses are reported as part of net income. c. An# discount or premium is not amortized. d. All of t$ese are correct. 8n accounting for investments in debt securities t$at are classified as trading securitiesD a. a discount is reported separatel#. b. a premium is reported separatel#. c. an# discount or premium is not amortized. d. none of t$ese. 8nvestments in debt securities are generall# recorded at a. cost including accrued interest. b. maturit# value. c. cost including bro<erage and ot$er fees. d. maturit# value 5it$ a separate discount or premium account. Kordan "o. purc$ased ten-#earD 14I bonds t$at pa# interest semiannuall#. T$e bonds are sold to #ield +I. 9ne step in calculating t$e issue price of t$e bonds is to multipl# t$e principal b# t$e table value for a. 14 periods and 14I from t$e present value of 1 table. b. 14 periods and +I from t$e present value of 1 table. c. 24 periods and %I from t$e present value of 1 table. d. 24 periods and !I from t$e present value of 1 table. 8nvestments in debt securities s$ould be recorded on t$e date of ac3uisition at a. lo5er of cost or mar<et. b. mar<et value. c. mar<et value plus bro<erage fees and ot$er costs incident to t$e purc$ase. d. face value plus bro<erage fees and ot$er costs incident to t$e purc$ase.
33.
3!.
3%.
3'.
3*.
17 % 1@ Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition 3+. An available-for-sale debt securit# is purc$ased at a discount. T$e entr# to record t$e amortization of t$e discount includes a a. debit to Available-for-&ale &ecurities. b. debit to t$e discount account. c. debit to 8nterest -evenue. d. none of t$ese. APB Opinion No. 21 specifies t$atD regarding t$e amortization of a premium or discount on a debt securit#D t$e a. effective-interest met$od of allocation must be used. b. straig$t-line met$od of allocation must be used. c. effective-interest met$od of allocation s$ould be used but ot$er met$ods can be applied if t$ere is no material difference in t$e results obtained. d. par value met$od must be used and t$erefore no allocation is necessar#. G$ic$ of t$e follo5ing is correct about t$e effective-interest met$od of amortizationH a. T$e effective interest met$od applied to investments in debt securities is different from t$at applied to bonds pa#able. b. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. T$e effective-interest met$od produces a constant rate of return on t$e boo< value of t$e investment from period to period. G$en investments in debt securities are purc$ased bet5een interest pa#ment datesD preferabl# t$e a. securities account s$ould include accrued interest. b. accrued interest is debited to 8nterest Expense. c. accrued interest is debited to 8nterest -evenue. d. accrued interest is debited to 8nterest -eceivable.
3,.
!4.
!1.
!2. G$ic$ of t$e follo5ing is not generall# correct about recording a sale of a debt securit# before maturit# dateH a. Accrued interest 5ill be received b# t$e seller even t$oug$ it is not an interest pa#ment date. b. An entr# must be made to amortize a discount to t$e date of sale. c. T$e entr# to amortize a premium to t$e date of sale includes a credit to t$e 7remium on 8nvestments in Debt &ecurities. d. A gain or loss on t$e sale is not extraordinar#.
&
!3. G$en a compan# $as ac3uired a Lpassive interestL in anot$er corporationD t$e ac3uiring compan# s$ould account for t$e investment a. b# using t$e e3uit# met$od. b. b# using t$e fair value met$od. c. b# using t$e effective interest met$od. d. b# consolidation.
8nvestments
&
17 % 11
!!. &anto "orporation declares and distributes a cas$ dividend t$at is a result of current earnings. /o5 5ill t$e receipt of t$ose dividends affect t$e investment account of t$e investor under eac$ of t$e follo5ing accounting met$odsH a. b. c. d. Fair (alue >et$od 6o Effect 8ncrease 6o Effect Decrease E3uit# >et$od Decrease Decrease 6o Effect 6o Effect
!%. An investor $as a long-term investment in stoc<s. -egular cas$ dividends received b# t$e investor are recorded as Fair (alue >et$od a. 8ncome b. A reduction of t$e investment c. 8ncome d. A reduction of t$e investment E3uit# >et$od 8ncome A reduction of t$e investment A reduction of t$e investment 8ncome
!'.
G$en a compan# $olds bet5een 24I and %4I of t$e outstanding stoc< of an investeeD 5$ic$ of t$e follo5ing statements appliesH a. T$e investor s$ould al5a#s use t$e e3uit# met$od to account for its investment. b. T$e investor s$ould use t$e e3uit# met$od to account for its investment unless circumstances indicate t$at it is unable to exercise Lsignificant influenceL over t$e investee. c. T$e investor must use t$e fair value met$od unless it can clearl# demonstrate t$e abilit# to exercise Lsignificant influenceL over t$e investee. d. T$e investor s$ould al5a#s use t$e fair value met$od to account for its investment. 8f t$e parent compan# o5ns ,4I of t$e subsidiar# compan#Fs outstanding common stoc<D t$e compan# s$ould generall# account for t$e income of t$e subsidiar# under t$e a. cost met$od. b. fair value met$od. c. divesture met$od. d. e3uit# met$od. Moe$n "orporation accounts for its investment in t$e common stoc< of &ells "ompan# under t$e e3uit# met$od. Moe$n "orporation s$ould ordinaril# record a cas$ dividend received from &ells as a. a reduction of t$e carr#ing value of t$e investment. b. additional paid-in capital. c. an addition to t$e carr#ing value of t$e investment. d. dividend income. .nder t$e e3uit# met$od of accounting for investmentsD an investor recognizes its s$are of t$e earnings in t$e period in 5$ic$ t$e a. investor sells t$e investment. b. investee declares a dividend. c. investee pa#s a dividend. d. earnings are reported b# t$e investee in its financial statements.
!*.
!+.
!,.
17 % 12 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition %4. KuddD 8nc.D o5ns 3%I of "osb# "orporation. During t$e calendar #ear 2414D "osb# $ad net earnings of J344D444 and paid dividends of J34D444. Kudd mista<enl# recorded t$ese transactions using t$e fair value met$od rat$er t$an t$e e3uit# met$od of accounting. G$at effect 5ould t$is $ave on t$e investment accountD net incomeD and retained earningsD respectivel#H a. .nderstateD overstateD overstate b. 9verstateD understateD understate c. 9verstateD overstateD overstate d. .nderstateD understateD understate Dublin "o. $olds a 34I sta<e in "lub "o. 5$ic$ 5as purc$ased in 2411 at a cost of J3D444D444. After appl#ing t$e e3uit# met$odD t$e 8nvestment in "lub "o. account $as a balance of J3D4!4D444. At December 31D 2411 t$e fair value of t$e investment is J3D124D444. G$ic$ of t$e follo5ing values is acceptable for Dublin to use in its balance s$eet at December 31D 2411H 8. J3D444D444 88. J3D4!4D444 888. J3D124D444 a. 8D 88D or 888. b. 8 or 88 onl#. c. 88 onl#. d. 88 or 888 onl#. T$e fair value option allo5s a compan# to a. value its o5n liabilities at fair value. b. record income 5$en t$e fair value of its bonds increases. c. report most financial instruments at fair value b# recording gains and losses as a separate component of stoc<$oldersE e3uit#. d. All of t$e above are true of t$e fair value option. 8mpairments are a. based on discounted cas$ flo5s for securities. b. recognized as a realized loss if t$e impairment is )udged to be temporar#. c. based on fair value for available-for-sale investments and on negotiated values for $eld-to-maturit# investments. d. evaluated at eac$ reporting date for ever# investment. A reclassification ad)ustment is reported in t$e a. income statement as an 9t$er -evenue or Expense. b. stoc<$oldersE e3uit# section of t$e balance s$eet. c. statement of compre$ensive income as ot$er compre$ensive income. d. statement of stoc<$oldersE e3uit#. G$en an investment in a $eld-to-maturit# securit# is transferred to an available-for-sale securit#D t$e carr#ing value assigned to t$e available-for-sale securit# s$ould be a. its original cost. b. its fair value at t$e date of t$e transfer. c. t$e lo5er of its original cost or its fair value at t$e date of t$e transfer. d. t$e $ig$er of its original cost or its fair value at t$e date of t$e transfer.
%1.
%2.
%3.
%!.
%%.
8nvestments %'.
17 % 13
G$en an investment in an available-for-sale securit# is transferred to trading because t$e compan# anticipates selling t$e stoc< in t$e near futureD t$e carr#ing value assigned to t$e investment upon entering it in t$e trading portfolio s$ould be a. its original cost. b. its fair value at t$e date of t$e transfer. c. t$e $ig$er of its original cost or its fair value at t$e date of t$e transfer. d. t$e lo5er of its original cost or its fair value at t$e date of t$e transfer. A debt securit# is transferred from one categor# to anot$er. 0enerall# acceptable accounting principles re3uire t$at for t$is particular reclassification @1A t$e securit# be transferred at fair value at t$e date of transferD and @2A t$e unrealized gain or loss at t$e date of transfer currentl# carried as a separate component of stoc<$oldersF e3uit# be amortized over t$e remaining life of t$e securit#. G$at t#pe of transfer is being describedH a. Transfer from trading to available-for-sale b. Transfer from available-for-sale to trading c. Transfer from $eld-to-maturit# to available-for-sale d. Transfer from available-for-sale to $eld-to-maturit# :0ains trading; or :c$err# pic<ing; involves a. moving securities 5$ose value $as decreased since ac3uisition from available-for-sale to $eld-to-maturit# in order to avoid reporting losses. b. reporting investment securities at fair value but liabilities at amortized cost. c. selling securities 5$ose value $as increased since ac3uisition 5$ile $olding t$ose 5$ose value $as decreased since ac3uisition. d. All of t$e above are considered met$ods of :gains trading; or :c$err# pic<ing.; Transfers bet5een categories a. result in companies omitting recognition of fair value in t$e #ear of t$e transfer. b. are accounted for at fair value for all transfers. c. are considered unrealized and unrecognized if transferred out of $eld-to-maturit# into trading. d. 5ill al5a#s result in an impact on net income. "ompanies t$at attempt to exploit inefficiencies in various derivative mar<ets b# attempting to loc< in profits b# simultaneousl# entering into transactions in t5o or more mar<ets are called a. arbitrageurs. b. gamblers. c. $edgers. d. speculators. All of t$e follo5ing statements regarding accounting for derivatives are correct except t$at a. t$e# s$ould be recognized in t$e financial statements as assets and liabilities. b. t$e# s$ould be reported at fair value. c. gains and losses resulting from speculation s$ould be deferred. d. gains and losses resulting from $edge transactions are reported in different 5a#sD depending upon t$e t#pe of $edge.
%*.
%+.
%,.
='4.
='1.
17 % 17 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition ='2. All of t$e follo5ing are c$aracteristics of a derivative financial instrument except t$e instrument a. $as one or more underl#ings and an identified pa#ment provision. b. re3uires a large investment at t$e inception of t$e contract. c. re3uires or permits net settlement. d. All of t$ese are c$aracteristics. G$ic$ of t$e follo5ing are considered e3uit# securitiesH 8. "onvertible debt. 88. -edeemable preferred stoc<. 888. "all or put options. a. 8 and 88 onl#. b. 8 and 888 onl#. c. 88 onl#. d. 888 onl#. T$e accounting for fair value $edges records t$e derivative at its a. amortized cost. b. carr#ing value. c. fair value. d. $istorical cost. 0ains or losses on cas$ flo5 $edges are a. ignored completel#. b. recorded in e3uit#D as part of ot$er compre$ensive income. c. reported directl# in net income. d. reported directl# in retained earnings. An option to convert a convertible bond into s$ares of common stoc< is a@nA a. embedded derivative. b. $ost securit#. c. $#brid securit#. d. fair value $edge. All of t$e follo5ing are re3uirements for disclosures related to financial instruments except a. disclosing t$e fair value and related carr#ing value of t$e instruments. b. distinguis$ing bet5een financial instruments $eld or issued for purposes ot$er t$an trading. c. combining or netting t$e fair value of separate financial instruments. d. displa#ing as a separate classification of ot$er compre$ensive income t$e net gain loss on derivative instruments designated in cas$ flo5 $edges. A variable-interest entit# $as a. insufficient e3uit# investment at ris<. b. stoc<$olders 5$o $ave decision-ma<ing rig$ts. c. stoc<$olders 5$o absorb t$e losses or receive t$e benefits of a normal stoc<$older. d. All of t$e above are c$aracteristics of a variable-interest entit#.
'3.
='!.
='%.
=''.
='*.
'+.
8nvestments ',. .nder ..&. 0AA7D 5$ic$ of t$e follo5ing models ma# be used to determine if an investment is consolidatedH -is<-and-re5ard model (oting-interest approac$ a. Nes 6o b. 6o Nes c. 6o 6o d. Nes Nes
17 % 1;
Multi"le Choi!e Ans(ers'Con!e"tual

