Solutions manual intermediate accounting 18e by stice and stice ch14

To be classified as a trading security, the security must have a readily determinable fair value and must be purchased and held for the purpose of selling it to generate profits on s

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597

CHAPTER 14

QUESTIONS

1 Companies make investments in the

se-curities of another company to provide a

safety cushion of available funds and to

store a temporary excess of cash

Compa-nies also invest in other compaCompa-nies to earn

a return, to secure influence, or to gain

con-trol

2 FASB ASC Topic 320 applies to many debt

and equity securities All debt securities

with a readily determinable fair value fall

under its scope Debt securities that do not

have a readily determinable fair value are

accounted for under the rules outlined in

FASB ASC Topic 310 (Receivables), as

shown in the Expanded Material for this

chapter Equity securities with a readily

de-terminable fair value that are not accounted

for (1) using the equity method (i.e., greater

than 20% ownership) or (2) as investments

in consolidated subsidiaries are accounted

for using the rules outlined in Topic 320

3 A security is classified as held to maturity if

the business has the intent and the ability

to hold the security to maturity

4 To be classified as a trading security, the

security must have a readily determinable

fair value and must be purchased and held

for the purpose of selling it to generate

profits on short-term differences in price

5 Under the fair value option, a company has

the option to report, at each balance sheet

date, any or all of its financial assets and

liabilities at their fair values on the balance

sheet date The unrealized gains and

losses from changes in the fair values of

fi-nancial assets and liabilities accounted for

using the fair value option are reported in

the income statement

6 The classification of investment securities

under IFRS 9 is essentially the same as the

classification under U.S GAAP

7 (a) The stated rate of interest is used to

determine the amount of the annuity to

be received

(b) The market or effective rate of interest

is used in the present value

computa-tions to determine the present value of both the principal sum and the annuity

8 The effective-interest method computes

in-terest revenue by multiplying the effective interest rate by the carrying value of the investment

9 When a company does not own more than

50% of a company, other factors may be considered to determine if control exists Such factors include owning a large minority voting interest with no other shareholder owning a significant block of stock or having a majority voting interest in determining who is on the company‟s board of directors When these other factors exist, then control may be assumed and consolidation would

be appropriate

10 (a) Factors that may indicate the ability of

a minority-interest investor to exercise significant influence over an investee‟s operating and financial policies are as follows:

1 Representation on the board of rectors of the investee

di-2 Participation in the policy-making process

3 Material intercompany transactions between investee and investor

4 Interchange of managerial nel between investee and investor

person-5 Technological dependency of tee on investor

inves-6 Substantial minority interest of the investor in an investee whose shares of stock are widely distri- buted and not concentrated for control purposes

(b) Factors that may indicate the inability of

an investor with more than 20% of a company‟s stock to exercise significant influence over an investee‟s operating and financial policies are as follows:

1 Opposition by the investee, such as litigation or complaints to govern- mental regulatory authorities

2 An agreement between the investor and the investee under which the

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investor surrenders significant rights

as a shareholder

3 Majority ownership of the investee is

concentrated among a small group

of shareholders who operate the

in-vestee without regard to the views

of the investor

4 The investor needs or wants more

financial information to apply the

equity method than is available to

the investee‟s other shareholders,

tries to obtain the information, and

fails

5 The investor tries and fails to obtain

representation on the investee‟s

board of directors

11 A joint venture is accounted for using the

equity method for those partners that own

20% or more and not more than 50% of the

joint venture For these joint venture

part-ners, the liabilities of the joint venture do

not show up on the balance sheet Instead,

only the net investment in the joint venture

shows up on the balance sheet Thus, the

liabilities of the joint venture are “off” the

balance sheet of the partners that account

for the joint venture using the equity

me-thod

12 Under International Financial Reporting

Standards, an “equity method investee” is

called an “associate.”

