chapter 15 investments

8/10/2019 Chapter 15 Investments

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Chapter 15--Investments

Student: ___________________________________________________________________________

1. Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firmsare termedA. available-for-sale securitiesB. trading securitiesC. held-to-maturity securitiesD. marketable securities

2. Investments that are tyically held for short eriods of time and sold by the comany in the e!ectation of arofit on the short-term differences in rice are classified as

A. available-for-sale securitiesB. trading securitiesC. held-to-maturity securitiesD. marketable securities

". #hich of the follo$ing categories of investments are reorted at their fair values on the balance sheet andhave unreali%ed holding gains and losses included as a searate comonent of stockholders& equity'A. held-to-maturity debt securitiesB. marketable securities

C. available-for-sale securitiesD. trading securities

(. #hich of the follo$ing securities are reorted at their amorti%ed cost on the balance sheet date'A. held-to-maturity debt securitiesB. marketable securitiesC. available-for-sale securitiesD. trading securities

). Investments in debt securities include all of the follo$ing exceptA. *.+. treasury securitiesB. cororate bondsC. referred stocks that are redeemable at the otion of the issuerD. commercial aer


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,. Investments in equity securities include all of the follo$ing exceptA. common stocksB. referred stocksC. convertible bondsD. stock otions

. #hich of the follo$ing methods of accounting for investments is aroriate $hen the investor hassignificant influence over the investee'A. equity methodB. consolidationC. cost methodD. lo$er of cost or market method

. #ith consolidation/ control generally occurs $hen the investor o$ns $hat ercentage of the voting stock ofthe investee'

A. over )0B. bet$een 20 and )0C. less than 20D. over (0

. #hich of the follo$ing methods of accounting for investments is aroriate $hen the investor controls theinvestee'A. equity methodB. consolidation

C. cost methodD. lo$er of cost or market method

10. *nreali%ed holding gains and losses on debt securities affect net income $hen the securities are classified as

3rading Available-for-+ale 4eld-to-5aturityI. 6es 7o 7oII. 6es 6es 7oIII. 7o 6es 6es

I8. 7o 7o 6es

A. IB. IIC. IIID. I8


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11. 9ach of the three categories of investments in debt and equity securities has similar accounting for all of thefollo$ing transactions exceptA. initial recording of costB. recognition of dividend and interest incomeC. recognition of reali%ed gains or losses on salesD. recognition of unreali%ed holding gains and losses

12. 3he generally acceted accounting rinciles for trading securities include all of the follo$ing exceptA. initially recording the investment at costB. subsequently valuing the investment at fair valueC. including unreali%ed holding gains and losses as a comonent of stockholders& equityD. including interest and dividend revenue as art of income

1". #hich of the follo$ing regarding trading securities is correct'A. 3rading securities are reorted at cost on the balance sheet date/ and unreali%ed holding gains and losses are

included in income of the current eriod.B. 3rading securities are reorted at fair value on the balance sheet date/ and unreali%ed holding gains and lossesare included in income of the current eriod.C. 3rading securities are reorted at fair value on the balance sheet date/ but unreali%ed holding gains and lossesare notincluded in income of the current eriod.D. 3rading securities are reorted at cost on the balance sheet date/ but unreali%ed holding gains and losses arenotincluded in income of the current eriod.

1(. *nreali%ed gains and losses on investments in trading securities are reorted

A. as a current assetB. on the income statementC. on the balance sheet as art of stockholders& equityD. as a contra asset

1). #hen bonds are urchased bet$een interest dates/ the accrued interest should beA. debited to Interest :eceivableB. debited to Interest :evenueC. debited to Investment in Bonds

D. either a or b


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1,. Dividends that are declared at year-end but notreceived on investments in securities held for sale or tradingshould be recogni%ed $henA. received as cashB. the ne$ year beginsC. declaredD. accrued

1. 3he :olla Comany urchased 10/ ;00/000 bonds of the Batter * Comany at ar lus accrued intereston Aril 1/ 2010/ as an investment in available-for-sale securities. 3he bonds ay interest on Decrease in 8alue of +ecurities of ;"0/000

20. #hich of the follo$ing regarding available-for-sale securities is correct'

A. Available-for-sale securities are reorted at cost on the balance sheet date/ and unreali%ed holding gains andlosses are included in income of the current eriod.B. Available-for-sale securities are reorted at fair value on the balance sheet date/ and unreali%ed holding gainsand losses are included in income of the current eriod.C. Available-for-sale securities are reorted at fair value on the balance sheet date/ but unreali%ed holding gainsand losses are notincluded in income of the current eriod.D. Available-for-sale securities are reorted at cost on the balance sheet date/ but unreali%ed holding gains andlosses are notincluded in income of the current eriod.


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21. :eali%ed gains and losses on investments available for sale are reortedA. as a current assetB. on the income statementC. on the balance sheet as art of stockholders& equityD. as a contra asset

22. 3he entry to record a sale of available-for-sale securities for ;,)/000 on Decrease in 8alue of Available-for-+ale +ecurities of ;/000B. debit to *nreali%ed Increase>Decrease in 8alue of Available-for-+ale +ecurities of ;)/000C. debit to Allo$ance for Change in 8alue of Investment of ;)/000D. credit to ?ain on Disosal of +ecurities Available for +ale of ;/000

2". A reali%ed gain or loss on the sale of an available-for-sale security is determined by comaring

A. the carrying value of the security $ith the roceeds from the saleB. the original cost of the security $ith the roceeds from the saleC. the market value at the latest balance sheet date $ith the roceeds from the saleD. the original cost $ith the security&s carrying value

2(. 3he carrying value of available-for-sale debt and equity securities isA. historical costB. the current market valueC. the lo$er of cost or current market value

D. the higher of cost or current market value

2). #ithers Comany has available-for-sale debt and equity securities that on December "1/ 2010/ had a cost of;10)/000 and a market value of ;102/000. 3he market value rose to ;11/000 by December "1/ 2011. #hataccounting action is required on December "1/ 2011'A. Allo$ance for Change in 8alue should be credited for ;1)/000.B. *nreali%ed Increase>Decrease in 8alue should be debited for ;12/000.C. Allo$ance for Change in 8alue should be debited for ;1)/000.D. *nreali%ed Increase>Decrease in 8alue should be credited for ;12/000.


