Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Appendix C
Appendix C
Investments
QUESTIONS
1. To be classified as current assets, investments must be (i) capable of being
2. Short-term debt investments in trading securities are reported on the balance sheet
at the fair (market) value of the portfolio of trading securities.
4. The three classes of debt investments in securities are:
a) Trading.
5. To be classified as current assets, investments must be capable of being converted
into cash quickly and management must intend to sell the investments as a source
6. Unrealized holding gains and losses are not reported on the standard income
statement for available-for-sale debt securities. Unrealized gains and losses for
7. Unrealized Loss⎯Equity ……………………………………………. ##
Fair Value Adjustment—Available-for-Sale (LT) ……. ##
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Appendix C
B-2
8. The portfolio for investments in available-for-sale debt securities is reported on the
balance sheet at fair (market) value—this is separated into short- and long-term.
9. The portfolio of long-term investments in debt securities is reported at cost and
adjusted for amortization of any difference between cost and maturity when the
10. The equity method is used when the investor has a “significant influence” over the
investee corporation; this is generally when the investor owns between 20% and
50% of the investee’s voting stock.
12. Apple reports $224 million for the change in foreign currency translation, net of tax
effects. This change reflects an unrealized gain.
14. Samsung’s financial statements, including its income statement, are all labeled as
being consolidated statements. (Also, it titles those statements with a broad
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Appendix C
QUICK STUDIES
Quick Study C-1 (10 minutes)
True statements: b, d, f
Quick Study C-2 (10 minutes)
a. D
e. D
i. D
Quick Study C-3 (10 minutes)
May 7
Debt Investments—Trading ………………………………
10,300
Cash …………………………………………………………..
10,300
Cash ………………………………………………………………..
11,050
Gain on Sale of Debt Investments ……………….
Debt Investments—Trading …………………………
10,300
Quick Study C-4 (15 minutes)
Unrealized
Portfolio of Trading Securities Cost Fair Value Gain (Loss)
Tesla bonds ………………………………………………… $12,000 $ 9,000
Quick Study C-5 (15 minutes)
1.
KITTY COMPANY
Assets Section of Balance Sheet
December 31
Assets
Current Assets
2. Other Revenues and Gains (or Expenses and Losses) section.
Quick Study C-6 (10 minutes)
Jan. 1
Debt Investments—HTM ………………………………………..
40,000
Cash ………………………………………………………………..
40,000
Purchased bonds to be HTM.
Interest Revenue ………………………………………………
41,200
Debt Investments—HTM …………………………..
Interest Revenue ………………………………………………
B-5
Quick Study C-7 (15 minutes)
1. Nov. 25 Debt Investments—AFS ………………………………… 50,000
2. Dec. 31 Unrealized Loss—Equity ……………………………….. 3,000
3. Apr. 6 Cash …………………………………………………………… 6,000
Gain on Sale of Debt Investments …………. 1,000
Quick Study C-8 (10 minutes)
1. July 1 Debt Investments—AFS ………………………………….. 70,000
2.
B-6
Quick Study C-9 (15 minutes)
Unrealized
Available-for-Sale Portfolio Cost Fair Value Gain (Loss)
Verrizano Corporation bonds ……………………….. $ 89,600 $ 91,600
Quick Study C-10 (15 minutes)
1.
REGGIT COMPANY
Assets Section of Balance Sheet
December 31
Assets
Current Assets
2. No.
Quick Study C-11 (10 minutes)
Apr. 18
Stock Investments …………………………………………..
12,600
Cash ………………………………………………………….
12,600
Cash ……………………………………………………………….
Dividend Revenue ……………………………………..
Quick Study C-12 (10 minutes)
May 9
Stock Investments …………………………………………..
6,000
Cash ………………………………………………………….
6,000
Purchased 200 shares of
Higo
at $30.
June 2
Cash* ……………………………………………………………..
660
Gain on Sale of Stock Investments …………….
Stock Investments** …………………………………..
Dec. 31
Unrealized Loss—Income …………………………………..
1,260
Fair Value Adjustment—Stock ……………………….
1,260
Record an unrealized loss in fair value of equity
securities.
Quick Study C-13 (10 minutes)
1. (a)
May 20
Stock Investments …………………………………………………
150,000
Cash ………………………………………………………………..
