financial accounting tools for business decision making solutions 7e chapter 12

Management might prefer to account for an equity investment at the fair value through other comprehensive income model rather than using the fair value through profit or loss model when

Trang 1

REPORTING AND ANALYZING INVESTMENTS

LEARNING OBJECTIVES

1 Identify reasons to invest, and classify investments

2 Account for non-strategic investments

3 Account for strategic investments

4 Explain how investments are reported in the financial statements

5 Compare the accounting for a bond investment and a bond payable (Appendix 12A)

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Trang 2

Legend: The following abbreviations will appear throughout the solutions manual file

M Moderate

C Complex

Time: Estimated time to prepare in minutes

AACSB Association to Advance Collegiate Schools of Business

Reflec Thinking Reflective Thinking

CPA CM CPA Canada Competency

cpa-e001 Ethics Professional and Ethical Behaviour

cpa-e002 PS and DM Problem-Solving and Decision-Making

cpa-e003 Comm Communication

cpa-e004 Self-Mgt Self-Management

cpa-e005 Team & Lead Teamwork and Leadership

cpa-t001 Reporting Financial Reporting

cpa-t002 Stat & Gov Strategy and Governance

cpa-t003 Mgt Accounting Management Accounting

cpa-t004 Audit Audit and Assurance

cpa-t005 Finance Finance

cpa-t006 Tax Taxation

Trang 3

1 Companies invest primarily for two reasons: to earn investment income

such as interest, dividends, and the appreciation in the value of an

investment or to influence or control other companies through the

acquisition of large amounts of common shares

LO 1 BT: K Difficulty: S Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

2 A non-strategic investment is made for the purposes of generating

investment income A strategic investment is purchased to influence or

control the operations of another company in some way

LO 1 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

3 (a) This equity investment should be classified as a non-strategic

investment as the company intends to sell its Suncor Energy shares

if the need for cash arises

(b) The investment would most likely be classified as a current asset

(although judgement must be exercised here) as it was not purchased with the intent of holding it for a long period of time

LO 1,4 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

4 For most debt and equity investments, their fair value is determined by the

stock and bond markets Adjustments in the carrying amount of

investments are made for increases and decreases in fair value and the

adjustments generate unrealized gains and losses from holding the

investments For inventory, the valuation for reporting is at the lower of cost

and net realizable value Inventory cannot be written up beyond historical

cost In other words, there cannot be unrealized gains for inventory due to

fair value adjustments The same holds true for accounts receivable that

are reported at realizable value by establishing an allowance for doubtful

accounts

LO 2 BT: C Difficulty: C Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 4

6 Management might prefer to account for a bond investment at amortized

cost because the reasons for purchasing the bond were to hold it to

maturity and earn interest income If management does not intend to trade

the bond or earn gains from the appreciation in the price of the bond, then

information pertaining to the fair value of the bond is not relevant so its

carrying amount does not have to be adjusted to fair value By not adjusting

the bond to its fair value, the company would not be recording any

unrealized gains or losses pertaining to the bond and this would eliminate

the volatility in the amounts that are reported in the financial statements

caused in turn by the volatility of the interest rate environment affecting the

bond market

7 Realized gains (losses) are the differences between fair values and the

carrying amounts when the investments are actually sold Unrealized gains

(losses) are the differences between the fair values and carrying amounts

of investments still held or owned by the investor

Trang 5

and reported in the other revenues and expenses section in the income statement

(b) Yes, the answer would be different if the fair value could not be

determined No unrealized gain would be reported and the investment would be valued at cost

LO 2 BT: AP Difficulty: M Time: 5 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

9 (a) The bonds would be shown at their fair value of $1,050,000

(b) The interest revenue earned on the bonds would be reported as other

revenue under the other revenue and expenses section of the statement of income

LO 2 BT: AP Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

10 Management might prefer to account for an equity investment at the fair

value through other comprehensive income model rather than using the

fair value through profit or loss model when users of the financial

statements are not evaluating management or the company’s performance

on the appreciation in the value of the investment Although this model will

result in the investment being recorded at fair value, unrealized gains or

losses will have no impact on net income or earnings per share, two

measures of management and company performance Using this model

will eliminate the volatility in net income that can arise from recording

unrealized gains and losses in net income rather than in OCI If the

particular investment is subject to above average volatility, it would be

preferable to management that the unrealized increases and decreases in

the investment’s carrying amount not affect net income and basic earnings

per share

Trang 6

11 (a) Under the cost model, the carrying amount of the company’s

investment is equal to its cost The investment account is not affected

by the earnings of the entity into which the investment is made which

it is under the equity method Furthermore, dividends received do not affect the investment account when using the cost model as they do when using the equity method In the cost model, the investing company records any dividends received as investment revenue, leaving the carrying amount (usually cost) of the investment intact

