Chapter 12
INVESTMENTS
Questions for Review of Key Topics
Question 12–1
Debt investments are classified as “held-to-maturity,” “trading,” or “available-forsale” securities.
Question 12–2
Increases and decreases in the market value between the time a debt security is
acquired and the day it matures to a prearranged maturity value are ignored for a
security classified as “held-to-maturity.” These changes aren’t important if sale
before maturity isn’t an alternative, which is the case if an investor has the “positive
intent and ability” to hold the security to maturity.
Question 12–3
GAAP distinguishes between three levels of inputs to fair value determination,
with level 1 being readily observable fair values (for example, from a securities
exchange), level-2 inputs are other observable amounts (for example, quoted values
for similar items, or important inputs like interest rates), and level-3 inputs are
unobservable, like the company’s own assumptions. GAAP requires disclosure of the
amount of fair values based on each of these three classes of inputs.
Question 12–4
For debt investments to be held for an unspecified period of time, fair value
information is more relevant than for investments to be held to maturity. Changes in
fair values are less relevant if the investment is to be held to maturity because sale at
that fair value is not an option. The investor receives the same contracted interest
payments for the period held to maturity and the stated principal at maturity,
regardless of movements in market values. However, when the investment is of
unspecified length, changes in fair values indicate management’s success in deciding
when to acquire the investment and when to sell it, as well as the propriety of
investing in fixed-rate or variable-rate securities and long-term or short-term
securities.
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Answers to Questions (continued)
Question 12–5
The way unrealized holding gains and losses are reported in the financial
statements depends on whether the debt investments are classified as “securities
available-for-sale” or as “trading securities.” Securities available-for-sale are
reported at fair value, and resulting holding gains and losses are not included in the
determination of income for the period. Rather, they are reported as a separate
component of shareholders’ equity, as part of other comprehensive income (OCI).
(Available-for-sale securities for which the investor has chosen the fair value option
are treated like trading securities.)
Question 12–6
Comprehensive income is a more expansive view of the change in shareholders’
equity than traditional net income. It encompasses all changes in equity from nonowner transactions. The part of comprehensive income other than net income is called
“other comprehensive income.” Other comprehensive income includes net unrealized
holding gains (losses) on AFS investments.
Question 12–7
Unrealized holding gains or losses on trading securities are reported in the income
statement as if they actually had been realized. Trading securities are actively
managed in a trading account with the express intent of profiting from short-term
market price changes. So, any gains and losses that result from holding securities
during market price changes are suitable measures of success or lack of success in
achieving that goal.
On the other hand, unrealized holding gains or losses on securities available-forsale are not reported in the income statement. By definition, these securities are not
acquired for the purpose of profiting from short-term market price changes, so gains
and losses from holding these securities while prices change are less relevant
performance measures to be included in earnings.
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Answers to Questions (continued)
Question 12–8
When acquired, debt securities are assigned to one of the three reporting
classifications: held-to-maturity, trading, or available-for-sale. The appropriateness of
the classification is reassessed at each reporting date. A reclassification should be
accounted for as though the security had been sold and immediately reacquired at its
fair value. Any unrealized holding gain or loss should be accounted for in a manner
consistent with the classification into which the security is being transferred.
Specifically, when a security is transferred:
1. Into the trading category, any unrealized holding gain or loss should be
recognized in earnings of the reclassification period.
2. Into the available-for-sale category, any unrealized holding gain or loss should
be recorded in other comprehensive income, which will then increase
accumulated other comprehensive income in shareholders’ equity.
3. Into the held-to-maturity category, any unrealized holding gain or loss should be
amortized over the remaining time to maturity.
In the case of Western Die-Casting’s investment in the LGB Heating Equipment
bonds, the investment is being transferred to the held to maturity category, so any
unrealized holding gain or loss should be amortized over the remaining time to
maturity.
Question 12–9
Yes. Although a company is not required to report individual amounts for the
three categories of investments—held-to-maturity, available-for-sale, or trading—on
the face of the balance sheet, that information should be presented in the disclosure
notes. The following also should be disclosed for each year presented: aggregate fair
value, gross realized and unrealized holding gains, gross realized and unrealized
holding losses, the change in net unrealized holding gains and losses, and amortized
cost basis by major security type. Information about the level of the fair value
hierarchy upon which fair values are based should be provided, and more disclosure is
necessary with respect to amounts based on level 3 of the fair value hierarchy.
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Answers to Questions (continued)
Question 12–10
Under IFRS No. 9, investments in debt securities are classified either as amortized
cost (accounted for like HTM investments in U.S. GAAP), fair value through other
comprehensive income (“FVOCI”, accounted for like AFS investments) and fair value
through profit or loss (“FVPL”, accounted for like trading securities).
Question 12–11
Under IFRS No. 9, investments in equity securities are classified as either fair
value through profit and loss (“FVPL”, accounted for like trading securities) or fair
value through other comprehensive income (“FVOCI”, accounted for like AFS
investments). If the equity investment is held for trading, it must be classified as
FVPL, but otherwise the company can irrevocably elect to classify it as FVOCI.
Question 12–12
When a company elects the fair value option for held-to-maturity or available-forsale investments, it accounts for the investment the same way it would account for a
trading security. Specifically, it shows the investment at fair value in the balance
sheet and includes unrealized gains and losses in net income.
Question 12–13
U.S. GAAP allows companies complete discretion in electing the fair value option
when an investment is made. The only constraint is that the election is irrevocable.
IFRS allows companies to elect the fair value option only in specific circumstances,
for example, when electing the fair value option for an asset or liability allows a
company to avoid the “accounting mismatch” that occurs when some parts of a fair
value risk-hedging arrangement are accounted for at fair value and others are not.
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Answers to Questions (continued)
Question 12–14
The equity method is used when an investor can’t control but can “significantly
influence” the 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 12–15
The equity method, like consolidation, views the investor and investee as a special
type of single entity. By the equity method, though, the investor doesn’t include
separate financial statement items of the investee on an item-by-item basis as in
consolidation. Rather, by the equity method, the investor reports its equity interest in
the investee as a single investment account. That single investment account is
periodically adjusted to reflect the effects of consolidation, without actually
consolidating financial statements.
Question 12–16
The investor should account for dividends from the investee as a reduction in the
investment account. Since investment revenue is recognized when net income is
recognized by the investee, it would be inappropriate to again recognize revenue when
that income is distributed as dividends. Rather, the dividend distribution is considered
to be a reduction of the investee’s net assets, indicating that the investor’s ownership
interest in those net assets declines proportionately.
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Answers to Questions (continued)
Question 12–17
The equity method attempts to approximate the effects of accounting for the
purchase of the investee as a consolidation. Consolidated financial statements report
acquired identifiable net assets at their fair values as of the date the investor acquired
the investee. The accounting in the consolidated financial statements subsequent to
the acquisition date is based on those fair values. So, if Finest had consolidated its
acquisition of Penner, Penner’s depreciable assets would have been put on Finest’s
balance sheet in their respective asset accounts at their fair value on the date of
acquisition and then depreciated over 10 years. Under the equity method, Finest’s
investment in Penner is shown in a single investment account. Therefore, for the
equity method to approximate consolidation, it would reduce both investment revenue
(as if depreciation expense were being recognized) and the investment (as if the book
value of the asset were being reduced) by the negative income effect of the “extra
depreciation” the higher fair value would cause. This would equal 40% × $12 million
÷ 10 years = $480,000 each year for 10 years.
Question 12–18
The investment account was decreased by $40,000 (40% × $100,000).
increased by the same amount. There is no effect in the income statement.
Cash
Question 12–19
When it becomes necessary to change from the equity method to another method,
no adjustment is made to the carrying amount of the investment. The equity method
is simply discontinued and the new method is applied from then on. The investment
account balance when the equity method is discontinued would serve as the new cost
basis for writing the investment up or down to fair value in the next set of financial
statements.
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Answers to Questions (continued)
Question 12–20
IFRS require that accounting policies of investees be adjusted to correspond to
those of the investor when applying the equity method. U.S. GAAP has no such
requirement. Also, IFRS does not provide the fair value option for most investments
that qualify for the equity method. U.S. GAAP provides the fair value option for all
investments that qualify for the equity method.
Question 12–21
When a company elects the fair value option for a significant-influence investment,
the company carries the investment at fair value in the balance sheet and includes
unrealized gains and losses in earnings in the period in which they occur. The
investment is shown on its own line in the balance sheet as a significant-influence
investment, or is combined with equity method investments with the amount at fair
value shown parenthetically.
Question 12–22
A financial instrument is defined as one of the following: (1) cash, (2) evidence
of an ownership interest in an entity, (3) a contract that (a) imposes on one entity an
obligation to deliver cash or another financial instrument and (b) conveys to a second
entity a right to receive cash or another financial instrument, or (4) a contract that (a)
imposes on one entity an obligation to exchange financial instruments on potentially
unfavorable terms and (b) conveys to a second entity a right to exchange other
financial instruments on potentially favorable terms. Accounts payable, bank loans,
and investments in securities are examples.
Question 12–23
These instruments “derive” their values or contractually required cash flows from
some other security or index.
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Answers to Questions (continued)
Question 12–24
Since this money won’t be used within the upcoming operating cycle, it is a
noncurrent asset. It should be reported as part of investments.
Question 12–25
For a whole life insurance policy, part of each premium payment the company
makes is not used by the insurance company to pay for life insurance coverage, but
rather is invested on behalf of the insured company in a fixed-income investment.
This investment can be exchanged for a determinable amount of money while the
insured person is still alive. A company accounts for the cash surrender value by
increasing it each year for a portion of the premium paid, and reporting the balance of
the account in the investments section of the balance sheet.
Question 12–26
For HTM investments, unrealized gains and losses are ignored. However,
companies do apply the CECL model to account for credit losses. Therefore, if the
drop in fair value was due to worsening financial conditions of the investee, it is likely
that the investor would need to recognize credit losses due to a reduced expectation
that it would receive all future interest and principal payments associated with the
HTM investment.
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Answers to Questions (concluded)
Question 12–27
For AFS investments, the investment account is required to be reported at fair value
and unrealized gains and losses to adjust the investment account to fair value are
recorded through other comprehensive income (OCI).
However, companies do apply the CECL model to account for credit losses. If fair
value is less than amortized cost, there is some impairment of the investment. At this
point, we need to consider what the investor intends to do with the investment. If the
investor intends to sell the investment, or thinks it will be more likely than not that it
will be required to sell the investment prior to recovering the impairment, it is
required to recognize the entire accumulated unrealized loss in net income and write
down the investment to fair value in the balance sheet. Otherwise, the investor
considers whether credit losses exist. If there are no credit losses, the investor
continues recognizing unrealized losses in OCI as normal for AFS investments. On
the other hand, if there are some credit losses, the investor recognizes those losses in
net income and increases an allowance for credit losses (contra to the AFS investment
account) in the balance sheet. Any noncredit losses are recognized in OCI as normal
for AFS investments.
Question 12–28
U.S. GAAP and IFRS differ somewhat. Under IFRS No. 9, impairments are
recognized under the expected credit loss (ECL) model, and measured either as the
12-month expected credit loss (if the credit risk on the investment has increased
significantly) or the lifetime expected credit loss (if the credit risk on the investment
has not increased significantly. The entire impairment is recognized in earnings (there
is no equivalent to recognizing in OCI any non-credit losses on debt investments),
with an offsetting allowance reducing the carrying value of the investment to the
appropriate amount. Impairments can be recovered in earnings if estimates of credit
losses are reduced.
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BRIEF EXERCISES
Brief Exercise 12–1
(a)
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
720,000
120,000
600,000
(b)
Cash (1.5% × $720,000) ..........................................
Discount on bond investment (difference) ............
Interest revenue (2% × $600,000) .......................
10,800
1,200
12,000
Brief Exercise 12–2
Because S&L Financial is purchasing the bonds for purposes of earning profits on
short-term differences in price, those bonds would be classified as trading securities.
For trading securities, gains and losses from changes in fair values are recognized in
net income in the periods in which they occur.
2021 change in fair value: $875,000 – $873,000 = unrealized holding loss of $2,000
included in 2021 net income.
2022 change in fair value: $880,000 – $873,000 = unrealized holding gain of $7,000
included in 2022 net income.
Note: The total gain recognized over the life of the investment is $7,000 – $2,000 =
$5,000, which equals the sale price of $880,000 – the initial cost of $875,000 =
$5,000.
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Brief Exercise 12–3
2021
December 31
Loss on investments (unrealized, NI) ..................................
Fair value adjustment (TS) ($875,000 – $873,000) ...............
2,000
2,000
2022
January 3
Step 1: Adjust to fair value on date of sale:
Balance on December 31, 2021
± Adjustment needed to update fair value
Balance needed on January 3, 2022 ($880,000 − $875,000)
Fair Value
Adjustment
$(2,000)
?
$ 5,000
Fair Value Adjustment
12/31/2021
2,000
Change needed
7,000
1/3/2022
5,000
Fair value adjustment ($873,000 – $880,000) ..........................
Gain on investments (unrealized, NI) .............................
Step 2: Record the sale transaction:
Cash (selling price) .................................................................
Investment in bonds (account balance) ...............................
Fair value adjustment (account balance) .............................
7,000
7,000
880,000
875,000
5,000
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Brief Exercise 12–4
S&L Financial classifies the bonds as available-for-sale investments. For AFS
investments, gains and losses from changes in fair values are recognized in other
comprehensive income in the periods in which they occur, and recognized in net
income only in the period in which they are realized.
2021: no sale, so no effect on 2021 net income.
2022: $880,000 sales price – $875,000 initial cost = gain of $5,000 included in 2022
net income.
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Brief Exercise 12–5
2021
December 31
Loss on investments (unrealized, OCI) ..............................
Fair value adjustment ($875,000 – $873,000) ......................
2,000
2,000
2022
January 3: Three journal entries:
1. Adjust to fair value on date of sale:
Balance on December 31, 2021
± Adjustment needed to update fair value
Balance needed on January 3, 2022 ($880,000 − $875,000)
Fair Value
Adjustment
$(2,000)
?
$ 5,000
Fair Value Adjustment
12/31/2021
2,000
Change needed
7,000
1/3/2022
5,000
Fair value adjustment (amount necessary to reach balance of $5,000)
Gain on investments (unrealized, OCI) (to balance) ........
7,000
7,000
2. Reverse previous fair value adjustments:
Reclassification adjustment (OCI) (to balance) .....................
Fair value adjustment (account balance) ............................
3. Record the sale transaction:
Cash (selling price) .................................................................
Investment in bonds (account balance) ...............................
Gain on investments (NI) (to balance) ..............................
5,000
5,000
880,000
875,000
5,000
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Brief Exercise 12–6
Because S&L Financial elected the fair value option for their investment, unrealized
holding gains and losses from changes in fair values are recognized in net income in
the periods in which they occur.
2021
Change in fair value: $875,000 – $873,000 = unrealized holding loss of $2,000
included in 2021 net income.
2022
Change in fair value: $880,000 – $873,000 = unrealized holding gain of $7,000
included in 2022 net income.
Note: The total gain recognized over the life of the investment is $7,000 – $2,000 =
$5,000, which equals the sale price of $880,000 – the initial cost of $875,000 =
$5,000.
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Brief Exercise 12–7
AFS securities are reported at fair value, so in the December 31, 2022 balance sheet
the Microsoft bonds will be reported at $600,000.
Change needed in the fair value adjustment to report the bonds at that fair value:
Date
December 31,2021
Change needed:
December 31,2022
Amortized
Cost
$510,000
Fair Value
$610,000
520,000
600,000
Fair Value
Adjustment
$100,000
?
80,000
Fair Value Adjustment
100,000
20,000
80,000
December 31, 2022
Loss on investments (unrealized, OCI) (to balance) ...................
Fair value adjustment (amount necessary to reach balance of $80,000)
20,000
20,000
Brief Exercise 12–8
Fowler would account for the bonds at fair value through other comprehensive
income (FVOCI), because the bonds’ cash flows consist of only interest and principal,
and Fowler’s business model with respect to the bonds is to both collect contractual
cash flows and to hold the investment for sale at a gain. Therefore, Fowler would
report the bonds in the balance sheet as an investment of $80,000 and include the
$5,000 increase in fair value as a gain in other comprehensive income. Fowler would
report $0 gain or loss in 2021 net income.
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Brief Exercise 12–9
Fowler would account for the bonds at amortized cost, because its cash flows
consist of only interest and principal and Fowler’s business model with respect to the
bonds is to hold the bonds until maturity. Therefore, Fowler would report the bonds
in the balance sheet as an investment of $75,000, and would not include the $5,000
increase in fair value in either OCI or net income. Therefore, Fowler would report $0
gain or loss in 2021 net income.
Brief Exercise 12–10
Given that the size of Adams’ investment is not sufficient for it to exercise
significant influence over FedEx, Adams would account for this equity investment as
fair value through net income. That would require that the investment be carried at
its fair value of $4,000,000 (equal to 40,000 shares × $100/share).
Brief Exercise 12–11
Turner’s cash increased by $500,000 (10% × $5 million). It also reports $500,000
as dividend revenue in the income statement.
Since Turner holds only 10% of ICA stock, it’s assumed that it does not have
significant influence over the company. An investor should account for dividends
from an investment not accounted for by the equity method as dividend revenue.
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Brief Exercise 12–12
Turner’s cash increased by $2 million (40% × $5 million). Its investment
