CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions 1 Debt securities 1, 2, 3, 13 Brief Exercises Exercises Problems (a) Heldtomaturity 4, 5, 7, 8, 10, 13, 21 1, 3 (b) Trading 4, 6, 7, 8, 10, 21 (c) 4, 7, 8, 9, 10, 11, 21 2, 10 1, 2, 3, 4, 7 2 Bond amortization 8, 9 1, 2, 3 3, 4, 5 1, 2, 3 3 Equity securities 1, 12, 16 Availableforsale 2, 3, 5 Concepts for Analysis 1, 7 1 (a) Availableforsale 7, 10, 11, 15, 21 5, 8 6, 8, 9, 11, 3, 5, 6, 8, 9, 1, 2, 3 12, 16, 10, 11, 12 19, 20 (b) Trading 6, 7, 8, 10, 14, 15, 21 6, 7, 14, 15, 6, 8 19, 20 1, 3 (c) 16, 17, 18, 19, 20 12, 13, 16, 17 4, 5 4 Comprehensive income 22 10 9, 10, 12 5 Disclosures of investments 18 10 5, 8, 9, 10, 11, 12 6 Fair value option 25, 26, 27 19, 20, 21 7 Impairments 24 8 Transfers between categories 23 *9 Derivatives 28, 29, 30, 31, 32, 33, 34, 35 *10 Variable Interest Entities 36, 37 Equity method 10 18 1, 3, 6 22, 23, 24, 13, 14, 15, 25, 26, 27 16, 17, 18 *This material is dealt with in an Appendix to the chapter Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 171 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Questions Exercises Problems Concepts for Analysis Identify the three categories of debt securities and describe the accounting and reporting treatment for each category 1, 2, 3, 4, 5, 6, 7 Understand the procedures for discount and premium amortization on bond investments 8, 9, 10, 11 1, 2, 3, 4 2, 3, 4, 5, 21 1, 2, 3, 4, Identify the categories of equity securities and describe the accounting and reporting treatment for each category 12, 13, 14, 15 5, 6, 8 1, 6, 7, 8, 9, 11, 12, 14, 15, 16, 19, 20, 21 3, 5, 6, 8, 9, 10, 11, 12 CA171, CA173, CA175 Explain the equity method of accounting and compare it to the fair value method for equity securities. 16, 17, 18, 19, 20, 25 12, 13, 16, 17 CA174 Describe the accounting for the fair value option and the accounting for impairments of debt and equity investments 21, 24, 26, 27 10 18, 19, 20, 21 8, 9, 10, 12 Describe the reporting of reclassification adjustments and the accounting for transfers between categories 22, 23 10 *7 Describe the uses of, and accounting for derivatives. 28, 29 22, 26 CA171 CA176 13, 14, 15 *8 Explain how to 30, 31, 32 23, 25 16, 17, 18 account for a fair 172 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) value hedge *9 Explain how to account for a cash flow hedge 33, 34 *10 Identify special reporting issues for derivatives. 35, 36, 37 24, 27 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 173 ASSIGNMENT CHARACTERISTICS TABLE Item E171 E172 E173 E174 E175 E176 E177 E178 E179 E1710 E1711 E1712 E1713 E1714 E1715 E1716 E1717 E1718 E1719 E1720 E1721 *E1722 *E1723 *E1724 *E1725 *E1726 *E1727 P171 P172 P173 P174 P175 P176 P177 P178 P179 Description Investment classifications Entries for heldtomaturity securities Entries for heldtomaturity securities Entries for availableforsale securities Effectiveinterest versus straightline bond amortization Entries for availableforsale and trading securities Trading securities entries Availableforsale securities entries and reporting Availableforsale securities entries and financial statement presentation Comprehensive income disclosure Equity securities entries Journal entries for fair value and equity methods Equity method Equity investment—trading Equity investments—trading Fair value and equity method compared Equity method Impairment of debt securities Fair value measurement Fair value measurement issues. Fair value option Derivative transaction Fair value hedge Cash flow hedge Fair value hedge Call option Cash flow hedge Debt securities Availableforsale debt investments Availableforsale investments Availableforsale debt securities Equity securities entries and disclosures Trading and availableforsale securities entries Availableforsale and heldtomaturity debt securities entries Fair value and equity methods Financial statement presentation of availableforsale investments Level of Difficulty Time (minutes) Simple Simple Simple Simple Simple Simple Simple Simple Simple 5–10 10–15 15–20 10–15 20–30 10–15 10–15 5–10 10–15 Moderate Simple Simple Moderate Moderate Moderate Simple Simple Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate 20–25 20–25 15–20 10–15 10–15 15–20 15–20 10–15 15–20 15–20 15–20 15–20 15–20 20–25 20–25 15–20 20–25 25–30 Moderate Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate 20–30 30–40 25–30 25–35 25–35 25–35 25–35 20–30 20–30 174 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item P1710 P1711 P1712 *P1713 *P1714 *P1715 *P1716 *P1717 *P1718 CA171 CA172 CA173 CA174 CA175 CA176 CA177 Description Gain on sale of securities and comprehensive income Equity investments—availableforsale Availableforsale securities—statement presentation Derivative financial instrument Derivative financial instrument Freestanding derivative Fair value hedge interest rate swap Cash flow hedge Fair value hedge Level of Difficulty Moderate Complex Moderate Moderate Moderate Moderate Moderate Moderate Moderate Time (minutes) 20–30 30–40 20–30 20–25 20–25 20–25 30–40 25–35 25–35 Issues raised about investment securities Equity securities Financial statement