Ch17 - Chapter 17 solution for Intermediate Accounting by Donald E. Kieso, Jerry J. PDF

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CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE ( TOPIC) Topics Questions 1. Debt securities. Brief Exercises Exercises 1, 2, 3, 13 Problems 1 6 (a) 4, 5, 7, 8, 10, 13, 21 1, 3 (b) Trading. 4, 6, 7, 8, 10, 21 4 (c) 4, 7, 8, 9, 10, 11, 21 2, 10 4 1, 2, 3, 4, 7 2. Bond amortization. 8, 9 1, 2, ...

Description

CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics

Questions

1. Debt securities.

Brief Exercises Exercises

1, 2, 3, 13

1

(a) Held-to-maturity.

4, 5, 7, 8, 10, 13, 21

1, 3

(b) Trading.

4, 6, 7, 8, 10, 21

4

(c)

4, 7, 8, 9, 10, 11, 21

2, 10

4

2. Bond amortization.

8, 9

1, 2, 3

3, 4, 5

3. Equity securities.

1, 12, 16

Available-for-sale.

Concepts for Analysis

Problems

2, 3, 5

6 1, 7 1 1, 2, 3, 4, 7

1

1, 2, 3

1

6

6, 7, 8, 9, 11, 12, 16, 19, 20

3, 5, 6 , 8, 9, 1, 2, 3 10, 11

6, 7, 8, 10, 15, 6, 7 16, 17, 18, 19, 20

6, 12, 13, 14, 15, 16, 17, 19, 20

6, 8

4. Comprehensive income.

22

10

9, 11

5. Disclosures of investments.

18

10

5, 8, 9, 10, 11

6. Fair value option.

25, 26, 27

11,12

19, 20, 21

7. Impairments.

24

10,13

18, 22

8. Transfers between categories.

23

(a) less than 20%

7, 10, 11, 15, 21

(b) 20 – 50% (Equity method).

*9. Derivatives.

5, 6, 8

9

28, 29, 30, 31, 32, 33, 34, 35

1, 3, 4, 5

3 1, 3, 6

23, 24, 25, 26, 27, 28

12, 13, 14, 15, 16, 17

*This material is dealt with in an Appendix to the chapter.

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

17-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives

Brief Exercises

Questions 1. Understand the accounting for investments in debt securities.

Exercises

Problems

Concepts for Analysis

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11

1, 2, 3, 4

1, 2, 3, 4, 5, 9, 21

1, 2, 3, 4, 7

1

2.

Understand the accounting for investments in equity securities.

12, 13, 14, 15

5, 6, 8, 9,

1, 6, 7, 8, 11, 12, 14, 15, 16, 19, 20, 21

3, 5, 6, 8, 9, 10, 11

1, 2, 3, 5

3.

Explain the equity and consolidation methods of accounting.

16, 17, 18, 19, 20, 25

7

12, 13, 16, 17

8

4

4.

Evaluate other major issues related to investments in debt and equity securities.

21, 22, 23, 24, 26, 27

9, 10, 11, 12, 13

10, 18, 19, 20, 21, 22

9, 11

6

*5.

Describe the uses of and accounting for derivatives.

28, 29

23, 27

12, 13, 14

*6.

Explain to the accounting for hedges.

30, 31, 33, 34

24, 25, 26, 28 15, 16, 17

*7.

Identify special reporting issues for derivatives that cause unique accounting problems.

32, 33, 34, 35

*8.

Describe required fair value disclosures.

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16

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

ASSIGNMENT CHARACTERISTICS TABLE Item E17-1 E17-2 E17-3 E17-4 E17-5 E17-6 E17-7 E17-8 E17-9 E17-10 E17-11 E17-12 E17-13 E17-14 E17-15 E17-16 E17-17 E17-18 E17-19 E17-20 E17-21 E 17-22 *E17-23 *E17-24 *E17-25 *E17-26 *E17-27 *E17-28 P17-1 P17-2 P17-3 P17-4 P17-5 P17-6 P17-7 P17-8

Description

Level of Difficulty

Time (minutes)

Investment classifications. Entries for held-to-maturity securities. Entries for held-to-maturity securities. Entries for available-for-sale securities. Effective-interest versus straight-line bond amortization. Entries for equity securities. Equity securities entries. Equity securities entries and reporting. Available-for-sale debt securities entries and financial statement presentation. Comprehensive income disclosure. Equity securities entries. Journal entries for fair value and equity methods. Equity method. Equity investment. Equity investments Fair value and equity method compared. Equity method. Impairment of debt securities. Fair value measurement. Fair value measurement issues. Fair value option. Impairment Derivative transaction. Fair value hedge. Cash flow hedge. Fair value hedge. Call option. Cash flow hedge.

