...ACTG 351 Homework #3 (Investments) - Answers 1. Clear Monkey Technologies (CMT) purchased 10-year bonds issued from Banana Bandana’s Inc with a face value of $2,000,000 and a stated rate of 8 percent on January 1, 2013. Interest is payable semi-annually on December 31 and June 30. The market rate of interest for similar bonds is 10 percent. In addition, the market value of the bonds at June 30 and December 31 were $2,037,000 and $1,977,000, respectively. Assume the company prepares financial reports semiannually at June 30 and December 31. a) Assume CMT accounts for these bonds as (1) Held-to-Maturity Securities and (2) Available-for-Sale Securities. Please record the initial purchase of the bonds and the first two interest payments on June 30 and December 31, as well as any adjusting entries on June 30 and December 31 assuming these two classifications. HTM and AFS (PV = 2,000,000*.37689 + 80,000*12.46221): Jan 1 Investment in Bonds 2,000,000 Discount on Bonds Cash Jun 30 Cash 80,000 Discount on Bonds 7,538 Interest Revenue Dec 31 Cash 80,000 Discount on Bonds 7,915 Interest Revenue 249,243 1,750,757 87,538 87,915 Adjusting Entries for AFS: Adjustment = 2,037,000 – 1,758,295 = 278,705 Jun 30 Fair Value Adjustment 278,705 Net Unrealized Gains/Losses – OCI 278,705 Adjustment = (1,977,000 – 1,766,210) - 278,705 = -67,915 Dec 31 Net Unrealized Gains/Losses – OCI 67,915 Fair Value Adjustment 67,915 b) CMT sells the bonds...
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...Professional Research for Accountants December 13, 2015 Comprehensive Research Memorandum Motivation: The job of an investment management company is to oversee and manage the securities that, in this case for small to medium companies, companies acquire. A major part of his responsibility is to ensure the companies are receiving the maximum tax advantage possible. Also part of his responsibilities would be to recommend stock selection, and asset selection. This particular case is about a group whose Director is unsure of the accounting for gains and losses on securities. Additionally, he is unsure about the accounting treatment of realized and unrealized gains and losses on the investments which would include knowing if there is any impairment, if the impairment is temporary or otherwise for the securities the companies hold. This research yielded information to education the Director and his staff on the accounting of investment securities for his clients. Problem Statement: How should ABC Investment Group account for treatment of unrealized gains and losses on bonds and under what conditions these securities may be impaired. If impaired, how to determine a write down and how to report in the financials. Assumptions: Clients do not have significant influence over the financials of the companies they hold securities in. This research was confined to investment purchased by ABC’s clients and that none of the clients held any securities where they could influence the work or...
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...CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics | Questions | Brief Exercises | Exercises | Problems | Concepts for Analysis | 1. Debt securities. | 1, 2, 3, 13 | | 1 | | 6 | (a) Held-to-maturity. | 4, 5, 7, 8, 10, 13, 21 | 1, 3 | 2, 3, 5 | 1, 7 | | (b) Trading. | 4, 6, 7, 8, 10, 21 | 4 | | | 1 | (c) Available-for-sale. | 4, 7, 8, 9, 10, 11, 21 | 2, 10 | 4 | 1, 2, 3, 4, 7 | 1 | 2. Bond amortization. | 8, 9 | 1, 2, 3 | 3, 4, 5 | 1, 2, 3 | | 3. Equity securities. | 1, 12, 16 | | 1 | | 6 | (a) Available-for-sale. | 7, 10, 11, 15, 21 | 5, 8 | 6, 8, 9, 11, 12, 16, 19, 20 | 3, 5, 6, 8, 9, 10, 11, 12 | 1, 2, 3 | (b) Trading. | 6, 7, 8, 10, 14, 15, 21 | 6 | 6, 7, 14, 15, 19, 20 | 6, 8 | 1, 3 | (c) Equity method. | 16, 17, 18, 19, 20 | 7 | 12, 13, 16, 17 | 8 | 4, 5 | 4. Comprehensive income. | 22 | 9 | 10 | 9, 10, 12 | | 5. Disclosures of investments. | 18 | | 10 | 5, 8, 9, 10, 11, 12 | | 6. Fair value option. | 25, 26, 27 | | 19, 20, 21 | | | 7. Impairments. | 24 | 10 | 18 | | 3 | 8. Transfers between categories. | 23 | | | 8 | 1, 3, 6 | *9. Derivatives. | 28, 29, 30, 31, 32, 33, 34, 35 | | 22, 23, 24, 25, 26, 27 | 13, 14, 15, 16, 17, 18 | | *10. Variable Interest Entities. | 36, 37 | | | | | *This material is...
