Appendix D - Investments
Appendix D
Investments
REVIEW QUESTIONS
Question D-1 (LO D-1)
A company might invest in another company to (1) receive dividends, earn interest, and gain
from the increase in the value of their investment, (2) temporarily invest excess cash created by
operating in seasonable industries, or (3) build strategic alliances, increase market share, or enter
new industries.
Question D-2 (LO D-1)
Companies can gain from the increase in the value of their investment. Even without receiving
dividends, investors still benefit when companies reinvest earnings, leading to even more profits in
the future and eventually higher stock prices. Many companies also make investments for strategic
purposes to develop closer business ties, increase market share, or expand into new industries.
Question D-3 (LO D-1)
Companies in seasonal industries often invest excess funds generated during the busy season and
draw on these funds in the slow season.
Question D-4 (LO D-1)
PepsiCo purchased Tropicana in order to diversify beyond soft drinks.
Question D-5 (LO D-1)
The flip side of an investment in equity securities is the issuance of stock.
Question D-6 (LO D-1)
The method depends on the level of influence. An insignificant level of influence results in the
use of the fair value method. A significant, but not controlling, level of influence results in the use of
the equity method. A controlling level of influence results in the use of the consolidation method.
Question D-7 (LO D-2)
The two categories are trading securities and available-for-sale securities.
Question D-8 (LO D-2)
Dividends received are accounted for as dividend revenue under the fair value method.
Question D-9 (LO D-2)
An unrealized holding gain is the gain in value while holding the investment, while a realized
gain is recognized in cash (or the right to receive cash) after the investment has been sold.
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-1
Appendix D - Investments
Answers to Review Questions (continued)
Question D-10 (LO D-2)
The way unrealized holding gains and losses are reported in the financial statements depends on
whether the investments are classified as “trading” or “available-for-sale.” Trading securities are
reported at fair value, and resulting holding gains and losses are included in the determination of net
income for the period.
Question D-11 (LO D-2)
The way unrealized holding gains and losses are reported in the financial statements depends on
whether the investments are classified as “trading” or “available-for-sale.” Available-for-sale
securities are reported at fair value, and resulting holding gains and losses are not included in the
determination of net income for the period. Rather, they are reported as part of other comprehensive
income.
Question D-12 (LO D-3)
The equity method is used when an investor
control
investee. For example, if effective control is absent, the investor still might be able to exercise
significant influence over the operating and financial policies of the investee if the investor owns a
large percentage of the outstanding shares relative to other shareholders. By voting those shares as a
block, the investor often can sway decisions in the direction desired. We presume, in the absence of
evidence to the contrary, that the investor exercises significant influence over the investee when it
owns between 20% and 50% of the investee s voting shares.
Question D-13 (LO D-3)
The investor should account for dividends from the investee as a reduction in the investment
account. Since investment revenue is recognized as the investee earns it, it would be inappropriate to
recognize revenue again when earnings are distributed as dividends.
Question D-14 (LO D-4)
These statements combine the parent’s and subsidiary’s operating activities as if the two
companies were a single reporting company, even though both companies continue to operate as
separate legal entities.
Question D-15 (LO D-4)
It is appropriate to consolidate financial statements of two companies when the parent company
owns a controlling interest (more than 50%) in the voting stock of the subsidiary.
Question D-16 (LO D-5)
The flip side of an investment in debt securities is the issuance of debt, such as bonds.
Question D-17 (LO D-5)
If bonds are purchased at a discount, the carrying value of the investment in bonds and the
amount recorded for interest revenue will increase over time. Recall that interest revenue is
calculated as the carrying value of the bond times the market interest rate. As carrying value
increases, interest revenue also increases.
© The McGraw-Hill Companies, Inc., 2014
D-2
Financial Accounting, 3e
Appendix D - Investments
Answers to Review Questions (continued)
Question D-18 (LO D-5)
If bonds are purchased at a premium, the carrying value of the investment in bonds and the
amount recorded for interest revenue will decrease over time. Recall that interest revenue is
calculated as the carrying value of the bond times the market interest rate. As carrying value
decreases, interest revenue also decreases.