(b) Under the equity method, the investment is also recorded at cost on

the day when the investment is purchased However, the investment account is increased or decreased by the investor’s share of the investee company’s net income or loss for the period, respectively

The investing company would reduce the carrying amount of its investment by any dividends received from the investee, since the value of the latter’s net assets decreases as it declares dividends

(c) Under the fair value through profit or loss model, the recording of the

strategic investment is at cost at the date of purchase, but at all subsequent reporting periods, the carrying amount is adjusted to the investment’s fair value at that date The investing company records any dividends received as investment revenue

LO 3 BT: K Difficulty: M Time: 15 min AACSB: None CPA: cpa-t001 CM: Reporting

12 When an investor exercises significant influence over its associate, it is in

a position to affect some of the operational decisions of the associate

through membership on the board of directors Because this degree of

influence has been achieved, it is deemed appropriate for the investor to

record, in an account called Income from Associates, the investor’s

proportionate share of the net income or loss reported by the associate

This recording of income is done even if the associate has paid no

dividends to the investor If the associate does pay a dividend to the

investor, the dividend cannot be recorded in the income statement because

the dividend is simply a distribution of the previously recorded income from

the associate Consequently, dividends received are treated as a return of

the investment (reduction of the investment account) instead of revenue

Trang 7

only entry the investor would make relative to this investment is to record any cash dividends it receives from the investee as investment revenue or any realized gains or losses when selling the investment

(b) The equity method is used when the investor exercises significant

influence over the investee (known as an associate if it is significantly influenced) Consequently, the investor has played a role in the determination of any net income or loss experienced by the investee

As the investee earns income, its value will increase Thus the investor’s carrying amount of its investment in the investee should reflect this reality Consequently, the investor records investment revenue (loss) when the investee reports net income (or loss) and does not wait for the distribution of income by way of dividends to record income from the investee The investment is reduced by the amount of dividends received and does not result in the recording of dividend revenue This is done because the dividend is simply a distribution of income that has already been recorded Furthermore, when the investee (also known as associate) distributes a dividend, the value of the associate falls and a corresponding reduction in the investment account balance is appropriate

(c) Under the fair value through profit or loss model, as with the cost

model, the investor would record, in the income statement, any cash dividends it receives from the investee as investment revenue along with any realized gains or losses when selling the investment In addition, unrealized holding gains or losses are recorded in the income statement at the end of each reporting period

Trang 8

14 (a) Significant influence over an investee may result from representation

on the board of directors, participation in policy-making processes, material inter-company transactions, interchange of managerial personnel, or technological dependency An investment (direct or indirect) of 20% or more of the voting shares of an investee constitutes significant influence, unless there exists evidence to the contrary Control on the other hand exists when one entity holds more than 50% of the voting shares of the investee

(b) Companies are required to use judgement rather than to blindly follow

the 20% and 50% guidelines For example, 25% ownership in a company that is 75% controlled by another company would not necessarily indicate significant influence Similarly, a single investor holding 45% ownership in a public company that has the remaining 55% ownership spread over thousands of shareholders could have control over the investee

15 Consolidated (combined) financial statements are prepared when a parent

company owns a subsidiary (ownership with control) Consolidated

financial statements show the combined assets and liabilities of both the

parent and subsidiary companies In order to avoid duplication, the

investment account is eliminated and replaced with the assets and

liabilities of the subsidiary

LO 3 BT: K Difficulty: S Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 9

implying that they will be sold fairly soon

(b) Investment in associates is classified as a long-term investment under the assumption that if an investor has gone to the trouble of obtaining

a large enough block of shares to significantly influence the investee, they would want to hold onto the investment for more than one year