13 For trading securities and available-for-sale

securities, a market adjustment account is

used on the balance sheet to report the

se-curities at their fair values Held-to-maturity

securities are reported on the balance

sheet at their amortized cost For trading

securities, the change in fair value for the

current period is reported on the income

statement The change in value for

availa-ble-for-sale securities is reported in the

Eq-uity section on the balance sheet

14 Market Adjustment is a real account used

in valuing investments on the balance

sheet If the fair value of a security that falls

under the scope of Topic 320 increases,

the market adjustment account will be

de-bited If the value of the security decreases,

the market adjustment account will be

cre-dited The market adjustment account is

disclosed on the balance sheet either

net-ted against the relanet-ted securities account or

disclosed separately in addition to the

se-curities account

15 For “other-than-temporary” declines, the cost basis of the security should be reduced by crediting the investment account rather than a market adjustment account In addition, the write-down should be recognized as a loss and charged against current income The new cost basis for the security may not be adjusted upward to its original cost for any subsequent increases in fair value However, the market adjustment account may be used to record any subsequent increases

16 The sale of trading securities during the

year results in the computed unrealized gain or loss on trading securities being a combination of unrealized gains and losses for the year and reversals of cumulative unrealized gains and losses from prior years for trading securities sold during the year The same is true with respect

to the computation of unrealized increases and decreases in value for available-for- sale securities

17 When securities are transferred between

categories, the transfer is accounted for at the security‟s current fair value The historical cost of the security is removed from the books along with any associated market adjustment The difference between the security‟s current fair value and its fair value on the most recent balance sheet date is accounted for differently, depending

on the classifications involved in the fer

trans-18 If the purchase and sale of the trading

se-curities is determined to be an operating activity, realized gains on trading securities are subtracted from net income in computing cash from operating activities (when the indirect method is used) Realized losses are added back to net income The same is true for unrealized items; unrealized gains on trading securities are subtracted and unrealized losses on trading

securities are added back to net income

19 Because trading securities, by their very

definition, are held to take advantage of short-term differences in price, these securities are always classified as current Held- to-maturity securities are always classified

as long-term unless the security is maturing

in the current period The major tion problem arises with available-for-sale securities These securities can be classi-

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classifica-fied as either current or long-term,

depend-ing on the intention and assessments of

management

20 For all securities not classified as trading

and not accounted for using the fair value

option, the cash flow effects of purchases

and sales are reported in the Investing

section of the statement of cash flows For

securities classified as trading and for

se-curities accounted for using the fair value

option, the purchase and sale of securities

are reported in either the Operating or

In-vesting section, depending on the purpose

for which the securities were acquired

21 The following additional disclosures for the

different classifications of securities are

re-quired:

Trading securities—the change in the net

unrealized holding gain or loss that is

in-cluded in the income statement

Available-for-sale securities—the

aggre-gate fair value, gross unrealized holding

gains and gross unrealized holding losses,

and amortized cost basis by major security

type In addition, for debt securities the

company should disclose information about

contractual maturities Companies need to

also disclose the proceeds from sales of

available-for-sale securities, the gross

un-realized gains and losses on those sales,

and the basis on which cost was mined in computing unrealized gains and losses Finally, companies should disclose the change in net unrealized holding gain

deter-or loss on available-fdeter-or-sale securities that has been included in stockholders‟ equity during the period

Held-to-maturity securities—the aggregate fair value, gross unrealized holding gains and gross unrealized holding losses, and amortized cost basis by major security type In addition, the company should disclose information about contractual maturities

For investment securities reported at fair value, the magnitude of the fair values determined using Level 1, Level 2, and Level

3 inputs is disclosed

22.‡ Topic 320 applies to all debt securities for which there is a readily determinable fair value Thus, most debt securities would fall under the scope of this pronouncement Loans often do not have a readily determinable fair value because they are not traded on an exchange as are most debt securities Thus, the provisions of Topic

320 are not applicable to impaired loans FASB ASC Section 310-10-35 addresses

the accounting for the impairment of a loan

‡

Relates to Expanded Material

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PRACTICE EXERCISES PRACTICE 14–1 PURCHASING DEBT SECURITIES

June 30

Cash 4,000

Interest Receivable 667 Interest Revenue 3,333 Cash: $100,000  0.08  (6/12) = $4,000

June 30

Cash 4,000

Interest Revenue 4,000 Cash: $100,000  0.08  (6/12) = $4,000

PRACTICE 14–2 PURCHASING EQUITY SECURITIES

Investment in Available-for-Sale Securities 54,000

Cash 54,000 Investment: 2,000 shares  $27 = $54,000

PRACTICE 14–3 COMPUTING THE VALUE OF DEBT SECURITIES

Business Calculator Keystrokes:

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PRACTICE 14–4 INTEREST REVENUE FOR HELD-TO-MATURITY SECURITIES

1 Investment in Held-to-Maturity Securities 25,518

Cash 25,518

2 Cash [$20,000  0.10  (6/12)] 1,000

Investment in Held-to-Maturity Securities 107 Interest Revenue 893 Interest Revenue: $25,518  0.07  (6/12) = $893

3 Cash 1,000

Investment in Held-to-Maturity Securities 111 Interest Revenue 889 Interest Revenue: ($25,518 – $107)  0.07  (6/12) = $889

PRACTICE 14–5 COST METHOD, EQUITY METHOD, AND CONSOLIDATION

Number of Total Shares

Shares Owned of Investee Company Percentage Accounting

by Investor Company Outstanding Ownership Classification

Cash 9,320

Dividend Revenue 9,320 Cash: (2,000 shares  $1.75) + (6,000 shares  $0.97) = $9,320

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PRACTICE 14–7 REVENUE FOR EQUITY METHOD SECURITIES

Because Burton owns more than 20% of Company A stock (2,000/8,000 = 25%), the investment is accounted for using the equity method Because the purchase price was equal to Burton’s share of the book value of Company A’s equity, there is no excess of purchase price over cost basis

Year 1

Investment in Company A Stock 54,000

Cash 54,000 Investment in Company A Stock 10,000

Income from Company A Stock 10,000 Income from Company A Stock: $40,000  (2,000 shares/8,000 shares) = $10,000 Cash 3,200

Investment in Company A Stock 3,200 Cash: $1.60  2,000 shares = $3,200

Year 2

Investment in Company A Stock 12,500

Income from Company A Stock 12,500 Income from Company A Stock: $50,000  (2,000 shares/8,000 shares) = $12,500 Cash 4,000

Investment in Company A Stock 4,000 Cash: $2.00  2,000 shares = $4,000

PRACTICE 14–8 EQUITY METHOD: EXCESS DEPRECIATION

1 Underlying fair value of net assets ($82,000  3) $ 246,000

Book value of net assets 202,000

Implied amount of excess value of building $ 44,000

Investor’s interest in net assets  1/3

Amount of excess building value to be depreciated $ 14,667

Depreciation period ÷ 11 years

Annual extra depreciation $ 1,333

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PRACTICE 14–8 (Concluded)

Year 1

Investment in Company B Stock 82,000

Cash 82,000 Investment in Company B Stock 24,000

Income from Company B Stock 24,000 Income from Company B Stock: $72,000  (5,000 shares/15,000 shares) = $24,000 Cash 8,250

Investment in Company B Stock 8,250 Cash: 5,000 shares  $1.65 = $8,250

Income from Company B Stock 1,333

Investment in Company B Stock 1,333

PRACTICE 14–9 EQUITY METHOD: COST GREATER THAN BOOK VALUE

1 Underlying fair value of net assets ($100,000/0.25) $ 400,000 Book value of net assets 300,000 Implied amount of excess of fair value over book value $ 100,000 Excess fair value identified with:

Inventory $ 10,000 Building 50,000 Goodwill 40,000 Total $ 100,000 Investor’s interest in net assets 0.25 Amount of excess inventory cost this year $ 2,500 Amount of excess building value to be depreciated $ 12,500 Depreciation period ÷ 10 years Annual extra depreciation $ 1,250

No extra expense is associated with the goodwill, assuming that it is not paired during the year

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im-PRACTICE 14–9 (Concluded)

Year 1

Investment in Company C Stock 100,000

Cash 100,000 Investment in Company C Stock 17,500

Income from Company C Stock 17,500 Income from Company C Stock: $70,000  (2,500 shares/10,000 shares) = $17,500 Cash 5,000

Investment in Company C Stock 5,000 Cash: 2,500 shares  $2.00 = $5,000

Income from Company C Stock 3,750

Investment in Company C Stock 3,750 Extra inventory cost $2,500 + Extra depreciation $1,250 = $3,750

