,SOLUTION MANUAL FOR Financial Accounting 6th
Edition by Jay S. Rich
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,APPENDIX
1 INVESTMENTS
DISCUSSION QUESTIONS
1. The three classifications for investments in debt securities are as follows:
a. Held-to-maturity securities are debt investments that management intends to
hold until the debt contract requires the borrower to repay the debt in its entirety.
On the balance sheet, held-to-maturity securities are classified as noncurrent assets
unless the date of maturity is within 1 year or one operating cycle, whichever is
longer.
b. Trading securities are debt investments that management intends to sell in
the near term. Trading securities are bought and sold frequently and typically are owned
for under 1 month. Trading securities are always classified as current assets on the
balance sheet.
c. Available-for-sale securities are debt investments that management intends to sell in the
future, but not necessarily in the near term. Therefore, investments in debt securities
that do not warrant inclusion as trading securities or held-to-maturity securities are
considered available-for-sale. On the balance sheet, available-for-sale securities are
classified as current or noncurrent assets depending on whether they will be sold within
1 year or one operating cycle, whichever is longer.
2. The amortized cost method is used for investments in debt securities that are to be held
to maturity. It is implemented by:
● Recording securities purchased at cost
● Carrying those investments on the balance sheet at cost adjusted for unamortized premium
or discount amortization during the holding period
● Recording receipt of interest income with appropriate amortization of premium/discount each
accounting period
● Removing cost from the accounting records when the securities are redeemed at
maturity
3. Investment income is recognized for: (1) the amortized cost method when interest is earned
each accounting period and when amortization of premium or discount is recorded, (2) the fair
value method when interest or dividends are received and when investments are sold, and (3) the
equity method when the investee earns income (or loss) and when investments are sold.
,4. The fair value method is used for investments in debt securities that are classified
as trading or available-for-sale. It is implemented by:
● Recording securities purchased at cost (fair value on the date of purchase)
● Adjusting the carrying amount of those investments to their fair (or market) value at
the end of each accounting period
● Recognizing the adjustment to the carrying amount (for unrealized gains or losses)
of these investments as a separate element of stockholders’ equity (available-for-sale
debt securities) or as income on the income statement (investments in debt
securities classified as trading)
● Recording interest or dividends as income as they are realized each accounting period
● Removing the investment carrying amount from the accounting records when the
securities are sold and recognizing a gain (or loss) measured by the difference
between the selling price and the cost of the investment
The fair value method is also used to account for equity securities. The accounting for equity
securities under the fair value method mirrors that of the accounting for debt securities classified
as trading securities.
5. Trading securities are debt investments that management intends to sell in the
near term. Trading securities are bought and sold frequently and typically are owned for
less than 1 month. Trading securities are always classified as current assets. On the
income statement, unrealized gains (losses) on trading securities are included on the income
statement as part of net income. Available-for-sale securities are debt investments that
management intends to sell in the future but not necessarily in the near term. On the balance
sheet, available-for-sale debt securities are classified as current or noncurrent assets
depending on whether they will be sold within 1 year or one operating cycle, whichever is
longer. Unrealized gains (losses) on available-for-sale securities are not included on the
income statement; instead, they are reported in accumulated other comprehensive
income, which is an element of stockholders’ equity.
6. The allowance to adjust short-term investments to market is the valuation account
containing unrealized gains and losses on the short-term investment portfolio. It is
adjusted at year end to the current amount of unrealized gain or loss and is reported on
the balance sheet to adjust the cost of the portfolio to its current market value. Use of this
allowance reveals the current cash-generating potential of the short-term investments;
reporting only their cost would deny this information to users of the financial statements.
7. The equity method is used to account for long-term investments in common stock,
which enables the investor to significantly influence the operations of another business.
When an investment represents an ownership of 20% or more, the investor
can usually influence the operations of the investee, and the equity method is used.
