Financial Accounting-3e CHAPTER 12- Wygandt Kimmel Kieso

CHAPTER 12

Investments

ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives Questions

Brief

Exercises Do It! Exercises

A

Problems

B

Problems

1. Discuss why corporations

invest in debt and share

securities.

1 1

2. Explain the accounting

for debt investments.

2, 3, 4 1 1 2, 3 1A, 2A 1B, 2B

3. Explain the accounting

for share investments.

5, 6, 7, 8,

9, 10

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

5A

2B, 3B, 4B,

5B

4. Describe the use of

consolidated financial

statements.

11 9

5. Indicate how debt and

share investments are

reported in financial

statements.

12, 13, 14,

15, 16, 17

4, 5, 6,

7, 8

3 8, 10,

11, 12

1A, 2A, 3A,

5A, 6A

1B, 2B, 3B,

5B, 6B

6. Distinguish between

short-term and long-term

investments.

18, 19 5, 7, 8 4 10, 11, 12 1A, 2A, 3A,

5A, 6A

1B, 2B, 3B,

5B, 6B

*7. Describe the form and

content of consolidated

financial statements as

well as how to prepare

them.

20, 21 9, 10 13, 14 7A 7B

Note: All asterisked Question, Exercises, and Problems relate to material contained in the appendix to the

chapter.

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Number Description

Difficulty

Level

Time

Allotted (min.)

1A Journalize debt investment transactions and show

financial statement presentation.

Moderate 30–40

2A Journalize investment transactions, prepare adjusting

entry, and show statement presentation.

Moderate 30–40

3A Journalize transactions and adjusting entry for share

investments.

Moderate 30–40

4A Prepare entries under the cost and equity methods,

and tabulate differences.

Simple 20–30

5A Journalize share investment transactions and show

statement presentation.

Moderate 40–50

6A Prepare a statement of financial position. Moderate 30–40

*7A Prepare consolidated worksheet and statement of

financial position when cost exceeds book value.

Simple 30–40

1B Journalize debt investment transactions and show

financial statement presentation.

Moderate 30–40

2B Journalize investment transactions, prepare adjusting

entry, and show statement presentation.

Moderate 30–40

3B Journalize transactions and adjusting entry for share

investments.

Moderate 30–40

4B Prepare entries under the cost and equity methods,

and tabulate differences.

Simple 20–30

5B Journalize share investment transactions and show

statement presentation.

Moderate 40–50

6B Prepare a statement of financial position. Moderate 30–40

*7B Prepare consolidated worksheet and statement of

financial position when cost exceeds book value.

Simple 30–40

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 3e

CHAPTER 12

INVESTMENTS

Number LO BT Difficulty Time (min.)

BE1 2 AP Simple 2–4

BE2 3 AP Simple 3–5

BE3 3 AP Simple 3–5

BE4 5 AP Simple 2–3

BE5 5, 6 AN Simple 2–4

BE6 5 AN Simple 2–3

BE7 5, 6 AP Simple 2–4

BE8 5, 6 AP Simple 3–5

*BE9 7 AP Simple 3–5

*BE10 7 AP Simple 3–5

DI1 2 AP Moderate 6–8

DI2 3 AP Simple 6–8

DI3 5 AN Simple 4–6

DI4 6 C Simple 4–6

EX1 1 C Simple 8–10

EX2 2 AP Moderate 8–10

EX3 2 AP Moderate 8–10

EX4 3 AP Simple 8–10

EX5 3 AP Simple 6–8

EX6 3 AP Simple 8–10

EX7 3 AP Simple 6–8

EX8 3, 5 AP Simple 8–10

EX9 4 C Simple 6–8

EX10 5, 6 AN Simple 4–6

EX11 5, 6 AN Simple 8–10

EX12 5, 6 AN Simple 6–8

*EX13 7 AP Simple 3–5

*EX14 7 AP Simple 4–6

P1A 2, 5, 6 AN Moderate 30–40

P2A 2, 3, 5, 6 AN Moderate 30–40

P3A 3, 5, 6 AN Moderate 30–40

INVESTMENTS (Continued)

Number LO BT Difficulty Time (min.)