PRACTICE 14–10 CHANGES IN VALUE: TRADING SECURITIES

(a) Market Adjustment—Trading Securities 1,350

Unrealized Gain on Trading Securities 1,350

(b) Unrealized Loss on Trading Securities 1,250

Market Adjustment—Trading Securities 1,250 (c) $3,000 + $1,350 = $4,350

(d) $3,000  $1,250 = $1,750

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PRACTICE 14–11 CHANGES IN VALUE: AVAILABLE-FOR-SALE SECURITIES

(a) Market Adjustment—Available-for-Sale Securities 1,350

PRACTICE 14–12 CHANGES IN VALUE: HELD-TO-MATURITY SECURITIES

(a) No adjusting entry

(b) No adjusting entry

(c) $3,000 + No income impact = $3,000

(d) $3,000 – No income impact = $3,000

PRACTICE 14–13 CHANGES IN VALUE: EQUITY METHOD

(a) No adjusting entry

Realized Loss on Trading Securities 1,600

Investment SecuritiesTrading (400  $24) 9,600

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PRACTICE 14–15 SALE OF SECURITIES AND THE MARKET ADJUSTMENT

ACCOUNT

1 Cash proceeds $ 9,500 – Cost 10,000 Realized loss $ (500)

2 Cumulative unrealized loss, end of year ($5,800 – $9,000) $ (3,200) Cumulative unrealized gain, beginning of year ($26,000 – $19,000) 7,000 Unrealized loss for the year $ (10,200) PRACTICE 14–16 TRANSFER BETWEEN CATEGORIES: TO AND FROM TRADING Security A

Investment Securities—Available for Sale 5,500

Market Adjustment—Trading 1,000

Unrealized Gain on Transfer of Securities 1,500 Investment Securities—Trading 5,000 Security B

Investment Securities—Trading 4,100

Unrealized Loss on Transfer of Securities 3,900

Market Adjustment—Available for Sale 2,000 Investment Securities—Available for Sale 6,000 PRACTICE 14–17 TRANSFER BETWEEN CATEGORIES: AVAILABLE FOR SALE Security A

Investment Securities—Held to Maturity 8,850

Market Adjustment—Available for Sale 1,100

Unrealized Increase in Available-for-Sale Securities 1,750 Investment Securities—Available for Sale 8,200 Security B

Investment Securities—Available for Sale 9,450

Unrealized Decrease in Available-for-Sale Securities 550

Investment Securities—Held to Maturity 10,000

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PRACTICE 14–18 CASH FLOW AND AVAILABLE-FOR-SALE SECURITIES

Realized gain: $470 sales proceeds – $350 cost = $120 realized gain

Unrealized increase: $65 fair value – $50 cost ($400 – $350) = $15 unrealized increase Net income: $880 + $120 realized gain = $1,000

1 Operating activities:

Net income $ 1,000

Less: Realized gain on sale of securities (120) $880

2 Investing activities:

Purchase of available-for-sale securities $ (400)

Sale of available-for-sale securities 470 $70

PRACTICE 14–19 CASH FLOW AND TRADING SECURITIES

Unrealized gain: $65 fair value – $50 cost ($400 – $350) = $15 unrealized gain

Net income: $880 + $120 realized gain + $15 unrealized gain = $1,015

1 Operating activities:

Net income $ 1,015

Purchase of trading securities (400)

Sale of trading securities 470

Less: Realized gain on sale of securities (120)

Less: Unrealized gain on sale of securities (15) $950

Dec 31 Unrealized Decrease in Available-for-Sale Securities 35,000

Market Adjustment—Available for Sale 35,000 The key with the market adjustment is to get the ending balance in the market adjustment account equal to a $60,000 debit [10,000 shares  ($38  $32)] This requires

a credit of $35,000 since the balance at the end of last year was a $95,000 debit

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PRACTICE 14–20 (Concluded)

2 The easy way to get the answer is Realized gain $96,000 – Unrealized ―loss‖

$35,000 = $61,000 economic gain In this case, it doesn’t matter that the lized decrease is not recognized in the income statement; it is still an economic loss

unrea-To prove this, look at the economic value of the portfolio at the beginning of the year compared to the value of the portfolio plus cash at the end of the year: Beginning: Cost of $470,000 ($150,000 + $320,000) + $95,000 market

adjustment = $565,000

Ending: $380,000 in stock (10,000  $38) + $246,000 cash = $626,000

The increase is $61,000 ($626,000  $565,000)

