17-1
CHAPTER 17
Investments
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Debt securities.
1, 2, 3, 13
1
4, 7
(a) Held-to-maturity.
4, 5, 7, 8,
10, 13, 21
1, 3
2, 3, 5
1, 7
4
4. Comprehensive income.
22
9
10
10, 12
5. Disclosures of investments.
21
8, 9
5, 8, 9, 10,
11, 12
6. Fair value option.
25, 26, 27
19, 20, 21
7. Impairments.
24
10
18
3
28, 29, 30, 31,
32, 33, 34, 35
22, 23, 24,
25, 26, 27
13, 14, 15,
16, 17, 18
36, 37
(c) Available-for-sale.
4, 7, 8, 9,
10, 11, 21
2, 10
4
1, 2, 3, 4, 7
1, 4
2. Bond amortization.
8, 9
1, 2, 3
3, 4, 5
1, 2, 3
3. Equity securities.
1, 12, 16
1
4, 7
15, 21
12, 16,
19, 20
10, 11, 12
(b) Trading.
6, 7, 8, 10,
14, 15, 21
6
6, 7,
14, 15
6, 8
1, 3
(c) Equity method.
16, 17, 18,
19, 20
7
12, 13,
16, 17
8
5, 6
17-2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Problems
1. Identify the three categories of debt securities
and describe the accounting and reporting
treatment for each category.
4. Explain the equity method of accounting and
compare it to the fair value method for equity
securities.
7
8
5. Describe the accounting for the fair value
option.
8, 9, 10, 12
6. Discuss the accounting for impairments
of debt and equity investments.
7. Explain why companies report reclassification
adjustments.
9
8. Describe the accounting for transfer of
investment securities between categories.
*9. Explain who uses derivatives and why.
accounting for derivatives.
financial instruments.
13, 14, 15
16, 18
2. Understand the procedures for discount and
premium amortization on bond investments.
1, 2, 3, 4
2, 3, 4, 5, 21
1, 2, 3, 4, 7
treatment for each category.
11, 12, 14,
15, 16, 19,
20, 21
10, 11, 12
17-3
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E17-1
Investment classifications.
Simple
5–10
E17-2
Entries for held-to-maturity securities.
Simple
10–15
E17-3
Entries for held-to-maturity securities.
Simple
15–20
E17-10
Comprehensive income disclosure.
Moderate
20–25
E17-11
Equity securities entries.
Simple
20–25
E17-12
Journal entries for fair value and equity methods.
Simple
15–20
E17-13
Equity method.
Moderate
10–15
E17-14
Equity investment—trading.
Moderate
10–15
E17-15
Equity investments—trading.
Moderate
15–20
E17-16
Fair value and equity method compared.
Simple
15–20
E17-17
Equity method.
Simple
10–15
E17-18
Impairment of debt securities.
Moderate
15–20
E17-19
Fair Value measurement.
Moderate
15–20
E17-20
Fair Value measurement.
Moderate
15–20
Derivative transaction.
Moderate
15–20
Fair value hedge.
Moderate
20–25
Cash flow hedge.
Moderate
20–25
Fair value hedge.
Moderate
15–20
Call option.
Moderate
20–25
Cash flow hedge.
Moderate
25–30
P17-1
Debt securities.
Moderate
30–40
P17-2
Available-for-sale debt securities.
Moderate
30–40
P17-3
Available-for-sale investments.
Moderate
25–30
P17-4
Available-for-sale debt securities.
Moderate
25–35
P17-5
Equity securities entries and disclosures.
Moderate
25–35
P17-6
Trading and available-for-sale securities entries.
Simple
25–35
P17-7
Available-for-sale and held-to–maturity debt securities entries.
Moderate
P17-8
Fair value and equity methods.
Moderate
20–30
investments.
E17-4
Entries for available-for-sale securities.
Simple
10–15
E17-5
Effective-interest versus straight-line bond amortization.
Simple
20–30
E17-6
Entries for available-for-sale and trading securities.
Simple
10–15
E17-7
Trading securities entries.
Simple
10–15
E17-8
Available-for-sale securities entries and reporting.
Simple
presentation.
17-4
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
Description
Level of
Difficulty
Time
(minutes)
P17-10
Gain on sale of securities and comprehensive income.
Moderate
20–30
P17-11
Equity investments—available-for-sale.
Complex
35–45
P17-12
Available-for-sale securities—statement presentation.
Moderate
20–30
*P17-13
Derivative financial instrument.
Moderate
20–25
CA17-1
Issues raised about investment securities.
Moderate
25–30
CA17-2
Equity securities.
Moderate
25–30
CA17-3
Financial statement effect of equity securities.
Simple
20–30
CA17-4
Equity securities.
Moderate
20–25
CA17-5
Investment accounted for under the equity method.
Simple
15–25
CA17-6
Equity investment.
Moderate
25–35
CA17-7
Fair value—ethics.
Moderate
25–35
*P17-14
Derivative financial instrument.
Moderate
20–25
*P17-15
Free-standing derivative.
Moderate
20–25
*P17-16
Fair value hedge interest rate swap.
Moderate
30–40
*P17-17
Cash flow hedge.
Moderate
25–35
*P17-18
Fair value hedge.
Moderate
25–35
17-5
SOLUTIONS TO CODIFICATION EXERCISES
CE17-1
Master Glossary
(a) Trading securities are securities that are bought and held principally for the purpose of selling
them in the near term and therefore held for only a short period of time. Trading generally reflects
active and frequent buying and selling, and trading securities are generally used with the
objective of generating profits on short-term differences in price.
CE17-2
According to FASB ASC 235-10-S99-1 (Notes to Financial Statements—SEC Materials):
(n) Accounting policies for certain derivative instruments. Disclosures regarding accounting policies
shall include descriptions of the accounting policies used for derivative financial instruments and
derivative commodity instruments and the methods of applying those policies that materially
affect the determination of financial position, cash flows, or results of operation. This description
shall include, to the extent material, each of the following items:
(1) A discussion of each method used to account for derivative financial instruments and
derivative commodity instruments;
CE17-2 (Continued)
(6) The method used to account for derivatives when the designated item matures, is sold, is
extinguished, or is terminated. In addition, the method used to account for derivatives
designated to an anticipated transaction, when the anticipated transaction is no longer likely
to occur; and
Instructions to paragraph 4-08(n).
1. For purposes of this paragraph (n), derivative financial instruments and derivative
commodity instruments (collectively referred to as “derivatives”) are defined as follows:
(i) Derivative financial instruments have the same meaning as defined by generally
accepted accounting principles (see Financial Accounting Standards Board
2. For purposes of paragraphs (n)(2), (n)(3), (n)(4), and (n)(7), the required disclosures
should address separately derivatives entered into for trading purposes and derivatives
entered into for purposes other than trading.
For purposes of this paragraph, trading purposes has the same meaning as defined by
generally accepted accounting principles (see, e. g., FAS 119, paragraph 9a (October
1994)).
17-7
CE17-3
According to FASB ASC 323-10–35-20 (Investments—Equity Method and Joint Ventures—Subsequent
Measurement):
CE17-4
According to FASB ASC 815–10–45-4 (Derivatives and Hedging—Other Presentation Matters—Balance
Sheet Netting);
17-8
ANSWERS TO QUESTIONS
1. A debt security is an instrument representing a creditor relationship with an enterprise. Debt
securities include U.S. government securities, municipal securities, corporate bonds, convertible
debt, and commercial paper. Trade accounts receivable and loans receivable are not debt securi-
2. The variety in bond features along with the variability in interest rates permits investors to shop
3. Cost includes the total consideration to acquire the investment, including brokerage fees and
other costs incidental to the purchase.
4. The three types of classifications are:
Held-to-maturity: Debt investments that the enterprise has the positive intent and ability to
hold to maturity.
Trading: Debt investments bought and held primarily for sale in the near term to
generate income on short-term price differences.
Available-for-sale: Debt investments not classified as held-to-maturity or trading securities.
8. $3,500,000 X 10% = $350,000; $350,000 ÷ 2 = $175,000. Wheeler would make the following entry:
Cash ($4,000,000 X 8% X 1/2) …………………………………………………… 160,000
Debt Investments ……………………………………………………………………. 15,000
Interest Revenue ($3,500,000 X 10% X 1/2) ………………………….. 175,000
9. Fair Value Adjustment (Available-for-Sale) ………………………………………… 89,000
Unrealized Holding Gain or Loss—Equity
[$3,604,000 – ($3,500,000 + $15,000)*] ………………………………….. 89,000
17-9
Questions Chapter 17 (Continued)
11. (a) Unrealized Holding Gain or Loss—Equity ………………………………. 60,000
Fair Value Adjustment (Available-for-Sale) ………………………. 60,000
(b) Unrealized Holding Gain or Loss—Equity ………………………………. 70,000
Fair Value Adjustment (Available-for-Sale) ………………………. 70,000
determinable fair values.
13. Investments in stock do not have a maturity date and therefore cannot be classified as held-to–
maturity securities.
14. Gross selling price of 10,000 shares at $27.50 ………………………………. $275,000
Less: Brokerage commissions ……………………………………………………. (1,770)
15. Both trading and available-for-sale equity securities are reported at fair value. However, any
unrealized holding gain or loss is reported in net income for trading securities but as other
comprehensive income and as a separate component of stockholders’ equity for available-for-
sale securities.
17. 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
investor’s proportionate share of the earnings (losses) of the investee and decreased by all
dividends received by the investor from the investee.
18. The following disclosures in the investor’s financial statements are generally applicable to the
equity method:
Questions Chapter 17 (Continued)
19. Dividends subsequent to acquisition should be accounted for as a reduction in the investment in
common stock account.
20. 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
21. Trading securities should be reported at aggregate fair value as current assets. Individual held-to–
maturity and available-for-sale securities are classified as current or noncurrent depending upon the
22. Reclassification adjustments are necessary to insure that double counting does not result when
realized gains or losses are reported as part of net income but also are shown as part of other
comprehensive income in the current period or in previous periods.
23. When a security is transferred from one category to another, the transfer should be recorded at
24. A debt security is impaired when “it is probable that the investor will be unable to collect all
25. Fair value is now defined as “the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.” Fair
value is therefore a market-based measure.
26. The fair value option gives companies the option to report most financial instruments at fair value
with all gains and losses related to changes in fair value reported in the income statement. This
27. No. The fair value option is generally available only at the time a company first purchases the
financial asset or incurs a financial liability. If a company chooses to use the fair value option, it
must measure this instrument at fair value until the company no longer has ownership.
17–11
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
Stock price times the number
of shares.
Change in stock price (underlying)
times number of shares (notional
amount).
Initial Investment
Investor pays full cost.
Initial investment is less than full cost.
Settlement
Deliver stock to receive cash.
Receive cash equivalent, based on
changes in stock price times the
number of shares.
*30. The purpose of a fair value hedge is to offset the exposure to changes in the fair value of a
recognized asset or liability or of an unrecognized firm commitment.
*31. The unrealized holding gain or loss on available-for-sale securities should be reported as income
*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
*33. A cash flow hedge is used to hedge exposures to cash flow risk, which is exposure to the
*34. Derivatives used in cash flow hedges are accounted for at fair value on the balance sheet but
gains or losses are recorded in equity as part of other comprehensive income.
*35. A hybrid security is a security that has characteristics of both debt and equity and often is a
17–12
Questions Chapter 17 (Continued)
*36. The voting-interest model is when a company owns more than 50% of another company. The
risk-and-reward model is when a company is involved substantially in the economics of another
company. If one of these two conditions exist, the consolidation should occur.
*37. A variable-interest entity (VIE) is an entity that has one of the following characteristics:
(a) Insufficient equity investment at risk. Stockholders are assumed to have sufficient capital
investment to support the entity’s operations. If thinly capitalized, the entity is considered
17–13
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 17-1
(a) Debt Investments (Held-to-Maturity) …………………… 74,086
Cash ………………………………………………………….. 74,086
BRIEF EXERCISE 17-2
(a) Debt Investments (Available-for-Sale)…………………. 74,086
Cash ………………………………………………………….. 74,086
BRIEF EXERCISE 17-3
(a) Debt Investments (Held-to-Maturity) …………………… 65,118
Cash ………………………………………………………….. 65,118
17–14
BRIEF EXERCISE 17-4
(a) Debt Investments (Trading) ……………………………… 50,000
Cash …………………………..…………………………... 50,000
BRIEF EXERCISE 17-5
(a) Equity Investments (Available-for-Sale) ……………. 13,200
Cash …………………………..…………………………... 13,200
BRIEF EXERCISE 17-6
(a) Equity Investments (Trading) …………………………... 13,200
Cash …………………………..…………………………... 13,200
(b) Cash ………………………………………………………………. 1,300
Dividend Revenue (400 X $3.25) ………………… 1,300
BRIEF EXERCISE 17-7
Equity Investments ……………………………………………….. 300,000
Cash ………………………………………………………………. 300,000
BRIEF EXERCISE 17-8
Fair Value Adjustment (Available-for-Sale)
Bal. 200
500
Bal. 700
BRIEF EXERCISE 17-9
(a) Other comprehensive income (loss) for 2009: $9.8 million
Note to instructor: In 2009, Starbucks also reported foreign currency trans–
lation adjustments, which affected accumulated other comprehensive income.
BRIEF EXERCISE 17-10
EXERCISE 17-1 (5–10 minutes)
(a) 1 (b) 2 (c) 1 (d) 2 (e) 3 (f) 2
(b) December 31, 2012
Cash …………………………………………………………. 30,000
Interest Revenue ………………………………… 30,000
17–17
EXERCISE 17-3 (Continued)
(b) Schedule of Interest Revenue and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Date
Cash
Received
Interest
Revenue
Premium
Amortized
Carrying Amount
of Bonds
*Rounded by 75¢.
(c) December 31, 2011
Cash ……………………………………………………………. 60,000
Debt Investments (Held-to-Maturity) ……….. 6,209.26
Interest Revenue …………………………………… 53,790.74
EXERCISE 17-4 (10–15 minutes)
(a) January 1, 2011
Debt Investments (Available-for-Sale)……………. 537,907.40
Cash …………………………………………………….. 537,907.40
EXERCISE 17-4 (Continued)
(c) December 31, 2012
Unrealized Holding Gain or Loss—Equity …….. 12,369.81
Fair Value Adjustment
(Available-for-Sale) …………………………... 12,369.81
EXERCISE 17-5 (20–30 minutes)
(a) Schedule of Interest Revenue and Bond Discount Amortization
Straight-line Method
9% Bond Purchased to Yield 12%
Date
Cash
Interest
Bond Discount
Carrying Amount
(b) Schedule of Interest Revenue and Bond Discount Amortization
Effective-Interest Method
9% Bond Purchased to Yield 12%
Date
Cash
Received
Interest
Revenue
Bond Discount
Amortization
Carrying Amount
of Bonds
17–19
EXERCISE 17-5 (Continued)
(c) December 31, 2013
Cash ……………………………………………………………….. 27,000.00
Debt Investments (Held-to-Maturity) …………………. 7,205.00
Interest Revenue ………………………………………. 34,205.00
EXERCISE 17-6 (10–15 minutes)
(a) Fair Value Adjustment (Trading) ……………………….. 3,000
Unrealized Holding Gain or Loss—Income …. 3,000
EXERCISE 17-7 (10–15 minutes)
(a) December 31, 2012
Unrealized Holding Gain or Loss—Income ………… 1,400
Fair Value Adjustment (Trading) ………………… 1,400
EXERCISE 17-7 (Continued)
(c) December 31, 2013
Securities
Cost
Fair Value
Unrealized
Gain (Loss)
Stargate Corp. stock
$20,000
$19,300
($ (700)
Vectorman Co. stock
( 500)
Total of portfolio
$40,000
$39,800
( (200)
EXERCISE 17-8 (5–10 minutes)
The unrealized gains and losses resulting from changes in the fair value of
available-for–sale securities are recorded in an unrealized holding gain or loss
account that is reported as other comprehensive income and as a separate
component of stockholders’ equity until realized. Therefore, the following
adjusting entry should be made at the year-end:
EXERCISE 17-9 (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
which $200 is already recognized. Therefore, the December 31, 2012
adjusting entry should be: