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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.
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-1
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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-2
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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-3
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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-4
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.
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-6
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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-7
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.
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-8
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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-9
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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-10
*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
Copyright © 2016 John Wiley & Sons, Inc. Weygandt Financial Accounting IFRS 3e Solutions Manual (For Instructor Use Only) 12-11
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