(c) Debt investments held to maturity are classified as long-term investments except in the year of maturity, when the securities would

be classified as current assets

17

Account Financial Statement Classification

(a) Unrealized Gain on Held

for Trading Investments

Income Statement Other revenues and

Trang 10

18 Comprehensive income includes all changes to shareholders’ equity during

a period except changes resulting from investments by shareholders and dividends declared Net income is one component of comprehensive

income The other component is other comprehensive income, which

includes the current period’s unrealized gains/losses on securities

accounted for using the fair value through other comprehensive income

model and certain other unrealized gains/losses such as revaluation gains

under the revaluation model for property, plant, and equipment that was

covered in Chapter 9 Net income and other comprehensive income can

be reported separately in two statements although the preferred approach

is to report both in a single statement known as the statement of

comprehensive income

Accumulated other comprehensive income is the cumulative total of each

period’s other comprehensive income/loss Just as net income is closed

out to retained earnings at the end of the year, other comprehensive

income is closed out to accumulated other comprehensive income at the

end of the year The changes to accumulated other comprehensive income

are reported in the statement of changes in equity, and the ending balance

of accumulated other comprehensive income is reported in the

shareholders’ equity section of the statement of financial position

19 Net income reported on the income statement is a component of

comprehensive income Net income along with other comprehensive

income is reported in the statement of comprehensive income (if the

company chooses to report both under a single statement) Net income

(loss) increases (decreases) retained earnings Other comprehensive

income (loss) increases (decreases) accumulated other comprehensive

income which, like retained earnings, is an equity account Changes in both

retained earnings and accumulated other comprehensive income are

reported in the statement of changes in equity Total shareholders’ equity

is reported in the statement of financial position (assets = liabilities +

shareholders’ equity)

Trang 11

financial statements George Weston would have created an investment account when it first purchased Loblaw Upon consolidation, the investment account would be replaced with the assets and liabilities of Loblaw in creating consolidated financial statements Because the investment account is eliminated in the consolidation process, it really does not matter whether the investment account is accounted for using the equity or cost method prior to consolidation

(b) At that time, George Weston Ltd was the parent and Loblaw was the

subsidiary because the parent exercised control over the subsidiary since it owned 63% of the voting shares of Loblaw

(c) Consolidated financial statements were prepared When consolidated

financial statements were prepared, George Weston eliminates its investment account from its own records and replaces this with the specific assets and liabilities of Loblaw The consolidated financial statements would include all of George Weston’s assets and liabilities

at their carrying amount in addition to the assets and liabilities of Loblaw

(d) Following the purchase of Shoppers Drug Mart by Loblaw, and the

decrease in the ownership percentage of George Weston in Loblaw

to 46%, George Weston would presumably no longer have control of Loblaw It would however still be able to exercise significant influence

In this case, consolidation would normally not be required and the investment account would be accounted for using the equity method (it would not be eliminated anymore when consolidation occurred)

However, George Weston, even though it does not own a majority of the voting shares of Loblaw, still controls Loblaw because it has the right to acquire more shares in that company (although a discussion

of the detailed reasons for this covers material beyond the scope of this textbook)

Trang 12

20 (continued)

(e) Based on the facts provided, Loblaw would now be an associate and

not a subsidiary of George Weston However, as stated above, George Weston does exercise control (for reasons beyond the scope

of this text) and still continues to treat Loblaw as a subsidiary despite the fact that it only owns 46% of the voting shares

LO 3,4 BT: AP Difficulty: C Time: 15 min AACSB: None CPA: cpa-t001 CM: Reporting

*21 The accounting treatment for an investment in bonds is essentially the

inverse of the recording required for a bond liability In both cases, the

bond is recorded at its issue price, with any premium or discount netted

with the bond account The premium or discount is amortized using the

effective interest method, unless the bond is held for trading Debt

investments in bonds that are held for trading are re-valued to fair value at

year-end, whereas bond liabilities are not because it is extremely rare for

them to have been issued for the purposes of trading (because they are

liabilities, not investments)

*22 Premiums and discounts must be amortized when using the amortized cost

model because the amortization of the discount or premium provides the

proper matching of interest revenue to the periods the investment is held

and reflects the effective interest rate in the financial statements When

using the fair value model for debt securities, the investment is held for a

short time and any misstatement of interest caused from not amortizing the

discount/premium is not considered material

LO 2,5 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 13

independent third party purchases the bonds on the market, and as such,

that transaction is occurring between two investors and has nothing to do

with the company that originally issued the debt The liability has not been

settled, but rather, the amount of the bonds owing is simply payable to a

different investor

LO 5 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 14

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 12-1

(a) Debt or Equity Investment?

(b) Non-Strategic or Strategic Investment?

(c) Reason for Making the Investment?