effect of equity securities Equity securities Investment accounted for under the equity method Equity investment Fair value Moderate Moderate Simple Moderate Simple Moderate Moderate 25–30 25–30 20–30 15–25 15–25 25–35 25–35 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 175 SOLUTIONS TO CODIFICATION EXERCISES CE171 Master Glossary (a) Trading securities are securities that are bought and held principally for the purpose of selling them in the near term and therefore held for only a short period of time. Trading generally reflects active and frequent buying and selling, and trading securities are generally used with the objective of generating profits on shortterm differences in price (b) A holding gain or loss is the net change in fair value of a security. The holding gain or loss does not include dividend or interest income recognized but not yet received or writedowns for other thantemporary impairment (c) A cash flow hedge is a hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk (d) A fair value hedge is a hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk CE172 According to FASB ASC 23510S991 (Notes to Financial Statements—SEC Materials): (n) Accounting policies for certain derivative instruments. Disclosures regarding accounting policies shall include descriptions of the accounting policies used for derivative financial instruments and derivative commodity instruments and the methods of applying those policies that materially affect the determination of financial position, cash flows, or results of operation. This description shall include, to the extent material, each of the following items: (1) A discussion of each method used to account for derivative financial instruments and derivative commodity instruments; (2) The types of derivative financial instruments and derivative commodity instruments accounted for under each method; (3) The criteria required to be met for each accounting method used, including a discussion of the criteria required to be met for hedge or deferral accounting and accrual or settlement accounting (e. g., whether and how risk reduction, correlation, designation, and effectiveness tests are applied); (4) The accounting method used if the criteria specified in paragraph (n)(3) of this section are not met; (5) The method used to account for terminations of derivatives designated as hedges or derivatives used to affect directly or indirectly the terms, fair values, or cash flows of a designated item; 176 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) CE172 (Continued) (6) The method used to account for derivatives when the designated item matures, is sold, is extinguished, or is terminated In addition, the method used to account for derivatives designated to an anticipated transaction, when the anticipated transaction is no longer likely to occur; and (7) Where and when derivative financial instruments and derivative commodity instruments, and their related gains and losses, are reported in the statements of financial position, cash flows, and results of operations. Instructions to paragraph 408(n) For purposes of this paragraph (n), derivative financial instruments and derivative commodity instruments (collectively referred to as “derivatives”) are defined as follows: (i) Derivative financial instruments have the same meaning as defined by generally accepted accounting principles (see Financial Accounting Standards Board (“FASB”), Statement of Financial Accounting Standards No. 119, “Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments,” (“FAS 119”) paragraphs 5–7, (October 1994)), and include futures, forwards, swaps, options, and other financial instruments with similar characteristics (ii) Derivative commodity instruments include, to the extent such instruments are not derivative financial instruments, commodity futures, commodity forwards, commodity swaps, commodity options, and other commodity instruments with similar characteristics that are permitted by contract or business custom to be settled in cash or with another financial instrument. For purposes of this paragraph, settlement in cash includes settlement in cash of the net change in value of the derivative commodity instrument (e. g., net cash settlement based on changes in the price of the underlying commodity) For purposes of paragraphs (n)(2), (n)(3), (n)(4), and (n)(7), the required disclosures should address separately derivatives entered into for trading purposes and derivatives entered into for purposes other than trading For purposes of this paragraph, trading purposes has the same meaning as defined by generally accepted accounting principles (see, e. g., FAS 119, paragraph 9a (October 1994)). For purposes of paragraph (n)(6), anticipated transactions means transactions (other than transactions involving existing assets or liabilities or transactions necessitated by existing firm commitments) an enterprise expects, but is not obligated, to carry out in the normal course of business (see, e g., FASB, Statement of Financial Accounting Standards No. 80, “Accounting for Futures Contracts,” paragraph 9, (August 1984)). Registrants should provide