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2,. 7i!on Comany urchased 10/000 shares of @ostas Comany as an available-for-sale security at ;() ershare. Brokerage fees amounted to ;1/000 and transfer ta!es $ere ;)0. 3he investment should be recorded atA. ;()0/000B. ;()0/)0C. ;()1/000D. ;()1/)0

2. ing Comany urchased several investments in December 2010. Costs and market values of thoseinvestments on December "1/ 2010/ are resented belo$

Cost 5arket 8alue6 stock ;200/000 ;10/000ABC stock (00/000 (20/000D9E stock ,00/000 )(0/000

Assuming all of the securities are classified as available for sale/ the Fournal entry required on December "1/ 2010/ the end of ing&s fiscal year/

$ould include aA. debit to *nreali%ed Increase>Decrease in 8alue of ;,0/000B. credit to *nreali%ed Increase>Decrease in 8alue of ;,0/000C. credit to *nreali%ed Increase>Decrease in 8alue of ;0/000D. debit to Investment in Available-for-+ale +ecurities of ;,0/000

2. Barchak Cororation began oerations on Decrease in 8alueB. debit of ;)0 to *nreali%ed Increase>Decrease in 8alueC. debit of ;20 to Allo$ance for Change in 8alue of Investment

D. debit of ;)0 to Allo$ance for Change in 8alue of Investment

2. Gremiums or discounts associated $ith available-for-sale debt securities areA. usually not amorti%ed because the effect of the amorti%ation $ould usually be immaterialB. amorti%ed to interest revenue over the life of the investmentC. usually recorded in searate accounts at the time the bonds are acquiredD. not treated like remiums or discounts on bonds held to maturity


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"0. =n


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"). #hen the market value of a comany&s available-for-sale investments is lo$er than its cost/ the differenceshould beA. reorted as a liabilityB. reorted in the footnotes to financial statementsC. deducted from the investment in available-for-sale securities accountD. added to the investment in available-for-sale securities account

",. =n


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(0. =n =ctober 1/ 2010/ the +tu Comany acquired bonds of


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((. =n


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(. #hen transferring investments bet$een categories/ unreali%ed holding gains for securities transferred fromtrading to available-for-sale must beA. reali%ed on the income statementB. recogni%ed on the income statementC. reali%ed and reorted in comrehensive incomeD. recogni%ed and reorted in comrehensive income

)0. Germanent value declines in available-for-sale securities should beA. recorded in the allo$ance accountB. included in income as a reali%ed lossC. amorti%ed over the remaining life of the securityD. recorded similarly to temorary declines in value

)1. 3he Coer Comany has a bond investment classified as held to maturity/ $hich has a carrying value of;,2/000 and a fair value of ;2(/000. 3he decline in value is considered as other than temorary. Coer should

record the decline asA. *nreali%ed oss on 8alue Decline "/000 Allo$ance for Change in 8alue of Investment "/000B. Investment in 4eld-to-5aturity Debt +ecurities "/000 :eali%ed oss on Decline in 8alue "/000C. :eali%ed oss on Decline in 8alue "/000 Investment in 4eld-to-5aturity Debt +ecurities "/000D. *nreali%ed oss on 8alue Decline "/000

Investment in 4eld-to-5aturity Debt +ecurities "/000

)2. #hich of the follo$ing disclosures is notrequired for investments in securities by current ?AAG'A. the roceeds from sales and the gross reali%ed gains and losses from the sale of available-for-sale securitiesB. the circumstances leading to the decision to sell or transfer a trading securityC. the contractual maturities of held-to-maturity debt securitiesD. the aggregate fair value of available-for-sale securities by maFor security tye

)". #hich tye of investment in securities must al$ays be classified as a current asset'A. held-to-maturity debt securitiesB. available-for-sale securitiesC. trading securitiesD. none of the these/ they may all be classified as current or long-term assets


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)(. Eor available-for-sale securities/ a decline in value due to a temorary decline in market value belo$ cost isA. disclosed in the financial statements by means of a footnoteB. disclosed as a reduction from stockholders& equity on the balance sheetC. disclosed as a loss on the income statementD. not disclosed because the decline in value is only temorary

)). 3he fair value method of accounting for investments $as roosed to overcome $hich issues associated$ith the rior use of lo$er of cost or market'A. reliability and liquidityB. relevance and liquidityC. reliability and financial fle!ibilityD. relevance and financial fle!ibility

),. A maFor controversy surrounding fair value accounting for investments is thatA. fair value is required for trading securities and available-for-sale securities but is only suggested for held-to-

maturity securitiesB. fair value is required for trading securities and available-for-sale securities but is not required for held-to-maturity securitiesC. fair value is required for trading securities but is only suggested for available-for-sale and held-to-maturitysecurities.D. fair value is required for trading securities but is only suggested for available-for-sale securities/ and is notrequired for held-to-maturity securities.

). #hen selecting the aroriate accounting for held-to-maturity securities/ the comany must

A. never sell the equity instrument before maturityB. never sell the debt instrument before maturityC. have the intent and ability to hold the equity investment to maturityD. have the intent and ability to hold the debt instrument to maturity

). *nreali%ed holding gains and losses occur because a comanyA. actively trades securitiesB. holds securities until maturityC. holds securities through the end of the reorting eriod

D. records a change in fair value of the securities held even if they are not sold


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). Investment securities are classified based uon management&s intent. 3his may resent difficulties to readersof financial statements becauseA. management&s Fudgment of intent and ability may lack comarabilityB. management&s Fudgment may lack relevanceC. gain trading may result in not roducing sufficient gainsD. gain trading may result in not roducing sufficient reliability

,0. Acquisition of greater than 20 of the outstanding stock of a comany normally suggests the use of theA. consolidation methodB. equity methodC. fair-value methodD. straight-line method

,1. #ith the equity method/ the investor recogni%es its share of the earnings of the subsidiary $hen theA. investor sells the investment

B. investee ays a cash dividendC. investee declares a cash dividendD. investee reorts earnings on its income statement

,2. *nder the equity method/ dividends received by the investor should be recorded asA. a reduction in the carrying value of the investmentB. an addition to the carrying value of the investmentC. dividend revenueD. investment revenue

,". *nder the equity method/ a receit of cash dividends by the investor $ouldA. increase total assets and stockholders& equityB. increase total assets and liabilitiesC. decrease the investment accountD. increase the investment account

,(. David Comany o$ns "0 of :alh Comany. During 2010/ :alh reorted earnings of ;)00/000 and aidcash dividends of "20/000. #hat effect $ould this have on David&s investment account and net income'

Investment Account 7et IncomeI. J;1)0/000 J; ,/000II. --- J; ,/000III. J; )(/000 J; ,/000I8. J; )(/000 J;1)0/000


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,). Exhibit 15-1

=n


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,. Exhibit 15-2=n


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2. 3he 5ason Comany acquired a "0 interest in the Di!on Comany on


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). =n


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. #hich of the follo$ing is nota derivative'A. equity contractsB. futures contractsC. otion contractsD. s$a contracts