1 120-day treasury bill Debt Non-Strategic Interest revenue for

120 days

2 A few common shares of

a small oil company

4 Bonds purchased with a

temporary cash surplus

that will be held to

maturity

Debt Non-Strategic Interest revenue

5 100% of the common

shares of a company

purchased to combine its

operations with those of

the investor

Equity Strategic Control the

operations of the other company

6 Five-year bonds intended

to be held for the entire

term of the bonds

Debt Non-Strategic Interest revenue

over the long term

LO 1 BT: K Difficulty: M Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 15

(a)

Jan 1 Held for Trading Investments 200,000

Cash 200,000 (b)

July 1 Cash 10,000

Interest Revenue ($200,000 × 10% × 6/12) 10,000 (c)

Dec 31 Interest Receivable 10,000

Interest Revenue ($200,000 × 10% × 6/12) 10,000

Dec 31 Unrealized Loss on Held for Trading Investments 6,000

Held for Trading Investments 6,000 ($200,000 – [$200,000 × 97%])

2019

Jan 2 Cash 194,000

Held for Trading Investments 194,000

The investment is already carried at fair value so no gain or loss will result on this sale

Trang 16

Dec 31 Held for Trading Investments 4,000

Unrealized Gain on Held for Trading Investments 4,000

Trang 17

Income from Associates 20,000

(b) Rook would report $20,000 of revenue from its investment in Hook for the year

(b) Since Rook uses the cost model to account for its investment, the only

revenue that Rook should report is its pro-rata share of any dividends

declared by Hook, which amounts to $10,000 (25% × $40,000)

(c) Accounting for the investment using the cost model is different from using

the equity method which records a pro-rata share of income from Hook and

records receipt of dividends as a reduction of the investment account on

the statement of financial position

Trang 18

(a) Significant influence – The balance in the equity investment account at

December 31, would be $287,000 The investment would be reported as

an investment in associates in long-term investments

Cost of investment $225,000

Add: Share of Dong’s net income (20% × $350,000) 70,000

Less: Dividends received from Dong (20% × $40,000) (8,000)

$287,000 (b) Without significant influence, the investment would be reported at the fair

value of $275,000 in long-term investments

(c) Under the cost model, the investment would be reported at its purchase

price of $225,000 It would be reported as an investment in associates in

long-term investments

LO 2,3,4 BT: AP Difficulty: C Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

Trang 19

(a) (b) (c)

Significant Influence Equity Method

No-Significant Influence FVTPL Model* Cost Model Statement of Financial

Other revenues and expenses

Dividend revenue 0 $ 8,000 $8,000 Income from associates $70,000 0 0 Unrealized gain on long-

*Fair value through profit or loss model

Trang 20

Financial Statement Classification

A bond investment that will

mature next year

Statement of financial position

position

Long-term investments Investment of a few hundred

common shares in a large

publicly traded company that is

held for trading purposes

Current assets

A bond investment that

management intends to hold for

10 years

Long-term investments

Realized gain on a held for

trading investment

Income statement Other revenues

and expenses Unrealized gain on a held for

trading investment

Income statement Other revenues

and expenses Dividends received from a

strategic investment accounted

for using the equity method

Long-term investments (Investment in Associate is reduced) Interest earned on a held for

Trang 21

Include in net income

Realized gain on long-term investments Net income

Unrealized loss on held for trading investments Net income

Income from associates Net income

For investments that are non-strategic and not held for trading, Rosewater can

elect to report unrealized gains and losses in other comprehensive income

SABRE CORPORATION Statement of Financial Position (Partial)

December 31, 2018

Assets Current assets

Held for trading investments……… $ 45,000

Long-term investments

Long-term investments 870,000 * Investment in associates 233,600 **

* $870,000 = $550,000 (equity investment in Epee at fair value) + $320,000 (bond investment held to maturity at amortized cost)

** $233,600 = $220,000 + ($50,000 × 40%) – ($16,000 × 40%)

Trang 22

Brookfield’s purchase of investment in associates should be reported on the

company’s statement of cash flows as a cash outflow in investing activities The amount would also be included in the statement of financial position in long-

term investments as an investment in associates

Brookfield’s share of income from associates would be reported on the company’s

income statement in the other revenues and expenses section The amount would

also cause an increase in the investment in associates account in the long-term

investments section on the statement of financial position

Dividends received from associates would be reported on the company’s

statement of cash flows as a cash inflow as an operating activity or an investing

activity The amount would also reduce the investment in associates account on

the statement of financial position

The year-end balance of investment in associates would be reported on the

statement of financial position in long-term investments

LO 4 BT: C Difficulty: M Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

Trang 23

Trang 24

SOLUTIONS TO EXERCISES

EXERCISE 12-1

(a) Debt or Equity Investment?