IteAns# IteAns# IteAns# IteAns# IteAns# IteAns# IteAns#
21. 22. 23. 2!. 2%. 2'. 2*.
c b c c a a c
2+. 2,. 34. 31. 32. 33. 3!.
b a d b c d c
3%. 3'. 3*. 3+. 3,. !4. !1.
c d c a c d c
!2. !3. !!. !%. !'. !*. !+.
c b a c b d a
!,. %4. %1. %2. %3. %!. %%.
d d d a d c b
%'. %*. %+. %,. ='4. ='1. ='2.
b d c b a c b
='3. ='!. ='%. =''. ='*. ='+. =',.
d c b a c a d
M$&TIP&E CH*ICE'Co-"utational
*4. 9n August 1D 2414D Dambro "o. ac3uired 244D J1D444D ,I bonds at ,* plus accrued interest. T$e bonds 5ere dated >a# 1D 2414D and mature on April 34D 241'D 5it$ interest paid eac$ 9ctober 31 and April 34. T$e bonds 5ill be added to DambroEs available-forsale portfolio. T$e preferred entr# to record t$e purc$ase of t$e bonds on August 1D 2414 is a. Available-for-&ale &ecurities................................................ 1,+D%44 "as$......................................................................... 1,+D%44 b. Available-for-&ale &ecurities................................................ 8nterest -eceivable.............................................................. "as$......................................................................... c. Available-for-&ale &ecurities................................................ 8nterest -evenue................................................................. "as$......................................................................... d. Available-for-&ale &ecurities................................................ 8nterest -evenue................................................................. Discount on Debt &ecurities..................................... "as$ ........................................................................ 1,!D444 !D%44 1,+D%44 1,!D444 !D%44 1,+D%44 244D444 !D%44 'D444 1,+D%44
*1. Mern "ompan# purc$ased bonds 5it$ a face amount of J!44D444 bet5een interest pa#ment dates. Mern purc$ased t$e bonds at 142D paid bro<erage costs of J'D444D and paid accrued interest for t$ree mont$s of J14D444. T$e amount to record as t$e cost of t$is long-term investment in bonds is a. J!2!D444. b. J!1!D444. c. J!4+D444. d. J!44D444.
17 % 1< Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition .se t$e follo5ing information for 3uestions *2 and *3. 7atton "ompan# purc$ased J!44D444 of 14I bonds of &cott "o. on Kanuar# 1D 2411D pa#ing J3*'D144. T$e bonds mature Kanuar# 1D 2421O interest is pa#able eac$ Kul# 1 and Kanuar# 1. T$e discount of J23D,44 provides an effective #ield of 11I. 7atton "ompan# uses t$e effectiveinterest met$od and plans to $old t$ese bonds to maturit#. *2. 9n Kul# 1D 2411D 7atton "ompan# s$ould increase its /eld-to->aturit# Debt &ecurities account for t$e &cott "o. bonds b# a. J2D3,2. b. J1D3*1. c. J1D1,'. d. J'+'. *3. For t$e #ear ended December 31D 2411D 7atton "ompan# s$ould report interest revenue from t$e &cott "o. bonds ofB a. J!2D3,2. b. J!1D!4,. c. J!1D3'+. d. J!4D444. .se t$e follo5ing information for 3uestions *! and *%. 1andis "o. purc$ased J%44D444 of +ID %-#ear bonds from -itterD 8nc. on Kanuar# 1D 2411D 5it$ interest pa#able on Kul# 1 and Kanuar# 1. T$e bonds sold for J%24D*,4 at an effective interest rate of *I. .sing t$e effective-interest met$odD 1andis "o. decreased t$e Available-for-&ale Debt &ecurities account for t$e -itterD 8nc. bonds on Kul# 1D 2411 and December 31D 2411 b# t$e amortized premiums of J1D**4 and J1D+34D respectivel#. *!. At December 31D 2411D t$e fair value of t$e -itterD 8nc. bonds 5as J%34D444. G$at s$ould 1andis "o. report as ot$er compre$ensive income and as a separate component of stoc<$oldersF e3uit#H a. J12D+14. b. J,D214. c. J3D'44. d. 6o entr# s$ould be made. *%. At April 1D 2412D 1andis "o. sold t$e -itter bonds for J%1%D444. After accruing for interestD t$e carr#ing value of t$e -itter bonds on April 1D 2412 5as J%1'D+*%. Assuming 1andis "o. $as a portfolio of Available-for-&ale Debt &ecuritiesD 5$at s$ould 1andis "o. report as a gain or loss on t$e bondsH a. @J1!D'+%A. b. @J14D,3%A. c. @J1D+*%A. d. J 4.
8nvestments *'.
17 % 17
9n August 1D 2414D Fo5ler "ompan# ac3uired J244D444 face value 14I bonds of Masnic "orporation at 14! plus accrued interest. T$e bonds 5ere dated >a# 1D 2414D and mature on April 34D 241%D 5it$ interest pa#able eac$ 9ctober 31 and April 34. T$e bonds 5ill be $eld to maturit#. G$at entr# s$ould Fo5ler ma<e to record t$e purc$ase of t$e bonds on August 1D 2414H a. /eld-to->aturit# &ecurities................................................... 24+D444 8nterest -evenue................................................................. %D444 "as$......................................................................... 213D444 b. /eld-to->aturit# &ecurities................................................... "as$......................................................................... c. /eld-to->aturit# &ecurities................................................... 8nterest -evenue...................................................... "as$......................................................................... d. /eld-to->aturit# &ecurities................................................... 7remium on ?onds.............................................................. "as$......................................................................... 213D444 213D444 213D444 %D444 24+D444 244D444 13D444 213D444
**.
9n 9ctober 1D 2414D -enfro "o. purc$ased to $old to maturit#D 1D444D J1D444D ,I bonds for J,,4D444 5$ic$ includes J1%D444 accrued interest. T$e bondsD 5$ic$ mature on Februar# 1D 241,D pa# interest semiannuall# on Februar# 1 and August 1. -enfro uses t$e straig$t-line met$od of amortization. T$e bonds s$ould be reported in t$e December 31D 2414 balance s$eet at a carr#ing value of a. J,*%D444. b. J,*%D*%4. c. J,,4D444. d. J,,4D2%4. 9n 6ovember 1D 2414D /o5ell "ompan# purc$ased '44 of t$e J1D444 face valueD ,I bonds of -amse#D 8ncorporatedD for J'32D444D 5$ic$ includes accrued interest of J,D444. T$e bondsD 5$ic$ mature on Kanuar# 1D 241%D pa# interest semiannuall# on >arc$ 1 and &eptember 1. Assuming t$at /o5ell uses t$e straig$t-line met$od of amortization and t$at t$e bonds are appropriatel# classified as available-for-saleD t$e net carr#ing value of t$e bonds s$ould be s$o5n on /o5ellFs December 31D 2414D balance s$eet at a. J'44D444. b. J'23D444. c. J'22D4+4. d. J'32D444. 9n 6ovember 1D 2414D /orton "o. purc$ased 1opezD 8nc.D 14-#earD ,ID bonds 5it$ a face value of J2%4D444D for J22%D444. An additional J*D%44 5as paid for t$e accrued interest. 8nterest is pa#able semiannuall# on Kanuar# 1 and Kul# 1. T$e bonds mature on Kul# 1D 241*. /orton uses t$e straig$t-line met$od of amortization. 8gnoring income taxesD t$e amount reported in /ortonFs 2414 income statement as a result of /ortonFs available-forsale investment in 1opez 5as a. J!D3*%. b. J!D1'*. c. J3D*%4. d. J3D333.
*+.
*,.
17 % 1= Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition +4. 9n 9ctober 1D 2414D >en<e "o. purc$ased to $old to maturit#D 244D J1D444D ,I bonds for J24+D444. An additional J'D444 5as paid for accrued interest. 8nterest is paid semiannuall# on December 1 and Kune 1 and t$e bonds mature on December 1D 241!. >en<e uses straig$t-line amortization. 8gnoring income taxesD t$e amount reported in >en<eFs 2414 income statement from t$is investment s$ould be a. J!D%44. b. J!D424. c. J!D,+4. d. J%D!'4. During 244+D /au<e "o. purc$ased 2D444D J1D444D ,I bonds. T$e carr#ing value of t$e bonds at December 31D 2414 5as J1D,'4D444. T$e bonds mature on >arc$ 1D 241%D and pa# interest on >arc$ 1 and &eptember 1. /au<e sells 1D444 bonds on &eptember 1D 2412D for J,++D444D after t$e interest $as been received. /au<e uses straig$t-line amortization. T$e gain on t$e sale is a. J4. b. J!D+44. c. J+D444. d. J11D244.
+1.
.se t$e follo5ing information for +2 and +3. 9n Kanuar# 3D 2414D >oss "o. ac3uires J144D444 of Adam "ompan#Es 14-#earD 14I bonds at a price of J14'D!1+ to #ield ,I. 8nterest is pa#able eac$ December 31. T$e bonds are classified as $eld-to-maturit#. +2. Assuming t$at >oss "o. uses t$e effective-interest met$odD 5$at is t$e amount of interest revenue t$at 5ould be recognized in 2411 related to t$ese bondsH a. J14D444 b. J14D'!2 c. J,D%*+ =d. J,D%!4 Assuming t$at >oss "o. uses t$e straig$t-line met$odD 5$at is t$e amount of premium amortization t$at 5ould be recognized in 2412 related to t$ese bondsH =a. J'!2 b. J!22 c. J!'4 d. J%42
+3.
Puestions +! and +% are based on t$e follo5ing informationB -ic$man "o. purc$ased J344D444 of +ID %-#ear bonds from "arlinD 8nc. on Kanuar# 1D 2414D 5it$ interest pa#able on Kul# 1 and Kanuar# 1. T$e bonds sold for J312D!*! at an effective interest rate of *I. .sing t$e effective interest met$odD -ic$man "o. decreased t$e Available-for-&ale Debt &ecurities account for t$e "arlinD 8nc. bonds on Kul# 1D 2414 and December 31D 2414 b# t$e amortized premiums of J1D4'2 and J1D4,+D respectivel#.
8nvestments +!.
17 % 1>
At December 31D 2414D t$e fair value of t$e "arlinD 8nc. bonds 5as J31+D444. G$at s$ould -ic$man "o. report as ot$er compre$ensive income and as a separate component of stoc<$oldersE e3uit#H a. J4 b. J2D1'4 c. J%D%2' d. J*D'+' At Februar# 1D 2411D -ic$man "o. sold t$e "arlin bonds for J34,D444. After accruing for interestD t$e carr#ing value of t$e "arlin bonds on Februar# 1D 2411 5as J314D12%. Assuming -ic$man "o. $as a portfolio of Available-for-&ale Debt &ecuritiesD 5$at s$ould -ic$man "o. report as a gain @or lossA on t$e bondsH a. J4. b. @J1D12%A. c. @J'D%'1A. d. @J+D+11A. During 2414 1ogic "ompan# purc$ased !D444 s$ares of >idiD 8nc. for J34 per s$are. T$e investment 5as classified as a trading securit#. During t$e #ear 1ogic "ompan# sold 1D444 s$ares of >idiD 8nc. for J3% per s$are. At December 31D 2414 t$e mar<et price of >idiD 8nc.Es stoc< 5as J2+ per s$are. G$at is t$e total amount of gain @lossA t$at 1ogic "ompan# 5ill report in its income statement for t$e #ear ended December 31D 2414 related to its investment in >idiD 8nc. stoc<H a. @J+D444A b. J%D444 c. @J3D444A d. @J1D444A
