12-1 Solutions
CHAPTER 12
MARKETABLE SECURITIES AND DERIVATIVES
Questions, Exercises, and Problems: Answers and Solutions
12.2 a. Debt securities that a firm intends to hold to maturity (for example, to lock
in the yield at acquisition for the full period to maturity) and has the ability
to hold to maturity (for example, the firm has adequate liquid assets and
b. The classification as “trading securities” implies a firm’s active involvement
in buying and selling securities for profit. The holding period of trading
c. Amortized acquisition cost equals the purchase price of debt securities
plus or minus amortization of any difference between acquisition cost and
Solutions 12-2
12-3 Solutions
12.2 continued.
d. Unrealized holding gains and losses occur when the fair value of a
e. Realized gains and losses appear in the income statement when a firm
12.3 Firms acquire trading securities primarily for their short-term profit potential.
Including the unrealized holding gain or loss in income provides the financial
12.4 The required accounting does appear to contain a degree of inconsistency.
One might explain this seeming inconsistency by arguing that the balance
sheet and income statement serve different purposes. The balance sheet
attempts to portray the resources of a firm and the claims on those users by
Solutions 12-4
12-5 Solutions
12.5 A derivative is a hedge when the firm bears a risk such that the change in the
value of the derivative attempts to offset the change in the value of the firm as
time passes. We distinguish an attempt at hedging from an effective hedge
Under this interpretation, a derivative is not a hedge when changes in the fair
If the firm chooses not to use hedge accounting when it could, the fluctuations
in the fair value of the derivative appear in income, not offset by the changes in
12.6 A
fair-value hedge
is a hedge of an exposure to changes in the fair value of a
12.7 Firms do not recognize the fair value of the commitment except to the extent
commitment.
12.8 The rationale relates to matching. Under a fair value hedge, firms report
recognized assets and liabilities at fair value and include unrealized gains and
losses in net income. Firms also report associated derivatives at fair value
Solutions 12-6
12-7 Solutions
12.9 To qualify for hedge accounting, there must be an expectation that the
derivative will be effective in hedging a particular risk. Obtaining a derivative
that will be highly effective in hedging a particular risk may be costly. A firm
12.10 This statement is correct. Firms would report all financial assets and financial
12.11 (Classifying securities.)
c. Securities available for sale; current asset.
d. Securities available for sale; noncurrent asset.
12.12 (Accounting principles for marketable securities and derivatives).
a. (4) The firm has option to use hedge accounting, deferring income
effects until realization and reporting changes in fair value in periodic
b. (1) This derivative is not an accounting hedge, so gains and losses
Solutions 12-8
c. (1) Because not both ability and intent to hold to maturity are present, it
d. (3) Standard treatment for securities available for sale.
12-9 Solutions
12.13 (Murray Company; accounting for bonds held to maturity.)
a. Present Value of Periodic Payments: $3,000 X 6.73274a = $ 20,198
b. See Schedule 12.1 below.
Schedule 12.1
Amortization Table for $100,000 Bonds with Interest Paid
Semiannually at 6% and Priced to Yield 8% Compounded
Semiannually
(Exercise 13)
Period
Balance at
Beginning
of Period
Interest
Revenue
for Period
Cash
Received
Portion of
Payment
Increasing
Carrying
Value
Balance
at End
of Period
1
$93,267
$3,731
$3,000
$731
$ 93,998
2
$93,998
$3,760
$3,000
$760
$ 94,758
3
$94,758
$3,790
$3,000
$790
$ 95,548
4
$95,548
$3,822
$3,000
$822
$ 96,370
5
$96,370
$3,855
$3,000
$855
$ 97,225
6
$97,225
$3,889
$3,000
$889
$ 98,114
7
$98,114
$3,925
$3,000
$925
$ 99,038
8
$99,038
$3,962
$3,000
$962
$ 100,000
c. January 1, 2008
Marketable Debt Securities ………………………………… 93,267
Cash ……………………………………………………………. 93,267
Solutions 12–10
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–93,267
+93,267
12–11 Solutions
12.13 c. continued.
June 30, 2008
Cash ……………………………………………………………….. 3,000
Marketable Debt Securities ………………………………… 731
Interest Revenue …………………………………………… 3,731
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+3,000
+3,731
IncSt → RE
+731
December 31, 2008
Cash ……………………………………………………………….. 3,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+3,000
+3,760
IncSt → RE
+760
d. December 31, 2011
Cash ……………………………………………………………….. 3,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+3,000
+3,962
IncSt → RE
+962
December 31, 2011
Cash ……………………………………………………………….. 100,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+100,000
–100,000
Solutions 12–12
12.14 (Kelly Company, accounting for bonds held to maturity.)
a. Present Value of Periodic Payments: $17,500 X 5.41719a = $ 94,801
b. See Schedule 12.2 below.
