Chapter 12 Investments
xxx. Espana Corporation purchased $100,000 of Hales Inc. 6% bonds at par and classifies its
investment as available for sale. Unfortunately, a combination of problems at Hales and in the
debt market caused the fair value of the Hales investment to decline to $70,000 during 2016.
Wang views this decline as an other-than-temporary impairment. Wang calculates that, of the
$30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-
credit losses. If Wang accounts for the Hales bonds under IAS No. 39, before-tax net income
for 2016 will be reduced by:
a. $0.
b. $10,000.
c. $20,000.
d. $30,000.
111. If the fair value of a held-to–maturity investment declines for a reason that is viewed as “other
than temporary” because the company intends to sell the investment:
a. The investment is not written down to fair value.
b. The investment is written down to fair value, and the entire impairment loss is recognized
in net income.
c. The investment is written down to fair value, and the entire impairment loss is recognized
in accumulated other comprehensive income.
. d. The investment is treated the same way it would be treated if the decline in fair value was
viewed as temporary.
112. If the fair value of a held-to-maturity investment declines for a reason that is viewed as “other
than temporary” because the company has incurred a credit loss on the investment:
a. The investment is written down to fair value, and only the noncredit-loss component of
Chapter 12 Investments
the impairment loss is recognized in net income.
b. The investment is written down to fair value, and the entire impairment loss is recognized
in net income.
c. The investment is written down to fair value, and only the credit-loss component of the
impairment loss is recognized in net income.
d. The investment is written down to fair value, but none of the impairment loss is
recognized in net income.
113. If the fair value of a trading security declines for a reason that is viewed as “other than
temporary”:
a. The investment is not written down to fair value.
b. The investment is written down to fair value, and an “impairment loss” is recognized in
net income.
c. The investment is written down to fair value, and the impairment loss is recognized in
accumulated other comprehensive income.
d. The investment is treated the same way it would be treated if the decline in fair value was
viewed as temporary.
114. When an impairment of an equity investment that is classified as available for sale occurs for a
reason that is judged to be “other than temporary,” the investment is written down to its fair
value and the amount of the write-down is:
a. Recorded as a deferred credit.
b. Included in net income.
c. Recorded as deferred asset.
d. Treated as unrealized.
Chapter 12 Investments
115. An OTT impairment for an equity investment is recognized in net income if fair value declines
below the investment’s cost and:
a. The company has incurred noncredit losses.
b. The company does not have the intent and ability to hold the investment until fair value
recovers.
c. The company lacks intent to hold the investment until fair value recovers.
d. The company has incurred credit losses.
116. If the fair value of a debt investment that is classified as an available-for-sale investment
declines for a reason that is viewed as “other than temporary” because it is viewed as “more
likely than not” that the investor will be required to sell the investment prior to recovering the
amortized cost of the investment less any credit losses arising in the current year:
a. The investment is not written down to fair value.
b. The investment is written down to fair value, and the impairment loss is recognized in net
income.
c. The investment is written down to fair value, and the impairment loss is recognized in
accumulated other comprehensive income.
. d. The investment is written down to fair value, and only the noncredit loss is included in net
income.
117. If the fair value of a debt investment that is classified as an available-for-sale investment
declines for a reason that is viewed as “other than temporary” because the company has
incurred a credit loss on the investment:
a. The investment is written down to fair value, and only the noncredit-loss component of
the impairment loss is recognized in net income.
b. The investment is written down to fair value, and the entire impairment loss is recognized
in net income.
c. The investment is written down to fair value, and only the credit-loss component of the
impairment loss is recognized in net income.
d. The investment is written down to fair value, but none of the impairment loss is
recognized in net income.
Chapter 12 Investments
118. Which of the following is not a reason to consider a decline in the fair value of a debt
investment to be “other than temporary”?
a. The investor determines that a credit loss exists on the investment.
b. The investor intends to sell the investment.
c. The investor believes it is “more likely than not” that the investor will be required to sell
the investment prior to recovering the amortized cost of the investment less any credit
losses arising in the current year.