+%.
+'.
.se t$e follo5ing information for 3uestions +* and ++. 8nstrument "orp. $as t$e follo5ing investments 5$ic$ 5ere $eld t$roug$out 2414Q2411B >ar<et (alue "ost 12 31 14 12 31 11 Trading J344D444 J!44D444 J3+4D444 Available-for-sale 344D444 324D444 3'4D444 +*. G$at amount of gain or loss 5ould 8nstrument "orp. report in its income statement for t$e #ear ended December 31D 2411 related to its investmentsH a. J24D444 gain. b. J24D444 loss. c. J1!4D444 gain. d. J+4D444 gain. G$at amount 5ould be reported as accumulated ot$er compre$ensive income related to investments in 8nstrument "orp.Es balance s$eet at December 31D 2414H a. J!4D444 gain. b. J'4D444 gain. c. J24D444 gain. d. J124D444 gain.
++.
17 % 2@ Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition +,. At December 31D 2411D Atlanta "o. $as a stoc< portfolio valued at J!4D444. 8ts cost 5as J33D444. 8f t$e &ecurities Fair (alue Ad)ustment @Available-for-&aleA $as a debit balance of J2D444D 5$ic$ of t$e follo5ing )ournal entries is re3uired at December 31D 2411H a. &ecurities Fair (alue Ad)ustment @Available-for-&aleA .nrealized /olding 0ain or 1oss-E3uit# b. &ecurities Fair (alue Ad)ustment @Available-for-&aleA .nrealized /olding 0ain or 1oss-E3uit# c. .nrealized /olding 0ain or 1oss-E3uit# &ecurities Fair (alue Ad)ustment @Available-for-&aleA d. .nrealized /olding 0ain or 1oss-E3uit# &ecurities Fair (alue Ad)ustment @Available-for-&aleA ,4. *D444 *D444 %D444 %D444 *D444 *D444 %D444 %D444
Mramer "ompan#Fs trading securities portfolio 5$ic$ is appropriatel# included in current assets is as follo5sB December 31D 2414 Fair .nrealized "ost (alue 0ain @1ossA "atlett "orp. J2%4D444 J244D444 J@%4D444A 1#manD 8nc. 2!%D444 2'%D444 24D444 J!,%D444 J!'%D444 J@34D444A 8gnoring income taxesD 5$at amount s$ould be reported as a c$arge against income in MramerFs 2414 income statement if 2414 is MramerFs first #ear of operationH a. J4. b. J24D444. c. J34D444. d. J%4D444.
,1.
9n its December 31D 2414D balance s$eetD Trump "o. reported its investment in availablefor-sale securitiesD 5$ic$ $ad cost J'44D444D at fair value of J%%4D444. At December 31D 2411D t$e fair value of t$e securities 5as J%+%D444. G$at s$ould Trump report on its 2411 income statement as a result of t$e increase in fair value of t$e investments in 2411H a. J4. b. .nrealized loss of J1%D444. c. -ealized gain of J3%D444. d. .nrealized gain of J3%D444.
,2. During 2414D Goods "ompan# purc$ased 24D444 s$ares of /olmes "orp. common stoc< for J31%D444 as an available-for-sale investment. T$e fair value of t$ese s$ares 5as J344D444 at December 31D 2414. Goods sold all of t$e /olmes stoc< for J1* per s$are on December 3D 2411D incurring J1!D444 in bro<erage commissions. Goods "ompan# s$ould report a realized gain on t$e sale of stoc< in 2411 of a. J11D444. b. J2%D444. c. J2'D444. d. J!4D444.
8nvestments .se t$e follo5ing information for 3uestions ,3 and ,!.
17 % 21
9n its December 31D 2414 balance s$eetD "al$oun "ompan# appropriatel# reported a J14D444 debit balance in its &ecurities Fair (alue Ad)ustment @Available-for-&aleA account. T$ere 5as no c$ange during 2411 in t$e composition of "al$ounEs portfolio of mar<etable e3uit# securities $eld as available-for-sale securities. T$e follo5ing information pertains to t$at portfolioB &ecurit# R N S "ost J12%D444 144D444 1*%D444 J!44D444 Fair value at 12 31 11 J1'4D444 ,%D444 12%D444 J3+4D444
,3. G$at amount of unrealized loss on t$ese securities s$ould be included in "al$ounFs stoc<$oldersF e3uit# section of t$e balance s$eet at December 31D 2411H a. J34D444. b. J24D444. c. J14D444. d. J4. ,!. T$e amount of unrealized loss to appear as a component of compre$ensive income for t$e #ear ending December 31D 2411 is a. J34D444. b. J24D444. c. J14D444. d. J4. ,%. 9n Kanuar# 2D 2414 7od "ompan# purc$ased 2%I of t$e outstanding common stoc< of KobsD 8nc. and subse3uentl# used t$e e3uit# met$od to account for t$e investment. During 2414 KobsD 8nc. reported net income of J!24D444 and distributed dividends of J1+4D444. T$e ending balance in t$e 8nvestment in 7od "ompan# account at December 31D 2414 5as J324D444 after appl#ing t$e e3uit# met$od during 2414. G$at 5as t$e purc$ase price 7od "ompan# paid for its investment in KobsD 8ncH a. J1*4D444 b. J2'4D444 c. J3+4D444 d. J!*4D444
,'. Siegler "orporation purc$ased 2%D444 s$ares of common stoc< of t$e &$erman "orporation for J!4 per s$are on Kanuar# 2D 244+. &$erman "orporation $ad 144D444 s$ares of common stoc< outstanding during 2411D paid cas$ dividends of J'4D444 during 2411D and reported net income of J244D444 for 2411. Siegler "orporation s$ould report revenue from investment for 2411 in t$e amount of a. J1%D444. b. J3%D444. c. J%4D444. d. J%%D444. .se t$e follo5ing information for 3uestions ,* and ,+. /arrison "o. o5ns 24D444 of t$e %4D444 outstanding s$ares of Ta#lorD 8nc. common stoc<. During 2411D Ta#lor earns J+44D444 and pa#s cas$ dividends of J'!4D444.
17 % 22 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition ,*. 8f t$e beginning balance in t$e investment account 5as J%44D444D t$e balance at December 31D 2411 s$ould be a. J+24D444. b. J''4D444. c. J%'!D444. d. J%44D444. ,+. /arrison s$ould report investment revenue for 2411 of a. J324D444. b. J2%'D444. c. J'!D444. d. J4. .se t$e follo5ing information for 3uestions ,, t$roug$ 142. T$e summarized balance s$eets of 0oebel "ompan# and Dobbs "ompan# as of December 31D 2414 are as follo5sB 0oebel "ompan# ?alance &$eet December 31D 2414 Assets J1D244D444 1iabilities "apital stoc< -etained earnings Total e3uities Dobbs "ompan# ?alance &$eet December 31D 2414 Assets 1iabilities "apital stoc< -etained earnings Total e3uities ,,. J,44D444 J22%D444 %%%D444 124D444 J,44D444 J 1%4D444 '44D444 !%4D444 J1D244D444
8f 0oebel "ompan# ac3uired a 24I interest in Dobbs "ompan# on December 31D 2414 for J1,%D444 and t$e fair value met$od of accounting for t$e investment 5ere usedD t$e amount of t$e debit to 8nvestment in Dobbs "ompan# &toc< 5ould $ave been a. J13%D444. b. J111D444. c. J1,%D444. d. J1+4D444. 8f 0oebel "ompan# ac3uired a 34I interest in Dobbs "ompan# on December 31D 2414 for J22%D444 and t$e e3uit# met$od of accounting for t$e investment 5ere usedD t$e amount of t$e debit to 8nvestment in Dobbs "ompan# &toc< 5ould $ave been a. J2+%D444. b. J22%D444. c. J1+4D444. d. J242D%44.
144.
8nvestments 141.
17 % 23
8f 0oebel "ompan# ac3uired a 24I interest in Dobbs "ompan# on December 31D 244, for J13%D444 and during 2411 Dobbs "ompan# $ad net income of J*%D444 and paid a cas$ dividend of J34D444D appl#ing t$e fair value met$od 5ould give a debit balance in t$e 8nvestment in Dobbs "ompan# &toc< account at t$e end of 2411 of a. J111D444. b. J13%D444. c. J1%4D444. d. J1!!D444. 8f 0oebel "ompan# ac3uired a 34I interest in Dobbs "ompan# on December 31D 2414 for J242D%44 and during 2411 Dobbs "ompan# $ad net income of J*%D444 and paid a cas$ dividend of J34D444D appl#ing t$e e3uit# met$od 5ould give a debit balance in t$e 8nvestment in Dobbs "ompan# &toc< account at t$e end of 2411 of a. J242D%44. b. J21'D444. c. J22%D444. d. J21*D%44.
142.
.se t$e follo5ing information for 3uestions 143 and 14!. ?lanco "ompan# purc$ased 244 of t$e 1D444 outstanding s$ares of Darb# "ompan#Fs common stoc< for J344D444 on Kanuar# 2D 2414. During 2414D Darb# "ompan# declared dividends of J%4D444 and reported earnings for t$e #ear of J244D444. 143. 8f ?lanco "ompan# used t$e fair value met$od of accounting for its investment in Darb# "ompan#D its 8nvestment in Darb# "ompan# account on December 31D 2414 s$ould be a. J2,4D444. b. J334D444. c. J344D444. d. J3!4D444.
8f ?lanco "ompan# uses t$e e3uit# met$od of accounting for its investment in Darb# "ompan#D its 8nvestment in Darb# "ompan# account at December 31D 2414 s$ould be a. J2,4D444. b. J344D444. c. J334D444. d. J3!4D444. .se t$e follo5ing information for 3uestions 14% and 14'. ?ro5n "orporation earns J2!4D444 and pa#s cas$ dividends of J+4D444 during 2414. Dexter "orporation o5ns 3D444 of t$e 14D444 outstanding s$ares of ?ro5n. 14%. G$at amount s$ould Dexter s$o5 in t$e investment account at December 31D 2414 if t$e beginning of t$e #ear balance in t$e account 5as J324D444H a. J3,2D444. b. J324D444. c. J3'+D444. d. J!+4D444.
14!.
17 % 27 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition 14'. /o5 muc$ investment income s$ould Dexter report in 2414H a. J+4D444. b. J*2D444. c. J!+D444. d. J2!4D444. >#ers "o. ac3uired a '4I interest in 0annon "orp. on December 31D 2414 for J,!%D444. During 2411D 0annon $ad net income of J'44D444 and paid cas$ dividends of J1%4D444. At December 31D 2411D t$e balance in t$e investment account s$ould be a. J,!%D444. b. J1D34%D444. c. J1D21%D444. d. J1D3,%D444.
14*.
.se t$e follo5ing information for 3uestions 14+ and 14,. Trac# "o. o5ns !D444 of t$e 14D444 outstanding s$ares of 7enn "orp. common stoc<. During 2414D 7enn earns J124D444 and pa#s cas$ dividends of J!4D444. 14+. 8f t$e beginning balance in t$e investment account 5as J2!4D444D t$e balance at December 31D 2414 s$ould be a. J2!4D444. b. J2*2D444. c. J2++D444. d. J324D444. Trac# s$ould report investment revenue for 2414 of a. J1'D444. b. J32D444. c. J!4D444. d. J!+D444. T$e follo5ing information relates to Gindom "ompan# for 2414B -ealized gain on sale of available-for-sale securities .nrealized $olding gains arising during t$e period on available-for-sale securities -eclassification ad)ustment for gains included in net income GindomEs 2414 ot$er compre$ensive income is a. J2%D444. b. J!4D444. c. J%4D444. d. J'4D444.
14,.
114.
J1%D444 3%D444 14D444
8nvestments
17 % 2;
Multi"le Choi!e Ans(ers'Co-"utational