Question D-19 (LO D-5)
When interest rates go down, the value of a bond with fixed interest payments goes up because
the fixed interest payments are now more attractive to investors.
Question D-20 (LO D-5)
Investments in debt securities are classified as “held-to-maturity,” “trading,” or “available-forsale” securities. Held-to-maturity securities are debt securities that the company expects to hold until
they mature, which means until they become payable. Trading securities are securities that the
investor expects to sell in the near future. These investments are adjusted to fair value with the
unrealized gain or loss included in net income. Available-for-sale securities are investments that do
not fit the other two categories; they are not expected to be sold in the near future, yet they are not
expected to be held to maturity either. These investments are adjusted to fair value with the
unrealized gain or loss included in comprehensive income.
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-3
Appendix D - Investments
BRIEF EXERCISES
Brief Exercise D-1 (LO D-1)
X
1. To invest excess cash created by operating in seasonal industries.
2. To increase employees’ morale.
X
3. To build strategic alliances.
4. To reduce government regulation.
X
5. To receive interest and dividends.
Brief Exercise D-2 (LO D-2)
September 1
Investments (150 shares × $13)
Cash
(Purchase common stock)
November 1
Cash (150 shares × $17)
Investments (150 shares × $13)
Gain (difference)
(Sell investments above recorded amount)
© The McGraw-Hill Companies, Inc., 2014
D-4
Debit
1,950
Credit
1,950
2,550
1,950
600
Financial Accounting, 3e
Appendix D - Investments
Brief Exercise D-3 (LO D-2)
December 28
Investments
Cash
(Purchase common stock)
December 31
Unrealized Holding Loss—Net Income
Investments
(Adjust investments to fair value)
Debit
485,000
Credit
485,000
2,000
2,000
Brief Exercise D-4 (LO D-2)
December 28
Investments
Cash
(Purchase common stock)
Debit
485,000
Credit
485,000
December 31
Unrealized Holding Loss—Other Comprehensive Income
Investments
(Adjust investments to fair value)
Solutions Manual, Appendix D
2,000
2,000
© The McGraw-Hill Companies, Inc., 2014
D-5
Appendix D - Investments
Brief Exercise D-5 (LO D-2)
These are trading securities and are reported at their fair value, $20,000. We know
this because actively traded investments in debt or equity securities acquired
principally for the purpose of selling them in the near term are classified as “trading
securities.” Of course, the equity method isn’t appropriate because 1,000 shares of
GE certainly don’t constitute “significant influence.” Investments in trading
securities are reported at fair value.
Brief Exercise D-6 (LO D-2)
These are available-for-sale securities and are reported at their fair value,
$20,000. Actively traded investments in debt or equity securities acquired principally
for the purpose of selling them in the near term are classified as “trading securities.”
The GE shares have been held for over a year. They are classified as “available-forsale” since all investments in debt and equity securities that don’t fit the definitions
of the other reporting categories are classified this way. Of course, the equity
method isn’t appropriate either because 1,000 shares of GE certainly don’t constitute
“significant influence.” Investments in available-for-sale securities are reported at
fair value.
Brief Exercise D-7 (LO D-3)
An investor should account for net income from an equity method investee as an
increase in its investments account and an increase in equity income. Therefore,
Strong String’s reported net income of $20 million will increase investments and
equity income for Wendy Day Kite Company by $8 million (= $20 million × 40%).
Brief Exercise D-8 (LO D-3)
An investor should account for dividends from an equity method investee as a
reduction in its investment account. Since investment revenue is recognized as the
investee earns it, it would be inappropriate to recognize revenue again when earnings
are distributed as dividends. Instead, the dividend distribution is considered to be a
reduction of the investee’s net assets, reflecting the fact that the investor’s ownership
interest in those net assets declined proportionately. Wendy Day’s cash increased by
$4 million (= $10 million × 40%). Its investment account declined by the same
amount. There is no effect on the income statement.
