Accounting Chapter 12 Homework However Only The Credit Loss Component Recognized

Question 12–1

Question 12–2

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

Question 12–3

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

Question 12–4

For 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

Chapter 12 INVESTMENTS

Questions for Review of Key Topics

12–2 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 12–5

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

statements depends on whether the investments are classified as “securities

Question 12–6

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

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

Answers to Questions (continued)

Question 12–8

When acquired, debt and equity 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

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—

12–4 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 12–10

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

Question 12–11

According to U.S. GAAP, the fair value of an equity security is considered

readily determinable only if its selling price is currently available on particular

securities exchanges or over-the-counter markets. If the fair value of an equity

Question 12–12

Answers to Questions (continued)

Question 12–13

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

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

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

Answers to Questions (continued)

Question 12–16

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

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

Question 12–18

Answers to Questions (continued)

Question 12–19

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

Question 12–20

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

Question 12–21

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

investment, that investment is not reclassified as a trading security. Rather, the

12–8 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 12–22

A financial instrument is: (a) cash, (b) evidence of an ownership interest in an

entity, (c) a contract that (1) imposes on one entity an obligation to deliver cash or

Question 12–23

Question 12–24

Question 12–25

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

Answers to Questions (continued)

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, the investor is required to recognize the entire impairment loss in the

Question 12–27

If the OTT impairment relates to an equity investment, the entire amount of

impairment is recognized in net income. Any previously recorded unrealized

losses are reclassified out of AOCI.

12–10 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 12–28

Given that the decline in shares relates to a new law banning a primary

approach used by the company, it likely would be treated as an other-than-

Question 12–29

U.S. GAAP and IFRS differ somewhat. Under IFRS, OTT impairments only

are recognized on debt that is classified as HTM to the extent that credit losses

BRIEF EXERCISES

Brief Exercise 12–1

(a)

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

Brief Exercise 12–2

Unlike for securities available-for-sale, unrealized holding gains and losses for

trading securities are included in earnings. S&L reports its $2,000 holding loss in

2016 earnings. When the fair value rises by $7,000 in 2017, that amount is

reported in 2017 earnings ($5,000 as a realized gain, and $2,000 as the reversal of

the unrealized loss that was recognized in 2016). S&L’s journal entries for these

transactions would be:

2016

December 27

Investment in Coca Cola shares …………………………………… 875,000

12–12 Intermediate Accounting, 8/e

Brief Exercise 12–2 (concluded)

2017

January 3

Cash (selling price) ……………………………………………………….. 880,000

Brief Exercise 12–3

Unlike for trading securities, unrealized holding gains and losses for securities

available-for-sale are not included in earnings. S&L reports its $2,000 holding loss

in 2016 as other comprehensive income in the statement of comprehensive income.

When the fair value rises to $880,000 in 2017, the amount reported in 2017

earnings is the $5,000 gain realized by the sale of the securities. S&L’s journal

entries for these transactions would be:

2016

December 27

2017

January 3

Cash (selling price) ……………………………………………………….. 880,000

12–14 Intermediate Accounting, 8/e

Brief Exercise 12–4

Securities available-for-sale are reported at fair value, and resulting holding

gains and losses are not included in the determination of net income for the period.

Rather, they are reported as “other comprehensive income” in the statement of

comprehensive income. The accumulated balance of net holding gains and losses

is reported as a separate component of shareholders’ equity, as part of accumulated

other comprehensive income. The adjusting entry needed to increase the fair value

adjustment from $110,000 to $170,000 is:

Brief Exercise 12–5

These are securities available-for-sale and are reported at their fair value,

$4,000,000. We know this because securities “held–to–maturity” are debt securities

Brief Exercise 12–6

Because S&L elected the fair value option, it would classify this investment as

a trading security and account for it in that fashion. Therefore, S&L reports its

$2,000 holding loss in 2016 earnings. When the fair value rises by $7,000 in 2017,

that amount is reported in 2017 earnings ($5,000 as a realized gain, and $2,000 as

the reversal of the unrealized loss that was recognized in 2016). S&L’s journal

entries for these transactions would be:

2016

December 27

2017

January 3

Cash (selling price) ……………………………………………………….. 880,000

12–16 Intermediate Accounting, 8/e

Brief Exercise 12–7

An investor should account for dividends from an investment not accounted for

Brief Exercise 12–8

Fowler would account for the bonds at fair value through other comprehensive

income (FVOCI), because the bonds’ cash flows consist of only interest and

Brief Exercise 12–9

Fowler would account for the bonds at amortized cost, because its cash flows

Brief Exercise 12–10

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 12–11

With the equity method we attempt to approximate the effects of accounting for

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

Brief Exercise 12–12

Kim doesn’t need to amortize any of the $2 million difference, because the

entire difference relates to land, which does not depreciate. Kim would increase its

12–18 Intermediate Accounting, 8/e

Brief Exercise 12–13

The investment would be increased by $12 million. Financial statements

would be recast to reflect the equity method for each year reported for

Brief Exercise 12–14

Given Turner’s election of the fair value option, it would account for this

investment similar to a trading security, while still preserving its classification as a

significant-influence investment and showing it as a noncurrent asset in the balance

sheet.

2016

January 2

Investment in ICA Company …………………………..………….. 10,000,000

December 30

Cash (40% x $500,000) ………………………………………………….. 200,000

Investment revenue ………………………………………………… 200,000

December 31

12–20 Intermediate Accounting, 8/e