Chapter 25: Quick Study 2

QS C-1: Distinguishing Between Short- and Long-Term Investments True Statements for Long-Term Investments: • • • They can include assets not used in operations, such as investments in land. They are reported with noncurrent assets on the balance sheet. They can include bonds and stocks not intended to be sold in the near future. QS C-2: Distinguishing Between Debt and Equity Securities • • Debt Securities: U.S. Treasury bonds, Certificate of deposit, Apple bonds, IBM corporate notes, German government bonds, Costco corporate notes, Chicago municipal bonds, David Bowie bonds. Equity Securities: Google stock, Amazon stock, Apple stock, Facebook stock. QS C-3: Accounting for Debt Investments Classified as Trading 1. Jan. 1: Purchase of Kraft bonds o Debit: Trading Securities $10,300 o Credit: Cash $10,300 2. June 30: Sale of Kraft bonds o Debit: Cash $11,050 o Credit: Trading Securities $10,300 o Credit: Gain on Sale of Securities $750 QS C-4: Fair Value Adjustment to a Portfolio of Trading Securities 1. December 31: Year-end Fair Value Adjustment o Debit: Fair Value Adjustment—Trading Securities (amount based on difference between cost and fair value). o Credit: Unrealized Gain—Income QS C-5: Reporting Trading Securities on Financial Statements 1. Assets Section of Balance Sheet: o Trading Securities (adjusted to fair value based on QS C-4 entries). 2. Income Statement Section for Unrealized Gain/Loss: o Reported under “Other Revenues and Gains” or “Expenses and Losses.” QS C-6: Accounting for Debt Investments Classified as Held-to-Maturity (HTM) 1. May 7: Purchase of PBS bonds o Debit: HTM Securities $40,000 o Credit: Cash $40,000 2. June 6: Receipt of Semiannual Interest o Debit: Cash (Interest Amount) o Credit: Interest Revenue 3. December 31: Receipt of Principal and Interest o Debit: Cash (Principal and Interest Amount) o Credit: HTM Securities $40,000 o Credit: Interest Revenue QS C-7: Accounting for Available-for-Sale (AFS) Debt Securities 1. Nov. 25: Purchase of AFS debt securities o Debit: AFS Securities $50,000 o Credit: Cash $50,000 2. Dec. 31: Fair Value Adjustment o Debit: Unrealized Loss—Equity $3,000 o Credit: Fair Value Adjustment—AFS $3,000 3. April 6: Sale of Part of AFS Securities o Debit: Cash $6,000 o Credit: AFS Securities $5,000 o Credit: Gain on Sale of Investments $1,000 QS C-8: Recording Fair Value Adjustment for AFS Debt Securities 1. July 1: Purchase of debt securities o Debit: AFS Securities $70,000 o Credit: Cash $70,000 2. December 31: Fair Value Adjustment o Debit: Unrealized Loss—Equity $12,000 o Credit: Fair Value Adjustment—AFS $12,000 QS C-9: Adjusting AFS Debt Securities to Fair Value • December 31: Fair Value Adjustment entry o Debit: Unrealized Loss—Equity $9,100 o Credit: Fair Value Adjustment—AFS $9,100 QS C-10: Reporting AFS Securities on Financial Statements 1. Assets Section on Balance Sheet: o AFS Securities (adjusted to fair value after the fair value adjustment). 2. Unrealized Gain/Loss Reporting: o Unrealized gain or loss on AFS securities is reported in the equity section, not on the income statement. QS C-11: Accounting for Stock Investments (Insignificant Influence) 1. Jan. 1: Purchase of XLT shares o Debit: Stock Investments $12,600 (300 shares × $42) o Credit: Cash $12,600 2. Dividend Receipt: o Debit: Cash $300 (300 shares × $1) o Credit: Dividend Revenue $300 QS C-12: Adjusting Stock Investments to Fair Value 1. Purchase of Higo Shares: o Debit: Stock Investments $6,000 (200 shares × $30) o Credit: Cash $6,000 2. Sale of Higo Shares: o Debit: Cash $660 (20 shares × $33) o Credit: Stock Investments $600 o Credit: Gain on Sale of Investments $60 3. Fair Value Adjustment at Year-End: o Debit: Unrealized Loss—Income (adjusted based on fair value change) o Credit: Fair Value Adjustment—Stock QS C-13: Reporting Stock Investments with Insignificant Influence 1. Acquisition of ORD Shares: o Debit: Stock Investments $150,000 o Credit: Cash $150,000 2. Sale of ORD Shares: o Debit: Cash $18,000 o Credit: Stock Investments (calculate based on proportionate cost) o Credit: Gain or Loss on Sale (difference between cash and cost) 3. Reporting Method: o Stock investments are reported at fair value if classified as trading or available-for-sale; otherwise, at cost if held-to-maturity. QS C-14: Financial Statement Presentation of Investments • • • • • Trading Securities: Current assets Unrealized Gain on AFS Securities: Equity (as part of other comprehensive income) HTM Securities (15 years): Long-term investments Unrealized Gain on Trading Securities: Other revenues and gains Fair Value Adjustment—Trading: Current asset (adjustment to Trading Securities) QS C-15 to QS C-19: Equity Method and ROA Calculations • • For equity method transactions, calculate ownership share of net income and dividends. Return on Total Assets (ROA): ROA = Net Income / Total Assets o Compare ROA from one year to another to determine efficiency improvements or declines. This provides a structured approach for journal entries and reporting for various investment types.