IteAns# IteAns# IteAns# IteAns# IteAns# IteAns# IteAns#
*4. *1. *2. *3. *!. *%.
c b d b a c
*'. **. *+. *,. +4. +1.
a b c a b b
+2. +3. +!. +%. +'. +*.
d a d b d b
++. +,. ,4. ,1. ,2. ,3.
c b c a a b
,!. ,%. ,'. ,*. ,+. ,,.
a b c c a c
144. 141. 142. 143. 14!. 14%.
b b b c c c
14'. 14*. 14+. 14,. 114.
b c b d b
M$&TIP&E CH*ICE'CPA Ada"ted

111. 9n 9ctober 1D 2414D Genn "o. purc$ased '44 of t$e J1D444 face valueD +I bonds of 1o#D 8nc.D for J*42D444D including accrued interest of J12D444. T$e bondsD 5$ic$ mature on Kanuar# 1D 241*D pa# interest semiannuall# on Kanuar# 1 and Kul# 1. Genn used t$e straig$t-line met$od of amortization and appropriatel# recorded t$e bonds as available-forsale. 9n GennFs December 31D 2411 balance s$eetD t$e carr#ing value of t$e bonds is a. J',4D444. b. J'+!D444. c. J'+1D'44. d. J'*2D444. (alet "orp. began operations in 2414. An anal#sis of (aletEs e3uit# securities portfolio ac3uired in 2414 s$o5s t$e follo5ing totals at December 31D 2414 for trading and available-for-sale securitiesB Trading Available-for-&ale &ecurities &ecurities Aggregate cost J,4D444 J114D444 Aggregate fair value '%D444 ,%D444 G$at amount s$ould (alet report in its 2414 income statement for unrealized $olding lossH a. J!4D444. b. J14D444. c. J1%D444. d. J2%D444. 113. At December 31D 2414D Keter "orp. $ad t$e follo5ing e3uit# securities t$at 5ere purc$ased during 2414D its first #ear of operationB Fair .nrealized "ost (alue 0ain @1ossA Trading &ecuritiesB &ecurit# A J ,4D444 J '4D444 J@34D444A ? 1%D444 24D444 %D444 Totals J14%D444 J +4D444 J@2%D444A Available-for-&ale &ecuritiesB &ecurit# N S Totals J *4D444 +%D444 J1%%D444 J +4D444 %%D444 J13%D444 J 14D444 @34D444A J@24D444A
112.
17 % 2< Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition All mar<et declines are considered temporar#. Fair value ad)ustments at December 31D 2414 s$ould be establis$ed 5it$ a corresponding c$arge against 8ncome &toc<$oldersE E3uit# a. J!%D444 J 4 b. J34D444 J34D444 c. J2%D444 J24D444 d. J2%D444 J 4 11!. 9n December 2,D 2411D Kames "o. sold an e3uit# securit# t$at $ad been purc$ased on Kanuar# !D 2414. Kames o5ned no ot$er e3uit# securities. An unrealized $olding loss 5as reported in t$e 2414 income statement. A realized gain 5as reported in t$e 2411 income statement. Gas t$e e3uit# securit# classified as available-for-sale and did its 2414 mar<et price decline exceed its 2411 mar<et price recover#H 2414 >ar<et 7rice Decline Exceeded 2411 Available-for-&ale >ar<et 7rice -ecover# a. Nes Nes b. Nes 6o c. 6o Nes d. 6o 6o
.se t$e follo5ing information for 3uestions 11% t$roug$ 11*. -ic$D 8nc. ac3uired 34I of Doane "orp.Fs voting stoc< on Kanuar# 1D 2414 for J!44D444. During 2414D Doane earned J1'4D444 and paid dividends of J144D444. -ic$Fs 34I interest in Doane gives -ic$ t$e abilit# to exercise significant influence over DoaneFs operating and financial policies. During 2411D Doane earned J244D444 and paid dividends of J'4D444 on April 1 and J'4D444 on 9ctober 1. 9n Kul# 1D 2411D -ic$ sold $alf of its stoc< in Doane for J2'!D444 cas$. 11%. ?efore income taxesD 5$at amount s$ould -ic$ include in its 2414 income statement as a result of t$e investmentH a. J1'4D444. b. J144D444. c. J!+D444. d. J34D444. T$e carr#ing amount of t$is investment in -ic$Fs December 31D 2414 balance s$eet s$ould be a. J!44D444. b. J!1+D444. c. J!!+D444. d. J!'4D444. G$at s$ould be t$e gain on sale of t$is investment in -ic$Fs 2411 income statementH a. J'!D444. b. J%%D444. c. J!,D444. d. J!4D444.
11'.
11*.
8nvestments 11+.
17 % 27
9n Kanuar# 1D 2414D -eston "o. purc$ased 2%I of Ace "orp.Fs common stoc<O no good5ill resulted from t$e purc$ase. -eston appropriatel# carries t$is investment at e3uit# and t$e balance in -estonEs investment account 5as J*24D444 at December 31D 2414. Ace reported net income of J!%4D444 for t$e #ear ended December 31D 2414D and paid common stoc< dividends totaling J1+4D444 during 2414. /o5 muc$ did -eston pa# for its 2%I interest in AceH a. J'%2D%44. b. J*'%D444. c. J*+*D%44. d. J+**D%44. 9n December 31D 2414D 7atel "o. purc$ased e3uit# securities as trading securities. 7ertinent data are as follo5sB Fair (alue &ecurit# "ost At 12 31 11 A J132D444 J11*D444 ? 1'+D444 1+'D444 " 2++D444 2%+D444 9n December 31D 2411D 7atel transferred its investment in securit# " from trading to available-for-sale because 7atel intends to retain securit# " as a long-term investment. G$at total amount of gain or loss on its securities s$ould be included in 7atelFs income statement for t$e #ear ended December 31D 2411H a. J3D444 gain. b. J2*D444 loss. c. J34D444 loss. d. J!%D444 loss.
11,.
Multi"le Choi!e Ans(ers'CPA Ada"ted