. d. The investor intends to hold the investment to maturity.
Use the following to answer questions 119–121:
Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to
hold the bonds until they matured in 2020, so Nichols classifies its investment as held to maturity.
Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the
Holly investment to decline to $70,000 during 2016. Nichols calculates that, of the $30,000 decrease
in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses.
119. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired
because Nichols is planning to sell the bonds in the near future. Before-tax net income for
2016 will be reduced by:
a. $0.
b. $10,000.
c. $20,000.
d. $30,000.
120. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired
because Nichols believes it is more likely than not that it will have to sell the Holly bonds
before the bonds have a chance to recover their fair value. Before-tax net income for 2016
Chapter 12 Investments
will be reduced by:
a. $0.
b. $10,000.
c. $20,000.
d. $30,000.
121. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired
because Nichols calculates that the bonds have incurred credit losses. Before-tax net income
for 2016 will be reduced by:
a. $0.
b. $10,000.
c. $20,000.
d. $30,000.
122. Dicker Furriers purchased 1,000 shares of Loose Corporation stock on January 10, 2015, for
$800 per share and classified the investment as securities available for sale. Loose’s market
value was $400 per share on December 31, 2015, and the decline in value was viewed as
temporary. As of December 31, 2016, Dicker still owned the Loose stock whose market value
had declined to $100 per share. The decline is due to a reason that’s judged to be other than
temporary. Dicker’s December 31, 2016, balance sheet and the 2016 income statement would
show the following:
Investment in
Loose stock
Income
statement loss
on
investments
a.
100,000
700,000
b.
100,000
300,000
c.
400,000
0
d.
100,000
300,000
123. Which of the following is not an example of a derivative?
a. Interest rate swap.
b. Cash.
c. Stock option.
d. Forward contract.
124. Which of the following is not true about derivatives?
a. Large losses on derivative investments have been reported in the press.
b. Derivatives are so named because their value is derived from some underlying measure.
c. Derivatives are useful instruments for managing risk.
d. Accounting for derivatives is fully resolved and no additional rules or interpretations are
likely.
Matching Pair Questions
125. Indicate (by number) the level of stock ownership that most frequently relates to each concept
listed below.
Chapter 12 Investments
1. Less than 20%
The investor can significantly influence, but not control,
the investee’s operating and financial policies.
___
2. 20% – 50%
The reporting of the investment depends on the intent of
management to hold or trade it.
___
3. More than 50%
The investment is reported at cost, adjusted for
subsequent growth in the investee.
___
The investment is reported at fair value.
___
Financial statements are combined as if a single
company.
___
The investor controls the investee.
___
Unrealized gains and losses are recorded at each
reporting date.
___
The investee is a subsidiary of the investor.
___
Assets and liabilities of the investee are combined with
those of the investor for reporting purposes.
___
The investor does not include an investment account for
the investee in the balance sheet.
___
Answer:
The investor can significantly influence, but not control,
the investee’s operating and financial policies.
2. 20% – 50%
The reporting of the investment depends on the intent of
management to hold or trade it.
3. More than 50%
The investment is reported at cost, adjusted for subsequent
The investment is reported at fair value.
Financial statements are combined as if a single company.
The investor controls the investee.
Unrealized gains and losses are recorded at each reporting
date.
The investee is a subsidiary of the investor.
Assets and liabilities of the investee are combined with
those of the investor for reporting purposes.
The investor does not include an investment account for
the investee in the balance sheet.
Chapter 12 Investments
126. Indicate (by number) the way each of the investments listed below usually should be
accounted for under U.S. GAAP based on the information provided.
1. None of the these
choices apply
Treasury bonds held for their entire life.
____
2. Trading Securities
Accounts Receivable.
____
3. Consolidation
Treasury bonds held for short-term profit.
____
4. Securities Held to
Maturity
Common stock held for immediate resale.
