Appendix D – Investments
Appendix D
Investments
REVIEW QUESTIONS
Question D-1 (LO D-1)
A company might invest in another company to (1) receive dividends, earn interest, and gain
Question D-2 (LO D-1)
Companies can gain from the increase in the value of their investment. Even without receiving
Question D-3 (LO D-1)
Companies in seasonal industries often invest excess funds generated during the busy season and
Question D-4 (LO D-1)
PepsiCo purchased Tropicana in order to diversify beyond soft drinks.
Question D-5 (LO D-1)
Question D-6 (LO D-1)
The method depends on the level of influence, generally by ownership percentage of voting
Question D-7 (LO D-2)
Fair value is the amount for which the investment could be bought or sold in a current
transaction between willing parties.
Question D-8 (LO D-2)
Question D-9 (LO D-2)
Appendix D – Investments
D-2 Financial Accounting, 5e
Question D-10 (LO D-2)
Fair value increases are reported in the income statement as unrealized holding gains. Fair value
Question D-11 (LO D-2)
At the end of the year, the investment’s carrying amount is adjusted upward for fair value
Question D-12 (LO D-3)
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
Question D-13 (LO D-3)
The investor should account for dividends from the investee as a reduction in the investment
Question D-14 (LO D-4)
These statements combine the parent’s and subsidiary’s operating activities as if the two
Question D-15 (LO D-4)
It is appropriate to consolidate financial statements of two companies when the parent company
Question D-16 (LO D-5)
The flip side of an investment in debt securities is the issuance of debt, such as bonds.
Question D-17 (LO D-5)
Question D-18 (LO D-5)
If bonds are purchased at a premium, the amortized cost of the investment in bonds and the
Appendix D – Investments
Question D-19 (LO D-5)
When interest rates go down, the value of a bond with fixed interest payments goes up because
the fixed interest payments are now more attractive to investors.
Question D-20 (LO D-5)
Investments in debt securities are classified as “held–to–maturity,” “trading,” or “available-for-
Appendix D – Investments
D-4 Financial Accounting, 5e
BRIEF EXERCISES
Brief Exercise D-1 (LO D-1)
X
1.
To invest excess cash created by operating in seasonal industries.
2.
X
3.
4.
To reduce government regulation.
X
5.
Brief Exercise D-2 (LO D-2)
September 1
Debit
Credit
Investments (150 shares × $13)
1,950
1,950
November 1
Cash (150 shares × $17)
2,550
1,950
Appendix D – Investments
Brief Exercise D-3 (LO D-2)
December 28
Debit
Investments
485,000
December 31
Brief Exercise D-4 (LO D-2)
December 28
Debit
Investments
485,000
Appendix D – Investments
D-6 Financial Accounting, 5e
Brief Exercise D-5 (LO D-2)
December 29, 2021
Credit
Investments
Cash
19,000
December 31, 2021
January 24, 2022
Cash
Investments
20,000
(Sell investment for realized gain)
Brief Exercise D-6 (LO D-2)
December 29, 2021
Credit
Investments
Cash
19,000
(Purchase common stock)
(Adjust investments to fair value)
Cash
Investments
20,000
(Sell investment for realized loss)
Brief Exercise D-7 (LO D-3)
Appendix D – Investments
An investor should account for net income from an equity method investee as an
Brief Exercise D-8 (LO D-3)
An investor should account for dividends from an equity method investee as a
reduction in its investment account. Since investment revenue is recognized as the
Brief Exercise D-9 (LO D-4)
Wendy Day would report total inventory of $22,000 in the consolidated financial
String’s total inventory of $8,000 in Wendy Day’s consolidated financial statements.
Brief Exercise D-10 (LO D-5)
1.
Credit
January 1
Investments
Cash
40,000
June 30
Appendix D – Investments
D-8 Financial Accounting, 5e
Brief Exercise D-11(LO D-5)
1.
Debit
Credit
January 1
Investments
37,282
Cash
37,282
2.
June 30
Cash ($40,000 × 7% × ½)
Investments (difference)
Brief Exercise D-12 (LO D-5)
1.
Debit
Credit
January 1
Investments
42,975
Cash
42,975
June 30
Cash ($40,000 × 7% × ½)
Appendix D – Investments
EXERCISES
Exercise D-1 (LO D-1)
__T__ 1. A reason companies invest in other companies is to build strategic alliances.
__F__ 2. All companies are required to pay dividends to their investors.
Appendix D – Investments
Exercise D-2 (LO D-2)
Requirement 1
December 20
Credit
Investments
(Purchase common stock)
December 28
(Receive cash dividends)
December 31
Unrealized Holding Loss—Net Income
Investments (300,000 shares × $0.20 per share)
60,000
(Adjust investments to fair value)
The investments decreased in value $0.20 per share from $5.00 per share to
$4.80 per share. Unrealized holding losses are included in net income.
Requirement 2
Appendix D – Investments
Exercise D-3 (LO D-2)
Requirement 1
February 1
Debit
Investments
2,400
Cash
June 15
October 31
December 31
Requirement 2
The balance of the investment account on December 31 is $1,200, equal to the 100
remaining shares times $12 per share fair value. The balance of the investment
D-12 Financial Accounting, 5e
Exercise D-4 (LO D-2)
Requirement 1
March 1, 2021
Credit
Investments (3,000 shares × $62)
Cash
186,000
July 1, 2021
Cash ($1.25 × 3,000 shares)
Dividend Revenue
December 31, 2021
Investments (3,000 shares × $13)
Unrealized Holding Gain–Net Income
Requirement 2
February 1, 2022
Cash (1,000 shares × $70)
Loss (difference)
Investments [1,000 shares × ($62 + $13)]
Appendix D – Investments
Exercise D-5 (LO D-2)
Requirement 1
March 1, 2021
Debit
Investments (3,000 shares × $62)
186,000
July 1, 2021
Cash ($1.25 × 3,000 shares)
December 31, 2021
Investments (3,000 shares × $13)
Requirement 2
February 1, 2022
Cash (1,000 shares × $80)
80,000
Exercise D-6 (LO D-3)
January 1
Debit
Credit
Investments
700,000
Cash
700,000
(Purchase common stock)
Investments
Equity Income
(Earn equity income)
December 31
Cash
Appendix D – Investments
Exercise D-7 (LO D-3)
January 1
Credit
Investments
Cash
600,000
(Purchase common stock)
December 31
Investments
Equity Income
(Earn equity income)
December 31
Cash
Appendix D – Investments
D-16 Financial Accounting, 5e
Exercise D-8 (LO D-2, D-3)
Requirement 1
Purchase:
Credit
Investments
Cash
360,000
(Purchase common stock)
Net income:
Dividends:
Cash
Fair value adjustment:
Investments
Appendix D – Investments
Exercise D-8 (concluded)
Requirement 2
Purchase:
Credit
Investments
Net income:
Investments
Dividends:
No adjustment is made under the equity method