© The McGraw-Hill Companies, Inc., 2014
D-6
Financial Accounting, 3e
Appendix D - Investments
Brief Exercise D-9 (LO D-4)
Wendy Day would report total inventory of $22,000 in the consolidated financial
statements. Since Wendy Day owns all of the outstanding stock in Strong String
Company, Wendy Day will combine their total inventory of $14,000 with Strong
String’s total inventory of $8,000 in Wendy Day’s consolidated financial statements.
Brief Exercise D-10 (LO D-5)
1.
January 1
Investments
Cash
(Purchase bonds)
2.
June 30
Cash
Interest Revenue
(Receive semiannual interest revenue)
($1,400 = $40,000 × 7% × ½)
Solutions Manual, Appendix D
Debit
Credit
40,000
40,000
1,400
1,400
© The McGraw-Hill Companies, Inc., 2014
D-7
Appendix D - Investments
Brief Exercise D-11(LO D-5)
1.
January 1
Investments
Cash
(Purchase bonds)
2.
June 30
Cash ($40,000 × 7% × ½)
Investments (difference)
Interest Revenue ($37,282 × 8% × ½)
(Receive semiannual interest revenue)
Debit
Credit
37,282
37,282
1,400
91
1,491
Brief Exercise D-12 (LO D-5)
1.
January 1
Investments
Cash
(Purchase bonds)
2.
June 30
Cash ($40,000 × 7% × ½)
Investments (difference)
Interest Revenue ($42,975 × 6% × ½)
(Receive semiannual interest revenue)
© The McGraw-Hill Companies, Inc., 2014
D-8
Debit
Credit
42,975
42,975
1,400
111
1,289
Financial Accounting, 3e
Appendix D - Investments
EXERCISES
Exercise D-1 (LO D-1)
__T__ 1. A reason companies invest in other companies is to build strategic alliances.
__F__ 2. All companies are required to pay dividends to their investors.
__F__ 3. When market interest rates increase, the market value of a bonds increases
as well.
__T__ 4. One way for a company to expand operations into a new industry is to
acquire the majority of another company’s common stock that already
operates in that industry.
__T__ 5. Stocks typically have greater upside potential, providing a higher average
return to their investors over the long-run than do bonds.
__F__ 6. Companies purchase debt securities primarily for the dividend revenue they
provide.
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-9
Appendix D - Investments
Exercise D-2 (LO D-2)
Requirement 1
December 20
Investments
Cash
(Purchase common stock)
December 28
Cash
Dividend Revenue
(Receive cash dividends)
December 31
Unrealized Holding Loss—Net Income
Investments (300,000 shares × $0.20 per share)
(Adjust investments to fair value)
Debit
1,500,000
Credit
1,500,000
6,000
6,000
60,000
60,000
Note: The investments decreased in value $0.20 per share from $5.00 per
share ($1,500,000/300,000 shares) to $4.80 per share. Unlike for securities
available-for-sale, unrealized holding gains and losses for trading securities
are included in net income.
Requirement 2
Balance of the investments account on December 31: $1,500,000 − 60,000 =
$1,440,000.
© The McGraw-Hill Companies, Inc., 2014
D-10
Financial Accounting, 3e
Appendix D - Investments
Exercise D-3 (LO D-2)
Requirement 1
February 1
Investments
Cash
(Purchase common stock)
June 15
Cash (50 shares × $14)
Loss (difference)
Investments (50 shares × $16)
(Sell investments below recorded amount)
October 31
Cash (100 shares × $0.50 per share)
Dividend Revenue
(Receive cash dividends)
Debit
2,400
Credit
2,400
700
100
800
50
50
December 31
Unrealized Holding Loss Other Comprehensive Income
Investments (100 shares × [$16 $12])
(Adjust investments to fair value)
400
400
Requirement 2
The balance of the investment account on December 31 is $1,200, equal to the 100
remaining shares times $12 per share fair value. The balance of the investment
account can be verified by posting all journal entries to a t-account.
