Accounting Ch17 Answer

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Debt investments. (a) Held-for-collection. (b) Trading. 2. Bond amortization. 3. Equity investments. (a) Non-trading. (b) Trading.

Questions 1, 2, 3, 13 4, 5, 6, 8, 11, 13 2, 4, 7, 8, 9, 22 6, 7 1, 12, 17 16, 22 8, 9, 14, 15, 16, 22 17, 18, 19, 20, 21 22 10, 11, 25 23, 27 24 29 30, 31, 32, 33, 34, 35, 36, 37 5 10 11 12 21 22, 23, 24, 25, 26, 27 12 13, 14, 15, 16, 17, 18 7, 8 6 1, 3, 10 2, 4 1, 2, 3 Brief Exercises Exercises 1 2, 3, 4 5 3, 4, 5 1 8, 10, 11 8, 9, 11, 12, 13, 15, 16, 17 13, 14, 17, 18 10, 11 6, 7 19, 20 5, 6, 8, 9, 10, 12 1, 2, 7 1, 3, 4, 7 1, 2 4, 7 3 Problems Concepts for Analysis 4, 7 1, 4 1, 4 3, 5, 6, 8, 9, 1, 2, 3 10, 11 8 5, 8, 9, 10, 11, 12 2, 7 1, 3 1, 3, 7 5, 6 (c) Equity method. 4. Disclosures of investments. 5. Fair value option. 6. Impairments. 7. Transfers between categories. 8. Comprehensive income. *9. Derivatives. *This material is dealt with in an Appendix to the chapter. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-1 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. 3. 4. 5. Describe the accounting framework for financial assets. Understand the accounting for debt investments at amortized cost.

Understand the accounting for debt investments at fair value. Describe the accounting for the fair value option. Understand the accounting for equity investments at fair value. Explain the equity method of accounting and compare it to the fair value method for equity securities. Discuss the accounting for impairments of debt investments. Describe the accounting for transfer of investments between categories. Explain why companies report reclassification adjustments. Explain who uses derivatives and why. Understand the basic guidelines for accounting for derivatives.

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Equity investment entries. Journal entries for fair value and equity methods. Equity method. Equity investments—trading. Equity investments—trading. Fair value and equity method compared. Equity method. Impairment. Impairment. Comprehensive income disclosure. Derivative transaction. Fair value hedge. Cash flow hedge. Fair value hedge. Call option. Cash flow hedge. Debt investments. Debt investments, fair value option. Debt and equity investments. Debt investments. Equity investment entries and disclosures. Equity investments. Debt investment entries. Fair value and equity methods.

Financial statement presentation of equity investments. Level of Difficulty Simple Simple Simple Simple Simple Simple Moderate Simple Simple Simple Simple Simple Simple Moderate Moderate Moderate Simple Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate Time (minutes) 5–10 10–15 15–20 10–15 10–15 5–10 15–20 10–15 10–15 5–10 10–15 20–25 15–20 10–15 10–15 15–20 15–20 10–15 15–20 10–15 20–25 15–20 20–25 20–25 15–20 20–25 25–30 20–30 30–40 25–30 25–35 25–35 25–35 25–35 20–30 20–30

Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-3 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item P17-10 P17-11 P17-12 *P17-13 *P17-14 *P17-15 *P17-16 *P17-17 *P17-18 CA17-1 CA17-2 CA17-3 CA17-4 CA17-5 CA17-6 CA17-7 Description Equity investments. Investments—statement presentation. Gain on sale of investments and comprehensive income. Derivative financial instrument. Derivative financial instrument. Free-standing derivative. Fair value hedge interest rate swap.

Cash flow hedge. Fair value hedge. Issues raised about investments. Equity investments. Financial statement effect of investments. Equity investments. Investment accounted for under the equity method. Equity investments. Fair value—ethics. Level of Difficulty Complex Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Simple Moderate Simple Moderate Moderate Time (minutes) 30–40 20–30 20–30 20–25 20–25 20–25 30–40 25–35 25–35 25–30 25–30 20–30 20–25 15–25 25–35 25–35 17-4 Copyright © 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com ANSWERS TO QUESTIONS 1. The two criteria for determining the valuation of financial assets are the (1) company’s business model for managing their financial assets and (2) contractual cash flow characteristics of the financial asset. 2. Only debt investments such as loans and bond investments are valued at amortized cost. A company should use amortized cost if it has a business model whose objective is to hold assets in order to collect contractual cash flows and he contractual terms of the financial asset gives specified dates to cash flows. 3. Amortized cost is the initial recognition amount of the investment minus repayments, plus or minus cumulative amortization and net of any reduction for uncollectibility. Fair value is the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction. 4. Lady Gaga should classify this investment as a trading investment because companies frequently buy and sell this type of investment to generate profits in short term differences in price. . If Lady Gaga plans to hold the investment to collect interest and receive the principal at maturity, it should account for this investment at amortized cost. 6. $3,500,000 X 10% = $350,000; $350,000 ? 2 = $175,000. Wheeler would make the following entry: Cash ($4,000,000 X 8% X 1/2) ……………………………………………………. Debt Investments …………………………………………………………………….. Interest Revenue ($3,500,000 X 10% X 1/2) ……………………………… 7.

Securities Fair Value Adjustment ………………………………………………………. Unrealized Holding Gain or Loss—Income [$3,604,000 – ($3,500,000 + $15,000)*] …………………………………… *See number 6. 8. Unrealized holding gains and losses for trading investments should be included in net income for the current period. Unrealized holding gains and losses are not recognized for held-for-collection investments. 9. (a) Unrealized Holding Gain or Loss—Income …………………………………..

Securities Fair Value Adjustment ………………………………………… (b) Unrealized Holding Gain or Loss—Income ………………………………….. Securities Fair Value Adjustment ………………………………………… 60,000 60,000 70,000 70,000 160,000 15,000 175,000 89,000 89,000 10. The fair value option allows companies the choice of reporting debt investments at fair value. If this option is chosen, the company records in net income unrealized gains and losses with corresponding increases/decreases to the debt investment.

