intermediateaccounting

CHAPTER17InvestmentsASSIGNMENTCLASSIFICATIONTABLE(BYTOPIC) Problems ConceptsforAnalysis 1.Debtsecurities. 1,2,3,13 1 64,5,7,8, 10,13,21 1,3 2,3,5 1,7 4,6,7,8, 10,21 4 14,7,8,9, 10,11,21 2,10 4 1,2,3,4,7 1 2.Bondamortization. 8,9 1,2,3 3,4,5 1,2,3 3.Equitysecurities. 1,12,16 1 67,10,11,6,8,9,11,12,16,3,5,6,8,9, 10,11,12 1,2,36,7,8,10, 14,15,21 6 6,7,14,15,19,20 6,8 1,316,17,18,12,13, 16,17 8 4,5 4.Comprehensiveincome. 22 9 10 9,10,12 5,8,9,10, 11,12 6.Fairvalueoption. 25,26,27 19,20,21 7.Impairments. 24 10 18 38.Transfersbetween categories. 23 8 1,3,6 *9.Derivatives. 28,29,30,31,32,33,34,35 22,23,24,25,26,27 13,14,15,16,17,18 *10.VariableInterestEntities. 36,37 *ThismaterialisdealtwithinanAppendixtothechapter.ASSIGNMENTCLASSIFICATIONTABLE(BYLEARNINGOBJECTIVE) Exercises Problems ConceptsforAnalysis 1.Identifythethreecategoriesofdebtsecuritiesanddescribetheaccountingandreportingtreatmentforeachcategory. 1,2,3,4,5,6,7 1 CA17-1 2.Understandtheproceduresfordiscountandpremiumamortizationonbondinvestments. 8,9,10,11 1,2,3,4 2,3,4,5,21 1,2,3,4,7 1,6,7,8,9,11,12,14,15,16,19, 20,21 3,5,6,8,9,10,11,12 CA17-1,CA17-3,CA17-512,13, 16,17 8 CA17-45.Describetheaccountingforthefairvalueoptionandtheaccountingforimpairments ofdebtandequityinvestments. 21,24,26,27 10 18,19,20,21 8,9,10,12 CA17-6 6.Describethereportingofreclassificationadjustmentsandtheaccountingfortransfersbetweencategories. 22,23 9 10 *7.Describetheusesof,andaccountingforderivatives. 28,29 22,26 13,14,15 *8.Explainhowtoaccountforafairvaluehedge. 30,31,32 23,25 16,17,18 *9.Explainhowtoaccountforacashflowhedge. 33,34 24,27 *10.Identifyspecialreportingissuesforderivatives. 35,36,37 ASSIGNMENTCHARACTERISTICSTABLETime (minutes) E17-1 Investmentclassifications. Simple 5–10 E17-2 Entriesforheld-to-maturitysecurities. Simple 10–15 E17-3 Entriesforheld-to-maturitysecurities. Simple 15–20 E17-4 Entriesforavailable-for-salesecurities. Simple 10–15 E17-5 Effective-interestversusstraight-linebondamortization. Simple 20–30 E17-6 Entriesforavailable-for-saleandtradingsecurities. Simple 10–15 E17-7 Tradingsecuritiesentries. Simple 10–15 E17-8 Available-for-salesecuritiesentriesandreporting. Simple 5–10 E17-9 Available-for-salesecuritiesentriesandfinancialstatementpresentation. Simple 10–15 E17-10 Comprehensiveincomedisclosure. Moderate 20–25 E17-11 Equitysecuritiesentries. Simple 20–25 E17-12 Journalentriesforfairvalueandequitymethods. Simple 15–20 E17-13 Equitymethod. Moderate 10–15 E17-14 Equityinvestment—trading. Moderate 10–15 E17-15 Equityinvestments—trading. Moderate 15–20 E17-16 Fairvalueandequitymethodcompared. Simple 15–20 E17-17 Equitymethod. Simple 10–15 E17-18 Impairmentofdebtsecurities. Moderate 15–20 E17-19 Fairvaluemeasurement. Moderate 15–20 E17-20 Fairvaluemeasurementissues. Moderate 15–20 E17-21 Fairvalueoption. Moderate 15–20 *E17-22 Derivativetransaction. Moderate 15–20 *E17-23 Fairvaluehedge. Moderate 20–25 *E17-24 Cashflowhedge. Moderate 20–25 *E17-25 Fairvaluehedge. Moderate 15–20 *E17-26 Calloption. Moderate 20–25 *E17-27 Cashflowhedge. Moderate 25–30 P17-1 Debtsecurities. Moderate 20–30 P17-2 Available-for-saledebtinvestments. Moderate 30–40 P17-3 Available-for-saleinvestments. Moderate 