P4A 3 AN Simple 20–30

P5A 3, 5, 6 AN Moderate 40–50

P6A 5, 6 AP Moderate 30–40

*P7A 7 AP Moderate 20–30

P1B 2, 5, 6 AN Moderate 30–40

P2B 2, 3, 5, 6 AN Moderate 30–40

P3B 3, 5, 6 AN Moderate 30–40

P4B 3 AN Simple 20–30

P5B 3, 5, 6 AN Moderate 40–50

P6B 5, 6 AP Moderate 30–40

*P7B 7 AP Moderate 20–30

BYP1 4 C Simple 10–15

BYP2 4 AN Simple 10–15

BYP3 — C Simple 10–15

BYP4 3 C Moderate 15–20

BYP5 5 C Simple 5–10

BYP6 5 E Simple 10–15

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and Problems

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Discuss why corporations invest

in debt and share securities.

Q12-1 E12-1

2. Explain the accounting for debt

investments.

Q12-2 Q12-3

Q12-4

BE12-1

DI12-1

E12-2

E12-3

P12-1A

P12-2A

P12-1B

P12-2B

3. Explain the accounting for share

investments.

Q12-7 Q12-5

Q12-8

Q12-9

Q12-10

Q12-6

BE12-2

BE12-3

DI12-2

E12-4

E12-5

E12-6

E12-7

E12-8

P12-2A

P12-3A

P12-4A

P12-5A

P12-2B

P12-3B

P12-4B

P12-5B

4. Describe the use of consolidated

financial statements.

Q12-11 E12-9

5. Indicate how debt and share

investments are reported in

financial statements.

Q12-12

Q12-17

Q12-13 Q12-14

Q12-16

BE12-4

BE12-7

BE12-8

E12-8

P12-6A

P12-6B

Q12-15

BE12-5

BE12-6

DI12-3

E12-10

E12-11

E12-12

P12-1A

P12-2A

P12-3A

P12-5A

P12-1B

P12-2B

P12-3B

P12-5B

6. Distinguish between short-term

and long-term investments.

Q12-18

Q12-19

DI12-4

BE12-7

BE12-8

P12-6A

P12-6B

BE12-5

E12-10

E12-11

E12-12

P12-1A

P12-2A

P12-3A

P12-5A

P12-1B

P12-2B

P12-3B

P12-5B

*7. Describe the form and content of

consolidated financial statements

as well as how to prepare them.

Q12-20

Q12-21

BE12-9

BE12-10

E12-13

E12-14

P12-7A

P12-7B

Broadening Your Perspective Financial Reporting

Real-World Focus

Decision-Making

Across the

Organization

Communication

Comparative Analysis Ethics Case

ANSWERS TO QUESTIONS

1. The reasons corporations invest in securities are: (1) excess cash not needed for operations that

can be invested, (2) for additional earnings, and (3) strategic reasons.

2. (a) The cost of an investment in bonds consists of all expenditures necessary to acquire the bonds,

such as the market price of the bonds plus any brokerage fees.

(b) Interest is recorded as it is earned; that is, over the life of the investment in bonds.

3. (a) Losses and gains on the sale of debt investments are computed by comparing the cost of

the investment to the net proceeds from the sale.

(b) Gains and losses are reported in the income statement under other income and expense.

4. Kolkata Ltd. is incorrect. The gain is the difference between the net proceeds, exclusive of interest, and

the cost of the bonds. The correct gain is Rs4,500, or [(Rs45,000 – Rs500) – Rs40,000].

5. The cost of an investment in shares includes all expenditures necessary to acquire the

investment. These expenditures include the actual purchase price plus any commissions or

brokerage fees.