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...17-1 CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Debt securities. 1, 2, 3, 13 1 4, 7 (a) Held-to-maturity. 4, 5, 7, 8, 10, 13, 21 1, 3 1, 2, 3, 5 1, 7 4 (b) Trading. 4, 6, 7, 8, 10, 21 4 1, 4 (c) Available-for-sale. 4, 7, 8, 9, 10, 11, 21 2, 10 4 1, 2, 3, 4, 7 1, 4 2. Bond amortization. 8, 9 1, 2, 3 3, 4, 5 1, 2, 3 3. Equity securities. 1, 12, 13, 16 4, 7 (a) Available-for-sale. 7, 10, 11, 15, 21 5, 8 6, 8, 9, 11, 12, 16 5, 6, 8, 9, 10, 11, 12 1, 2, 3 (b) Trading. 6, 7, 8, 14, 15, 21 6 6, 7, 14, 15 6, 8 1, 3 (c) Equity method. 16, 17, 18, 19, 20 7 12, 13, 16, 17 8 5, 6 4. Comprehensive income. 22 9 10 10, 12 5. Disclosures of investments. 21 8, 9 5, 9, 10, 11, 12 6. Impairments. 24 10 18 3 7. Transfers between categories. 23 1, 3, 7 *8. Derivatives 25, 26, 27, 28, 29, 30, 31, 32 19, 20, 21, 22, 23, 24 13, 14, 15, 16, 17, 18 *9. Variable Interest Entities 33, 34 *This material is dealt with in an Appendix to the chapter. 17-2 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems 1. Identify the three categories of debt securities and describe the accounting and reporting treatment for each category. 1 2. Understand the procedures for discount and premium amortization on bond investments. 1, 2, 3, 4 2, 3, 4, 5 1, 2, 3, 4, 7 3. Identify the categories of equity...
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...process, the entire $100,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts. 3. Sales price per unit ($900,000 ÷ 3,000 units) $ 300 Number of units in Safeco’s ending inventory × 500 Intercompany inventory at transfer price $150,000 Gross profit rate (.6 ÷ 1.6) .375 Intercompany profit in ending inventory $56,250 4. In intercompany transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gain on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gain on merchandise still being held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gain from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold....
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...director of ABC Investment Group. Since the Director has a limited understanding the US GAAP regarding Debt security, therefore I have to be concise in my presentation. ABC Investment Group is an investment company, and they deal with debt security. Their main concerns are how to recognize and record the transaction on unrealized gains/losses in their holding debt securities, and when they should write down debt securities. The key to the problem lies on how the ACB Investment Group treat their investment. According to FASB ASC 320-10-25 the debt securities are classified in three groups as Trading Security (TD), Available For Sale (AFS), and Held To Maturity (HTM); and each class of debt investment has different accounting method to recording its transaction. Trading Security uses the Fair Value method in account for the gains/losses, and this debt security is the most active portfolio to the company because the objective of this portfolio is to generate profit in a short term by participating in the buying and selling of debt securities. When unrealized gains/losses for trading securities are recognized, they need to record as an earning in income statement, and trading securities will be treated as a current asset in the balance sheet of the company. Available For Sale (AFS): like trading security, AFV also use the Fair Value method in recognize any unrealized gains/losses as it occurs in the recording period. Unlike the trading security, Unrealized gains/losses on...