Investments
2,400
800
400
1,200
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-11
Appendix D - Investments
Exercise D-4 (LO D-2)
Requirement 1
March 1
Investments (3,000 shares × $62)
Cash
(Purchase common stock)
July 1
Cash ($1.25 × 3,000 shares)
Dividend Revenue
(Receive cash dividends)
October 1
Cash (750 shares × $70)
Investments (750 shares × $62)
Gain (difference)
(Sell investments above recorded amount)
Debit
186,000
Credit
186,000
3,750
3,750
52,500
46,500
6,000
December 31
Investments (2,250 shares × $13)
29,250
Unrealized Holding Gain Other Comprehensive Income
(Adjust investments to fair value)
29,250
Requirement 2
The balance of the investment account on December 31 is $168,750, equal to the
2,250 remaining shares times $75 per share fair value. The balance of the
investment account can be verified by posting all journal entries to a t-account.
Investments
186,000
46,500
29,250
168,750
© The McGraw-Hill Companies, Inc., 2014
D-12
Financial Accounting, 3e
Appendix D - Investments
Exercise D-5 (LO D-2)
Requirement 1
Comprehensive income is an expansion of the familiar net income. Most
revenues, expenses, gains, and losses are included in net income. A few less
traditional gains and losses, though, are reported outside the income statement in the
more inclusive statement of comprehensive income in which we report all changes in
stockholders’ equity other than those caused by investments by stockholders and
payment of dividends. Comprehensive income includes net income as well as other
comprehensive income. The most frequent items in other comprehensive income are
the unrealized holding gains and losses on investments.
Requirement 2
Sales Revenue
Operating expenses
Gain on sale of investments
Net income
Other comprehensive income:
Unrealized holding loss
Comprehensive income
Solutions Manual, Appendix D
$ 260,000
(140,000)
13,000
133,000
(17,000)
$ 116,000
© The McGraw-Hill Companies, Inc., 2014
D-13
Appendix D - Investments
Exercise D-6 (LO D-3)
January 1
Investments
Cash
(Purchase common stock)
December 31
Investments
Equity Income
(Earn equity income)
($40,000 = $160,000 × 25%)
December 31
Cash
Investments
(Receive cash dividends)
($15,000 = $60,000 × 25%)
© The McGraw-Hill Companies, Inc., 2014
D-14
Debit
700,000
Credit
700,000
40,000
40,000
15,000
15,000
Financial Accounting, 3e
Appendix D - Investments
Exercise D-7 (LO D-3)
January 1
Investments
Cash
(Purchase common stock)
December 31
Investments
Equity Income
(Earn equity income)
($45,500 = $130,000 × 35%)
December 31
Cash
Investments
(Receive cash dividends)
($14,000 = $40,000 × 35%)
Debit
600,000
Credit
600,000
45,500
45,500
14,000
14,000
Under the equity method, no adjustment is made to fair value.
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-15
Appendix D - Investments
Exercise D-8 (LO D-2, D-3)
Requirement 1
Purchase:
Investments
Cash
(Purchase common stock)
Debit
360,000
Credit
360,000
Net income:
Dividends:
Cash
Dividend Revenue
(Receive cash dividends)
($15,000 = $0.25 × 300,000 shares × 20%)
Fair value adjustment:
Investments
Unrealized Holding Gain Other Comprehensive
Income
(Adjust investments to fair value)
($15,000 = $375,000 $360,000)
© The McGraw-Hill Companies, Inc., 2014
D-16
15,000
15,000
15,000
15,000
Financial Accounting, 3e
Appendix D - Investments
Exercise D-8 (concluded)
Requirement 2
Purchase:
Investments
Cash
(Purchase common stock)
Debit
360,000
Net income:
Investments
Equity Income
(Earn equity income)
($27,000 = $135,000 × 20%)
Credit
360,000
27,000
27,000
Dividends:
Cash
15,000
Investments
(Receive cash dividends)
($15,000 = $0.25 × 300,000 shares × 20%)
15,000
Fair value adjustment:
No adjustment is made under the equity method
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-17
Appendix D - Investments
Exercise D-9 (LO D-4)
X
X
1. 10% of the common stock of Beta.
