Ch17 Kieso IFRS4 SM - Lecture notes ch17 PDF

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Copyright © 2020 Wiley Kieso, IFRS, 4/e, Solutions Manual (For Instructor Use Only) 17-CHAPTER 17InvestmentsASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)Topics QuestionsBrief Exercises Exercises ProblemsConcepts for Analysis Debt investments. 1, 2, 3, 4, 11, 12 1, 9 1 4, 7(a) Held -for -collection. 6, ...

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CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics

Questions

1. Debt investments.

Brief Exercises Exercises

1, 2, 3, 4, 11, 12

(a) Held-for-collection.

6, 7, 9

(b) Held-for-collection and selling.

6, 9

(c)

5, 8, 9, 10

2. Bond amortization.

1, 9

Problems

Concepts for Analysis

1

4, 7

1, 2, 4, 11 2, 3, 5, 7, 22 1, 2, 7

1, 4

6

1, 4, 7

4

3, 6

4

1, 3, 4, 7

1, 3, 4

7, 8

1, 2, 3, 4

3, 4, 5

1, 2

3. Fair value option.

11, 12, 27

5

7, 8, 19

2, 7

4. Equity investments.

1, 13, 14, 16

Trading.

1

4, 7

(a) Non-trading.

17, 23

8, 9

10, 12, 13

(b) Trading.

15, 17, 23

7

10, 11, 13, 3, 5, 6, 8, 9, 1, 2, 3 14, 15, 17, 10, 11 18, 19

(c)

18, 19, 20, 21, 10 22

15, 16, 19, 20

5. Impairments.

25

11, 12

21, 22, 23

6. Recycling, Reclassifications between categories.

24, 26

13

Equity method; Consolidations.

8

5, 6 1, 3 1, 3, 7

7. Disclosures of investments. * 8. Derivatives.

4, 5, 6, 8, 10 3, 4

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

10

5, 8, 9, 10, 11

24, 25, 26, 27, 28, 29

12, 13, 14, 15, 16, 17

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

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17-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives

Brief Exercises

Exercises

Problems

Concepts for Analysis

1.

Describe the accounting for debt investments.

1, 2, 3, 4, 5, 6

1, 2, 3, 4, 5, 6, 7, 8

1, 2, 3, 4, 7

1, 3, 7

2.

Describe the accounting for equity investments.

7, 8, 9

1, 10, 11, 12, 13, 14, 15, 17 18, 19

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

1, 2, 3, 4, 7

3.

Explain the equity method of accounting.

10

15, 16, 19, 20

8

5, 6

4.

Evaluate other major issues related to debt and equity investments.

11, 12, 13

9, 21, 22, 23

7

7

*5. Describe the uses of and accounting for derivatives.

24

12, 13, 14

*6. Explain the accounting for hedges.

25, 26, 27, 28

15, 16, 17

*7. Identify special reporting issues related to derivative financial instruments that cause unique accounting problems.

29

8.

17-2

Describe required fair value disclosures.

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ASSIGNMENT CHARACTERISTICS TABLE Level of Difficulty

Time (minutes)

Investment classifications. Debt investments. Debt investments. Debt investments. Debt investments. HFCS debt securities entries and financial statement presentation Fair value option. Fair value option. Comprehensive income disclosure Entries for equity investments. Equity investments. Equity investment entries and reporting. Equity investment entries and financial statement presentation. Equity investment entries. Journal entries for fair value and equity methods. Equity method. Equity investments—trading. Equity investments—trading. Fair value and equity method compared. Equity method. Impairment. Impairment. Impairment. Derivative transaction. Fair value hedge. Cash flow hedge. Fair value hedge. Call option. Cash flow hedge.

Simple Moderate Moderate Moderate Moderate Moderate

5–7 6–8 15–20 10–15 8–10 12-15

Moderate Moderate Moderate Moderate Moderate Moderate Moderate

12–15 8–10 10-15 8–10 10–15 5–7 10–15

Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate

20–25 15–20 10–15 8–10 15–20 20–25 8–10 8–12 10–15 15-18 8–10 8–12 8–12 10–15 20–25 25–30

Debt investments. Debt investments, fair value option. Debt and equity investments. Debt investments. Equity investment entries and disclosures. Equity investments. Debt investment entries. Fair value and equity method. Financial statement presentation of equity investments.

Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate

20–30 20–25 20–25 20–30 25–35 15–25 20–30 20–30 20–30

Item

Description

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 E17.22 E17.23 *E17.24 *E17.25 *E17.26 *E17.27 *E17.28 *E17.29 P17.1 P17.2 P17.3 P17.4 P17.5 P17.6 P17.7 P17.8 P17.9

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17-3

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item 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 CA17.7

17-4

Description Equity investments. Investments—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 Moderate Moderate Moderate Moderate Moderate Moderate Moderate

Time (minutes) 30–40 20–30 20–25 10–15 20–25 30–40 25–35 25–35

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

Moderate Moderate Moderate Moderate Moderate Moderate Moderate

15–20 20–25 15–20 20–25 10–15 15–20 20–25

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ANSWERS TO QUESTIONS 1. The two criteria for determining the valuation of financial assets are the (1) company’s business model for managing their financial assets, and (2) contractual cash flow characteristics of the financial asset. LO: 1,2, Bloom: K, Difficulty: Simple, Time: 2-3, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

2. Only debt investments such as loans and bond investments are valued at amortized cost. A company should use amortized cost if it has a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms of the financial asset gives specified dates to cash flows. The rationale for this treatment is that under these conditions, changes in fair value are not relevant for assessing the future cash flows of such investments. LO: 1 Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

3. Amortized cost is the initial recognition amount of the investment minus repayments, plus or minus cumulative amortization and net of any reduction for uncollectibility. Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction. LO: 1, Bloom: K, Difficulty: Simple, Time: 2-3, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

4.

Companies group investments in debt securities into three separate categories for accounting and reporting purposes. •

•

•

Held-for-collection: Investments held (1) with the objective of holding assets in order to collect contractual cash flows, and (2) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Held-for-collection and selling: Investments held (1) with the objective to both collect contractual cash flows and sell financial assets and (2) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Trading: All debt investments not held-for-collection or held-for-collection and selling. These investments are bought and held primarily for sale in the near term to generate income on the short-term price differences.

LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

5. Lady Gaga should classify this investment as a trading investment because companies frequently buy and sell this type of investment to generate profits from short term differences in price. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

6. (a) If Lady Gaga plans to hold the investment to collect interest and receive the principal at maturity, it should account for this investment as a held-for-collection security and report as amortized cost. (b) If Lady Gaga plans to hold the investment to collect interest and receive the principal at maturity and may also sell it, it should account for this investment as a held-for-collection and selling security and report at fair value with unrealized gains and losses recorded in other comprehensive income. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

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17-5

Questions Chapter 17 (Continued) 7.

€3,604,062 × 0.10 × ½ = €180,203; Wheeler would make the following entry: Cash (€4,000,000 × 0.08 × 1/2) Debt Investments Interest Revenue (€3,604,062 × 0.10 × ½)

160,000 20,203 180,203

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

8. Fair Value Adjustment ................................................................................. Unrealized Holding Gain or Loss—Income [€3,700,000 – (€3,604,062 + €20,203)*] .......................................... *See number 7.

75,735 75,735

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

9. (a) Unrealized holding gains and losses for trading investments should be included in net income for the current period. (b) Unrealized holding gains and losses are not recognized for held-forcollection investments. (c) Unrealized gains and losses on HFCS investments are recorded in other comprehensive income. LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

10. (a) Unrealized Holding Gain or Loss—Income.......................................... Fair Value Adjustment..................................................................

60,000

(b) Unrealized Holding Gain or Loss—Income.......................................... Fair Value Adjustment..................................................................