account declined by the same amount. There is no effect in the income statement.
Since Turner owns 40% of ICA stock, it is presumed that Turner has significant
influence over the operating and financial policies of the investee. As such, Turner
should account for its investment in ICA under the equity method of accounting. 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
recognizes net income, it would be inappropriate to again recognize revenue when net
income is 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.
Brief Exercise 12–13
With the equity method we attempt to approximate the effects of accounting for the
purchase of the investee as a consolidation. Consolidated financial statements report
acquired identifiable net assets at their fair values. Both investment revenue and the
investment would be reduced by the negative income effect of the “extra
depreciation” the higher fair value would cause. This would equal (30% × $50
million) ÷ 15 years = $1 million each year for 15 years.
Brief Exercise 12–14
Kim doesn’t need to amortize any of the $2 million difference, because the entire
difference relates to land, which does not depreciate. Kim would increase its
investment for its percentage share of Phelps’ net income and decrease it for its
percentage share of Phelps’ dividends. Therefore, at December 31, 2021, Phelps’
investment would be carried at $10 + [30% × ($1 – $0.50)] = $10.15 million.
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Brief Exercise 12–15
When a change to the equity method is appropriate, Pioneer’s investment
account would not change. The previous method is discontinued and the balance in
the investment account at the date of the change (including any unrealized holding
gains or losses that occurred prior to the date the investment qualifies for the equity
method) is used as the starting balance for applying the equity method. A disclosure
note also should describe the change. Instead, the equity method would start as if the
investment had been purchased in the current year for $44 million.
Yes, the answer would be the same if Pioneer changes from the equity method
in that Pioneer’s investment account would not change. The equity method is
discontinued, and the new method is applied from then on. If the equity method had
been used prior to the change in accounting principle, the balance of $56 million in
the investment account when the equity method is discontinued would serve as the
new cost basis for writing the investment up or down to fair value in the next set of
financial statements. There also would be no revision of prior years, but the change
should be described in a disclosure note.
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Brief Exercise 12–16
Given Turner’s election of the fair value option, it would account for this
investment similar to an investment accounted for using the fair value through net
income approach, for the percentage of ownership of the investee, while still
preserving its classification as a significant influence investment and showing it as a
noncurrent asset in the balance sheet.
2021
January 2
Investment in equity affiliate ..............................................
Cash .................................................................................
December 30
Cash (40% × $500,000) ..........................................................
Investment revenue .........................................................
December 31
Fair value adjustment ($11.5M – $10M) .................................
Gain on investment (unrealized, NI) ...............................
10,000,000
10,000,000
200,000
200,000
1,500,000
1,500,000
Note: A different approach to reach the same outcome would be for Turner to use
equity method accounting throughout the year, and then at the end of the year
make whatever adjustment to fair value is necessary to adjust the investment
account to fair value. Under that approach, Turner would recognize 40% of ICA’s
$750,000 income ($300,000) as investment income, it would not recognize
investment income associated with ICA’s dividend, and it would end up with an
investment account containing $10,100,000 ($10,000,000 + $300,000 –
$200,000). Turner then would need to make a fair value adjustment of
$1,400,000 ($11,500,000 – $10,100,000) to its ICA investment. So the total
amount of income recognized would be $1,700,000 ($300,000 investment income
+ $1,400,000 unrealized gain). Note that this alternative produces the same total
amount of investment income as is produced above, $1,700,000 ($200,000
investment revenue + $1,500,000 unrealized gain).
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Brief Exercise 12–17
LED would reduce the carrying value of the investment using an allowance for
credit losses contra account and would record a $200,000 credit loss as follows:
Credit loss expense ...........................................
Allowance for credit losses ..........................
200,000
200,000
In the income statement, the $200,000 credit loss is a reduction toward net
income. No noncredit loss would be recognized for an HTM investment.
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Brief Exercise 12–18
LED believes it is more likely than not that it will have to sell the investment
before fair value recovers, so the portion of the impairment that consists of credit and
noncredit losses is not relevant. LED must recognize the entire impairment by writing
down the carrying value of the investment and recognizing a loss in net income. LED
reduces the carrying value of the LED investment by crediting the account(s) used to
reflect carrying value. In this exercise, a discount on bond investment account was not
evident as part of the accounting for the carrying value, but the journal entry required
to write down the investment may use such an account.
Since there is already a fair value adjustment for this investment, the balance in
that account will be removed with a corresponding amount to reverse the existing
effect in accumulated other comprehensive income. LED reclassifies previously
recognized unrealized losses of $100,000 and records the impairment of $450,000 as
follows:
Fair value adjustment ......................................
Reclassification adjustment (OCI) .............
100,000
100,000
Loss on impairment (NI) ................................
Discount on bond investment ......................
450,000
450,000
In the income statement, $450,000 will be shown as an impairment loss. A
$100,000 reclassification adjustment will increase OCI. Therefore, the net effect
on comprehensive income during the current period will be a decrease of
$350,000.
Solutions Manual, Vol.1, Chapter 12
12–21
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McGraw-Hill Education.
Brief Exercise 12–19
LED does not intend to sell the investment, and it does not believe it is more likely
than not that it will have to sell the investment before fair value recovers, so the
portion of the impairment that consists of credit and noncredit losses is relevant. LED
must recognize in net income the $200,000 credit loss component of the impairment,
and must increase the total unrealized loss and the fair value adjustment on the AFS
investment by $150,000 from the $100,000 recorded previously so that the total
unrealized loss and fair value adjustment to date will be $250,000. LED records the
following entries:
Credit loss expense ............................................
Allowance for credit losses ...........................
200,000
200,000
Loss on investments (unrealized, OCI) ..........
Fair value adjustment ...................................
150,000
150,000
LED would include the credit loss as a $200,000 reduction of net income. The
$150,000 unrealized loss would decrease OCI. Therefore, the net effect on
comprehensive income during the current period will be a decrease of $350,000.
12–22
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Brief Exercise 12–20
Wickum would have recorded a journal entry previously that recognized the
impairment in earnings and reduced the investment account:
Loss on impairment (NI) ...................................
Allowance for credit losses ............................
500,000
500,000
If impairment is recognized in one period and the investment value increases in
another period, the credit loss is reduced. This means there is a recovery of a prior
credit loss. Upon recovery of $300,000 of fair value, Wickum would reverse by
that amount the impairment previously recorded:
Allowance for credit losses...............................
Loss on impairment (NI) .............................
300,000
300,000
Solutions Manual, Vol.1, Chapter 12
12–23
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McGraw-Hill Education.
EXERCISES
Exercise 12–1
Requirement 1
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
($ in millions)
240.0
40.0
200.0
Requirement 2
Cash (3% × $240 million) ........................................
Discount on bond investment (difference) ............
Interest revenue (4% × $200) .............................
7.2
0.8
8.0
Requirement 3
Tanner-UNF reports its investment in the December 31, 2021, balance sheet at
its amortized cost—that is, its book value:
Investment in bonds ............................................
Less: Discount on bond investment ($40 – $0.8 million)
Amortized cost ................................................
$240.0
39.2
$200.8
If sale before maturity isn’t an alternative, increases and decreases in the fair
value between the time a debt security is acquired and the day it matures to a
prearranged maturity value are relatively unimportant. For this reason, if an
investor has the “positive intent and ability” to hold the securities to maturity,
investments in debt securities are classified as “held-to-maturity” and reported
at amortized cost rather than fair value in the balance sheet.
Requirement 4
Cash (proceeds from sale) .......................................
Discount on bond investment (balance, determined above)
Loss on investments (to balance) ...........................
Investment in bonds (face amount) ....................
($ in millions)
190.0
39.2
10.8
240.0
12–24
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–2
Requirement 1
Investment in bonds (face amount) .......................
Premium on bond investment (difference)............
Cash (price of bonds) ..........................................
($ in millions)
240.0
40.0
280.0
Requirement 2
Cash (3% × $240 million) .......................................
Premium on bond investment (difference) ........
Interest revenue (2% × $280) ............................
7.2
1.6
5.6
Requirement 3
Mills reports its investment in the December 31, 2021, balance sheet at its
amortized cost—that is, its book value:
Investment in bonds ............................................
Plus: Premium on bond investment ($40 – $1.6 million)
Amortized cost ................................................
$240.0
38.4
$278.4
If sale before maturity isn’t an alternative, increases and decreases in the
market value between the time a debt security is acquired and the day it matures
to a prearranged maturity value are relatively unimportant. For this reason, if
an investor has the “positive intent and ability” to hold the securities to
maturity, investments in debt securities are classified as “held-to-maturity” and
reported at amortized cost rather than fair value in the balance sheet.
Requirement 4
Cash (proceeds from sale) .......................................
Premium on bond investment (balance, determined above)
Investment in bonds (face amount) ....................
Gain on investments (to balance) ......................
($ in millions)
290.0
38.4
240.0
11.6
Solutions Manual, Vol.1, Chapter 12
12–25
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McGraw-Hill Education.
Exercise 12–3
November 1
Cash .................................................................
Interest revenue ...........................................
($ in millions)
2.4
2.4
December 1
Investment in bonds .......................................
Cash .............................................................
30.0
December 31
Investment in bonds .......................................
Cash .............................................................
8.9
30.0
8.9
December 31
Adjusting entries:
Accrue interest for Convenience, Inc. bonds:
Interest receivable.......................................
Interest revenue ($48 million × 10% × 2/12)
0.8
Accrue interest for Facsimile Enterprises bonds:
Interest receivable .......................................
Interest revenue ($30 million × 12% × 1/12) ............
0.3
0.8
0.3
Note: Securities held-to-maturity are not adjusted to fair value.
12–26
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–4
Requirement 1
The specific citation that specifies the circumstances and conditions under which it is
appropriate to account for investments as held-to-maturity is FASB ASC 320–10–25–
4: “Investments—Debt and Equity Securities—Overall—Recognition
—Circumstances Not Consistent with Held-to-Maturity Classification.”
Requirement 2
FASB ASC 320–10–25–4 reads as follows:
“An entity shall not classify a debt security as held-to-maturity if the entity has the
intent to hold the security for only an indefinite period. Consequently, a debt security
shall not, for example, be classified as held-to-maturity if the entity anticipates that the
security would be available to be sold in response to any of the following
circumstances:
a. Changes in market interest rates and related changes in the security's
prepayment risk
b. Needs for liquidity (for example, due to the withdrawal of deposits,
increased demand for loans, surrender of insurance policies, or payment of
insurance claims)
c. Changes in the availability of and the yield on alternative investments
d. Changes in funding sources and terms
e. Changes in foreign currency risk.”
Solutions Manual, Vol.1, Chapter 12
12–27
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McGraw-Hill Education.
Exercise 12–5
Requirement 1
($ in millions)
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
240.0
40.0
200.0
Requirement 2
Cash (3% × $240 million) ........................................
Discount on bond investment (difference) ............
Interest revenue (4% × $200) ..................................
7.2
0.8
8.0
Requirement 3
The amortized cost of the bonds is $240 – ($40 – $0.8) = $200.8. Therefore, to
adjust to fair value of $210, Tanner-UNF would need a fair value adjustment of
$210 – $200.8 = $9.2.
Fair Value
Adjustment
Balance on 7/1/2021
$ 0
± Adjustment needed to update fair value
?
Balance needed on 12/31/2021 ($210 – $200.8)
$9.2
Fair Value Adjustment
7/1/2021
0
Change needed
9.2
9.2
12/31/2021
Tanner-UNF would record the following journal entry:
Fair value adjustment ..........................................
Gain on investments (unrealized, NI) (to balance)
9.2
9.2
12–28
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–5 (concluded)
Requirement 4
1)
Update the fair value adjustment:
Need to move from a fair value adjustment of $9.2 to ($10.8):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($200.8 − $190)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$ 9.2
?
$(10.8)
9.2
Change needed
20.0
1/2/2022
10.8
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment ..............................................................
2)
20.0
20.0
Record the sale transaction:
Cash (proceeds from sale) .......................................
Fair value adjustment (account balance) ................
Discount on bond investment (account balance) ....
Investment in bonds (account balance)...............
190.0
10.8
39.2
240.0
Solutions Manual, Vol.1, Chapter 12
12–29
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McGraw-Hill Education.
Exercise 12–6
Requirement 1
($ in millions)
Investment in bonds (face amount) ........................
Premium on bond investment (difference) ............
Cash (price of bonds) ..........................................
240.0
40.0
280.0
Requirement 2
Cash (3% × $240 million) ........................................
Premium on bond investment (difference) ........
Interest revenue (2% × $280) .............................
7.2
1.6
5.6
Requirement 3
The amortized cost of the bonds is $240 + ($40 – $1.6) = $278.4. Therefore, to
adjust to fair value of $270, Tanner-UNF would need a fair value adjustment of
$270 – $278.4 = ($8.4).
Fair Value
Adjustment
Balance on 7/1/2021
$ 0
± Adjustment needed to update fair value
?
Balance needed on 12/31/2021 ($270 – $278.4)
$(8.4)
Fair Value Adjustment
7/1/2021
0
Change needed
12/31/2021
8.4
8.4
Mills would record the following journal entry:
Loss on investments (unrealized, NI) (to balance)
Fair value adjustment ......................................
8.4
8.4
12–30
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–6 (concluded)
Requirement 4
($ in millions)
1) Update the fair value adjustment:
Need to move from a fair value adjustment from ($8.4) to $11.6:
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($290 – $278.4)
Fair Value Adjustment
12/31/2021
Change needed
1/2/2022
Fair Value
Adjustment
$(8.4)
?
$11.6
8.4
20.0
11.6
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ....................
20.0
20.0
2) Record the sale transaction:
Cash (proceeds from sale) .......................................
Premium on bond investment (balance, determined above)
Investment in bonds (face amount) ....................
Fair value adjustment (account balance) ........
290.0
38.4
240.0
11.6
Solutions Manual, Vol.1, Chapter 12
12–31
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McGraw-Hill Education.
Exercise 12–7
Requirement 1
2021
December 17
Investment in bonds ............................................................
Cash ..................................................................................
350,000
December 28
Cash ......................................................................................
Interest revenue ................................................................
2,000
350,000
2,000
December 31
Need to move from a fair value adjustment of $0 to $50,000:
Balance on 12/17/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($400,000 − $350,000)
Fair Value Adjustment
12/17/2021
0
Change needed
50,000
50,000
12/31/2021
Fair value adjustment ...........................................................
Gain on investments (unrealized, NI) ($400,000 – $350,000)
Fair Value
Adjustment
$
0
?
$50,000
50,000
50,000
12–32
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–7 (continued)
2022
January 5
1) Update the fair value adjustment:
Need to move from a fair value adjustment of $50,000 to $45,000:
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/5/2022 ($395,000 − $350,000)
Fair Value Adjustment
12/31/2021
50,000
Change needed
1/5/2022
Fair Value
Adjustment
$50,000
?
$45,000
5,000
45,000
Loss on investments (unrealized, NI) ($395,000 – $400,000) .
Fair value adjustment ......................................................
5,000
5,000
2) Record the sale transaction:
Cash (selling price) .................................................................
Fair value adjustment (account balance) .............................
Investment in bonds (account balance) ...............................
395,000
45,000
350,000
Solutions Manual, Vol.1, Chapter 12
12–33
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McGraw-Hill Education.
Exercise 12–7 (concluded)
Requirement 2
Balance Sheet
December 31, 2021
Current Assets
Investment in bonds .............................................
Income Statement:
Interest revenue ...............................................................
Gain on investments (from adjusting entry) ........................
$ 400,000
$ 2,000
50,000
12–34
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–8
The specific citation for each of the following items is:
1. Unrealized holding gains for trading securities should be included in earnings:
FASB ASC 320–10–35–1a: “Investments—Debt and Equity Securities—
Overall—Subsequent Measurement—General.”
2. Under the equity method, the investor accounts for its share of the earnings or
losses of the investee in the periods they are reported by the investee in its
financial statements: FASB ASC 323–10–35–4: “Investments—Equity Method
and Joint Ventures—Overall—Subsequent Measurement—The Equity Method—
Overall Guidance.”
3. Transfers of securities between categories shall be accounted for at fair value:
FASB ASC 320–10–35–10: “Investments—Debt Securities—Overall—
Subsequent Measurement—Transfers of Securities Between Categories.”
4. Disclosures for available-for-sale securities should include total losses for
securities that have net losses included in accumulated other comprehensive
income: FASB ASC 320–10–50–2: “Investments—Debt Securities—Overall—
Disclosure—Securities Classified as Available for Sale.”
Solutions Manual, Vol.1, Chapter 12
12–35
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McGraw-Hill Education.
Exercise 12–9
Requirement 1
Need to move from a fair value adjustment of $0 to ($25,000):
Fair Value
Adjustment
$
0
?
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($20,000 long term −
$45,000 short term)
$(25,000)
Fair Value Adjustment
1/1/2021
0
Change needed
25,000
12/31/2021
25,000
Loss on investments (unrealized, OCI) (to balance)
Fair value adjustment
25,000
25,000
Requirement 2
None. Accumulated net holding gains and losses for securities available-forsale are reported as a component of shareholders’ equity (in accumulated
other comprehensive income), and changes in the balance are reported as
other comprehensive income or loss in the statement of comprehensive
income rather than as part of net income. This statement can be reported
either (a) as a combined statement of comprehensive income that includes net
income and other comprehensive income, or (b) as a separate statement of
comprehensive income.
12–36
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–10
Requirement 1
($ in millions)
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds) ..........................................
240.0
40.0
200.0
Requirement 2
Cash (3% × $240 million) .......................................
Discount on bond investment (difference) ............
Interest revenue (4% × $200) ..................................
7.2
0.8
8.0
Requirement 3
The amortized cost of the bonds is $240 – ($40 – $0.8) = $200.8. Therefore, to
adjust to fair value of $210, Tanner-UNF would need a fair value adjustment of
$210 – $200.8 = $9.2.
Fair Value