Schedule 12.2
Amortization Table for $500,000 Bonds with Interest Paid
Semiannually at 7% and Priced to Yield 6% Compounded
Semiannually
(Exercise 14)
Period
Balance at
Beginning
of Period
Interest
Revenue
for Period
Cash
Received
Portion of
Payment
Reducing
Carrying
Value
Balance
at End
of Period
(1)
(2)
(3)
(4)
(5)
(6)
1
$513,541
$15,406
$17,500
$(2,094)
$ 511,447
2
$511,447
$15,343
$17,500
$(2,157)
$ 509,291
3
$509,291
$15,279
$17,500
$(2,221)
$ 507,069
4
$507,069
$15,212
$17,500
$(2,288)
$ 504,781
5
$504,781
$15,143
$17,500
$(2,357)
$ 502,425
6
$502,225
$15,075a
$17,500
$(2,425)
$ 500,000
aAmount does not equal 3% of balance at the beginning of the period due to
rounding.
c. January 1, 2008
Marketable Debt Securities ………………………………… 513,341
12–13 Solutions
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–513,341
+513,341
Solutions 12–14
12.14 c. continued.
June 30, 2008
Cash ……………………………………………………………….. 17,500
Interest Revenue …………………………………………… 15,406
Marketable Debt Securities …………………………….. 2,094
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+17,500
+15,406
IncSt → RE
–2,094
December 31, 2008
Cash ……………………………………………………………….. 17,500
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+17,500
+15,343
IncSt → RE
–2,157
d. December 31, 2010
Cash ……………………………………………………………….. 17,500
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+17,500
+15,075
IncSt → RE
–2,425
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+500,000
–500,000
12–15 Solutions
12.15 (Elston Corporation; accounting for securities available for sale.)
10/15/2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+28,000
–28,000
To record acquisition of shares of Security A.
11/02/2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+49,000
–49,000
To record acquisition of shares of Security B.
12/31/2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,000
+1,000
IncSt → RE
To record dividend received from Security B.
12/31/2008
Unrealized Holding Loss on Security A Available for
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–3,000
–3,000
OCInc →
AOCInc
Solutions 12–16
12–17 Solutions
12.15 continued.
12/31/2008
Marketable Securities (Security B) ……………………………. 6,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+6,000
+6,000
OCInc →
AOCInc
To record unrealized holding gain on Security B.
2/10/2009
Realized Loss on Sale of Securities Available for Sale
Marketable Securities (Security A) ………………….. 25,000
Unrealized Holding Loss on Security A
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+24,000
–4,000
IncSt → RE
–25,000
+3,000
OCInc →
AOCInc
To record sale of Security A.
12/31/2009
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,200
+1,200
IncSt → RE
To record dividend received from Security B.
Solutions 12–18
12.15 continued.
12/31/2009
Unrealized Holding Gain on Security B Available for
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,000
–2,000
OCInc →
AOCInc
To revalue Security B to market value.
7/15/2010
Cash ……………………………………………………………………. 57,000
Unrealized Holding Gain on Security B Available for
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+57,000
+8,000
IncSt → RE
–53,000
–4,000
OCInc →
AOCInc
To record sale of Security B.
12.16 (Simmons Corporation; accounting for securities available for sale.)
6/13/2008
12–19 Solutions
12.16 continued.
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+12,000
+29,000
+43,000
–84,000
To record acquisition of marketable equity securities as a
temporary investment.
10/11/2008
Cash ……………………………………………………………………. 39,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+39,000
–4,000
IncSt → RE
–43,000
To record sale of Security U.
12/31/2008
Unrealized Holding Gain on Security S Avail-
able for Sale (Other Comprehensive
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,500
+1,500
OCInc →
AOCInc
To revalue Security S to market value.
Solutions 12–20
12.16 continued.
12/31/2008
Unrealized Holding Loss on Security T Available for
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–2,800
–2,800
OCInc →
AOCInc
To revalue Security T to market value.
12/31/2009
Marketable Securities (Security S) (= $15,200 –
Unrealized Holding Gain on Security S Avail-
able for Sale (Other Comprehensive
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,700
+1,700
OCInc →
AOCInc
To revalue Security S to market value.
12/31/2009
Unrealized Holding Loss on Security T Avail-
able for Sale (from 12/31/2008 Entry)
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+5,500
+2,800
OCInc →
AOCInc