It is implemented by:
● Recording securities purchased at cost
● Recognizing as income the investor’s share of investee net income (or net loss)
● Adding the investor’s share of investee net income (or subtracting the investor’s
share of net loss) to the investment account
● Recording dividends received as a reduction in the investment account
● Removing the investment carrying amount from the accounting records when the
securities are sold and recognizing a gain (or loss) measured by the difference
between the selling price and the carrying amount
,8. Under the equity method, the investor recognizes its share of investee net income as the
income is earned by the investee. The investor records income when income is earned
by the investee and not when a dividend is declared and paid. Dividends are recorded as
a reduction in the Investment account. This prevents the investor’s income from being
manipulated by investor-stimulated changes (since they possess significant influence
over the investee through having greater than 20% stock ownership) in an investee’s
dividend policy. As explained in advanced accounting courses, the equity method also
prevents manipulation through intercorporate transactions, whose effects must be
eliminated.
9. A parent is an investor whose investment in the stock of another firm enables it to control
the other firm (the subsidiary). A subsidiary is a firm whose operations are controlled by
another entity through that entity’s investment in the subsidiary firm’s stock. Usually,
ownership of 50% or more of the outstanding voting stock is sufficient to give a
parent control over a subsidiary.
10. Noncontrolling interest is the portion of a subsidiary’s common stock that is not held by
the parent. This amount must be shown as a component of stockholders’ equity on the
consolidated balance sheet. It represents the equity interest of the noncontrolling
stockholders in the subsidiary’s assets and liabilities.
11. The consolidated balance sheet is essentially the same as the parent’s corporate balance
sheet except that the parent’s Investment in Subsidiary account is replaced with the
detailed assets and liabilities of the subsidiary. In addition, other differences may arise
from intercorporate transactions described in advanced accounting courses.
12. Because a parent and subsidiary are two separate legal entities, they often engage in
business transactions such as buying or selling inventory, borrowing funds, and so on. Further,
because they keep separate accounting records, these transactions produce, for example,
sales revenue, receivables, and payables in the financial statements. However, in
consolidation, the two separate legal entities are reported as a single accounting entity.
Because a single entity cannot sell to itself or owe money to itself, these intercompany
transactions must be eliminated in consolidation.
13. An asset acquisition is a business combination in which the assets and liabilities of
another company are acquired. A stock acquisition is a business combination in which
the common stock of another company is acquired with the parent’s own common stock.
14. Goodwill represents intangible assets that cannot be specifically identified or separated
from the business, such as a reputation for quality products. It is calculated by subtracting
the fair value of identifiable net assets received from the acquisition price.
, MULTIPLE-CHOICE QUESTIONS
A1-1. a
A1-2. a
A1-3. d
A1-4. d
A1-5. b
A1-6. d
A1-7. d
A1-8. b
A1-9. a
A1-10. a
A1-11. b
A1-12. c
A1-13. c
A1-14. b
A1-15. a
A1-16. d
EXERCISES
E A1-17
1. d
2. c
3. b
4. b
5. a
,E A1-18
1. Journal
Date Account and Explanation Debit Credit
Dec. 31 Investment in Equity Securities 14,000
Unrealized Gain (Loss) on Equity
Securities 14,000
* [($39.50 – $38.00) × 20,000 shares] + [($16.50 – $17.00) × 32,000 shares] = $14,000
2. For equity securities, the unrealized gain is included in the income statement.
It would increase earnings before income taxes by $14,000 and would thus flow
into retained earnings.
E A1-19
1. Journal
Date Account and Explanation Debit Credit
Dec. 31 Allowance to Adjust Available-for-Sale
Securities to Market* 2,000
Unrealized Gain (Loss) on Available-for-
Sale Securities 2,000
* [$520,000 – $500,000] + [$950,000 – $968,000] = $2,000
2. For available-for-sale securities, the unrealized gain is not included on the
income statement. Instead, it is included as part of “Accumulated Other
Comprehensive Income,” a separate account included in stockholders’ equity.
,E A1-20
Journal
Date Account and Explanation Debit Credit
Dec. 31 Allowance to Adjust Available-for-Sale
Securities to Market* 4,200
Unrealized Gain (Loss) on Available-for-
Sale Securities 4,200
* See the following T-account.