The unrealized gain (loss) is the difference between the investment’s amortized cost and its fair value. 11. No, Franklin cannot use the fair value option for this investment. This option is generally available only at the time a company first purchases the investment. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-5 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Questions Chapter 17 (Continued) 12. Investments in equity securities can be classified as follows: (a) Holdings of less than 20% (fair value method)—investor has passive interest. b) Holdings between 20% and 50% (equity method)—investor has significant influence. (c) Holdings of more than 50% (consolidated statements)—investor has controlling interest. Holdings of less than 20% are then classified into trading and non-trading, assuming determinable fair values. 13. Investments in shares do not have a maturity date and therefore cannot be classified as held-forcollection. 14. Equity Investments ……………………………………………………………………..

Brokerage Expense ……………………………………………………………………. Cash [(10,000 X $26) + $1,500] …………………………………………….. 15. Gross selling price of 10,000 shares at $27. 50 ………………………………. Less: Brokerage commissions ……………………………………………………… Proceeds from sale ……………………………………………………………………… Cost of 10,000 shares …………………………………………………………………..

Gain on sale of shares …………………………………………………………………. Cash …………………………………………………………………………………………. Equity Investments ……………………………………………………………….. Gain on Sale of Equity Investment ………………………………………….. 273,230 260,000 13,230 260,000 1,500 261,500 $275,000 (1,770) 273,230 (260,000) $ 13,230 16. Both trading and non-trading equity investments are reported at fair value.

However, any unrealized holding gain or loss is reported in net income for trading investments but as other comprehensive income and as a separate component of equity for non-trading investments. 17. Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. An investment (direct or indirect) of 20% or more of the voting shares of an investee constitutes significant influence unless there exists evidence to the contrary. 8. Under the equity method, the investment is originally recorded at cost, but is adjusted for changes in the investee’s net assets. The investment account is increased (decreased) by the investor’s proportionate share of the earnings (losses) of the investee and decreased by all dividends received by the investor from the investee. 19. The following information is reported under the equity method: 1. Investments originally recorded at cost with adjustment for the investor’s share of the investee’s income or loss, and decreased by dividends received from the investee (reported under investments. Investment revenue is recognized equal to the investor’s ownership percentage times the investee’s income or loss reported subsequent to the date of acquisition (reported under other income and expense). 2. 20. Dividends subsequent to acquisition should be accounted for as a reduction in the equity investment account. 17-6 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Questions Chapter 17 (Continued) 21. Ordinarily, Raleigh Corp. hould discontinue applying the equity method and not provide for additional losses beyond the carrying value of ? 170,000. However, if Raleigh Corp. ’s loss is not limited to its investment (due to a guarantee of Borg’s obligations or other commitment to provide further financial support or if imminent return to profitable operations by Borg appears to be assured), it is appropriate for Raleigh Corp. to provide for its entire ? 186,000 share of the ? 620,000 loss. 22. Trading equity investments are reported as a current asset while non-trading investments are reported as a long-term investment.

Trading investments are expected to be disposed of within the coming year and therefore qualify as current assets. This is not the case for non-trading investments which are presented under investments. 23. A debt investment is impaired when ? it is probable that the investor will be unable to collect all amounts due according to the contractual terms.? When an impairment has occurred, the investment is written down to its fair value, which is also the security’s new cost basis. The amount of the writedown is accounted for as a realized loss. 4. When an investment is transferred from one category to another, the transfer should be recorded at fair value, which in this case becomes the new basis for the security. 25. Major unresolved issues related to fair value accounting include measurement based on business model, gains trading, and liabilities not fairly valued. 26. Similarities include: (1) The accounting for trading investments is the same between U. S. GAAP and IFRS. Held-to-maturity (U. S. GAAP) and held-for-collection investments are accounted for at amortized cost.

Gains and losses related to available-for-sale securities (U. S. GAAP) and non-trading equity investments (IFRS) are reported in other comprehensive income; (2) U. S. GAAP and IFRS are similar in the accounting for the fair value option. That is, the selection to use the fair value method must be made at initial recognition, the selection is irrevocable, and gains and losses related to fair value changes are reported as part of income; (3) Measurement of impairments is similar under U. S. GAAP and IFRS; (4) Both U. S.

GAAP and IFRS use the same tests to determine whether the equity method of accounting should be used—that is, significant influence with a general guide of over 20 percent ownership. Differences include: (1) U. S. GAAP and IFRS have different classifications for investments. U. S. GAAP classifies investments as trading, available-for-sale (both debt and equity investments), and held-to-maturity (only for debt investments). IFRS uses held-for-collection (debt investments), trading (both debt and equity investments), and non-trading equity investments classifications.

U. S. GAAP classifications are based on management’s intent with respect to the investment. IFRS classifications are based on the business model used to manage the investments and the type of security; (2) Reclassifications in and out of trading securities are allowed under U. S. GAAP if management changes its intent, but this type of reclassification should be rare. Reclassifications of held-to-maturity investments are tightly constrained under U. S. GAAP. IFRS allows reclassifications if the business model for managing the investments changes. Similar to U. S.

GAAP, such changes in business model should be rare; (3) The basis for consolidation under IFRS is control. Under U. S. GAAP, a bipolar approach is used, which is a risk-and-reward model (often referred to as a variable-entity approach) and a voting-interest approach. However, under both systems, for consolidation to occur, the investor company must generally own 50 percent of another company (4) U. S. GAAP allows the fair value option for equity method investments; IFRS does not; and (5) U. S. GAAP does not permit the reversal of an important charge related to available-for-sale debt and equity investments.