(b) Non-Strategic or Strategic Investment?

Trang 25

(a) (b) (c)

1 10-year BCE bonds

Non-Strategic

Held until maturity

Non-current

2 10-year GE bonds

Non-Strategic

Held for trading

Current

3 5-year Government of

Canada bonds

Strategic

Non-Held for trading

Current

4 180-day treasury bill

Non-Strategic

Held for trading

Current

5 Bank of Montreal

preferred shares*

Strategic

Non-Neither held for trading

or held to maturity

Non-current

6 Common shares

Non-Strategic

Held for trading

Current

* Note that if Kroshka is a public company, it has the choice and can elect to value

these preferred shares using the fair value through other comprehensive income

model If Kroshka reports under ASPE, the investment would be carried using the

fair value through income or loss model

LO 1,4 BT: K Difficulty: M Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 26

EXERCISE 12-3

(a)

July 1 Held for Trading Investments ($1,000,000 × 108.5%) 1,085,000

Cash 1,085,000 (b)

Dec 31 Interest Receivable 20,000

Interest Revenue ($1,000,000 × 4% × 6/12) 20,000

Adjustment to fair value:

Dec 31 Unrealized Loss on Held for Trading Investments 15,000

($1,000,000 × 107%) – $1,085,000 Held for Trading Investments 15,000

Trang 27

31 Held for Trading Investments 15,000

Unrealized Gain on Held for Trading Investments 15,000 (1,500 × $115) – ($210,000 – $52,500)

(a) Transactions (continued)

Jan 31 Cash (700 x $89) 62,300

Realized Loss on Held for Trading Investments 18,200

Held for Trading Investments 80,500 (Carrying amount = $115 × 700)

Feb 15 Cash (500 × $117) 58,500

Realized Gain on Held for Trading Investments 1,000 Held for Trading Investments 57,500 (Carrying amount = $115 × 500)

Trang 28

EXERCISE 12-4 (CONTINUED)

(c) After the Feb 15, 2019 sale, McCormick held 300 Starr preferred shares

(2,000 – 500 – 700 –500) at carrying amount $34,500 (carrying amount per share $115 x 300) or ($210,000 – $52,500 + $15,000 – $80,500 –

Trang 29

(a)

Dec 31 Held for Trading Investments 2,000

Unrealized Gain on Held for Trading Investments 2,000 ($54,000 – $52,000)

Unrealized gain on held for trading investments $2,000

Trang 30

Dec 31 Investment in Associates 120,000

Income from Associates 120,000 ($300,000 × 40%)

Dec 31 Unrealized Loss on Long-Term Investments

[($1,680,000 – (60,000 × $26)] 120,000 Long-Term Investments 120,000

When the equity method is used to account for investment in associates, the

investment account is not adjusted to fair value

LO 2,3 BT: AP Difficulty: M Time: 15 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

Trang 31

31 No entry

* 200,000 shares / 1,000,000 shares

Trang 32

EXERCISE 12-8

(a) and (b)

Income Statement:

Dividend revenue $10,000 (A)

Income from associates 40,000 (B)

Realized gain on held for trading investments 15,000 (C)

Unrealized loss on held for trading investments (10,000) (D)

$55,000

(b) Calculations:

Account

Held for Trading Investments

Investment

in Associates

Balance, beginning of year (given) $120,000 $500,000

Purchases of investments during the year 50,000 120,000

Carrying amount of investments sold

during the year (given) (30,000)

Dividends received (given) (60,000)

(B) Share of associates’ income (derived) 40,000

($600,000 - $500,000 - $120,000 +$60,000)

(D) Fair value adjustment (derived)

($130,000−$120,000 + $30,000 −$50,000) (10,000)

Balance, end of year (given) $130,000 $600,000

(A) Given for held for trading investments

(C) Proceeds from sale of held for trading investments $45,000 less carrying

amount of $30,000

Trang 33

(a) Account

Trading Investments

Investment

in Associates

Balance, beginning of year $100,000 $300,000

Purchases of investments during the year 30,000 40,000

Carrying amount of investments sold

during the year (43,000)* (42,000)**

Share of associates’ income 43,000

Fair value adjustment derived($94,000−$100,000

- $30,000 +$43,000) 7,000

Balance, end of year $94,000 $333,000

* $55,000 less gain of $12,000

** $32,000 plus loss of $10,000

(b) Held for Trading Investments

Unrealized Gain on Held for Trading Investments 7,000

Trang 34

Income from Associates 43,000

(c)

