CHAPTER 17
Investments
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Debt investments.
1, 2, 3, 4, 11,
12
1, 9
4, 7
(b) Trading.
5, 8,
9, 10
3, 5
4
1, 3, 4, 7
1, 4
2. Bond amortization.
7, 8
1, 2, 3, 4
3, 4, 5
1, 2
3. Equity investments.
1, 13, 14, 16
1
4, 7
(a) Non-trading.
17, 23
8, 9
13
10
15, 17, 23
13, 14,
17, 18, 19
10, 11
10, 11, 12,
5, 6, 8, 9,
3
4. Disclosures of investments.
24
10, 11
5, 8, 9, 10,
11
5. Fair value option.
11, 12, 27
6
7, 8, 19
2, 7
6. Impairments.
25
11, 12
21, 22, 23
1, 3
7. Recycling, Reclassifications
26
13
1, 3, 7
*This material is dealt with in an Appendix to the chapter.
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Exercises
Problems
Concepts
for
Analysis
1. Describe the accounting for debt
investments.
1, 2, 3, 4, 5,
6, 7, 8
1, 2, 3, 4, 7
1, 3, 7
13, 14, 15, 17
9, 10, 11
accounting.
8
5, 6
4. Evaluate other major issues related to
debt and equity investments.
9, 21, 22, 23
7
7
*5. Describe the uses of and accounting
for derivatives.
24
12, 13, 14
15, 16, 17
accounting problems.
8. Describe required fair value
disclosures.
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E17.1
Investment classifications.
Simple
5–10
E17.2
Debt investments.
Simple
10–15
E17.3
Debt investments.
Simple
15–20
E17.4
Debt investments.
Simple
10–15
E17.5
Debt investments.
Simple
10–15
presentation
E17.7
Fair value option.
Simple
5–10
E17.8
Fair value option.
Moderate
15–20
E17.9
Comprehensive income disclosure
Moderate
20–25
E17.10
Entries for equity investments.
Simple
10–15
E17.11
Equity investments.
Simple
10–15
E17.12
Equity investment entries and reporting.
Simple
presentation.
E17.14
Equity investment entries.
Moderate
20–25
E17.15
Journal entries for fair value and equity methods.
Moderate
15–20
E17.16
Equity method.
Moderate
10–15
E17.17
Equity investments—trading.
Moderate
10–15
E17.18
Equity investments—trading.
Moderate
15–20
E17.19
Fair value and equity method compared.
Moderate
15–20
E17.20
Equity method.
Simple
10–15
E17.21
Impairment.
Moderate
15–20
E17.22
Impairment.
Moderate
10–15
E17.23
Impairment.
Moderate
20–25
*E17.24
Derivative transaction.
Moderate
15–20
*E17.25
Fair value hedge.
Moderate
20–25
*E17.26
Cash flow hedge.
Moderate
20–25
*E17.27
Fair value hedge.
Moderate
15–20
*E17.28
Call option.
Moderate
20–25
*E17.29
Cash flow hedge.
Moderate
25–30
P17.1
Debt investments.
Moderate
20–30
P17.2
Debt investments, fair value option.
Moderate
30–40
P17.3
Debt and equity investments.
Moderate
25–30
P17.4
Debt investments.
Moderate
25–35
P17.5
Equity investment entries and disclosures.
Moderate
25–35
P17.6
Equity investments.
Moderate
25–35
P17.7
Debt investment entries.
Moderate
25–35
P17.8
Fair value and equity method.
Moderate
20–30
P17.9
Financial statement presentation of equity investments.
Moderate
20–30
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P17.10
Equity investments.
Complex
30–40
P17.11
Investments—statement presentation.
Moderate
20–30
Derivative financial instrument.
Moderate
20–25
Derivative financial instrument.
Moderate
20–25
Free-standing derivative.
Moderate
20–25
Fair value hedge interest rate swap.
Moderate
30–40
Cash flow hedge.
Moderate
25–35
Fair value hedge.
Moderate
25–35
CA17.1
Issues raised about investments.
Moderate
25–30
CA17.2
Equity investments.
Moderate
25–30
CA17.3
Financial statement effect of investments.
20–30
CA17.4
Equity investments.
Moderate
20–25
CA17.5
Investment accounted for under the equity method.
15–25
CA17.6
Equity investments.
Moderate
25–35
CA17.7
Fair value.
Moderate
25–35
ANSWERS TO QUESTIONS
1. The two criteria for determining the valuation of financial assets are the (1) company’s business
2. Only debt investments such as loans and bond investments are valued at amortized cost. A
company should use amortized cost if it has a business model whose objective is to hold assets
3. Amortized cost is the initial recognition amount of the investment minus repayments, plus or
minus cumulative amortization and net of any reduction for uncollectibility.