PRACTICE 14–21 ‡ LOAN IMPAIRMENT: INITIAL MEASUREMENT

Sum of payments to be received:

Maturity value $5,000

Annual interest payments (5  $800) 4,000

Total $9,000

The entire $9,000 will be received at the end of the loan term The loan term is 5

years However, because 1 year has already elapsed (as of the end of Year 1), the

$9,000 payment will be received after four more years The present value of this

$9,000 payment is computed as follows:

Business Calculator Keystrokes:

FV = $9,000, N = 4, I = 8% → $6,615

The following journal entry is made to record the loan impairment:

Bad Debt Expense ($10,000 – $6,615) 3,385

Allowance for Loan Impairment 3,385 Before this entry, the carrying amount of the loan was $10,000 because the $800 interest receivable for Year 1 had not been recognized

‡

Relates to Expanded Material

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PRACTICE 14–22 ‡ LOAN IMPAIRMENT: SUBSEQUENT INTEREST REVENUE

An amortization schedule for the annual interest revenue amount is as follows:

Payment Interest (8%) Principal Balance

Allowance for Loan Impairment 572

Interest Revenue 572

Year 4

Interest Revenue 617 Year 5

Interest Revenue 667 Cash 9,000

Allowance for Loan Impairment 1,000

Loan Receivable 10,000

‡

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EXERCISES 14–23

(a) Investment in Trading Securities—Treasury Bonds 56,100*

To record sale of 400 shares of Dulce Co stock

*400 shares at $81 per share = $32,400

†

(400/2,100)  $140,700 = $26,800

(e) Cash 20,380*

Realized Loss on Sale of Securities 200

Investment in Trading Securities—Treasury Bonds 20,400 † Interest Revenue 180

To record sale of $20,000 worth of U.S Treasury 6%

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14–24

1 Investment in Trading Securities—Gimli 9,000

Investment in Trading Securities—Treasury Bonds 11,000

Investment in Available-for-Sale Securities—Legolas 22,000

Investment in Available-for-Sale Securities—Glorfindel 42,500

Investment in Held-to-Maturity Securities—Mirkwood 24,000

Cash 108,500

To record the purchase of securities during January

2 Cash 5,390

Interest Revenue 3,630 Dividend Revenue 1,760

To record the receipt of interest and dividend

revenue during the year

3 Cash 3,400

Realized Loss on Sale of Securities 200

Investment in Trading Securities—Gimli 3,600

To record sale of 200 shares of Gimli stock;

purchased at $18 per share, sold at $17 per share

Cash 4,750

Investment in Available-for-Sale Securities—

Glorfindel 4,250 Realized Gain on Sale of Securities 500

To record sale of 250 shares of Glorfindel stock;

purchased at $17 per share, sold at $19 per share

14–25

(a) Equity Method with Consolidation Even though RV Insurance Company is a

nonhomogeneous operation, it should be consolidated because it is a owned subsidiary

majority-(b) Cost Method (Available for Sale) Buy Right has 10% ownership (20,000/200,000

shares) with no additional information to suggest that significant influence can

be exercised

(c) Cost Method (Available for Sale) Super Tire holds nonvoting preferred stock

The cost method is used for investments in preferred stock

(d) Cost Method (Trading or Available for Sale) While Takeover Company owns

30% (15,000/50,000 shares) of Western’s common stock, it has been unable to obtain representation on Western’s board of directors Takeover does not have significant influence and so must use the cost method The securities would probably not be classified as trading unless Takeover is in the business of regu- larly making such investments in order to generate short-term trading profits

(e) Equity Method Espino has 40% (50,000/125,000 shares) ownership and

presum-ably can exercise significant influence, even though it does not have a ling interest in Independent Mining

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control-14–26

1 Available for Sale

Jan 10 Investment in Available-for-Sale Securities—

Kennedy Company Stock 600,000 Cash 600,000

To record investment in 12,000 shares of Kennedy Company common stock

Dec 31 Investment in Kennedy Company Stock 45,000

Income from Investment in Kennedy

Company Stock 45,000

To record proportionate share of Kennedy Company’s earnings for 2013 (25%  $180,000)

