CHAPTER 16
Investments
ASSIGNMENT CLASSIFICATION TABLE
Learning Objectives
Questions
Brief
Exercises
Do It!
Exercises
A
Problems
1. Explain how to account for
debt investments.
1, 2, 3, 4
1
1
1, 2, 3
1A
2. Explain how to account for
stock investments.
5, 6, 7, 8, 9,
2, 3
2
4, 5, 6, 7,
1A, 2A, 3A,
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Journalize debt investment transactions and show
financial statement presentation.
Moderate
30–40
2A
Journalize investment transactions, prepare adjusting
entry, and show statement presentation.
Moderate
30–40
3A
Journalize transactions and adjusting entry for stock
investments.
Moderate
30–40
5A
Journalize stock investment transactions and show
statement presentation.
Moderate
40–50
WEYGANDT ACCOUNTING PRINCIPLES 12E
CHAPTER 16
INVESTMENTS
Number
LO
BT
Difficulty
Time (min.)
BE1
1
AP
Simple
2–4
BE2
2
AP
Simple
3–5
BE3
2
AP
Simple
3–5
BE4
3
AP
Simple
2–3
BE5
3
AN
Simple
2–4
BE6
3
AN
Simple
2–3
BE7
3
AP
Simple
2–4
BE8
3
AP
Simple
3–5
DI1
1
AP
Moderate
6–8
DI2
2
AP
Simple
6–8
DI3a
3
AN
Simple
4–6
DI3b
3
K
Simple
4–6
EX1
1
K
Simple
8–10
EX2
1
AP
Moderate
8–10
EX3
1
AP
Moderate
8–10
EX4
2
AP
Simple
8–10
EX5
2
AP
Simple
6–8
EX6
2
AP
Simple
8–10
EX7
2
AP
Simple
6–8
EX8
AP
Simple
8–10
EX9
2
K
Simple
6–8
EX10
3
AN
Simple
4–6
EX11
3
AN
Simple
8–10
EX12
3
AN
Simple
6–8
P1A
2, 3
AN
Moderate
30–40
P2A
2, 3
AN
Moderate
30–40
P3A
2, 3
AN
Moderate
30–40
P4A
2, 3
AN
Simple
20–30
P5A
2, 3
AN
Moderate
40–50
INVESTMENTS (Continued)
Number
LO
BT
Difficulty
Time (min.)
BYP1
2
C
Simple
10–15
BYP2
2
AN
Simple
10–15
BYP3
2
AN
Simple
5–10
BYP4
—
K
Simple
10–15
BYP5
2
C
Moderate
15–20
BYP6
3
Simple
5–10
BYP7
3
E
Simple
10–15
BYP8
—
C
Simple
10–15
BYP9
AP
BLOOM’ S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End–of-Chapter Exercises and Problems
Learning Objective
Knowledge
Comprehension
Application
Analysis
Synthesis
Evaluation
1. Explain how to account for debt
investments.
E16-1
Q16-1
Q16-2
Q16-3
Q16-4
BE16-1
DI16-1
E16-2
E16-3
2. Explain how to account for stock
investments.
Q16-7
Q16-11
Q16-20
E16-9
Q16-5
Q16-8
Q16-9
Q16-10
Q16-6
BE16-2
BE16-3
DI16-2
E16-4
E16-5
E16-6
E16-7
E16-8
P16-1A
P16-2A
P16-3A
P16-4A
P16-5A
E16-11
P16-5A
ANSWERS TO QUESTIONS
1. The reasons corporations invest in securities are: (1) excess cash not needed for operations that
can be invested, (2) for additional earnings, and (3) strategic reasons.
2. (a) The cost of an investment in bonds consists of all expenditures necessary to acquire the bonds,
such as the market price of the bonds plus any brokerage fees.
(b) Interest is recorded as it is earned; that is, over the life of the investment in bonds.
4. Seibel Company is incorrect. The gain is the difference between the net proceeds, exclusive of interest,
and the cost of the bonds. The correct gain is $4,500, or [($45,000 – $500) – $40,000].