4. Companies group investments in debt securities into three separate categories for accounting
and reporting purposes.
• Held-for-collection: Investments held (1) with the objective of holding assets in order to
collect contractual cash flows, and (2) the contractual terms of the financial asset give rise
5. Lady Gaga should classify this investment as a trading investment because companies frequently
buy and sell this type of investment to generate profits in short term differences in price.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
6. (a) If Lady Gaga plans to hold the investment to collect interest and receive the principal at
maturity, it should account for this investment at amortized cost.
7. €3,604,062 X 10% = €360,406; €360,406 ÷ 2 = €180,203. Wheeler would make the following entry:
Questions Chapter 17 (Continued)
8. Fair Value Adjustment ……………………………………………………………………. 75,735
Unrealized Holding Gain or Loss—Income
9. (a) Unrealized holding gains and losses for trading investments should be included in net income
for the current period. (b) Unrealized holding gains and losses are not recognized for held-for-
10. (a) Unrealized Holding Gain or Loss—Income ………………………………….. 60,000
Fair Value Adjustment ………………………………………………………. 60,000
11. The fair value option allows companies the choice of reporting debt investments at fair value. If
this option is chosen, the company records in net income unrealized gains and losses with
12. No, Franklin cannot use the fair value option for this investment. This option is generally available
13. Investments in equity securities can be classified as follows:
(a) Holdings of less than 20% (fair value method)—investor has passive interest.
14. Investments in shares do not have contractual cash flows (nor a maturity date) and therefore
Questions Chapter 17 (Continued)
15. Equity Investments (10,000 X $26) ………………………………………………. 260,000
16. Gross selling price of 10,000 shares at $27.50 ………………………………. $275,000
Less: Brokerage commissions ……………………………………………………. (1,770)
Proceeds from sale ……………………………………………………………………. 273,230
17. Both trading and non-trading equity investments are reported at fair value. However, any
18. Significant influence over an investee may result from representation on the board of directors,
participation in policy-making processes, material intercompany transactions, interchange of
19. Under the equity method, the investment is originally recorded at cost, but is adjusted for
changes in the investee’s net assets. The investment account is increased (decreased) by the
20. The following information is reported under the equity method:
1. Investments originally recorded at cost with adjustment for the investor’s share of the
Questions Chapter 17 (Continued)
21. Dividends subsequent to acquisition should be accounted for as a reduction in the equity
22. Ordinarily, Raleigh Corp. should discontinue applying the equity method and not provide for
additional losses beyond the carrying value of £170,000. However, if Raleigh Corp.’s loss is not
23. Trading equity investments are reported as a current asset while non-trading investments are
reported as a long-term investment. Trading investments are expected to be disposed of within
24. Recycling adjustments are necessary to insure that double counting does not result when
25. A debt investment is impaired when “it is probable that the investor will be unable to collect all
amounts due according to the contractual terms.” When an impairment has occurred, the
26 When an investment is transferred from one category to another, the transfer should be recorded
27. Major unresolved issues related to fair value accounting include measurement based on
Questions Chapter 17 (Continued)
*28. An underlying is a special interest rate, security price, commodity price, index of prices or rates,
or other market-related variable. Changes in the underlying determine changes in the value of
*29. See illustration below:
Feature
Traditional Financial Instrument
(e.g., Trading Security)
Derivative Financial Instrument
(e.g., Call Option)
Payment Provision
Initial Investment
Share price times the number
Change in share price (underlying)
*30. The purpose of a fair value hedge is to hedge (offset) the exposure to changes in the fair value of
*31. The unrealized holding gain or loss on non-trading equity investments should be reported as
income when this security is designated as a hedged item in a qualifying fair value hedge. If the
*32. This is likely a setting where the company is hedging the fair value of a fixed-rate debt obligation.