Adjustment
Balance on 7/1/2021
$ 0
± Adjustment needed to update fair value
?
Balance needed on 12/31/2021 ($210 – $200.8)
$9.2
Fair Value Adjustment
7/1/2021
Change needed
12/31/2021
0
9.2
9.2
Tanner-UNF would record the following journal entry:
Fair value adjustment .........................................
Gain on investments (unrealized, OCI) (to balance)
9.2
9.2
Solutions Manual, Vol.1, Chapter 12
12–37
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McGraw-Hill Education.
Exercise 12–10 (continued)
Requirement 4
1) Update the fair value adjustment:
Need to move from a fair value adjustment from $9.2 to ($10.8):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($200.8 − $190)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$ 9.2
?
$(10.8)
9.2
Change needed
20.0
1/2/2022
10.8
Loss on investments (unrealized, OCI) (to balance) .....................
Fair value adjustment .............................................................
20.0
20.0
12–38
Intermediate Accounting, 10/e
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Exercise 12–10 (concluded)
2)
Record any reclassification adjustment
Need to move from a fair value adjustment from ($10.8) to $0:
Balance on 1/2/2022:
± Reclassification adjustment
Balance needed to close fair value adjustment
Fair Value Adjustment
1/2/2022
10.8
Change needed
10.8
1/2/2022
0
Fair value adjustment ......................................................
Reclassification adjustment (OCI) (to balance) ............
3)
Fair Value
Adjustment
$(10.8)
?
$
0
10.8
10.8
Record the sale transaction:
Cash (proceeds from sale) .......................................
Loss on investments (NI) (to balance) .................
Discount on bond investment (account balance) ....
Investment in bonds (account balance)...............
190.0
10.8
39.2
240.0
Note: The loss of $10.8 included in NI equals the difference between the proceeds
($190 million) and the carrying value of the investment ($240.0 – $39.2 = $200.8). It
also equals the amount of unrealized gain that had accumulated in AOCI and was
removed from AOCI with the reclassification adjustment.
Solutions Manual, Vol.1, Chapter 12
12–39
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McGraw-Hill Education.
Exercise 12–11
Requirement 1
($ in millions)
Investment in bonds (face amount) ........................
Premium on bond investment (difference) ............
Cash (price of bonds) ..........................................
240.0
40.0
280.0
Requirement 2
Cash (3% × $240 million) ........................................
Premium on bond investment (difference) ........
Interest revenue (2% × $280) .............................
7.2
1.6
5.6
Requirement 3
The amortized cost of the bonds is $240 + ($40 – $1.6) = $278.4.
Investment in bonds ............................................
Plus: Premium on bond investment ($40 – $1.6 million)
Amortized cost
$240.0
38.4
$278.4
Therefore, to adjust to fair value of $270, Tanner-UNF would need a fair value
adjustment of $270 – $278.4 = ($8.4).
Fair Value
Adjustment
Balance on 7/1/2021
$ 0
± Adjustment needed to update fair value
?
Balance needed on 12/31/2021 ($270 – $278.4)
$(8.4)
Fair Value Adjustment
7/1/2021
0
Change needed
8.4
12/31/2021
8.4
Mills would record the following journal entry:
Loss on investments (unrealized, OCI) (to balance)
Fair value adjustment ......................................
8.4
8.4
12–40
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–11 (continued)
Requirement 4
1) Update the fair value adjustment:
Need to move from a fair value adjustment from ($8.4) to $11.6:
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($290 – $278.4)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$(8.4)
?
$11.6
8.4
Change needed
20.0
1/2/2022
11.6
Fair value adjustment .................................................................
Gain on investments (unrealized, OCI) (to balance) .................
20
20
Solutions Manual, Vol.1, Chapter 12
12–41
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McGraw-Hill Education.
Exercise 12–11 (concluded)
2) Record any reclassification adjustment:
Need to move from a fair value adjustment of ($11.6) to $0:
Balance on 1/2/2022:
± Reclassification adjustment
Balance needed to close fair value adjustment
Fair Value Adjustment
1/2/2022
11.6
Change needed
1/2/2022
Fair Value
Adjustment
$11.6
?
$ 0
11.6
0
Reclassification adjustment (OCI) (to balance) ................
Fair value adjustment ..............................................................
11.6
11.6
3) Record the sale transaction:
Cash (proceeds from sale) .......................................
Premium on bond investment (balance, determined above)
Investment in bonds (face amount) ....................
Gain on investments (NI) (to balance) ...............
290.0
38.4
240.0
11.6
Note: The gain included in NI equals the difference between the proceeds ($290
million) and the carrying value of the investment ($278.4 million). It also equals the
amount of unrealized gain that had accumulated in AOCI and was removed from
AOCI with the reclassification adjustment.
12–42
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–12
Requirement 1
a. July 1, 2021: Purchase of the Jackson bonds
Investment in bonds ........................................................
Cash .............................................................................
1,000,000
1,000,000
b. December 31, 2021: Recognition of interest revenue
Cash ...............................................................................
Interest revenue ($1,000,000 × 5% × ½ year) ..................
25,000
25,000
c. December 31, 2021: Year-end adjusting entries
Need to move from a fair value adjustment of $0 to $200,000:
Balance on 7/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($1,200,000 − $1,000,000)
Fair Value Adjustment
7/1/2021
Change needed
0
200,000
12/31/2021
200,000
Fair value adjustment ......................................................
Gain on investments (unrealized, OCI) (to balance) .....
Fair Value
Adjustment
$
0
?
$200,000
200,000
200,000
Solutions Manual, Vol.1, Chapter 12
12–43
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McGraw-Hill Education.
Exercise 12–12 (continued)
d. June 30, 2022: Recognition of interest revenue
Cash ................................................................................
Interest revenue ($1,000,000 × 5% × ½ year) ...................
25,000
25,000
e. July 1, 2022: Any entries necessary upon sale of the Jackson bonds
1)
Update the fair value adjustment:
Need to move from a fair value adjustment of $200,000 to ($100,000):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 7/1/2022 ($900,000 − $1,000,000)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$200,000
?
$(100,000)
200,000
Change needed
300,000
7/1/2022
100,000
Loss on investments (unrealized, OCI) (to balance) .....................
Fair value adjustment ..................................................
300,000
300,000
12–44
Intermediate Accounting, 10/e
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Exercise 12–12 (concluded)
2) Record any reclassification adjustment:
Need to move from a fair value adjustment of ($100,000) to $0:
Balance on 7/1/2022:
± Reclassification adjustment
Balance needed to close fair value adjustment
Fair Value Adjustment
7/1/2022
Fair Value
Adjustment
$(100,000)
?
$
0
100,000
Change needed
100,000
7/1/2022
0
Fair value adjustment .....................................................
Reclassification adjustment (OCI) (to balance) .............
100,000
100,000
3) Record the sale transaction:
Cash .............................................................................................
Loss on investments (NI) (to balance) ...........................................
Investment in bonds (amortized cost) .............................
900,000
100,000
1,000,000
Requirement 2
2021
Net Income
$25,000
OCI
$200,000
Comprehensive
Income
$225,000
2022
Total
$25,000 – $100,000
= $(75,000)
$(300,000) +
$100,000 =
$(200,000)
$25,000 + $(75,000)
= $(50,000)
$(275,000)
$200,000 +
$(200,000) = $0
$225,000 +
$(275,000) =
$(50,000)
Solutions Manual, Vol.1, Chapter 12
12–45
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McGraw-Hill Education.
Exercise 12–13
Requirement 1
Securities “held-to-maturity” are debt securities that an investor has the “positive
intent and ability” to hold to maturity. Actively traded investments in debt
acquired principally for the purpose of selling them in the near term are classified
as “trading securities.” The IBM bonds are classified as “available-for-sale”
since all investments in debt securities that don’t fit the definitions of the other
reporting categories are classified this way.
Investments in securities available-for-sale are reported at fair value, and holding
gains or losses are not included in the determination of income for the period.
Instead, they are reported as other comprehensive income or loss in the statement
of comprehensive income. This statement can be reported either (a) as a
combined statement of comprehensive income that includes net income and other
comprehensive income, or (b) as a separate statement of comprehensive income.
Accumulated net holding gains and losses for securities available-for-sale are
reported as a separate component of shareholders’ equity in the balance sheet.
Requirement 2
Need to move from a fair value adjustment of $0 to ($20,000):
Balance on 2/18/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($580,000 − $600,000)
Fair Value Adjustment
2/18/2021
Fair Value
Adjustment
$
0
?
$(20,000)
0
Change needed
20,000
12/31/2021
20,000
12–46
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–13 (concluded)
December 31, 2021
Loss on investments (unrealized, OCI) (to balance) ..............
Fair value adjustment .................................................
20,000
20,000
Requirement 3
Need to move from a fair value adjustment from ($20,000) to $10,000:
Balance on 1/1/2022:
± Reclassification adjustment
Balance needed on 12/31/2022 ($610,000 − $600,000)
Fair Value Adjustment
1/1/2022
Fair Value
Adjustment
$(20,000)
?
$ 10,000
20,000
Change needed
30,000
12/31/2022
10,000
Fair value adjustment .....................................................
Gain on investments (unrealized, OCI) (to balance) .....
30,000
30,000
Solutions Manual, Vol.1, Chapter 12
12–47
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McGraw-Hill Education.
Exercise 12–14
1. Investments reported as current assets.
Security A
$ 910,000
Security B
100,000
Security C
780,000
Security E
490,000
Total
$2,280,000
2. Investments reported as noncurrent assets.
Security D
$ 915,000
Security F
615,000
$1,530,000
3. Unrealized gain (or loss) recognized in net income.
Trading Securities:
Cost
Security
A
B
Totals
$ 900,000
105,000
$1,005,000
Fair value
Unrealized
gain (loss)
$ 910,000
$10,000
100,000
(5,000)
$1,010,000
$ 5,000
4. Unrealized gain (or loss) in AOCI in shareholders’ equity.
Securities Available-for-Sale:
Cost
Security
Totals
C
D
$ 700,000
900,000
$1,600,000
Fair value
Unrealized
gain (loss)
$ 780,000
$80,000
915,000
15,000
$1,695,000
$95,000
12–48
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–15
Requirement 1
Purchase
($ in millions)
Investment in equity securities ....................................................
Cash ........................................................................................
50
50
Net income
No entry
Dividends
No entry (none were declared)
Adjusting entry
Need to move from a fair value adjustment of $0 to ($15 million):
Balance on 3/31/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($35 − $50)
Fair Value Adjustment
3/31/2021
Fair Value
Adjustment
$ 0
?
$(15)
0
Change needed
15
12/31/2021
15
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment ($35 – $50 million) ...................................
15
15
Solutions Manual, Vol.1, Chapter 12
12–49
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Exercise 12–15 (concluded)
Requirement 2
1)
Update the fair value adjustment:
Need to move from a fair value adjustment of ($15.0) to ($20.0):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/20/2022 ($50 − $30)
Fair Value Adjustment
12/31/2021
Change needed
15
5
1/20/2022
20
Fair Value
Adjustment
$(15)
?
$(20)
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment .............................................................
5
5
Note: The loss included in NI equals the difference between the proceeds ($30
million) and the carrying value of the investment ($35 million). An additional $15
million was recognized in net income as an unrealized loss in 2021, when fair value
decreased from $50 million to $35 million.
2)
Record the sale transaction:
Cash (proceeds from sale) .......................................
Fair value adjustment (account balance).................
Investment in equity securities (face amount)....
30
20
50
12–50
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–16
Requirement 1
Purchase
($ in millions)
Investment in equity securities ....................................................
Cash ........................................................................................
90
90
Net income
No entry
Dividends
Cash (5% × $60 million) ..................................................................
3
Dividend revenue.....................................................................
3
Adjusting entry
Need to move from a fair value adjustment of $0 to $8 million:
Balance on 1/2/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($98 − $90)
Fair Value Adjustment
1/2/2021
Change needed
0
8
12/31/2021
8
Fair value adjustment ($98 – $90 million) .......................................
Gain on investments (unrealized, NI) (to balance) ....................
Fair Value
Adjustment
$0
?
$8
8
8
Solutions Manual, Vol.1, Chapter 12
12–51
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McGraw-Hill Education.
Exercise 12–16 (concluded)
Requirement 2
1)
Update the fair value adjustment:
Need to move from a fair value adjustment of $8 to $20:
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($110 − $90)
Fair Value Adjustment
12/31/2021
8
Change needed
12
1/2/2022
20
Fair Value
Adjustment
$ 8
?
$20
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ...................
12.0
12.0
Note: The gain included in NI equals the difference between the proceeds ($110
million) and the carrying value of the investment ($98 million). An additional $8
million was recognized in net income as an unrealized gain in 2021, when fair value
increased from $90 million to $98 million.
2)
Record the sale transaction:
Cash (proceeds from sale) .......................................
Investment in equity securities .......................
Fair value adjustment (account balance) .............
110.0
90.0
20.0
12–52
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–17
Requirement 1
Need to move from a fair value adjustment of $(145,000) to ($170,000):
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($1,175,000 – $1,345,000)
Fair Value Adjustment
1/1/2021
Change needed
145,000
25,000
12/31/2021
170,000
Loss on investments (unrealized, NI) (to balance) ...................
Fair value adjustment ......................................................
Fair Value
Adjustment
$(145,000)
?
$(170,000)
25,000
25,000
Solutions Manual, Vol.1, Chapter 12
12–53
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McGraw-Hill Education.
Exercise 12–17 (continued)
Requirement 2
Need to move from a fair value adjustment from ($145,000) to ($70,000):
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($1,275,000 – $1,345,000)
Fair Value Adjustment
1/1/2021
Change needed
12/31/2021
Fair Value
Adjustment
$(145,000)
?
$(70,000)
145,000
75,000
70,000
Fair value adjustment ......................................................
Gain on investments (unrealized, NI) (to balance) .........
75,000
75,000
12–54
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–17 (concluded)
Requirement 3
Need to move from a fair value adjustment from ($145,000) to $30,000:
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($1,375,000 – $1,345,000)
Fair Value Adjustment
1/1/2021
Fair Value
Adjustment
$(145,000)
?
$ 30,000
145,000
Change needed
175,000
12/31/2021
30,000
Fair value adjustment ......................................................
Gain on investments (unrealized, NI) (to balance) ........
175,000
175,000
Solutions Manual, Vol.1, Chapter 12
12–55
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McGraw-Hill Education.
Exercise 12–18
Requirement 1
The sale of the A Corporation shares increased Harlon’s pretax earnings by $1
million. In prior periods Harlon would have recorded losses corresponding to the
decline in the fair value of those securities from $20 to $14 million, and established a
fair value adjustment with a credit balance of $6 million to reduce the carrying value
from cost of $20 million to fair value of $14 million. The journal entries to record the
sale would be:
June 1, 2022
1) Update the fair value adjustment:
Need to move from a fair value adjustment of ($6) to ($5):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 6/1/2022 ($15 − $20)
Fair Value Adjustment
12/31/2021
Change needed
6/1/2022
Fair Value
Adjustment
$(6)
?
$(5)
6
1
5
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ...................
1
1
12–56
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–18 (concluded)
2)
Record the sale transaction:
($ in millions)
Cash…………………………………………………..
Fair value adjustment (account balance)…………………..
Investment in equity securities (cost)………….
15
5
20
December 31, 2022: Update the fair value adjustment:
The purchase of C Corporation shares would require recognizing any postpurchase unrealized gains or losses in 2022 earnings. The fair value of the C
Corporation shares declined by $1, so Harlon needs to move from a fair value
adjustment of 0 at purchase to ($1) as of 12/31/2022:
Balance on 9/12/2022
± Adjustment needed to update fair value
Balance needed on 12/31/2022 ($14 − $15)
Fair Value Adjustment
9/12/2022
Change needed
0
1
12/31/2022
1
Fair Value
Adjustment
$ 0
?
$(1)
Loss on investments (unrealized, NI) (to balance) .......................
Fair value adjustment ..............................................................
1
1
Total effect on 2022 pretax earnings: gain of $1 + loss of ($1) = $0.
Requirement 2
Harlon’s equity investment portfolio should be reported in its 2022 balance sheet at
its fair value of $101 million.
.
Solutions Manual, Vol.1, Chapter 12
12–57
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McGraw-Hill Education.
Exercise 12–19
Requirement 1
The investment would be accounted for at fair value through net income:
Purchase
Investment in equity securities.............................................
Cash ................................................................................
480,000
480,000
Net income
No entry
Dividends
Cash (20% × 400,000 shares × $0.25 per share) ...........................
Dividend revenue ............................................................
20,000
20,000
Adjusting entry
Need to move from a fair value adjustment of $0 to $25,000:
Balance at purchase
± Adjustment needed to update fair value
Balance needed at year end ($505,000 – $480,000)
Fair Value Adjustment
1/2/2021
Change needed
0
25,000
12/31/2021
25,000
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ....................
Fair Value
Adjustment
$
0
?
$25,000
25,000
25,000
12–58
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–19 (concluded)
Requirement 2
The investment would be accounted for using the equity method:
Purchase
Investment in equity affiliate ...............................................
Cash ...............................................................................
480,000
480,000
Net income
Investment in equity affiliate (20% × $250,000) ....................
Investment revenue.........................................................
Dividends
Cash (20% × 400,000 shares × $0.25 per share) ...........................
Investment in equity affiliate..........................................
50,000
50,000
20,000
20,000
Adjusting entry
No entry
Solutions Manual, Vol.1, Chapter 12
12–59
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McGraw-Hill Education.
Exercise 12–20
Purchase
Investment in equity affiliate ..................................................
Cash ....................................................................................
($ in millions)
56
56
Net income
Investment in equity affiliate (30% × $40 million) ....................
Investment revenue .............................................................
Dividends
Cash (30% × 8 million shares × $1.25 per share) .............................
Investment in equity affiliate ..............................................
12
12
3
3
Adjusting entry
No entry
12–60
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–21
Requirement 1: Error discovered before the books are adjusted or closed in
2021.
The journal entry the company made is:
Cash .............................................................
Investment in equity affiliate ...................
100,000
100,000
The journal entry the company should have made is:
Cash .............................................................
Investment in equity affiliate ...................
Gain on investments ($100,000 – $75,000) .
100,000
75,000
25,000
Therefore, to get from what was done to what should have been done, the
following entry is needed:
Investment in equity affiliate (to balance) .....
Gain on investments ($100,000 – $75,000) .
25,000
25,000
Requirement 2: Error not discovered until early 2022.
Investment in equity affiliate (to balance) .....
Retained earnings ($100,000 – $75,000) .....
25,000
25,000
Solutions Manual, Vol.1, Chapter 12
12–61
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McGraw-Hill Education.
Exercise 12–22
Purchase
($ in millions)
Investment in equity affiliate ...............................................
Cash .................................................................................
68
68
Net income
Investment in equity affiliate (25% × $40 million) .................
Investment revenue ..........................................................
Dividends
Cash (4 million shares × $1 per share) ........................................
10
10
4
Investment in equity affiliate ...........................................
4
Depreciation Adjustment
‡
Investment revenue ($8 million [calculation below ] ÷ 8 years) ..
Investment in equity affiliate ..........................................
1
1
‡
Calculations:
Investee
Identifiable
Net Assets