____
5. Equity Method
40% of the voting common stock of XYZ Company.
____
85% of the voting common stock of ABC Corporation.
____
25% of the voting common stock of DEF Corporation.
____
50% of the voting common stock of JMG Corporation.
____
18% of voting common stock of Griggs Corporation;
investor’s CEO on the board of directors of Griggs
Corporation; no other investor owns more than 1%.
____
Corporate bonds to be held for full term of 10 years.
____
1. None of these choices
apply
Treasury bonds held for their entire life.
4
2. Trading Securities
Accounts Receivable.
1
3. Consolidation
Treasury bonds held for short-term profit.
2
4. Securities Held to
Maturity
Common stock held for immediate resale.
2
5. Equity Method
40% of the voting common stock of XYZ Company.
5
85% of the voting common stock of ABC Corporation.
3
25% of the voting common stock of DEF Corporation.
5
50% of the voting common stock of JMG Corporation.
5
Corporate bonds to be held for full term of 10 years.
4
Chapter 12 Investments
127. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Trading securities only
Temporary declines in the fair value of an
available for sale security.
____
2. Securities available for sale only
Reported at fair value.
____
3. Unrealized losses
Changes in market value affect
comprehensive income, but not net income.
____
4. Dividends received
Changes in market value affect net income.
____
5. Trading securities and securities
available for sale
Reduces the investment account balance
under the equity method.
____
TERM
1. Trading securities only
Temporary declines in the fair value of an
2. Securities available for sale only
Reported at fair value.
3. Unrealized losses
Changes in market value affect
4. Dividends received
Changes in market value affect net income.
5. Trading securities and securities
Reduces the investment account balance
Chapter 12 Investments
128. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms with respect to accounting for investments under IFRS. Match each phrase with the
correct term by placing the number designating the best term in the space provided by the
phrase.
TERM
PHRASE
NUMBER
1. Business purpose test
Does not allow the “held–to-maturity” approach for
debt investments.
____
2. IFRS No. 9
Can be accounted for as “fair value through profit
and loss” or as “fair value through other
comprehensive income” under IFRS No. 9.
____
3. Equity investments
One of the criteria that must be met under IFRS No.
9 to qualify for use of the amortized cost method.
____
4. Fair value through other
comprehensive income
Similar to available for sale investments, except
realized gains and losses on equity investments are
not reclassified into net income.
____
5. Accounting mismatch
One of the circumstances in which the fair-value
option can be used under IFRS.
____
Answer:
TERM
1. Business purpose test
Does not allow the “held–to-maturity” approach for
debt investments.
3. Equity investments
One of the criteria that must be met under IFRS No.
9 to qualify for use of the amortized cost method.
129. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Change from the equity
method
Result from a decline in fair value prior to sale.
____
2. Financial instruments
Change accounted for prospectively.
____
3. Unrealized losses
Change accounted for retrospectively.
____
4. Change to the equity method
Encompass cash, equity securities, and debt
securities
____
5. Unrealized gains
When related to trading securities, they increase
net income.
____
Answer:
TERM
1. Change from the equity
method
Result from a decline in fair value prior to sale.
2. Financial instruments
Change accounted for prospectively.
3. Unrealized losses
Change accounted for retrospectively.
4. Change to the equity method
Encompass cash, equity securities, and debt
securities
5. Unrealized gains
When related to trading securities, they increase
net income.
Chapter 12 Investments
130. Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Securities held to maturity
Recognized only to the extent of carrying
value under the equity method.
____
2. Unrealized holding gains and
losses
Reported in the income statement for
trading securities.
____
3. Impairment of securities available
for sale
Reduces investment account under the
equity method if its fair value is higher than
its book value.
____
4. Losses of investee
Requires positive intent and ability.
____
5. Amortization of a patent that was
obtained in a business acquisition
Requires recognition in the income
statement if judged to be other than
temporary.
____
Answer:
TERM
NUMBER
1. Securities held to maturity
Recognized only to the extent of carrying
value under the equity method.