6. The entry is:

Share Investments………………………………………………………………………….. 63,200

Cash………………………………………………………………….….…….…….….. 63,200

7. (a) Whenever the investor’s influence on the operating and financial affairs of the associate is

significant, the equity method should be used. The major factor in determining significant influence

is the percentage of ownership interest held by the investor in the investee. The general

guideline for use of the equity method is 20%–50% ownership interest. Companies are required to

use judgment, however, rather than blindly follow the 20%–50% guideline.

(b) Revenue is recognized by the investor as it is earned by the associate.

8. Since Rijo SA uses the equity method, the income reported by Pippen Packing (€80,000) should be

multiplied by Rijo’s ownership interest (30%) and the result (€24,000) should be debited to Share

Investments and credited to Revenue from Share Investments. Also, of the total dividend

declared and paid by Pippen (€10,000) Rijo will receive 30% or €3,000. This amount should be

debited to Cash and credited to Share Investments.

9. Significant influence over an associate may result from representation on the board of directors,

participation in policy-making processes, material intercompany transactions. One must also consider

whether the shares held by other shareholders is concentrated or dispersed. An investment

(direct or indirect) of 20%–50% of the voting shares of an associate constitutes significant influence

unless there exists evidence to the contrary.

Questions Chapter 12 (Continued)

10. Under the cost method, an investment is originally recorded and reported at cost. Dividends are

recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized gain or

loss is recognized and included in income (trading security) or as a separate component of

equity (non-trading security). Under the equity method, the investment is originally recorded and

reported at cost; subsequently, the investment account is adjusted during each period for

the investor’s share of the earnings or losses of the associate. The investor’s share of the

associate’s earnings is recognized in the earnings of the investor. Dividends received from

the associate are reductions in the carrying amount of the investment.

11. Consolidated financial statements present the details of the assets and liabilities controlled by the

parent company and the total revenues and expenses of the affiliated companies.

Consolidated financial statements are especially useful to the shareholders, board of directors, and

management of the parent company.

12. Companies classify debt investments into two categories

1. Trading securities are bought and held primarily for sale in the near term to generate income

on short-term price differences.

2. Held-for-collection securities are debt securities that the investor has the intent and ability to

hold to maturity.

Share investments are classified either as trading or non-trading securities. Share investments

have no maturity date and therefore are never classified as held-for-collection securities.

Share investments can also be equity method investments if ownership is between 20% and 50%,

or consolidated investments if ownership is 50% or more.

13. Tina should report as follows:

(1) Under current assets in the statement of financial position:

Short-term investment, at fair value…..……..……..……...…..…..…....…..…... €70,000

(2) Under other income and expense in the income statement:

Unrealized loss—income…….……..……..……..……..…..…..…..…..…....…..… € 4,000

14. Tina should report as follows:

(1) Under investments in the statement of financial position:

Investments in shares of less than 20% owned companies, at fair value. . €70,000

(2) Under equity in the statement of financial position:

Accumulated other comprehensive loss……………………………………….…… € 4,000

15. The entry is:

Fair Value Adjustment—Non-Trading………..……..……..……..…....…..…....… 10,000

Unrealized Gain or Loss—Equity…………..……..….…....…..…..…..….... 10,000

Questions Chapter 12 (Continued)

16. The entry is:

Fair Value Adjustment—Trading…………………………………………………..…... 10,000

Unrealized Gain—Income…………..……..……..……..….…....…..…..….... 10,000

17. Unrealized Loss—Equity is closed out to the account Accumulated Other Comprehensive Income.

This account is report as an addition to (or in the case of on accumulated loss, a deduction from)

equity. The unrealized loss is not included in the computation of net income.

18. Reporting Unrealized Gains (Losses)—Equity in the equity section by closing it out to Accumulated

Other Comprehensive Income serves two important purposes: (1) it reduces the volatility of net

income due to fluctuations in fair value, and (2) it still informs the financial statement user of the

gain or loss that would occur if the securities were sold at fair value.