25–30 P17-4 Available-for-saledebtsecurities. Moderate 25–35 P17-5 Equitysecuritiesentriesanddisclosures. Moderate 25–35 P17-6 Tradingandavailable-for-salesecuritiesentries. Simple 25–35 P17-7 Available-for-saleandheld-to-maturitydebtsecuritiesentries. Moderate 25–35 P17-8 Fairvalueandequitymethods. Moderate 20–30 P17-9 Financialstatementpresentationofavailable-for-saleinvestments. Moderate 20–30ASSIGNMENTCHARACTERISTICSTABLE(Continued)Time (minutes) P17-10 Gainonsaleofsecuritiesandcomprehensiveincome. Moderate 20–30 P17-11 Equityinvestments—available-for-sale. Complex 30–40 P17-12 Available-for-salesecurities—statementpresentation. Moderate 20–30 *P17-13 Derivativefinancialinstrument. Moderate 20–25 *P17-14 Derivativefinancialinstrument. Moderate 20–25 *P17-15 Free-standingderivative. Moderate 20–25 *P17-16 Fairvaluehedgeinterestrateswap. Moderate 30–40 *P17-17 Cashflowhedge. Moderate 25–35 *P17-18 Fairvaluehedge. Moderate 25–35 CA17-1 Issuesraisedaboutinvestmentsecurities. Moderate 25–30 CA17-2 Equitysecurities. Moderate 25–30 CA17-3 Financialstatementeffectofequitysecurities. Simple 20–30 CA17-4 Equitysecurities. Moderate 15–25 CA17-5 Investmentaccountedforundertheequitymethod. Simple 15–25 CA17-6 Equityinvestment. Moderate 25–35 CA17-7 Fairvalue. Moderate 25–35SOLUTIONSTOCODIFICATIONEXERCISESCE17-1MasterGlossary(a)Tradingsecuritiesaresecuritiesthatareboughtandheldprincipallyforthepurposeofsellingthemintheneartermandthereforeheldforonlyashortperiodoftime.Tradinggenerallyreflectsactiveandfrequentbuyingandselling,andtradingsecuritiesaregenerallyusedwiththeobjectiveofgeneratingprofitsonshort-termdifferencesinprice.(b)Aholdinggainorlossisthenetchangeinfairvalueofasecurity.Theholdinggainorlossdoesnotincludedividendorinterestincomerecognizedbutnotyetreceivedorwrite-downsforother-than-temporaryimpairment.(c)Acashflowhedgeisahedgeoftheexposuretovariabilityinthecashflowsofarecognizedassetorliability,orofaforecastedtransaction,thatisattributabletoaparticularrisk.(d)Afairvaluehedgeisahedgeoftheexposuretochangesinthefairvalueofarecognizedassetorliability,orofanunrecognizedfirmcommitment,thatareattributabletoaparticularrisk.CE17-2AccordingtoFASBASC235-10-S99-1(NotestoFinancialStatements—SECMaterials):(n)Accountingpoliciesforcertainderivativeinstruments.Disclosuresregardingaccountingpoliciesshallincludedescriptionsoftheaccountingpoliciesusedforderivativefinancialinstrumentsandderivativecommodityinstrumentsandthemethodsofapplyingthosepoliciesthatmateriallyaffectthedeterminationoffinancialposition,cashflows,orresultsofoperation.Thisdescriptionshallinclude,totheextentmaterial,eachofthefollowingitems:(1)Adiscussionofeachmethodusedtoaccountforderivativefinancialinstrumentsandderivativecommodityinstruments;(2)Thetypesofderivativefinancialinstrumentsandderivativecommodityinstrumentsaccountedforundereachmethod;(3)Thecriteriarequiredtobemetforeachaccountingmethodused,includingadiscussionofthecriteriarequiredtobemetforhedgeordeferralaccountingandaccrualorsettlementaccounting(e.g.,whetherandhowriskreduction,correlation,designation,andeffectivenesstestsareapplied);(4)Theaccountingmethodusedifthecriteriaspecifiedinparagraph(n)(3)ofthissectionarenotmet;(5)Themethodusedtoaccountforterminationsofderivativesdesignatedashedgesorderivativesusedtoaffectdirectlyorindirectlytheterms,fairvalues,orcashflowsofadesignateditem;CE17-2(Continued)(6)Themethodusedtoaccountforderivativeswhenthedesignateditemmatures,issold,isextinguished,oristerminated.Inaddition,themethodusedtoaccountforderivativesdesignatedtoananticipatedtransaction,whentheanticipatedtransactionisnolongerlikelytooccur;and(7)Whereandwhenderivativefinancialinstrumentsandderivativecommodityinstruments,andtheirrelatedgainsandlosses,arereportedinthestatementsoffinancialposition,cashflows,andresultsofoperations.Instructionstoparagraph4-08(n).1.Forpurposesofthisparagraph(n),derivativefinancialinstrumentsandderivativecommodityinstruments(collectivelyreferredtoas“derivatives”)aredefinedasfollows:(i)Derivativefinancialinstrumentshavethesamemeaningasdefinedbygenerallyacceptedaccountingprinciples(seeFinancialAccountingStandardsBoard(“FASB”),StatementofFinancialAccountingStandardsNo.119,“DisclosureaboutDerivativeFinancialInstrumentsandFairValueofFinancialInstruments,”(“FAS119”)paragraphs5–7,(October1994)),andincludefutures,forwards,swaps,options,andotherfinancialinstrumentswithsimilarcharacteristics.(ii)Derivativecommodityinstrumentsinclude,totheextentsuchinstrumentsarenotderivativefinancialinstruments,commodityfutures,commodityforwards,commodityswaps,commodityoptions,andothercommodityinstrumentswithsimilarcharacteristicsthatarepermittedbycontractorbusinesscustomtobesettledincashorwithanotherfinancialinstrument.Forpurposesofthisparagraph,settlementincashincludessettlementincashofthenetchangeinvalueofthederivativecommodityinstrument(e.g.,netcashsettlementbasedonchangesinthepriceoftheunderlyingcommodity).2.Forpurposesofparagraphs(n)(2),(n)(3),(n)(4),and(n)(7),therequireddisclosuresshouldaddressseparatelyderivativesenteredintofortradingpurposesandderivativesenteredintoforpurposesotherthantrading.Forpurposesofthisparagraph,tradingpurposeshasthesamemeaningasdefinedbygenerallyacceptedaccountingprinciples(see,e.g.,FAS119,paragraph9a(October1994)).3.Forpurposesofparagraph(n)(6),anticipatedtransactionsmeanstransactions(otherthantransactionsinvolvingexistingassetsorliabilitiesortransactionsnecessitatedbyexistingfirmcommitments)anenterpriseexpects,butisnotobligated,tocarryoutinthenormalcourseofbusiness(see,e.g.,FASB,StatementofFinancialAccountingStandardsNo.80,“AccountingforFuturesContracts,”paragraph9,(August1984)).4.Registrantsshouldprovidedisclosuresrequiredunderparagraph(n)infilingswiththeCommissionthatincludefinancialstatementsoffiscalperiodsendingafterJune15,1997.[45FR63669,Sept.25,1980,asamendedat46FR56179,Nov.16,1981;50FR25215,June18,1985;50FR49532,Dec.3,1985;51FR3770,Jan.30,1986;57FR45293,Oct.1,1992;59FR65636,Dec.20,1994;62FR6063,Feb.10,1997]CE17-3AccordingtoFASBASC323-10-35-20(Investments—EquityMethodandJointVentures—SubsequentMeasurement):Theinvestorordinarilyshalldiscontinueapplyingtheequitymethodiftheinvestment(andnetadvances)isreducedtozeroandshallnotprovideforadditionallossesunlesstheinvestorhasguaranteedobligationsoftheinvesteeorisotherwisecommittedtoprovidefurtherfinancialsupportfortheinvestee.CE17-4AccordingtoFASBASC815-10-45-4(DerivativesandHedging—OtherPresentationMatters—BalanceSheetNetting);Unlesstheconditionsinparagraph210-20-45-1aremet,thefairvalueofderivativeinstrumentsinalosspositionshallnotbeoffsetagainstthefairvalueofderivativeinstrumentsinagainposition.Similarly,amountsrecognizedasaccruedreceivablesshallnotbeoffsetagainstamountsrecognizedasaccruedpayablesunlessarightofsetoffexists.ANSWERSTOQUESTIONS1.Adebtsecurityisaninstrumentrepresentingacreditorrelationshipwithanentity.Debtsecuritiesinclude.governmentsecurities,municipalsecurities,corporatebonds,convertibledebt,andcommercialpaper.Tradeaccountsreceivableandloansreceivablearenotdebtsecuri​tiesbecausetheydonotmeetthedefinitionofasecurity.Anequitysecurityisdescribedasasecurityrepresentinganownershipinterestsuchascommon,preferred,orothercapitalstock.Italsoincludesrightstoacquireordisposeofanownershipinterestatanagreed-uponordeterminableprice,suchaswarrants,rights,andcalloptionsorputoptions.Convertibledebtsecuritiesandredeemablepreferredstocksarenottreatedasequitysecurities.2.Thevarietyinbondfeaturesalongwiththevariabilityininterestratespermitsinvestorstoshopforexactlytheinvestmentthatsatisfiestheirrisk,yield,andmarketabilitydesires,andpermitsissuerstocreateadebtinstrumentbestsuitedtotheirneeds.3.Costincludesthetotalconsiderationtoacquiretheinvestment,includingbrokeragefeesandothercostsincidentaltothepurchase.4.Thethreetypesofclassificationsare:Held-to-maturity:Debtinvestmentsthatthecompanyhasthepositiveintentandabilitytoholdtomaturity.Trading:Debtinvestmentsboughtandheldprimarilyforsaleintheneartermtogenerateincomeonshort-termpricedifferences.Available-for-sale:Debtinvestmentsnotclassifiedasheld-to-maturityortradingsecurities.5.Adebtinvestmentshouldbeclassifiedasheld-to-maturityonlyifthecompanyhasboth:(1)thepositiveintentand(2)theabilitytoholdthosesecuritiestomaturity.6.Tradingsecuritiesarereportedatfairvalue,withunrealizedholdinggainsandlossesreportedaspartofnetincome.Anydiscountorpremiumisamortized.7.Tradingandavailable-for-salesecuritiesshouldbereportedatfairvalue,whereasheld-to-maturitysecuritiesshouldbereportedatamortizedcost.8.$3,500,000X10%=$350,000;$350,000÷2=$175,000.Wheelerwouldmakethefollowingentry:Cash($4,000,000X8%X1/2)160,000DebtInvestments15,000InterestRevenue($3,500,000X10%X1/2)175,0009.FairValueAdjustment(available-for-sale)89,000UnrealizedHoldingGainorLoss—Equity[$3,604,000–($3,500,000+$15,000)*]89,000*Seenumber8.10.Unrealizedholdinggainsandlossesfortradingsecuritiesshouldbeincludedinnetincomeforthecurrentperiod.Unrealizedholdinggainsandlossesforavailable-for-salesecuritiesshouldbereportedasothercomprehensiveincomeandasaseparatecomponentofstockholders’equity.Unrealizedholdinggainsandlossesarenotrecognizedforheld-to-maturitysecurities.QuestionsChapter17(Continued)11.(a)UnrealizedHoldingGainorLoss—Equity60,000FairValueAdjustment(available-for-sale)60,000(b)UnrealizedHoldingGainorLoss—Equity70,000FairValueAdjustment(available-for-sale)70,00012.Investmentsinequitysecuritiescanbeclassifiedasfollows:(a)Holdingsoflessthan20%(fairvaluemethod)—investorhaspassiveinterest.(b)Holdingsbetween20%and50%(equitymethod)—investorhassignificantinfluence.