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...Chapter 1 the equity method of accounting for investments Answers to Questions 1. The equity method should be applied if the ability to exercise significant influence over the operating and financial policies of the investee has been achieved by the investor. However, if actual control has been established, consolidating the financial information of the two companies will normally be the appropriate method for reporting the investment. 2. According to Paragraph 17 of APB Opinion 18, "Ability to exercise that influence may be indicated in several ways, such as representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by an investor in relation to the extent of ownership of other shareholdings." The most objective of the criteria established by the Board is that holding (either directly or indirectly) 20 percent or more of the outstanding voting stock is presumed to constitute the ability to hold significant influence over the decision-making process of the investee. 3. The equity method is appropriate when an investor has the ability to exercise significant influence over the operating and financing decisions of an investee. Because dividends represent financing decisions, the investor may have the ability to influence the timing of the dividend. If dividends were recorded as income...
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...Account + Unrealized gains - Unrealized losses etc.… Other comprehensive income **At every year-end, Other Comprehensive Income is transferred to Accumulated Other Comprehensive Income (AOCI)** OCI xxx AOCI xxx ** AOCI is a cumulative end of the year balance ** 2011 OCI transferred to AOCI +2012 OCI Transferred to AOCI +2013 OCI Transferred to AOCI Balance end of 2013 1. Changes in revaluation surplus for PPE and equipment (land, machinery, building…) a. You bought a land. Then any change in value during year or subsequently: Put in REVALUATION SURPLUS account until sold. Ex: increase in FV of 74,000 Land 74,000 Gain on Revaluation (OCI) 74,000 Then, at year-end, OCI is transferred in AOCI OCI (OCI acct) 74,000 AOCI (B/S Shareholder’s equity acct) 74,000 b. When sold: any difference in CV and proceed (POD-CV) I/S (NI) Cash (POD) 216,000 Land (CV) 215,000 Gain/Loss (I/S) 1,000 AND When sold: any balance in AOCI related to revaluation surplus RETAINED EARNINGS NOT income statement AOCI (B/S SE acct) 74,000 R/E (B/S SE acct) 74,000 So, REend = REbeg + NI – Dividend +/- Reclassification of Surplus 2. FV-NI investment c. Change in FV in the year (Unrealized gains and losses) I/S (NI) Ex: increase in FV of 1,000 FVNI investment (asset) 1,000 Unrealized gain on FVNI...
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...CHAPTER 13 investments and fair value accounting 1 DISCUSSION QUESTIONS 1. A business might invest in another company’s stock to earn dividends or in expectation of market price increases. In addition, a business may want to purchase another company outright for strategic reasons, such as (1) reducing costs, (2) replacing management, (3) expanding operations, or (4) integrating operations. 2. A gain or loss can occur when the fair value of the bond upon sale differs from the cost. The price of bond investments can change due to changes in the market rate of interest. As the market interest rate increases, the fair value of the bond investment will decline. As market interest rates decrease, the fair value of the bond will increase. 3. The cost method is used for equity investments representing less than 20% of the outstanding shares of the investee. 4. Under the cost method, a dividend received is treated as dividend revenue. Under the equity method, a dividend received is not treated as dividend revenue, but is treated as a reduction in the book value of the investment. Thus, a dividend under the cost method has an income statement impact, while a dividend under the equity method does not. 5. An investment greater than 50% of the investee is considered to be an investment that exerts control. Thus, the financial statements of the investee are consolidated (combined) with that of the investor. 6. Both portfolios are reported at fair value. However, changes in the...
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...CHAPTER 15 INVESTMENTS CONTENT ANALYSIS OF EXERCISES AND PROBLEMS Time Range (minutes) 10-15 10-15 10-15 15-20 15-20 10-15 Number E15-1 E15-2 E15-3 E15-4 E15-5 E15-6 Content Trading Securities. (Easy) Journal entries. Unrealized holding gain. Balance sheet disclosure. Trading Securities. (Moderate) Journal entries. Income statement and balance sheet disclosures. Long-Term Investments. (Easy) Securities available for sale. Purchase and adjusting entries. Available-for-Sale Securities. (Easy) Journal entries. Compute unrealized increase/decrease balance. Available-for-Sale Securities. (Easy) Journal entries. Balance sheet disclosure. Held-to-Maturity Bond Investment. (Easy) Premium, straight-line amortization, journal entries. Error in recording interest at acquisition. Held-to-Maturity Bond Investment. (Easy) Discount, semiannual interest receipts, straight-line and effective interest methods of amortization, journal entries. Held-to-Maturity Bond Investment. (Moderate) Discount, semiannual interest receipts, sale at gain. Effective interest method. Journal entries. Bond Investment. (Moderate) Discount, semiannual interest receipts, amortization schedule using effective interest method, journal entries. Bond Investment. (Moderate) Premium, semiannual interest receipts, amortization schedule using effective interest method, journal entries. Bond Investment. (Moderate) Premium, semiannual interest receipts, sale at loss. Effective interest method. Journal entries. Transfer...
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...are recorded on the balance sheet at market value. Q9-2. An unrealized holding gain (loss) is an increase (decrease) in the fair value of an investment security that is still owned. Q9-3. Unrealized holding gains and losses related to trading securities are reported in the current-year income statement (which flows to retained earnings). Unrealized holding gains and losses related to available-for-sale securities are reported as part of a separate component of stockholders' equity called Accumulated Other Comprehensive Income (AOCI). Q9-4. Significant influence gives the owner of the stock the ability to significantly influence the operating and financing activities of the company whose stock is owned. Normally, a 20% through 50% ownership of the company's voting stock provides evidence of significant influence. The equity method is used to account for investments with significant influence. Such an investment is initially recorded at cost; the investment is increased by the proportionate share of the investee company's net income, and equity income is reported in the income statement. The investment account is decreased by dividends received on the investment, and is reported in the balance sheet at its book value. Unrealized gains or losses on the investment are not recognized in the financial statements. Q9-5. Because Yetman Company's investment in Livnat Company is an investment with...
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...Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer must be eliminated in the consolidation process (Entry Tl) C. Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit 1. For consolidation purposes, this intra-entity gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G). 2. Because the effects of the transfer carry over into the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G). a. The retained earnings figure being adjusted is that of the original seller. b. If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Investment in Subsidiary account. 3. The consolidation process is designed to shift the profit from the period of transfer into the time period in which the goods are actually sold to unrelated...
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...Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer must be eliminated in the consolidation process (Entry Tl) C. Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit 1. For consolidation purposes, this intra-entity gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G). 2. Because the effects of the transfer carry over into the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G). a. The retained earnings figure being adjusted is that of the original seller. b. If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Investment in Subsidiary account. 3. The consolidation process is designed to shift the profit from the period of transfer into the time period in which the goods are actually sold to unrelated...
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...according to Section 320-10-35-4. The company can record the Dividend or Interest Revenue as follows, Journal Entry: Cash $1 Dividend/Interest Revenue $1 iii. The company would record the increase in market value using the fair value method as follows, Journal Entry: Fair Value Adjustment (trading) $1 Unrealized holding gain $1 B. i. According to 320-10-25-1, available- for-sale is “Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities.” ii. According to 320-10-35-4 “Dividend and interest income, including amortization of the premium and discount arising at acquisition, for all three categories of investments in securities shall be included in earnings”. Also, available-for-sale is one of the three categories, so company can accord this entry as follow, Journal entry: Cash $1...
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...Annual Amortization $3,300 Schedule 2: Deferral of Unrealized Gain – 2012 Inventory remaining at end of year $15,000 Gross profit percentage 33.33% Gross profit remaining in inventory $5,000 Ownership % 40% Unrealized gain to be deferred until 2013 $2,000 Schedule 3: Deferral of Unrealized Gain – 2013 Inventory remaining at end of year $24,000 Gross profit percentage 37.50% Gross profit remaining in inventory $9,000 Ownership % 40% Unrealized gain to be deferred until 2014 $3,600 Journal Entries (note all entries should have an appropriate description) Date Account DR CR 1/1/2012 Investment in Stokes Co. $210,000 Cash $210,000 To record acquisition of 40% of Stokes During 2012 Cash $4,000 Investment in Stockes Co. $4,000 To record dividends received 12/31/2012 Equity in Stokes Income - Loss $16,000 Extraordinary loss- Stokes $8,000 Investment in Stokes Co. $24,000 To record accrual of income/loss 12/31/2012 Equity in Stokes Income $3,300 Investment in Stokes Co. $3,300 To record the amortization of acquisition 12/31/2012 Equity in Stokes Income - Loss $2,000 Investment in Stokes Co. $2,000 To defer unrealized gross profit on intra-entity sale...
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