0. An interest rate s$a in $hich a comany has a fi!ed rate of interest and ays a variable rate is called aA. cash flo$ hedgeB. fair value hedgeC. deferred hedgeD. hedge of foreign currency e!osure of a net investment in foreign oerations

1. A derivative may beA. an asset accountB. a liability account

C. an o$ners& equity accountD. either an asset or a liability account

2. In a matched s$a/ the actual loan amount isA. greater than the notional amountB. less than the notional amountC. equal to the notional amountD. the only amount because there is no notional amount

". Current ?AAG requires a comany to recogni%e in its current net income any gain or loss from a change inthe fair value of the derivative for a

Eair 8alue 4edge Cash Elo$ 4edgeI. yes yesII. yes noIII. no noI8. no yes



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(. In a erfectly matched hedge of fi!ed-rate debt using an interest rate s$a/ the effect of a change in fairvalue of the derivative on the income statementA. is al$ays a gainB. may be a gain or a lossC. is %eroD. is al$ays a loss

). An unconsolidated investee is referred to under IE:+ and ?AAG as an

IE:+ ?AAGI. associate equity method investeeII. equity method investee associateIII. associate associateI8. equity method investee equity method investee

A. I

B. IIC. IIID. I8

,. oans and receivables can be classified and accounted for as available-for-sale under

IE:+ ?AAGI. yes yesII. yes noIII. no yes

I8. no no


. :eversals of imairment losses on held-to-maturity and available-for-sale securities are recogni%ed inincome under

IE:+ ?AAGI. yes yesII. no yesIII. yes noI8. no no


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. =n


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0. At December "1/ 2010/ #ilkerson had the follo$ing ortfolio of equity securities available for sale

Cost 5arket 8alueBark Co. stock ;"0 ;"24o$l Co. stock 0 (

Required:

a. Assuming any gain or loss is considered to be temorary/ reare the adFusting entry required under current ?AAG.b. Assuming that/ in 2011/ #ilkerson sold the 4o$l Co. stock for ;"/ record the sale.c. Assuming that the ortfolio at the end of 2011 is comosed of the follo$ing holdings/ reare any necessary entry.

Cost 5arket 8alue Bark Co. stock ;"0 ;"2 6el Co. stock 0 )d. Assuming that the ortfolio at the end of 2012 is comosed of the follo$ing holdings/ reare any necessary

entry.

Cost 5arket 8alue ?na$ Co. bonds ;100 ;)

Bark Co. stock "0 ") 6el Co. bonds 0 ,"e. Assuming that/ in 201"/ the ?na$ Co. bonds $ere reclassified as held to maturity $hen the market value $as

;(/ reare any necessary entry.

1. =n August "1/ 2010/ 5erry Comany acquired four ;1/000 face value bonds $ith a 10 interest rate at facevalue lus accrued interest. Interest on the bonds is aid semiannually on 5arch "1 and +etember "0. AtDecember "1/ 2010/ the bonds are quoted at ,. 3he decline in value is deemed temorary. Assume that thebonds $ere classified as available for sale.

Required:

a. Greare the Fournal entries to record 5erry&s transactions in temorary investments in bonds for 2010.b. 7o$ assume that the bonds $ere sold on December "1 at , lus accrued interest. Greare the Fournal entry to reflect this transaction.


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2. =n 5ay 1/ 2010/ 9dsel/ Inc. bought "00 of De+oto/ Inc.&s ;1/000/ 10 bonds that ay interest on


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(. =n


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Changes in fair value $ere considered to be temorary. =n 5arch 1/ 2011/ half of the B Comany stock $as sold for ;,)0. At December "1/ 2011/the follo$ing investments in stock $ere held by 7uvi

+ecurity Cost 5arket 8alueB ; )0 ; ))0C "/)00 "/)0

Changes in fair value again $ere considered to be temorary.

Required:

Greare Fournal entries for

a. December "1/ 2010b. 5arch 1/ 2011c. December "1/ 2011

,. =n


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. =n


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. =n


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101. =n


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10". =n


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10). =n December "1/ 2010/ the 9ngland Comany held / ;200/000 bonds of 5arshall Cororation that$ere urchased at an amount to yield . 3he bonds $ere classified as held to maturity and had a carryingvalue of ;20/,(0 on December "1/ 2010. Interest on the bonds is aid 2012 ;10/000 /00


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During the year/ A Cor. acquired for trading 5 Co. stock for ;1/000. At year-end/ the stock has a fair market value of ;1/200. 3he @ Inc. investment$as transferred from AE+ to trading on December "1 $hen the fair market value $as ;2/)00. 3he + Co. investment had a December "1 market valueof ;"/)00. 3he ? Inc. bonds had a fair market value on December "1 of ;/)0.

Required:

#hat disclosures are required in the December "1/ 2010 financial statements for investments'

10. =n


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10. A-:od Cor. bought 2) of


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111. inger Comany acquired (0 of the outstanding stock of the 3iger Comany for ;20/000 on


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11". Cromer Cor. insured its resident on


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11). Discuss the three categories of investments described in the EA+B&s current standard for investments inmarketable securities.

11,. *nder current ?AAG for marketable securities/ trading securities and available-for-sale securities arereorted at their fair value/ but held-to-maturity securities are reorted at their amorti%ed cost.

Required:

9!lain $hy there is a difference in the reorting requirements for these three classifications of marketable

securities.

11. A marketable security is initially classified as a trading security/ an available-for-sale security/ or a held-to-maturity debt security. +ubsequently/ a security can be transferred among categories.

Required:

9!lain the accounting for a related unreali%ed holding gain or loss $hen a transfer to another category occurs.


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11. 3he accounting for investments in marketable securities has changed significantly over the years. Eoraro!imately t$enty years/ comanies $ere required to reort marketable equity securities at the lo$er of costor market. 3hen in 1"/ the EA+B issued a ne$ standard/ $hich requires comanies to use fair values fortrading and available-for-sale securities.

Required:

Discuss Ha criticisms of the lo$er of cost or market method and Hb maFor controversies or criticisms of current

?AAG.

