Accounting 25th Edition Solution
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CHAPTER 15
INVESTMENTS AND FAIR VALUE ACCOUNTING
15-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, DISCUSSION QUESTIONS
1. A company may temporarily have excess cash that is not needed for use in its current
operations. Instead of letting excess cash remain idle in a checking account, most companies
invest their excess cash in temporary investments. The primary objective of investing in
temporary investments is to:
a. earn interest revenue.
b. receive dividends.
c. realize gains from increases in the market price of the securities.
2. A gain or loss can occur when the selling price of the bond differs from the book value (cost) of
the bond. The price of bond investments can change due to changes in the market rate of interest.
If the proceeds from the sale exceed the book value (cost) of the bonds, then a gain is recorded.
3. The equity method is used for equity investments representing more than 20% and less than 50%
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.
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 (subsidiary) are consolidated (combined)
with that of the investor (parent company).
6. Both portfolios are reported at fair value. However, changes in the fair value of trading securities
during a period are reported as an unrealized gain or loss on the income statement. For available-for-
sale securities, changes in the fair value of the securities are reported in stockholders’ equity and,
thus, are not recognized as part of net income.
7. A credit balance in Valuation Allowance for Available-for-Sale Investments is subtracted from
Available-for-Sale Investments (at cost). The net reported amount is the available-for-sale securities
at fair value.
8. A debit balance in Unrealized Gain (Loss) on Available-for-Sale Investments would be reported as a
reduction in the Stockholders’ Equity section of the balance sheet, after Retained Earnings.
9. Current GAAP requires fair value accounting for impaired assets. Current GAAP allows financial
assets and liabilities to be reported at fair value. The assets and liabilities reported at fair value are
becoming a more significant portion of many companies’ balance sheets. International Financial
Reporting Standards are also moving more aggressively toward fair value accounting. As a result
of the desire to converge U.S. and international standards, the United States is also moving
toward fair value reporting.
10. Fair values may not be readily obtainable for some assets or liabilities, which causes financial
statement valuations to become more subjective. In addition, comparability between financial
statements among different companies may be hampered by different methods of determining fair
value. Lastly, using fair value can result in greater fluctuations in reported results, making predictions
of future trends potentially more difficult.
15-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 15 Investments and Fair Value Accounting
PRACTICE EXERCISES
PE 15–1A
a. Investments—Tyler City Bonds 400,000
Interest Receivable 2,000
Cash 402,000
b. Cash* 12,000
Interest Receivable 2,000
Interest Revenue 10,000
* $400,000 × 6% × 1/2
c. Cash* 197,000
Loss on Sale of Investments 4,000
Interest Revenue 1,000
Investments—Tyler City Bonds 200,000
* Sales proceeds ($200,000 × 98%)…………………………$196,000
Accrued interest…………………………………………… 1,000
Total proceeds from sale……………………………………$197,000
PE 15–1B
a. Investments—Iceline Inc. Bonds 120,000
Interest Receivable 1,000
Cash 121,000
b. Cash* 3,000
Interest Receivable 1,000
Interest Revenue 2,000
* $120,000 × 5% × 1/2
c. Cash* 61,100
Interest Revenue 500
Gain on Sale of Investments 600
Investments—Iceline Inc. Bonds 60,000
* Sales proceeds ($60,000 × 101%)……………………… $60,600
Accrued interest…………………………………………… 500
Total proceeds from sale………………………………… $61,100
15-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 15 Investments and Fair Value Accounting
PE 15–2A
Mar. 20 Investments—Thorlite Company Stock* 300,250
Cash 300,250
*(10,000 shares × $30 per share) + $250
May 30 Cash* 2,500
Dividend Revenue 2,500
*$0.25 per share × 10,000 shares
June 15 Cash* 179,800
Gain on Sale of Investments 29,675
Investments—Thorlite Company Stock** 150,125
*(5,000 shares × $36) – $200
**5,000 shares × ($300,250 ÷ 10,000 shares)
PE 15–2B
Sept. 12 Investments—Aspen Company Stock* 100,200
Cash 100,200
*(2,000 shares × $50 per share) + $200
Oct. 15 Cash* 1,000
Dividend Revenue 1,000
*$0.50 per share × 2,000 shares
Nov. 10 Cash* 50,250
Loss on Sale of Investments 9,870
Investments—Aspen Company Stock** 60,120
*(1,200 shares × $42) – $150
**1,200 shares × ($100,200 ÷ 2,000 shares)
15-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
(Download complete and 100% accurate work written as per requirements)
Topic: _________________
Student Name: __________
Course Title: ____________
Instructor: ______________
Date of submission: _______
For any problem feel free to message me on “Stuvia”
Complete Answer (Next Page)
CHAPTER 15
INVESTMENTS AND FAIR VALUE ACCOUNTING
15-1
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, DISCUSSION QUESTIONS
1. A company may temporarily have excess cash that is not needed for use in its current
operations. Instead of letting excess cash remain idle in a checking account, most companies
invest their excess cash in temporary investments. The primary objective of investing in
temporary investments is to:
a. earn interest revenue.
b. receive dividends.
c. realize gains from increases in the market price of the securities.