IFRS allows reversals of impairments of held-for-collection investments. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-7 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Questions Chapter 17 (Continued) 27. (a) Under U. S. GAAP, Ramirez makes no entry, because impaired investments may not be written up if they recover in value. Under IFRS, Ramirez makes the following entry: (b) Debt Investments ……………………………………………………………………….. Recovery of Loss on Investment ……………………………………………… 00,000 300,000 28. IFRS 9, introduced new investment classifications and increased the situations when investments are accounted for at fair value with gains and losses recorded in income. The IASB’s decision to issue new rules on investments before the FASB has completed its deliberations on financial instrument accounting could affect convergence with U. S. GAAP. *29. Reclassification adjustments are necessary to insure that double counting does not result when realized gains or losses are reported as part of net income but also are shown as part of other comprehensive income in the current period or in previous periods. *30.

An underlying is a special interest rate, security price, commodity price, index of prices or rates, or other market-related variable. Changes in the underlying determine changes in the value of the derivative. Payment is determined by the interaction of the underlying with the face amount and the number of shares, or other units specified in the derivative contract (these elements are referred to as notional amounts). *31. See illustration below: Traditional Financial Instrument Feature (e. g. , Trading Security) Payment Provision Share price times the number of shares. Initial Investment Settlement Investor pays full cost.

Deliver shares to receive cash. Derivative Financial Instrument (e. g. , Call Option) Change in share price (underlying) times number of shares (notional amount). Initial investment is less than full cost. Receive cash equivalent, based on changes in share price times the number of shares. For a traditional financial instrument, an investor generally must pay the full cost, while derivatives require little initial investment. In addition, the holder of a traditional security is exposed to all risks of ownership, while most derivatives are not exposed to all risks associated with ownership in the underlying.

For example, the intrinsic value of a call option only can increase in value. Finally, unlike a traditional financial instrument, the holder of a derivative could realize a profit without ever having to take possession of the underlying. This feature is referred to as net settlement and serves to reduce the transaction costs associated with derivatives. *32. The purpose of a fair value hedge is to offset the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment. *33.

The unrealized holding gain or loss on non-trading equity investments should be reported as income when this security is designated as a hedged item in a qualifying fair value hedge. If the hedge meets the special hedge accounting criteria (designation, documentation, and effectiveness), the unrealized holding gain or losses is reported as income. 17-8 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Questions Chapter 17 (Continued) *34.

This is likely a setting where the company is hedging the fair value of a fixed-rate debt obligation. The fixed payments received on the swap will offset fixed payments on the debt obligation. As a result, if interest rates decline, the value of the swap contract increases (a gain), while at the same time the fixed-rate debt obligation increases (a loss). The swap is an effective risk management tool in this setting because its value is related to the same underlying (interest rates) that will affect the value of the fixed-rate bond payable.

Thus, if the value of the swap goes up, it offsets the loss in the value of the debt obligation. *35. A cash flow hedge is used to hedge exposures to cash flow risk, which is exposure to the variability in cash flows. The cash flows received on the hedging instrument (derivative) will offset the cash flows received on the hedged item. Generally, the hedged item is a transaction that is planned some time in the future (an anticipated transaction). *36. Derivatives used in cash flow hedges are accounted for at fair value on the statement of financial position but gains or losses are recorded in equity as part of ther comprehensive income. *37. A hybrid security is a security that has characteristics of both debt and equity and often is a combination of traditional and derivative financial instruments. A convertible bond is a hybrid security because it is comprised of a debt security, referred to as the host security, combined with an option to convert the bond to ordinary shares, the embedded derivative. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-9 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 17-1 (a) Debt Investments ………………………………………………. Cash …………………………………………………………… (b) Cash (€80,000 X . 09) …………………………………………… Debt Investments ………………………………………………. Interest Revenue (€74,086 X . 11) ………………….. BRIEF EXERCISE 17-2 (a) Debt Investments ………………………………………………. Cash …………………………………………………………… (b) Cash (€80,000 X . 09) ……………………………………………

Debt Investments ………………………………………………. Interest Revenue (€74,086 X . 11) ………………….. (c) Securities Fair Value Adjustment ……………………….. Unrealized Holding Gain or Loss—Income [(€74,086 + €949) – €75,500] ………………………. BRIEF EXERCISE 17-3 (a) Debt Investments ………………………………………………. Cash …………………………………………………………… (b) Cash (€60,000 X . 08 x /12) …………………………………… Debt Investments………………………………………… 6 Interest Revenue (€65,118 X . 6 x /12) ………….. BRIEF EXERCISE 17-4 (a) Debt Investments ………………………………………………. Cash …………………………………………………………… (b) Cash …………………………………………………………………. Interest Revenue…………………………………………. (c) Unrealized Holding Gain or Loss—Income ………….. Securities Fair Value Adjustment ($50,000 – $47,400)…………………………………… 17-10 Copyright © 2011 John Wiley & Sons, Inc. 6 74,086 74,086 7,200 949 8,149 74,086 74,086 7,200 949 8,149 465 465 5,118 65,118 2,400 446 1,954 50,000 50,000 2,000 2,000 2,600 2,600 Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com BRIEF EXERCISE 17-5 Unrealized Holding Gain or Loss—Income ………………. Debt Investments [(€65,118 – €446) – €64,000] …… BRIEF EXERCISE 17-6 (a) Equity Investments ………………………………………….. Cash ………………………………………………………… (b) Cash ……………………………………………………………….. Dividend Revenue (400 X ? 3. 25) ………………… c) Securities Fair Value Adjustment ……………………… Unrealized Holding Gain or Loss—Income [(400 X ? 34. 50) – ? 13,200] ………………………. 13,200 13,200 1,300 1,300 600 600 672 672 BRIEF EXERCISE 17-7 (a) Equity Investments ………………………………………….. Cash ………………………………………………………… (b) Cash ……………………………………………………………….. Dividend Revenue (400 X ? 3. 25) ………………… (c) Securities Fair Value Adjustment ……………………… Unrealized Holding Gain or Loss— Equity [(400 X ? 4. 50) – ? 13,200] ……………. 13,200 13,200 1,300 1,300 600 600 BRIEF EXERCISE 17-8 Securities Fair Value Adjustment Bal. 200 500 Bal. 700 500 500 17-11 Securities Fair Value Adjustment ………………………………. Unrealized Holding Gain or Loss—Equity …………… Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com BRIEF EXERCISE 17-9 Equity Investments ………………………………………………… Cash ……………………………………………………………….