11. ABC Comany has been urchasing stock of 6 Comany for a fe$ years. ABC has classified the 6Comany stock as available for sale. ABC has Fust urchased an additional 10 of 6&s stock so it no$ o$ns2) and is the largest stockholder. 4o$ does this last urchase affect ABC&s accounting for this stock'

120. Comare and contrast the IE:+ versus ?AAG marketable securities guidance.


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Chater 1)--Investments @ey

1. Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firms

are termedA.available-for-sale securitiesB.trading securitiesC.held-to-maturity securitiesD.marketable securities

2. Investments that are tyically held for short eriods of time and sold by the comany in the e!ectation of arofit on the short-term differences in rice are classified asA.available-for-sale securities

B.trading securitiesC.held-to-maturity securitiesD.marketable securities

". #hich of the follo$ing categories of investments are reorted at their fair values on the balance sheet andhave unreali%ed holding gains and losses included as a searate comonent of stockholders& equity'A.held-to-maturity debt securitiesB.marketable securitiesC.available-for-sale securities

D.trading securities

(. #hich of the follo$ing securities are reorted at their amorti%ed cost on the balance sheet date'A.held-to-maturity debt securitiesB.marketable securitiesC.available-for-sale securitiesD.trading securities

). Investments in debt securities include all of the follo$ing exceptA.*.+. treasury securitiesB.cororate bondsC.referred stocks that are redeemable at the otion of the issuerD.commercial aer


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,. Investments in equity securities include all of the follo$ing exceptA.common stocksB.referred stocksC.convertible bondsD.stock otions

. #hich of the follo$ing methods of accounting for investments is aroriate $hen the investor hassignificant influence over the investee'A.equity methodB.consolidationC.cost methodD.lo$er of cost or market method

. #ith consolidation/ control generally occurs $hen the investor o$ns $hat ercentage of the voting stock ofthe investee'

A.over )0B.bet$een 20 and )0C.less than 20D.over (0

. #hich of the follo$ing methods of accounting for investments is aroriate $hen the investor controls theinvestee'A.equity methodB.consolidation

C.cost methodD.lo$er of cost or market method

10. *nreali%ed holding gains and losses on debt securities affect net income $hen the securities are classified as

3rading Available-for-+ale 4eld-to-5aturityI. 6es 7o 7oII. 6es 6es 7oIII. 7o 6es 6es

I8. 7o 7o 6es

A.IB.IIC.IIID.I8


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11. 9ach of the three categories of investments in debt and equity securities has similar accounting for all of thefollo$ing transactions exceptA.initial recording of costB.recognition of dividend and interest incomeC.recognition of reali%ed gains or losses on salesD.recognition of unreali%ed holding gains and losses

12. 3he generally acceted accounting rinciles for trading securities include all of the follo$ing exceptA.initially recording the investment at costB.subsequently valuing the investment at fair valueC.including unreali%ed holding gains and losses as a comonent of stockholders& equityD.including interest and dividend revenue as art of income

1". #hich of the follo$ing regarding trading securities is correct'A.3rading securities are reorted at cost on the balance sheet date/ and unreali%ed holding gains and losses are

included in income of the current eriod.B.3rading securities are reorted at fair value on the balance sheet date/ and unreali%ed holding gains and lossesare included in income of the current eriod.C.3rading securities are reorted at fair value on the balance sheet date/ but unreali%ed holding gains and lossesare notincluded in income of the current eriod.D.3rading securities are reorted at cost on the balance sheet date/ but unreali%ed holding gains and losses arenotincluded in income of the current eriod.

1(. *nreali%ed gains and losses on investments in trading securities are reorted

A.as a current assetB.on the income statementC.on the balance sheet as art of stockholders& equityD.as a contra asset

1). #hen bonds are urchased bet$een interest dates/ the accrued interest should beA.debited to Interest :eceivableB.debited to Interest :evenueC.debited to Investment in Bonds

D.either a or b


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1,. Dividends that are declared at year-end but notreceived on investments in securities held for sale or tradingshould be recogni%ed $henA.received as cashB.the ne$ year beginsC.declaredD.accrued

1. 3he :olla Comany urchased 10/ ;00/000 bonds of the Batter * Comany at ar lus accrued intereston Aril 1/ 2010/ as an investment in available-for-sale securities. 3he bonds ay interest on Decrease in 8alue of +ecurities of ;"0/000

20. #hich of the follo$ing regarding available-for-sale securities is correct'

A.Available-for-sale securities are reorted at cost on the balance sheet date/ and unreali%ed holding gains andlosses are included in income of the current eriod.B.Available-for-sale securities are reorted at fair value on the balance sheet date/ and unreali%ed holding gainsand losses are included in income of the current eriod.C.Available-for-sale securities are reorted at fair value on the balance sheet date/ but unreali%ed holding gainsand losses are notincluded in income of the current eriod.D.Available-for-sale securities are reorted at cost on the balance sheet date/ but unreali%ed holding gains andlosses are notincluded in income of the current eriod.


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21. :eali%ed gains and losses on investments available for sale are reortedA.as a current assetB.on the income statementC.on the balance sheet as art of stockholders& equityD.as a contra asset

22. 3he entry to record a sale of available-for-sale securities for ;,)/000 on Decrease in 8alue of Available-for-+ale +ecurities of ;/000B.debit to *nreali%ed Increase>Decrease in 8alue of Available-for-+ale +ecurities of ;)/000C.debit to Allo$ance for Change in 8alue of Investment of ;)/000D.credit to ?ain on Disosal of +ecurities Available for +ale of ;/000

2". A reali%ed gain or loss on the sale of an available-for-sale security is determined by comaring

A.the carrying value of the security $ith the roceeds from the saleB.the original cost of the security $ith the roceeds from the saleC.the market value at the latest balance sheet date $ith the roceeds from the saleD.the original cost $ith the security&s carrying value

2(. 3he carrying value of available-for-sale debt and equity securities isA.historical costB.the current market valueC.the lo$er of cost or current market value

D.the higher of cost or current market value

2). #ithers Comany has available-for-sale debt and equity securities that on December "1/ 2010/ had a cost of;10)/000 and a market value of ;102/000. 3he market value rose to ;11/000 by December "1/ 2011. #hataccounting action is required on December "1/ 2011'A.Allo$ance for Change in 8alue should be credited for ;1)/000.B.*nreali%ed Increase>Decrease in 8alue should be debited for ;12/000.C.Allo$ance for Change in 8alue should be debited for ;1)/000.D.*nreali%ed Increase>Decrease in 8alue should be credited for ;12/000.