150,000
(b)
Gain on Sale of Stock Investments ……………………
2. Fair Value: Fair value is used to account for stock investments in long-term
equity securities with insignificant influence.
Quick Study C-14 (10 minutes)
1. (a) Current assets
Quick Study C-15 (10 minutes)
1.
July 1
Equity Method Investments …………………………….
500,000
Cash …………………………………………………………
500,000
Record purchase of 100 JBI shares.
2.
Equity Method Investments ……………………….
3.
Equity Method Investments …………………………….
Earnings from Equity Method Investments ..
B-9
Quick Study C-16 (10 minutes)
1. Consolidation Method.
Explanation. Accenture uses the Consolidation Method to account for
2. Consolidated Financial Statements.
Explanation. After the acquisition, Accenture will prepare Consolidated
Quick Study C-17 (15 minutes)
1.
One year ago return on total assets Current year return on total assets
2. Less efficient.
Explanation. Fivio appears to be less efficient in its use of total assets
for the current year compared to one year ago as indicated by the
B-10
Quick Study C-18 (10 minutes)
1. Return on total assets =
4. Component analysis is useful as it allows the determination of whether
return on assets is achieved primarily due to
• Profitability, or
Net income
Average total assets
EXERCISES
Exercise C-1 (10 minutes)
1. Debt securities reflect a (g) creditor relation such as with investments in
notes and bonds.
3. Short-term investments are securities that (1) management intends to
4. Long-term investments in securities are defined as those securities that
Exercise C-2 (20 minutes)
1. Dec. 27
Debt Investments—Trading …………………………..
66,000
66,000
2. Dec. 31
Fair Value Adjustment—Trading ……………………
6,000
6,000
3. Jan. 3
Cash ……………………………………………………………..
4,000
3,000
B-12
Exercise C-3 (10 minutes)
a.
Jun. 15
1,000
1,025
Exercise C-4 (10 minutes)
a.
Aug. 1
50,000
50,000
Exercise C-5 (15 minutes)
Computation of Fair Value Adjustment
Cost
Fair
Value
Unrealized
Gain (Loss)
Nintendo Co. notes ………………………………………………..
$ 44,450
$ 48,900
Atlantic bonds ……………………………………………………….
49,000
47,000
McDonald’s Corp. bonds …………………………..
Dec. 31
Unrealized Loss—Equity ……………………………………….
Exercise C-6 (30 minutes)
Year 1
Dec. 31
Fair Value Adjustment—AFS …………………………..
$2,000
Unrealized Gain—Equity …………………………………..
$2,000
Record fair value of
LT
AFS portfolio ($15,000-$13,000).
12/31/Year 1—F.V. Adj—AFS
Unadj.
Adj.
2,000
End.
2,000
Year 2
Dec. 31
Fair Value Adjustment—AFS* …………………………..
$3,000
Unrealized Gain—Equity …………………………………..
$3,000
12/31/Year 2—F.V. Adj—AFS
Unadj.
2,000
Adj.
3,000
End.
5,000
Year 3
Dec. 31
Fair Value Adjustment—AFS* …………………………..
$1,000
Unrealized Gain—Equity …………………………………..
$1,000
12/31/Year 3—F.V. Adj—AFS
Unadj.
5,000
Adj.
1,000
End.
6,000
Dec. 31
Unrealized Gain—Equity ………………………………………..
$3,500
Fair Value Adjustment—AFS* ………………………….
$3,500
Record fair value of LT AFS portfolio.
* $19,000 – $16,500 = $2,500 net gain
($6,000 prior gain – $3,500 current gain reversal).
12/31/Year 4—F.V. Adj—AFS
Unadj.
6,000
Adj.
End.
2,500
B-14
Exercise C-7 (15 minutes)
a.
Mar. 22
10,000
10,000
Exercise C-8 (15 minutes)
Computation of Fair Value Adjustment
Cost
Fair
Value
Unrealized
Gain (Loss)
Apple stock ……………………………………………………….
$ 6,000
$ 8,000
Chipotle stock ……………………………………………………….
Under Armour stock ………………………………………………
Dec. 31
Unrealized Gain—Income …………………………..
B-15
Exercise C-9 (15 minutes)
1.
MARS CO.
Assets Section of Balance Sheet
December 31
Assets
Current Assets
2. Other Revenues and Gains (or Expenses and Losses) section.
Exercise C-10 (25 minutes)
July 22
Stock Investments …………………………………………
48,000
Cash ………………………………………………………..
48,000
Purchased
Hunt
shares (1,600 sh x $30).
Cash ………………………………………………………………
Cash ………………………………………………………..
Oct. 3
Cash ……………………………………………………………..
40,000
Loss on Sale of Stock Investments ………………..
8,000
Stock Investments ……………………………………
48,000
Sold
Hunt
shares (1,600 sh x $25).
Oct. 30
Stock Investments …………………………………………
Cash ………………………………………………………..
Dec. 17
Cash ………………………………………………………………
Fair Value Adjustment—Stock ……………………….
Unrealized Gain—Income* ………………………..
Unrealized
Portfolio of Stock Investments (ST) Cost Fair Value Gain (Loss)
HCA 3,400 x $34 …………………………….. $115,600
Black & Decker 1,200 x $50 …………………………….. 60,000
$175,600 $180,000 *$4,400
We can also use a T-account to help determine the needed adjustment to fair value:
12/31—F.V. Adj—Stock
Unadj.
0
Adj.
End.
B-17
Exercise C-11 (30 minutes)
(a) Feb. 15
Debt Investments—HTM ………………………………………..
160,000
Cash ……………………………………………………….
160,000
Purchased 10%, 90-day notes of
GMI
.
(b) Mar. 22
Cash ……………………………………………………….
Purchased 700 shares of
(700 x $51).
(c) May 15
Cash ……………………………………………………………………..
164,000
Debt Investments—HTM …………………………..
160,000
Interest Revenue ………………………………………………
(d) July 30
Debt Investments—Trading …………………………..
100,000
Cash ……………………………………………………….
100,000
Purchased 8%, 6-month notes of
(e) Sept. 1
Cash ……………………………………………………………………..
700
Dividend Revenue ……………………………………………
700
Received dividend on
Fran
shares
(700 shares x $1).
(f) Oct. 8
Cash* …………………………………………………………………….
Stock Investments** …………………………………………
Gain on Sale of Stock Investments ……………………
(g) Oct. 30
Cash ……………………………………………………………………..
Interest Revenue ………………………………………………
($100,000 x 8% x 3/12).
Exercise C-12 (30 minutes)
Year 1
Jan. 2
Equity Method Investments* …………………………..
411,000
Cash ………………………………………………………………..
411,000
Record purchase of equity method investment.
Sept. 1
Cash ……………………………………………………………………..
45,000
Equity Method Investments …………………………..
45,000
Dec. 31
Equity Method Investments ……………………………………
162,300
Earnings from Equity Method Investments ……….
Year 2
June 1
Cash ……………………………………………………………………..
63,000
Equity Method Investments …………………………..
63,000
Record receipt of cash dividend. 30,000 sh x $2.10
Dec. 31
Equity Method Investments ……………………………………
234,250
Earnings from Equity Method Investments ……….
234,250
Cash ……………………………………………………………………..
71,000
Gain on Sale of Investments …………………………..
Equity Method Investments* …………………………..
69,955
Exercise C-13 (15 minutes)
1. Classification of Investments in Securities
a. Brava bonds: Long-term investment
Debt Investments—Held–to-Maturity
2. Fair Value Adjustment entry at December 31.
Dec. 31
Fair Value Adjustment—AFS ………………………………….
10,825
Unrealized Gain⎯Equity …………………………………..
10,825
Record fair value of AFS portfolio ($255,800 – $266,625).
AFS securities
Cost
Fair Value
Duffa bonds …………………………………………………..
$165,500
$178,000
Exercise C-14 (20 minutes)
GERMX CO.
Assets Section of Balance Sheet
December 31
Assets
Current assets
Cash ……………………………………………………………. $ 10,000
Stock investments (at cost) …………………………... $23,000
Fair value adjustment—Stock ……………………….. (1,000)
Exercise C-15 (15 minutes)
1. Only FSN is considered a subsidiary of Wixi.
2. Individual assets and liabilities of a parent and its subsidiary are
consolidated into one balance sheet.