Chapter 12 Investments
Use the following to answer questions 163–165:
In early December of 2016, Blue Corp. purchased $40,000 of Yellow Company common stock, which
constitutes less than 3% of Yellow’s outstanding shares. Blue accounts for the Yellow investment as
available for sale. By December 31, 2016, the value of the Yellow investment had fallen to $30,000,
and Blue recorded an unrealized loss. By December 31, 2017, the value of the Yellow investment had
fallen to $15,000, and Blue determined that it can no longer assert that it has both the intent and ability
to hold the shares long enough for their fair value to recover, so Blue recorded an OTT impairment.
By December 31, 2018, fair value had recovered to $20,000.
163. Prepare appropriate entry(s) at December 31, 2016, and indicate how the scenario will affect
net income, OCI, and comprehensive income.
164. Prepare appropriate entry(s) at December 31, 2017, and indicate how the scenario will affect
net income, OCI, and comprehensive income.
165. Prepare appropriate entry(s) at December 31, 2018, and indicate how the scenario will affect
net income, OCI, and comprehensive income.
166. Stanhope Associates accounts for the following investments under IFRS No. 9:
1. 10 shares of Blackstone equity, held for long-term investment, no election of FVOCI.
2. 10 shares of Erickson equity, held for risk management, election to classify as FVOCI.
3. 10 shares of AT&E equity, held for immediate resale.
4. 10 bonds (consisting of only interest and principal) issued by Filo Inc., held for long-term
collection of cash flows.
5. 10 bonds (consisting of only interest and principal) of SimSung, held for risk management
but also might be sold
6. 10 bonds (consisting of only interest and principal) issued by Attachi, held for immediate
resale.
Required:
For each investment, indicate: (a) the accounting approach that will be used to account for the
investment, and briefly explain why that approach is appropriate, and (b) the effect on
earnings of an increase in the fair value of the investment in the period following acquisition
of the investment, assuming that Stanhope does not sell the investment. You may group the
specific investments if they have the same answers. Identify the investments you are including
in the group.
Answer:
Chapter 12 Investments
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
167. From time to time, debt and equity securities must be reclassified when conditions and
circumstances surrounding the investment change.
Required:
Describe the general accounting procedures for reclassifying securities from one category to
another—held to maturity, available for sale, or trading.
168. Previously, marketable equity securities were reported using a technique referred to as “lower
of cost or market.” The current accounting standard requires fair value reporting for trading
securities and securities available for sale. Some accountants believe that the FASB was
inconsistent when GAAP was issued requiring changes in the value of trading securities to be
reported in the income statement and balance sheet, while changes in the value of securities
available for sale are reported only in the balance sheet.
Required:
Evaluate the rationale for these two diverse reporting requirements for equity securities. What
arguments could be made to support each treatment?
Chapter 12 Investments
169. In its 20X4 annual report to shareholders, Maytag Corporation included the following
disclosures in its income statement and related footnotes:
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
20X4
20X3
20X2
(In thousands)
Loss on securities ………………
(7,230)
(17,600)
—
Special Charges and Loss on Securities
During the fourth quarter of 20X4, the Company recorded special charges and loss on
securities totaling $17.0 million, or $13.5 million after-tax. Special charges of $9.8 million, or
$6.2 million after-tax, were associated with a salaried workforce reduction of approximately
250 employees. Cash expenditures for 20X4 related to this charge were $3.7 million. Loss on
securities of $7.2 million resulted from the write–down of the remaining investment in a
privately held Internet-related company.
During the fourth quarter of 20X3, the Company recorded special charges and loss on
securities totaling $57.5 million, or $36.5 million after-tax. Special charges of $39.9 million,
or $25.3 million after-tax, were associated with terminated product initiatives, asset write–
downs, and executive severance costs related to management changes. Loss on securities of
$17.6 million, or $11.2 million after-tax, resulted from a lower market valuation of securities
of TurboChef Technologies, Inc., and investments in privately held Internet-related
Companies ….. The loss on securities charge of $17.6 million was noncash.
Required:
Discuss the possible rationale behind the losses on securities reported by Maytag in 20X3 and
20X4.
170. Companies need to consider GAAP regarding fair value measurements when determining the
fair value of an investment that distinguishes between various levels of inputs to fair value
determination.
Required:
Describe the various levels of inputs, explaining key aspects that distinguish them, and
indicate which level is most preferred and which is least preferred.
171. Jaycom Enterprises has invested its excess cash in the stock of several different companies
and desires to maximize income over the short run. Jaycom is unsure about the appropriate
investment policy and thus what reporting practice to follow.
Required:
What classification procedure and subsequent classification could Jaycom follow in order to
meet its objective? How will Jaycom justify its choice to the Jaycom auditors?
172. Newjohn Company owns stock in several affiliated companies. Investments in some of these
affiliates are accounted for as securities available for sale while some are accounted for using
the equity method.
Required:
(1.) What factors determine which method should be used?
(2.) What events are recorded when the equity method is used?
(3.) What events are recorded when the securities are accounted for as available for sale?
173. Discuss the following questions.
Chapter 12 Investments
Required:
What securities must be classified within one of the three categories of held to maturity,
available for sale, and trading? (Do not describe how to determine how securities are classified
among these three categories.) Identify the four primary recording activities related to
investments in securities.
174. When an investor owns 20% to 50% of the voting stock of an investee company, the investor
is presumed to exercise significant influence over the investee unless there is evidence to the
contrary.
Required:
(1.) What factors could be evidence of significant influence?
(2.) What factors could be evidence of lack of significant influence?
175. Many corporations own more than 50% of the voting stock in other corporations. Sometimes
these affiliated companies operate within the same industry, and many times the companies
are in unrelated industries.
Required:
What is the significance of owning more than 50% of the voting common stock of another
company?
176. Sometimes companies change the extent to which they can significantly influence an investee,
such that they have to change to the equity method or from the equity method of accounting
for the investment.
Required:
Describe the adjustments necessary when a company (1) changes to the equity method from
another method, and (2) when a company changes from the equity method to another method.
177. Assume Gibson Company is an equal partner in a joint venture with Glover Company. Each
company owns 50% of Pesci Company, and equally shares decision-making authority.
Required:
Describe how U.S. GAAP and IFRS differ in how they would have Gibson account for this
investment.
178. According to GAAP, companies can elect the fair value option when accounting for many
investments.
Required:
Describe how accounting for a held–to-maturity investment, an available-for-sale investment,
and an equity-method investment is affected by a company electing the fair value option.
179. IFRS No. 9 is a standard that indicates accounting for investments when the investor does not
have significant influence under the investee.
Required:
Explain how debt investments are accounted for under IFRS No. 9. What alternative
accounting approaches are available, what determines whether an investment qualifies for
each approach, and what are the key features of each approach with respect to accounting for
unrealized gains and losses?
180. IFRS No. 9 is a standard that indicates accounting for investments when the investor does not
have significant influence over the investee.
Required:
Explain how equity investments are accounted for under IFRS No. 9. What alternative
accounting approaches are available, what determines whether an investment qualifies for
each approach, and what are the key features of each approach with respect to accounting for
unrealized gains and losses?