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2,. 7i!on Comany urchased 10/000 shares of @ostas Comany as an available-for-sale security at ;() ershare. Brokerage fees amounted to ;1/000 and transfer ta!es $ere ;)0. 3he investment should be recorded atA.;()0/000B.;()0/)0C.;()1/000D.;()1/)0

2. ing Comany urchased several investments in December 2010. Costs and market values of thoseinvestments on December "1/ 2010/ are resented belo$

Cost 5arket 8alue6 stock ;200/000 ;10/000ABC stock (00/000 (20/000D9E stock ,00/000 )(0/000

Assuming all of the securities are classified as available for sale/ the Fournal entry required on December "1/ 2010/ the end of ing&s fiscal year/

$ould include aA.debit to *nreali%ed Increase>Decrease in 8alue of ;,0/000B.credit to *nreali%ed Increase>Decrease in 8alue of ;,0/000C.credit to *nreali%ed Increase>Decrease in 8alue of ;0/000D.debit to Investment in Available-for-+ale +ecurities of ;,0/000

2. Barchak Cororation began oerations on Decrease in 8alueB.debit of ;)0 to *nreali%ed Increase>Decrease in 8alueC.debit of ;20 to Allo$ance for Change in 8alue of Investment

D.debit of ;)0 to Allo$ance for Change in 8alue of Investment

2. Gremiums or discounts associated $ith available-for-sale debt securities areA.usually not amorti%ed because the effect of the amorti%ation $ould usually be immaterialB.amorti%ed to interest revenue over the life of the investmentC.usually recorded in searate accounts at the time the bonds are acquiredD.not treated like remiums or discounts on bonds held to maturity


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"0. =n


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"). #hen the market value of a comany&s available-for-sale investments is lo$er than its cost/ the differenceshould beA.reorted as a liabilityB.reorted in the footnotes to financial statementsC.deducted from the investment in available-for-sale securities accountD.added to the investment in available-for-sale securities account

",. =n


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(0. =n =ctober 1/ 2010/ the +tu Comany acquired bonds of


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((. =n


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(. #hen transferring investments bet$een categories/ unreali%ed holding gains for securities transferred fromtrading to available-for-sale must beA.reali%ed on the income statementB.recogni%ed on the income statementC.reali%ed and reorted in comrehensive incomeD.recogni%ed and reorted in comrehensive income

)0. Germanent value declines in available-for-sale securities should beA.recorded in the allo$ance accountB.included in income as a reali%ed lossC.amorti%ed over the remaining life of the securityD.recorded similarly to temorary declines in value

)1. 3he Coer Comany has a bond investment classified as held to maturity/ $hich has a carrying value of;,2/000 and a fair value of ;2(/000. 3he decline in value is considered as other than temorary. Coer should

record the decline asA.*nreali%ed oss on 8alue Decline "/000 Allo$ance for Change in 8alue of Investment "/000B.Investment in 4eld-to-5aturity Debt +ecurities "/000 :eali%ed oss on Decline in 8alue "/000C.:eali%ed oss on Decline in 8alue "/000 Investment in 4eld-to-5aturity Debt +ecurities "/000D.*nreali%ed oss on 8alue Decline "/000

Investment in 4eld-to-5aturity Debt +ecurities "/000

)2. #hich of the follo$ing disclosures is notrequired for investments in securities by current ?AAG'A.the roceeds from sales and the gross reali%ed gains and losses from the sale of available-for-sale securitiesB.the circumstances leading to the decision to sell or transfer a trading securityC.the contractual maturities of held-to-maturity debt securitiesD.the aggregate fair value of available-for-sale securities by maFor security tye

)". #hich tye of investment in securities must al$ays be classified as a current asset'A.held-to-maturity debt securitiesB.available-for-sale securitiesC.trading securitiesD.none of the these/ they may all be classified as current or long-term assets


47/76

)(. Eor available-for-sale securities/ a decline in value due to a temorary decline in market value belo$ cost isA.disclosed in the financial statements by means of a footnoteB.disclosed as a reduction from stockholders& equity on the balance sheetC.disclosed as a loss on the income statementD.not disclosed because the decline in value is only temorary

)). 3he fair value method of accounting for investments $as roosed to overcome $hich issues associated$ith the rior use of lo$er of cost or market'A.reliability and liquidityB.relevance and liquidityC.reliability and financial fle!ibilityD.relevance and financial fle!ibility

),. A maFor controversy surrounding fair value accounting for investments is thatA.fair value is required for trading securities and available-for-sale securities but is only suggested for held-to-

maturity securitiesB.fair value is required for trading securities and available-for-sale securities but is not required for held-to-maturity securitiesC.fair value is required for trading securities but is only suggested for available-for-sale and held-to-maturitysecurities.D.fair value is required for trading securities but is only suggested for available-for-sale securities/ and is notrequired for held-to-maturity securities.

). #hen selecting the aroriate accounting for held-to-maturity securities/ the comany must

A.never sell the equity instrument before maturityB.never sell the debt instrument before maturityC.have the intent and ability to hold the equity investment to maturityD.have the intent and ability to hold the debt instrument to maturity

). *nreali%ed holding gains and losses occur because a comanyA.actively trades securitiesB.holds securities until maturityC.holds securities through the end of the reorting eriod

D.records a change in fair value of the securities held even if they are not sold


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). Investment securities are classified based uon management&s intent. 3his may resent difficulties to readersof financial statements becauseA.management&s Fudgment of intent and ability may lack comarabilityB.management&s Fudgment may lack relevanceC.gain trading may result in not roducing sufficient gainsD.gain trading may result in not roducing sufficient reliability

,0. Acquisition of greater than 20 of the outstanding stock of a comany normally suggests the use of theA.consolidation methodB.equity methodC.fair-value methodD.straight-line method

,1. #ith the equity method/ the investor recogni%es its share of the earnings of the subsidiary $hen theA.investor sells the investment

B.investee ays a cash dividendC.investee declares a cash dividendD.investee reorts earnings on its income statement

,2. *nder the equity method/ dividends received by the investor should be recorded asA.a reduction in the carrying value of the investmentB.an addition to the carrying value of the investmentC.dividend revenueD.investment revenue

,". *nder the equity method/ a receit of cash dividends by the investor $ouldA.increase total assets and stockholders& equityB.increase total assets and liabilitiesC.decrease the investment accountD.increase the investment account

,(. David Comany o$ns "0 of :alh Comany. During 2010/ :alh reorted earnings of ;)00/000 and aidcash dividends of "20/000. #hat effect $ould this have on David&s investment account and net income'

Investment Account 7et IncomeI. J;1)0/000 J; ,/000II. --- J; ,/000III. J; )(/000 J; ,/000I8. J; )(/000 J;1)0/000


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A.IB.IIC.IIID.I8

,). Exhibit 15-1

=n


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,. Exhibit 15-2=n


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2. 3he 5ason Comany acquired a "0 interest in the Di!on Comany on


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). =n


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. #hich of the follo$ing is nota derivative'A.equity contractsB.futures contractsC.otion contractsD.s$a contracts

0. An interest rate s$a in $hich a comany has a fi!ed rate of interest and ays a variable rate is called aA.cash flo$ hedgeB.fair value hedgeC.deferred hedgeD.hedge of foreign currency e!osure of a net investment in foreign oerations

1. A derivative may beA.an asset accountB.a liability account

C.an o$ners& equity accountD.either an asset or a liability account

2. In a matched s$a/ the actual loan amount isA.greater than the notional amountB.less than the notional amountC.equal to the notional amountD.the only amount because there is no notional amount