Cost
Identifiable
Net Assets
Purchased
Difference
Attributed to:


$68

Fair value:
$224* × 25% = $56
Book value:
$192 × 25% = $48

Goodwill:$12
Undervaluation
of assets:$8
*[$192 + $32] = $224
Adjusting entry
No entry to adjust for changes in fair value as this investment is accounted for
under the equity method.
12–62
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–23
Requirement 1
Purchase
($ in millions)
Investment in equity affiliate ...............................................
Cash ................................................................................
300
300
Net income
Investment in equity affiliate (20% × $150 million) ............. 30
Investment revenue ..........................................................
30
Dividends
Cash (20% × $30 million) ........................................................
6
Investment in equity affiliate ...........................................
Adjustment for depreciation
6
‡
Investment revenue ($10 million [calculation below ] ÷ 10 years)
Investment in equity affiliate ...........................................
‡
1
1
calculation:
Investee
Identifiable
Net Assets
Identifiable
Net Assets
Purchased
Difference
Attributed to:



Cost
$300

Fair value:
$120
$900 × 20% = $180

Book value:
Goodwill:
$800 × 20% = $160
Undervaluation
of buildings ($10) and land ($10): $20
Solutions Manual, Vol.1, Chapter 12
12–63
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Exercise 12–23 (concluded)
Requirement 2
a. Investment in Lake Construction shares
($ in millions)
_______________________________________
Cost
Share of
net income
Balance
300
30
6 Dividends
1 Depreciation adjustment
_________________
323
b. As net investment revenue in the income statement.
$30 million (share of net income) – $1 million (depreciation adjustment) = $29 million
net investment revenue
c. Among investing activities in the statement of cash flows.
$300 million outflow
[Cash dividends received ($6 million) also are reported—as part of operating
activities. If Cameron reports cash flows using the indirect method, the
operating activities section of its statement of cash flows would include an
adjustment of ($23 million) to get from the net income figure that includes
$29 million of revenue to a cash flow number that should only include $6
million of cash flow.]
12–64
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–24
Requirement 1
Purchase
($ in millions)
Investment in equity affiliate ...............................................
Cash ................................................................................
100.00
100.00
Net income
Investment in equity affiliate (25% × $32 million) ....................
Investment revenue ..........................................................
8.00
8.00
Dividends
Cash (25% × $24 million) ........................................................
6.00
Investment in equity affiliate ...........................................
Amortization of differential
6.00
‡
Investment revenue (calculation below ) .......................................
Investment in equity affiliate ...........................................
‡
6.75
6.75
calculation:
Investee
Identifiable
Net Assets
Identifiable
Net Assets
Purchased
Difference
Attributed to:



Cost
$100

Fair value:
$350 × 25% =
$220 × 25% =
$12.5
$87.5

Book value:
Goodwill:
$55
Total Undervaluation
$32.5
inventory ($20 × 25% = $5),
buildings ($80 × 25% = $20),
and equipment ($30 × 25% = $7.5)
Calculation of 2021 amortization of differential:
Inventory (all sold in latter half of 2021, so entire differential expensed):
Buildings ($20 ÷ 10 year remaining life × 0.5 year):
Equipment ($7.5 ÷ 5 year remaining life × 0.5 year):
Total:
$5.00
1.00
0.75
$6.75
Solutions Manual, Vol.1, Chapter 12
12–65
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Exercise 12–24 (concluded)
Requirement 2
a.
Investment in VB shares
($ in millions)
_______________________________________
Cost
Share of
net income
Balance
100
8
6
Dividends
6.75 Amortization of differentials
_________________
95.25
b. As net investment revenue or loss in the income statement.
$8 million (share of net income) – $6.75 million (adjustment for amortization purchase
price differential) = $1.25 million net investment revenue
c. Among investing activities in the statement of cash flows.
$100 million outflow
[Cash dividends received ($6 million) also are reported as part of operating
activities. If Gupta reports cash flows using the indirect method, the
operating activities section of its statement of cash flows would include an
add back of $4.75 million to get from the net income figure that includes
$1.25 million of income to a cash flow number that should include $6
million of cash flow.]
12–66
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–25
Requirement 1
Held to maturity at fair value
Electing the fair value option for held-to-maturity securities requires accounting
for those investments the same way Tanner-UNF would account for trading
securities. The securities would be shown at fair value in Tanner-UNF’s balance
sheet and unrealized gains and losses would be included in Tanner-UNF’s net
income in the periods in which they arise.
Requirement 2
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds) ..........................................
Requirement 3
Cash (3% × $240 million) .......................................
Discount on bond investment (difference) ............
Interest revenue (4% × $200) ..................................
($ in millions)
240.0
40.0
200.0
7.2
0.8
8.0
Requirement 4
The amortized cost of the bonds is $240 – ($40 – $0.8) = $200.8. Therefore, to
adjust to fair value of $210, Tanner-UNF would need a fair value adjustment of
$210 – $200.8 = $9.2.
Fair Value
Adjustment
Balance on 7/1/2021
$ 0
± Adjustment needed to update fair value
?
Balance needed on 12/31/2021 ($210 – $200.8)
$9.2
Fair Value Adjustment
7/1/2021
0
Change needed
9.2
12/31/2021
9.2
Tanner-UNF would record the following journal entry:
Fair value adjustment .........................................
Gain on investments (unrealized, NI) (to balance)
9.2
9.2
Solutions Manual, Vol.1, Chapter 12
12–67
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McGraw-Hill Education.
Exercise 12–25 (concluded)
Requirement 5
Tanner-UNF reports its investment in the December 31, 2021, balance sheet at
fair value of $210 million.
Requirement 6
1)
Update the fair value adjustment:
Need to move from a fair value adjustment of $9.2 to ($10.8):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($190.0 – $200.8)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$ 9.2
?
$(10.8)
9.2
Change needed
1/2/2022
20
10.8
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment .............................................................
20.0
20.0
Note: the loss equals the difference between the proceeds ($190 million) and the
carrying value of the investment ($210 million).
2)
Record the sale transaction:
($ in millions)
Cash (proceeds from sale) .......................................
Fair value adjustment (account balance) .................
Discount on bond investment (account balance) ....
Investment in bonds (account balance) ...............
190.0
10.8
39.2
240.0
12–68
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–26
Requirement 1
a. July 1, 2021: Purchase Jackson bonds
These are available for sale securities but when electing the fair value option
Colah must account for the bonds with unrealized gains and losses recognized
each period in net income and report the bond investment at fair value on the
balance sheet.
Investment in bonds .........................................................
Cash .............................................................................
1,000,000
1,000,000
b. December 31, 2021: Recognize interest revenue
Cash ...............................................................................
Interest revenue ($1,000,000 × 5% × ½ year) ..................
25,000
25,000
c. December 31, 2021: Year-end adjusting entries
Need to move from a fair value adjustment of $0 to $200,000:
Balance on 7/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($1,200,000 − $1,000,000)
Fair Value Adjustment
7/1/2021
Change needed
0
200,000
12/31/2021
200,000
Fair value adjustment .....................................................
Gain on investments (unrealized, NI) (to balance) ........
Fair Value
Adjustment
$
0
?
$200,000
200,000
200,000
Solutions Manual, Vol.1, Chapter 12
12–69
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McGraw-Hill Education.
Exercise 12–26 (continued)
d. June 30, 2022: Recognize interest revenue
Cash ................................................................................
Interest revenue ($1,000,000 × 5% × ½ year) ...................
25,000
25,000
e. July 1, 2022: Any entries necessary upon sale of the Jackson bonds
1)
Update the fair value adjustment:
Need to move from a fair value adjustment of $200,000 to ($100,000):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 7/1/2022 ($1,000,000 – $900,000)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$ 200,000
?
$(100,000)
200,000
Change needed
300,000
7/1/2022
100,000
Loss on investments (unrealized, NI) (to balance) .................. 300,000
Fair value adjustment ................................................
300,000
Note: The loss equals the difference between the proceeds ($900,000) and the
carrying value of the investment ($1.2 million).
2)
Record the sale transaction:
Cash ....................................................................................... 900,000
Fair value adjustment ............................................................ 100,000
Investment in bonds (amortized cost) ..............................
1,000,000
12–70
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–26 (concluded)
Requirement 2
2021
2022
Total
Net Income
$25,000 +
$200,000 =
$225,000
$25,000 –
$300,000 =
$(275,000)
$225,000 +
($275,000) =
$(50,000)
OCI
-0-
-0-
$0
$(275,000)
$225,000 +
$(275,000) =
$(50,000)
Comprehensive
Income
$225,000
Solutions Manual, Vol.1, Chapter 12
12–71
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McGraw-Hill Education.
Exercise 12–27
Requirement 1
Significant influence investment at fair value
Electing the fair value option for significant influence investments requires the
securities to be shown at fair value in the balance sheet and unrealized gains and
losses to be included in net income in the periods in which they arise. However, the
investments will still be classified as significant influence investments and shown
either on the same line of the balance sheet as equity method investments (but with
the amount at fair value indicated parenthetically) or on a separate line of the balance
sheet.
Requirement 2
(Prepared in the manner of equity investments that do not have significant influence.)
Purchase
($ in millions)
Investment in equity affiliate ..................................................
Cash ....................................................................................
56
56
Net income
No entry.
Dividends
Cash (30% × 8 million shares × $1.25 per share) .............................
3
Dividend revenue ................................................................
3
Adjusting entry ......................................................................................
Need to move from a fair value adjustment of $0 to ($4) million:
Balance at purchase
± Adjustment needed to update fair value
Balance needed at year end ($52 million – $56 million)
Fair Value
Adjustment
$ 0
?
$(4)
12–72
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Exercise 12–27 (concluded)
Fair Value Adjustment
1/1/2021
0
Change needed
4
12/31/2021
4
Florists would make the following journal entry:
Loss on investments (unrealized, NI) to balance) .........................
Fair value adjustment ..........................................................
4
4
Note: A different approach to reach the same outcome would be for Florists to use
equity method accounting throughout the year, and then at the end of the year make
whatever adjustment to fair value is necessary to adjust the investment account to fair
value. Under that approach, Florists would recognize 30% of Nursery’s $40 million
of income ($12 million) as investment income, it would not recognize investment
income associated with Nursery’s dividend, and would end up with an investment
account containing $65 ($56 million + $12 million – $3 million). The company
would need to make a fair value adjustment of $13 million ($65 million – $52 million).
So the total amount of loss recognized would be $1 million ($12 million investment
income – $13 million unrealized loss). Note that this alternative produces the same
total amount of investment loss as is produced above: $1 million ($3 million dividend
(investment revenue) – $4 million unrealized loss).
Solutions Manual, Vol.1, Chapter 12
12–73
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McGraw-Hill Education.
Exercise 12–28
Requirement 1
Insurance expense (difference) ...............................................
Cash surrender value of life insurance ($27,000 – $21,000) ....
Cash (2021 premium) ..........................................................
64,000
6,000
70,000
Requirement 2
Cash (death benefit) .........................................................
Cash surrender value of life insurance (account balance)
Gain on life insurance settlement (to balance) ...........
4,000,000
27,000
3,973,000
Exercise 12–29
Requirement 1
Insurance expense (difference) .......................................
Cash surrender value of life insurance ($4,600 – $2,500)
Cash (premium) ..........................................................
22,900
2,100
25,000
Requirement 2
Cash (death benefit) .........................................................
Cash surrender value of life insurance (account balance)
Gain on life insurance settlement (to balance) ...........
250,000
16,000
234,000
12–74
Intermediate Accounting, 10/e
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Exercise 12–30
Requirement 1
For HTM investments, it is not relevant that Bloom believes it is more likely than
not it will have to sell the investment before fair value recovers. Also for HTM
investments, noncredit losses also are not relevant. Bloom must recognize credit
losses toward net income as follows:
Credit loss expense ..........................................
Allowance for credit losses .............................
250,000
250,000
In the income statement, the $250,000 will be shown as a credit loss expense.
Requirement 2
Because it is not relevant that Bloom believes it is more likely than not it will have
to sell the investment before fair value recovers, the answer for requirement 2 is the
same as that given for requirement 1. Bloom must recognize credit losses toward net
income as follows:
Credit loss expense ..........................................
Allowance for credit losses .............................
250,000
250,000
In the income statement, the $250,000 will be shown as a credit loss expense.
Solutions Manual, Vol.1, Chapter 12
12–75
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McGraw-Hill Education.
Exercise 12–31
Requirement 1: Assuming Bloom has not previously recorded a $100,000 loss
Scenario 1: Bloom believes it is more likely than not it will have to sell the
investment before fair value recovers, so the portion of the impairment that consists of
credit and noncredit losses is not relevant. Bloom must recognize the entire
impairment in earnings. Bloom makes the following entry:
Loss on impairment (NI) ...................................
Discount on bond investment ..........................
400,000
400,000
In the income statement, the entire $400,000 will be shown as an impairment loss
which will reduce net income.
There is no effect on OCI, and the net effect is a $400,000 decrease in
comprehensive income.
Scenario 2: Bloom does not plan to sell the investment, and does not believe it is
more likely than not that it will have to sell the investment before fair value recovers,
so the portion of the impairment that consists of credit and noncredit losses is relevant.
Bloom must recognize the $250,000 of credit losses in earnings, and the other
$150,000 as a reduction of OCI. Bloom makes the following entries:
Credit loss expense ...........................................
Allowance for credit losses .............................
250,000
250,000
Loss on investments (unrealized, OCI) ..............
Fair value adjustment ......................................
150,000
150,000
In the income statement, $250,000 will be shown as a credit loss which will
decrease net income.
OCI will decrease by $150,000, and the net effect is a $400,000 decrease in
comprehensive income.
12–76
Intermediate Accounting, 10/e
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Exercise 12–31 (continued)
Requirement 2: Assuming Bloom has previously recorded a $100,000 unrealized
loss
Scenario 1: Bloom believes it is more likely than not it will have to sell the
investment before fair value recovers, so the portion of the impairment that consists of
credit and noncredit losses is not relevant. Bloom must recognize the entire
impairment in net income. Bloom makes the following entry:
Loss on impairment (NI) ..................................
Discount on bond investment .........................
400,000
400,000
At December 31, 2021, Bloom must reclassify out of OCI the loss that was recorded
in the prior year 2020. Bloom would reverse that 2020 entry:
Fair value adjustment .........................................
Reclassification adjustment (OCI) .................
100,000
100,000
In the income statement, $400,000 will be shown as a loss on impairment which
will decrease net income.
OCI will increase by $100,000, and the net effect is a $300,000 decrease in
comprehensive income.
Note: The total effect of the decline in fair value is $400,000 of which $300,000 is
recognized in comprehensive income in year 2021, and $100,000 was recognized in
comprehensive income in the prior year of 2020 when Bloom would have made the
following entry for the unrealized loss at December 31, 2020:
Loss on investments (unrealized, OCI) .............
Fair value adjustment ......................................
100,000
100,000
Solutions Manual, Vol.1, Chapter 12
12–77
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McGraw-Hill Education.
Exercise 12–31 (concluded)
Scenario 2: Bloom does not plan to sell the investment, and does not believe it is
more likely than not that it will have to sell the investment before fair value recovers,
so the portion of the impairment that consists of credit and noncredit losses is relevant.
Bloom must recognize the $250,000 of credit losses in net income. Bloom also
should recognize in OCI an additional $50,000 of unrealized losses on its AFS
investment, as that loss has increased from $100,000 to $150,000:
Credit loss expense..............................................
Allowance for credit losses .............................
Loss on investments (unrealized, OCI) ..............
Fair value adjustment ......................................
250,000
250,000
50,000
50,000
In the income statement, $250,000 will be shown as a credit loss expense which
will decrease net income.
OCI will be decreased by $50,000, and the net effect is a $300,000 decrease in
comprehensive income.
Note: Of the total $400,000 decline in fair value since the investment was purchased,
$100,000 of decrease in OCI and comprehensive income occurred in 2020, when the
$100,000 unrealized loss was recognized.
12–78
Intermediate Accounting, 10/e
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Exercise 12–32
Requirement 1
Under IFRS No. 9, if there has not been a significant increase in credit risk, only
12-month credit losses are recognized as impairments:
Loss on impairment (NI) ..................................
Allowance for credit losses .............................
750,000
750,000
Requirement 2
Under IFRS No. 9, if there has been a significant increase in credit risk, lifetime
credit losses are recognized as impairments:
Loss on impairment (NI) (€750,000 + €450,000) ..
Allowance for credit losses .............................
1,200,000
1,200,000
Requirement 3
Under IFRS No. 9, credit losses are eligible for reversal if they recover. In this
case, because no significant increase in credit risk has occurred, only 12-month credit
losses have been recognized as impairments, totaling €750,000. Now 12-month credit
losses total €650,000, so the allowance should be reduced by €100,000:
Allowance for credit losses ................................
Loss on impairment (NI) ..............................
100,000
100,000
Solutions Manual, Vol.1, Chapter 12
12–79
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McGraw-Hill Education.
PROBLEMS
Problem 12–1
Requirement 1
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
($ in millions)
80.00
14.00
66.00
Requirement 2
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × $66) ....................................
3.20
0.10
Requirement 3
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × [$66 + $0.1]) ......................
3.20
0.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2021, balance sheet
at its amortized cost; that is, its book value:
Investment in bonds ...........................................................
$80.00
Less: Discount on bond investment ($14 – $0.10 – $0.11 million) 13.79
Amortized cost ...............................................................
$66.21
Increases and decreases in the fair value between the time a debt security is
acquired and the day it matures to a prearranged maturity value are relatively
unimportant if sale before maturity isn’t an alternative. For this reason, if an
investor has the positive intent and ability 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.
12–80
Intermediate Accounting, 10/e
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Problem 12–1 (concluded)
Requirement 5
Fuzzy Monkey’s 2021 statement of cash flows would be affected as follows:
Operating activities cash flows: Cash flow from interest
received of $3.2 + $3.2 = $6.4 inflow.
(Note: if Fuzzy Monkey prepares an indirect method statement of
cash flows, it would have interest revenue of $3.30 + $3.31 =
$6.61 included in net income, so would have to include an
adjustment of $6.4 – $6.61 = ($0.21) to get from net income to
cash flow from operating activities.)
Investing activities cash flows: Cash flow from purchase of
investments = $66 outflow.
Solutions Manual, Vol.1, Chapter 12
12–81
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McGraw-Hill Education.
Problem 12–2
Requirement 1
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
($ in millions)
80.00
14.00
66.00
Requirement 2
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × $66) ....................................
3.20
0.10
Requirement 3
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × [$66 + $0.1]) ......................
3.20
0.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2021, balance sheet
at its fair value, $70 million.
For investments in trading securities, changes in market values, and thus market
returns, provide an indication of management’s success in deciding when to
acquire the investment, when to sell it, whether to invest in fixed-rate or
variable-rate securities, and whether to invest in long-term or short-term
securities.
To do this, we first need to determine the investment’s amortized cost (or book
value) at the end of the year:
Investment in bonds ...........................................................
Less: Discount on bond investment ($14 – $0.10 – $0.11 million)
Amortized cost ...............................................................
$80.00
13.79
$66.21
Thus, Fuzzy Monkey needs to move from a fair value adjustment of $0 to $3.79