31 Cash 6,600

Investment in Kennedy Company Stock 6,600

To record dividend received from Kennedy Company for 2013 ($0.55  12,000 shares)

14–27

2012

Jan 1 Investment in Beta Co Stock 240,000

Cash 240,000

To record purchase of 25% interest in Beta Co

common stock ($12  20,000 shares)

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14–27 (Concluded)

Dec 31 Investment in Beta Co Stock 88,000

Income from Investment in Beta Co Stock 88,000

To record 25% share of income (0.25  $360,000 =

$90,000 less amortization of $2,000*)

*Underlying fair value of net assets ($240,000/0.25) $ 960,000 Book value of net assets 800,000 Broadcast license $ 160,000 Investor’s interest in net assets  0.25 Amount of license to be amortized $ 40,000 Amortization period ÷ 20 Annual amortization $ 2,000

31 Cash 32,000

Investment in Beta Co Stock 32,000

To record receipt of dividend ($1.60  20,000 shares)

2013

Dec 31 Investment in Beta Co Stock 95,500

Income from Investment in Beta Co Stock 95,500

To record 25% share of income (0.25  $390,000 =

$97,500 less amortization of $2,000)

31 Cash 40,000

Investment in Beta Co Stock 40,000

To record receipt of dividend ($2.00  20,000 shares)

14–28

Investment in Old Farms Co Stock 128,000

Cash 128,000

To record the purchase of 40% of the outstanding

common stock of Old Farms Co

Income from Investment in Old Farms Co Stock 32,000

To report 40% of the net income reported by Old

Farms Co (0.40  $80,000)

Cash 20,000

To record the receipt of $20,000 in dividends from

Old Farms Co (0.40  $50,000)

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Income from Investment in Old Farms Co Stock 5,000

To amortize the differential associated with the

equipment and buildings as follows:

Fair Book 40% of Remaining Amount Value Value Difference Difference Life Amortized Equipment $100,000 $60,000 $40,000 $16,000 4 years $4,000 Buildings 80,000 50,000 30,000 12,000 12 years 1,000 14–29

1 Investment in Held-to-Maturity Securities 718,764

Cash 718,764

To record the purchase of the debt security whose

value is computed as follows:

Using present value tables:

$ 30,000  19.7928 = $ 593,784

600,000  0.2083 = 124,980

$ 718,764 Using a business calculator:

To record the cash received for the first interest

payment and to recognize interest revenue

*$718,764  0.04 = $28,751; $30,000 – $28,751 = $1,249

Cash 30,000

Investment in Held-to-Maturity Securities 1,299* Interest Revenue 28,701*

To record the cash received for the second interest

payment and to recognize interest revenue

*($718,764 – $1,249)  0.04 = $28,701; $30,000 – $28,701 = $1,299

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14–30

1 Amortization Schedule:

Interest Interest

Interest (0.04   Carrying Discount Unamortized Carrying Payment $100,000) Value) Amortization Discount Value

Investment in Held-to-Maturity Securities 645

Interest Revenue 4,645 14–31

This debt security’s book value following the second interest payment is $93,536 (from amortization table) The journal entries to adjust the security to fair value under differing assumptions are as follows:

1 Trading Security:

Market Adjustment—Trading Securities 2,964*

To record unrealized increase in fair value of security

Increase is recognized on the income statement

*Fair value less book value = $96,500 – $93,536 = $2,964 unrealized gain

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2 Available-for-Sale Security:

Market Adjustment—Available-for-Sale Securities 2,964

Unrealized Increase/Decrease in Value of Available-

for-Sale Securities 2,964

To record unrealized increase in fair value of security

Increase is recognized in Stockholders’ Equity section

3 For held-to-maturity securities, increases and decreases in value are not recognized

If the fair value of security B were $95,000, net income would be increased by

$11,000 ($396,000 – $385,000) Net income would be reported at $298,000 ($287,000 + $11,000)

14–33

1 Unrealized Loss on Trading Securities 2,000*

Market Adjustment—Trading Securities 2,000

To record the decrease in fair value of trading

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3 (a) Unrealized Loss on Trading Securities 1,500

