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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
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