Chapter 11: Financial Instruments: Investments in Debt and
Equity Securities
Assignment 11-4
Requirement 1
$
517,380
90,884
Principal $600,000 x (P/F, 2.5%,6 ) (.86230) =
Interest $16,500* (P/A, 2.5%, 6)
(5.50813) =
Fair value
$608,264
*$600,000 x 5.5% x 6/12
Requirement 2
Effective interest amortization
Cash
2.5% Interest
Amortization
Payment
Revenue
Period
0
1 $16,500
$15,207
2 16,500
15,174
3 16,500
15,141
4 16,500
15,107
5 16,500
15,072
6 16,500
15,035*
* $15,037 - $2 rounding
$ 1,293
1,326
1,359
1,393
1,428
1,465
Bond
Carrying
Value
$608,264
606,971
605,645
604,286
602,893
601,465
600,000
Requirement 3
First period revenue:
Cash .......................................................................................
Investment in debt securities: Old bonds ....................
Investment revenue: Interest ......................................
Second period revenue:
Cash .......................................................................................
Investment in debt securities: Old bonds ....................
Investment revenue: Interest ......................................
Third period revenue:
16,500
1,293
15,207
16,500
1,326
15,174
Cash .......................................................................................
Investment in debt securities: Old bonds ....................
Investment revenue: Interest ......................................
16,500
1,359
15,141
Requirement 4
Straight-line amortization
Cash
Interest Straight line
Bond
Period Payment Revenue Amortization* Carrying Value
0
$608,264
1 $16,500 $15,123
$ 1,377
606,887
2 16,500 15,123
1,377
605,510
3 16,500 15,123
1,377
604,133
4 16,500 15,123
1,377
602,756
5 16,500 15,122
1,378
601,378
6 16,500 15,122
1,378
600,000
* $8,264/6
Requirement 5
First period revenue:
Cash .......................................................................................
Investment in debt securities: Old bonds ....................
Investment revenue: Interest ......................................
Second period revenue:
Cash .......................................................................................
Investment in debt securities: Old bonds ....................
Investment revenue: Interest ......................................
Third period revenue:
Cash .......................................................................................
Investment in debt securities: Old bonds ....................
Investment revenue: Interest ......................................
16,500
1,377
15,123
16,500
1,377
15,123
16,500
1,377
15,123
Assignment 11-12
Requirement 1
a)
FVTOCI investment: Front Corp., common .................................
96,720
Cash .......................................................................................
96,720
[(3,000 x $31) + (3,000 x $31 x 4%)]= $96,720 ($32.24 per share)
b) FVTOCI investment: Ledrow Corp., preferred ..............................
803,400
Cash .......................................................................................
803,400
[(10,000 x $78) + (10,000 x $78 x 3%] = $803,400 ($80.34 per share)
c)
FVTOCI investment: Front Corp., common ..................................
Cash .......................................................................................
[(2,000 x $35) + (2,000 x $35 x 4%)] = 72,800 ($36.40 per share)
d) Accrued interest receivable ($400,000 x .09 x 3/12) ...............
FVTPL investment: Container Bonds .........................................
Cash .......................................................................................
e)
f)
g)
72,800
72,800
9,000
400,000
409,000
Cash ..........................................................................................
Investment revenue: dividends (10,000 x $4) ..................
40,000
Accrued interest receivable ($400,000 x .09 x 2/12) ...............
Investment income: interest ...............................................
6,000
40,000
6,000
Investment revenue: Unrealized holding loss: Container bonds
FVTPL investment:Container Bonds ...................................
8,000
8,000
FVTOCI investment: Front Corp shares .......................................
FVTOCI investment in Ledrow Corp. shares ...............................
OCI: Unrealized holding gain: Front Corp. shares ....................
OCI: Unrealized holding gain: Ledrow Corp shares .................
480
16,600
480
16,600
Computations:
Cost/
Carrying Value
Investment
Quantity
Market
Unrealized G/L
Container
$400,000
$400,000
x 98% = $392,000
$ 8,000 loss
Front
Ledrow
5,000 shares
10,000 shares
$169,520
$803,400
x $34 = 170,000
x $82 = 820,000
$990,000
480 gain
16,600 gain
$17,080 gain
Requirement 2
20x2 Earnings:
Revenue from investments:
Investment revenue ($40,000 + $6,000 - $8,000) ........................ $
38,000
20x2 Statement of financial position:
Accrued interest receivable .......................................................................
$15,000\
FVTOCI investments ................................................................................... $990,000
FVTPL investment ...................................................................................... 392,000
Equity reserve: unrealized holding gain: OCI ............................................ 17,080 gain
Requirement 3
a)
FVTPL investment: Front Corp., common (3,000 x $31) ......