". Current ?AAG requires a comany to recogni%e in its current net income any gain or loss from a change inthe fair value of the derivative for a

Eair 8alue 4edge Cash Elo$ 4edgeI. yes yesII. yes noIII. no noI8. no yes

A.IB.IIC.IIID.I8


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(. In a erfectly matched hedge of fi!ed-rate debt using an interest rate s$a/ the effect of a change in fairvalue of the derivative on the income statementA.is al$ays a gainB.may be a gain or a lossC.is %eroD.is al$ays a loss

). An unconsolidated investee is referred to under IE:+ and ?AAG as an

IE:+ ?AAGI. associate equity method investeeII. equity method investee associateIII. associate associateI8. equity method investee equity method investee

A.I

B.IIC.IIID.I8

,. oans and receivables can be classified and accounted for as available-for-sale under

IE:+ ?AAGI. yes yesII. yes noIII. no yes

I8. no no

A.IB.IIC.IIID.I8

. :eversals of imairment losses on held-to-maturity and available-for-sale securities are recogni%ed inincome under

IE:+ ?AAGI. yes yesII. no yesIII. yes noI8. no no


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A.IB.IIC.IIID.I8

. =n "0/000 M ;12 er share;21/(00 - H;12 L 2/000 M ;2/,00 loss

. During


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b. Allo$ance for Change in

8alue of Investment12/000

*nreali%ed Increase>Decrease in 8alue ofAvailable-for-+ale +ecurities 12/000

c. Cash 2"/000

*nreali%ed Increase>Decreasein 8alue of

Available-for-+ale+ecurities

,/000

Allo$ance for Change of 8alue of Investment ,/000 ?ain on +ale of Available-for-+ale +ecurity /000 Investment in Available-for-+ale +ecurities 1)/000

0. At December "1/ 2010/ #ilkerson had the follo$ing ortfolio of equity securities available for sale

Cost 5arket 8alueBark Co. stock ;"0 ;"24o$l Co. stock 0 (

Required:

a. Assuming any gain or loss is considered to be temorary/ reare the adFusting entry required under current ?AAG.b. Assuming that/ in 2011/ #ilkerson sold the 4o$l Co. stock for ;"/ record the sale.c. Assuming that the ortfolio at the end of 2011 is comosed of the follo$ing holdings/ reare any necessary entry.

Cost 5arket 8alue Bark Co. stock ;"0 ;"2 6el Co. stock 0 )d. Assuming that the ortfolio at the end of 2012 is comosed of the follo$ing holdings/ reare any necessary

entry.

Cost 5arket 8alue

?na$ Co. bonds ;100 ;) Bark Co. stock "0 ") 6el Co. bonds 0 ,"e. Assuming that/ in 201"/ the ?na$ Co. bonds $ere reclassified as held to maturity $hen the market value $as

;(/ reare any necessary entry.

a. *nreali%edIncrease>Decrease in8alue of


(

Allo$ance for Change in 8alue of Investment (b. Cash "

oss on +ale of Available-for-+ale +ecurities


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Allo$ance for Change in8alue of Investment

,

*nreali%ed Increase>Decrease in 8alue ofAvailable-for-+ale +ecurities ,

Investment in Available-for-+ale +ecurities 0c. *nreali%ed Increase>Decrease

in 8alue of


11

Allo$ance for Change in 8alue of Investment 11

d. Allo$ance for Change in

8alue of Investment2

*nreali%ed Increase>Decrease in 8alue ofAvailable-for-+ale +ecurities 2

e. Investment in 4eld-to-

5aturity +ecurities(

oss on 3ransfer of+ecurities

,


)

*nreali%ed Increase>Decrease in 8alue ofAvailable-for-+ale +ecurities )

Investment in Available-for-+ale +ecurities 100

1. =n August "1/ 2010/ 5erry Comany acquired four ;1/000 face value bonds $ith a 10 interest rate at facevalue lus accrued interest. Interest on the bonds is aid semiannually on 5arch "1 and +etember "0. AtDecember "1/ 2010/ the bonds are quoted at ,. 3he decline in value is deemed temorary. Assume that thebonds $ere classified as available for sale.

Required:

a. Greare the Fournal entries to record 5erry&s transactions in temorary investments in bonds for 2010.b. 7o$ assume that the bonds $ere sold on December "1 at , lus accrued interest. Greare the Fournal entry to reflect this transaction.

a. Aug. "1 Investment inAvailable-for-+ale

+ecurities

(/000.00

Interest:evenueH(/000 L .10 L )>12

1,,.,

Cash (/1,,.,

+e. "0 Cash H(/000 L .10 L ,>12200.00Interest :evenue 200.00

Dec. "1 Interest :eceivable

H(/000 L .10 L ">12100.00

Interest :evenue 100.00


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"1 *nreali%edIncrease>Decrease in8alue

of Available-for-+ale+ecurities

1,0.00

Allo$ance for Change in 8alueof Investment 1,0.00

b. Dec. "1 Cash N100 J H(/000 L .

,O"/(0.00

oss on +ale of

Available-for-+ale

+ecurities 1,0.00Investment in Available-for-+ale

+ecurities (/000.00 Interest :evenue

H(/000 L .10 L ">12 100.00

2. =n 5ay 1/ 2010/ 9dsel/ Inc. bought "00 of De+oto/ Inc.&s ;1/000/ 10 bonds that ay interest on


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3he comany&s year ends on December "1 and the bonds ay interest semiannually on 12d. ;/00

(. =n


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a. InvestmentinAvailable-for-+ale+ecurities

(/,00

Cash (/,00b. Cash 2/(00

Dividend :evenue 2/(00c. *nreali%ed Increase>Decrease

in 8alue of


00

Allo$ance for Change in 8alue of Investment 00d. Cash H00 L ;1 1(/(00


H;1/,00 - ;1(/(00 "/200*nreali%ed Increase>Decreasein 8alue of


1/,00

Allo$ance for Change in 8alue of Investment 1/,00 Investment in Available-for-+ale +ecurities 1/,00

). At December "1/ 2010/ 7uvi Co. held the follo$ing investments in stock that are classified as available-for-sale securities. All investments $ere acquired in December 2010.

+ecurity Cost 5arket 8alueB ;1/)00 ;1/")0C "/000 "/0)0

Changes in fair value $ere considered to be temorary. =n 5arch 1/ 2011/ half of the B Comany stock $as sold for ;,)0. At December "1/ 2011/the follo$ing investments in stock $ere held by 7uvi

+ecurity Cost 5arket 8alueB ; )0 ; ))0C "/)00 "/)0

Changes in fair value again $ere considered to be temorary.

