978-1259722660 Chapter 12 Solution Manual Part 14

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Problem 12–16 (continued)

Need to move from a fair-value adjustment from $0 to ($9,420):

Fair-Value

Adjustment

1/1/2018 0

December 31, 2018

Bond Fair Value at December 31, 2018:

Fair Value

Adjustment

Balance on 1/1/2018 $ 2

± Adjustment needed to update fair value ?

Balance needed on 6/30/2018 ($9,420)

Problem 12–16 (concluded)

Comparing the amortized initial cost with the fair value of the bonds on that

date provides the amount needed to adjust the investment to its fair value.

Fair-Value

Adjustment

Problem 12–17

Requirement 1

The Donald Company bonds include only interest and principal, so Feherty’s

business purpose is relevant for the purpose of classification and reporting. Ten

Fair Value

Adjustment

Balance on 6/30/2018 ($ 9,420)

± Adjustment needed to update fair value ?

The Watson company stock would be accounted for at fair value through

OCI (FVOCI) because that is what Feherty elected. Feherty can make that

irrevocable election, but otherwise, because it does not qualify for the equity

method, would account for the Watson equity investment as FVPL.

Requirement 2

The Donald Company bonds would be reported as follows:

Ten bonds are accounted for at amortized cost. No unrealized gain or

Forty bonds are accounted for at FVOCI. Ten of the bonds were sold at

For the other 30 bonds accounted for at FVOCI, unrealized gains of 30

The Watson Company common stock investment is accounted for at

FVOCI, so an unrealized gain of $5,000 ($30,000 – 25,000) would be included

in other comprehensive income and, therefore, in comprehensive income.

Problem 12–17 (concluded)

Total effects are as follows:

Net income:

Other comprehensive income (OCI):

Problem 12–18

Bee Company Investment

2018: Stewart does not plan to sell the Bee investment, and does not believe it is

more likely than not that it will have to sell the investment before fair value

recovers, so the portion of the impairment that consists of credit and noncredit

losses is relevant. Stewart must recognize the $240,000 of credit losses as an OTT

impairment in earnings, and the other $260,000 as a reduction of OCI, as follows:

2019: Stewart ignores the change in Bee’s fair value during 2019, as the Bee

investment is accounted for as an HTM investment and fair value changes are not

relevant unless viewed as OTT impairments. GAAP does not allow recovery of

prior OTT impairments when fair value increases. Over the remaining life of the

Oliver Corporation Investment

2018: Stewart accounts for the Oliver investment as a trading security, so OTT

impairment accounting is not relevant. Stewart simply continues to recognize in

Problem 12–18 (continued)

2019: Fair value increased to $2,700,000 during 2019, so Stewart needs to have a

positive fair value adjustment of $200,000 in the balance sheet to adjust from

Jones, Inc Investment

2018: Stewart does not plan to sell the Jones investment, and does not believe it is

more likely than not that it will have to sell the investment before fair value

recovers, so the portion of the impairment that consists of credit and noncredit

However, Stewart still would need to show on the face of the income statement the

Problem 12–18 (concluded)

2019: Stewart continues to treat the Jones investment as AFS. Therefore, Stewart

would show an unrealized gain associated with an increase of fair value from

Real World Case 12–1

Requirement 1

Fair Value Adjustment, AFS Investments

Given the T-account above, the fair value adjustment change during 2015 was a

reduction of $1,089 million.

Requirement 2

Intel would record the following entry to account for unrealized holding gains

and losses associated with its AFS investments:

Actually, Intel would have some gains and some losses recognized in OCI. This

journal entry combines entries made for all AFS investments.

The effect of that journal entry would be to credit (decrease) the T-account.

CASES

Case 12–1 (concluded)

Requirement 3

Intel would record the following entry to make its reclassification adjustment:

The fair value adjustment is credited (reduced) by $93 because reclassification is

removing unrealized gains from the fair value adjustment and from OCI. The

effect of that journal entry would be to credit (decrease) the T-account.

Requirement 4

After considering these adjustments, the T-account appears as follows:

Fair Value Adjustment, AFS Investments

Dec. 27, 2014 $3,794 gain – $9 loss 3,785

One possible explanation for the debit plug of $3 is an OTT impairment. As

discussed in Appendix 12B, if an unrealized holding loss had been recognized

Research Case 12–2

The note that describes an investment in securities “available-for-sale” may be

headed by any one of a variety of captions or subsumed within another disclosure

note. Likewise, the caption by which the investments are reported in the balance

sheet can be reported separately as one of several asset titles or included within

another asset caption.

Investments in securities available-for-sale will be reported as current or

noncurrent assets depending on the intent of management regarding the timing of

their eventual sale. Realized gains or losses are reported in the income statement if

any of these securities were sold during any year reported.

Investments in securities available-for-sale are reported at fair value. Unrealized

holding gains and losses from retaining securities during periods of price change

are not included in the determination of income for the period. Rather, they are

accumulated and reported as accumulated other comprehensive income, a separate

component of shareholders’ equity. This means an unrealized holding gain would

increase shareholders’ equity and an unrealized holding loss would decrease

shareholders’ equity. The amounts of unrealized gains and losses will be shown on

a combined statement of comprehensive income that includes net income and other

comprehensive income, or as a separate statement of comprehensive income, or

summarized in the statement and detailed in the notes to the financial statements.

By definition, securities available-for-sale are not acquired for the purpose of

profiting from short-term market price changes, so gains and losses from holding

these securities while prices change are not considered relevant performance

measures to be included in earnings.

Cash outflows from acquiring these investments or inflows from selling them are

reported as investing activities in the company’s comparative statements of cash

flows unless trading securities are included in the operating activities section.

Whether they are specifically identifiable depends on the degree of detail the

company uses in reporting its cash flows. Information on investing activities

assists investors and creditors by indicating the direction the company is directing

its funds.

International Case 12–3

Requirement 1

Satisfied by going to http://www.iasplus.com/standard/ias28.htm.

Requirement 2

Renault’s decision appears appropriate, as the company has significant

Requirement 3

It is not surprising that Renault makes adjustments that take into account the

fair value of Nissan’s assets and liabilities at the time Renault invested in

Requirement 4

Renault’s harmonization adjustments are required by IFRS, which requires that,

“if the associate uses accounting policies that differ from those of the investor,