APPENDIX H
Reporting and Analyzing Investments
Learning Objectives
1. Explain how to account for debt investments.
2. Explain how to account for stock investments.
3. Discuss how debt and stock investments are reported in the financial statements.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
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Questions
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Brief Exercises
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Exercises
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Problems
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
PH-1
Journalize debt investment transactions.
Moderate
30–40
PH-2
Journalize investment transactions, prepare adjusting
entry, and show financial statement presentation.
Moderate
30–40
PH-3
Journalize transactions, prepare adjusting entry for stock
investments, and show balance sheet presentation.
Moderate
30–40
PH-4
Prepare entries under cost and equity methods, and
prepare memorandum.
Simple
20–30
PH-5
Journalize stock transactions, and show balance sheet
presentation.
Moderate
40–50
PH-6
Prepare a balance sheet.
Moderate
30–40
ANSWERS TO QUESTIONS
1. Companies invest because (1) they have excess cash for a short period of time, or (2) they want
2. (a) The cost of an investment in bonds consists of the market price of the bonds plus any
3. (a) Losses and gains on the sale of debt investments are computed by comparing the cost of
the securities to the net proceeds from the sale.
4. Heliy Company is incorrect. The gain is the difference between the net proceeds, exclusive of
5. The cost of an investment in stock includes all expenditures necessary to acquire the investment.
6. Brokerage fees are part of the cost of the investment. Therefore, the entry is:
7. (a) Whenever the investor’s influence on the operating and financial affairs of the investee is
significant, the equity method should be used. The major factor in determining significant
influence is the percentage of ownership interest held by the investor in the investee. The
8. Since Stetson Corporation uses the equity method, the income reported by Pike Packing
($80,000) should be multiplied by Stetson’s ownership interest (30%) and the result ($24,000)
9. Significant influence over an investee may result from representation on the board of directors,
participation in policy-making processes, or material intercompany transactions. An investment
10. Under the cost method, an investment is originally recorded and reported at cost. Dividends are
recorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized holding
gain or loss is recognized and included in income (trading security) or as separate component of
11. Consolidated financial statements present the assets and liabilities controlled by the parent com-
12. The valuation and reporting of investments is as follows:
Category Valuation and Reporting
13. Pat should report the data as follows:
(1) Under current assets in the balance sheet:
Short-term investments, at fair value ……………………………………………….. $70,000
(2) Under other expenses and losses in the income statement:
14. Pat should report as follows:
(1) Under investments in the balance sheet:
Investments in stock of less than 20% owned companies, at fair value …. $70,000
(2) Under stockholders’ equity in the balance sheet:
15. The entry is:
16. The entry is:
17. Accumulated other comprehensive loss is reported in stockholders’ equity. It is not included in the
18. The investment in Cyrus Corporation stock is not a short-term investment because there is no
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE H-1
Jan. 1 Debt Investments …………………………………… 40,800
Cash ……………………………………………….. 40,800
BRIEF EXERCISE H-2
Aug. 1 Stock Investments …………………………………. 35,600
Cash ……………………………………………….. 35,600
BRIEF EXERCISE H-3
Dec. 31 Stock Investments …………………………………. 37,500
Revenue from Stock Investments
(25% X $150,000) …………………………... 37,500
BRIEF EXERCISE H-4
Dec. 31 Unrealized Loss—Income ……………………….. 2,400
BRIEF EXERCISE H-5
Balance Sheet
BRIEF EXERCISE H-6
Dec. 31 Unrealized Gain or Loss—Equity ………………. 3,000
BRIEF EXERCISE H-7
Balance Sheet
BRIEF EXERCISE H-8
Investments
Bond sinking fund ………………………………………………………. $150,000
SOLUTIONS TO EXERCISES
EXERCISE H-1
(a) Jan. 1 Debt Investments ……………………………… 90,000
Cash ………………………………………….. 90,000
July 1 Cash ($90,000 X 10% X 1/2) ……………….. 4,500
EXERCISE H-2
(a) Feb. 1 Stock Investments ………………………….... 8,400
Cash ………………………………………….. 8,400
July 1 Cash (1,200 X $2) ……………………………… 2,400
(b) Dividend revenue and the gain on sale of stock investments are reported
under other revenues and gains in the income statement.
LO 2, 3 BT: AN Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Measurement & Reporting
EXERCISE H-3
Jan. 1 Stock Investments ………………………………… 59,200
Cash …………………………………………….. 59,200
EXERCISE H-4
(a) Jan. 1 Stock Investments ………………………….. 150,000
Cash ……………………………………….. 150,000
Dec. 31 Cash ($80,000 X 25%) ……………………… 20,000
(b) Investment in Shane, January 1 ………………………. $150,000
Less: Dividend received …………………………………. 20,000
EXERCISE H-5
2017
1. Mar. 18 Stock Investments …………………………... 504,000
Cash (300,000 X 12% X $14) ……….. 504,000
2. Jan. 1 Stock Investments …………………………... 82,500
Cash (30,000 X 25% X $11) …………. 82,500
June 15 Cash ……………………………………………….. 8,750
EXERCISE H-6
(a) Dec. 31 Unrealized Loss—Income ………………… 4,800
Fair Value Adjustment—Trading … 4,800
EXERCISE H-7
(a) Dec. 31 Unrealized Gain or Loss—Equity …………… 4,800
(b) Balance Sheet
Investments
(c) Dear Ms. Jenks:
Investments which are classified as trading (held for sale in the near
term) are reported at fair value in the current asset section of the
balance sheet, with unrealized gains or losses reported in net income.
Investments which are classified as available-for-sale (held longer than
trading but not to maturity) are also reported at fair value in either the
current assets section or the investment section of the balance sheet,
but unrealized gains or losses are reported as an item of other
comprehensive income.