in order to reflect a fair value of $70 million:
12–82
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–2 (concluded)
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($70 – $66.21)
Fair Value Adjustment
1/1/2021
0
Change needed
3.79
12/31/2021
3.79
Fair value adjustment (calculated above) ........................
Gain on investments (unrealized, NI) (to balance) ....
Fair Value
Adjustment
$ 0
?
$3.79
3.79
3.79
Because these are trading securities, the unrealized holding gain of $3.79 would
be recognized in Fuzzy Monkey’s 2021 income statement.
Requirement 5
Fuzzy Monkey’s 2021 statement of cash flows would be affected as follows:
Operating activities cash flows: Cash flow from interest
received of $3.2 + $3.2 = $6.4 inflow.
(Note: if Fuzzy Monkey prepares an indirect method statement of
cash flows, it would have interest revenue of $3.30 + $3.31 =
$6.61 and an unrealized holding gain of $3.79 included in net
income, totaling $10.4, so would have to include an adjustment of
$6.4 – $10.4 = ($4.0) to get from net income to cash flow from
operating activities.)
Fuzzy Monkey would also be likely to treat the cash flow from
purchase of trading securities as an operating activities $66
cash outflow.
Solutions Manual, Vol.1, Chapter 12
12–83
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McGraw-Hill Education.
Problem 12–3
Requirement 1
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
($ in millions)
80.00
14.00
66.00
Requirement 2
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × $66) ....................................
3.20
0.10
Requirement 3
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × [$66 + $0.1]) ......................
3.20
0.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2021, balance sheet
at its fair value, $70 million.
For investments in securities available-for-sale, changes in market values, and
thus market returns, provide an indication of management’s success in deciding
when to acquire the investment, when to sell it, whether to invest in fixed-rate
or variable-rate securities, and whether to invest in long-term or short-term
securities.
To do this, we first need to determine the investment’s amortized cost (or book
value) at the end of the year:
Investment in bonds ...........................................................
Less: Discount on bond investment ($14 – $0.10 – $0.11 million)
Amortized cost ...............................................................
$80.00
13.79
$66.21
Thus, Fuzzy Monkey needs to move from a fair value adjustment of $0 to $3.79
in order to reflect a fair value of $70 million:
12–84
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–3 (concluded)
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($70 – $66.21)
Fair Value Adjustment
1/1/2021
0
Change needed
3.79
12/31/2021
3.79
Fair value adjustment (calculated above) ........................
Gain on investments (unrealized, OCI) (to balance) .
Fair Value
Adjustment
$ 0
?
$3.79
3.79
3.79
Because these are securities available for sale, the unrealized holding gain of
$3.79 would be recognized in Fuzzy Monkey’s 2021 other comprehensive
income. They only would be recognized in net income in the period in which
they are sold.
Requirement 5
Fuzzy Monkey’s 2021 statement of cash flows would be affected as follows:
Operating activities cash flows: Cash flow from interest
received of $3.2 + $3.2 = $6.4 inflow.
(Note: if Fuzzy Monkey prepares an indirect method statement
of cash flows, it would have interest revenue of $3.30 + $3.31 =
$6.61 included in net income, so would have to include an
adjustment of $6.4 – $6.61 = ($0.21) to get from net income to
cash flow from operating activities.)
Investing activities cash flows: Cash flow from purchase of
investments = $66 outflow.
Solutions Manual, Vol.1, Chapter 12
12–85
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McGraw-Hill Education.
Problem 12–4
Note: Because Fuzzy Monkey elected the fair value option, these investments will be
accounted for similar to trading securities with regard to recognizing unrealized gains
or losses on the investment in net income. Therefore, the answers to Requirements
1–3 are the same as for any type of investment in debt securities, and the answer to
Requirement 4 follows that for trading securities in Problem 12–2.
Requirement 1
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
($ in millions)
80.00
14.00
66.00
Requirement 2
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × $66) ....................................
3.20
0.10
Requirement 3
Cash (4% × $80 million) .........................................
Discount on bond investment (difference) ............
Interest revenue (5% × [$66 + $0.10]) ....................
3.20
0.11
3.30
3.31
Requirement 4
Fuzzy Monkey reports its investment in the December 31, 2021, balance sheet
at its fair value, $70 million.
To determine the journal entry that Fuzzy Monkey must make, we first need to
determine the investment’s amortized cost (or book value) at the end of the
year:
Investment in bonds ...........................................................
Less: Discount on bond investment ($14 – $0.10 – $0.11 million)
Amortized cost ...............................................................
$80.00
13.79
$66.21
Thus, Fuzzy Monkey needs to move from a fair value adjustment of $0 to $3.79
in order to reflect a fair value of $70 million:
12–86
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–4 (continued)
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ($70 – $66.21)
Fair Value Adjustment
1/1/2021
0
Change needed
3.79
12/31/2021
3.79
Fair value adjustment (calculated above) ........................
Gain on investments (unrealized, NI) (to balance) ....
Fair Value
Adjustment
$ 0
?
$3.79
3.79
3.79
The unrealized holding gain of $3.79 would be recognized in Fuzzy Monkey’s
2021 income statement.
Requirement 5
Fuzzy Monkey’s 2021 statement of cash flows would be affected as follows:
Operating activities cash flows: Cash flow from interest
received of $3.2 + $3.2 = $6.4 inflow.
(Note: if Fuzzy Monkey prepares an indirect method statement
of cash flows, it would have included in net income interest
revenue of $3.30 + $3.31 = $6.61 and an unrealized holding gain
of $3.79, totaling $10.4, so would have to include an adjustment
of $6.4 – $10.4 = ($4.0) to get from net income to the correct
operating activities cash flow.)
Solutions Manual, Vol.1, Chapter 12
12–87
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McGraw-Hill Education.
If Fuzzy Monkey anticipates holding these investments for a
sufficiently long period, which seems likely given that it didn’t
classify them as trading securities to begin with, it would report
this $66 cash outflow as an investing activities cash flow. Note
that if Fuzzy Monkey had instead anticipated holding the
securities for a short period of time, it might treat the cash
outflow as an operating activities cash flow, similar to how it
would treat cash flows associated with a trading security.
Investing activities cash flows: Cash flow from purchase of investments = $66
outflow
12–88
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–4 (concluded)
Requirement 6
The answers to requirements 1–5 would not differ if the investment
qualified for treatment as a held-to-maturity investment, because Fuzzy
Monkey’s choice of the fair value option still requires accounting for the
investment at fair value and recognizing unrealized gains or losses in net
income.
Solutions Manual, Vol.1, Chapter 12
12–89
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McGraw-Hill Education.
Problem 12–5
Requirement 1
2021
March 31 for Distribution Transformer bonds
Investment in bonds ....................................................
Cash ..........................................................................
400,000
400,000
September 1 for American Instruments bonds
Investment in bonds ....................................................
Cash ..........................................................................
900,000
September 30 for Distribution Transformer bonds
Cash ..............................................................................
Interest revenue ($400,000 × 8% × 6/12) ......................
16,000
900,000
16,000
October 2 for Distribution Transformer bonds
1)
Update the fair value adjustment for Distribution Transformer bonds
Need to move from a fair value adjustment of $0 to $25,000:
Balance on 3/31/2021
± Adjustment needed to update fair value
Balance needed on 10/2/2021 ($425,000 – $400,000)
Fair Value Adjustment
3/31/2021
0
Change needed
25,000
10/2/2021
25,000
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ...................
Fair Value
Adjustment
$
0
?
$25,000
25,000
25,000
Note: The gain included in NI equals the difference between the proceeds ($425,000)
and the carrying value of the investment ($400,000).
12–90
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–5 (continued)
2)
Record the sale transaction for Distribution Transformer bonds
Cash (proceeds) ..............................................................
Investment in bonds (cost) ........................................
Fair value adjustment (account balance) .....................
November 1 for M&D bonds
Investment in bonds ....................................................
Cash .........................................................................
425,000
400,000
25,000
1,400,000
1,400,000
Solutions Manual, Vol.1, Chapter 12
12–91
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McGraw-Hill Education.
Problem 12–5 (continued)
December 31
Adjusting entries:
Accrue interest for American Instruments bonds
Interest receivable ........................................................
Interest revenue ($900,000 × 10% × 4/12) .....................
30,000
Accrue interest for M&D bonds
Interest receivable ........................................................
Interest revenue ($1,400,000 × 6% × 2/12) ....................
14,000
30,000
14,000
Prepare fair value adjustment for remaining investments
Trading Securities Investments
M & D Corporation bonds
American Instruments bonds
Totals—Dec. 31, 2021
Accumulated
Unrealized
Cost
Fair Value
Gain (Loss)
$1,400,000
$1,460,000 $60,000
900,000
850,000
(50,000)
$2,300,000
$2,310,000 $10,000*
Need to move from a fair value adjustment of $0 to $10,000:
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021
Fair Value Adjustment
1/1/2021
0
Change needed
10,000
12/31/2021
10,000
Fair value adjustment (calculated above) .........................
Gain on investments (unrealized, NI) .....................
Fair Value
Adjustment
$
0
?
$10,000
10,000
10,000
12–92
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–5 (concluded)
Requirement 2
Income statement:
Interest revenue ($16,000 + $30,000 + $14,000)
Gain on investments ($25,000 + $10,000)
Net Income
$
$
Statement of comprehensive income:
Net income
Other comprehensive income
Comprehensive income
Balance sheet:
Current Assets
Interest receivable
Investment in bonds
Plus: Fair value adjustment
$2,310,000
Shareholders’ Equity
Retained Earnings ...............................................
60,000
35,000
95,000
$95,000
0
$95,000
$
44,000
$2,300,000
10,000
$95,000
Solutions Manual, Vol.1, Chapter 12
12–93
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McGraw-Hill Education.
Problem 12–6
Requirement 1
2021
March 31 for Distribution Transformer bonds
Investment in bonds ....................................................
Cash ..........................................................................
400,000
400,000
September 1 for American Instruments bonds
Investment in bonds ....................................................
Cash ..........................................................................
900,000
September 30 for Distribution Transformer bonds
Cash ..............................................................................
Interest revenue ($400,000 × 8% × 6/12) ......................
16,000
900,000
16,000
October 2 for Distribution Transformer bonds
1) Update the fair value adjustment for Distribution Transformer bonds
Need to move from a fair value adjustment from $0 to $25,000:
Initial balance
± Adjustment needed to update fair value
Balance needed on 10/2/2021 ($425,000 – $400,000)
Fair Value Adjustment
Initial
0
Change needed
25,000
10/2/2021
25,000
Fair value adjustment .................................................................
Gain on investments (unrealized, OCI) (to balance) .................
Fair Value
Adjustment
$
0
?
$25,000
25,000
25,000
12–94
Intermediate Accounting, 10/e
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–6 (continued)
2) Record any reclassification adjustment for Distribution Transformer
bonds
Need to move from a fair value adjustment from $25,000 to $0:
Balance on 10/2/2021:
± Reclassification adjustment
Balance needed to close fair value adjustment
Fair Value Adjustment
10/2/2021
25,000
Change needed
10/2/2021
Fair Value
Adjustment
$25,000
?
$
0
25,000
0
Reclassification adjustment (OCI) (to balance) ................
Fair value adjustment ..............................................................
25,000
25,000
3) Record the sale transaction for Distribution Transformer bonds
Cash .............................................................................
Investment in bonds ................................................
Gain on investments (NI) .......................................
425,000
400,000
25,000
Note: The gain included in NI equals the difference between the proceeds ($425,000)
and the carrying value of the investment ($400,000). It also equals the amount of
unrealized gain that had accumulated in AOCI and was removed from AOCI with the
reclassification adjustment.
November 1 for M&D bonds
Investment in bonds ....................................................
Cash .........................................................................
1,400,000
1,400,000
Solutions Manual, Vol.1, Chapter 12
12–95
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McGraw-Hill Education.
Problem 12–6 (continued)
December 31
Adjusting entries:
Accrue interest for American Instruments bonds
Interest receivable ........................................................
Interest revenue ($900,000 × 10% × 4/12) .....................
30,000
Accrue interest for M&D bonds
Interest receivable ........................................................
Interest revenue ($1,400,000 × 6% × 2/12) ....................
14,000
30,000
14,000
Prepare fair value adjustment for remaining investments
Available-for-Sale Securities
M & D Corporation bonds
American Instruments bonds
Totals—Dec. 31, 2021
Accumulated
Unrealized
Cost
Fair Value
Gain (Loss)
$1,400,000
$1,460,000 $60,000
900,000
850,000
(50,000)
$2,300,000
$2,310,000 $10,000*
Need to move from a fair value adjustment of $0 to $10,000 for the portfolio:
Balance on 1/1/2021
± Adjustment needed to update fair value
* Balance needed on 12/31/2021
Fair Value Adjustment
1/1/2021
0
Change needed
10,000
12/31/2021
10,000
Fair value adjustment (calculated above) .........................
Gain on investments (unrealized, OCI) ..................
Fair Value
Adjustment
$
0
?
$10,000
10,000
10,000
12–96
Intermediate Accounting, 10/e
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–6 (concluded)
Requirement 2
Income statement:
Interest revenue ($16,000 + $30,000 + $14,000))
Gain on investments
Net income ............................................
Statement of comprehensive income:
Net income
Other comprehensive income:
Gain on investments ($25,000 + $10,000)
Reclassification adjustment
Comprehensive income
Balance sheet:
Current Assets
Interest receivable
Noncurrent Assets
Investment in bonds
Plus: Fair value adjustment
$2,310,000
Shareholders’ Equity
Retained Earnings
Accumulated other comprehensive income
$ 60,000
25,000
$ 85,000
$ 85,000
$ 35,000
(25,000)
10,000
$95,000
$
44,000
$2,300,000
10,000
$
85,000
10,000
Solutions Manual, Vol.1, Chapter 12
12–97
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McGraw-Hill Education.
Problem 12–7
Requirement 1
2021
March 31 for Distribution Transformer stock
Investment in equity securities ....................................
Cash ..........................................................................
400,000
400,000
September 1 for American Instruments stock
Investment in equity securities ....................................
Cash ..........................................................................
900,000
September 30 for Distribution Transformer stock
Cash ..............................................................................
Dividend revenue .....................................................
16,000
900,000
16,000
October 2 for Distribution Transformer stock
1)
Update the fair value adjustment for Distribution Transformer stock
Need to move from a fair value adjustment of $0 to $25,000:
Balance on 3/31/2021
± Adjustment needed to update fair value
Balance needed on 10/2/2021 ($425,000 – $400,000)
Fair Value Adjustment
3/31/2021
0
Change needed
25,000
10/2/2021
25,000
Fair Value
Adjustment
$
0
?
$25,000
Fair value adjustment ......................................................... 25,000
Gain on investments (unrealized, NI) (to balance) .....
25,000
Note: The gain included in NI equals the difference between the proceeds ($425,000)
and the carrying value of the investment ($400,000).
12–98
Intermediate Accounting, 10/e
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–7 (continued)
2)
Record the sale transaction for Distribution Transformer stock
Cash (proceeds) ..............................................................
Investment in equity securities (cost) .......................
Fair value adjustment (account balance) .................
November 1 for M&D stock
Investment in equity securities ....................................
Cash .........................................................................
425,000
400,000
25,000
1,400,000
1,400,000
December 31
Adjusting entry:
Prepare fair value adjustment for remaining investments
Equity Securities
M & D Corporation stock
American Instruments stock
Totals—Dec. 31, 2021
Accumulated
Unrealized
Cost
Fair Value
Gain (Loss)
$1,400,000
$1,460,000 $60,000
900,000
850,000
(50,000)
$2,300,000
$2,310,000 $10,000*
*Need to move from a fair value adjustment of $0 to $10,000:
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021
Fair Value Adjustment
1/1/2021
0
Change needed
10,000
12/31/2021
10,000
Fair value adjustment (calculated above) ........................
Gain on investments (unrealized, NI) .....................
Fair Value
Adjustment
$
0
?
$10,000
10,000
10,000
Solutions Manual, Vol.1, Chapter 12
12–99
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–7 (concluded)
Requirement 2
Income statement:
Dividend revenue
Gain on investments (unrealized)
Gain on investments (sold)
Net Income
Statement of comprehensive income:
Net income
Other comprehensive income
Comprehensive income
Balance sheet:
Noncurrent Assets
Investments in equity securities
Plus: Fair value adjustment
$2,310,000
Shareholders’ Equity
Retained Earnings ...............................................
$16,000
10,000
25,000
$51,000
$51,000
______0
$51,000
$2,300,000
10,000
$51,000
12–100
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–8
Requirement 1
2021
December 12 for FF&G bonds
Investment in bonds .....................................................................
Cash ..........................................................................................
December 13 for Ferry Intercommunications stock
Investment in equity securities .....................................................
Cash ..........................................................................................
($ in millions)
12.0
12.0
22.0
22.0
December 15 for FF&G bonds
1) Update the fair value adjustment for FF&G bonds
Need to move from a fair value adjustment of $0 to $0.1 million:
Balance on 12/12/2021
± Adjustment needed to update fair value
Balance needed on 12/15/2021 ($12.1 – $12.0)
Fair Value Adjustment
12/12/2021
0
Change needed
0.1
12/15/2021
0.1
Fair Value
Adjustment
$0
?
$0.1 million
Fair value adjustment ............................................................................... 0.1
Gain on investments (unrealized, NI) (to balance) ...................
0.1
Note: The gain included in NI equals the difference between the proceeds ($12.1
million) and the carrying value of the investment ($12.0 million).
Solutions Manual, Vol.1, Chapter 12
12–101
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McGraw-Hill Education.
Problem 12–8 (continued)
2)
Record the sale transaction for FF&G bonds