IteAns# IteAns# IteAns# IteAns# IteAns#
111. 112.
d d
113. 11!.
c d
11%. 11'.
c b
11*. 11+.
c a
11,.
)ERIVATI*NS ' Co-"utational

No# Ans(er
*4. c
)erivation
Dr. Available-for-&ale &ecuritiesB 244 T J1D444 T .,* C J1,!D444 Dr. 8nterest -evenueB J244D444 T .4!% T 3 ' C J!D%44 "r. "as$B J1,!D444 U J!D%44 C J1,+D%44. @J!44D444 T 1.42A U J'D444 C J!1!D444. @J3*'D144 T .4%%A Q @J!44D444 T .4%A C J'+'. J3*'D144 T .4%% C J24D'+' @J3*'D144 U J'+'A T .4%% - J24D*23O J24D'+' U J24D*23 C J!1D!4,. J%34D444 Q @J%24D*,4 Q J1D**4 Q J1D+34A C J12D+14. J%1'D+*% Q J%1%D444 C J1D+*%.
*1. *2. *3. *!. *%.
b d b a c
17 % 2= Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition
)ERIVATI*NS ' Co-"utational 0!ont#1

No# Ans(er
*'. a
)erivation
Dr. /eld-to->aturit# &ecuritiesB J244D444 T 1.4! C J24+D444 Dr. 8nterest -evenueB J244D444 T .4% T 3 ' C J%D444 "r. "as$B J24+D444 U J%D444 C J213D444. J,*%D444 U @J2%D444 T 3 144A C J,*%D*%4. J'32D444 Q J,D444 C J'23D444 J'23D444 Q @J23D444 T 2 %4A C J'22D4+4. @J2%4D444 T .4!%A U @J2%D444 T 2 +4A Q J*D%44 C J!D3*%. @J244D444 T .4, T 3 12A Q @J+D444 T 3 %4A C J!D424. Discount amortizationB J!4D444 T + %4 C J'D!44 @J1D,'4D444 U J'D!44A V 2 C J,+3D244O J,++D444 Q J,+3D244 C J!D+44 gain. @J14'D!1+ .4,A Q @J144D444 .14A C @J!22A @J14'D!1+ Q J!22A .4, C J,D%!4. @J14'D!1+ Q J144D444A V 14 C J'!2. J31+D444 Q @J312D!*! Q J1D4'2 Q J1D4,+A C J*D'+'. J314D12% Q J34,D444 C J1D12%. W@J3% Q J34A 1D444X Q W@J34 Q J2+A 3D444X C @J1D444A. J!44D444 Q J3+4D444 C J24D444 loss. J324D444 Q J344D444 C J24D444 gain. @J!4D444 Q J33D444A Q J2D444 C J%D444 unrealized gain. J34D444 @unrealized lossA. J4 @available-for-sale securitiesA. W@24D444 T J1*A Q J1!D444X Q J31%D444 C J11D444. @J!44D444 Q J3+4D444A C J24D444. J14D444 U J24D444 C J34D444. R U W@J!24D444 Q J1+4D444A .2%X C J324D444 R U J'4D444 C J324D444 R C J2'4D444. J244D444 T @2%D444 V 144D444A C J%4D444.
**. *+. *,. +4. +1. +2. +3. +!. +%. +'. +*. ++. +,. ,4. ,1. ,2. ,3. ,!. ,%.
b c a b b d a d b d b c b c a a b a b
,'.
8nvestments
17 % 2>
)ERIVATI*NS ' Co-"utational 0!ont#1

No# Ans(er
,*. ,+. ,,. 144. 141. 142. 143. 14!. 14%. 14'. 14*. 14+. 14,. 114. c a c b b b c c c b c b d b
)erivation
J%44D444 U W@J+44D444 Q J'!4D444A T @24D444 V %4D444AX C J%'!D444. J+44D444 T @24D444 V %4D444A C J324D444. J1,%D444D ac3uisition cost. J22%D444D ac3uisition cost. J13%D444D ac3uisition cost. J242D%44 U @J*%D444 T .3A Q @J34D444 T .3A C J21'D444. J344D444D ac3uisition cost. J344D444 U @J244D444 T .2A Q @J%4D444 T .2A C J334D444. J324D444 U @J2!4D444 T .3A Q @J+4D444 T .3A C J3'+D444. J2!4D444 T .3 C J*2D444. J,!%D444 U @J'44D444 T .'A Q @J1%4D444 T .'A C J1D21%D444. J2!4D444 U @J124D444 T .!A Q @J!4D444 T .!A C J2*2D444. J124D444 T .! C J!+D444. J1%D444 U J3%D444 Q J14D444 C J!4D444.
)ERIVATI*NS ' CPA Ada"ted

No# Ans(er
111. d
)erivation
J*42D444 Q J12D444 C J',4D444 1% J',4D444 Q J,4D444 T 2 *%
A C J'*2D444.
112. 113. 11!. 11%. 11'. 11*.
d c d c b c
J,4D444 Q J'%D444 C J2%D444.
"onceptual. J1'4D444 T 34I C J!+D444. J!44D444 U J!+D444 Q @J144D444 T 34IA C J!1+D444. J!1+D444 Q @J'4D444 T 34IA U @J244D444 T %4I T 34IA C J!34D444.
17 % 3@ Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition J2'!D444 Q @J!34D444 V 2A C J!,D444.
)ERIVATI*NS ' CPA Ada"ted 0!ont#1

