12–62 Intermediate Accounting, 8/e
Exercise 12–29 (continued)
Scenario 3: Bloom does not plan to sell the investment, and does not believe it is
more likely than not that it will have to sell the investment before fair value
recovers, but the entire impairment consists of noncredit losses, so Bloom does not
record any OTT impairment.
Requirement 2: Assuming Bloom has previously recorded a $100,000 loss
Scenario 1: Bloom believes it is more likely than not it will have to sell the
investment before fair value recovers, so the portion of the impairment that
Exercise 12–29 (concluded)
Scenario 2: Bloom does not plan to sell the 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. Bloom must recognize the $250,000 of credit losses as an OTT
impairment in earnings, and the other $150,000 as a reduction of OCI. Bloom
makes the following entry:
Scenario 3: Bloom does not plan to sell the investment, and does not believe it is
more likely than not that it will have to sell the investment before fair value
recovers, but the entire impairment consists of noncredit losses, so Bloom does not
record any OTT impairment. Instead, Bloom needs to record a change in its
12–64 Intermediate Accounting, 8/e
Exercise 12–30
December 31, 2016:
Kettle must record an unrealized loss of $10,000 to account for the fact that the
fair value of Icalc’s shares has fallen from the original cost of $50,000 to $40,000.
December 31, 2017:
Kettle now must record an OTT impairment. To reduce the investment from its
original cost of $50,000 to $25,000, Kettle makes the following entry:
December 31, 2018:
Subsequent to recording the OTT impairment, Kettle continues to treat the
investment as AFS, but with an amortized cost of $25,000. Given an increase in
fair value to $30,000 during 2018, Kettle records a $5,000 unrealized gain, with no
effect on net income but an increase of $5,000 to OCI and comprehensive income:
Exercise 12–31
Requirement 1
HTM investment, December 31, 2016
Under IAS No. 39, only credit losses are recognized as OTT impairments with
Requirement 2
HTM investment, December 31, 2017
Requirement 3
AFS debt investment, December 31, 2016
Exercise 12–31 (concluded)
Requirement 4: AFS debt investment, December 31, 2017
Under IAS No. 39, OTT impairments associated with debt investments can be
recovered. Therefore, Flower would record a reversal of OTT impairment to
12–68 Intermediate Accounting, 8/e
CPA / CMA REVIEW
QUESTIONS
CPA Exam Questions
1. d.
Sales price (2,000 shares x $14)
$28,000
Less: Brokerage commission
(1,400)
Net Proceeds
$26,600
Realized loss on trading security
$(4,900)
CPA Review Questions (continued)
2. a. Marketable equity securities (equity securities with readily determinable
fair values) are categorized as either trading securities (which are
classified as current assets) or available-for-sale securities (which are
classified as current or noncurrent assets), as appropriate. Because
Lark’s investments are long-term, they are categorized as available-for-
sale securities.
3. d. $116,250.
LT investments in marketable equity securities at fair value $ 96,450
Plus: Net unrealized holding gains and losses on
12–70 Intermediate Accounting, 8/e
CPA Review Questions (continued)
4. d. Since the decline in value occurred in 2015, the available-for-sale
security was reduced to fair value with a related unrealized holding loss
reported in other comprehensive income in 2015. In 2016, the asset
5. d. Neither a change in fair value of investee’s common stock nor cash
dividends from investee affect the investor’s reported investment income
(equity in earnings of investee) under the equity method. Under the
6. c. The entries should have been:
Investment in affiliate (40% x 20,000) 8,000
CPA Review Questions (continued)
7. b. Under the equity method, the investor should reflect adjustments, which
would be made in consolidation, based on the investor’s percentage
ownership, if such adjustment (eliminations) can be recorded between
8. a. $435,000. The equity method of accounting for investments in common
stock should be used if the investor has significant influence over the
operating and financial policies of the investee. Well Company’s
significant influence is demonstrated by its officers being a majority of
the investees’ board of directors.
9. d. Under IFRS No. 9, debt can be classified in all of those categories,
depending on the circumstances.
12–72 Intermediate Accounting, 8/e
CMA Exam Questions
1. c. According to GAAP, available-for-sale securities are investments in debt
securities that are not classified as held-to-maturity or trading securities
2. b. Available-for-sale securities include (1) equity securities with readily
determinable fair values that are not classified as trading securities and
(2) debt securities that are not classified as held-to-maturity or trading
securities. Unrealized holding gains and losses are measured by the
3. d. Debt securities that the company has the positive intent and ability to
Problem 12–1
Requirement 1 ($ in millions)
Investment in bonds (face amount) …………………… 80
Discount on bond investment (difference) …….. 14
PROBLEMS
12–74 Intermediate Accounting, 8/e
Problem 12–1 (concluded)
Requirement 5
Fuzzy Monkey’s 2016 statement of cash flows would be affected as
follows:
Problem 12–2
Requirement 1 ($ in millions)
Investment in bonds (face amount) …………………… 80
Discount on bond investment (difference) …….. 14
12–76 Intermediate Accounting, 8/e
Problem 12–2 (concluded)
Requirement 5
Fuzzy Monkey’s 2016 statement of cash flows would be affected as
follows:
Problem 12–3
Requirement 1 ($ in millions)
Investment in bonds (face amount) …………………… 80
Discount on bond investment (difference) …….. 14
12–78 Intermediate Accounting, 8/e
Problem 12–3 (concluded)
Requirement 5
Fuzzy Monkey’s 2016 statement of cash flows would be affected as
follows:
12–80 Intermediate Accounting, 8/e
Problem 12–4
Note: Because Fuzzy Monkey elected the fair value option, these investments will
be reclassified as trading securities and accounted for under that approach.
Therefore, the answers to Requirements 1–5 are the same as those to Problem 12–
2.
Requirement 1 ($ in millions)
Investment in bonds (face amount) …………………… 80
Discount on bond investment (difference) …….. 14
Cash (price of bonds) …………………………………… 66