Required:

Greare Fournal entries for

a. December "1/ 2010b. 5arch 1/ 2011c. December "1/ 2011


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a. *nreali%edIncrease>Decrease in8alue of


100

Allo$ance for Change in 8alue of Investment 100b. Cash ,)0


)


100

*nreali%ed Increase>Decrease in 8alue ofAvailable-for-+ale +ecurities )

Investment in Available-for-+ale +ecurities )0c. *nreali%ed Increase>Decrease

in 8alue of Available-

for-+ale +ecurities 12)Allo$ance for Change in 8alue of Investment 12)

,. =n 1/000 M ;,( cost er share;1/200>;,( M "00 shares


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. =n 12/000

Interest :evenue H;(0/(0 L .0)) L (>12 /() Investment in 4eld-to-5aturity +ecurities )2)

. =n +etember 1/ 200)/ :utgers/ Inc./ bought ;,0/000 of Claremore Comuters& 20-year/ , bonds dated


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Investment in 4eld-to-5aturity Debt+ecurities

1(

Interest :evenue H;1( L ( months L 1>( 1(Cash H;1)/000 J ;,00 1)/,00

Interest :eceivable ,00 Investment in 4eld-to-5aturity Debt +ecurities

PN;),/20 J H;1( L 120 monthsO > (Q 1(/,)0 ?ain on +ale of 4eld-to-5aturity Debt +ecurities ")0

. =n 12 "0/000

Investment in 4eld-to-5aturity Debt +ecuritiesNH;,2/"00>10 L ,>12O "/11)

Interest :evenue 2,/)

Cash H;)00/000 L 0.12 L ,>12 "0/000Investment in 4eld-to-5aturity Debt +ecurities

NH;,2/"00>10 L ,>12O "/11) Interest :evenue 2,/)

100. =n 5ay 1/ 2010/ #illie bought ;(0/000 of :angel&s 12/ 10-year bonds for ;(0/"0/ $hich includesaccrued interest. 3he bonds ay interest semiannually/ mature on


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a. Investment in4eld-to-5aturityDebt +ecurities

,

Interest:evenue H2>"

L ;1/22

,

b. Cash H;20/200 J;00

21/000

Interest:evenueH;20/000 L 0.12L (>12

00

Investment in4eld-to-5aturity Debt+ecuritiesR

1/,,0

?ain on +ale of4eld-to-

5aturity Debt+ecurities

)(0

R Investment in 4eld-to-5aturity Debt +ecurities

"/0

2010 ,

20(

2011 20(

1",

"/"20

;"/"20>2 M ;1/,,0

101. =n


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102. =n 12 (/000Investment in 4eld-to-5aturity Debt+ecurities

),(

Interest :evenue H;,/0,, L 0.12 L ,>12 (/),(Cash (/000

Investment in 4eld-to-5aturity Debt+ecurities

)

Interest :evenue H;,/0,, J ),( L 0.12 L ,>12 (/)


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10(. =n "0>10 ;1)/000 ;1)/,(, ;,(, 22(/1,1 12>"1>10 1)/000 1)/,1 ,1 22(/)2b. Investment Carrying 8alue of Interest in Debt Investment Cash :evenue +ecurities in Debt Date Debit1 Credit2 Debit" +ecurities(

01>01>10 ;21/1), 0,>"0>10 ;1)/000 ;1(/0) ;H(2 20/21( 12>"1>10 1)/000 1(/011 H 2/22)

1 ;2)0/000 L 0.12 L ,>122 Grevious carrying value L 0.1( L ,>12"

Amount from footnote b - Amount from footnote a( Grevious carrying value J Amount from footnote c

10). =n December "1/ 2010/ the 9ngland Comany held / ;200/000 bonds of 5arshall Cororation that$ere urchased at an amount to yield . 3he bonds $ere classified as held to maturity and had a carryingvalue of ;20/,(0 on December "1/ 2010. Interest on the bonds is aid 2011 CashH;200/000L .0 L,>12

/000.00

Investment in 4eld-to-5aturity Debt+ecurities ,.,0

Interest :evenueH;20/,(0 L .0 L ,>12 /"02.(0


67/76

>01>2011 Investment in Available-for-

+ale +ecurities20(/000.00

oss on 3ransfer of+ecurities

"/(2.(0

Investment in 4eld-to-5aturity Debt+ecurities 20/(2.(0

10,. +tuart Cor. urchased 100 shares of Dumb Co. for ; a share. It urchased 200 shares of +illy Inc. for ;12a share. As of December "1/ Dumb Co. is selling for ; a share and +illy Inc. is selling for ;1" a share. DumbCo. $ill be held at least " years and is classified as available for sale and +illy is classified as trading. +tuart hadnet income of ;10/000 before reorting the imact of investment transactions.

Required:

a. :ecord the December "1 adFusting entries for investments.b. #hat is +tuart Cor.&s net income after adFusting for investments'c. #hat is the aroriate balance sheet classification for each investment'

a. 9ntries forDumb Co.Investment

Allo$anceforChange in8alue of

AE+Investment

100

*nreali%ed Increase in 8alue for Available-for-+ale +ecurities Hreorted as

art of comrehensiveincomeR

100

R H5arket ; - Cost ; L 100 shares

9ntries for +illy Inc.Investment

Allo$ance for Change in8alue of 3rading

Investment 200*nreali%ed Increase in 8alue

of 3rading +ecuritiesR

200

R H5arket ;1" - Cost ;12 L 200 shares

b. 7et income beforeinvestments

;10/000

Income imact of tradingadFustment

200

7et income ;10/200

c. Dumb Co. 7oncurrent +illy Inc. Current


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10. =n "1>2012 ;10/000 /00

During the year/ A Cor. acquired for trading 5 Co. stock for ;1/000. At year-end/ the stock has a fair market value of ;1/200. 3he @ Inc. investment$as transferred from AE+ to trading on December "1 $hen the fair market value $as ;2/)00. 3he + Co. investment had a December "1 market valueof ;"/)00. 3he ? Inc. bonds had a fair market value on December "1 of ;/)0.

Required:

#hat disclosures are required in the December "1/ 2010 financial statements for investments'

Balance +heet

Classification 8aluation 9!lanation3rading Hat cost ;"/)00 3he 5 Co. investment $ould aear on the balance sheet at

;1/200. 3he unreali%ed holding gain of ;200 $ould be reorted innet income.

3he @ Inc. investment $ould be reorted at ;2/)00. 3he totalunreali%ed holding gain of ;00 $ould be reorted in net income$ith the rior balance from the allo$ance account of ;100transferred from comrehensive income.