Cash ...............................................................................................
Investment in bonds .................................................................
Fair value adjustment (account balance).......................................
December 22 for U.S. treasury bills and bonds
Investment in bonds .....................................................................
Cash ...........................................................................................
12.1
12.0
0.1
121.0
121.0
December 23 for Ferry Intercommunications stock
1)
Update the fair value adjustment for Ferry Intercommunications stock
Need to move from a fair value adjustment of $0 to ($1.0) million:
Balance on 12/13/2021
± Adjustment needed to update fair value
Balance needed on 12/23/2021 ($10.0 – $11.0)
Fair Value Adjustment
12/13/2021
Fair Value
Adjustment
$ 0
?
($1.0)
0
Change needed
1.0
12/23/2021
1.0
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment .............................................................
1.0
1.0
Note: The loss included in NI equals the difference between the proceeds ($10.0
million) and the carrying value of the investment ($11.0 million).
12–102
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–8 (continued)
2) Record the sale transaction for Ferry Intercommunications stock
Cash ..............................................................................................
Fair value adjustment (account balance) ..........................................
Investment in equity securities ................................................
10.0
1.0
11.0
December 26 for U.S. Treasury bills
1)
Update the fair value adjustment for U.S. Treasury bills
Need to move from a fair value adjustment of $0 to $1.0 million:
Balance on 12/22/2021
± Adjustment needed to update fair value
Balance needed on 12/26/2021 ($57 – 56)
Fair Value Adjustment
12/22/2021
0
Change needed
1.0
12/26/2021
1.0
Fair Value
Adjustment
$ 0
?
$1.0
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ...................
1.0
1.0
Note: The gain included in NI equals the difference between the proceeds ($57.0
million) and the carrying value of the investment ($56.0 million).
Solutions Manual, Vol.1, Chapter 12
12–103
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McGraw-Hill Education.
Problem 12–8 (continued)
2)
Record the sale transaction for U.S. Treasury bills
Cash (selling price) ...........................................................................
Fair value adjustment (account balance).......................................
Investment in bonds (account balance) .........................................
57.0
1.0
56.0
December 27 for U.S. Treasury bonds
1)
Update the fair value adjustment for U.S. Treasury bonds
Need to move from a fair value adjustment of $0 to ($2) million:
Balance on 12/22/2021
± Adjustment needed to update fair value
Balance needed on 12/27/2021 ($63.0 – $65.0)
Fair Value Adjustment
12/22/2021
Change needed
0
2.0
12/27/2021
2.0
Fair Value
Adjustment
$0
?
$(2)
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment .............................................................
2.0
2.0
Note: The loss included in NI equals the difference between the proceeds ($63.0
million) and the carrying value of the investment ($65.0 million).
2)
Record the sale transaction for U.S. Treasury bonds
Cash (selling price) ...........................................................................
Fair value adjustment (account balance)...........................................
Investment in bonds (account balance) .........................................
63
2
65
12–104
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–8 (continued)
December 28 for Ferry Intercommunications
Cash ..............................................................................................
Dividend revenue......................................................................
0.2
0.2
December 31
Adjusting entry:
Prepare fair value adjustment for Ferry Intercommunications
(in millions)
December 13 Cost of 2 million shares
$ 22.0
December 23 Sale of 1 million shares, original cost
(11.0)
December 31 Cost of remaining 1 million shares
$ 11.0
December 31 Fair value (1m shares × $10 per share
December 31 Cost (from above)
December 31 Fair value adjustment required
$ 10.0
(11.0)
( 1.0)
Loss on investments (unrealized, NI) ..........................................
Fair value adjustment ...............................................................
1.0
1.0
Requirement 2
($ in millions)
Balance sheet:
Current Assets
Investments in equity securities
Less: Fair value adjustment
$ 11.0
( 1.0)
$ 10.0
Solutions Manual, Vol.1, Chapter 12
12–105
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McGraw-Hill Education.
Problem 12–8 (continued)
Income statement:
Other revenue (expenses):
Interest revenue (11 months)
Dividend revenue (December)
Total interest and dividend revenue
Gain(loss) on investments:
Gain on investments (11 months)
Loss on investments (11 months)
FF&G bonds
Ferry Intercommunications
U.S. Treasury bills
U.S. Treasury bonds
Net loss on investments
Total other revenue(expenses)
$ 5.0
0.2
$ 5.2
$ 8.0
(11.0)
0.1
(2.0)
1.0
(2.0)
(5.9)
$(0.7)
12–106
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–8 (concluded)
Requirement 3
2022
January 2
1) Update the fair value adjustment for Ferry Intercommunications:
Need to move from a fair value adjustment of ($1.0) to ($0.8) million:
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/2/2022 ($10.2 – $11.0)
Fair Value Adjustment
12/31/2021
Change needed
1/2/2022
Fair Value
Adjustment
$ (1)
?
$(0.8)
1.0
0.2
0.8
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ....................
0.2
0.2
Note: The gain included in NI equals the difference between the proceeds ($10.2
million) and the carrying value of the investment ($10 million).
2)
Record the sale transaction for Ferry Intercommunications:
($ in millions)
Cash (selling price) ..........................................................................
Fair value adjustment (account balance) ..........................................
Investment in equity securities (account balance) ........................
January 5 for Warehouse Designs bonds
Investment in bonds .....................................................................
Cash ..........................................................................................
10.2
0.8
11.0
34.0
34.0
Solutions Manual, Vol.1, Chapter 12
12–107
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McGraw-Hill Education.
Problem 12–9
2021
($ in millions)
October 18 for Millwork Ventures stock
Investment in equity securities......................................................
58.0
Cash ...........................................................................................
58.0
October 31 for Kansas Abstractors bonds
Cash ...............................................................................................
Interest revenue .........................................................................
1.5
November 1 for Holistic Entertainment bonds
Investment in bonds ......................................................................
Cash ...........................................................................................
18.0
1.5
18.0
November 1 for Kansas Abstractors bonds
1)
Update the fair value adjustment for Kansas Abstractors bonds:
Need to move from a fair value adjustment of $0 to ($2) million:
Balance on 5/1/2021
± Adjustment needed to update fair value
Balance needed on 11/1/2021 ($28 – $30)
Fair Value Adjustment
5/1/2021
Fair Value
Adjustment
$ 0
?
$(2.0)
0
Change needed
2.0
11/1/2021
2.0
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment .............................................................
2.0
2.0
Note: The loss included in NI equals the difference between the proceeds ($28
million) and the carrying value of the investment ($30 million).
12–108
Intermediate Accounting, 10/e
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–9 (continued)
2)
Record the sale transaction for Kansas Abstractors bonds:
Cash ..............................................................................................
Fair value adjustment (account balance) ..........................................
Investment in bonds (TS) ........................................................
28.0
2.0
30.0
December 1 for Household Plastics bonds
Investment in bonds .....................................................................
Cash ..........................................................................................
60.0
December 20 for U.S. Treasury bonds
Investment bonds .........................................................................
Cash ..........................................................................................
5.6
December 21 for NXS Corporation stock
Investment in equity securities .....................................................
Cash ..........................................................................................
44.0
60.0
5.6
44.0
December 23 for U.S. Treasury bonds
1)
Update the fair value adjustment for U.S. Treasury bonds:
Need to move from a fair value adjustment of $0 to $0.1 million:
Balance on 12/20/2021
± Adjustment needed to update fair value
Balance needed on 12/23/2021 ($5.7 – $5.6)
Fair Value Adjustment
12/20/2021
0
Change needed
0.1
12/23/2021
0.1
Fair Value
Adjustment
$ 0
?
$0.1
Solutions Manual, Vol.1, Chapter 12
12–109
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–9 (continued)
Fair value adjustment ..................................................................
Gain on investments (unrealized, NI) (to balance) ...................
0.1
0.1
Note: The gain included in NI equals the difference between the proceeds ($5.7
million) and the carrying value of the investment ($5.6 million).
2)
Record the sale transaction for U.S. Treasury bonds:
Cash ...............................................................................................
Investment bonds .....................................................................
Fair value adjustment (account balance).......................................
5.7
5.6
0.1
($ in millions)
December 29 for Millwork Ventures stock
Cash ...............................................................................................
Dividend revenue....................................................................
3.0
3.0
December 31
Adjusting entries:
Accrue interest for Holistic Entertainment bonds:
Interest receivable ($18 million × 10% × 2/12) ..................................
Interest revenue
0.3
Accrue interest for Household Plastics bonds
Interest receivable ($60 million × 12% × 1/12) ...................................
Interest revenue .....................................................................
0.6
Prepare fair value adjustment for remaining investments
(in millions)
Investments in Securities
Millwork Ventures stock
NXS Corporation stock
Totals—Dec. 31, 2021
Cost
$ 58.0
44.0
$102.0
Fair Value
$ 55.0
46.0
$101.0
0.3
0.6
Accumulated
Unrealized
Gain (Loss)
$(3.0)
2.0
$(1.0)*
Note: For held-to-maturity investments, there are no adjustments to fair value.
12–110
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–9 (continued)
Need to move from a fair value adjustment of $0 to $(1.0 million) for the
portfolio:
Balance on 10/18/2021
± Adjustment needed to update fair value
*Balance needed on 12/31/2021
Fair Value Adjustment
10/18/2021
Fair Value
Adjustment
$ 0
?
$(1)
0
Change needed
1
12/31/2021
1
Loss on investments (unrealized, NI) (to balance) .........................
Fair value adjustment ............................................................
1
1
Solutions Manual, Vol.1, Chapter 12
12–111
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Problem 12–9 (concluded)
2022
January 7 for NXS Corporation stock
1)
Update the fair value adjustment:
Need to move from a fair value adjustment from $2 to $(1 million):
Balance on 12/31/2021
± Adjustment needed to update fair value
Balance needed on 1/7/2022 ($43 cost – $44 fair value)
Fair Value Adjustment
12/31/2021
Fair Value
Adjustment
$
2
?
$
(1)
2
Change needed
3
1/7/2022
1
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment .............................................................
2)
3
3
Record the sale transaction:
Cash ..............................................................................
Fair value adjustment ...................................................
Investment in equity securities.................................
43
1
44
Note: Because accounted for as fair value through net income, all gain or loss has
already been recognized in NI as unrealized gains and losses, so no additional gain or
loss is recognized in the transaction recording the sale.
12–112
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–10
Requirement 1
Purchase
Investment in equity affiliate ........................................................
Cash .........................................................................................
324
Net income
Investment in equity affiliate (30% × $160 million) ........................
Investment revenue ...................................................................
48
Dividends
Cash (10 million shares × $2 per share) ...............................................
Investment in equity affiliate ....................................................
20
Depreciation adjustment
Investment revenue ([30% × $80 million] ÷ 6 years) .........................
Investment in equity affiliate ....................................................
4
($ in millions)
324
48
20
4
Adjusting entry
No entry to recognize changes in the fair value of the Lavery investment, as
Runyan is accounting for its investment under the equity method.
Solutions Manual, Vol.1, Chapter 12
12–113
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McGraw-Hill Education.
Problem 12–10 (concluded)
Requirement 2
Purchase
Investment in equity securities......................................................
Cash ..........................................................................................
($ in millions)
324
324
Net income
No entry
Dividends
Cash (10 million shares × $2 per share) ...............................................
Dividend revenue ......................................................................
20
20
Adjusting entry
Need to move from a fair value adjustment from $0 to ($14 million):
Balance on 1/4/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ([10 × $31] – $324 )
Fair Value Adjustment
1/4/21
Fair Value
Adjustment
$
0
?
$ (14)
0
Change needed
14
12/31/2021
14
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment ............................................................
14
14
12–114
Intermediate Accounting, 10/e
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McGraw-Hill Education.
Problem 12–11
Note: The answer to P12-11 is the same as the answer to Requirement 2 of P12-10.
Purchase
Investment in equity securities .....................................................
Cash .........................................................................................
($ in millions)
324
324
Net income
No entry
Dividends
Cash (10 million shares × $2 per share) ...............................................
Dividend revenue......................................................................
20
20
Adjusting entry
Need to move from a fair value adjustment from $0 to ($14 million):
Balance on 1/4/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ([10 × $31] – $324)
Fair Value Adjustment
1/4/21
Fair Value
Adjustment
$
0
?
$ (14)
0
Change needed
14
12/31/2021
14
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment ..............................................................
14
14
Solutions Manual, Vol.1, Chapter 12
12–115
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Problem 12–12
Requirement 1
Note: The journal entries for Requirement 1 of P12-12 are the same as the answer to
Requirement 2 of P12-10 and the same as the answer to P12-11.
Purchase
Investment in equity securities......................................................
Cash ..........................................................................................
($ in millions)
324
324
Net income
No entry
Dividends
Cash (10 million shares × $2 per share) ...............................................
Dividend revenue ......................................................................
20
20
Adjusting entry
Need to move from a fair value adjustment from $0 to ($14 million):
Balance on 1/4/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021 ([10 × $31] – $324)
Fair Value Adjustment
1/4/2021
Fair Value
Adjustment
$
0
?
$ 14)
0
Change needed
14
12/31/2021
14
Loss on investments (unrealized, NI) (to balance) ........................
Fair value adjustment ..............................................................
14
14
12–116
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Problem 12–12 (continued)
Because Runyan is accounting for the Lavery investment under the fair value
option, the unrealized holding loss would be included in 2021 net income.
Therefore, the total effect on net income would be $20 of dividend – $14 of
unrealized holding loss, or $6. The investment would be shown in the balance
sheet at its fair value of $310.
Requirement 2
Purchase
Investment in in equity affiliate....................................................
Cash .........................................................................................
324
Net income
Investment in in equity affiliate (30% × $160 million) ....................
Investment revenue ...................................................................
48
Dividends
Cash (10 million shares × $2 per share) ...............................................
Investment in Lavery Labeling shares......................................
20
Depreciation adjustment
Investment revenue ([30% × $80 million] ÷ 6 years) ..........................
Investment in Lavery Labeling shares......................................
4
($ in millions)
324
48
20
4
Solutions Manual, Vol.1, Chapter 12
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Problem 12–12 (concluded)
Note: After the preceding journal entries are recorded, the balance in the
Lavery Labeling investment account would be:
Investment in Lavery Labeling shares
_______________________________________
($ in millions)
Cost
Share of
net income
Balance
324
48 20Dividends
4 Depreciation adjustment
_________________
348
At December 31, 2021, the fair value of that investment is $310 (= 10 million
shares × $31/share), implying need for the following adjusting entry to adjust
the $348 carrying value of the investment to fair value [$310 – $348 = ($38)]:
Loss on investments (unrealized, NI) ..................................................
Fair value adjustment ................................................................
38
38
Because Runyan is accounting for the Lavery investment under the fair value
option, the unrealized holding loss would be included in 2021 net income.
Therefore, the total effect on net income would be $48 million for Runyan’s
share of Lavery net income minus $4 million of depreciation adjustment and
minus the $38 million unrealized holding loss, yielding a total of $6 million of
income. The investment would be shown in the balance sheet at its fair value of
$310 million.
Note that the net income effect and the carrying value in the balance sheet are
the same in requirements 1 and 2.
12–118
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Problem 12–13
Requirement 1
Purchase
Investment in equity affiliate ........................................................
Cash .........................................................................................
($ in millions)
400.0
400.0
Net income
Investment in equity affiliate (40% × $140 million) ........................
Investment revenue ...................................................................
56.0
Dividends
Cash (40% × $30 million) .................................................................
Investment in equity affiliate ....................................................
12.0
Inventory adjustment
Investment revenue ($5 million × 40%: all sold in 2021) ....................
Investment in equity affiliate ....................................................
2.0
Depreciation adjustment
‡
Investment revenue ([$20 million × 40%] ÷ 16 years) .....................
Investment in equity affiliate ....................................................
0.5
56.0
12.0
2.0
0.5
‡
Calculations:
Investee
Identifiable
Net Assets
Identifiable
Net Assets
Purchased