Equity Investments ………………………………………………… Revenue from Investment (30% X $180,000) …….. Cash ……………………………………………………………………… Equity Investments (30% X $60,000) ………………… 300,000 300,000 54,000 54,000 18,000 18,000 BRIEF EXERCISE 17-10 Loss on Impairment ………………………………………… Debt Investments……………………………………… 10,000 10,000 In this case, an impairment has occurred and the individual security should be written down.

BRIEF EXERCISE 17-11 Debt Investments ……………………………………………… Securities Fair Value Adjustment ……………….. 10,325 10,325 BRIEF EXERCISE 17-12 (a) Other comprehensive income (loss) for 2011: (€20. 380 million) (b) Comprehensive income for 2011: €652. 258 million or (€672. 638 – €20. 380) (c) Accumulated other comprehensive income: €16. 893 million or (€37. 273 – €20. 380) 17-12 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com SOLUTIONS TO EXERCISES EXERCISE 17-1 (5–10 minutes) (a) 2. b) 4. (c) 2. (d) 1. (e) 1. (f) 4. EXERCISE 17-2 (10–15 minutes) (a) January 1, 2010 Debt Investments ……………………………………….. Cash …………………………………………………… (b) December 31, 2010 Cash ………………………………………………………….. Interest Revenue …………………………………. (c) December 31, 2011 Cash ………………………………………………………….. Interest Revenue …………………………………. EXERCISE 17-3 (15–20 minutes) (a) January 1, 2010 Debt Investments ………………………………………..

Cash …………………………………………………… (b) 537,907. 40 537,907. 40 30,000 30,000 30,000 30,000 300,000 300,000 Schedule of Interest Revenue and Bond Premium Amortization 12% Bonds Sold to Yield 10% Date 1/1/10 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 Cash Received — $60,000 60,000 60,000 60,000 60,000 Interest Revenue — $53,790. 74 53,169. 81 52,486. 80 51,735. 48 50,909. 77* Premium Amortized — $6,209. 26 6,830. 19 7,513. 20 8,264. 52 *9,090. 23 Carrying Amount of Bonds $537,907. 40 531,698. 14 524,867. 95 517,354. 75 509,090. 23 500,000. 00 *Rounded by 75?. Copyright © 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition, Solutions Manual 17-13 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-3 (Continued) (c) December 31, 2010 Cash ……………………………………………………………. Debt Investments…………………………………… Interest Revenue……………………………………. (d) December 31, 2011 Cash ……………………………………………………………. Debt Investments…………………………………… Interest Revenue……………………………………. 60,000. 00 6,830. 19 53,169. 81 60,000. 0 6,209. 26 53,790. 74 EXERCISE 17-4 (10–15 minutes) (a) Schedule of Interest Revenue and Bond Discount Amortization 9% Bond Purchased to Yield 12% Date 1/1/10 12/31/10 12/31/11 12/31/12 Cash Received — $27,000 27,000 27,000 Interest Bond Discount Carrying Amount Revenue Amortization of Bonds — — $278,384. 00 $33,406. 08* $6,406. 08 284,790. 08 34,174. 81 7,174. 81 291,964. 89 35,035. 11** 8,035. 11 300,000. 00 **$278,384 X . 12 = $33,406. 08 **Rounded by $. 68. (b) December 31, 2011 Cash ……………………………………………………………. Debt Investments ………………………………………….

Interest Revenue……………………………………. EXERCISE 17-5 (10–15 minutes) (a) January 1, 2010 Debt Investments …………………………………………. 537,907. 40 Cash ……………………………………………………… 537,907. 40 27,000. 00 7,174. 81 34,174. 81 17-14 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-5 (Continued) (b) December 31, 2010 Cash …………………………………………………………….

Debt Investments ………………………………….. Interest Revenue ($537,907. 40 X . 10) ……… Securities Fair Value Adjustment ………………….. Unrealized Holding Gain or Loss— Income ($534,200. 00 – $531,698. 14) ……. (c) December 31, 2011 Unrealized Holding Gain or Loss—Income ……. Securities Fair Value Adjustment …………… 12,369. 81 12,369. 81 Unrealized Holding Gain (Loss) 60,000. 00 6,209. 26 53,790. 74 2,501. 86 2,501. 86 Amortized Cost Debt investments Previous securities fair value adjustment—Dr. Securities fair value adjustment—Cr.

Fair Value $524,867. 95 $515,000. 00 $ (9,867. 95) 2,501. 86 $(12,369. 81) EXERCISE 17-6 (5–10 minutes) (a) December 31, 2010 Debt Investments …………………………………………. Unrealized Holding Gain or Loss— Income ($540,000 – $531,698. 14) …………. 8,301. 86 8,301. 86 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-15 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-6 (Continued) (b) December 31, 2011 Unrealized Holding Gain or Loss-Income …. Debt Investments ($533,169. 1 – $525,000) ……………….. 8,169. 81 8,169. 81 Carrying Value at 12/31/10 ……………………….. $540,000. 00 Amortization …………………………………………… (6,830. 19) Carrying Value at 12/31/11 ………………… $533,169. 81 (See Exercise 17-3) EXERCISE 17-7 (15-20 minutes) (a) Net income before gains and losses ……………………. Investments Debt ($41,000 – $40,000) ………………….. Bonds payable ($220,000 – $195,000) ………………….. Net income …………………………………………………………. b) Bonds Payable …………………………………………………… Unrealized Holding Gain or Loss-Income ($220,000 – $195,000) ……………………………….. 25,000 25,000 $100,000 1,000 25,000 $126,000 EXERCISE 17-8 (10–15 minutes) (a) Securities Fair Value Adjustment ………………………… Unrealized Holding Gain or Loss—Income ……. (b) Securities Fair Value Adjustment ………………………… Unrealized Holding Gain or Loss—Equity……… 3,000 3,000 3,000 3,000 (c) The Unrealized Holding Gain or Loss—Income account is reported in the income statement under Other income and expense.