The fixed payments received on the swap will offset fixed payments on the debt obligation. As a
result, if interest rates decline, the value of the swap contract increases (a gain), while at the
Questions Chapter 17 (Continued)
*33. A cash flow hedge is used to hedge exposures to cash flow risk, which is exposure to the
variability in cash flows. The cash flows received on the hedging instrument (derivative) will offset
*34. Derivatives used in cash flow hedges are accounted for at fair value on the statement of financial
*35. A hybrid security is a security that has characteristics of both debt and equity and often is a
combination of traditional and derivative financial instruments. A convertible bond is a hybrid
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 17.1
January 1, 2019
(a) Debt Investments ………………………………………………. 74,086
Cash ………………………………………………………….. 74,086
BRIEF EXERCISE 17.2
January 1, 2019
(a) Debt Investments ………………………………………………. 74,086
Cash ………………………………………………………….. 74,086
BRIEF EXERCISE 17.3
(a) Debt Investments ………………………………………………. 74,086
Cash ………………………………………………………….. 74,086
BRIEF EXERCISE 17.4
(a) Debt Investments ……………………………………………… 65,118
Cash …………………………………………………………. 65,118
BRIEF EXERCISE 17.5
Unrealized Holding Gain or Loss—Income ……………… 672
BRIEF EXERCISE 17.6
(a) Debt Investments ……………………………………………… 50,000
Cash …………………………………………………………. 50,000
BRIEF EXERCISE 17.7
(a) Equity Investments …………………………………………. 13,200
Cash ……………………………………………………….. 13,200
BRIEF EXERCISE 17.8
(a) Equity Investments …………………………………………. 13,200
Cash ……………………………………………………….. 13,200
BRIEF EXERCISE 17.9
Equity Investment ……………………………………………………. 700
BRIEF EXERCISE 17.10
Equity Investments ……………………………………………….. 300,000
BRIEF EXERCISE 17.11
Loss on Impairment ($70,000 – $60,000) ……………. 10,000
BRIEF EXERCISE 17.12
Case 1 The total fair value adjustments is $10,000 ($40,000−$30,000), of
which $5,000 is due to expected credit losses. The entry to record the
Case 2 No impairment results, because the fair value is greater than
amortized cost
BRIEF EXERCISE 17.13
January 1, 2020
Debt Investments ……………………………………………… 10,325
SOLUTIONS TO EXERCISES
EXERCISE 17.1 (5–10 minutes)
EXERCISE 17.2 (10–15 minutes)
(a) January 1, 2019
Debt Investments ………………………………………. 300,000
Cash ………………………………………………….. 300,000
EXERCISE 17.3 (15–20 minutes)
(a) January 1, 2019
Debt Investments ………………………………………. 537,907.40
(b) Schedule of Interest Revenue and Bond Premium Amortization
12% Bonds Sold to Yield 10%
Date
Cash
Received
(1)
Interest
Revenue
@ 10%
(2)
Premium
Amortized
(1–2)
Carrying Amount
of Bonds
1/1/19
—
—
—
$537,907.40
12/31/19
$60,000
$53,790.74
$6,209.26
531,698.14
(c) December 31, 2019
Cash …………………………………………………………… 60,000.00
Debt Investments …………………………………. 6,209.26
Interest Revenue ………………………………….. 53,790.74
EXERCISE 17.4 (10–15 minutes)
(a) January 1, 2019
Debt Investments …………………………………………. 537,907.40
Cash ………………………………………………….. 537,907.40
(b) December 31, 2019
(c) December 31, 2020
Unrealized Holding Gain or Loss— Income 12,369.81
Fair Value Adjustment ……………………… 12,369.81
Amortized
Cost
Fair Value
Unrealized
Holding
Gain (Loss)
Debt investments
$524,867.95
$515,000.00
($ (9,867.95)
EXERCISE 17.5 (10–15 minutes)
(a) Schedule of Interest Revenue and Bond Discount Amortization
9% Bond Purchased to Yield 12%
Date
Cash
Received
(1)
Interest
Revenue
@12%
(2)
Bond Discount
Amortization
(2–1)
Carrying Amount
of Bonds
(b) December 31, 2020
Cash …………………………………………………………… 27,000.00
EXERCISE 17.6 (10–15 minutes)
(a) The portfolio should be reported at the fair value of €54,500. Since the
cost of the portfolio is €53,000, the unrealized holding gain is €1,500, of
EXERCISE 17.6 (Continued)
STEFFI GRAF, SA
Balance Sheet
As of December 31, 2019
_____________________________________________________________
Current assets:
Debt investments €54,500*
Stockholders’ equity:
(c) Computation of realized gain or loss on sale of debt security:
Net proceeds from sale of security A €15,100
Cost of security A (17,500)
EXERCISE 17.7 (5–10 minutes)
(a) December 31, 2019
Debt Investments ………………………………………… 8,301.86
(b) December 31, 2020
Unrealized Holding Gain or Loss—Income .. 8,169.81
EXERCISE 17.8 (15-20 minutes)
(a) Net income before gains and losses …………………… ¥100,000
Debt investments (¥41,000 – ¥40,000) …………………. 1,000