Glus Allo$ance 2003rading Hat fair value ;"/00Available for sale Hat cost ;"/000 3he + Co. investment $ould be valued at ;"/)00 $ith the ;)00

unreali%ed holding gain reorted as art of comrehensive income.Glus Allo$ance )00Available for sale Hat fairvalue

;"/)00

4eld to maturity Hamorti%edcost

;/00 At "M ;100 amorti%ation er year.


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10. =n


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7ondereciable assets

; ,0/000 ; (/000 ;1(/000

Dereciable assets

1,0/000 1,/000 ",/000

3otal assets ;220/000 ;20/000 ;)0/0003otal liabilities ; 0/000 ; 0/000

During 2010/ C Comany earned income of ;0/000 and aid dividends of ;1/000. 3he dereciable assets have a ten-year remaining life and no

residual value.

Required:

Greare all of the Fournal entries on Cororation&s books to record the acquisition and subsequent events in 2010 related to the investment in C

Comany.

3o record theacquisition

Investment in

+tock CComanyH;"0 L (/00

1((/000

Cash 1((/0003o record 20 share ofreorted net income

Investment in +tock CComany H0.20 L ;0/000

1(/000

InvestmentIncome

1(/000

3o record the receit ofdividends

Cash H0.20 L 1/000 "/,00

Investmentin +tockCComany

"/,00

3o dereciate the increase in recorded value of dereciable assets acquiredInvestment Income NH;",/000L 0.20>10O

20

Investmentin +tockCComany

20

R Gurchase

rice ;1((/000

BookvalueH;1(0/000L 0.20

2/000

9!cess ;11,/000 AdFustmen

ts

Dereciable assets H;",/000 L 0.20 ;/2007ondereciable assets H;1(/000 L 0.20 2/00 10/000

?ood$ill ;10,/000


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111. inger Comany acquired (0 of the outstanding stock of the 3iger Comany for ;20/000 on


72/76

Investment in +tock #hite Comany 2/(00

R Dereciable assets M NH;(0/000 L "0 > ) yrs M ;2/(00

11". Cromer Cor. insured its resident on


73/76

11(. Ansel Comany has a ;(/000/000/ bank loan from Adams Bank. =n


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11,. *nder current ?AAG for marketable securities/ trading securities and available-for-sale securities arereorted at their fair value/ but held-to-maturity securities are reorted at their amorti%ed cost.

Required:

9!lain $hy there is a difference in the reorting requirements for these three classifications of marketablesecurities.

:eorting trading securities and available-for-sale securities at fair value may assist users in evaluating theerformance of a comany&s investment strategies and increase the comarability of balance sheets. 3he fairvalue of such investments may rovide a better indication of a comany&s solvency/ articularly financialinstitutions.

It may be argued that the fair value of held-to-maturity debt securities is not relevant if a comany has no intentto sell the security and no need to do so. 3he fair value is not relevant because the cash flo$ $ill not occur.3herefore/ amorti%ed cost is aroriate if the security is actually held to maturity.

11. A marketable security is initially classified as a trading security/ an available-for-sale security/ or a held-to-maturity debt security. +ubsequently/ a security can be transferred among categories.

Required:

9!lain the accounting for a related unreali%ed holding gain or loss $hen a transfer to another category occurs.

3he accounting treatment for any unreali%ed gain or loss differs deending on the tye of transfer

1. Eor transfers from the trading category/ no accounting for the unreali%ed holding gain or loss is necessary because it has already been

recogni%ed in income.2. Eor transfers into the trading category/ the revious unreali%ed gain or loss is eliminated and a gain or loss is included in income.". Eor transfers into the available-for-sale category from the held-to-maturity category/ an unreali%ed holding gain or loss is established

and included in stockholders& equity.(. Eor transfers of a debt security into the held-to-maturity category from the available-for-sale category/ the unreali%ed gain or loss on the

available-for-sale security is eliminated and an unreali%ed gain or loss on the held-to-maturity security is created for the same amountand included in stockholders& equity.


75/76

11. 3he accounting for investments in marketable securities has changed significantly over the years. Eoraro!imately t$enty years/ comanies $ere required to reort marketable equity securities at the lo$er of costor market. 3hen in 1"/ the EA+B issued a ne$ standard/ $hich requires comanies to use fair values fortrading and available-for-sale securities.

Required:

Discuss Ha criticisms of the lo$er of cost or market method and Hb maFor controversies or criticisms of current

?AAG.

a. 3he lo$er of cost or market method $as critici%ed for the follo$ingreasons

H1 It did not reflect the liquidity value of the securities $hen the securities $ere reorted at cost.

H2 +ome comanies $ould sell those securities $hose market value e!ceeded their cost in order to record gains and increase net

income. 3his ractice $as kno$n as Tgains trading.Tb. 3he accounting rocedures of current ?AAG alleviate the roblems caused by the lo$er of cost or

market method. 4o$ever/ some criticisms are as follo$s

H1 Eair values are not required for liabilities. +ome comanies urchase certain marketable securities to hedge against theirliabilities. 6et/ liabilities are not reorted at fair values.

H2 *nreali%ed holding gains and losses are reorted differently for trading and available-for-sale securities.

H" 4eld-to-maturity debt securities are reorted at amorti%ed cost/ but fair values are used for trading and available-for-sale

securities.

H( 3he classification of securities is based on management intent.

11. ABC Comany has been urchasing stock of 6 Comany for a fe$ years. ABC has classified the 6Comany stock as available for sale. ABC has Fust urchased an additional 10 of 6&s stock so it no$ o$ns2) and is the largest stockholder. 4o$ does this last urchase affect ABC&s accounting for this stock'

Currently/ the 6 holding is valued using fair value methods. #ith the latest acquisition of stock/ ABC o$ns2) of 6 and has become the largest stockholder/ so ABC is no$ considered to be in a osition to e!ertsignificant influence. 3his means/ through the board of directors/ that it can imact the olicy-making rocessand otential intercomany transactions of 6. ABC should s$itch to the equity method of accounting for the6 stock.

3he imact of the change to the equity method $ould involve a retroactive adFustment Hrior-eriod to the

investment account and retained earnings. 3his adFustment $ould be comuted as if the investment had al$aysbeen accounted for using the equity method Hbut at the original ercentage o$ned.


76/76

120. Comare and contrast the IE:+ versus ?AAG marketable securities guidance.

#hile both use the three categoriesUtrading/ available for sale/ and held to maturityUand the valuation methodsare the same/ the trading category under IE:+ has a broader definition. 3his leads to the inclusion of allfinancial instruments/ not Fust securities/ in the mark-to-market rocedures. *nder ?AAG/ only instruments thatmeet the definition of a security qualify.

chapter 15 investments

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