The Unrealized Holding Gain or Loss—Equity account is reported as a part of other comprehensive income and as a component of equity until realized. The Securities Fair Value Adjustment account is added to the cost of the Equity Investments account to arrive at fair value. 17-16 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-9 (10–15 minutes) (a) December 31, 2010 Unrealized Holding Gain or Loss—Income ………….. Securities Fair Value Adjustment …………………. b) During 2011 Cash ………………………………………………………………….. Loss on Sale of Equity Investment ……………………… Equity Investments ……………………………………… (c) December 31, 2011 Unrealized Gain (Loss) (€ (700) ( 500) ( (200) ( (1,400) (€1,200) 1,200 1,200 1,400 1,400 9,500 500 10,000 Investments Stargate Corp. shares Vectorman Co. shares Total of portfolio Previous securities fair value adjustment balance—Cr. Securities fair value adjustment—Dr. Cost €20,000 20,000 €40,000 Fair Value €19,300 20,500 €39,800

Securities Fair Value Adjustment………………………….. Unrealized Holding Gain or Loss—Income ……. EXERCISE 17-10 (5–10 minutes) The unrealized gains and losses resulting from changes in the fair value of equity investments [classified as non-trading] are recorded in an unrealized holding gain or loss account that is reported as other comprehensive income and as a separate component of equity until realized. Therefore, the following adjusting entry should be made at the year-end: Unrealized Holding Gain or Loss—Equity ……………………… Securities Fair Value Adjustment ……………………………. 6,000 6,000

Unrealized Holding Gain or Loss—Equity is reported as other comprehensive income and as a separate component in equity and not included in net income. The Securities Fair Value Adjustment account is a valuation account to the related investment account. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-17 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-11 (10–15 minutes) (a) The portfolio should be reported at the fair value of $54,500. Since the cost of the portfolio is $53,000, the unrealized holding gain is $1,500, of which $200 is already recognized.

Therefore, the December 31, 2010 adjusting entry should be: Securities Fair Value Adjustment ……………………………. Unrealized Holding Gain or Loss—Income ……….. 1,300 1,300 (b) The unrealized holding gain of $1,300 should be reported as other income and expense on the income statement and the Securities Fair Value Adjustment account balance of $1,500 should be added to the cost of the investment account. WENGER, INC. Statement of Financial Position As of December 31, 2010 ____________________________________________________________ Current assets: Equity investment……………………………………….. 54,500 (c) Computation of realized gain or loss on sale of investment: Net proceeds from sale of investment …………. Cost of investment A …………………………………… Loss on sale of shares ………………………………… January 20, 2011 Cash …………………………………………………………………. Loss on Sale of Equity Investment ……………………… Equity Investments ……………………………………… (d) Securities Fair Value Adjustment ……………………….. Unrealized Holding Gain or Loss—Equity…….. 15,300 2,200 17,500 1,300 1,300 $15,300 (17,500) ($ 2,200) 7-18 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-12 (20–25 minutes) (a) The total purchase price of these investments is: Gonzalez: (9,000 X $33. 50) = $301,500 Belmont: (5,000 X $52. 00) = $260,000 Thep: (7,000 X $26. 50) = $185,500 The purchase entries will be: January 15, 2011 Commission Expense ……………………………………. Equity Investments ………………………………………… Cash ……………………………………………………….

April 1, 2011 Commission Expense ……………………………………. Equity Investments ………………………………………… Cash ………………………………………………………. September 10, 2011 Commission Expense ……………………………………. Equity Investments ………………………………………… Cash ………………………………………………………. (b) Gross selling price of 3,000 shares at $35 ………. Less: Commissions, taxes, and fees ……………… Net proceeds from sale …………………………………..

Cost of 3,000 shares ($301,500 X 3/9) ……………… Gain on sale of shares …………………………………… May 20, 2010 Cash ……………………………………………………………… Equity Investment …………………………………… Gain on Sale of Equity Investment …………… 102,150 100,500 1,650 4,910 185,500 190,410 $105,000 (2,850) 102,150 (100,500) $ 1,650 3,370 260,000 263,370 1,980 301,500 303,480 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-19 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com

EXERCISE 17-12 (Continued) (c) Investments Gonzalez Co. Belmont Co. Thep Co. Total portfolio value Previous securities fair value adjustment balance Securities fair value adjustment—Dr. Cost Fair Value $201,000* $180,000(1) 260,000 275,000(2) 185,500 196,000(3) $646,500 $651,000 Unrealized Gain (Loss) $(21,000) (15,000 10,500 4,500 0 $ 4,500 (3) *$301,500 X 6/9 = $201,000. (1) (2) (6,000 X $30) (5,000 X $55) December 31, 2010 (7,000 X $28) Securities Fair Value Adjustment …………………….. Unrealized Holding Gain or Loss—Income … EXERCISE 17-13 (15–20 minutes) Situation 1: Journal entries by Hatcher Cosmetics: ,500 4,500 To record purchase of 20,000 shares of Ramirez Fashion at a cost of $14 per share: March 18, 2010 Equity Investments ………………………………………………… Cash ………………………………………………………………. To record the dividend revenue from Ramirez Fashion: June 30, 2010 Cash ……………………………………………………………………… Dividend Revenue ($75,000 X 10%) ………………….. 7,500 7,500 280,000 280,000 17-20 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-13 (Continued) To record the investment at fair value: December 31, 2010 Securities Fair Value Adjustment ……………………………… Unrealized Holding Gain or Loss—Income …………. *($15 – $14) X 20,000 shares = $20,000 Situation 2: Journal entries by Holmes, Inc. : To record the purchase of 25% of Nadal Corporation’s ordinary shares: January 1, 2010 Equity Investments…………………………………………………… Cash [(30,000 X 25%) X $9] ………………………………… 67,500 67,500 20,000 20,000*