5. The cost of an investment in stock includes all expenditures necessary to acquire the investment.
These expenditures include the actual purchase price plus any commissions or brokerage fees.
6. The entry is:
Stock Investments …………………………………………………………………………. 62,000
Cash …………………………………………………………………………………….. 62,000
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
8. Since Ling Corporation uses the equity method, the income reported by Gorman Packing ($80,000)
should be multiplied by Ling’s ownership interest (35%) and the result ($28,000) should be debited to
Stock Investments and credited to Revenue from Stock Investments. Also, of the total dividend
declared and paid by Gorman ($10,000) Ling will receive 35% or $3,500. This amount should be
debited to Cash and credited to Stock Investments.
Questions Chapter 16 (Continued)
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 a separate component
11. Consolidated financial statements present the details of the assets and liabilities controlled by the
parent company and the total revenues and expenses of the affiliated companies.
12. The valuation guidelines for investments is as follows:
Category
Valuation and Reporting
Trading
Available-for-sale
Held-to-maturity
At fair value with changes reported in net income
At fair value with changes reported in stockholders’ equity
At amortized cost
13. Jill should report as follows:
(1) Under current assets in the balance sheet:
Short-term investments, at fair value ……………………………………………….. $72,000
14. Jill should report as follows:
(1) Under investments in the balance sheet:
Investments in stock of less than 20% owned companies, at fair value …. $72,000
15. The entry is:
Fair Value Adjustment—Available-for-Sale ……………………………………….. 10,000
Unrealized Gain or Loss—Equity ……………………………………………… 10,000
16. The entry is:
Questions Chapter 16 (Continued)
17. Unrealized Loss—Equity is reported as a deduction from stockholders’ equity. The unrealized loss is
not included in the computation of net income.
18. Reporting Unrealized Gains (Losses)—Equity in the stockholders’ equity section serves two important
purposes: (1) it reduces the volatility of net income due to fluctuations in fair value, and (2) it still
informs the financial statement user of the gain or loss that would occur if the securities were sold at
fair value.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 16-1
Jan. 1 Debt Investments ……………………………………… 52,000
Cash …………………………………………………. 52,000
BRIEF EXERCISE 16-2
Aug. 1 Stock Investments ……………………………………. 37,000
Cash …………………………………………………. 37,000
BRIEF EXERCISE 16-3
Dec. 31 Stock Investments (25% X $180,000) ………….. 45,000
Revenue from Stock Investments ……….. 45,000
BRIEF EXERCISE 16-4
Dec. 31 Unrealized Loss—Income ………………………….. 5,000
Fair Value Adjustment—Trading
($64,000 – $59,000) …………………………. 5,000
BRIEF EXERCISE 16-5
Balance Sheet
Current assets
Short-term investments, at fair value ……………………….. $59,000
BRIEF EXERCISE 16-6
Dec. 31 Unrealized Gain or Loss—Equity …………………….. 4,000
Fair Value Adjustment—Available-for-Sale .. 4,000
BRIEF EXERCISE 16-7
Balance Sheet
Investments
Investments in stock of less than 20% owned
companies, at fair value ……………………………………………. $68,000
BRIEF EXERCISE 16-8
Investments
Investments in stock of less than 20% owned
companies, at fair value ……………………………………………. $115,000
SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 16-1
2017
(a) Jan. 1 Debt Investments ……………………………….. 50,000
Cash …………………………………………….. 50,000
2018
Jan. 1 Cash …………………………………………………. 5,000
Interest Receivable
($50,000 X 10%) ………………………….. 5,000
DO IT! 16-2
(a) June 17 Stock Investments ……………………………… 550,000
Cash …………………………………………….. 550,000
Sept. 3 Cash …………………………………………………. 16,000
Dividend Revenue …………………………. 16,000
DO IT! 16-3a
Trading securities:
Unrealized Loss—Income …………………………………………. 14,600*
Fair Value Adjustment—Trading …………………………... 14,600
*$11,400 + $3,200
Available-for-sale securities:
DO IT! 16-3b
Item
Financial statement
Category
1. Loss on sale of investments
in stock.