Moderate Simple Moderate Moderate Moderate Simple Moderate Simple Moderate

5–10 10–15 15–20 10–15 20–30 10–15 10–15 5–10 10–15

Moderate Moderate Moderate Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate

20–25 20–25 15–20 8–10 8–10 15–20 15–20 10–15 15–20 15–20 15–20 15–20 20–25 15–20 15–20 15–20 15–20 20–25 25–30

Debt securities. Available-for-sale debt investments. Debt and equity investments. Debt investments. Equity securities entries and disclosures. Equity securities entries. Available-for-sale and held-to-maturity debt securities entries. Fair value and equity methods.

Moderate Moderate Moderate Moderate Moderate Simple Moderate Moderate

20–30 30–40 25–30 25–35 25–35 25–35 25–35 20–30

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

17-3

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item P17-9 P17-10 P17-11 *P17-12 *P17-13 *P17-14 *P17-15 *P17-16 *P17-17 CA17-1 CA17-2 CA17-3 CA17-4 CA17-5 CA17-6

17-4

Description Gain on sale of investments and comprehensive income. Equity investments. Equity securities—statement presentation. Derivative financial instrument. Derivative financial instrument. Free-standing derivative. Fair value hedge interest rate swap. Cash flow hedge. Fair value hedge.

Level of Difficulty Moderate Complex Moderate Moderate Moderate Moderate Complex Moderate Moderate

Time (minutes) 20–30 30–40 20–30 20–25 20–25 20–25 30–40 25–35 25–35

Issues raised about investment securities. Equity securities. Financial statement effect of securities. Investment accounted for under the equity method. Equity investment. Fair value.

Moderate Moderate Moderate Moderate Simple Moderate

25–30 25–30 20–30 15–25 15–25 25–35

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

ANSWERS TO QUESTIONS 1.

A debt security is an instrument representing a creditor relationship with an entity. Debt securities include U.S. government securities, municipal securities, corporate bonds, convertible debt, and commercial paper. Trade accounts receivable and loans receivable are not debt securities because they do not meet the definition of a security. An equity security is described as a security representing an ownership interest such as common, preferred, or other capital stock. It also includes rights to acquire or dispose of an ownership interest at an agreed-upon or determinable price, such as warrants, rights, and call options or put options. Convertible debt securities and redeemable preferred stocks are not treated as equity securities.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

2.

The variety in bond features along with the variability in interest rates permits investors to shop for exactly the investment that satisfies their risk, yield, and marketability desires, and permits issuers to create a debt instrument best suited to their needs.

LO: 1, Bloom: K, Difficulty: Simple, Time: 5-10, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

3.

Cost of a long-term investment in bonds includes the total consideration to acquire the investment, including brokerage fees and other costs incidental to the purchase.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

4.

The three types of classifications for debt investments are: Held-to-maturity: Debt investments that the company has the positive intent and ability to hold to maturity. Trading:Debt investments bought and held primarily for sale in the near term to generate income on short-term price differences. Available-for-sale: Debt investments not classified as held-to-maturity or trading securities.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

5.

A debt investment should be classified as held-to-maturity only if the company has both: (1) the positive intent and (2) the ability to hold those securities to maturity.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

6.

Debt investments classified as trading are reported at fair value, with unrealized holding gains and losses reported as part of net income. Any discount or premium is amortized.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

7.