Held for Trading Investment Investments in Associates Statement of Financial Position:

Held for trading investments $94,000

Investment in associates $333,000

Income Statement:

Realized gain on held for trading investments $12,000

Unrealized gain on held for trading investments 7,000

Realized loss from investment in associates (10,000)

LO 2,3,4 BT: AP Difficulty: M Time: 40 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

Trang 35

(a) 100% Cameco Europe – equity method but then investment is eliminated

when the subsidiary accounts are consolidated together with those of the

parent company

20.3% UEX – equity method

24% GE-Hitachi Global – equity method

Unnamed public company – fair value through profit or loss model

All of the first three investments exceed 20% ownership in each

corporation Control is exerted over Cameco Europe and significant

influence over the other two investees’ operations by Cameco is assumed

Other factors should be examined to determine if significant influence does

exist regardless of the percentage of ownership If there is significant

influence, the equity method would be used

For the insignificant investment in an unnamed public company, the fair

value through profit or loss model is used for this long-term investment

Fair value is easily determined as the investee is a public company

(b) Cameco Europe should be consolidated with Cameco’s operations

because Cameco is the parent company of a fully owned subsidiary,

Cameco Europe

LO 4 BT: AN Difficulty: M Time: 15 min AACSB: None CPA: cpa-t001 CM: Reporting

Trang 36

*EXERCISE 12-11

(a) Key inputs: Future value (FV) = $500,000

Market interest rate (i) = 3% (6% × 6/12)

Interest payment (PMT) = $12,500 ($500,000 × 5% × 6/12)

Number of semi-annual periods (n) = 20 (10 years × 2)

Using present value tables

Semi-annual interest payments $500,000 × 2.5% $ 12,500

Present value factor for annuity, 3% for 20 periods × 14.87747

Present value of interest payments 185,968

Present value of $500,000, in 20 periods at 3%

$500,000 × 0.55368 276,840

Issue price of the bonds $462,808

Note to the instructor: Rounding discrepancies may arise depending on whether

present value tables, calculators, or a spreadsheet program is used to determine

the present value

Trang 37

(d) The response to (a) would differ in that the bond purchase would be

recorded in a Held for Trading Investments account Companies can

amortize the discount and then adjust for the change in fair value but the

separation of these two items for reporting purposes is usually not done so

for our purposes we will not do this The $12,500 accrual for the interest

would be recorded as interest revenue The collection of interest at January

1, 2019 would be the same The bonds’ carrying amount would be adjusted

to the fair value of $465,000 ($500,000 × 93%) at December 31, 2018 An

unrealized gain of $2,192 would be reported on the income statement

[$465,000 (fair value) – $462,808 (carrying amount) = $2,192]

There would be no changes to how the investee recorded the bonds or

interest

LO 5 BT: AN Difficulty: C Time: 30 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

Trang 38

*80,000/200,000 = 40%

Dec 31 Interest Receivable

($120,000 × 3% × 5/12) 1,500 Interest Revenue 1,500

31 Unrealized Loss on Held for Trading Investments

($208,000 – $83,200) – $120,000 4,800 Held for Trading Investments 4,800

(b)

GIVARZ CORPORATION Statement of Financial Position (Partial)

December 31, 2018

Current assets

Interest receivable $ 1,500 Held for trading investments 120,000

Trang 39

(c)

GIVARZ CORPORATION Income Statement (Partial) Year Ended December 31, 2018

Interest revenue ($3,000 + $1,500) $4,500 Unrealized loss on held for trading investments $4,800

Realized loss on held for trading investments 1,600 (6,400)

$(1,900)

LO 2,4 BT: AP Difficulty: M Time: 30 min AACSB: Analytic CPA: cpa-t001 CM: Reporting

Trang 40

Dec 31 Unrealized Loss on Held for Trading Investments

($48,000 – $46,800) 1,200 Held for Trading Investments 1,200 Security Cost Fair Value

CBF common $24,000* $22,000 (400 × $55) RSD common 24,000 24,800 (800 × $31)

$48,000 $46,800

*$36,000  $12,000 = $24,000

Tiêu đề	Reporting And Analyzing Investments
Tác giả	Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley
Trường học	John Wiley & Sons Canada, Ltd.
Chuyên ngành	Financial Accounting
Thể loại	solutions manual
Năm xuất bản	2017
Thành phố	Canada

Định dạng
Số trang	96
Dung lượng	747,47 KB