Allowance to Adjust Available-for-Sale Securities to Market
7,200 Beginning balance
Necessary adjustment to
achieve desired ending
balance 4,200
3,000 Desired ending balance
E A1-21
1. Journal
Date Account and Explanation Debit Credit
2025
Dec. 31 Allowance to Adjust Trading Securities
to Market* 5,100
Unrealized Gain (Loss) on Trading
Securities 5,100
2026
Dec. 31 Allowance to Adjust Trading Securities
to Market* 5,800
Unrealized Gain (Loss) on Trading
Securities 5,800
2027
Dec. 31 Unrealized Gain (Loss) on Trading
Securities 2,700
Allowance to Adjust Trading Securities
to Market* 2,700
* See T-account on next page.
,E A1-21 (Continued)
Allowance to Adjust Trading Securities to Market
8,500 12/31/2024 Balancea
Necessary adjustment to
achieve desired 12/31/2025
balance 5,100
3,400 12/31/2025 desired balanceb
Necessary adjustment to
achieve desired 12/31/2026
balance 5,800
12/31/2026 desired balancec 2,400
Necessary adjustment to
achieve desired 12/31/2027
2,700 balance
300 12/31/2027 desired balanced
a
$153,800 – $162,300 = –$8,500
b
$106,200 – $109,600 = –$3,400
c
$151,300 – $148,900 = $2,400
d
$138,700 – $139,000 = –$300
2. The 2027 income statement effect is a $2,700 loss resulting from the $2,700 debit
to unrealized gain (loss) on trading securities in the December 31, 2027 journal
entry.
3. The 2027 income statement effect is $0, because unrealized gains and losses on
available-for-sale securities do NOT go to the income statement. Instead, they are
part of “Accumulated Other Comprehensive Income.”
, E A1-22
1. Journal
Date Account and Explanation Debit Credit
Apr. 9 Investment in Equity Securities 14,600
Cash 14,600
June 30 Investment in Equity Securities 14,500
Cash 14,500
Aug. 30 Cash* 240
Dividend Income 240
Oct. 10 Cash** 900
Dividend Income 900
* 200 shares × $1.20 = $240
** 500 shares × $1.80 = $900
2. Market value of portfolio on December 31:
$15,000
200 Southwestern shares at $75 per share…………………………………………………………………
12,500
500 Montgomery shares at $25 per share……………………………………………………………………
$27,500
Portfolio market value……………………………………………………………………………...………
Edition by Jay S. Rich
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,APPENDIX
1 INVESTMENTS
DISCUSSION QUESTIONS
1. The three classifications for investments in debt securities are as follows:
a. Held-to-maturity securities are debt investments that management intends to
hold until the debt contract requires the borrower to repay the debt in its entirety.
On the balance sheet, held-to-maturity securities are classified as noncurrent assets
unless the date of maturity is within 1 year or one operating cycle, whichever is
longer.
b. Trading securities are debt investments that management intends to sell in
the near term. Trading securities are bought and sold frequently and typically are owned
for under 1 month. Trading securities are always classified as current assets on the
balance sheet.
c. Available-for-sale securities are debt investments that management intends to sell in the
future, but not necessarily in the near term. Therefore, investments in debt securities
that do not warrant inclusion as trading securities or held-to-maturity securities are
considered available-for-sale. On the balance sheet, available-for-sale securities are
classified as current or noncurrent assets depending on whether they will be sold within
1 year or one operating cycle, whichever is longer.
2. The amortized cost method is used for investments in debt securities that are to be held
to maturity. It is implemented by:
● Recording securities purchased at cost
● Carrying those investments on the balance sheet at cost adjusted for unamortized premium
or discount amortization during the holding period
● Recording receipt of interest income with appropriate amortization of premium/discount each
accounting period
● Removing cost from the accounting records when the securities are redeemed at
maturity
3. Investment income is recognized for: (1) the amortized cost method when interest is earned
each accounting period and when amortization of premium or discount is recorded, (2) the fair
value method when interest or dividends are received and when investments are sold, and (3) the
equity method when the investee earns income (or loss) and when investments are sold.
,4. The fair value method is used for investments in debt securities that are classified
as trading or available-for-sale. It is implemented by:
● Recording securities purchased at cost (fair value on the date of purchase)
● Adjusting the carrying amount of those investments to their fair (or market) value at
the end of each accounting period
● Recognizing the adjustment to the carrying amount (for unrealized gains or losses)
of these investments as a separate element of stockholders’ equity (available-for-sale
debt securities) or as income on the income statement (investments in debt
securities classified as trading)
● Recording interest or dividends as income as they are realized each accounting period
● Removing the investment carrying amount from the accounting records when the
securities are sold and recognizing a gain (or loss) measured by the difference
between the selling price and the cost of the investment
The fair value method is also used to account for equity securities. The accounting for equity
securities under the fair value method mirrors that of the accounting for debt securities classified
as trading securities.
5. Trading securities are debt investments that management intends to sell in the
near term. Trading securities are bought and sold frequently and typically are owned for
less than 1 month. Trading securities are always classified as current assets. On the
income statement, unrealized gains (losses) on trading securities are included on the income
statement as part of net income. Available-for-sale securities are debt investments that
management intends to sell in the future but not necessarily in the near term. On the balance
sheet, available-for-sale debt securities are classified as current or noncurrent assets
depending on whether they will be sold within 1 year or one operating cycle, whichever is
longer. Unrealized gains (losses) on available-for-sale securities are not included on the
income statement; instead, they are reported in accumulated other comprehensive
income, which is an element of stockholders’ equity.
6. The allowance to adjust short-term investments to market is the valuation account
containing unrealized gains and losses on the short-term investment portfolio. It is
adjusted at year end to the current amount of unrealized gain or loss and is reported on
the balance sheet to adjust the cost of the portfolio to its current market value. Use of this
allowance reveals the current cash-generating potential of the short-term investments;
reporting only their cost would deny this information to users of the financial statements.
7. The equity method is used to account for long-term investments in common stock,
which enables the investor to significantly influence the operations of another business.
When an investment represents an ownership of 20% or more, the investor
can usually influence the operations of the investee, and the equity method is used.
It is implemented by:
● Recording securities purchased at cost
● Recognizing as income the investor’s share of investee net income (or net loss)
● Adding the investor’s share of investee net income (or subtracting the investor’s
share of net loss) to the investment account
● Recording dividends received as a reduction in the investment account
● Removing the investment carrying amount from the accounting records when the
securities are sold and recognizing a gain (or loss) measured by the difference
between the selling price and the carrying amount
,8. Under the equity method, the investor recognizes its share of investee net income as the
income is earned by the investee. The investor records income when income is earned
by the investee and not when a dividend is declared and paid. Dividends are recorded as
a reduction in the Investment account. This prevents the investor’s income from being
manipulated by investor-stimulated changes (since they possess significant influence
over the investee through having greater than 20% stock ownership) in an investee’s
dividend policy. As explained in advanced accounting courses, the equity method also
prevents manipulation through intercorporate transactions, whose effects must be
eliminated.
9. A parent is an investor whose investment in the stock of another firm enables it to control
the other firm (the subsidiary). A subsidiary is a firm whose operations are controlled by
another entity through that entity’s investment in the subsidiary firm’s stock. Usually,
ownership of 50% or more of the outstanding voting stock is sufficient to give a
parent control over a subsidiary.
10. Noncontrolling interest is the portion of a subsidiary’s common stock that is not held by
the parent. This amount must be shown as a component of stockholders’ equity on the
consolidated balance sheet. It represents the equity interest of the noncontrolling
stockholders in the subsidiary’s assets and liabilities.
11. The consolidated balance sheet is essentially the same as the parent’s corporate balance
sheet except that the parent’s Investment in Subsidiary account is replaced with the
detailed assets and liabilities of the subsidiary. In addition, other differences may arise
from intercorporate transactions described in advanced accounting courses.
12. Because a parent and subsidiary are two separate legal entities, they often engage in
business transactions such as buying or selling inventory, borrowing funds, and so on. Further,
because they keep separate accounting records, these transactions produce, for example,
sales revenue, receivables, and payables in the financial statements. However, in
consolidation, the two separate legal entities are reported as a single accounting entity.
Because a single entity cannot sell to itself or owe money to itself, these intercompany
transactions must be eliminated in consolidation.
13. An asset acquisition is a business combination in which the assets and liabilities of
another company are acquired. A stock acquisition is a business combination in which
the common stock of another company is acquired with the parent’s own common stock.
14. Goodwill represents intangible assets that cannot be specifically identified or separated
from the business, such as a reputation for quality products. It is calculated by subtracting
the fair value of identifiable net assets received from the acquisition price.
, MULTIPLE-CHOICE QUESTIONS
A1-1. a
A1-2. a
A1-3. d
A1-4. d
A1-5. b
A1-6. d
A1-7. d
A1-8. b
A1-9. a
A1-10. a
A1-11. b
A1-12. c
A1-13. c
A1-14. b
A1-15. a
A1-16. d
EXERCISES
E A1-17
1. d
2. c
3. b
4. b
5. a
,E A1-18
1. Journal
Date Account and Explanation Debit Credit
Dec. 31 Investment in Equity Securities 14,000
Unrealized Gain (Loss) on Equity
Securities 14,000
* [($39.50 – $38.00) × 20,000 shares] + [($16.50 – $17.00) × 32,000 shares] = $14,000
2. For equity securities, the unrealized gain is included in the income statement.
It would increase earnings before income taxes by $14,000 and would thus flow
into retained earnings.
E A1-19
1. Journal
Date Account and Explanation Debit Credit
Dec. 31 Allowance to Adjust Available-for-Sale
Securities to Market* 2,000
Unrealized Gain (Loss) on Available-for-
Sale Securities 2,000
* [$520,000 – $500,000] + [$950,000 – $968,000] = $2,000
2. For available-for-sale securities, the unrealized gain is not included on the
income statement. Instead, it is included as part of “Accumulated Other
Comprehensive Income,” a separate account included in stockholders’ equity.
,E A1-20
Journal
Date Account and Explanation Debit Credit
Dec. 31 Allowance to Adjust Available-for-Sale
Securities to Market* 4,200
Unrealized Gain (Loss) on Available-for-
Sale Securities 4,200
* See the following T-account.
Allowance to Adjust Available-for-Sale Securities to Market
7,200 Beginning balance
Necessary adjustment to
achieve desired ending
balance 4,200
3,000 Desired ending balance
E A1-21
1. Journal
Date Account and Explanation Debit Credit
2025
Dec. 31 Allowance to Adjust Trading Securities
to Market* 5,100
Unrealized Gain (Loss) on Trading
Securities 5,100
2026
Dec. 31 Allowance to Adjust Trading Securities
to Market* 5,800
Unrealized Gain (Loss) on Trading
Securities 5,800
2027
Dec. 31 Unrealized Gain (Loss) on Trading
Securities 2,700
Allowance to Adjust Trading Securities
to Market* 2,700
* See T-account on next page.
,E A1-21 (Continued)
Allowance to Adjust Trading Securities to Market
8,500 12/31/2024 Balancea
Necessary adjustment to
achieve desired 12/31/2025
balance 5,100
3,400 12/31/2025 desired balanceb
Necessary adjustment to
achieve desired 12/31/2026
balance 5,800
12/31/2026 desired balancec 2,400
Necessary adjustment to
achieve desired 12/31/2027
2,700 balance
300 12/31/2027 desired balanced
a
$153,800 – $162,300 = –$8,500
b
$106,200 – $109,600 = –$3,400
c
$151,300 – $148,900 = $2,400
d
$138,700 – $139,000 = –$300
2. The 2027 income statement effect is a $2,700 loss resulting from the $2,700 debit
to unrealized gain (loss) on trading securities in the December 31, 2027 journal
entry.
3. The 2027 income statement effect is $0, because unrealized gains and losses on
available-for-sale securities do NOT go to the income statement. Instead, they are
part of “Accumulated Other Comprehensive Income.”
, E A1-22
1. Journal
Date Account and Explanation Debit Credit
Apr. 9 Investment in Equity Securities 14,600
Cash 14,600
June 30 Investment in Equity Securities 14,500
Cash 14,500
Aug. 30 Cash* 240
Dividend Income 240
Oct. 10 Cash** 900
Dividend Income 900
* 200 shares × $1.20 = $240
** 500 shares × $1.80 = $900
2. Market value of portfolio on December 31:
$15,000
200 Southwestern shares at $75 per share…………………………………………………………………
12,500
500 Montgomery shares at $25 per share……………………………………………………………………
$27,500
Portfolio market value……………………………………………………………………………...………