No# Ans(er
11+. 11,. a b
)erivation
J*24D444 Q @J!%4D444 T 2%IA U @J1+4D444 T 2%IA C J'%2D%44. J1+D444 Q J1%D444 Q J34D444 C J2*D444 loss.
E4ERCISES
EA# 17%12@28nvestment in debt securities at premium. 9n April 1D 2414D Gest "o. purc$ased J1'4D444 of 'I bonds for J1''D344 plus accrued interest as an available-for-sale securit#. 8nterest is paid on Kul# 1 and Kanuar# 1 and t$e bonds mature on Kul# 1D 241%. Instru!tions @aA 7repare t$e )ournal entr# on April 1D 2414. @bA T$e bonds are sold on 6ovember 1D 2411 at 143 plus accrued interest. Amortization 5as recorded 5$en interest 5as received b# t$e straig$t-line met$od @b# mont$s and round to t$e nearest dollarA. 7repare all entries re3uired to properl# record t$e sale.
Solution 17%12@ @aA Available-for-&ale &ecurities.......................................................... 8nterest -evenue @J1'4D444 T .4' T 1 !A....................................... "as$................................................................................. @bA 8nterest -evenue @J'D344 T ! V '3A............................................... Available-for-&ale &ecurities............................................. "as$ @J1'4D444 T .4' T 1 3A.......................................................... 8nterest -evenue.............................................................. "as$.............................................................................................. 0ain on &ale of &ecurities................................................ Available-for-&ale &ecurities ............................................ J1''D344 Q W@J'D344 V '3A T 1,X 1''D344 2D!44 1'+D*44 !44 !44 3D244 3D244 1'!D+44 !44 1'!D!44
EA# 17%12128nvestment in debt securities at a discount. 9n >a# 1D 2414D Mirmer "orp. purc$ased J!%4D444 of 12I bondsD interest pa#able on Kanuar# 1 and Kul# 1D for J!22D+44 plus accrued interest. T$e bonds mature on Kanuar# 1D 241'. Amortization is recorded 5$en interest is received b# t$e straig$t-line met$od @b# mont$s and round to t$e nearest dollarA. @Assume bonds are available for sale.A
8nvestments Instru!tions @aA 7repare t$e entr# for >a# 1D 2414.
17 % 31
@bA T$e bonds are sold on August 1D 2411 for J!2%D444 plus accrued interest. 7repare all entries re3uired to properl# record t$e sale. Solution 17%121 @aA Available-for-&ale &ecurities......................................................... 8nterest -evenue @J!%4D444 T .12 T ! 12A.................................... "as$................................................................................. Available-for-&ale &ecurities @J2*D244 V '+ T 1A.......................... 8nterest -evenue.............................................................. "as$ @J!%4D444 T .12 T 1 12A....................................................... 8nterest -evenue.............................................................. "as$............................................................................................. 1oss on &ale of &ecurities............................................................ Available-for-&ale &ecurities............................................. J!22D+44 U W@J2*D244 V '+A 1%X !22D+44 1+D444 !!4D+44 !44 !44 !D%44 !D%44 !2%D444 3D+44 !2+D+44
@bA
EA# 17%12228nvestments in e3uit# securities. 7resented belo5 are unrelated cases involving investments in e3uit# securities. "ase 8. T$e fair value of t$e trading securities at t$e end of last #ear 5as 34I belo5 original costD and t$is 5as properl# reflected in t$e accounts. At t$e end of t$e current #earD t$e fair value $as increased to 24I above cost. "ase 88. T$e fair value of an available-for-sale securit# $as declined to less t$an fort# percent of t$e original cost. T$e decline in value is considered to be ot$er t$an temporar#. "ase 888. An e3uit# securit#D 5$ose fair value is no5 less t$an costD is classified as trading but is reclassified as available-for-sale. Instru!tions 8ndicate t$e accounting re3uired for eac$ case separatel#.
Solution 17%122 "ase 8. At t$e end of last #earD t$e compan# 5ould $ave recognized an unrealized $olding loss and recorded a &ecurities Fair (alue Ad)ustment @TradingA. At t$e end of t$e current #earD t$e compan# 5ould record an unrealized $olding gain t$at 5ould be reported in t$e ot$er revenue and gains section. T$e ad)ustment account 5ould no5 $ave a debit balance.
17 % 32 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition Solution 17%122 @cont.A "ase 88. G$en t$e decline in value is considered to be ot$er t$an temporar#D t$e loss s$ould be recognized as if it 5ere realized and earnings 5ill be reduced. T$e fair value becomes a ne5 cost basis. "ase 888. T$e securit# is transferred at fair valueD 5$ic$ is t$e ne5 cost basis of t$e securit#. T$e Available-for-&ale &ecurities account is recorded at fair valueD and t$e .nrealized /olding 1oss2 8ncome account is debited for t$e unrealized loss. T$e Trading &ecurities account is credited for cost.
EA# 17%12328nvestment in e3uit# securities. Agee "orp. ac3uired a 2%I interest in Trent "o. on Kanuar# 1D 2414D for J%44D444. At t$at timeD Trent $ad 1D444D444 s$ares of its J1 par common stoc< issued and outstanding. During 2414D Trent paid cas$ dividends of J1'4D444 and t$ereafter declared and issued a %I common stoc< dividend 5$en t$e mar<et value 5as J2 per s$are. TrentFs net income for 2414 5as J3'4D444. G$at is t$e balance in AgeeEs investment account at t$e end of 2414H Solution 17%123 "ost &$are of net income @.2% T J3'4D444A &$are of dividends @.2% T J1'4D444A ?alance in investment account J%44D444 ,4D444 @!4D444A J%%4D444
EA# 17%1272Fair value and e3uit# met$ods. @Essa#A "ompare t$e fair value and e3uit# met$ods of accounting for investments in stoc<s subse3uent to ac3uisition. Solution 17%127 .nder t$e fair value met$odD investments are originall# recorded at cost and are reported at fair value. Dividends are reported as ot$er revenues and gains. .nder t$e e3uit# met$odD investments are originall# recorded at cost. &ubse3uentl#D t$e investment account is ad)usted for t$e investorFs s$are of t$e investeeFs net income or loss and t$is amount is recognized in t$e income of t$e investor. Dividends received from t$e investee are reductions in t$e investment account.
8nvestments EA# 17%12;2Fair value and e3uit# met$ods.
17 % 33
Fill in t$e dollar c$anges caused in t$e 8nvestment account and Dividend -evenue or 8nvestment -evenue account b# eac$ of t$e follo5ing transactionsD assuming "rane "ompan# uses @aA t$e fair value met$od and @bA t$e e3uit# met$od for accounting for its investments in /udson "ompan#. @aA Fair (alue >et$od @bA E3uit# >et$od 8nvestment Dividend 8nvestment 8nvestment Transaction Account -evenue Account -evenue 2222222222222222222222222222222222222222222 1. At t$e beginning of Near 1D "rane boug$t 34I of /udsonFs common stoc< at its boo< value. Total boo< value of all /udsonFs common stoc< 5as J+44D444 on t$is date. 2222222222222222222222222222222222222222222 2. During Near 1D /udson reported J'4D444 of net income and paid J34D444 of dividends. 2222222222222222222222222222222222222222222 3. During Near 2D /udson reported J34D444 of net income and paid J!4D444 of dividends. 2222222222222222222222222222222222222222222 !. During Near 3D /udson reported a net loss of J14D444 and paid J%D444 of dividends. 2222222222222222222222222222222222222222222 %. 8ndicate t$e Near 3 ending balance in t$e 8nvestment accountD and cumulative totals for Nears 1D 2D and 3 for dividend revenue and investment revenue. 2222222222222222222222222222222222222222222 Solution 17%12; Transaction 1. 2. ,D444 3. 12D444 !. 1D%44 %. 2!4D444 22D%44 @aA Fair (alue >et$od @bA E3uit# >et$od 8nvestment Dividend 8nvestment 8nvestment Account -evenue Account -evenue 2!4D444 2!4D444 1+D444 @,D444A ,D444 @12D444A @3D444A @1D%44A 2!1D%44 1+D444 ,D444 @3D444A 2!D444
22222222222222222222222222222222222222222222222 22222222222222222222222222222222222222222222222
22222222222222222222222222222222222222222222222
22222222222222222222222222222222222222222222222
22222222222222222222222222222222222222222222222 22222222222222222222222222222222222222222222222
17 % 37 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition EA# 17%12<2"ompre$ensive income calculation. T$e follo5ing information is available for 8r5in "ompan# for 2414B 6et 8ncome -ealized gain on sale of available-for-sale securities .nrealized $olding gain arising during t$e period on available-for-sale securities -eclassification ad)ustment for gains included in net income Instru!tions @1A Determine ot$er compre$ensive income for 2414. @2A "ompute compre$ensive income for 2414. Solution 17%12< @1A 2414 ot$er compre$ensive income C J2'D444 @J14D444 realized gain U J2!D444 unrealized $olding gain Q J+D444 reclassification ad)ustmentA. @2A 2414 compre$ensive income C J1!'D444 @J124D444 U J2'D444A. ?EA# 17%1272Fair value $edge. 9n Kanuar# 2D 2414D T#lor "o. issued a !-#earD J%44D444 note at 'I fixed interestD interest pa#able semiannuall#. T#lor no5 5ants to c$ange t$e note to a variable rate note. As a resultD on Kanuar# 2D 2414D T#lor "o. enters into an interest rate s5ap 5$ere it agrees to receive 'I fixed and pa# 18?9- of %.'I for t$e first ' mont$s on J%44D444. At eac$ '-mont$ periodD t$e variable interest rate 5ill be reset. T$e variable rate is reset to '.'I on Kune 34D 2414. Instru!tions @aA "ompute t$e net interest expense to be reported for t$is note and related s5ap transaction as of Kune 34D 2414. @bA "ompute t$e net interest expense to be reported for t$is note and related s5ap transaction as of December 31D 2414. ?Solution 17%127 @aA and @bA Fixed-rate debt Fixed rate @'I V 2A &emiannual debt pa#ment &5ap fixed receipt 6et income effect &5ap variable rate %.'I T Y T J%44D444 '.'I T Y T J%44D444 6et interest expense ' 34 14 J%44D444 3I J 1%D444 1%D444 J 4 J 1!D444 4 J 1!D444 12 31 14 J%44D444 3I J 1%D444 1%D444 J 4 J 1'D%44 J 1'D%44 J124D444 14D444 2!D444 +D444
8nvestments ?EA# 17%12=2"as$ flo5 $edge.
17 % 3;
9n Kanuar# 2D 2414D &loan "ompan# issued a %-#earD J+D444D444 note at 18?9- 5it$ interest paid annuall#. T$e variable rate is reset at t$e end of eac$ #ear. T$e 18?9- rate for t$e first #ear is '.+I &loan "ompan# decides it prefers fixed-rate financing and 5ants to loc< in a rate of 'I. As a resultD &loan enters into an interest rate s5ap to pa# *I fixed and receive 18?9- based on J+ million. T$e variable rate is reset to *.!I on Kanuar# 2D 2411. Instru!tions @aA "ompute t$e net interest expense to be reported for t$is note and related s5ap transactions as of December 31D 2414. @bA "ompute t$e net interest expense to be reported for t$is note and related s5ap transactions as of December 31D 2411. ?Solution 17%12= @aA and @bA (ariable-rate debt (ariable rate Debt pa#ment Debt pa#ment &5ap receive variable 6et income effect &5ap pa#able2fixed 6et interest expense 12 31 4* J+D444D444 '.+I J %!!D444 J %!!D444 @%!!D444A J 4 %'4D444 J %'4D444 12 31 4+ J+D444D444 *.!I J %,2D444 J %,2D444 @%,2D444A J 4 %'4D444 J %'4D444
PR*+&EMS
Pr# 17%12>2Trading e3uit# securities. Morman "ompan# $as t$e follo5ing securities in its portfolio of trading e3uit# securities on December 31D 2414B "ost Fair (alue %D444 s$ares of T$omas "orp.D "ommon J1%%D444 J13,D444 14D444 s$ares of 0antD "ommon 1+2D444 1,4D444 J33*D444 J32,D444 All of t$e securities $ad been purc$ased in 2414. 8n 2411D Morman completed t$e follo5ing securities transactionsB >arc$ 1 April 1 &old %D444 s$ares of T$omas "orp.D "ommon Z J31 less fees of J1D%44. ?oug$t '44 s$ares of Gert$ &toresD "ommon Z J!% plus fees of J%%4.
17 % 3< Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition Pr# 17%12> @cont.A T$e Morman "ompan# portfolio of trading e3uit# securities appeared as follo5s on December 31D 2411B "ost Fair (alue 14D444 s$ares of 0antD "ommon J1+2D444 J1,%D%44 '44 s$ares of Gert$ &toresD "ommon 2*D%%4 2%D%44 J24,D%%4 J221D444 Instru!tions 7repare t$e general )ournal entries for Morman "ompan# forB @aA t$e 2414 ad)usting entr#. @bA t$e sale of t$e T$omas "orp. stoc<. @cA t$e purc$ase of t$e Gert$ &toresF stoc<. @dA t$e 2411 ad)usting entr#. Solution 17%12> @aA 12-31-14 .nrealized /olding 0ain or 1oss28ncome................................... &ecurities Fair (alue Ad)ustment @TradingA....................... @J33*D444 Q J32,D444A 3-1-11 "as$ W@%D444 J31A Q J1D%44X..................................................... 1oss on &ale of &ecurities............................................................ Trading &ecurities............................................................. !-1-11 Trading &ecurities......................................................................... "as$ W@'44 J!%A U J%%4X............................................... 12-31-11 &ecurities Fair (alue Ad)ustment @TradingA.................................. .nrealized /olding 0ain or 1oss28ncome....................... +D444 +D444
@bA
1%3D%44 1D%44 1%%D444 2*D%%4 2*D%%4 1,D!%4 1,D!%4
@cA
@dA
Pr# 17%13@2Trading e3uit# securities. 7erez "ompan# began operations in 244,. &ince t$enD it $as reported t$e follo5ing gains and losses for its investments in trading securities on t$e income statementB 0ains @lossesA from sale of trading securities .nrealized $olding losses on valuation of trading securities .nrealized $olding gain on valuation of trading securities 244, J 1%D444 @2%D444A 2 "ost J!%4D444 214D444 11%D444 2414 J@24D444A 2 14D444 2411 J 1!D444 @34D444A 2
At Kanuar# 1D 2412D 7erez o5ned t$e follo5ing trading securitiesB ?MD "ommon @1%D444 s$aresA 1-F 7referred @2D444 s$aresA Dra<e "onvertible bonds @144 bondsA
8nvestments Pr# 17%13@ @cont.A
17 % 37