2. A gain or loss can occur when the selling price of the bond differs from the book value (cost) of
the bond. The price of bond investments can change due to changes in the market rate of interest.
If the proceeds from the sale exceed the book value (cost) of the bonds, then a gain is recorded.
3. The equity method is used for equity investments representing more than 20% and less than 50%
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.
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 (subsidiary) are consolidated (combined)
with that of the investor (parent company).
6. Both portfolios are reported at fair value. However, changes in the fair value of trading securities
during a period are reported as an unrealized gain or loss on the income statement. For available-for-
sale securities, changes in the fair value of the securities are reported in stockholders’ equity and,
thus, are not recognized as part of net income.
7. A credit balance in Valuation Allowance for Available-for-Sale Investments is subtracted from
Available-for-Sale Investments (at cost). The net reported amount is the available-for-sale securities
at fair value.
8. A debit balance in Unrealized Gain (Loss) on Available-for-Sale Investments would be reported as a
reduction in the Stockholders’ Equity section of the balance sheet, after Retained Earnings.
9. Current GAAP requires fair value accounting for impaired assets. Current GAAP allows financial
assets and liabilities to be reported at fair value. The assets and liabilities reported at fair value are
becoming a more significant portion of many companies’ balance sheets. International Financial
Reporting Standards are also moving more aggressively toward fair value accounting. As a result
of the desire to converge U.S. and international standards, the United States is also moving
toward fair value reporting.
10. Fair values may not be readily obtainable for some assets or liabilities, which causes financial
statement valuations to become more subjective. In addition, comparability between financial
statements among different companies may be hampered by different methods of determining fair
value. Lastly, using fair value can result in greater fluctuations in reported results, making predictions
of future trends potentially more difficult.
15-2
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 15 Investments and Fair Value Accounting
PRACTICE EXERCISES
PE 15–1A
a. Investments—Tyler City Bonds 400,000
Interest Receivable 2,000
Cash 402,000
b. Cash* 12,000
Interest Receivable 2,000
Interest Revenue 10,000
* $400,000 × 6% × 1/2
c. Cash* 197,000
Loss on Sale of Investments 4,000
Interest Revenue 1,000
Investments—Tyler City Bonds 200,000
* Sales proceeds ($200,000 × 98%)…………………………$196,000
Accrued interest…………………………………………… 1,000
Total proceeds from sale……………………………………$197,000
PE 15–1B
a. Investments—Iceline Inc. Bonds 120,000
Interest Receivable 1,000
Cash 121,000
b. Cash* 3,000
Interest Receivable 1,000
Interest Revenue 2,000
* $120,000 × 5% × 1/2
c. Cash* 61,100
Interest Revenue 500
Gain on Sale of Investments 600
Investments—Iceline Inc. Bonds 60,000
* Sales proceeds ($60,000 × 101%)……………………… $60,600
Accrued interest…………………………………………… 500
Total proceeds from sale………………………………… $61,100
15-3
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, CHAPTER 15 Investments and Fair Value Accounting
PE 15–2A
Mar. 20 Investments—Thorlite Company Stock* 300,250
Cash 300,250
*(10,000 shares × $30 per share) + $250
May 30 Cash* 2,500
Dividend Revenue 2,500
*$0.25 per share × 10,000 shares
June 15 Cash* 179,800
Gain on Sale of Investments 29,675
Investments—Thorlite Company Stock** 150,125
*(5,000 shares × $36) – $200
**5,000 shares × ($300,250 ÷ 10,000 shares)
PE 15–2B
Sept. 12 Investments—Aspen Company Stock* 100,200
Cash 100,200
*(2,000 shares × $50 per share) + $200
Oct. 15 Cash* 1,000
Dividend Revenue 1,000
*$0.50 per share × 2,000 shares
Nov. 10 Cash* 50,250
Loss on Sale of Investments 9,870
Investments—Aspen Company Stock** 60,120
*(1,200 shares × $42) – $150
**1,200 shares × ($100,200 ÷ 2,000 shares)
15-4
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