2. 40% of the bonds of Gamma.
3. 75% of the common stock of Delta.
4. 15% of the bonds of Epsilon.
5. 25% of the common stock of Zeta.
6. 60% of the bonds of Eta.
7. 100% of the common stock of Theta.
© The McGraw-Hill Companies, Inc., 2014
D-18
Financial Accounting, 3e
Appendix D - Investments
Exercise D-10 (LO D-5)
Requirement 1
(1)
Date
(2)
(3)
Cash
Received
Face Amount
× Stated Rate
Interest
Revenue
Carrying Value
× Market Rate
$ 6,125
6,125
$ 6,395
6,406
1/ 1
6/30
12/31
Requirement 2
January 1
Investments
Cash
(Purchase bonds)
June 30
Cash ($175,000 × 7% × ½)
Investments (difference)
Interest Revenue ($159,869 × 8% ×
½)
(Receive semiannual interest revenue)
December 31
Cash ($175,000 × 7% × ½)
Investments (difference)
Interest Revenue ($160,139 × 8% ×
½)
(Receive semiannual interest revenue)
Solutions Manual, Appendix D
(4)
Increase in
Carrying
Value
(3)
(2)
$ 270
281
(5)
Carrying
Value
Prior Carrying
Value + (4)
$159,869
160,139
160,420
159,869
159,869
6,125
270
6,395
6,125
281
6,395
© The McGraw-Hill Companies, Inc., 2014
D-19
Appendix D - Investments
Exercise D-11 (LO D-5)
Requirement 1
(1)
Date
1/ 1
6/30
12/31
(2)
(3)
Cash
Received
Face Amount
× Stated Rate
Interest
Revenue
Carrying Value
× Market Rate
$ 17,500
17,500
$ 16,470
16,439
Requirement 2
January 1
Investments
Cash
(Purchase bonds)
June 30
Cash ($500,000 × 7% × ½)
Investments (difference)
Interest Revenue ($549,001 × 6% × ½)
(Receive semiannual interest revenue)
December 31
Cash ($500,000 × 7% × ½)
Investments (difference)
Interest Revenue ($547,971 × 6% × ½)
(Receive semiannual interest revenue)
© The McGraw-Hill Companies, Inc., 2014
D-20
(4)
Decrease in
Carrying
Value
(2)
(3)
$ 1,030
1,061
(5)
Carrying
Value
Prior Carrying
Value (4)
$ 549,001
547,971
546,910
549,001
549,001
17,500
1,030
16,470
17,500
1,061
16,439
Financial Accounting, 3e
Appendix D - Investments
PROBLEMS: SET A
Problem D-1A (LO D-2)
Requirement 1
January 2
Investments
Cash
(Purchase common stock)
February 14
Investments
Cash
(Purchase preferred stock)
May 15
Cash (300 shares × $62)
Loss (difference)
Investments (300 shares × $70)
(Sell investments below recorded amount)
December 30
Cash
Dividend Revenue
(Receive cash dividends)
(1,200 shares × $0.50) + (600 shares × $0.50)
Solutions Manual, Appendix D
Debit
105,000
Credit
105,000
7,200
7,200
18,600
2,400
21,000
900
900
© The McGraw-Hill Companies, Inc., 2014
D-21
Appendix D - Investments
Problem D-1A (concluded)
Requirement 1 (concluded)
December 31
Investments
3,600
Unrealized Holding Gain Other Comprehensive
Income
(Adjust investments in common stock to fair value)
($3,600 = 1,200 shares × $3)
December 31
Investments
1,200
Unrealized Holding Gain Other Comprehensive
Income
(Adjust investments in preferred stock to fair value)
($1,200 = 600 shares × $2)
3,600
1,200
Requirement 2
The balance of the Investments account on December 31 is $96,000, equal to the
1,200 remaining common shares times $73 per share fair value plus the 600
preferred shares times $14 per share fair value.