During 2412D t$e follo5ing events occurredB 1. &old %D444 s$ares of ?MD for J1*4D444. 2. Ac3uired 1D444 s$ares of /orton "ommon for J!4 per s$are. ?ro<erage commissions totaled J1D444. At 12 31 12D t$e fair values for 7erezFs trading securities 5ereB ?MD "ommonD J2+ per s$are 1-F 7referredD J114 per s$are Dra<e ?ondsD J1D424 per bond /orton "ommonD J!2 per s$are Instru!tions @aA 7repare a sc$edule 5$ic$ s$o5s t$e balance in t$e &ecurities Fair (alue Ad)ustment @TradingA at December 31D 2411 @after t$e ad)usting entr# for 2411 is madeA. @bA 7repare a sc$edule 5$ic$ s$o5s t$e aggregate cost and fair values for 7erezFs trading securities portfolio at 12 31 12. @cA 7repare t$e necessar# ad)usting entr# based upon #our anal#sis in @bA above. Solution 17%13@ @aA ?alance 12 31 4, @result of t$at #earFs ad)usting entr#A Deduct unrealized gain for 2414 AddB .nrealized loss for 2411 ?alance at 12 31 11 Aggregate cost and fair value for trading securities at 12 31 12B ?MD "ommon 14D444 s$ares 1-F 7referred 2D444 s$ares /orton "ommonD 1D444 s$ares Dra<e ?ondsD 144 bonds Total @cA "ost J344D444 214D444 !1D444 11%D444 J'''D444 23D444 23D444 Fair (alue J2+4D444 224D444 !2D444 142D444 J'!!D444 J@2%D444A 14D444 @34D444A J@!%D444A
@bA
Ad)usting entr# at 12 31 12B &ecurities Fair (alue Ad)ustment @TradingA.................................. .nrealized /olding 0ain or 1oss28ncome....................... @?alance at 1 1 12 J!%D444 ?alance needed at 12 31 12 22D444 -ecover# J23D444A
17 % 3= Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition Pr# 17%1312Available-for-sale e3uit# securities. During t$e course of #our examination of t$e financial statements of Doppler "orporation for t$e #ear ended December 31D 2414D #ou found a ne5 accountD L8nvestments.L Nour examination revealed t$at during 2414D Doppler began a program of investmentsD and all investment-related transactions 5ere entered in t$is account. Nour anal#sis of t$is account for 2414 follo5sB Doppler "orporation Anal#sis of 8nvestments For t$e Near Ended December 31D 2414 Date22414 @aA /armon "ompan# "ommon &toc< Feb. 1! 7urc$ased !D444 s$ares Z J%% per s$are. J224D444 Kul# 2' -eceived !44 s$ares of /armon "ompan# common stoc< as a stoc< dividend. @>emorandum entr# in general ledger.A &ept. 2+ &old t$e !44 s$ares of /armon "ompan# common stoc< received Kul# 2' Z J*4 per s$are. @bA Debit Apr. 9ct. Taber 8nc.D "ommon &toc< 34 7urc$ased 24D444 s$ares Z J!4 per s$are. 2+ -eceived dividend of J1.24 per s$are. J+44D444 J2!D444 "redit Debit "redit
J2+D444
Additional informationB 1. T$e fair value for eac$ securit# as of t$e 2414 date of eac$ transaction follo5B &ecurit# Feb. 1! Apr. 34 Kul# 2' &ept. 2+ /armon "o. J%% J'2 J*4 Taber 8nc. J!4 Doppler "orp. 2% 2+ 34 33
Dec. 31 J*! 32 3%
2. All of t$e investments of Doppler are nominal in respect to percentage of o5ners$ip @%I or lessA. 3. Eac$ investment is considered b# DopplerEs management to be available-for-sale. Instru!tions @1A 7repare an# necessar# correcting )ournal entries related to investments @aA and @bA. @2A 7repare t$e entr#D if necessar#D to record t$e proper valuation of t$e available-for-sale e3uit# securit# portfolio as of December 31D 2414. Solution 17%131 @1A @aA /armon 2 original purc$ase stoc< dividend total $olding !D444 s$ares !44 s$ares !D!44 s$ares
Total cost of J224D444 V Total s$ares of !D!44 C J%4 cost per s$are
8nvestments Solution 17%131 @cont.A &old 144 s$ares "orrect entr#B "as$ @!44 T J*4A....................................................................... Available-for-&ale &ecurities.......................................... 0ain on &ale of &ecurities.............................................. Entr# madeB "as$.......................................................................................... Available-for-&ale &ecurities.......................................... "orrectionB Available-for-&ale &ecurities...................................................... 0ain on &ale of &ecurities.............................................. @bA Taber2s$ould record cas$ dividend as dividend income. "orrect entr#B "as$.......................................................................................... Dividend -evenue.......................................................... Entr# madeB "as$.......................................................................................... Available-for-&ale &ecurities.......................................... "orrectionB Available-for-&ale &ecurities...................................................... Dividend -evenue.......................................................... @To properl# record dividends under fair value met$odA @2A (aluation at End of NearB /armon Taber Puantit# !D444 s$ares 24D444 s$ares "ost J 244D444 +44D444 J1D444D444 Fair (alue J2,'D444 '!4D444 J,3'D444
17 % 3>
2+D444 24D444 +D444 2+D444 2+D444 +D444 +D444
2!D444 2!D444
2!D444 2!D444
2!D444 2!D444
8ncrease @DecreaseA J ,'D444 @1'4D444A J '!D444
Near-end Ad)ustmentB .nrealized /olding 0ain or 1oss2E3uit#........................................ &ecurities Fair (alue Ad)ustment @Available-for-&aleA.......
'!D444 '!D444
17 % 7@ Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition ?Pr# 17%1322Derivative financial instrument. /ummel "o. purc$ased a put option on 9lne# common s$ares on Kul# *D 2414D for J144. T$e put option is for 244 s$aresD and t$e stri<e price is J34. T$e option expires on Kanuar# 31D 2411. T$e follo5ing data are available 5it$ respect to t$e put optionB Date &eptember 34D 2414 December 31D 2414 Kanuar# 31D 2411 >ar<et 7rice of 9lne# &$ares J32 per s$are J31 per s$are J33 per s$are Time (alue of 7ut 9ption J%3 21 4
Instru!tions 7repare t$e )ournal entries for /ummel "o. for t$e follo5ing datesB @aA @bA @cA @dA Kul# *D 241428nvestment in put option on 9lne# s$ares. &eptember 34D 24142 /ummel prepares financial statements. December 31D 24142 /ummel prepares financial statements. Kanuar# 31D 241127ut option expires.
?Solution 17%132 @aA Kul# *D 2414 7ut 9ption.................................................................................... "as$................................................................................. &eptember 34D 2414 .nrealized /olding 0ain or 1oss28ncome................................... 7ut 9ption @J144 Q J%3A.................................................... December 31D 2414 .nrealized /olding 0ain or 1oss28ncome................................... 7ut 9ption @J%3 Q J21A...................................................... Kanuar# 31D 2411 1oss on &ettlement of 7ut 9ption................................................. 7ut 9ption @J21 Q J4A........................................................ 144 144 !* !* 32 32 21 21
@bA
@cA
@dA
?Pr# 17%1332Free-standing derivative. Gelc$ "o. purc$ased a put option on -eese common s$ares on Kul# *D 2414D for J21%. T$e put option is for 344 s$aresD and t$e stri<e price is J%1. T$e option expires on Kul# 31D 2414. T$e follo5ing data are available 5it$ respect to t$e put optionB Date >arc$ 31D 2414 Kune 34D 2414 Kul# 'D 2414 >ar<et 7rice of -eese &$ares J!+ per s$are J%4 per s$are J!' per s$are Time (alue of 7ut 9ption J124 %! 1'
8nvestments ?Pr# 17%133 @cont.A Instru!tions 7repare t$e )ournal entries for Gelc$ "o. for t$e follo5ing datesB @aA @cA @dA @eA Kanuar# *D 241428nvestment in put option on -eese s$ares. >arc$ 31D 24142 Gelc$ prepares financial statements. Kune 34D 24142 Gelc$ prepares financial statements. Kul# 'D 24142 Gelc$ settles t$e call option on t$e -eese s$ares.
17 % 71
?Solution 17%133 @aA Kanuar# *D 2414 7ut 9ption.................................................................................... "as$................................................................................. >arc$ 31D 2414 7ut 9ption.................................................................................... .nrealized /olding 0ain or 1oss28ncome @J3 T 344A...... .nrealized /olding 0ain or 1oss28ncome................................... 7ut 9ption @J21% Q J124A.................................................. @cA Kune 34D 2414 .nrealized /olding 0ain or 1oss28ncome................................... 7ut 9ption @J2 T 344A....................................................... .nrealized /olding 0ain or 1oss28ncome................................... 7ut 9ption @J124 Q J%!A.................................................... @dA Kul# 'D 2414 .nrealized /olding 0ain or 1oss28ncome................................... 7ut 9ption @J%! Q J1'A...................................................... "as$ @344 T J%A............................................................................ 0ain on &ettlement of 7ut 9ption..................................... 7ut 9ption=....................................................................... =(alue of 7ut 9ption settlementB 7ut 9ption 21% ,44 21% 21% ,44 ,44 ,% ,% '44 '44 '' '' 3+ 3+ 1D%44 1D1+! 31'
@bA
,% '44 '' 3+
31'
17 % 72 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition
IFRS 9$ESTI*NS
TrueBFalse 1. i0AA7 re3uires t$at gains and losses on available-for-sale securities be reported directl# in e3uit#. 2. .nder i0AA7D impairment c$arges related to available-for-sale debt securities ma# be reversedD but impairment c$arges related to available-for-sale e3uit# securities ma# not be reversed. 3. -eclassification in and out of trading securities is permitted under i0AA7D alt$oug$ t$is t#pe of reclassification s$ould be rare. !. i0AA7 re3uires t$at "ompan# A consolidate "ompan# ? 5$en it controls and o5ns at least %4I of "ompan# ?. %. .nder i0AA7D bot$ t$e investor and t$e associate compan# s$ould follo5 t$e same accounting practicesD re3uiring ad)ustments be made to t$e investorEs boo<s in order to prepare financial information. Ans(ers to TrueBFalse 1. True 2. True 3. False !. True %. False Multi"le Choi!e 1. >atc$ t$e approac$ and location 5$ere gains and losses from available-for-sale securities are reportedB 1ocation 5$ere gains Approac$ losses reported[ [[ a. 0AA7 E3uit# b. i0AA7 E3uit# c. 0AA7 8ncome d. i0AA7 "ompre$ensive income
8nvestments .se t$e follo5ing information for 3uestions 2 and 3
17 % 73
-us$ia "ompan# $as an available-for-sale investment in t$e 14ID 14-#ear bonds of 7ear "o. T$e investmentEs carr#ing value is J3D244D444 at December 31D 2414. 9n Kanuar# ,D 2411D -us$ia learns t$at 7ear "o. $as lost its primar# manufacturing facilit# in an uninsured fire. As a resultD -us$ia determines t$at t$e investment is impaired and no5 $as a fair value of J2D344D444. 8n KuneD 2412D 7ear "o. $as succeeded in rebuilding its manufacturing facilit#D and its prospects $ave improved as a result. 2. 8f -us$ia "ompan# determines t$at t$e fair value of t$e investment is no5 J3D,44D444 and is using ..&. 0AA7 for its external financial reportingD 5$ic$ of t$e follo5ing is trueH a. -us$ia is pro$ibited from recording t$e recover# in value of t$e impaired investment. b. -us$ia ma# record a recover# of J,44D444. c. -us$ia ma# record a recover# of J*44D444. d. -us$ia ma# record a recover# of J1D'44D444. 3. 8f -us$ia "ompan# determines t$at t$e fair value of t$e investment is no5 J2D,44D444 and is using i0AA7 for its external financial reportingD 5$ic$ of t$e follo5ing is trueH a. -us$ia is pro$ibited from recording t$e recover# in value of t$e impaired investment. b. -us$ia ma# record a recover# of J'44D444. c. -us$ia ma# record a recover# of J,44D444. d. -us$ia ma# record a recover#D but is limited to +4I of t$e value of t$e recover#. Ans(ers to -ulti"le !hoi!e 1. b 2. a 3. b
Short Ans(erC
1. ?riefl# describe some of t$e similarities and differences bet5een ..&. 0AA7 and 80AA7 5it$ respect to t$e accounting for investments. 1. T$e accounting and reporting under i0AA7 and ..&. 0AA7 are for t$e most part ver# similarD alt$oug$ t$e criteria used to determine t$e accounting is often different. For exampleD among t$e notable similarities areB @1A t$e accounting for tradingD availablefor-saleD and $eld-to-maturit# securities is essentiall# t$e same bet5een i0AA7 and ..&. 0AA7O @2A bot$ i0AA7 and ..&. 0AA7 use t$e same test to determine 5$et$er t$e e3uit# met$od of accounting s$ould be used Q t$at isD significant influence 5it$ a general guide of over 24I o5ners$ip. i0AA7 uses t$e term associate investment rat$er t$an e3uit# investment to describe its investment under t$e e3uit# met$odO @3A reclassifications of securities from one categor# to anot$er generall# follo5 t$e same accounting under t$e t5o 0AA7 s#stems. -eclassification in and out of trading securities is pro$ibited under i0AA7. 8t is not pro$ibited under ..&. 0AA7D but t$is t#pe of reclassification s$ould be rare.
17 % 77 Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition Differences includeB @1A 0ains and losses related to available-for-sale securities are reported in ot$er compre$ensive income under ..&. 0AA7. .nder i0AA7D t$ese gains and losses are reported directl# in e3uit#O @2A under i0AA7D bot$ t$e investor and an associate compan# s$ould follo5 t$e same accounting policies. As a resultD in order to prepare financial informationD ad)ustments are made to t$e associateEs policies to conform to t$e investorEs boo<sO @3A t$e basis for consolidation under i0AA7 is control. .nder ..&. 0AA7D a bipolar approac$ is used 5$ic$ is a ris<-and-re5ard model @often referred to as a variable-entit# approac$A and a voting-interest approac$. /o5everD under bot$ s#stemsD for consolidation to occurD t$e investor compan# must generall# o5n %4I of anot$er compan#O @!A ..&. 0AA7 does not permit t$e reversal of an impairment c$arge related to available-for-sale debt and e3uit# investments. i0AA7 follo5s t$e same approac$ for available-for-sale e3uit# investments but permits reversal for available-for-sale debt securities and $eld-to-maturit# securities. 2. -amirez "ompan# $as an available-for-sale investment in t$e 'ID 24-#ear bonds of &oto "ompan#. T$e investment 5as originall# purc$ased for J1D244D444 in 244,. Earl# in 2414D -amirez recorded an impairment of J244D444 on t$e &oto investmentD due to &otoEs financial distress. 8n 2411D &oto returned to profitabilit# and t$e &oto investment 5as no longer impaired. G$at entr# does -amirez ma<e in 2411 under @aA ..&. 0AA7 and @bA i0AA7H 2. .nder ..&. 0AA7D -amirez ma<es no entr#D because impaired investments ma# not be 5ritten up if t$e# recover in value. .nder i0AA7D -amirez ma<es t$e follo5ing entr#B Available-for-&ale 8mpairment\\\\\\\\\\\\\\ -ecover# of 1oss on 8nvestment\\\\\\\\\.. 244D444 244D444