Since Holmes, Inc. obtained significant influence over Nadal Corp. , Holmes, Inc. now employs the equity method of accounting. To record the receipt of cash dividends from Nadal Corporation: June 15, 2010 Cash ($36,000 X 25%) ……………………………………………….. Equity Investments ……………………………………………. 9,000 9,000 To record Holmes’s share (25%) of Nadal Corporation’s net income of $85,000: December 31, 2010 Equity Investments (25% X $85,000) ………………………….. Revenue from Investment ………………………………….. 21,250 21,250

Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-21 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-14 (10–15 minutes) (a) (b) $130,000, the increase to the Investment account. If the dividend payout ratio is 40%, then 40% of the net income is their share of dividends = $52,000. The answer is also given in the T-account information. Their share is 25%, so, Total Net Income X 25% = $130,000 Total Net Income = $130,000 ? 25% = $520,000 $52,000 ? 25% = $208,000 or $520,000 X 40% = $208,000 (c) (d) EXERCISE 17-15 (10–15 minutes) 1.

Equity Investments (300 shares X $40) ……………… Cash …………………………………………………….. Cash (100 shares X $43)……………………………………. Gain on Sale of Equity Investment …………. Equity Investments (100 X $40) ……………… Unrealized Holding Gain or Loss—Income ………… Securities Fair Value Adjustment ($40 – $35) X 200 ………………………………… 12,000 12,000 4,300 300 4,000 1,000 1,000 2. 3. EXERCISE 17-16 (15–20 minutes) (a) Unrealized Holding Gain or Loss—Income …………. Securities Fair Value Adjustment ……………….. (b) Cash [(1,500 X ? 5) – ? 1,200] …………………………….. Loss on Sale of Equity Investment …………………….. Equity Investments …………………………………….. (c) Brokerage Expense …………………………………………… Equity Investments (700 X ? 75)………………………….. Cash ………………………………………………………….. 5,900 5,900 66,300 5,200 71,500 1,300 52,500 53,800 17-22 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-16 (Continued) (d)

Investments Beilman Corp. , Ordinary McDowell Corp. , Ordinary Duncan, Inc. , Preference Total portfolio Previous securities fair value adjustment—Cr. Securities fair value adjustment—Cr. Cost ? 180,000 52,500 60,000 ? 292,500 Fair Value ? 175,000 50,400 58,000 ? 283,400 Unrealized Holding Gain (Loss) ? (5,000) (2,100) (2,000) (9,100) (5,900) ? (3,200) Unrealized Holding Gain or Loss— Income…………………………………………………… Securities Fair Value Adjustment ………… 3,200 3,200 EXERCISE 17-17 (15–20 minutes) (a) December 31, 2010 Equity Investments ……………………………………. 25,000,000 Cash ………………………………………………….. 125,000,000 June 30, 2011 Cash …………………………………………………………. Dividend Revenue (50,000 X ? 80) ………… December 31, 2011 Cash …………………………………………………………. Dividend Revenue (50,000 X ? 80) ………… 4,000,000 4,000,000 4,000,000 4,000,000 Securities Fair Value Adjustment ……………….. 10,000,000 Unrealized Holding Gain or Loss— Income …………………………………………… ?2,700 X 50,000 = ? 135,000,000 ? 135,000,000 – ? 125,000,000 = ? 0,000,000 10,000,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-23 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-17 (Continued) (b) December 31, 2010 Equity Investments …………………………………….. 125,000,000 Cash ……………………………………………………. 125,000,000 June 30, 2011 Cash ………………………………………………………….. Equity Investments ………………………………. December 31, 2011 Cash …………………………………………………………..

Equity Investments ………………………………. Equity Investments …………………………………….. Revenue from Investment (20% X ? 73,000,000)………………………….. (c) Investment amount (statement of financial position) Dividend revenue (income statement) Unrealized holding gain (income statement) Revenue from investment (income statement) 4,000,000 4,000,000 14,600,000 14,600,000 4,000,000 4,000,000 Fair Value Method Equity Method ?135,000,000 *? 131,600,000* 8,000,000 0 10,000,000 14,600,000 *? 125,000,000 + ? 14,600,000 – ? 4,000,000 – ? 4,000,000

EXERCISE 17-18 (10–15 minutes) Equity Investments …………………………………………… Cash ………………………………………………………….. Cash (? 20,000 X . 25) ………………………………………….. Equity Investments …………………………………….. Equity Investments …………………………………………… 17-24 Copyright © 2011 John Wiley & Sons, Inc. 200,000 200,000 5,000 5,000 20,000 Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Revenue from Investment (. 25 X ? 0,000) …… 20,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-25 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-19 (15–20 minutes) (a) The entry to record the impairment is as follows: Loss on Impairment ($800,000 – $740,000) ……….. Debt Investments……………………………………… 60,000 60,000 (b) The new cost basis is $740,000. If the bonds are impaired, it is inappropriate to increase (amortize) the asset back up to its original maturity value. (c) Debt Investments …………………………………………….

Recovery of Impairment Loss ($760,000 – $740,000) …………………………….. EXERCISE 17-20 (10–15 minutes) (a) Contractual cash flow [(€400,000 X . 10 X 3) + €400,000] ……………………. Expected cash flow …………………………………………. Cash flow loss ………………………………………………… Recorded investment ………………………………………. Less: Present value of €350,000 due in 3 years at 10% (€350,000 X . 75131) ………………… Present value of €35,000 annual interest for 3 years at 10% (€35,000 X 2. 48685) ……………

Impairment loss ………………………………………………. (b) Loss on Impairment ………………………………………… Debt Investment……………………………………….. €520,000 (455,000) € 65,000 €400,000 €262,959 87,040 349,999 € 50,001 50,001 20,000 20,000 50,001 17-26 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 17-20 (Continued) (c) Since Komissarov will now receive the contractual cash flow (€520,000) there is no cash flow loss.