© The McGraw-Hill Companies, Inc., 2014
D-22
Financial Accounting, 3e
Appendix D - Investments
Problem D-2A (LO D-3)
($ in millions)
Purchase:
Investments
Cash
(Purchase common stock)
Net income:
Investments
Equity Income
(Earn equity income)
($32.50 = $130 × 25%)
Dividends:
Cash
Investments
(Receive cash dividends)
($9.35 = $1.10 × 34 million shares × 25%)
Solutions Manual, Appendix D
Debit
178
Credit
178
32.50
32.50
9.35
9.35
© The McGraw-Hill Companies, Inc., 2014
D-23
Appendix D - Investments
Problem D-3A (LO D-5)
Requirement 1
(1)
Date
1/ 1
6/30
12/31
(2)
(3)
Cash
Received
Face Amount
× Stated Rate
Interest
Revenue
Carrying Value
× Market Rate
$ 4,500
4,500
$ 4,689
4,696
Requirement 2
January 1
Investments
Cash
(Purchase bonds)
(4)
Increase in
Carrying
Value
(3)
$ 189
196
Carrying
Value
Prior Carrying
Value + (4)
$ 133,984
134,173
134,369
133,984
June 30
Cash ($150,000 × 6% × ½)
4,500
Investments (difference)
189
Interest Revenue ($133,984 × 7% × ½)
(Receive semiannual interest revenue)
December 31
Cash ($150,000 × 6% × ½)
4,500
Investments (difference)
196
Interest Revenue ($134,173 × 7% × ½)
(Receive semiannual interest revenue)
© The McGraw-Hill Companies, Inc., 2014
D-24
(2)
(5)
133,984
4,689
4,696
Financial Accounting, 3e
Appendix D - Investments
Requirement 3
December 31
Cash
Gain (difference)
Investments
(Sell bonds before maturity)
145,000
10,631
134,369
Requirement 4
Bond prices move in the opposite direction of market interest rates. Since bond prices
went up between the beginning and end of the year, market interest rates must have
decreased.
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-25
Appendix D - Investments
Problem D-4A (LO D-5)
Requirement 1
Investments ........................................................
Cash ................................................................
(Purchase bonds)
Requirement 2
Cash ($180,000 × 8% × ½) ...............................
Investments ........................................................
Interest revenue ($152,000 × 10% × ½) ......
(Receive semiannual interest revenue)
Requirement 3
Cash ($180,000 × 8% × ½) ...............................
Investment..........................................................
Interest revenue ([$152,000 + 400] × 10% × ½)
(Receive semiannual interest revenue)
152,000
152,000
7,200
400
7,600
7,200
420
7,620
Requirement 4
Since these are held-to-maturity securities, Justin Investor reports its
investment in the December 31, balance sheet at its amortized cost – that is, its
book value:
Investments: $152,000 + 400 + 420 = $152,820
Increases and decreases in the fair value between the time a debt security is
acquired and the day it matures are relatively unimportant if sale before
maturity isn’t an alternative. For this reason, if an investor has the intent to
hold the securities to maturity, investments in debt securities are classified as
“held-to-maturity” and reported at amortized cost rather than fair value in the
balance sheet.
© The McGraw-Hill Companies, Inc., 2014
D-26
Financial Accounting, 3e
Appendix D - Investments
PROBLEMS: SET B
Problem D-1B (LO D-2)
Requirement 1
February 2
Investments
Cash
(Purchase common stock)
February 4
Investments
Cash
(Purchase preferred stock)
July 15
Cash (400 shares ×$40)
Investments (400 shares × $35)
Gain (difference)
(Sell investments above recorded amount)
November 30
Cash
Dividend Revenue
(Receive cash dividends)
(1,100 shares × $1.10) + (600 shares × $1.80)
Solutions Manual, Appendix D
Debit
52,500
Credit
52,500
19,200
19,200
16,000
14,000
2,000
2,290
2,290
© The McGraw-Hill Companies, Inc., 2014
D-27
Appendix D - Investments
Problem D-1B (concluded)
Requirement 1 (concluded)
December 31
Unrealized Holding Loss Other Comprehensive Income
Investments
4,400
4,400
(Adjust investments in common stock to fair value)
($4,400 = 1,100 shares × $4 decrease per share)
December 31
Unrealized Holding Loss Other Comprehensive Income
Investments
(Adjust investments in preferred stock to fair value)
($1,200 = 600 shares × $2 decrease per share)
1,200
1,200
Requirement 2
The balance of the Investments account on December 31 is $52,100, equal to the
1,100 remaining common shares times $31 per share fair value plus the 600
preferred shares times $30 per share fair value.
