978-1259722660 Chapter 12 Solution Manual Part 1

Question 12–1

Question 12–2

Increases and decreases in the market value between the time a debt security is

acquired and the day it matures to a prearranged maturity value are ignored for a

Question 12–3

GAAP distinguishes between three levels of inputs to fair value determination,

with level 1 being readily observable fair values (for example, from a securities

Question 12–4

For debt investments to be held for an unspecified period of time, fair value

information is more relevant than for investments to be held to maturity. Changes in

fair values are less relevant if the investment is to be held to maturity because sale at

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Chapter 12 INVESTMENTS

Questions for Review of Key Topics

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Answers to Questions (continued)

Question 12–5

The way unrealized holding gains and losses are reported in the financial

statements depends on whether the debt investments are classified as “securities

Question 12–6

Comprehensive income is a more expansive view of the change in shareholders’

equity than traditional net income. It encompasses all changes in equity from

Question 12–7

Unrealized holding gains or losses on trading securities are reported in the income

statement as if they actually had been realized. Trading securities are actively

On the other hand, unrealized holding gains or losses on securities

available-for-sale are not reported in the income statement. By definition, these

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Answers to Questions (continued)

Question 12–8

When acquired, debt securities are assigned to one of the three reporting

classifications: held-to-maturity, trading, or available-for-sale. The appropriateness of

the classification is reassessed at each reporting date. A reclassification should be

1. Into the trading category, any unrealized holding gain or loss should be

2. Into the available-for-sale category, any unrealized holding gain or loss should

3. Into the held-to-maturity category, any unrealized holding gain or loss should be

Question 12–9

Yes. Although a company is not required to report individual amounts for the three

categories of investments—held-to-maturity, available-for-sale, or trading—on the

face of the balance sheet, that information should be presented in the disclosure notes.

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Answers to Questions (continued)

Question 12–10

Under IFRS No. 9, investments in debt securities are classified either as amortized

Question 12–11

Under IFRS No. 9, investments in equity securities are classified as either fair

value through profit and loss (“FVPL”, accounted for like trading securities) or fair

Question 12–12

When a company elects the fair value option for held-to-maturity or

Question 12–13

U.S. GAAP allows companies complete discretion in electing the fair value option

when an investment is made. The only constraint is that the election is irrevocable.

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Answers to Questions (continued)

Question 12–14

The equity method is used when an investor can’t control but can “significantly

influence” the investee. For example, if effective control is absent, the investor still

might be able to exercise significant influence over the operating and financial policies

Question 12–15

The equity method, like consolidation, views the investor and investee as a special

type of single entity. By the equity method, though, the investor doesn’t include

Question 12–16

The investor should account for dividends from the investee as a reduction in the

investment account. Since investment revenue is recognized as the investee earns it, it

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Answers to Questions (continued)

Question 12–17

The equity method attempts to approximate the effects of accounting for the

purchase of the investee as a consolidation. Consolidated financial statements report

acquired net assets at their fair values as of the date the investor acquired the investee.

The accounting in the consolidated financial statements subsequent to the acquisition

date is based on those fair values. So, if Finest had consolidated its acquisition of

Question 12–18

The investment account was decreased by $40,000 (40% x $100,000). Cash

Question 12–19

When it becomes necessary to change from the equity method to another method,

no adjustment is made to the carrying amount of the investment. The equity method is

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Answers to Questions (continued)

Question 12–20

IFRS require that accounting policies of investees be adjusted to correspond to

those of the investor when applying the equity method. U.S. GAAP has no such

Question 12–21

When a company elects the fair value option for a significant-influence investment,

the investment still appears in the balance sheet as a significant-influence investment,

either parenthetically on a single line that includes the total amount of

Question 12–23

These instruments “derive” their values or contractually required cash flows from

some other security or index.

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Answers to Questions (continued)

Question 12–24

Question 12–25

Part of each premium payment the company makes is not used by the insurance

company to pay for life insurance coverage, but rather is “invested” on behalf of the

Question 12–26

If the investor intends to sell the investment, or thinks it will be more likely than

not that it will be required to sell the investment prior to recovering the impairment,

Otherwise, the investor considers whether credit losses exist. If there are no credit

losses, no impairment loss is recognized. On the other hand, if there are some credit

losses, then the investment is written down to fair value in the balance sheet.

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Answers to Questions (continued)

Question 12–27

First, if the investor intends to sell the investment, or thinks it will be more likely

Otherwise, the investor considers whether credit losses exist. If there are no credit

losses, no impairment loss is recognized. On the other hand, if there are some credit

However, only the credit loss component is recognized in net income. Any noncredit

losses are recognized in OCI. In the income statement, the entire impairment loss is

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Answers to Questions (concluded)

Question 12–29

For HTM investments, the CECL model requires companies to recognize

impairments the same way they recognize bad debts for any other note receivable.

They will use a contra-asset account, the allowance for credit losses, to reduce the

For AFS investments, companies won’t apply the CECL model. Instead, they’ll

apply a new AFS Credit Loss model that is very similar to what companies currently

use for OTT impairments. The main difference is that, when companies recognize

Question 12–30

U.S. GAAP and IFRS differ somewhat. Under IFRS No. 9, there is no OTT

designation. Instead, impairments are recognized under the expected credit loss

(ECL) model, and measured either as the 12-month expected credit loss (if the credit

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Brief Exercise 12–1

(a)

Investment in bonds (face amount)…………………… 720,000

(b)

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BRIEF EXERCISES