2. Unrealized holding gains and
losses
Reported in the income statement for
trading securities.
4. Losses of investee
Requires positive intent and ability.
Chapter 12 Investments
131. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the correct term.
TERM
PHRASE
NUMBER
1. Investor’s share of
investee income
Can be required in the future when, at the time an
equity-method investment is made, the fair value of
investee’s identifiable net assets exceeds their carrying
value.
____
2. Additional depreciation
Recognized as revenue for available-for-sale
investments, but not equity-method investments.
____
3. Equity method
Used when investor can significantly influence
investee.
____
4. Consolidation
Used when investor has effective control of investee.
____
5. Dividends
Recognized as revenue for equity-method
investments, but not for available-for-sale
investments.
____
Answer:
TERM
1. Investor’s share of
investee income
Can be required in the future when, at the time an
equity-method investment is made, the fair value of
investee’s identifiable net assets exceeds their carrying
value.
3. Equity method
Used when investor can significantly influence
investee.
4. Consolidation
Used when investor has effective control of investee.
5. Dividends
Recognized as revenue for equity-method investments,
but not for available-for-sale investments.
Chapter 12 Investments
Problems
132. On March 1, 2016, Navy Corporation used excess cash to purchase U.S. Treasury bonds for
$103,000 plus accrued interest. The bonds were purchased at face value. The appropriate
interest rate is 6%. Interest on these bonds is payable on January 1 and July 1 of each year.
Navy’s investment is accounted for as held to maturity. The fair value of the Treasury bonds is
$104,000 at year-end.
Required:
Prepare the appropriate journal entries to record the transactions for the year, including any
year-end adjustments. Show calculations, rounded to the nearest dollar.
133. On January 1, 2016, Wildcat Company purchased $93,000 of 10% bonds at face value. The
bonds are to be held to maturity. The bonds pay interest semiannually on January 1 and July 1.
Required:
(1.) Prepare the appropriate journal entry to record the acquisition of the bonds.
(2.) Record the first two interest payments (ignore year-end accruals).
134. On January 1, 2016, Hoosier Company purchased $930,000 of 10% bonds at face value. The
bond market value was $980,000 on December 31, 2016.
Required:
Prepare the appropriate journal entry on December 31, 2016, to properly value the bonds
assuming the bonds are classified as:
(1.) Trading securities.
(2.) Securities available for sale.
(3.) Held-to-maturity securities.
(1.)
Fair value adjustment, bonds ($980,000 –$930,000)
Net unrealized holding gain/loss—I/S
(2.)
Fair value adjustment, bonds ($980,000 –$930,000)
Net unrealized holding gain/loss—OCI
(3.)
Changes in FV of held-to-maturity securities are not
135. FKG Inc. carries the following investments on its books at December 31, 2015, and December
31, 2016. All securities were purchased during 2015.
Trading Securities:
Company
Cost
Value, Dec. 31, 2015
Value, Dec. 31, 2016
A Company
$25,000
$13,000
$20,000
B Company
$13,000
$20,000
$20,000
C Company
$35,000
$30,000
$25,000
Available for Sale
Securities:
Company
Cost
Value, Dec. 31, 2015
Value, Dec. 31, 2016
X Company
$210,000
$130,000
$50,000
Y Company
$ 50,000
$ 60,000
$70,000
Required:
(1.) Prepare the necessary journal entries for FKG on December 31, 2015, and December 31,
2016.
(2.) What net effect would the valuation of these stock investments have on 2015 net income?
On 2016 net income?
Chapter 12 Investments
136. The following transactions occurred during the year for XYZ Corporation:
(a.) During the year, trading securities were purchased for $250,000.
(b.) During the year, securities available for sale were purchased for $80,000.
(c.) During the year, trading securities that are carried on the balance sheet at their fair value
of $125,000 were sold for $125,000 cash.
(d.) At the end of the year, the trading securities portfolio has an aggregate market value of
$142,000 and an aggregate cost of $150,000.