Trading and available-for-sale debt securities should be reported at fair value, whereas held-tomaturity debt securities should be reported at amortized cost.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

8. $3,500,000 X 10% = $350,000; $350,000 ÷ 2 = $175,000. Wheeler would make the following entry: ............................................................................................................................. Cash ($4,000,000 X 8% X 1/2)............................................................................................................... 160,000 ............................................................................................................................. Debt Investments .................................................................................................................. 15,000 .................................................................................................... Interest Revenue ($3,500,000 X 10% X 1/2)...................................................................................... 175,000 LO: 1, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

17-5

Questions Chapter 17 (Continued) 9.......................................................................................Fair Value Adjustment 89,000 ............................................................................................................................. Unrealized Holding Gain or Loss—Equity ............................................................................................................................. [$3,604,000 – ($3,500,000 + $15,000)*]...................................................................................... 89,000 ............................................................................................................................. *See number 8. LO: 1, Bloom: K, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: None

10.

Unrealized holding gains and losses for trading debt securities should be included in net income for the current period. Unrealized holding gains and losses for available-for-sale debt securities should be reported as other comprehensive income and as a separate component of stockholders’ equity. Unrealized holding gains and losses are not recognized for held-to-maturity securities.

LO: 1, Bloom: K, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

11.

(a)..........................Unrealized Holding Gain or Loss—Equity 60,000 ............................................................................................... Fair Value Adjustment ....................................................................................60,000

(b)..........................Unrealized Holding Gain or Loss—Equity 70,000 ............................................................................................... Fair Value Adjustment ($60,000 + $10,000)........................................................................................ 70,000 LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

12. Investments in equity securities can be classified as follows: (a) Holdings of less than 20% (fair value method)—investor has passive interest. (b) Holdings between 20% and 50% (equity method)—investor has significant influence. (c) Holdings of more than 50% (consolidated statements)—investor has controlling interest. If an equity investment is not publicly traded and is nonmarketable, a company values the investment and reports it at cost in periods subsequent to acquisition. This approach is often referred to as the cost approach. Companies recognize dividends when received and only recognize gains and losses when selling the securities. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

13. Investments in stock do not have a maturity date and therefore cannot be classified as held-tomaturity securities. LO: 2, Bloom: K, Difficulty: Simple, Time: 1-3, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

14....................................................Selling price of 10,000 shares at $27.50 .........................................................................................................$275,000 ........................................................................Less: Brokerage commissions ......................................................................................................... 1,770 .........................................................................................Proceeds from sale ......................................................................................................... 273,230 .....................................................................................Cost of 10,000 shares ........................................................................................................ (260,000) ............................................................................Gain on sale of investments ......................................................................................................... $ 13,230 ............................................................................................................... Cash 273,230 ........................................................................................................................ Equity Investments ........................................................................................................................ 260,000

17-6

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

........................................................................................................................ Gain on Sale of Investments....................................................................................................

13,230

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving

15. Marketable equity securities are reported at fair value. Any unrealized holding gain or loss is reported in net income. Nonmarketable securities are reported at cost less impairments. A company is encouraged to adjust for observable price changes subsequent to recording the investment at cost if it can determine prices in orderly transactions for identical investments or from similar investments of the same issuer. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

Copyright © 2016 John Wiley & Sons, Kieso, Inc. Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)

17-7

Questions Chapter 17 (Continued) 16. Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. An investment (direct or indirect) of 20% or more of the voting stock of an investee constitutes significant influence unless there exists evidence to the contrary. LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

17. Under the equity method, the investment is originally recorded at cost, but is adjusted for changes in the investee’s net assets. The investment account is increased (decreased) by the investor’s proportionate share of the earnings (losses) of the investee and decreased by all dividends received by the investor from the investee. LO: 3, Bloom: K, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication

18. The 20% rule is that an investment (direct or indirect) of 20 percent or more of the voting stock of an investee leads to the presumption that an investor has the ability to exercise significant influence over an investee and the equity method should be used. However, there are other factors, when considered, may indicate that ownership of 20 percent or more may not enable an investor to exercise significant influence. An investor with ownership just below 20% may be able to exercise significant influence based on representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by an investor in relation to the concentration of other shareholdings. Factors that could lead to a conclusion of no significant ownership, when ownership is above 20 percent include: (1) The investee opposes the investor’s acquisition of its stock; (2) The investor and investee sign an agreement under which the investor surrenders significant shareholder rights; (3) The investor’s ownership share does not result in “significant influence” because majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the investor; (4) The investor tries and fails to obtain repr...