Commission expense (3,000 x $31 x 4%) ..................................
Cash .......................................................................................
b) FVTPL investment: Ledrow Corp., preferred (10,000 x $78) ....
Commission expense (10,000 x $78 x 3%) ................................
Cash .......................................................................................
c)
FVTPL investment: Front Corp., common (2,000 x $35) ...........
Commission expense (2,000 x $35 x 4%)] .................................
Cash .......................................................................................
d) Accrued interest receivable ($400,000 x .09 x 3/12) ...............
FVTPL investment: Container Bonds .........................................
Cash .......................................................................................
e)
f)
93,000
3,720
96,720
780,000
23,400
803,400
70,000
2,800
72,800
9,000
400,000
409,000
Cash ..........................................................................................
Investment revenue: dividends (10,000 x $4) ..................
40,000
Accrued interest receivable ($400,000 x .09 x 2/12) ...............
Investment revenue: interest ...............................................
6,000
40,000
6,000
g)
FVTPL investment: Front Corp shares .........................................
Investment revenue: holding loss: Container bonds ..................
FVTPL investment: Ledrow Corp. shares ....................................
Investment revenue: holding gain: Front Corp. shares ...........
FVTPL investment: Container Bonds .......................................
Investment revenue: holding gain: Ledrow Corp shares .........
7,000
8,000
40,000
7,000
8,000
40,000
Computations:
Investment
Container
Front
Ledrow
Quantity
$400,000
5,000 shares
10,000 shares
Cost/
Carrying Value
$400,000
$163,000
$780,000
Market
Unrealized G/L
x 98% = $392,000
x $34 = 170,000
x $82 = 820,000
$1,382,000
$ 8,000 loss
7,000 gain
40,000 gain
$39,000 gain
20x2 Earnings:
Revenue from long term investments:
Investment revenue ............................................................................
Commission expense .........................................................................
Investment holding gain ($40,000 + $7,000 - $8,000)..................
$46,000
29,920
39,000
20x2 Statement of financial position:
Accrued interest receivable .......................................................................$
15,000
FVTPL investments.....................................................................................
$1,382,000
Note: Retained earnings is higher under this alternative.
Assignment 11-21
Requirements 1 and 2
Entries and Other Information
a)
Entry to date of acquisition, 3 January
20x4:
Investment in UK Corp. common .........
Cash .....................................................
b) Goodwill Computation:
Requirement 1
Cost Method
Is Appropriate
14,600
14,600
14,600
14,600
Not applicable
Purchase price (20% ownership)
FMV of net assets purchased (20%):
Total fair value of assets of UK
($50,000 + $33,000)
Less: Total liabilities of UK
Total fair value of net identifiable assets
Proportion purchased
FMV purchased
Goodwill
Depreciable: $3,000 x .2 = $600 (/10 = $60)
$ 2,000
$14,600
$83,000
(20,000)
63,000
x 20%
12,600
$ 2,000
c) Entry on 31 December 20x4 to record
$15,000 earnings reported by UK:
No entry
Investment in UK Corp. common............
Investment revenue............................
Income: $15,000 x .2
$3,000
Depreciation: ($3,000 x .2) / 10 ( 60)
$2,940
d) Entry on 31 March 20x5 for a $1 cash
dividend; $1 x 2000 shares = $2,000
Cash......................................................
Investment revenue........................
Investment in UK Corp. common..
Requirement 2
Equity Method
Is Appropriate
2,000
2,000
2,940
2,940
2,000
Requirement 3
TA Co might use the cost method if it were a private company. They might also use
the cost method during the year, adjusting to equity for external reporting.
2,000
Assignment 11-25
Requirement 1
The parent company must use the consolidation method to report to shareholders
and other users. Consolidation only occurs at year-end; the parent company must do
something during the year, and may use either cost or equity.
Requirement 2
The following accounts appear in the consolidated financial statements but not in the
unconsolidated financial statements:
Intangible assets (goodwill)
Intangible assets implied in the purchase
price. Excess of (grossed up) purchase price
over FMV of net assets.
Non-controlling interest (SFP)
Interest in net assets of subsidiary owned by
other shareholders.
Non-controlling interest
(allocation of income)
Percentage of confirmed earnings
subsidiary not accruing to the parent.
of
Requirement 3
The following accounts disappear from the unconsolidated financial statements:
1. Investment in S Co.
Replaced with net assets of subsidiary.
2. Equity accounts of S Co.
Equity is owned by the parent or
reclassified as NCI.
3. Inter-company receivables and payables Only receivables or payables to those
outside the two companies are left.
4. Inter-company sales
See #3.
Requirement 4
Both accounts receivable and current liabilities do not cross-add by $4,000. This
implies that there is an inter-company receivable/payable that was eliminated from
the categories.