Therefore Komissarov must reverse the impairment loss by debiting Debt Investments and crediting Recovery of impairment loss. *EXERCISE 17-21 (20–25 minutes) (a) WENGER, INC. Statement of Comprehensive Income For the Year Ended December 31, 2010 _____________________________________________________________ Net income ………………………………………………………….. $120,000 Other comprehensive income Unrealized holding gain arising during year …… 1,300 Comprehensive income ……………………………………….. $121,300 WENGER, INC.

Statement of Comprehensive Income For the Year Ended December 31, 2011 _____________________________________________________________ Net income ………………………………………………………….. $140,000 Other comprehensive income Holding gains arising during year ………………….. $30,000 Add: Reclassification adjustment for loss included in net income………………….. 2,200 32,200 Comprehensive income ……………………………………….. $172,200 (b) *EXERCISE 17-22 (15–20 minutes) (a) Call Option………………………………………………………….

Cash …………………………………………………………… (b) Unrealized Holding Gain or Loss—Income ………….. Call Option ($300 – $200)……………………………… Call Option…………………………………………………………. Unrealized Holding Gain or Loss— Income (1,000 X $3) …………………………………… (c) Unrealized Holding Gain: $2,900 ($3,000 – $100) Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 300 300 100 100 3,000 3,000 17-27 Visit Free Slides and Ebooks : http://downloadslide. logspot. com *EXERCISE 17-23 (20–25 minutes) (a) Fixed-rate debt Fixed rate (6% ? 2) Semiannual debt payment Swap fixed receipt Net income effect Swap variable rate 5. 7% X 1/2 X €100,000 6. 7% X 1/2 X €100,000 Net interest expense 6/30/10 €100,000 X3% € 3,000 (3,000) € 0 € € 2,850 0 2,850 (b) 12/31/10 €100,000 X3% € 3,000 (3,000) € 0 € € 3,350 3,350 Note to instructor: An interest rate swap in which a company changes its interest payments from fixed to variable is a fair value hedge because the changes in fair value of both the derivative and the hedged liability offset one another. EXERCISE 17-24 (20–25 minutes) (a) Variable-rate debt Variable rate Debt payment Debt payment Swap variable received Net income effect Swap payable—fixed ($10,000 X 6%) Net interest expense 12/31/10 (b) 12/31/11 $10,000,000 $10,000,000 X5. 8% X6. 6% $ 580,000 $ 660,000 580,000 (580,000) 0 600,000 600,000 660,000 (660,000) 0 600,000 600,000 $ $ $ $ Note to instructor: An interest rate swap in which a company changes its interest payments from variable to fixed is a cash flow hedge because interest costs are always the same. 17-28 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com *EXERCISE 17-25 (15–20 minutes) (a) Interest Expense ………………………………………………. Cash (7. 5% X ?1,000,000) …………………………… (b) Cash ………………………………………………………………… Interest Expense ……………………………………….. (c) Swap Contract ………………………………………………….. Unrealized Holding Gain or Loss—Income …… (d) Unrealized Holding Gain or Loss—Income ………… Note Payable……………………………………………… 5,000 75,000 13,000 13,000 48,000 48,000 48,000 48,000 *EXERCISE 17-26 (20–25 minutes) (a) August 15, 2010 Call Option……………………………………………………….. Cash …………………………………………………………. September 30, 2010 Call Option……………………………………………………….. Unrealized Holding Gain or Loss—Income ($8 X 400) ………………………………………………. Unrealized Holding Gain or Loss—Income ………… Call Option ($360 – $180)……………………………. (c) December 31, 2010 Unrealized Holding Gain or Loss—Income …………

Call Option ($2 X 400) ………………………………… Unrealized Holding Gain or Loss—Income ………… Call Option ($180 – $65)……………………………… 360 360 (b) 3,200 3,200 180 180 800 800 115 115 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-29 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com *EXERCISE 17-26 (Continued) (d) January 15, 2011 Call Option ($1 X 400) ……………………………………….. Unrealized Holding Gain or Loss—Income ….. Unrealized Holding Gain or Loss—Income ………….

Call Option ($65 – $30) ……………………………….. Cash (400 X $7) …………………………………………………. Loss on Settlement of Call Option……………………… Call Option* ……………………………………………….. *Value of Call Option at settlement: Call Option 360 3,200 400 2,830 *EXERCISE 17-27 (25–30 minutes) (a) May 1, 2010 Memorandum entry to indicate entering into the futures contract. June 30, 2010 Futures Contract ……………………………………………….. 400,000 Unrealized Holding Gain or Loss—Equity [(? 52,000 – ? 0,000) X 200 ounces] ……………. September 30, 2010 Futures Contract ……………………………………………….. 100,000 Unrealized Holding Gain or Loss—Equity [(? 52,500 – ? 52,000) X 200 ounces] ……………. 400 400 35 35 2,800 30 2,830 180 800 115 35 (b) 400,000 (c) 100,000 17-30 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com *EXERCISE 17-27 (Continued) (d) October 5, 2010 Titanium Inventory ……………………………………………. 10,500,000 Cash (? 2,500 X 200 ounces) ……………………… 10,500,000 Cash ………………………………………………………………… Futures Contract [(? 52,500 – ? 50,000) X 200 ounces] ………….. 500,000 500,000 Note to instructor: In practice, futures contracts are settled on a daily basis; for our purposes, we show only one settlement for the entire amount. (e) December 15, 2010 Cash ………………………………………………………………… 25,000,000 Sales Revenue …………………………………………… 25,000,000 Cost of Goods Sold ………………………………………….. 4,000,000 Inventory (Drivers) …………………………………….. 14,000,000 Unrealized Holding Gain or Loss—Equity ………….. Cost of Goods Sold (? 400,000 + ? 100,000) ….. (f) 500,000 500,000 CHOI GOLF CO. Partial Income Statement For the Quarter Ended December 31, 2010 Sales revenue…………………………………………………… Cost of goods sold …………………………………………… Gross profit……………………………………………….. *Cost of inventory ……………………………………………..