Cost

$400

Goodwill:
$80 [plug]
$800* × 40% =$320
Fair value:

(5) × 40%
inventory

(20) × 40%
plant facilities
Book value:
Difference
Attributed to:
$775
× 40% =
Undervaluation
of inventory:
$2
Undervaluation
of plant:
$8
$310
* $775 + $5 + $20
Solutions Manual, Vol.1, Chapter 12
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Problem 12–13 (concluded)
Requirement 2
Investment Revenue
($ in millions)
56.0 Share of net income
Inventory
2.0
Depreciation
0.5
_________________
Balance
53.5
Requirement 3
Investment in Equity Affiliate
($ in millions)
Cost
400.0
Share of net income 56.0
Balance
12.0 Dividends
2.0 Inventory
0.5 Depreciation
_________________
441.5
Requirement 4
$400 million cash outflow in investing activities to purchase investment
$12 million cash inflow in operating activities for dividends received
Note: If Northwest uses the indirect method to report its cash flows from
operating activities, it would need an adjustment of ($41.5) to get from the
$53.5 included as investment revenue in net income to the $12 of cash actually
received in dividends and needing to be shown in cash flow from operating
activities.
12–120
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Problem 12–14
Requirement 1
Miller’s management should decide whether it has the ability to exercise
significant influence over operating and financial policies of the Marlon Company.
Ability to exercise significant influence is presumed for investments of 20 percent or
more of voting stock and presumed not to exist for investments of less than 20
percent, other things being equal. Evidence to the contrary should be considered,
including participation on the board of directors, technological dependency, material
intercompany transactions, or interchange of managerial personnel.
Requirement 2
a.
Income statement:
($ in millions)
Investment revenue ($12 million × 1/6)
Patent amortization adjustment ($4 million* ÷ 10)
$2.0
(0.4)
*([$24 million] × 1/6])
$1.6
b.
Balance sheet:
Investment in equity affiliate
($19 million + $2 million – $1 million – $0.4 million)
$19.6*
*Investment in Equity Affiliate
($ in millions)
Cost
19.0
Share of net income 2.0
Balance
1.0 Dividends ($6 million × 1/6)
0.4 Amortization adjustment
_________________
19.6
Solutions Manual, Vol.1, Chapter 12
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Problem 12–14 (concluded)
c. Statement of cash flows:
$19 million cash outflow in investing activities for purchase of investment
$1 million cash inflow in operating activities for dividends received
Note: If Marlon uses the indirect method to report its cash flows from operating
activities, it would need an adjustment of ($0.6) to get from the $1.6 included
as investment revenue in net income to the $1 of cash actually received in
dividends and needing to be shown in cash flows from operating activities.
12–122
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Problem 12–15
Item
Reporting Category
__F_ 1. 35% of the nonvoting preferred stock
T. Trading securities
of American Aircraft Company.
M. Held-to-maturity
__M_ 2. Treasury bills to be held-to-maturity.
A. Available-for-sale
__M_ 3. Two-year note receivable from affiliate.F. FV through NI
__N_ 4. Accounts receivable.
E. Equity method
__M_ 5. Treasury bond maturing in one week. C. Consolidation
__F_ 6. Common stock held in an investment
N. None of these
account for immediate resale.
__T_ 7. Bonds acquired to profit from short-term differences in price.
__F_ 8. 15% of the voting common stock of Computer Storage Devices Company.
__C_ 9. 90% of the voting common stock of Affiliated Peripherals, Inc.
__A_10. Corporate bonds of Primary Smelting Company to be sold if interest rates
fall 1/2%.
__E _11. 25% of the voting common stock of Smith Foundries Corporation: 51%
family-owned by Smith family; fair value readily determinable.
__ F_12. 17% of the voting common stock of Shipping Barrels Corporation:
Investor’s CEO on the board of directors of Shipping Barrels Corporation.
Solutions Manual, Vol.1, Chapter 12
12–123
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Problem 12–16
Requirement 1
Bond Fair Value at 1/1/2021:
Interest [($150,000 × 6%) ÷ 2] × 14.21240 * =
Principal
$150,000 x 0.50257 ** =
Present value of the receivable
*
$ 63,956
75,386
$139,342
Present value of an ordinary annuity of $1: n = 20, i = 3.5% (= 7% ÷ 2) (from Table 4)
** Present value of $1: n = 20, i = 3.5% (= 7% ÷ 2) (from Table 2)
January 1, 2021
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
150,000
10,658
139,342
Requirement 2
January 1, 2021
Investment in bonds (face amount) ........................
Discount on bond investment (difference).........
Cash (price of bonds) ..........................................
150,000
10,658
139,342
June 30, 2021
Cash [($150,000 × 6%) ÷ 2] ....................................
Discount on bond investment (difference) ............
Interest revenue [($150,000 – $10,658) × 7%] ÷ 2
4,500
377
December 31, 2021
Cash (6% ÷ 2 × $150,000) .......................................
Discount on bond investment (difference) ............
Interest revenue [{$150,000 – ($10,658 – $377)} × 7%] ÷ 2
4,500
390
4,877
4,890
Note: For held-to-maturity investments, there are no adjustments to fair value.
12–124
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Problem 12–16 (continued)
Requirement 3
January 1, 2021
Investment in bonds (face amount) .......................
Discount on bond investment (difference) ........
Cash (price of bonds) ..........................................
150,000
10,658
139,342
June 30, 2021
Cash ($150,000 × 6%) ÷ 2 .....................................
Discount on bond investment (difference) ............
Interest revenue [($150,000 – $10,658) × 7%] ÷ 2
Bond Fair Value at June 30, 2021:
Interest [($150,000 × 6%) ÷ 2] × 13.13394 *
Principal $150,000 × 0.47464 ** =
Present value of the receivable
4,500
377
4,877
$ 59,103
71,196
$130,299
=
*Present value of an ordinary annuity of $1: n = 19, i = 4% (= 8% ÷ 2) (from Table 4)
**Present value of $1: n = 19, i = 4% (= 8% ÷ 2) (from Table 2)
January 1 initial cost
Increase from discount amortization
June 30 amortized initial cost
$139,342
377
$139,719
Comparing the amortized initial cost with the fair value of the bonds on that date
provides the amount needed to adjust the investment to its fair value.
June 30 amortized initial cost
June 30 fair value
Fair value adjustment needed
$139,719
130,299
$ 9,420
Solutions Manual, Vol.1, Chapter 12
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Problem 12–16 (continued)
Need to move from a fair value adjustment from $0 to ($9,420):
Balance on 1/1/2021
± Adjustment needed to update fair value
Balance needed on 6/30/2021
Fair Value Adjustment
1/1/2021
Fair Value
Adjustment
$
0
?
$(9,420)
0
Change needed
9,420
6/30/2021
9,420
Loss on investments (unrealized, NI) ..........................................
Fair value adjustment ...........................................................
December 31, 2021
Cash ($150,000 × 6%) ÷ 2 .....................................
Discount on bond investment (difference) ............
Interest revenue [{$150,000 – ($10,658 – $377)} × 7%] ÷ 2
Bond Fair Value at December 31, 2021:
Interest [($150,000 × 6%) ÷ 2] × 12.15999 * =
Principal $150,000 × 0.45280 ** =
Present value of the receivable
9,420
9,420
4,500
390
4,890
$ 54,720
67,920
$122,640
*Present value of an ordinary annuity of $1: n = 18, i = 4.5% (= 9% ÷ 2) (from Table 4)
**Present value of $1: n = 18, i = 4.5% (= 9% ÷ 2) (from Table 2)
12–126
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Problem 12–16 (concluded)
June 30 amortized initial cost
Increase from discount amortization
Dec. 31 amortized initial cost
$139,719
390
$140,109
Comparing the amortized initial cost with the fair value of the bonds on that date
provides the amount needed to adjust the investment to its fair value.
Dec. 31 amortized initial cost
Dec. 31 fair value
Fair value adjustment balance needed: debit/(credit)
$140,109
122,640
$ (17,469)
Need to move from a fair value adjustment from ($9,420) to ($17,469):
Balance on 6/30/2021
± Adjustment needed to update fair value
Balance needed on 12/31/2021
Fair Value Adjustment
6/30/2021
Change needed
12/31/2021
Fair Value
Adjustment
$ ( 9,420)
?
$(17,469)
9,420
8,049
17,469
Loss on investments (unrealized, NI) ..........................................
Fair value adjustment ..........................................................
8,049
8,049
Solutions Manual, Vol.1, Chapter 12
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Problem 12–17
Requirement 1
The Donald Company bonds include only interest and principal, so Feherty’s
business purpose is relevant for the purpose of classification and reporting. Ten
bonds are to be held to collect contractual cash flows over the life of the debt, so
they would be accounted for at amortized cost. The remaining bonds would be
accounted for at fair value through other comprehensive income (FVOCI), as
Feherty is holding those bonds both to collect contractual cash flows and for sale.
The Watson company stock would be accounted for at fair value through OCI
(FVOCI) because that is what Feherty elected. Feherty can make that irrevocable
election, but otherwise, because it does not qualify for the equity method, would
account for the Watson equity investment as FVPL.
Requirement 2
The Donald Company bonds would be reported as follows:
a) 5 bonds are accounted for at amortized cost and were not sold. No
unrealized gain or loss would be recognized in OCI or net income.
Effect: $0 in net income
$0 in other comprehensive income
$0 in comprehensive income
b) 5 of the amortized cost bonds were sold at a price of $1,040 per bond,
yielding a realized gain on sale of 5 × ($1,040 – $1,000) = $200.
Effect: $200 in net income
$ 0 in other comprehensive income
$200 in comprehensive income
c) 30 bonds are accounted for at FVOCI and were not sold.
Unrealized gains of 30 × ($1,040 – $1,000) = $1,200.
Effect: $
0 in net income
$1,200 in other comprehensive income
$1,200 in comprehensive income
12–128
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Problem 12–17 (concluded)
d) 10 of the FVOCI bonds were sold at a price of $1,040 per bond, yielding a
realized gain on sale of 10 × ($1,040 – $1,000) = $400.
Effect: $400 in net income
$ 0 in other comprehensive income
$400 in comprehensive income
e) The Watson Company common stock investment is accounted for at
FVOCI. Unrealized gain of $5,000 ($30,000 – $25,000).
Effect: $ 0 in net income
$5,000 in other comprehensive income
$5,000 in comprehensive income
Summary of effects:
Net income:
Realized gain on 5 bonds sold that were at amortized cost:
Realized gain on 10 bonds sold that were at FVOCI:
Total effect on net income ..............................
$ 200
400
$ 600
Other comprehensive income (OCI):
Unrealized gain on 30 bonds retained that are at FVOCI:
Unrealized gain on Watson equity accounted for at FVOCI:
Total effect on other comprehensive income .
$1,200
5,000
$6,200
Comprehensive income = Net income + OCI =
$6,800
Solutions Manual, Vol.1, Chapter 12
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Problem 12–18
Bee Company Investment
2021: Stewart must recognize the $240,000 of credit losses in net income. The other
$260,000 is ignored.
Credit loss expense (NI) .....................................
Allowance for credit losses .............................
240,000
240,000
2022: The credit loss is reduced from $240,000 to $140,000, so Stewart must
recognize a $100,000 recovery of credit loss in 2022:
Allowance for credit losses .................................
Credit loss expense (NI) ..................................
100,000
100,000
Oliver Corporation Investment
2021: Stewart accounts for the Oliver investment as a trading security, so impairment
accounting is not relevant. Stewart continues to recognize in net income any
unrealized gains and losses associated with fair value changes. Given that the bonds
already have a negative fair value adjustment of $200,000, and need a negative fair
value adjustment of $300,000 to adjust from amortized cost of $2,500,000 to fair
value of $2,200,000, Stewart must recognize additional unrealized losses of $100,000
for 2021.
Loss on investments (unrealized, NI) ......... ...........
Fair value adjustment .............................. ...........
100,000
100,000
2022: Fair value increased to $2,700,000 during 2022, so Stewart needs to have a
positive fair value adjustment of $200,000 in the balance sheet to adjust from
amortized cost of $2,500,000 to fair value of $2,700,000. Therefore, Stewart must
recognize an unrealized gain of $500,000 for 2022, moving the fair value adjustment
from a negative $300,000 to a positive $200,000. Note that this is not a recovery of
the impairment, but just normal ongoing accounting for a TS investment.
Fair value adjustment .............................. ...........
Gain on investments (unrealized, NI) .............
500,000
500,000
12–130
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Problem 12–18 (concluded)
Jones, Inc Investment
2021: Stewart does not plan to sell the Jones investment, and does not believe it is
more likely than not that it will have to sell the investment before fair value recovers,
so the portion of the impairment that consists of credit and noncredit losses is relevant.
Stewart must recognize the $225,000 of credit losses in net income, as follows:
Credit loss expense (NI) ...................................
Allowance for credit losses .............................
225,000
225,000
Stewart also must recognize a total of $575,000 of unrealized losses. Given that it
already has an unrealized loss of $400,000, it can recognize an additional $175,000 of
unrealized loss as a reduction of OCI:
Loss on investments (unrealized, OCI) .............
Fair value adjustment......................................
175,000
175,000
2022: Fair value has increased to $2,875,000, with the $625,000 difference between
cost and fair value consisting of $125,000 of credit losses and $500,000 of noncredit
losses. Stewart therefore should account for a $100,000 recovery of credit loss
($225,000 – $125,000) as well as a $75,000 unrealized gain associated with the
noncredit loss portion of that difference ($575,000 – $500,000):
Allowance for credit losses ..............................
Credit loss expense (NI) .................................
Fair value adjustment .........................................
Gain on investments (unrealized, OCI) .........
100,000
100,000
75,000
75,000
Solutions Manual, Vol.1, Chapter 12
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DECISION MAKERS’ PERSPECTIVES CASES
Real World Case 12–1
Requirement 1
Dec. 26, 2015
Dec. 31, 2016
Fair Value Adjustment, AFS Investments
$2,710 gain – $14 loss
2,696
Increase during 2016
642
$3,372 gain – $34 loss
3,338
Given the T-account above, the fair value adjustment change during 2016 was an
increase of $642 million.
Requirement 2
Intel would record the following entry to account for unrealized holding gains and
losses associated with its AFS investments:
Fair value adjustment ..............................................
Gain on investments (unrealized, OCI) ...........
1,170
1,170
Actually, Intel would have some gains and some losses recognized in OCI. This
journal entry combines entries made for all AFS investments.
The effect of that journal entry would be to debit (increase) the T-account of the fair
value adjustment.
12–132
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Case 12–1 (concluded)
Requirement 3
Intel would record the following entry to make its reclassification adjustment:
Reclassification adjustment (OCI) ........................
Fair value adjustment ......................................
530
530
The fair value adjustment is credited (reduced) by $530 because reclassification is
removing unrealized gains from the fair value adjustment and from OCI. The effect
of that journal entry would be to credit (decrease) the T-account of the fair value
adjustment.
Requirement 4
After considering these adjustments, the T-account appears as follows:
Dec. 26, 2015
Fair Value Adjustment, AFS Investments
$2,710 gain – $14 loss
2,696
Net unrealized
holding gain
1,170
Reclassification adjustment
Dec. 31, 2016
Plug
$3,372 gain – $34 loss
530
2
3,338
One possible explanation for the debit plug of $2 is an impairment. As discussed
in Appendix 12B, if an unrealized holding loss had been recognized previously, the
fair value adjustment would have been reduced (credited) at that time to reduce the
carrying amount of the AFS investment to its fair value. Recognizing that loss as an
impairment would require removing it from the fair value adjustment by debiting that
account and recognizing the loss in income, just as if it were a realized loss.
Solutions Manual, Vol.1, Chapter 12
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Research Case 12–2
The note that describes an investment in securities “available-for-sale” may be
headed by any one of a variety of captions or subsumed within another disclosure
note. Likewise, the caption by which the investments are reported in the balance sheet
can be reported separately as one of several asset titles or included within another
asset caption.
Investments in securities available-for-sale will be reported as current or noncurrent
assets depending on the intent of management regarding the timing of their eventual
sale. Realized gains or losses are reported in the income statement if any of these
securities were sold during any year reported.
Investments in securities available-for-sale are reported at fair value. Unrealized
holding gains and losses from retaining securities during periods of price change are
not included in the determination of net income for the period. Rather, they are
accumulated and reported as accumulated other comprehensive income, a separate
component of shareholders’ equity. This means an unrealized holding gain would
increase shareholders’ equity and an unrealized holding loss would decrease
shareholders’ equity. The amounts of unrealized gains and losses will be shown on a
combined statement of comprehensive income that includes net income and other
comprehensive income, or as a separate statement of comprehensive income, or
summarized in the statement and detailed in the notes to the financial statements.
By definition, securities available-for-sale are not acquired for the purpose of
profiting from short-term market price changes, so gains and losses from holding
these securities while prices change are not considered relevant performance measures
to be included in earnings.
Cash outflows from acquiring these investments or inflows from selling them are
reported as investing activities in the company’s comparative statements of cash flows
unless trading securities are included in the operating activities section. Whether they
are specifically identifiable depends on the degree of detail the company uses in
reporting its cash flows. Information on investing activities assists investors and
creditors by indicating the direction the company is directing its funds.
12–134
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International Case 12–3
Requirement 1
Satisfied by going to http://www.iasplus.com/standard/ias28.htm.
Requirement 2
Renault’s decision appears appropriate, as the company has significant
influence, but not control. Significant influence is indicated by a greater-than20% equity stake and seats on the Nissan board. Lack of control is indicated by
Renault not owning a majority of voting rights or board seats and not having full
rights to use assets or the obligations with respect to liabilities.
Requirement 3
It is not surprising that Renault makes adjustments that take into account the fair
value of Nissan’s assets and liabilities at the time Renault invested in Nissan. For
example, if the fair value of Nissan’s fixed assets was greater than the book value
of those assets on the date of Renault’s purchase, Renault would need to recognize
additional depreciation over the life of those assets when applying the equity
method. This is consistent with IFRS and also with U.S. GAAP.
Requirement 4
Renault’s harmonization adjustments are required by IFRS, which requires that,
“if the associate uses accounting policies that differ from those of the investor, the
associate's financial statements should be adjusted to reflect the investor's
accounting policies for the purpose of applying the equity method.” [IAS 28.27].
U.S. GAAP has no such requirement.
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International Case 12–4
Requirement 1
P. 146 of the Annual Report includes the following note:
Under the equity method, the investments are initially recognized at cost and
adjusted thereafter to recognize the Group’s share of the profit/(loss) and other
comprehensive income/(loss) of the investee. The Group’s share of the investee’s
profit/(loss) is recognized in the Consolidated Income Statement. Distributions
received from an investee reduce the carrying amount of the investment. Postacquisition movements in Other comprehensive income/(loss) are recognized in
Other comprehensive income/(loss) with a corresponding adjustment to the
carrying amount of the investment.
Unrealized gains on transactions between the Group and its joint ventures and
associates are eliminated to the extent of the Group’s interest in the joint venture
or associate. Unrealized losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred.
Thus, FCA carries some equity investments as available-for-sale investments. Prior to
ASU 2016-1, U.S. GAAP allowed classification of equity investments as AFS
securities if those investments were not held for trading, but ASU 2016-1 requires
equity investments to be accounted for at fair value through net income unless the
investor can exert significant influence over the activities of the investee. Therefore,
FCA’s approach is not consistent with GAAP in effect in 2018.
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Research Case 12–5
Answers to the questions will, of course, vary because students will research
financial statements of different companies.
The responses should identify securities held that are classified as trading
securities, available-for-sale, or held-to-maturity. If the financial statements were
issued in 2018 or after, there also may be equity investments accounted for as fair
value through net income; if before 2018, those same equity investments could be
classified as trading securities or available-for-sale securities.
Although a company is not required to report individual amounts for the three
categories of investments—held-to-maturity, available-for-sale, or trading—on the
face of the balance sheet, that information should be presented in the disclosure
notes.
If securities available-for-sale are held, there may be accumulated unrealized gains
or losses reported in AOCI in the shareholders’ equity section of the balance sheet.
Investments in securities available-for-sale are reported at fair value, and holding
gains or losses are not included in the determination of income for the period.
Instead, they are reported as a separate component of shareholders’ equity.
Unlike the treatment of securities available-for-sale, unrealized holding gains and
losses are included in income for trading securities. There may also be gains or
losses from the sale of investments during the year. There also will likely be interest
revenue in the income statement.
The statement of cash flows will report acquisitions or disposals of available for
sale investments as investing activities. Acquisitions and disposals of trading
securities typically are shown as operating activities. Interest revenue is an operating
activity.
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Real World Case 12–6
Requirement 1
Note 5 lists a total fair value of $20,179 million of available-for-sale
investments. Merck’s 2016 balance sheet lists $11,416 million of investments
as non-current assets. It indicates that available-for-sale debt securities of
$7.8 billion were included in short-term investments. That leaves $963
million (equal to $20,179 – (11,416 + 7,800)) unidentified.
Requirement 2
Merck (in the summary of critical accounting policies) describes its policy regarding
accounting for its investments:
Accounting for unrealized gains and losses (both temporary and OTT):
“Investments — Investments in marketable debt and equity securities classified
as available-for-sale are reported at fair value. Fair values of the Company’s
investments are determined using quoted market prices in active markets for
identical assets or liabilities or quoted prices for similar assets or liabilities or
other inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or liabilities. Changes in fair
value that are considered temporary are reported net of tax in Other
Comprehensive Income (OCI).
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Case 12–6 (concluded)
Accounting for realized gains and losses:
“Realized gains and losses for both debt and equity securities are included
in Other (income) expense, net.”
Requirement 3
Yes. Investments accounted for using the equity method are described in Note
8, “Joint Ventures and Other Equity Method Affiliates.” The company has
ongoing joint ventures and other equity-method investments with Sanofi
Pasteur MSD and others.
Requirement 4
As indicated in the income statement and in Note 8, equity income recognized
by Merck during 2016 was $86 million.
Requirement 5
Yes. Operating activities section: Cash inflows from dividends are shown in
operations on the statement of cash flows, and equal $16 million for 2016.
Cash flows from interest income are included in net income, and given that
Merck prepares an indirect-method statement of cash flows that starts the
operating activities section with net income, interest income is included in
operations via that number.
Investing section: Cash outflows from acquiring investments or inflows from
selling them are reported as investing activities in the company’s comparative
statements of cash flows. Whether they are specifically identifiable depends on
the degree of disaggregation the company uses in reporting its cash flows.
Merck shows 2016 cash spent on “purchases of securities and other
investments” of $(15,651) million, and cash received from “proceeds from
sales of securities and other investments” of $14,353 million.
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Real World Case 12–7
Requirement 1
Fair value adjustment ($517 + $267) ...............................................
Gain on investments (unrealized, OCI) (to balance) ................
784
784
Requirement 2
Fair value adjustment ($1,633 + $880) ..........................................
Reclassification adjustment (OCI) (to balance) ......................
2,513
2,513
12–140
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DATA ANALYTICS case
Your Tableau analysis should produce the following bar chart:
Solutions Manual, Vol.1, Chapter 12
12–1
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Data Analytics Case (concluded)
Requirement 1
What is the percentage of noncurrent assets invested in equity securities for (a) Big
Store and for (b) Discount Goods in 2021?
In 2021, (a) Big Store invested 3% of its noncurrent assets in equity securities,
while (b) Discount Goods invested only 0.5% of its noncurrent assets in equity
securities.
Requirement 2
Comparing the percentage of noncurrent assets invested in equity securities ratios
over the most recent four-year period, is Discount Good’s equity investment (a)
generally increasing, (b) roughly the same, or (c) generally decreasing from year to
year?
Comparing the percentage of noncurrent assets invested in equity securities ratios
over the most recent four-year period, Discount Good’s equity investment is
generally decreasing from year to year, declining from about 2 percent to just
over one-half percent.
Requirement 3
In general, which company invests the higher amount in equity securities as a
percentage of its noncurrent asset during the most recent four-year period?
In general, Big Store invests the higher amount in equity securities as a percentage
of its noncurrent asset during the most recent four-year period, with an average of
about 3% to an average of about 1% for Discount Goods.
Continuing Cases
Target Case
Requirement 1
a. Per Note 1, the investments are classified as available-for-sale securities.
b. Per the balance sheet, the investments had a balance of $111 and $87 at
December 31, 2017 and 2016, respectively.
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c. Per the statement of cash flows, $86 was spent to purchase investments,
and $61 was received when investments matured.
d. The T-account is:
Short-term Investments
_______________________________________
($ in thousands)
Beg. Bal.
Purchases
End. Bal.
87
86
61
Sales
1
Plug
_________________
111
It is not clear why the “plug” of $1 occurred. An unrealized loss of $1 during
2017 would increase the account balance, but none is noted.
Requirement 2
a. CVS’s income would increase by CVS’s percentage share of Heartland’s
income.
b. CVS’s “investment in Heartland” asset would increase by CVS’s
percentage share of Heartland’s income.
12–2
Intermediate Accounting, 10/e
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Air France-KLM Case
Requirement 1
a. Per note 23 (“Other financial assets”), the balance of investments accounted
for at FVPL is $342 (including “Cash secured” portion) as of December 31,
2017, equal to $41 current marketable securities, $32 non-current marketable
securities, and $269 current cash secured.
b. Per note 23 (“Other financial assets”), $310 of the balance is classified as
current, and $32 is classified as noncurrent.
c. Per note 35.4 (“Valuation methods for financial assets and liabilities at their
fair value”), $15 of the $342 balance is estimated using level 1 inputs, and
the other $327 is estimated using level 2 inputs.
Requirement 2
a. Per note 23 (“Other financial assets”), the balance of investments accounted
for as available for sale is $400 as of December 31, 2017, including $102
available shares and $298 of shares secured. All $400 is included in the
$1,242 amount of “Other financial assets” that appears in the balance sheet.
b. Per note 23 and the balance sheet, all of that balance is classified as
noncurrent.
c. Per note 35.4 (“Valuation methods for financial assets and liabilities at their
fair value”), $400 of the $400 is estimated using level 1 inputs, and none is
estimated using level 2 inputs.
Requirement 3
Their available for sale fair value estimates are more reliable, as they are
entirely based on Level 1 inputs. Level 1 inputs to fair value estimates are the
most reliable of the three levels of inputs, so these fair value estimates should
be very reliable.
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Air France-KLM Case (concluded)
Requirement 4
a. Per note 4.3, “In accordance with IAS 28 “Investments in Associates and
Joint Ventures”, companies in which the Group has the ability to exercise
significant influence on financial and operating policy decisions are also
accounted for using the equity method. The ability to exercise significant
influence is presumed to exist when the Group holds more than 20 per
cent of the voting rights.”
b. Per note 4.3, “In accordance with IFRS 11 “Join arrangements”, the Group
applies the equity method to partnership over which it exercises control
jointly with one or more partners (joint venture).”
c. Per note 21 (“Equity affiliates”) and the balance sheet, the carrying value of
AF’s equity-method investments on its December 31, 2017, balance sheet is
$301.
d. Per note 21 and the income statement, AF’s equity-method investments
increased its net income from continuing operations by $10 during 2017.
12–4
Intermediate Accounting, 10/e
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