Income statement
Other expenses
and losses
2. Unrealized gain on available-
for-sale securities.
Balance sheet
Stockholders’
equity
SOLUTIONS TO EXERCISES
EXERCISE 16-1
1. Companies purchase investments in debt or stock securities because
they have excess cash, to generate earnings from investment income, or
for strategic reasons.
2. A corporation would have excess cash that it does not need for operations
due to seasonal fluctuations in sales and as a result of economic cycles.
6. The typical investment when investing cash for strategic reasons is
stock of companies in a related industry or in an unrelated industry that
the company wishes to enter.
EXERCISE 16-2
2017
1. Jan. 1 Debt Investments ……………………………….. 50,000
Cash …………………………………………… 50,000
EXERCISE 16-2 (Continued)
2018
4. Jan. 1 Cash …………………………………………………. 33,000
EXERCISE 16-3
January 1, 2017
Debt Investments …………………………………………………….. 70,000
Cash …………………………………………………………………. 70,000
December 31, 2017
Interest Receivable ($70,000 X 6%) ……………………………. 4,200
EXERCISE 16-4
(a) Feb. 1 Stock Investments …………………………….. 7,200
Cash ………………………………………….. 7,200
July 1 Cash (600 X $1) …………………………..…….. 600
Dividend Revenue ………………………. 600
EXERCISE 16-5
Jan. 1 Stock Investments ……………………………………. 152,000
Cash …………………………………………………. 152,000
July 1 Cash (2,500 X $3)………………………………………. 7,500
Dividend Revenue ……………………………… 7,500
EXERCISE 16-6
February 1
Stock Investments ……………………………………………………. 16,000
Cash (500 X $32) ……………………………………………….. 16,000
March 20
Cash ……………………………………………………….………………. 2,900
Loss on Sale of Stock Investments ……………………………. 300
Stock Investments ($16,000 X 100/500) ……………….. 3,200
EXERCISE 16-7
(a) Jan. 1 Stock Investments ……………………………… 180,000
Cash …………………………………………… 180,000
Dec. 31 Cash ($60,000 X 25%) …………………………. 15,000
Stock Investments ………………………. 15,000
EXERCISE 16-8
(a) Mar. 18 Stock Investments …………………………….. 260,000
Cash (200,000 X 10% X $13) ………… 260,000
June 30 Cash ………………………………………………… 6,000
Dividend Revenue
($60,000 X 10%) ………………………. 6,000
EXERCISE 16-9
(a) Since Agee owns more than 50% of the common stock of Himes
Corporation, Agee is called the parent company. Himes is the
subsidiary (affiliated) company. Because of its stock ownership,
Agee has a controlling interest in Himes.
EXERCISE 16-10
(a) Dec. 31 Unrealized Loss—Income ……………………….. 2,000
Fair Value Adjustment—Trading ……….. 2,000
(b) Balance Sheet
EXERCISE 16-11
(a) Dec. 31 Unrealized Gain or Loss—Equity …………….. 2,000
Fair Value Adjustment—Available-
for-Sale ……………………………………….. 2,000
(b) Balance Sheet
Investments
Investments in stock of less than 20% owned
companies, at fair value ………………………………… $51,000
EXERCISE 16-11 (Continued)
(c) Dear Ms. Kretsinger:
Investments which are classified as trading (held for sale in the near
term) are reported at fair value in 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, but unrealized gains or losses are reported in the
stockholders’ equity section.
Fair value is used as a reporting basis because it represents the cash
realizable value of the securities. Unrealized gains or losses on trading
Student
EXERCISE 16-12
(a) Fair Value Adjustment—Trading
($126,000 – $120,000) …………………………………………….. 6,000
Unrealized Gain—Income …………………………………… 6,000
(b) Balance Sheet
Current assets
Short-term investments, at fair value…………………… $126,000
Investments