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CHAPTER 17

Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition

M$&TIP&E CH*ICE'Con!e"tual 0!ont#1

M$&TIP&E CH*ICE'Co-"utational 0!ont#1

M$&TIP&E CH*ICE'CPA Ada"ted

Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition

CHAPTER &EARNIN5 *+6ECTIVES

8nvestments =1!. =1%.

S$MMAR8 *F &EARNIN5 *+6ECTIVES +8 9$ESTI*NS

TF TF TF TF TF TF >" >" TF TF TF TF TF TF >" >" TF TF TF TF TF >"

Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition

S$MMAR8 *F &EARNIN5 *+6ECTIVES +8 9$ESTI*NS 0!ont#1

TF C True-False >" C >ultiple "$oice

Multi"le Choi!e Ans(ers'Con!e"tual

21. 22. 23. 2!. 2%. 2'. 2*.

2+. 2,. 34. 31. 32. 33. 3!.

3%. 3'. 3*. 3+. 3,. !4. !1.

!2. !3. !!. !%. !'. !*. !+.

!,. %4. %1. %2. %3. %!. %%.

%'. %*. %+. %,. ='4. ='1. ='2.

='3. ='!. ='%. =''. ='*. ='+. =',.

8nvestments .se t$e follo5ing information for 3uestions ,3 and ,!.

J1%D444 3%D444 14D444

Multi"le Choi!e Ans(ers'Co-"utational

*4. *1. *2. *3. *!. *%.

*'. **. *+. *,. +4. +1.

+2. +3. +!. +%. +'. +*.

++. +,. ,4. ,1. ,2. ,3.

,!. ,%. ,'. ,*. ,+. ,,.

144. 141. 142. 143. 14!. 14%.

14'. 14*. 14+. 14,. 114.

M$&TIP&E CH*ICE'CPA Ada"ted

Multi"le Choi!e Ans(ers'CPA Ada"ted

)ERIVATI*NS ' Co-"utational

*1. *2. *3. *!. *%.

17 % 2= Test +an, or Inter-ediate A!!ountin./ Thirteenth Edition

)ERIVATI*NS ' Co-"utational 0!ont#1

)ERIVATI*NS ' Co-"utational 0!ont#1

)ERIVATI*NS ' CPA Ada"ted

112. 113. 11!. 11%. 11'. 11*.

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