Less: Futures contract adjustment …………………… Cost of goods sold …………………………………………… ?25,000,000 13,500,000* ? 11,500,000 ? 14,000,000 500,000 ? 13,500,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-31 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com TIME AND PURPOSE OF PROBLEMS Problem 17-1 (Time 20–30 minutes) Purpose—the student is required to prepare journal entries and adjusting entries covering a three-year period for debt investments first classified as held-for-collection and then classified as trading.

Bond premium amortization is also involved. Problem 17-2 (Time 30–40 minutes) Purpose—The student is required to prepare journal entries and adjusting entries for debt investments, along with an amortization schedule and a discussion of financial statement presentation. Problem 17-3 (Time 25–30 minutes) Purpose—to provide the student with an understanding of the differentiation in accounting treatments for debt and equity investments. The student is required to prepare the necessary journal entries to properly reflect transactions relating to debt and equity investments.

Problem 17-4 (Time 25–35 minutes) Purpose—the student is required to distinguish between the existence of a bond premium or discount. The student is also required to prepare the adjusting entries at two year-ends for debt investments. Problem 17-5 (Time 25–35 minutes) Purpose—the student is required to prepare journal entries for the sale and purchase of equity investments along with the year-end adjusting entry for unrealized holding gains or losses and to discuss the financial statement presentation.

Problem 17-6 (Time 25–35 minutes) Purpose—the student is required to prepare during-the-year and year-end entries for trading equity investments and to explain how the entries would differ if the investments were classified as non-trading. Problem 17-7 (Time 25–35 minutes) Purpose—the student is required to prepare during-the-year and year-end entries for debt investments and to explain how the entries would differ if the investments were classified as held-for-collection. Problem 17-8 (Time 20–30 minutes) Purpose—to provide the student with an understanding of the accounting for trading and equity investments.

The student is required to apply the fair value method to both classes of investments and describe how they would be reflected in the body and notes to the financial statements. Problem 17-9 (Time 20–30 minutes) Purpose—to provide the student with an understanding of the proper accounting treatment with respect to trading equity investments and the resulting effect of a reclassification from trading to non-trading status. The student is required to discuss the descriptions and amounts which would be reported on the face of the statement of financial position with regard to these investments, plus prepare any necessary note disclosures.

Problem 17-10 (Time 30–40 minutes) Purpose—to provide the student with an understanding of the reporting problems associated with trading equity investments. Description and amounts that should be reported on a company’s comparative financial statements are then required. Problem 17-11 (Time 20–30 minutes) Purpose—to provide the student with an understanding of the reporting problems associated with trading equity investments. Description and amounts that should be reported on a company’s comparative financial statements are then required. 17-32 Copyright © 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Time and Purpose of Problems (Continued) Problem 17-12 (Time 20–30 minutes) Purpose—to provide the student with an opportunity to prepare entries for non-trading investment transactions and to report the results in a comprehensive income statement and a statement of financial position. *Problem 17-13 (Time 20–25 minutes) Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration for a stand alone derivative (call option). Problem 17-14 (Time 20–25 minutes) Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration for a stand alone derivative (put option). *Problem 17-15 (Time 20–25 minutes) Purpose—the student is required to prepare the entries at purchase, throughout the life, and at expiration for a stand alone derivative (put option). *Problem 17-16 (Time 30–40 minutes) Purpose—the student is provided with an opportunity to prepare the entries for a fair value hedge in the context of an interest rate swap, including how the effects of the swap will be reported in the financial statements. Problem 17-17 (Time 25–35 minutes) Purpose—the student is provided with an opportunity to prepare the entries for a cash flow hedge in the context of an option contract on the purchase of inventory, including how the effects of the hedge will be reported in the financial statements. *Problem 17-18 (Time 25–35 minutes) Purpose—the student is provided with an opportunity to prepare the entries for a fair value hedge in the context of the use of a put option to hedge a non-trading equity investment, including how the effects for the hedging instrument and hedged item will be reported in the financial statements.

Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-33 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com SOLUTIONS TO PROBLEMS PROBLEM 17-1 (a) December 31, 2008 Debt Investments ………………………………… Cash …………………………………………… December 31, 2009 Cash …………………………………………………… Debt Investments………………………… Interest Revenue…………………………. December 31, 2011 Cash ……………………………………………………

Debt Investments………………………… Interest Revenue…………………………. December 31, 2008 Debt Investments ………………………………… Cash …………………………………………… December 31, 2009 Cash …………………………………………………… Debt Investments………………………… Interest Revenue…………………………. Unrealized Holding Gain or Loss— Income ($107,093 – $106,500) …………… Securities Fair Value Adjustment … 108,660 108,660 (b) 7,000 1,567 5,433 (c) 7,000 1,728 5,272 (d) 08,660 108,660 (e) 7,000 1,567 5,433 593 593 (f) December 31, 2011 Cash …………………………………………………… Debt Investments………………………… Interest Revenue…………………………. 7,000 1,728 5,272 17-34 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com PROBLEM 17-1 (Continued) Amortized Cost $103,719 Fair Value $105,650 Unrealized Gain (Loss) $1,931 2,053* $ (122) Spangler Company, 7% bonds Previous securities fair value adjustment—Dr.

Securities fair value adjustment— Cr. *($107,500 – $105,447) Unrealized Holding Gain or Loss—Income……………. Securities Fair Value Adjustment …………………… 122 122 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 17-35 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com PROBLEM 17-2 (a) January 1, 2010 purchase entry: Debt Investments ……………………………………………. Cash ………………………………………………………… b) The amortization schedule is as follows: Schedule of Interest Revenue and Bond Discount Amortization 8% Bonds Purchased to Yield 10% Interest Receivable Or Cash Received — € 16,000 16,000 16,000 16,000 16,000 16,000 16,000 16,000 16,000 16,000 €160,000 Bond Discount Amortization — € 2,456 2,579 2,707 2,843 2,985 3,134 3,291 3,455 3,628 3,808 €30,886 Carrying A

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