70,000

60,000 70,000

LO: 1, Bloom: AP, Difficulty: Moderate, Time: 4-5, AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None

11. The fair value option allows companies the choice of reporting debt investments at fair value. If this option is chosen, the company records in net income, unrealized gains and losses with corresponding increases/decreases to the debt investment. The unrealized gain (loss) is the difference between the investment’s amortized cost and its fair value. LO: 1, Bloom: K, Difficulty: Simple, Time: 2-3, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

12. No, Franklin cannot use the fair value option for this investment. This option is generally available only at the time a company first purchases the investment. LO: 1, Bloom: C, Difficulty: Simple, Time: 2-3, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

13. 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. Holdings of less than 20% are then classified into trading and non-trading, assuming determinable fair values. LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

14. Investments in shares do not have contractual cash flows (nor a maturity date) and therefore cannot be classified as held-for-collection. LO: 1, Bloom: K, Difficulty: Simple, Time: 2-3, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

17-6

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Questions Chapter 17 (Continued) 15.

Equity Investments (10,000 × $26) ........................................................ Brokerage Expense................................................................................ Cash [(10,000 × $26) + $1,500] .....................................................

260,000 1,500 261,500

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 3-4 AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None

16.

Gross selling price of 10,000 shares at $27.50 ...................................... Less: Brokerage commissions ............................................................... Proceeds from sale ................................................................................ Cost of 10,000 shares ............................................................................ Gain on sale of shares ........................................................................... Cash ....................................................................................................... Equity Investments ......................................................................... Gain on Sale of Equity Investments ...............................................

$275,000 (1,770) 273,230 (260,000) $ 13,230 273,230 260,000 13,230

LO: 2, Bloom: AP, Difficulty: Moderate, Time: 5-7 AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None

17.

Both trading and non-trading equity investments are reported at fair value. However, any unrealized holding gain or loss is reported in net income for trading investments, but as other comprehensive income as a separate component of equity for non-trading investments.

LO: 2, Bloom: C, Difficulty: Simple, Time: 2-3 AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None

18.

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 shares of an investee constitutes significant influence unless there exists evidence to the contrary.

LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5 AACSB: Analytic, AICPA BC: None, AICPA FC: Reporting, AICPA PC: None

19.

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: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

20.

The following information is reported under the equity method: 1.

Investments originally are recorded at cost with an increase for the investor’s share of the investee’s income or loss, and a decrease for dividends received from the investee (reported under investments.)

2.

Investment revenue is recognized equal to the investor’s ownership percentage times the investee’s income or loss reported subsequent to the date of acquisition and is reported under other income and expenses on the income statement.

LO:3, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

21. Dividends subsequent to acquisition should be accounted for as a reduction in the equity investment account and an increase to Cash. LO:3, Bloom: AP, Difficulty: Moderate, Time: 2-3, AACSB: Analytic, Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

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17-7

Questions Chapter 17 (Continued) 22. Ordinarily, Raleigh Corp. should discontinue applying the equity method and not provide for additional losses beyond the carrying value of £170,000. However, if Raleigh Corp.’s loss is not limited to its investment (due to a guarantee of Borg’s obligations or other commitment to provide further financial support or if imminent return to profitable operations by Borg appears to be assured), it is appropriate for Raleigh Corp. to provide for its entire £186,000 share of the £620,000 loss. LO:3, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: Analytic, Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

23. Trading equity investments are reported as a current asset while non-trading investments are reported as a long-term investment. Trading investments are expected to be disposed of at any time and therefore qualify as current assets. This is not the case for non-trading investments which are presented under investments. LO: 2, Bloom: C, Difficulty: Simple, Time: 2-3, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

24. Recycling adjustments are necessary to ensure that double counting does not result when realized gains or losses are reported as part of net income. They are shown as part of other comprehensive income in the current period and as an adjustment to Accumulated Other Comprehensive Income. LO: 4, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BC: None, AICPA FC: Reporting, AICPA PC: Communication

25. A debt investment is impaired when “it is probable that the investor will be unable to collect all amounts due according to the contractual terms.” When an impairment has occurred, the investment is written down to its fair value. A recovery can be recognized if the value increases subsequently up the original amortized cost. The amount of th...