(e.) At the end of the year the securities available for sale portfolio has an aggregate market
value of $95,000.
Required:
Indicate how each of these transactions would affect the statement of cash flows for a
corporation. Assume the statement of cash flows is prepared using the indirect method. Each
transaction is assumed to be independent of the other transactions.
137. Jackson Company engaged in the following investment transactions during the current year.
Feb. 17
Purchased 500 shares of Medical Company common for $20 per
share plus a brokerage commission of $100.
These are trading securities.
April 1
Bought 30,000 of the 100,000 outstanding shares of Olde
Company for $300,000. Goodwill of $80,000 was included in the
price.
June 25
Received a $1.20 per share dividend on Medical Company stock.
June 30
Olde Company reported second-quarter profits of $20,000.
Chapter 12 Investments
Oct. 1
Purchased 2,000 shares of Alpha Company for $15 per share plus
a brokerage fee of $400. These shares are classified as securities
available for sale.
Dec. 31
Medical Co. shares are selling for $25 and Alpha stock is selling
for $12.
Required:
Prepare the appropriate journal entries to record the transactions for the year including year–
end adjustments. Show calculations.
Feb. 17
Investment in Medical [$500 x $20) + $100]
Apr. 1
Investment in Olde
Jun. 25
Cash (500 x $1.20)
Jun. 30
Investment in Olde ($20,000 x 30%)
Oct. 1
Investment in Alpha [(2,000 x $15) + $400]
[500 x $25) – $10,100]
Dec. 31
Net unrealized holding gain/loss—OCI
138. Eastwood Enterprises owns 30,000 shares of the Van Cleef Company (5% of the outstanding
equity of Van Cleef). Eastwood is trying to determine Van Cleef’s fair value. The relevant
facts are as follows:
• Eastwood bought the Van Cleef shares earlier in the accounting period for $10/share at
a time when the shares were publicly traded on the New York Stock Exchange.
• Since Eastwood bought the shares, Van Cleef has been delisted and there is no longer an
active market in the Van Cleef shares.
• Eastwood’s internal valuation specialist estimates the Van Cleef shares to be worth
$8/share. Eastwood plans to continue holding the shares, but may someday sell them if
their value increases sufficiently.
Required:
(1) What is the fair value of Eastwood’s investment in Van Cleef? Briefly explain your choice
of fair value, and relate that choice to the requirements of GAAP regarding fair value
measurement.
(2) Prepare a journal entry to record any necessary fair value adjustment.
Chapter 12 Investments
139. On March 17, 2015, Union Corporation purchased 5,000 shares of AZQ common stock as a
long-term investment at $40 per share. On December 31, 2015, and December 31, 2016, the
market value of the AZQ stock is $42 and $43, respectively.
Required:
(1.) What is the appropriate reporting category for this stock? Why?
(2.) Prepare the adjusting entry on December 31, 2015.
(3.) Prepare the adjusting entry on December 31, 2016.
Answer:
Use the following to answer questions 140and 141:
In its 2016 annual report to shareholders, Kirby Inc. included the following disclosure regarding its
available for sale investments in securities:
Chapter 12 Investments
December 31
2016
2015
2014
In thousands
Accumulated other comprehensive income
Unrealized gains (losses) on securities:
Balance at beginning of year ……………………
—
(7,533
)
(6,862
)
Unrealized gains (losses) for the year ………..
1,509
(3,564
)
(671
)
Unrealized losses recognized …………………..
—
11,097
—
Balance at end of year ………………………………..
1,509
—
(7,533
)
Required:
140. Prepare the journal entry (in thousands) that Kirby made at the end of 2016 to record the
information disclosed above.
141. In 2015, Kirby made two adjustments to its available for sale investments.
Required:
Briefly explain the adjustments and why they occurred.
Answer:
Use the following to answer questions 142–144:
Fragrance International, a large perfume manufacturer, reported the following in its 2016 annual report
to shareholders: