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CHAPTER 17INVESTMENTS IFRS questions are available at the end of this chapter. TRUE-FALSE—Conceptual Answer F T F F T F T F T T F T F T F T F T F T No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Description Examples of debt securities. Definition of trading securities. Available-for-sale unrealized gains/losses. Classifying held-to-maturity securities. Fair value changes in AFS securities. Securities Fair Value Adjustment account. Accounting for trading securities. Definition of significant influence. Reporting Unrealized Holding Gain/Loss—Equity account. Examples of significant influence. Definition of controlling interest. Effect of dividends on investment under equity. Reporting revenue under fair value method. Definition of controlling interest. Using fair value option. Accounting for changes in fair value. Temporary declines and write downs. Necessary of reclassification adjustment. Transfer of held-to-maturity securities. Transfers from trading to available-for-sale. MULTIPLE CHOICE—Conceptual Answer c b c c a a c b a d b c d c c d c a No. 21. 22. 23. 24. P 25. S 26. S 27. S 28. S 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. Description Debt securities. Valuation of debt securities. Held-to-maturity securities. Unrealized gain/loss recognition for securities. Accounting for accrued interest. Identifying securities accounted for at amortized cost. Accounting for available-for-sale securities. Using effective-interest method of amortization. Identifying available-for-sale securities. Classification as held-to-maturity. Reporting held-to-maturity securities. Acquisition of held-to-maturity securities. Accounting for trading securities. Accounting for trading debt securities. Recording investments in debt securities. Calculating the issue price of bonds. Valuation of investments in debt securities. Recording amortization of bond discount. 17 - 2 c Test Bank for Intermediate Accounting, Thirteenth Edition 39. Amortization of premium/discount on investment in a debt security. MULTIPLE CHOICE—Conceptual (cont.) Answer d c c b a c b d a d d d a d c b b d c b a c b d c b a c a d P S No. 40. 41. 42. S 43. S 44. P 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. P 57. 58. 59. *60. *61. *62. *63. *64. *65. *66. *67. *68. *69. Description Effective-interest rate method. Debt securities purchased between interest dates. Sale of debt security prior to maturity. Passive interest investment. Fair value vs. equity method. Fair value vs. equity method. Conditions for using the equity method. Ownership interest required for using the equity method. Recording of dividends received under the equity method. Recognition of earnings of investee using the equity method. Effect of using the fair value method in error. Determine value of investment. Fair value option. Accounting for impairments. Reclassification adjustment in comprehensive income. Reclassification of securities. Reclassification of securities. Transfer of a debt security. Definition of “gains trading” or “cherry picking”. Accounting for transfers between Categories. Accounting for derivatives. Characteristics of a derivative instrument. Identifying companies that are arbitrageurs. Identifying equity securities. Accounting for fair value hedges. Gains/losses on cash flow hedges. Identifying an embedded derivative. Requirements for financial instrument disclosures. Variable-interest entity. Risk-and-reward model and voting-interest approach. These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. MULTIPLE CHOICE—Computational Answer c b d b a c a b c a No. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. Description Recording the purchase of debt securities. Computing cost of bond investment. Calculation of discount amortization. Calculation of revenue from HTM securities. Computation of other comprehensive income. Computation of gain/loss on sale of bonds. Acquisition of held-to-maturity securities. Carrying value of held-to-maturity securities. Carrying value of available-for-sale debt securities. Calculation of income from available-for-sale debt securities. Investments b 80. Calculation of income from HTM securities. 17 - 3 MULTIPLE CHOICE—Computational (cont.) Answer b d a d b d b c b c a a b a b c c a c b b b c c c b c b d b No. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. Description Determine gain on sale of debt securities. Computation of revenue from HTM securities. Calculation of premium amortization. Calculation of other comprehensive income. Calculation of loss on sale of bonds. Calculation of loss on sale of trading security. Determination of unrealized loss on trading security. Determination of accumulated other comprehensive income. Entry to record unrealized gain on AFS securities. Fair value for trading securities. Unrealized gain on available-for-sale securities. Calculation of gain on sale of equity security. Determination of unrealized loss on AFS securities. Calculation of unrealized loss included in comprehensive income. Computation of purchase price of equity method investment. Computation of revenue from investment. Computation of investment account balance. Calculation of investment revenue. Accounting for stock investments/fair value method. Accounting for stock investments/equity method. Accounting for stock investments/fair value method. Equity method of accounting. Fair value method of accounting for stock investment. Equity method of accounting for stock investment. Balance of investment account using the equity method. Investment income recognized under the equity method. Balance of investment account using the equity method. Balance of investment account using the equity method. Investment income recognized under the equity method. Other comprehensive income. MULTIPLE CHOICE—CPA Adapted Answer d d c d c b c a b No. 111. 112. 113. 114. 115. 116. 117. 118. 119. Description Carrying value of AFS debt securities. Unrealized loss on trading and AFS securities. Unrealized loss on trading and AFS securities. Classification of an equity security. Investment income recognized under the equity method. Balance of investment account using the equity method. Sale of stock investment. Calculate the acquisition price of a stock investment. Transfer of securities from trading to AFS. 17 - 4 Test Bank for Intermediate Accounting, Thirteenth Edition EXERCISES Item E17-120 E17-121 E17-122 E17-123 E17-124 E17-125 E17-126 *E17-127 *E17-128 Description Investment in debt securities at a premium. Investment in debt securities at a discount. Investments in equity securities (essay). Investment in equity securities. Fair value and equity methods (essay). Fair value and equity methods. Comprehensive income calculation. Fair value hedge. Cash flow hedge. PROBLEMS Item P17-129 P17-130 P17-131 *P17-132 *P17-133 Description Trading equity securities. Trading securities. Available-for-sale securities. Derivative financial instrument. Free-standing derivative. CHAPTER LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. 7. 8. *9. *10. *11. *12. *13. Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. Understand the procedures for discount and premium amortization on bond investments. Identify the categories of equity securities and describe the accounting and reporting treatment for each category. Explain the equity method of accounting and compare it to the fair value method for equity securities. Describe the accounting for the fair value option. Discuss the accounting for impairments of debt and equity investments. Explain why companies report reclassification adjustments. Describe the accounting for transfer of investment securities between categories. Explain who uses derivatives and why. Understand the basic guidelines for accounting for derivatives. Describe the accounting for derivative financial instruments. Explain how to account for a fair value hedge. Explain how to account for a cash flow hedge. MC E 132. MC 110. SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Ite Ty Ite Ty Ite Ty Ite Ty Ite Ty Ite Ty Ite Typ 1. MC 108. MC 78. 113. 99. MC 103. 115. 10. MC 79. MC 94. MC 81. 37. S 29. MC 112. P 45. 7. 48. 11. 60. 34. 21. MC 74. P Learning Objective 7 Learning Objective 8 MC 59. Learning Objective 5 MC 52. 96. 71. MC 92. 61. MC 27. 16. MC 119. 53. 19. P S MC 25. 13. 39. Learning Objective 4 MC 100. 32. MC 101. MC 107. MC 105. MC 93. 95. MC 129. 6. 41. MC 73. MC 109. 50. 54. 8. 17. 131. 31. 55. 89. Describe the accounting for variable-interest entities. 120. S Learning Objective 1 S MC 24. MC 82. 51. *15. 35. 46. 122. MC 122. 14. 87. MC 26. 2. 38. MC 76. MC 75. 43. 9. Learning Objective 2 MC 42. E P 130.Investments *14. 58. MC 91. 18. 114. Learning Objective 9* Learning Objective 10* MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC 70. 127. P Learning Objective 12* . 125. 36. TF TF TF TF TF TF MC MC TF TF TF TF TF TF MC MC TF TF TF TF TF MC 3. 30. 97. 122. MC 106. 15. 118. 49. 17 . 124. 33. S 44. 40. 98. 130. MC 102. 123. P MC MC MC 63. MC 104. 84. MC MC MC MC MC MC E E MC MC E MC MC MC MC E 129. 47. 23. P P P E E E P 57. 116.5 Identify special reporting issues related to derivative financial instruments that cause unique accounting problems. 20. 5. S 28. Learning Objective 3 MC 90. 12. MC 72. Learning Objective 6 E 130. 88. 62. 85. 56. 126. 4. MC 80. 64. 117. MC 77. Learning Objective 11* P 133. 86. 121. 111. 83. TF MC MC MC MC MC MC MC TF MC MC MC MC MC MC MC TF MC MC MC MC 22. A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity. 5. Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee. 2. 11.S.) Learning Objective 13* 65. 3. 4. 10.17 . but not U. 66. 8. Learning Objective 15* MC E = Exercise P = Problem 128. Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities. E Learning Objective 14* TF = True-False MC = Multiple Choice TRUE-FALSE—Conceptual 1. Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences. 7. Companies report trading securities at fair value. 9. 6. government securities.6 Test Bank for Intermediate Accounting. 67. Note: MC MC MC 68. Debt securities include corporate bonds and convertible debt. MC 69. Significant influence over an investee may be indicated by material intercompany transactions and interchange of managerial personnel. with unrealized holding gains and losses reported in net income. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other comprehensive income. The Securities Fair Value Adjustment account has a normal credit balance. The accounting profession has concluded that an investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee. Thirteenth Edition SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS (cont. Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold. . 14. 5. the investor reports as revenue its share of the net income reported by the investee. 17. d. 20. If a company transfers held-to-maturity securities to available-for-sale securities. F T F F T Item 6. 12.Investments 17 . 17. F T F T F Item 16. Convertible bonds b. 9. Under the fair value method. 18. held-to-maturity at amortized cost. 10. 15. 20. 7. If a decline in a security’s value is judged to be temporary. 15. All dividends received by an investor from the investee decrease the investment’s carrying value under the equity method. True-False Answers—Conceptual Item 1. 22. Ans. 4. 8. none of these. 3. available-for-sale at amortized cost. 16. T F T F T MULTIPLE CHOICE—Conceptual 21. All of these are debt securities. Companies may not use the fair value option for investments that follow the equity method of accounting. Which of the following is not a debt security? a. Ans. A reclassification adjustment is necessary when a company reports realized gains/losses as part of net income but also shows unrealized gains/losses as part of other comprehensive income. Ans. the unrealized gain or loss is recognized in income. 14. The transfer of securities from trading to available-for-sale and from available-for-sale to trading has the same impact on stockholders’ equity and net income. b. A correct valuation is a. 13. F T F T T Item 11. a company needs to write down the cost basis of the individual security to a new cost basis. 19. 19. . 13. Loans receivable d. c. Changes in the fair value of a company's debt instruments are included as part of earnings in any given period. Ans. Commercial paper c.7 12. 18. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation. 2. held-to-maturity at fair value. 27. b. 26. c. trading. trading debt securities. trading debt securities. trading securities where a company has holdings of less than 20%. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method. 24. 29. c. Debt securities that are accounted for at amortized cost. Thirteenth Edition Securities which could be classified as held-to-maturity are a. b. a varying amount being recorded as interest income from period to period. b. d. c. warrants. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a. a variable rate of return on the book value of the investment. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. d. the investor must a. held-to-maturity. available-for-sale. c. available-for-sale securities where a company has holdings of less than 20%. held-to-maturity debt securities. c securities where a company has holdings of between 20% and 50%. b. available-for-sale debt securities. redeemable preferred stock. When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment. none of these. d. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.17 . d. never-sell debt securities. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period. d. S S S S . are a. 28. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. held-to-maturity debt securities. not fair value. securities where a company has holdings of more than 50%.8 23. Use of the effective-interest method in amortizing bond premiums and discounts results in a. c. P 25. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date. d. Unrealized holding gains or losses which are recognized in income are from securities classified as a. available-for-sale debt securities. b. municipal bonds. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are a. d. never-sell debt securities. b. Test Bank for Intermediate Accounting. b. treasury stock. maturity value.000.9 31. b. positive intent. a discount is reported separately.000 of bonds for $315. d. c. Unrealized holding gains and losses are reported as part of net income. d. any discount or premium is not amortized. a. a credit to Premium on Investments of $15. d. none of these. a debit to Held-to-Maturity Securities at $300. 17 . One step in calculating the issue price of the bonds is to multiply the principal by the table value for a. Which of the following is not correct in regard to trading securities? a. Watt Co. 32. c. b.000. The bonds are sold to yield 8%. c. If Watt intends to hold the securities to maturity. c. the entry to record the investment includes a. c. Held-to-maturity securities are reported at a. b. b. acquisition cost plus amortization of a discount. the security must be a debt security. All of these are required. face value plus brokerage fees and other costs incident to the purchase. c. In accounting for investments in debt securities that are classified as trading securities. lower of cost or market. c. 35. b. Any discount or premium is not amortized. acquisition cost plus amortization of a premium. a debit to Held-to-Maturity Securities at $315. 10 periods and 8% from the present value of 1 table. 36. ability to hold the security to maturity. d. d. d. 33. 20 periods and 4% from the present value of 1 table. a premium is reported separately. A requirement for a security to be classified as held-to-maturity is a.000. cost including brokerage and other fees. They are held with the intention of selling them in a short period of time. d. . b. All of these are correct. Jordan Co. 37. b. acquisition cost. purchased $300.000.Investments 30. purchased ten-year. c. fair value. 10% bonds that pay interest semiannually. market value. Investments in debt securities are generally recorded at a. maturity value with a separate discount or premium account. cost including accrued interest. none of these. Investments in debt securities should be recorded on the date of acquisition at a. 20 periods and 5% from the present value of 1 table. 34. 10 periods and 10% from the present value of 1 table. b. market value plus brokerage fees and other costs incident to the purchase. d. c. b. An entry must be made to amortize a discount to the date of sale. b. The effective-interest method produces a constant rate of return on the book value of the investment from period to period. d. securities account should include accrued interest. 42. by consolidation. Which of the following is correct about the effective-interest method of amortization? a. none of these. the a. d. accrued interest is debited to Interest Expense. When a company has acquired a "passive interest" in another corporation. The effective interest method applied to investments in debt securities is different from that applied to bonds payable. d. The entry to record the amortization of the discount includes a a. straight-line method of allocation must be used. by using the effective interest method. Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. regarding the amortization of a premium or discount on a debt security. d. b. by using the equity method. c. A gain or loss on the sale is not extraordinary. accrued interest is debited to Interest Revenue. 40. APB Opinion No. accrued interest is debited to Interest Receivable. c. 41. Accrued interest will be received by the seller even though it is not an interest payment date. debit to the discount account. c. preferably the a. the acquiring company should account for the investment a. par value method must be used and therefore no allocation is necessary. An available-for-sale debt security is purchased at a discount. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. d. When investments in debt securities are purchased between interest payment dates. 21 specifies that. b.10 Test Bank for Intermediate Accounting. Thirteenth Edition 38. debit to Available-for-Sale Securities. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.17 . effective-interest method of allocation must be used. Amortization of a discount decreases from period to period. c. by using the fair value method. c. debit to Interest Revenue. . Amortization of a premium decreases from period to period. b. S 43. b. 39. d. 47. 48. an addition to the carrying value of the investment. b. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. a reduction of the carrying value of the investment. additional paid-in capital. the company should generally account for the income of the subsidiary under the a. The investor should always use the fair value method to account for its investment. investor sells the investment. c. investee declares a dividend. b. If the parent company owns 90% of the subsidiary company's outstanding common stock. The investor should always use the equity method to account for its investment. Fair Value Method No Effect Increase No Effect Decrease Equity Method Decrease Decrease No Effect No Effect P 45. cost method. Regular cash dividends received by the investor are recorded as Fair Value Method a. dividend income. Income b. A reduction of the investment c. . c. d. divesture method. d. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. c. b. c. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. d. b.Investments S 17 . Income d. an investor recognizes its share of the earnings in the period in which the a. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d.11 44. Under the equity method of accounting for investments. investee pays a dividend. fair value method. d. b. earnings are reported by the investee in its financial statements. An investor has a long-term investment in stocks. 49. c. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. which of the following statements applies? a. equity method. A reduction of the investment Equity Method Income A reduction of the investment A reduction of the investment Income 46. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a. When a company holds between 20% and 50% of the outstanding stock of an investee. . What effect would this have on the investment account. During the calendar year 2010. net income. c. overstate b.000. 51. Impairments are a. understate. which was purchased in 2011 at a cost of $3.000. 52. Overstate. II only. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31. record income when the fair value of its bonds increases. 53. Understate. the lower of its original cost or its fair value at the date of the transfer. I.000 III.000 a. d. The fair value option allows a company to a. 2011 the fair value of the investment is $3. recognized as a realized loss if the impairment is judged to be temporary. b. its original cost. All of the above are true of the fair value option. based on discounted cash flows for securities. overstate. its fair value at the date of the transfer. d. overstate d. c. understate Dublin Co. c. understate c.120. or III. b. b. and retained earnings. $3. At December 31. When an investment in a held-to-maturity security is transferred to an available-for-sale security.000 II. account has a balance of $3. II. owns 35% of Cosby Corporation.000.17 .. the higher of its original cost or its fair value at the date of the transfer. report most financial instruments at fair value by recording gains and losses as a separate component of stockholders’ equity. income statement as an Other Revenue or Expense. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. evaluated at each reporting date for every investment. $3. overstate.040. the Investment in Club Co.12 Test Bank for Intermediate Accounting. holds a 30% stake in Club Co. II or III only. I or II only. c. Cosby had net earnings of $300.000. statement of comprehensive income as other comprehensive income. $3. c. 55. stockholders’ equity section of the balance sheet. After applying the equity method. Judd. b. 2011? I. based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments. 54. respectively? a. Overstate. Inc. the carrying value assigned to the available-for-sale security should be a.000. Thirteenth Edition 50.000 and paid dividends of $30. b. value its own liabilities at fair value. understate. A reclassification adjustment is reported in the a.000.040. statement of stockholders’ equity. d.120. Understate. d. d. c. the higher of its original cost or its fair value at the date of the transfer. 58. d.13 When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future. gains and losses resulting from hedge transactions are reported in different ways. hedgers. result in companies omitting recognition of fair value in the year of the transfer. the lower of its original cost or its fair value at the date of the transfer. b. the carrying value assigned to the investment upon entering it in the trading portfolio should be a. Transfer from trading to available-for-sale b. *60. are accounted for at fair value for all transfers. d. d. c. All of the following statements regarding accounting for derivatives are correct except that a. d. P 57. gains and losses resulting from speculation should be deferred. reporting investment securities at fair value but liabilities at amortized cost. selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading. All of the above are considered methods of “gains trading” or “cherry picking. c. Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called a.” Transfers between categories a. they should be recognized in the financial statements as assets and liabilities. will always result in an impact on net income. Transfer from available-for-sale to trading c. b. depending upon the type of hedge. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses. 17 . Transfer from available-for-sale to held-to-maturity “Gains trading” or “cherry picking” involves a. c. gamblers. arbitrageurs. d.Investments 56. its fair value at the date of the transfer. its original cost. . c. speculators. b. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer. A debt security is transferred from one category to another. What type of transfer is being described? a. b. *61. and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. Transfer from held-to-maturity to available-for-sale d. they should be reported at fair value. b. 59. III. host security. 63. II only. *66.14 Test Bank for Intermediate Accounting. c. Gains or losses on cash flow hedges are a. combining or netting the fair value of separate financial instruments. c. carrying value. All of these are characteristics. All of the above are characteristics of a variable-interest entity. c. All of the following are requirements for disclosures related to financial instruments except a. b. embedded derivative. Thirteenth Edition *62. An option to convert a convertible bond into shares of common stock is a(n) a. Convertible debt. historical cost. Redeemable preferred stock. d. b. c. *64. reported directly in retained earnings. 68. b. The accounting for fair value hedges records the derivative at its a. c. II. d. stockholders who have decision-making rights. displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges. d. ignored completely. distinguishing between financial instruments held or issued for purposes other than trading. c. as part of other comprehensive income. *65. reported directly in net income. has one or more underlyings and an identified payment provision. . fair value hedge. fair value. disclosing the fair value and related carrying value of the instruments. Call or put options. b. insufficient equity investment at risk. I and II only. b. *67. Which of the following are considered equity securities? I. A variable-interest entity has a. b. d. c. requires or permits net settlement. amortized cost. b. stockholders who absorb the losses or receive the benefits of a normal stockholder. d. d. hybrid security. d. III only. All of the following are characteristics of a derivative financial instrument except the instrument a. I and III only. a. requires a large investment at the inception of the contract.17 . recorded in equity. ........ d c b a c a d MULTIPLE CHOICE—Computational 70.......... $414.. 40........................ Available-for-Sale Securities. 24............. *62........ 57... 2010. Kern purchased the bonds at 102.......... Cash.. b d c b a c b *63... Interest Revenue......500 200.......... Item Ans. 198... 53... *61...... The preferred entry to record the purchase of the bonds on August 1.....000 4....... *68......... 36.... Interest Receivable.....000.... c.000 between interest payment dates..... No Yes c............... acquired 200... *69........ 30.......... *65...000................... 38..500 194....... Item Ans. d d d a d c b 56.... $408.. Dambro Co.500 b.............. 45............ 29.... Available-for-Sale Securities.................... Available-for-Sale Securities.......500 198.............. Cash ................... The amount to record as the cost of this long-term investment in bonds is a.............000.... 27.... 2010 is a....... 26..... Item Ans.... No No d....................... 194...... *66.....000........S........000........ The bonds were dated May 1.... 22. Cash...Investments 69.......... 48. 2010.. 25.... *60. 59........... Under U...... 39... *67. Item Ans. 34. b.........500 198.. Available-for-Sale Securities.. $1..... Yes No b.... with interest paid each October 31 and April 30...... GAAP........................... 2016........... 58... 55. Interest Revenue.......... 23........ c.......500 6.....500 Cash.... Item Ans....000 4.. c b c c a a c 28...... $424................................ Yes Yes 17 ................ 41.. 198. paid brokerage costs of $6..... and mature on April 30... 21. Discount on Debt Securities. *64... 37... Kern Company purchased bonds with a face amount of $400................ Item Ans.....500 71................ b a d b c d c 35.. 52. 43....... 9% bonds at 97 plus accrued interest... 31... 32... 46........15 Multiple Choice Answers—Conceptual Item Ans. . $400..... d............. 50............. The bonds will be added to Dambro’s available-forsale portfolio. 33................000 4.. which of the following models may be used to determine if an investment is consolidated? Risk-and-reward model Voting-interest approach a...........000. On August 1..000 198... 51...... 54......... and paid accrued interest for three months of $10...... d....... c b a c b d a 49....... c d c a c d c 42... 47....000. 44....... c. $9. Thirteenth Edition Use the following information for questions 72 and 73.392. 75. Patton Company should report interest revenue from the Scott Co.600. 2011. paying $376. At April 1. $40. on January 1.196.000 of 10% bonds of Scott Co.000 of 8%. 2011. Using the effective-interest method.790 at an effective interest rate of 7%. 2011.770 and $1. . the fair value of the Ritter. report as other comprehensive income and as a separate component of stockholders' equity? a. After accruing for interest. $1.830. $41. $ 0. 73.371. $1. Inc. decreased the Available-for-Sale Debt Securities account for the Ritter.810. bonds of: a. b.368.000. 2011. sold the Ritter bonds for $515. c.17 .685).16 Test Bank for Intermediate Accounting.000. Inc.900 provides an effective yield of 11%. Patton Company purchased $400. b. The bonds mature January 1. Landis Co. b. Landis Co. No entry should be made.210. For the year ended December 31. respectively.392. d. Landis Co. 2012 was $516.935).875. 2012.409. ($14.100. Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. d. 2011 and December 31. purchased $500. The discount of $23.000. ($1. Assuming Landis Co. $12.875). Patton Company uses the effectiveinterest method and plans to hold these bonds to maturity. The bonds sold for $520. ($10. $41. has a portfolio of Available-for-Sale Debt Securities. $3. c. on January 1. $2. d. d. 72. c. $686. report as a gain or loss on the bonds? a. b. $42. At December 31. bonds on July 1. What should Landis Co. bonds was $530. 2011. Use the following information for questions 74 and 75. with interest payable on July 1 and January 1. 2021. interest is payable each July 1 and January 1. 5-year bonds from Ritter. On July 1. 74. 2011 by the amortized premiums of $1. what should Landis Co. Inc. the carrying value of the Ritter bonds on April 1. bonds by a. ........................ Horton uses the straight-line method of amortization.............. Horton Co.... $975....... 9% bonds of Ramsey............ purchased Lopez......000.... 2015........... 2019................................................Investments 76... 2010....... Renfro Co... The bonds were dated May 1.000. Renfro uses the straight-line method of amortization.................... On October 1......... Held-to-Maturity Securities. b........ Fowler Company acquired $200...000 200.. 79.......000.. $623............. Inc. The bonds should be reported in the December 31.. The bonds.. the net carrying value of the bonds should be shown on Howell's December 31..... balance sheet at a......... 10-year........ The bonds.......... for $225. c. b.. d......... 2010........ c.. pay interest semiannually on February 1 and August 1. 2010. On November 1..000 208. 213. 5.... $990......... Howell Company purchased 600 of the $1.........500 was paid for the accrued interest. 2010 balance sheet at a carrying value of a.. 2010..000 which includes $15...... 78.17 On August 1.. 17 .000. Cash..375. 2015. Premium on Bonds.... $3.......250. $1....... Interest Revenue....... The bonds mature on July 1.... b........... c..... bonds with a face value of $250. Interest is payable semiannually on January 1 and July 1...... for $632. with interest payable each October 31 and April 30...............750...000.............. Incorporated.. $622... 213....080. 1.... The bonds will be held to maturity..........000 b. 208..000..................................000 13. $632......... $4.......000....000 77....... $3.000 Cash... the amount reported in Horton's 2010 income statement as a result of Horton's available-forsale investment in Lopez was a................ 2010.................000 213.. which includes accrued interest of $9................ Cash..750........000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest............... pay interest semiannually on March 1 and September 1.... d. and mature on April 30. 9% bonds for $990...... $600.............000 accrued interest.. purchased to hold to maturity. $990...... Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale..000... 9%... ..167. d........000 5....000 213... which mature on January 1...... An additional $7.000.... c... Ignoring income taxes.. Held-to-Maturity Securities.... 2017............. 2010? a.000..... 2010............... Cash....... $975. d.... Held-to-Maturity Securities... which mature on February 1............000.. Held-to-Maturity Securities........... On November 1........................ $4..............000 Interest Revenue.. What entry should Fowler make to record the purchase of the bonds on August 1.000 face value....000 213.......333................... 2010.000 of Adam Company’s 10-year. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1. . Inc. Interest is payable each December 31. $422 c.000. $0.500. b. $4.642 c. On January 3. uses the straight-line method. On October 1. purchased $300.098. Moss Co. The bonds sold for $312. Assuming that Moss Co. and pay interest on March 1 and September 1.000. $4. $1.000. with interest payable on July 1 and January 1. $460 d. d. b. 81.540 Assuming that Moss Co. respectively. Inc.000.980. 82. bonds on July 1. 9% bonds. 2010. 2010 and December 31. purchased to hold to maturity. 9% bonds for $208. Menke uses straight-line amortization. $1. 200. what is the amount of premium amortization that would be recognized in 2012 related to these bonds? *a.17 .000. purchased 2. $4.474 at an effective interest rate of 7%. Hauke sells 1.200. An additional $6. 5-year bonds from Carlin. 2010 by the amortized premiums of $1.18 Test Bank for Intermediate Accounting. Using the effective interest method. acquires $100. 2015. 2010 was $1. 2014. $9.062 and $1.000. Ignoring income taxes.578 *d. The gain on the sale is a. after the interest has been received. Hauke Co. $11. Menke Co. d. Richman Co.460. $642 b. Questions 84 and 85 are based on the following information: Richman Co. c. $5.000 was paid for accrued interest.000 b. $10. Use the following information for 82 and 83. $8. the amount reported in Menke's 2010 income statement from this investment should be a. what is the amount of interest revenue that would be recognized in 2011 related to these bonds? a. The carrying value of the bonds at December 31.000 of 8%. The bonds are classified as held-to-maturity.020. on January 1.000 bonds on September 1. decreased the Available-for-Sale Debt Securities account for the Carlin. $9. for $988.418 to yield 9%.960. $4. uses the effective-interest method. Thirteenth Edition 80. 2010. c. $10. The bonds mature on March 1.000. Hauke uses straight-line amortization. 10% bonds at a price of $106. During 2008. 2012. $502 83.800. 000) d.000 gain.000 $380. report in its income statement for the year ended December 31. 17 . Inc. During the year Logic Company sold 1. c. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31.000 360. 2011 was $310.000) b.125. c.000 c. what should Richman Co. d. 2011 related to its investments? a. 2010 the market price of Midi.160 c. for $30 per share.000. has a portfolio of Available-for-Sale Debt Securities.686 At February 1. 2011. stock? a. $20. $20. ($1. 2010 related to its investment in Midi. $2. the fair value of the Carlin. $5. $5. ($8. $140.125). Use the following information for questions 87 and 88. What should Richman Co. ($8. report as other comprehensive income and as a separate component of stockholders’ equity? a.000 $400. After accruing for interest. ($6. b. $0 b. Inc. $120. b. $80.000. Inc. $0. 86.000 shares of Midi.Investments 84.000 gain. Inc.000 320.000 gain.000 gain.000 shares of Midi. for $35 per share. d. bonds was $318.526 d. Instrument Corp.000 gain. report as a gain (or loss) on the bonds? a. $40. Richman Co. ($1. 2010? a. Inc.19 At December 31.’s balance sheet at December 31.000 Available-for-sale 300.000 gain. has the following investments which were held throughout 2010–2011: Market Value Cost 12/31/10 12/31/11 Trading $300.561). d. What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.000 gain. The investment was classified as a trading security. 88. $20. ($3. $60. . c. What amount of gain or loss would Instrument Corp.000) 85.811). $7.000 87. Assuming Richman Co. During 2010 Logic Company purchased 4. At December 31. the carrying value of the Carlin bonds on February 1.’s stock was $28 per share. b. 2010.000 loss. sold the Carlin bonds for $309. 17 . 2011. d. The fair value of these shares was $300. Woods sold all of the Holmes stock for $17 per share on December 3. Realized gain of $35.000. $40.000.000. 2011. .000 $495.000 7. Its cost was $33.000. reported its investment in availablefor-sale securities. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit balance of $2.000 $(30. $30. What should Trump report on its 2011 income statement as a result of the increase in fair value of the investments in 2011? a. Unrealized loss of $15. $26. the fair value of the securities was $585.000 as an available-for-sale investment.000) Lyman. $11. c. At December 31. 2010. 91. c. 2010 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. incurring $14.000 at December 31.000 20.000 Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows: December 31.000. Atlanta Co. 2011. what amount should be reported as a charge against income in Kramer's 2010 income statement if 2010 is Kramer's first year of operation? a.000.000.000.20 Test Bank for Intermediate Accounting. Woods Company should report a realized gain on the sale of stock in 2011 of a. c.000.000.000 in brokerage commissions. At December 31. has a stock portfolio valued at $40. $0.000.000 shares of Holmes Corp. d. Thirteenth Edition 89. $50. which of the following journal entries is required at December 31.000 5.000 $(50. 7.000.000. Woods Company purchased 20. Unrealized Holding Gain or Loss-Equity Securities Fair Value Adjustment (Available-for-Sale) 90.000 $465.000. 245. 92.000 $200.000 7. Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss-Equity b. $20.000.000. $250.000 5. Unrealized Holding Gain or Loss-Equity Securities Fair Value Adjustment (Available-for-Sale) d. 2010.000 265. During 2010. which had cost $600.000 5. Trump Co. d. at fair value of $550. 2011? a. b. b.000) Ignoring income taxes. Unrealized gain of $35. Securities Fair Value Adjustment (Available-for-Sale) Unrealized Holding Gain or Loss-Equity c. $0.000 5.000 7. balance sheet. $25. b. Inc. On its December 31. common stock for $315. owns 20.000. reported net income of $420. b. During 2011.000.000 and distributed dividends of $180. $10. Use the following information for questions 97 and 98. $55. $470. What was the purchase price Pod Company paid for its investment in Jobs.000 shares of common stock of the Sherman Corporation for $40 per share on January 2. 2011? a.000 for 2011. b.000.000.000. d.000.000.000. The following information pertains to that portfolio: Security X Y Z Cost $125. The ending balance in the Investment in Pod Company account at December 31.000 96.000 debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. 2011 is a. On January 2.000 b. $30. 17 .000 outstanding shares of Taylor.000 125. paid cash dividends of $60. 94. common stock.000 $380. 2010 was $320. $30. $260.000 $400. During 2010 Jobs.21 On its December 31.000 100. Taylor earns $800.000 during 2011. $380. $15.000 shares of common stock outstanding during 2011. c. $50. The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31.Investments Use the following information for questions 93 and 94. There was no change during 2011 in the composition of Calhoun’s portfolio of marketable equity securities held as available-for-sale securities. d. 2010 Pod Company purchased 25% of the outstanding common stock of Jobs.000 Fair value at 12/31/11 $160. $20.000 c. c. Calhoun Company appropriately reported a $10. . Inc.000 d. Ziegler Corporation should report revenue from investment for 2011 in the amount of a. $35. and subsequently used the equity method to account for the investment.000 of the 50.000 95. Harrison Co.000. $0.000 93. 2010 balance sheet. Inc.000 after applying the equity method during 2010.000.000.000. c. Inc.000 175. What amount of unrealized loss on these securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31. d.000 and pays cash dividends of $640. $10. $20. and reported net income of $200. b. 95. Sherman Corporation had 100. Ziegler Corporation purchased 25. 2008. $170. Inc? a. $0. the balance at December 31.000. 2010 Assets $1. $195.200. d.000 $1. d. $180.000. c.000. $660.000 $900. $820. Use the following information for questions 99 through 102. If the beginning balance in the investment account was $500.000. d.000 If Goebel Company acquired a 20% interest in Dobbs Company on December 31.000. 100.000.000 Liabilities Capital stock Retained earnings Total equities Dobbs Company Balance Sheet December 31.000 and the equity method of accounting for the investment were used. $0.000.000. $111. b.000. The summarized balance sheets of Goebel Company and Dobbs Company as of December 31.500. 2010 are as follows: Goebel Company Balance Sheet December 31. $900. $256. 2010 for $195. If Goebel Company acquired a 30% interest in Dobbs Company on December 31.17 .000.000. $135. 2010 Assets Liabilities Capital stock Retained earnings Total equities 99.000 600.000 450. $180. c. $285.000. Thirteenth Edition 97. 98.000. c. $564.000 $ 150. b. $500. b. b.000 and the fair value method of accounting for the investment were used. 2011 should be a.000 120. d. $202.000. $225.000 $225. c. 2010 for $225. $320.22 Test Bank for Intermediate Accounting.200. the amount of the debit to Investment in Dobbs Company Stock would have been a. the amount of the debit to Investment in Dobbs Company Stock would have been a. $64. .000. Harrison should report investment revenue for 2011 of a.000 555. 000. 104. If Goebel Company acquired a 30% interest in Dobbs Company on December 31. $392.000. 2009 for $135. Dexter Corporation owns 3.000 and paid a cash dividend of $30. 103.000 of the 10.500. . $320. d. $300. $290. d. applying the equity method would give a debit balance in the Investment in Dobbs Company Stock account at the end of 2011 of a. 2010. $340. 2010 should be a. If Blanco Company used the fair value method of accounting for its investment in Darby Company.000.000. $330.000. 2010 if the beginning of the year balance in the account was $320. b. its Investment in Darby Company account at December 31. Blanco Company purchased 200 of the 1.500 and during 2011 Dobbs Company had net income of $75.000.000. $216. c. applying the fair value method would give a debit balance in the Investment in Dobbs Company Stock account at the end of 2011 of a. c. If Blanco Company uses the equity method of accounting for its investment in Darby Company. 105.000.000. $300. b. During 2010. Use the following information for questions 103 and 104.000.000.000 and reported earnings for the year of $200. c.000. $225.000 outstanding shares of Darby Company's common stock for $300. its Investment in Darby Company account on December 31.000 and pays cash dividends of $80. $368. $150.000.000 on January 2. $480. 2010 for $202.000.000 and paid a cash dividend of $30. c. $202. d. d. $217. $340. $135. 102. Darby Company declared dividends of $50.000.000. d. 2010 should be a. Use the following information for questions 105 and 106. Brown Corporation earns $240. b.Investments 101. What amount should Dexter show in the investment account at December 31.000 and during 2011 Dobbs Company had net income of $75.000? a.000.000 during 2010. $330. $290. 17 .500. $111.000.23 If Goebel Company acquired a 20% interest in Dobbs Company on December 31.000. b.000. $144. b. c.000.000 outstanding shares of Brown. $240. d.000 10.000. d. How much investment income should Dexter report in 2010? a. Thirteenth Edition 106.215. At December 31.000 35. Gannon had net income of $600.000 outstanding shares of Penn Corp.000.000 and paid cash dividends of $150.000. $1. During 2010.305.000. $72.000.000 .000. $320. d. $15. $32. $240. c. b.000.395. c. $16. d. $50. 109. During 2011.000. b.000. the balance in the investment account should be a. c. 2010 for $945. The following information relates to Windom Company for 2010: Realized gain on sale of available-for-sale securities Unrealized holding gains arising during the period on available-for-sale securities Reclassification adjustment for gains included in net income Windom’s 2010 other comprehensive income is a.000. Use the following information for questions 108 and 109.17 . Myers Co. 108. $1.000. 110. $25.000. b.000. $60. owns 4. $288. 2011. b.000. 107. $48. Tracy Co.000 and pays cash dividends of $40. common stock. $945. $48. Penn earns $120.000.000. $1. $80.000.000.24 Test Bank for Intermediate Accounting. c. d. b. $272. $40.000 of the 10.000. If the beginning balance in the investment account was $240. acquired a 60% interest in Gannon Corp.000.000.000. Tracy should report investment revenue for 2010 of a. on December 31. c. 2010 should be a. $40. the balance at December 31.000.000. On Wenn's December 31.000) B 15. On October 1. $690.000 $110.000 85.000) 112. 95. $40. c b c a a b 94. 104.000 $ 80. 72.000.000. 86.000 $(25. began operations in 2010.000) Available-for-Sale Securities: Security Y Z Totals $ 70. 113. 2011 balance sheet. d a d b d b 88.000 Aggregate fair value 65.600. 84. 85. 8% bonds of Loy. 101. pay interest semiannually on January 1 and July 1. 77. 96.000 95.000 $ 60. for $702. . b. c b d b a c 76. a b c a b b 82.000 $155. 78. Item Ans. b b b c c c 106.000.000. 80. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-forsale. 75. b. 98. 81. 2017. 107. c.25 Multiple Choice Answers—Computational Item Ans.000 5.000. 70.000 Totals $105. Wenn Co. 83. b c b d b MULTIPLE CHOICE—CPA Adapted 111. 93.000 $(30.000 $ 10. An analysis of Valet’s equity securities portfolio acquired in 2010 shows the following totals at December 31. 79. 105.000 face value. Item Ans. 109. $25. 89. $684. $672. 73.000. the carrying value of the bonds is a. had the following equity securities that were purchased during 2010. $10.000 20.000. 2010. 71. At December 31. 102. Item Ans. d. 99.000. 97. 87. 74.000) $(20.. 2010. d. c.Investments 17 . 2010 for trading and available-for-sale securities: Trading Available-for-Sale Securities Securities Aggregate cost $90. $681. its first year of operation: Fair Unrealized Cost Value Gain (Loss) Trading Securities: Security A $ 90. including accrued interest of $12. 108.000 $ 80. Item Ans. $15. Item Ans. Inc.000 55. 110. 103.000 What amount should Valet report in its 2010 income statement for unrealized holding loss? a. which mature on January 1. a b c c a c 100. 90. The bonds.000 (30.000 $135. 91. 92.000. purchased 600 of the $1. Valet Corp. Item Ans. Jeter Corp. b. b. . $100.000. No No Use the following information for questions 115 through 117. $448.000 and paid dividends of $100. $45. acquired 30% of Doane Corp. No Yes d. d. 2010 balance sheet should be a.000 and paid dividends of $60. Yes Yes b. Rich. Doane earned $160. James owned no other equity securities.'s voting stock on January 1. What should be the gain on sale of this investment in Rich's 2011 income statement? a.000 $30.000. $30. $25.26 Test Bank for Intermediate Accounting.000. $49. c. Yes No c.000. 117. On December 29.000. c. d. An unrealized holding loss was reported in the 2010 income statement. During 2010. $460. 2010 for $400.000.000. $160. Was the equity security classified as available-for-sale and did its 2010 market price decline exceed its 2011 market price recovery? 2010 Market Price Decline Exceeded 2011 Available-for-Sale Market Price Recovery a. Before income taxes. James Co.000 $ 0 114. A realized gain was reported in the 2011 income statement.000. 115.000.000. 2011. Inc. The carrying amount of this investment in Rich's December 31.000 $ 0 b. $40. 2011.000 on October 1. 2010 should be established with a corresponding charge against Income Stockholders’ Equity a. what amount should Rich include in its 2010 income statement as a result of the investment? a.000 c. Fair value adjustments at December 31. b. Thirteenth Edition All market declines are considered temporary. 116. On July 1.000.000.000 $20. $55. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. c.17 .000. Doane earned $200. $48. $30.000 d.000 on April 1 and $60. d. $418.000.000 cash. During 2011. sold an equity security that had been purchased on January 4. Rich sold half of its stock in Doane for $264. 2010. $64. $400. $25. 97 = $194. Ace reported net income of $450.000 during 2010.500 = $198.000 On December 31. Multiple Choice Answers—CPA Adapted Item Ans.000 C 288. 2010.723. b d b a c . c.000. What total amount of gain or loss on its securities should be included in Patel's income statement for the year ended December 31. c a 119. 2010.000 at December 31.000 B 168.500 Cr. 73.000 + $4.000 $117. c. On December 31.875 – $515. $45. 2010. 17 .000 258. $530.055 .000 × .000 × 1.500.790 – $1.055) – ($400. How much did Reston pay for its 25% interest in Ace? a. purchased 25% of Ace Corp. $376. 2011? a.Investments 118.000 × . $652. 119. Available-for-Sale Securities: 200 × $1. Item Ans. Item Ans.100 + $686) × . $27. 111. c d 115. 74. Answer 70. 2011. Item Ans.810.045 × 3/6 = $4. b DERIVATIONS — Computational No.409. b. $765. $20. 72.000 186.875. c Derivation Dr. 116.000 gain.686 ($376. 71. and paid common stock dividends totaling $180.770 – $1. $3. Patel transferred its investment in security C from trading to available-for-sale because Patel intends to retain security C as a long-term investment. c b 117.500.100 × . d.$20.000 loss. Patel Co. Reston appropriately carries this investment at equity and the balance in Reston’s investment account was $720.000 × . b. d d 113.000 for the year ended December 31. Interest Revenue: $200.000 = $414. ($376.000 – ($520.'s common stock.05) = $686. purchased equity securities as trading securities. Item Ans.100 × .000 = $1.000 loss. Reston Co. 2010.000 loss. $787.723 = $41. $30. $516.000 Dr. 114. no goodwill resulted from the purchase. 112. 75. $877. Cash: $194. 118.500.500.000. ($400.27 On January 1.686 + $20.055 = $20.830) = $12.02) + $6. d. Pertinent data are as follows: Fair Value Security Cost At 12/31/11 A $132. 000 = $11.000 × (25. Interest Revenue: $200.000) × .000). 88. 78. $310.000 = $5.000 = $320.000 – $180. 79.540.000 X + $60. 86. 90. 87.000] = ($1.000 × .200 = $4.125. 81. $10.000. [(20.098) = $7.062 – $1. $632. 83. 89.000 = $20. Held-to-Maturity Securities: $200.045) + ($25.000 Dr.000) – $2. $200. Cash: $208. 94.04 = $208.000 = $20. Thirteenth Edition DERIVATIONS — Computational (cont.000 (unrealized loss). ($106.000 – $380. 77.800 gain.09 × 3/12) – ($8. c .000 – $300. ($106.000.) No.000 $623.17 . $30.000 = $213.000 unrealized gain. $0 (available-for-sale securities).000 × 8/50 = $6.000.000 – ($312.418 – $422) × .000] – [($30 – $28) × 3.28 Test Bank for Intermediate Accounting.960. $400.020.000 – ($23.000 Cr.05 × 3/6 = $5.25] = $320.400) ÷ 2 = $983.375.000 × 3/100) = $975. Discount amortization: $40.000 × $17) – $14. a Derivation Dr.09 = $9. 91.000 – $33.000 gain.000 + $5.000) ÷ 10 = $642.000] – $315. 93. b c a b b d a d b d b c b c a a b a b 96. ($200.200.000 + $6.000. $320.000 × 2/80) – $7.10) = ($422) ($106.400 ($1. ($250.000 X = $260.000 × .000 – $9.000 = $1.418 × . [($35 – $30) × 1.000) = $20.000 × . 92.000 – $983.000 × 3/50) = $4.000 × . 84.750. 82. 85. $988.000 × 2/50) = $622.000 + ($25.000 = $30. 95.474 – $1.000.000) = $50.000 × 1.000 = $623. ($400. ($40.686. $318. 80.000 + $20.000 – $380. X + [($420.000 ÷ 100.000 loss.418 – $100.080.09) – ($100.500 = $4. $975. Answer 76.125 – $309.000. 000. 113.000. 117.000 + ($200.000) = $320. $240.000.000 × 30%) = $418.215.000 – $65.000)] = $564.000. 109. c a c b b b c c c b c b d b Derivation $500.000 + ($600.000 – $640.3) = $216.Investments 17 . 110.000 ÷ 50.000.6) = $1.000 × .4) = $272.000 = $690.4 = $48.000 × .000 × .000 × — 75 ( ) = $672.000 – ($60.6) – ($150. acquisition cost. acquisition cost. 105. $400.000 + $48. acquisition cost. acquisition cost.000 + $35. 104.000 ÷ 50.000 15 $690.29 DERIVATIONS — Computational (cont.000 × 30% = $48. d c d c b c $90. $800. DERIVATIONS — CPA Adapted No. d Derivation $702.000 × .000. $320. $15.000. 108.000 × .000. 115.000. $945.2) – ($50. $300. 101.3 = $72. 103.3) – ($30.000 × (20.000 – ($100.000 × 50% × 30%) = $430.000 × .000.000. 116. $160.) No.000 × . 102. $418.000 × .000 + ($240.3) – ($80.000 + [($800.000. $240.000.000 × .000 × . 100.4) – ($40.000.000 – $10.000. Conceptual.000 × . Answer 97.000 × 30%) + ($200.000.000 = $25. $195.000 = $40. $300.3) = $368.000 × . 114. 112.000. 99. $120. 106. $135.000 – $90.000.000 – $12.500 + ($75. 107. $225.000 + ($120.2) = $330.000) × (20. Answer 111.000. $202. . 98. ... (b) The bonds are sold on November 1.......... 17-121—Investment in debt securities at a discount.. 2010.................06 × 1/3)......300 – [($6...500..........06 × 1/4).000 of 12% bonds.................................400 168... Answer 118.. Solution 17-120 (a) Available-for-Sale Securities.........17 ... The bonds mature on January 1................. Prepare all entries required to properly record the sale. purchased $160...... 119........000 – $15. 2016....................... Instructions (a) Prepare the journal entry on April 1......) No..000 = $27........................... 2015.800 plus accrued interest.........000 × .000 loss..... Gain on Sale of Securities......................... Amortization was recorded when interest was received by the straight-line method (by months and round to the nearest dollar)....... Available-for-Sale Securities ..... Available-for-Sale Securities... (b) Interest Revenue ($6....... $18.................... Thirteenth Edition $264........... a b Derivation $720...200 3.........000 × 25%) + ($180....700 400 400 3..... On April 1.......... purchased $450...............000 × ........... 2010.... Cash.. 2011 at 103 plus accrued interest............30 Test Bank for Intermediate Accounting. Interest Revenue ($160...............200 164.............. West Co.... DERIVATIONS — CPA Adapted (cont...............000 ÷ 2) = $49........................................ for $422........ On May 1... $166...000 of 6% bonds for $166........... Kirmer Corp.. 17-120—Investment in debt securities at premium. Cash....) ........ Amortization is recorded when interest is received by the straight-line method (by months and round to the nearest dollar)............ (Assume bonds are available for sale....300 ÷ 63) × 19] 166................ interest payable on January 1 and July 1.......................800 400 164.300 2.....300 × 4 ÷ 63)......000 – $30. Interest Revenue...000 × 25%) = $652.................. 2010........ Cash ($160.... EXERCISES Ex...000 – ($430.......400 Ex..........................300 plus accrued interest as an available-for-sale security...... Interest is paid on July 1 and January 1 and the bonds mature on July 1...000..000 – ($450.. ..... ..................12 × 1/12).. Interest Revenue.... The fair value of an available-for-sale security has declined to less than forty percent of the original cost.......................... The decline in value is considered to be other than temporary..200 ÷ 68) × 15] 422.. Interest Revenue ($450............................................31 (b) The bonds are sold on August 1......000 440. the company would record an unrealized holding gain that would be reported in the other revenue and gains section................... 17 ..... 2011 for $425.............. whose fair value is now less than cost. At the end of the current year.......000 3...................000 × . Presented below are unrelated cases involving investments in equity securities............ Loss on Sale of Securities.............. Cash..................... Cash ($450......................................... An equity security...800 18...... 2010......800 (b) Ex......................................200 ÷ 68 × 1)......Investments Instructions (a) Prepare the entry for May 1..... The fair value of the trading securities at the end of last year was 30% below original cost.... 17-122—Investments in equity securities..800 428... $422............ Available-for-Sale Securities ($27.... Instructions Indicate the accounting required for each case separately............. Cash.............................. Available-for-Sale Securities....... and this was properly reflected in the accounts. At the end of the current year.... the company would have recognized an unrealized holding loss and recorded a Securities Fair Value Adjustment (Trading)...................... Interest Revenue........... is classified as trading but is reclassified as available-for-sale..... Case III...... Case II. Case I........................800 + [($27.................000 plus accrued interest.500 4....... Prepare all entries required to properly record the sale............ Solution 17-122 Case I..........800 400 400 4...................000 × ...... The adjustment account would now have a debit balance....................... Solution 17-121 (a) Available-for-Sale Securities. At the end of last year...500 425..12 × 4/12)........................................... the fair value has increased to 20% above cost. 000 Ex. (Essay) Compare the fair value and equity methods of accounting for investments in stocks subsequent to acquisition. Under the equity method.000.000) Share of dividends (.000. Subsequently. Case III. Dividends are reported as other revenues and gains. Dividends received from the investee are reductions in the investment account. 2010.32 Test Bank for Intermediate Accounting. The security is transferred at fair value.000.25 × $360. Agee Corp.) Case II. The Available-for-Sale Securities account is recorded at fair value. .000 90.000) $550. Trent had 1. on January 1. Thirteenth Edition Solution 17-122 (cont.17 . 17-123—Investment in equity securities.25 × $160. Trent paid cash dividends of $160. At that time. investments are originally recorded at cost and are reported at fair value. What is the balance in Agee’s investment account at the end of 2010? Solution 17-123 Cost Share of net income (. During 2010. The Trading Securities account is credited for cost.000 shares of its $1 par common stock issued and outstanding. the loss should be recognized as if it were realized and earnings will be reduced. The fair value becomes a new cost basis. Trent's net income for 2010 was $360. When the decline in value is considered to be other than temporary. and the Unrealized Holding Loss— Income account is debited for the unrealized loss.000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share. Ex. for $500.000 (40. 17-124—Fair value and equity methods. acquired a 25% interest in Trent Co. Solution 17-124 Under the fair value method.000) Balance in investment account $500. investments are originally recorded at cost. the investment account is adjusted for the investor's share of the investee's net income or loss and this amount is recognized in the income of the investor. which is the new cost basis of the security. 000 22.500 5. Hudson reported $30. and cumulative totals for Years 1. Hudson reported a net loss of $10.000) (1.000 of dividends.33 Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions.000 240. 2.000 3.000 (3. ——————————————————————————————————————————— 2. During Year 1. At the beginning of Year 1. ——————————————————————————————————————————— 3.000) 24.000 (9. 240. 2.000) 9.000 of dividends.000) (3. Indicate the Year 3 ending balance in the Investment account. 17-125—Fair value and equity methods. 12. ——————————————————————————————————————————— 5. Total book value of all Hudson's common stock was $800.Investments Ex.000 9.000 of net income and paid $30.500 (a) Fair Value Method (b) Equity Method Investment Dividend Investment Investment Account Revenue Account Revenue 240. 9. ——————————————————————————————————————————— 4. During Year 3. 17 .000 of net income and paid $40.500 18. During Year 2.000 18.000 ——————————————————————————————————————————————— ——————————————————————————————————————————————— ——————————————————————————————————————————————— ——————————————————————————————————————————————— ——————————————————————————————————————————————— ——————————————————————————————————————————————— .500) 241. ——————————————————————————————————————————— Solution 17-125 Transaction 1.000 of dividends. Hudson reported $60. and 3 for dividend revenue and investment revenue.000 4. (a) Fair Value Method (b) Equity Method Investment Dividend Investment Investment Transaction Account Revenue Account Revenue ——————————————————————————————————————————— 1. assuming Crane Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Hudson Company. Crane bought 30% of Hudson's common stock at its book value.000 (12.000 and paid $5.000 on this date. 1. 000 24.500 $120.34 Test Bank for Intermediate Accounting. $500.000 3% $ 15. *Solution 17-127 (a) and (b) Fixed-rate debt Fixed rate (6% ÷ 2) Semiannual debt payment Swap fixed receipt Net income effect Swap variable rate 5. 2010. Tylor now wants to change the note to a variable rate note.000 ($10.000). 2010. Solution 17-126 (1) 2010 other comprehensive income = $26.6% × ½ × $500. (2) 2010 comprehensive income = $146. interest payable semiannually.000 unrealized holding gain – $8.000 15.000 $ 0 $ 16. the variable interest rate will be reset. 17-126—Comprehensive income calculation. On January 2. Tylor Co. At each 6-month period.17 . on January 2.000 realized gain + $24. enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5. *Ex.000 Net interest expense 6/30/10 $500. (2) Compute comprehensive income for 2010. The variable rate is reset to 6. (b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31.000 12/31/10 $500. 2010. issued a 4-year.000 0 $ 14.000 6. 2010.000 + $26.000 15. 2010.000 8.000 .000 ($120.6% × ½ × $500. Tylor Co.000 reclassification adjustment). The following information is available for Irwin Company for 2010: Net Income Realized gain on sale of available-for-sale securities Unrealized holding gain arising during the period on available-for-sale securities Reclassification adjustment for gains included in net income Instructions (1) Determine other comprehensive income for 2010.000 note at 6% fixed interest.000.000 $ 0 $ 14.000 3% $ 15. Instructions (a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30. As a result. Thirteenth Edition Ex.500 $ 16. 17-127—Fair value hedge.6% for the first 6 months on $500.000 10.6% on June 30. 000 7.000.500. *Solution 17-128 (a) and (b) Variable-rate debt Variable rate Debt payment Debt payment Swap receive variable Net income effect Swap payable—fixed Net interest expense 12/31/07 $8. 17-128—Cash flow hedge. Sloan enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $8 million.000 $ 560. 2011.8% $ 544. Common 182.35 On January 2. Bought 600 shares of Werth Stores.. $8. Sloan Company issued a 5-year.000) $ 0 560. In 2011. .4% $ 592.000 All of the securities had been purchased in 2010. 2010: Cost Fair Value 5.000 PROBLEMS Pr.8% Sloan Company decides it prefers fixed-rate financing and wants to lock in a rate of 6%.000 $ 544.000 (544.000 $139.000 $329.000 note at LIBOR with interest paid annually. 17-129—Trading equity securities. Common $155.000 shares of Gant. The variable rate is reset at the end of each year.000.000 6.000 $ 592. Korman Company has the following securities in its portfolio of trading equity securities on December 31. Instructions (a) Compute the net interest expense to be reported for this note and related swap transactions as of December 31. Common @ $31 less fees of $1.000 190..000) $ 0 560.000 (592.000 shares of Thomas Corp. Common @ $45 plus fees of $550.000 10. The variable rate is reset to 7.000 $ 560. 2010. The LIBOR rate for the first year is 6.000 $337.4% on January 2.000 shares of Thomas Corp. As a result. 2011. (b) Compute the net interest expense to be reported for this note and related swap transactions as of December 31. Korman completed the following securities transactions: March 1 April 1 Sold 5. 2010. 17 .Investments *Ex.000.000 12/31/08 $8. .......000 – $329. Cash [(600 × $45) + $550]..000 8..........000 (30..000 shares of Gant...............000 115....500]...............000 Instructions Prepare the general journal entries for Korman Company for: (a) the 2010 adjusting entry...) The Korman Company portfolio of trading equity securities appeared as follows on December 31..... 8......000 2011 $ 14................... Common 27. Perez Company began operations in 2009........... 17-129 (cont... Loss on Sale of Securities........ Solution 17-129 (a) 12-31-10 Unrealized Holding Gain or Loss—Income.........................000 $195... Perez owned the following trading securities: BKD Common (15....... it has reported the following gains and losses for its investments in trading securities on the income statement: Gains (losses) from sale of trading securities Unrealized holding losses on valuation of trading securities Unrealized holding gain on valuation of trading securities 2009 $ 15.....450 19..........000) — Cost $450...........17 ................. 12-31-11 Securities Fair Value Adjustment (Trading).........000) 3-1-11 Cash [(5..500 155.................. (d) the 2011 adjusting entry........000) — 10........... 4-1-11 Trading Securities.....000 (25......000 × $31) – $1.000 2010 $(20.... Securities Fair Value Adjustment (Trading)............. Trading Securities... 2012.............000 27......... stock.........550 $221..........550 19.......000 210.........................000 shares) LRF Preferred (2..........000 (b) 153..... Since then.....550 25.......500 1....... Thirteenth Edition Pr. (b) the sale of the Thomas Corp.... (c) the purchase of the Werth Stores' stock.................500 600 shares of Werth Stores.....550 27.... Unrealized Holding Gain or Loss—Income....................36 Test Bank for Intermediate Accounting..500 $209.... Common $182....... 2011: Cost Fair Value 10..000 shares) Drake Convertible bonds (100 bonds) ..... 17-130—Trading equity securities.... ($337..000) — At January 1....450 (c) (d) Pr. 000 Fair Value $280.. $1... $110 per share Drake Bonds.000 102. Solution 17-130 (a) Balance 12/31/09 (result of that year's adjusting entry) Deduct unrealized gain for 2010 Add: Unrealized loss for 2011 Balance at 12/31/11 Aggregate cost and fair value for trading securities at 12/31/12: BKD Common 10.000 shares Horton Common..... 2011 (after the adjusting entry for 2011 is made).) 17 . 1..000 $(25... the following events occurred: 1..000..000 23.. 100 bonds Total (c) Cost $300.000 115.000 42..000 23...000 (30.020 per bond Horton Common.37 During 2012.000 41.000 shares Drake Bonds.000 shares of Horton Common for $40 per share.000) $(45.. (Balance at 1/1/12 $45....000) (b) Adjusting entry at 12/31/12: Securities Fair Value Adjustment (Trading)..000 Balance needed at 12/31/12 22....000 220. $42 per share Instructions (a) Prepare a schedule which shows the balance in the Securities Fair Value Adjustment (Trading) at December 31..000 shares of BKD for $170..... At 12/31/12.. $28 per share LRF Preferred.... 2..000) ..000 $666.. (c) Prepare the necessary adjusting entry based upon your analysis in (b) above...000 Recovery $23..000 shares LRF Preferred 2..000) 10. the fair values for Perez's trading securities were: BKD Common. Acquired 1.....000 210. (b) Prepare a schedule which shows the aggregate cost and fair values for Perez's trading securities portfolio at 12/31/12...000 $644..Investments Pr..000.... Unrealized Holding Gain or Loss—Income.. Sold 5. Brokerage commissions totaled $1.. 17-130 (cont... The fair value for each security as of the 2010 date of each transaction follow: Security Feb. "Investments. $40 Doppler Corp. (Memorandum entry in general ledger.000 July 26 Received 400 shares of Harmon Company common stock as a stock dividend. $55 $62 $70 Taber Inc.400 = $50 cost per share . $220.000 shares 400 shares 4. 31 $74 32 35 2. Oct. 28 Sold the 400 shares of Harmon Company common stock received July 26 @ $70 per share. Solution 17-131 (1) (a) Harmon — original purchase stock dividend total holding 4. 2010. Common Stock 30 Purchased 20. Your analysis of this account for 2010 follows: Doppler Corporation Analysis of Investments For the Year Ended December 31.17 . 2010 Date—2010 (a) Harmon Company Common Stock Feb.20 per share. 28 Received dividend of $1." Your examination revealed that during 2010. to record the proper valuation of the available-for-sale equity security portfolio as of December 31. Doppler began a program of investments.) Sept.000 $24.000 Credit Debit Credit $28.000 shares @ $40 per share. if necessary. 25 28 30 33 Dec. Each investment is considered by Doppler’s management to be available-for-sale. 3.000 ÷ Total shares of 4. All of the investments of Doppler are nominal in respect to percentage of ownership (5% or less). 2010. Thirteenth Edition Pr. (2) Prepare the entry. 14 Apr. During the course of your examination of the financial statements of Doppler Corporation for the year ended December 31. 30 July 26 Sept. Instructions (1) Prepare any necessary correcting journal entries related to investments (a) and (b).400 shares Total cost of $220.000 Additional information: 1.. $800. 28 Harmon Co. and all investment-related transactions were entered in this account. (b) Debit Apr. 17-131—Available-for-sale equity securities. you found a new account. Taber Inc. 14 Purchased 4.000 shares @ $55 per share.38 Test Bank for Intermediate Accounting. .................................................. Correction: Available-for-Sale Securities....................................000) $ 64............000 28.................................. Entry made: Cash..........000 shares 20................. Correction: Available-for-Sale Securities...000 24...................................000 8.....................Investments Solution 17-131 (cont.......................000 8.................................................... Correct entry: Cash... Entry made: Cash...........000 $936.........000 28.............. Available-for-Sale Securities...................000 (160................... 64......................000 Fair Value $296.............. Available-for-Sale Securities..39 28.......................000 24.................000 24....000 shares Cost $ 200..............................000 Increase (Decrease) $ 96...000 64.......000 Year-end Adjustment: Unrealized Holding Gain or Loss—Equity.......................000 24..000 800.......000 8....000 ...... Gain on Sale of Securities........... Available-for-Sale Securities.........000 $1..................................... Gain on Sale of Securities..... Securities Fair Value Adjustment (Available-for-Sale)...................................000 17 ..............................................000 24.....000 20......................................) Sold 100 shares Correct entry: Cash (400 × $70).... (To properly record dividends under fair value method) (2) Valuation at End of Year: Harmon Taber Quantity 4.....................000 24..000........000 640...................... (b) Taber—should record cash dividend as dividend income................................................... Dividend Revenue.......... Dividend Revenue......................... ............... for $215................. 2010....... 2010 December 31...... for $100.........40 Test Bank for Intermediate Accounting.............. *Solution 17-132 (a) July 7..... Cash.. 17-132—Derivative financial instrument....................... purchased a put option on Reese common shares on July 7......................... 2010 June 30......................... 2010 Unrealized Holding Gain or Loss—Income... Put Option ($21 – $0)...................... Thirteenth Edition *Pr.......................... Hummel Co............ The put option is for 300 shares. 17-133—Free-standing derivative. 2011—Put option expires. 2010........ Welch Co.... and the strike price is $30...... December 31....... January 31..... December 31.. The option expires on July 31....................... Put Option ($53 – $21). The put option is for 200 shares.... 2010 July 6..............17 ....... 2010— Hummel prepares financial statements. and the strike price is $51..... 2010—Investment in put option on Olney shares... 2010— Hummel prepares financial statements................. The following data are available with respect to the put option: Date September 30......................... 2010 Put Option...... The following data are available with respect to the put option: Date March 31... 2010 Unrealized Holding Gain or Loss—Income........... 2011 Market Price of Olney Shares $32 per share $31 per share $33 per share Time Value of Put Option $53 21 0 Instructions Prepare the journal entries for Hummel Co........ 2011..... purchased a put option on Olney common shares on July 7... September 30..... 2010............ 2011 Loss on Settlement of Put Option..................... 2010 January 31................... 100 100 47 47 32 32 21 21 (b) (c) (d) *Pr.............. 2010 Market Price of Reese Shares $48 per share $50 per share $46 per share Time Value of Put Option $120 54 16 .. Put Option ($100 – $53)............ for the following dates: (a) (b) (c) (d) July 7............. September 30..... The option expires on January 31.. January 31. ............... 2010— Welch settles the call option on the Reese shares.. 2010 Put Option.. Gain on Settlement of Put Option........... Put Option ($120 – $54).............................................................................................. 2010 Unrealized Holding Gain or Loss—Income......... Put Option*. 2010— Welch prepares financial statements.......................... 2010—Investment in put option on Reese shares............................ Cash.. Put Option ($2 × 300).......................................500 1......................................... (d) July 6...................... *Value of Put Option settlement: Put Option 215 900 215 215 900 900 95 95 600 600 66 66 38 38 1................. March 31.................. June 30.............................. 2010 Unrealized Holding Gain or Loss—Income......................... for the following dates: (a) (c) (d) (e) January 7.................................................................................................... 2010— Welch prepares financial statements..................................... Unrealized Holding Gain or Loss—Income......................................................... Unrealized Holding Gain or Loss—Income........ Put Option ($54 – $16)........................................................... 2010 Put Option.....................184 316 (b) 95 600 66 38 316 ......... Cash (300 × $5)......... (c) June 30.... Put Option ($215 – $120)....Investments *Pr.......... 17-133 (cont......................................................... July 6.... 17 ........... Unrealized Holding Gain or Loss—Income ($3 × 300)...) Instructions Prepare the journal entries for Welch Co............ March 31..41 *Solution 17-133 (a) January 7.................... True 5. iGAAP requires that gains and losses on available-for-sale securities be reported directly in equity. but impairment charges related to available-for-sale equity securities may not be reversed. requiring adjustments be made to the investor’s books in order to prepare financial information. False 4.17 . GAAP Income d. 2.42 Test Bank for Intermediate Accounting. iGAAP requires that Company A consolidate Company B when it controls and owns at least 50% of Company B. 4. iGAAP Comprehensive income . although this type of reclassification should be rare. True 2. Under iGAAP. Match the approach and location where gains and losses from available-for-sale securities are reported: Location where gains/ Approach losses reported_ __ a. True 3. 5. GAAP Equity b. Thirteenth Edition IFRS QUESTIONS True/False 1. both the investor and the associate company should follow the same accounting practices. 3. impairment charges related to available-for-sale debt securities may be reversed. Answers to True/False 1. False Multiple Choice 1. Reclassification in and out of trading securities is permitted under iGAAP. Under iGAAP. iGAAP Equity c. 000. 1. 10-year bonds of Pear Co. Rushia determines that the investment is impaired and now has a fair value of $2.S.43 Rushia Company has an available-for-sale investment in the 10%. If Rushia Company determines that the fair value of the investment is now $2. b. Rushia is prohibited from recording the recovery in value of the impaired investment. GAAP.000 and is using iGAAP for its external financial reporting. d. c. which of the following is true? a. GAAP and IGAAP with respect to the accounting for investments. 2012. Rushia may record a recovery of $900. The accounting and reporting under iGAAP and U. Pear Co. c. Rushia may record a recovery. d. In June. As a result. GAAP use the same test to determine whether the equity method of accounting should be used – that is. b 2. 2011.S.000. has lost its primary manufacturing facility in an uninsured fire. (2) both iGAAP and U. The investment’s carrying value is $3.000. b.900. 2010. available-for-sale. Rushia may record a recovery of $1. and its prospects have improved as a result. and held-to-maturity securities is essentially the same between iGAAP and U. Answers to multiple choice 1. GAAP.200. Rushia is prohibited from recording the recovery in value of the impaired investment.300. 3.900.S. has succeeded in rebuilding its manufacturing facility. Rushia may record a recovery of $900. 2. (3) reclassifications of securities from one category to another generally follow the same accounting under the two GAAP systems.000 and is using U. among the notable similarities are: (1) the accounting for trading. GAAP for its external financial reporting. Briefly describe some of the similarities and differences between U. For example. b Short Answer: 1.000 at December 31.000.000.000. Rushia may record a recovery of $600. Rushia may record a recovery of $700. although the criteria used to determine the accounting is often different. On January 9. iGAAP uses the term associate investment rather than equity investment to describe its investment under the equity method.Investments Use the following information for questions 2 and 3 17 . .S. which of the following is true? a. a 3. Rushia learns that Pear Co. GAAP are for the most part very similar. but is limited to 80% of the value of the recovery. Reclassification in and out of trading securities is prohibited under iGAAP. If Rushia Company determines that the fair value of the investment is now $3.S.600.S. but this type of reclassification should be rare. significant influence with a general guide of over 20% ownership. It is not prohibited under U. S. because impaired investments may not be written up if they recover in value. (2) under iGAAP. the investor company must generally own 50% of another company. both the investor and an associate company should follow the same accounting policies. What entry does Ramirez make in 2011 under (a) U. Under U. a bipolar approach is used which is a risk-and-reward model (often referred to as a variable-entity approach) and a voting-interest approach. these gains and losses are reported directly in equity.S. Ramirez makes no entry. iGAAP follows the same approach for available-for-sale equity investments but permits reversal for available-for-sale debt securities and held-to-maturity securities.44 Test Bank for Intermediate Accounting.. Under U.000 in 2009.S. 20-year bonds of Soto Company.S. Thirteenth Edition Differences include: (1) Gains and losses related to available-for-sale securities are reported in other comprehensive income under U. GAAP.200. (4) U. Ramirez recorded an impairment of $200. under both systems. Under iGAAP. GAAP and (b) iGAAP? 2. for consolidation to occur. due to Soto’s financial distress. As a result. GAAP.000 on the Soto investment. 200. In 2011. Soto returned to profitability and the Soto investment was no longer impaired. GAAP.S. adjustments are made to the associate’s policies to conform to the investor’s books. The investment was originally purchased for $1.000 200. Early in 2010. However. (3) the basis for consolidation under iGAAP is control. in order to prepare financial information. Ramirez Company has an available-for-sale investment in the 6%. GAAP does not permit the reversal of an impairment charge related to available-for-sale debt and equity investments.000 . Under iGAAP. 2. Ramirez makes the following entry: Available-for-Sale Impairment…………………………………… Recovery of Loss on Investment……………………….17 .