© The McGraw-Hill Companies, Inc., 2014
D-28
Financial Accounting, 3e
Appendix D - Investments
Problem D-2B (LO D-3)
($ in millions)
Purchase:
Investments
Cash
(Purchase common stock)
Net income:
Investments
Equity Income
(Earn equity income)
($2.7 = $9 × 30%)
Dividends:
Cash
Investments
(Receive cash dividends)
($1.5 = $0.50 × 10 million shares × 30%)
Solutions Manual, Appendix D
Debit
52
Credit
52
2.7
2.7
1.5
1.5
© The McGraw-Hill Companies, Inc., 2014
D-29
Appendix D - Investments
Problem D-3B (LO D-5)
Requirement 1
(1)
Date
1/1
6/30
12/31
(2)
(3)
Cash
Received
Face Amount
× Stated Rate
Interest
Revenue
Carrying Value
× Market Rate
$ 15,750
15,750
$ 16,777
16,818
Requirement 2
January 1
Investments
Cash
(Purchase bonds)
June 30
Cash ($450,000 × 7% × ½)
Investments (difference)
Interest Revenue ($419,422 × 8% × ½)
(Receive semiannual interest revenue)
December 31
Cash ($450,000 × 7% × ½)
Investments (difference)
Interest Revenue ($420,449 × 8% × ½)
(Receive semiannual interest revenue)
© The McGraw-Hill Companies, Inc., 2014
D-30
(4)
Increase in
Carrying
Value
(3)
(2)
$ 1,027
1,068
(5)
Carrying
Value
Prior Carrying
Value + (4)
$ 419,422
420,449
421,517
419,422
419,422
15,750
1,027
16,777
15,750
1,068
16,818
Financial Accounting, 3e
Appendix D - Investments
Requirement 3
December 31
Cash
Loss (difference)
Investments
(Sell bonds before maturity)
415,000
6,517
421,517
Requirement 4
Bond prices move in the opposite direction of market interest rates. Since bond
prices went down between the beginning and end of the year, market interest rates
must have increased.
Solutions Manual, Appendix D
© The McGraw-Hill Companies, Inc., 2014
D-31
Appendix D - Investments
Problem D-4B (LO D-5)
Requirement 1
Investments ........................................................
Cash ................................................................
(Purchase bonds)
Requirement 2
Cash ($130,000 × 7% × ½) ...............................
Investments ........................................................
Interest revenue ($124,728 × 8% × ½) ........
(Receive semiannual interest revenue)
Requirement 3
Cash ($130,000 × 7% × ½) ...............................
Investments ........................................................
Interest revenue ([$124,728 + 439] × 8% × ½)
(Receive semiannual interest revenue)
124,728
124,728
4,550
439
4,989
4,550
457
5,007
Requirement 4
Since these are held-to-maturity securities, Tsunami Sushi reports its
investment in the December 31, balance sheet at its amortized cost – that is, its
book value:
Investments: $124,728 + 439 + 457 = $125,624
Increases and decreases in the fair value between the time a debt security is
acquired and the day it matures are relatively unimportant if sale before
maturity isn’t an alternative. For this reason, if an investor has the intent to
hold the securities to maturity, investments in debt securities are classified as
“held-to-maturity” and reported at amortized cost rather than fair value in the
balance sheet.
© The McGraw-Hill Companies, Inc., 2014
D-32
Financial Accounting, 3e