19. No. The investment in Key Ltd. shares is a long-term investment because there is no intent to

convert the shares into cash within a year or the operating cycle, whichever is longer.

*20. (a) The parent company’s investment in the subsidiary’s ordinary shares and the subsidiary’s

equity account balances are eliminated.

(b) The investment account represents an interest in the assets of the subsidiary. The statement

of financial position of the subsidiary lists all its assets and liabilities (the net assets).

Therefore, there would be a double counting of net assets. Similarly, there would be a

double counting in equity because all the ordinary shares of the subsidiary are owned by the

shareholders of the parent.

*21. The remaining excess of HK$8,000,000 [HK$318,000,000 – (HK$290,000,000 +

HK$20,000,000)] should be allocated to goodwill and presented in the consolidated statement of

financial position as an intangible asset—Goodwill.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 12-1

Jan. 1 Debt Investments……………………………………….. 50,000

Cash……………………………………..…….……... 50,000

July 1 Cash……………………………………………………….…. 1,600

Interest Revenue………………………..……….. 1,600

BRIEF EXERCISE 12-2

Aug. 1 Share Investments…………………………………..…. 35,700

Cash………………………………….…….…….…... 35,700

Dec. 1 Cash………………………………………………………….. 40,000

Share Investments……………….……………… 35,700

Gain on Sale of Share Investments.……... 4,300

BRIEF EXERCISE 12-3

Dec. 31 Share Investments (25% X €190,000)…….…….. 47,500

Revenue from Share Investments............ 47,500

31 Cash (25% X €40,000)……………………….………… 10,000

Share Investments……………….……………… 10,000

BRIEF EXERCISE 12-4

Dec. 31 Unrealized Loss—Income…………..………………. 3,000

Fair Value Adjustment—Trading

(₤62,000 – ₤59,000) ………………….……….. 3,000

BRIEF EXERCISE 12-5

Statement of Financial Position

Current assets

Short-term investments, at fair value…………..……………. ₤59,000

Income Statement

Other income and expense

Unrealized loss—income………..…….…………………….…… 3,000

BRIEF EXERCISE 12-6

Dec. 31 Unrealized Gain or Loss—Equity.…………............. 6,000

Fair Value Adjustment— Non-Trading........... 6,000

BRIEF EXERCISE 12-7

Statement of Financial Position

Investments

Investments in shares of less than 20% owned

companies, at fair value ………………………………………….….. R$66,000

Equity

Accumulated other comprehensive loss…..……………………. R$ 6,000

BRIEF EXERCISE 12-8

Investments

Investments in shares of less than 20% owned

companies, at fair value ………………………………………….….. ₤115,000

Investment in shares of 20–50% owned company,

at equity …………………………………………………………………..… 270,000

Total investments….…………………….………..….……………. ₤385,000

*BRIEF EXERCISE 12-9

Eliminations

Paula

Company

Shannon

Company Dr. Cr.

Consolidated

Data

Investment in

Shannon

Ordinary Shares 190,000 190,000 0

Share Capital—Ord. 120,000 120,000 0

Retained Earnings 70,000 70,000 0

*BRIEF EXERCISE 12-10

Eliminations

Paula

Company

Shannon

Company Dr. Cr.

Consolidated

Data

Investment in

Shannon

Ordinary Shares 200,000 200,000 0

Excess of Cost

Over Book Value of

Subsidiary 10,000 10,000

Share Capital—Ord. 120,000 120,000 0

Retained Earnings 70,000 70,000 0

SOLUTIONS FOR DO IT! REVIEW EXERCISES

DO IT! 12-1

2017

(a) Jan. 1 Debt Investments…….…………………….…… 50,000

Cash………………..………..…….……………. 50,000

Dec. 31 Interest Receivable (£50,000 × 8%)…….... 4,000

Interest Revenue…………….……….…….. 4,000

2018

Jan. 1 Cash..…..….….….…………………………………. 4,000