disclosures required under paragraph (n) in filings with the Commission that include financial statements of fiscal periods ending after June 15, 1997 [45 FR 63669, Sept. 25, 1980, as amended at 46 FR 56179, Nov. 16, 1981; 50 FR 25215, June 18, 1985; 50 FR 49532, Dec. 3, 1985; 51 FR 3770, Jan. 30, 1986; 57 FR 45293, Oct. 1, 1992; 59 FR 65636, Dec. 20, 1994; 62 FR 6063, Feb. 10, 1997] Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 177 CE173 According to FASB ASC 323103520 (Investments—Equity Method and Joint Ventures—Subsequent Measurement): The investor ordinarily shall discontinue applying the equity method if the investment (and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee CE174 According to FASB ASC 81510454 (Derivatives and Hedging—Other Presentation Matters—Balance Sheet Netting); Unless the conditions in paragraph 21020451 are met, the fair value of derivative instruments in a loss position shall not be offset against the fair value of derivative instruments in a gain position Similarly, amounts recognized as accrued receivables shall not be offset against amounts recognized as accrued payables unless a right of setoff exists 178 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) ANSWERS TO QUESTIONS 1 A debt security is an instrument representing a creditor relationship with an entity. Debt securities include U.S. government securities, municipal securities, corporate bonds, convertible debt, and commercial paper Trade accounts receivable and loans receivable are not debt securities because they do not meet the definition of a security An equity security is described as a security representing an ownership interest such as common, preferred, or other capital stock. It also includes rights to acquire or dispose of an ownership interest at an agreedupon or determinable price, such as warrants, rights, and call options or put options. Convertible debt securities and redeemable preferred stocks are not treated as equity securities 2 The variety in bond features along with the variability in interest rates permits investors to shop for exactly the investment that satisfies their risk, yield, and marketability desires, and permits issuers to create a debt instrument best suited to their needs 3 Cost includes the total consideration to acquire the investment, including brokerage fees and other costs incidental to the purchase 4 The three types of classifications are: Heldtomaturity: Debt investments that the company has the positive intent and ability to hold to maturity Trading: Debt investments bought and held primarily for sale in the near term to generate income on shortterm price differences Availableforsale: Debt investments not classified as heldtomaturity or trading securities 5 A debt investment should be classified as heldtomaturity only if the company has both: (1) the positive intent and (2) the ability to hold those securities to maturity 6 Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income. Any discount or premium is amortized 7 Trading and availableforsale securities should be reported at fair value, whereas heldto maturity securities should be reported at amortized cost 8 $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) 160,000 Debt Investments 15,000 Interest Revenue ($3,500,000 X 10% X 1/2) 175,000 9 Fair Value Adjustment (availableforsale) 89,000 Unrealized Holding Gain or Loss—Equity [$3,604,000 – ($3,500,000 + $15,000)*] 89,000 *See number 8 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 179 10 Unrealized holding gains and losses for trading securities should be included in net income for the current period. Unrealized holding gains and losses for availableforsale securities should be reported as other comprehensive income and as a separate component of stockholders’ equity Unrealized holding gains and losses are not recognized for heldtomaturity securities 1710 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) ACCOUNTING, ANALYSIS, AND PRINCIPLES Accounting (a) Instar’s investment in Dorsel Corp bonds should be classified as heldtomaturity because they have a specific maturity date and Instar has the intent and ability to hold them until the maturity date Instar’s investment of idle cash in equity securities should be classified as trading Instar’s investment in its supplier should be classified as an available forsale security. Instar does not intend to sell it in the short term and thus the investment does not qualify for classification as trading Instar’s ownership stake is far less than 20%, and there is no evidence that Instar can exert significant influence over the supplier, so the investment does not qualify for classification as an equity method investment For similar reasons, Instar’s investment in Forter Corp. stock should be classified as availableforsale Instar’s investment in Slobbaer Co. common stock should be classified as an equity method investment because its holdings are greater than 20% and Instar exerts significant influence over Slobbaer (b) Fair Value Adjustment (trading) 120,000 Unrealized Holding Gain or Loss—Income 120,000 (To record the increase in value of the trading securities, $920,000 – $800,000) Fair Value Adjustment (availableforsale) 350,000 Unrealized Holding Gain or Loss—Equity 350,000 (To record the increase in the value of the investment in the supplier, $1,550,000 – $1,200,000) Loss on Impairment 150,000 Equity Investments (availableforsale) 150,000 (To record the otherthantemporary decline In value of the investment in Forter Co $50,000 – $200,000) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1789 ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued) Equity Investments (Slobbaer) Investment Income (To record income on the equity method, $300,000 X 25% = $75,000) 75,000 Cash Equity Investments (Slobbaer) (To record dividends received from equitymethod investee, $100,000 X 25% = $25,000 25,000 75,000 25,000 Analysis The total effect on net income is $120,000 – $150,000 + $75,000 = $45,000 Note that the gain on the availableforsale securities is a component of other comprehensive income, not net income reported on Instar’s income statement. Note also that the equity method dividends received reduce the balance sheet value of the investment and are not recorded as revenue or income Principles The rationale for reporting heldtomaturity securities at amortized cost is that if management intends to hold the securities to maturity, fair values are not relevant for evaluating the cash flows associated with these securities On the other hand, if the securities are trading or availableforsale, they may be sold before maturity or have such short maturities that information on their fair value is relevant for determining future cash flows When a company exercises significant influence over the operations of another company, it is argued that the investor company should use the equity method of accounting. The rationale for this measurement basis is that the investor company should report the net income at the time the investee company earns it. Under the fair value method for availablefor sale securities, the company does not report income until it receives a dividend or sells the security (although it can increase or decrease other comprehensive income) 1790 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) PROFESSIONAL RESEARCH (a) According to FASB ASC 32010: 155 The guidance in the Investments—Debt and Equity Securities Topic establishes standards of financial accounting and report ing for both of the following: a Investments in equity securities that have readily determinable fair values b All investments in debt securities, including debt instru ments that have been securitized. Readily Determinable Fair Value (FASB ASC 3201020 Glossary) An equity security has a readily determinable fair value if it meets any of the following conditions: a The fair value of an equity security is readily determinable if sales prices or bidandasked quotations are currently available on a securities exchange registered with the U.S Securities and Exchange Commission (SEC) or in the overthecounter market, provided that those prices or quotations for the overthecounter market are publicly reported by the National Association of Securities Dealers Automated Quotations systems or by Pink Sheets LLC. Restricted stock meets that definition if the restriction terminates within one year b The fair value of an equity security traded only in a foreign market is readily determinable if that foreign market is of a breadth and scope comparable to one of the U.S. markets referred to above c The fair value of an investment in a mutual fund is readily determinable if the fair value per share (unit) is determined and published and is the basis for current transactions Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1791 PROFESSIONAL RESEARCH (Continued) (b) See FASB ASC 3201035 3518 For individual securities classified as either available for sale or held to maturity, an entity shall determine whether a decline in fair value below the amortized cost basis is other than temporary Providing a general allowance for unidentified impairment in a portfolio of securities is not appropriate 3530 If the fair value of an investment is less than its amortized cost basis at the balance sheet date of the reporting period for which impairment is assessed, the impairment is either temporary or other than temporary. In addition to the guidance in this Section, an entity shall apply other guidance that is pertinent to the determination of whether an impairment is other than temporary, such as the guidance in Section 32540 35, as applicable Other than temporary does not mean permanent (c) See FASB ASC 3201025 2514 Sales of debt securities that meet either of the following conditions may be considered as maturities for purposes of the classification of securities and the disclosure requirements under this Subtopic: The sale of a security occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor. That is, the date of sale is so near the maturity or call date (for example, within three months) that changes in market interest rates would not have a significant effect on the security’s fair value The sale of a security occurs after the entity has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments (both principal and interest) over its term For variablerate securities, the scheduled payments need not be equal 1792 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) PROFESSIONAL RESEARCH (Continued) (d) See FASB ASC 3201050 5010 For any sales of or transfers from securities classified as held tomaturity, an entity shall disclose all of the following in the notes to the financial statements for each period for which the results of operations are presented: The net carrying amount of the sold or transferred security The net gain or loss in accumulated other comprehensive income for any derivative that hedged the forecasted acquisition of the heldtomaturity security The related realized or unrealized gain or loss The circumstances leading to the decision to sell or transfer the security. (Such sales or transfers should be rare, except for sales and transfers due to the changes in circumstances identified in paragraph 32010256(a) through (f).) Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1793 PROFESSIONAL SIMULATION Note: This assignment is available on the Kieso website Journal Entries (a) Debt Investments (availableforsale) Interest Revenue ($50,000 X .12 X 4/12) Investments 187,400* 2,000 189,400 *($37,400 + $100,000 + $50,000) (b) December 31, 2014 Interest Receivable Interest Revenue **Accrued interest: $50,000 X .12 X 10/12 = Accrued interest: $100,000 X .11 X 3/12 = 7,750 7,750** $5,000 2,750 $7,750 Measurement 1794 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) PROFESSIONAL SIMULATION (Continued) Explanation If Powerpuff owns 30%, it will use the equity method to account for the investment. As a result, this investment would not be reported at fair value and there would be no unrealized holding gains or losses. Under the equity method, the investment carrying amount is periodically increased (decreased) by the investor’s proportionate share of the earnings (losses) of the investor and decreased by all dividends received by the investor from the investee Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1795 IFRS CONCEPTS AND APPLICATION IFRS171 The accounting for investment securities is discussed in IAS 27 (“Consoli dated and Separate Financial Statements”), IAS 28 (“Accounting for Investments in Associates”), IAS 39 (“Financial Instruments: Recognition and Measurement”), and IFRS 9 (“Financial Instruments”) IFRS172 GAAP classifies investments as trading, availableforsale (both debt and equity investments), and heldtomaturity (debt investments). IFRS uses held forcollection (debt investments), trading (both debt and equity investments), and nontrading equity investment classifications The accounting for trading investments is the same between GAAP and IFRS Heldtomaturity (GAAP) and heldforcollection (IFRS) investments are accounted for at amortized cost. Gains and losses related to availableforsale (GAAP) and nontrading equity investments (IFRS) are reported in other comprehensive income Both GAAP and IFRS use the same test to determine whether the equity method of accounting should be used—that is, significant influence with a general guide of over 20 percent ownership The basis for consolidation under IFRS is control. Under GAAP, a bipolar approach is used, which is a riskandreward model (often referred to as a variableentity 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 GAAP and IFRS are similar in the accounting for the fair value option. That is, the option to use the fair value method must be made at initial recognition, the selection is irrevocable, and gains and losses are reported as part of income One difference is that GAAP permits the fair value option for equity method investments While measurement of impairments is similar, GAAP does not permit the reversal of an impairment charge related to availableforsale debt and equity investments. IFRS allows reversals of impairments for heldforcollection investments 1796 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) IFRS173 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 IFRS174 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 the contractual terms of the financial asset gives specified dates to cash flows IFRS175 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 IFRS176 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 IFRS177 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 heldforcollection investments IFRS178 (a) Under U.S. GAAP, Ramirez makes no entry, because impaired invest ments may not be written up if they recover in value. (b) Under IFRS, Ramirez makes the following entry: (b) Debt Investments Recovery of Impairment Loss 300,000 300,000 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1797 IFRS179 (a) Debt Investments Cash 65,118 (b) Cash ($60,000 X .08 X 6/12) Debt Investments Interest Revenue ($65,118 X .06 X 6/12) 2,400 65,118 446 1,954 IFRS1710 (a) Equity Investments Cash 13,200 (b) Cash Dividend Revenue (400 X $3.25) 1,300 (c) Fair Value Adjustment Unrealized Holding Gain or Loss—Income [(400 X $34.50) – $13,200] 600 13,200 1,300 600 IFRS1711 (a) Equity Investments Cash 13,200 (b) Cash Dividend Revenue (400 X $3.25) 1,300 (c) Fair Value Adjustment Unrealized Holding Gain or Loss— Equity [(400 X $34.50) – $13,200] 600 13,200 1,300 600 1798 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) IFRS1712 (a) January 1, 2014 Debt Investments Cash (b) 537,907.40 537,907.40 Schedule of Interest Revenue and Bond Premium Amortization 12% Bonds Sold to Yield 10% Date 1/1/14 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18 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¢ (c) December 31, 2014 Cash Debt Investments Interest Revenue (d) 60,000.00 6,209.26 53,790.74 December 31, 2015 Cash Debt Investments Interest Revenue 60,000.00 6,830.19 53,169.81 IFRS1713 (a) January 1, 2014 Debt Investments Cash 537,907.40 537,907.40 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1799 IFRS1713 (Continued) (b) December 31, 2014 Cash Debt Investments Interest Revenue ($537,907.40 X .10) 60,000.00 Fair Value Adjustment Unrealized Holding Gain or Loss— Income ($534,200.00 – $531,698.14) 2,501.86 (c) 6,209.26 53,790.74 2,501.86 December 31, 2015 Unrealized Holding Gain or Loss—Income Fair Value Adjustment Amortized Cost Debt investments Previous fair value adjustment —Dr Fair value adjustment—Cr 12,369.81 Fair Value 12,369.81 Unrealized Gain (Loss) $524,867.95 $515,000.00 $ (9,867.95) 2,501.86 $(12,369.81) IFRS1714 (a) December 31, 2014 Unrealized Holding Gain or Loss—Income Fair Value Adjustment 1,400 (b) During 2015 Cash Loss on Sale of Investments Equity Investments 9,500 500 1,400 10,000 17100 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) IFRS1714 (Continued) (c) December 31, 2015 Investments Stargate Corp. shares Vectorman Co. shares Total of portfolio Previous fair value adjustment balance—Cr Fair value adjustment—Dr Cost $20,000 20,000 $40,000 Fair Value $19,300 20,500 $39,800 Fair Value Adjustment Unrealized Holding Gain or Loss— Income Unrealized Gain (Loss) $ (700) 500) (200) (1,400) $ 1,200 1,200 1,200 IFRS1715 (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 Investments $520,000 (455,000) $ 65,000 $400,000 $262,959 87,040 349,999 $ 50,001 50,001 50,001 (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 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 17101 IFRS1716 (a) According to IAS 39, paragraph AG71, “A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.” (b) According to IAS 39, paragraph IN22, “The Standard requires that impairment losses on availableforsale equity instruments cannot be reversed through profit or loss, i.e. any subsequent increase in fair value is recognised in other comprehensive income.” Also, according to paragraph 58, “An entity shall assess at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the entity shall apply paragraph 63 (for financial assets carried at amortised cost), paragraph 66 (for financial assets carried at cost) or paragraph 67 (for availableforsale financial assets) to determine the amount of any impairment loss.” (c) According to IFRS 9, paragraph B4.3, Although the objective of an entity’s business model may be to hold financial assets in order to collect contractual cash flows, the entity need not hold all of those instruments until maturity. Thus an entity’s business model can be to hold financial assets to collect contractual cash flows even when sales of financial assets occur. For example, the entity may sell a financial asset if: the financial asset no longer meets the entity’s investment policy (e.g., the credit rating of the asset declines below that required by the entity’s investment policy); an insurer adjusts its investments portfolio to reflect a change in expected duration (i.e., the expected timing of payouts); or an entity needs to fund capital expenditures However, if more than an infrequent number of sales are made out of a portfolio, the entity needs to assess whether and how such sales are consistent with an objective of collecting contractual cash flows 17102 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) IFRS1717 (a) M&S reports both current and noncurrent “other financial assets,” along with both current and noncurrent derivative financial instruments These investments are reported on the statement of financial position and in the notes to the financial statements (b) M&S’s investments are valued at fair value for trading and nontrading, while heldforcollection investments are valued at amortized cost. If there is no quoted price in an active market for a security, and the fair value can’t be reliably measured, then the security is held at cost Derivatives are reported at fair value (c) M&S uses derivatives to manage its exposure to fluctuations in interest rates and exchange rates Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 17103 ... Copyrightâ2013JohnWiley&Sons,Inc.Kieso,IntermediateAccounting,15/e,SolutionsManual(ForInstructorUseOnly) *Roundedby45Â Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) ... 1716 Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 171 (a) Debt Investments... Copyright © 2013 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Solutions Manual (For Instructor Use Only) 1719 SOLUTIONS TO EXERCISES EXERCISE 171 (5–10 minutes) (a) 1