To record additional decline in value of trading securities from cost of $53,500 to fair value of

$50,000, $2,000 having already been recognized

(b) Market Adjustment—Trading Securities 1,000

To record increase in value of trading securities, reflecting previous decline of $2,000 with cost now $53,500 and fair value $52,500

(c) Market Adjustment—Trading Securities 4,500

To record increase in value of trading securities above cost of $53,500 to fair value of $56,000, also reflecting the previous decline of $2,000

14–34

1 Unrealized Loss on Trading Securities 4,000

To record the decline in value of trading securities

from cost of $26,000 to fair value of $22,000

Unrealized Increase/Decrease in Value of Available-for-

Sale Securities 2,000

To record decline in value of available-for-sale

securities from cost of $32,000 to fair value of $30,000

No entry to adjust held-to-maturity securities to fair value

2 Reported net income $ 100,000

Less: Unrealized loss on trading securities (4,000)

Adjusted net income $ 96,000

(Note: The decrease in value of available-for-sale securities is not reflected in

net income.)

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14–35

1 In 2012, the historical cost of the trading securities exceeds the fair value by

$5,000 ($51,000 – $46,000) Thus, income for 2012 would be reduced by $5,000 Unrealized Loss on Trading Securities 5,000

In 2013, the fair value of the securities exceeds historical cost by $2,300 With an existing balance in the market adjustment account of $5,000 (credit), an adjustment would be made to income for $7,300 to obtain the desired $2,300 debit balance in the market adjustment account

2 If the decline in the fair value of a security is believed to be other than temporary, the loss is recognized in income in the current period and the cost of the security

is adjusted

Unrealized Loss on Trading Securities 6,700

Investment in Trading Securities—Sonoma 6,700

To record the other-than-temporary decline in value of the

Sonoma security

To adjust market adjustment account from previous

$5,000 credit balance (as of 12/31/2012) to desired

debit balance of $9,000 [$53,300 fair value less

$44,300 ($15,000 + $24,000 + $5,300) adjusted cost]

14–36

1 Market Adjustment—Trading Securities 8,000

To record increase in value of trading securities

2 Investment in Available-for-Sale Securities—Security B 16,500

Market Adjustment—Trading Securities 3,000 Investment in Trading Securities—Security B 15,000

To reclassify security as available for sale at current

fair value of $16,500 and to remove historical cost of

trading security ($15,000) and associated market

adjustment Unrealized loss represents difference

between fair value at the beginning of the period

and fair value on date of transfer

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14–37

To record increase in value of trading securities from

cost of $9,000 to fair value of $10,000

Unrealized Increase/Decrease in Value of Available-for-

Sale Securities 3,000

To record decline in value of available-for-sale

2 Investment in Available-for-Sale Securities—Security B 5,500

Unrealized Loss on Transfer of Securities 500

Investment in Trading Securities—Security B 7,000

To reclassify security B as available for sale at

current fair value ($5,500), remove historical cost

($7,000) of trading security, remove associated

market adjustment, and record change in value

since balance sheet date ($500)

3 Investment in Trading Securities—Security C 17,000

for-Sale Securities 2,000 Investment in Available-for-Sale Securities—

Security C 18,000

To reclassify security C as a trading security at its

fair value ($17,000), remove previous adjustments

as a result of changing values, and to recognize on

the income statement the difference between

historical cost and current fair value ($1,000)

14–38

2012

Dec 31 Market Adjustment—Available-for-Sale Securities 6,200

Unrealized Increase/Decrease in Value of Available-for-Sale Securities 6,200

To record increase in market adjustment account from $0 to $6,200

Unrealized Loss on Trading Securities 1,800

To record decrease in market adjustment account from $0 to ($1,800)

Trang 24

2013

Dec 31 Unrealized Increase/Decrease in Value of

Available-for-Sale Securities 1,600

To record decline in market adjustment account from $6,200 to $4,600

To record increase in market adjustment account from ($1,800) to $300

2014

Dec 31 Unrealized Increase/Decrease in Value of

Available-for-Sale Securities 5,400

To record decline in market adjustment account from $4,600 to ($800)

To record increase in market adjustment account from $300 to $1,550

14–39

1 Unrealized Loss on Trading Securities 4,000

To record decrease in value of trading securities

To record increase in value of available-for-sale

2 Cash 8,000

Realized Loss on Sale of Securities 1,000

Investment in Trading Securities—Security A 9,000

To record sale of one-half of security A

Trang 25

To record increase in value of trading securities

from cost of $17,000 to fair value of $19,000 and also to

reflect the previous recognized decline of $4,000

To adjust available-for-sale securities from cost of

$29,000 to fair value of $30,000 while reflecting

previously recognized increase of $2,000

14–40

a Because aggregate fair value is less than aggregate cost, an unrealized loss of

$35,000 will be shown in the income statement However, because no cash is volved, this $35,000 will be added back to net income in computing net cash from operations in the statement of cash flows

in-b The $50,000 cash payment for trading securities will be reflected as an increase in the balance of trading securities and deducted in the cash from the Operating Activities section of the statement of cash flows The $70,000 purchase of available-for-sale securities will be disclosed as a cash outflow in the Investing Activities section of the statement of cash flows

c The $62,000 received from the sale of trading securities will be reflected in the Operating section of the statement of cash flows The $22,000 realized gain is subtracted in order to avoid double counting because the gain is already included

in net income

d Because aggregate fair value is greater than aggregate cost, an unrealized gain of

$20,000 will be shown in the income statement However, because no cash is volved, this $20,000 will be subtracted from net income in computing net cash from operations in the statement of cash flows

in-14–41

Available for sale:

Unrealized decrease: $460 fair value – $750 cost ($900 – $150) = $290 unrealized crease

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de-14–41 (Concluded)

Trading:

Realized loss: $220 sales proceeds – $300 cost = $80 realized loss

Unrealized gain: $310 fair value – $200 cost ($500 – $300) = $110 unrealized gain Operating activities:

Net income $ 985

Purchase of trading securities (500)

Sale of trading securities 220

Plus: Realized loss on sale of trading securities 80

Less: Unrealized gain on trading securities (110)

Less: Realized gain on sale of available-for-sale securities (320) $ 355 Investing activities:

Purchase of available-for-sale securities $ (900)

Sale of available-for-sale securities 470 (430) 14–42 ‡

1 Present value of expected future cash flows:

Date Payment Time of Discount Table Value Present Value @ 6% Jan 1, 2015 $70,000 now 1.000 $ 70,000

Jan 1, 2016 70,000 1 year 0.9434 66,038

Jan 1, 2017 70,000 2 years 0.8900 62,300

Present value at December 31, 2014 $ 198,338

2 2014

Dec 31 Bad Debt Expense 11,662

Allowance for Loan Impairment 11,662

To record impairment of loan by comparing present value of expected future cash flows with current carrying value, $210,000

3 2015

Jan 1 Cash 70,000

Loan Receivable 70,000

To record collection of loan payment

Dec 31 Allowance for Loan Impairment 7,700

Interest Revenue 7,700

To recognize interest revenue [($198,338 – $70,000)  0.06] for the period and reduce the allowance account

accordingly

‡

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PROBLEMS 14–43

2011

July 10 Investment in Trading Securities—NOP Company

Stock 450,000

Cash ($45  10,000 shares) 450,000 Dec 31 Market Adjustment—Trading Securities 20,000

(Cost = $450,000; Fair value = $470,000)

2012

Sept 29 Cash ($51  2,000 shares) 102,000

Realized Gain on Sale of Securities 12,000 Investment in Trading Securities—NOP Company

Stock 90,000

Dec 31 Unrealized Loss on Trading Securities 68,000*

*Cost = $45  8,000 shares = $360,000

Fair value = $39  8,000 shares = $312,000

Loss: Unadjusted allowance $20,000 – required

allowance ($48,000) = $68,000 loss

2013

Aug 17 Cash ($33  2,500 shares) 82,500

Realized Loss on Sale of Securities 30,000

Investment in Trading Securities—

NOP Company Stock ($45  2,500 shares) 112,500 Dec 31 Unrealized Loss on Trading Securities 29,000*

*Cost = $45  5,500 shares = $247,500

Fair value = $31  5,500 shares = $170,500

Loss on decline in value: Unadjusted allowance ($48,000) –

required allowance ($77,000) = $29,000 loss

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