(c)Holdingsofmorethan50%(consolidatedstatements)—investorhascontrollinginterest.Holdingsoflessthan20%arethenclassifiedintotradingandavailable-for-sale,assumingdeterminablefairvalues.13.Investmentsinstockdonothaveamaturitydateandthereforecannotbeclassifiedasheld-to-maturitysecurities.14.Sellingpriceof10,000sharesat$$275,000Less:Brokeragecommissions(1,770)Proceedsfromsale273,230Costof10,000shares(260,000)Gainonsaleofinvestments$13,230Cash273,230EquityInvestments260,000GainonSaleofInvestments13,23015.Bothtradingandavailable-for-saleequitysecuritiesarereportedatfairvalue.However,anyunrealizedholdinggainorlossisreportedinnetincomefortradingsecuritiesbutasothercomprehensiveincomeandasaseparatecomponentofstockholders’equityforavailable-for-salesecurities.16.Significantinfluenceoveraninvesteemayresultfromrepresentationontheboardofdirectors,participationinpolicy-makingprocesses,materialintercompanytransactions,interchangeofmanagerialpersonnel,ortechnologicaldependency.Aninvestment(directorindirect)of20%ormoreofthevotingstockofaninvesteeconstitutessignificantinfluenceunlessthereexistsevidencetothecontrary.17.Undertheequitymethod,theinvestmentisoriginallyrecordedatcost,butisadjustedforchangesintheinvestee’snetassets.Theinvestmentaccountisincreased(decreased)bytheinvestor’sproportionateshareoftheearnings(losses)oftheinvesteeanddecreasedbyalldividendsreceivedbytheinvestorfromtheinvestee.18.The20%ruleisthataninvestment(directorindirect)of20percentormoreofthevotingstockofaninvesteeleadstothepresumptionthataninvestorhastheabilitytoexercisesignificantinfluenceoveraninvesteeandtheequitymethodshouldbeused.However,thereareotherfactors,whenconsidered,mayindicatethatownershipof20percentormoremaynotenableaninvestortoexercisesignificantinfluence.Aninvestorwithownershipjustbelow20%maybeabletoexercisesignificantinfluencebasedonrepresentationontheboardofdirectors,participationinpolicy-makingprocesses,materialintercompanytransactions,interchangeofmanagerialpersonnel,ortechnologicaldependency.AnotherimportantconsiderationistheextentofownershipbyaninvestorinrelationtotheconcentrationofothershareholdingsQuestionsChapter17(Continued)Factorsthatcouldleadtoaconclusionofnosignificantownership,whenownershipinabove20percentinclude:(1)Theinvesteeopposestheinvestor’sacquisitionofitsstock;(2)Theinvestorandinvesteesignanagreementunderwhichtheinvestorsurrenderssignificantshareholderrights;(3)Theinvestor’sownershipsharedoesnotresultin“significantinfluence”becausemajorityownershipoftheinvesteeisconcentratedamongasmallgroupofshareholderswhooperatetheinvesteewithoutregardtotheviewsoftheinvestor;(4)Theinvestortriesandfailstoobtainrepresentationontheinvestee’sboardofdirectors.19.DividendssubsequenttoacquisitionshouldbeaccountedforasareductionintheEquityInvestmentreceivedaccount.20.Ordinarily,RaleighCorp.shoulddiscontinueapplyingtheequitymethodandnotprovideforadditionallossesbeyondthecarryingvalueof$170,000.However,ifRaleighCorp.’slossisnotlimitedtoitsinvestment(duetoaguaranteeofBorg’sobligationsorothercommitmenttoprovidefurtherfinancialsupportorifimminentreturntoprofitableoperationsbyBorgappearstobeassured),itisappropriateforRaleighCorp.toprovideforitsentire$186,000shareofthe$620,000loss.21.Tradingsecuritiesshouldbereportedataggregatefairvalueascurrentassets.Individualheld-to-maturityandavailable-for-salesecuritiesareclassifiedascurrentornoncurrentdependinguponthecircumstances.Held-to-maturitysecuritiesgenerallyshouldbeclassifiedascurrentornoncurrent,basedonthematuritydateoftheindividualsecurities.Debtsecuritiesidentifiedasavailable-for-saleshouldbeclassifiedascurrentornoncurrent,basedonmaturitiesandexpectationsastosalesandredemptionsinthefollowingyear.Equitysecuritiesidentifiedasavailable-for-saleshouldbeclassifiedascurrentifthesesecuritiesareavailableforuseincurrentoperations.22.Reclassificationadjustmentsarenecessarytoinsurethatdoublecountingdoesnotresultwhenrealizedgainsorlossesarereportedaspartofnetincomebutalsoareshownaspartofothercomprehensiveincomeinthecurrentperiodorinpreviousperiods.23.Whenasecurityistransferredfromonecategorytoanother,thetransfershouldberecordedatfairvalue,whichinthiscasebecomesthenewbasisforthesecurity.Anyunrealizedgainorlossatthedateofthetransferincreasesordecreasesstockholders’equity.Theunrealizedgainorlossatthedateofthetransfertothetradingcategoryisrecognizedinincome.24.Adebtsecurityisimpairedwhen“itisprobablethattheinvestorwillbeunabletocollectallamountsdueaccordingtothecontractualterms.”Whenanimpairmenthasoccurred,thesecurityiswrittendowntoitsfairvalue,whichisalsothesecurity’snewcostbasis.Theamountofthewritedownisaccountedforasarealizedloss.25.Fairvalueisdefinedas“thepricethatwouldbereceivedtosellanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.”Fairvalueisthereforeamarket-basedmeasure.26.Thefairvalueoptiongivescompaniestheoptiontoreportmostfinancialinstrumentsatfairvaluewithallgainsandlossesrelatedtochangesinfairvaluereportedintheincomestatement.Thisoptionisappliedonaninstrumentbyinstrumentbasis.Thefairvalueoptionisgenerallyavailableonlyatthetimeacompanyfirstpurchasesthefinancialassetorincursafinancialliability.Ifacompanychoosestousethefairvalueoption,itmustmeasurethisinstrumentatfairvalueuntilthecompanynolongerhasownership.27.No.Thefairvalueoptionisgenerallyavailableonlyatthetimeacompanyfirstpurchasesthefinancialassetorincursafinancialliability.Ifacompanychoosestousethefairvalueoption,itmustmeasurethisinstrumentatfairvalueuntilthecompanynolongerhasownership.QuestionsChapter17(Continued)*28.Anunderlyingisaspecialinterestrate,securityprice,commodityprice,indexofpricesorrates,orothermarket-relatedvariable.Changesintheunderlyingdeterminechangesinthevalueofthederivative.Paymentisdeterminedbytheinteractionoftheunderlyingwiththefaceamountandthenumberofshares,orotherunitsspecifiedinthederivativecontract(theseelementsarereferredtoasnotionalamounts).*29.Seeillustrationbelow:TraditionalFinancialInstrument .,TradingSecurity) DerivativeFinancialInstrument.,CallOption)Stockpricetimesthenumber ofshares. Changeinstockprice(underlying)timesnumberofshares(notionalamount). InitialInvestment Investorpaysfullcost. Initialinvestmentislessthanfullcost. Settlement Deliverstocktoreceivecash. Receivecashequivalent,basedonchangesinstockpricetimesthenumberofshares.Foratraditionalfinancialinstrument,aninvestorgenerallymustpaythefullcost,whilederivativesrequirelittleinitialinvestment.Inaddition,theholderofatraditionalsecurityisexposedtoallrisksofownership,whilemostderivativesarenotexposedtoallrisksassociatedwithownershipintheunderlying.Forexample,theintrinsicvalueofacalloptio