Accounting for Investments: Solved Exercises

Exercise C-1: Debt and Equity Securities and Short- and Long-Term Investments 1. Debt securities reflect a (g) creditor relation such as with investments in notes and bonds. 2. Equity securities reflect an (f) owner relation such as with investments in shares of stock. 3. Short-term investments are securities that (1) management intends to convert to cash within (e) one year or the (d) operating cycle, whichever is longer, and (2) are readily convertible to (c) cash. 4. Long-term investments in securities are defined as those securities that are (b) not readily convertible to cash or are (a) not intended to be converted into cash in the short term. Exercise C-2: Accounting for Debt Investments Classified as Trading 1. December 27: Purchase of Trading Securities o Debit: Trading Securities $66,000 o Credit: Cash $66,000 2. December 31: Fair Value Adjustment (Fair value is $72,000; Unrealized gain = $6,000) o Debit: Fair Value Adjustment—Trading $6,000 o Credit: Unrealized Gain—Income $6,000 3. January 3: Sale of Part of Trading Securities (Gain on sale: $1,000) o Debit: Cash $4,000 o Credit: Trading Securities $3,000 o Credit: Gain on Sale of Securities $1,000 Exercise C-3: Financial Statement Impact of Trading Securities For each transaction, update the accounting equation: 1. Purchase: Increases assets (Trading Securities + $66,000), decreases assets (Cash - $66,000). 2. Fair Value Adjustment: Increases assets (Fair Value Adjustment + $6,000), increases equity (Unrealized Gain + $6,000). 3. Sale of Part of Investment: Increases assets (Cash + $4,000), decreases assets (Trading Securities - $3,000), increases equity (Gain on Sale + $1,000). Exercise C-4: Accounting for Held-to-Maturity Debt Securities 1. June 15: Purchase of HTM Debt Securities o Debit: Held-to-Maturity Securities $1,000 o Credit: Cash $1,000 2. September 16: Receipt of Principal and Interest (Interest = $1,000 × 10% × 90/360 = $25) o Debit: Cash $1,025 o Credit: Interest Revenue $25 o Credit: Held-to-Maturity Securities $1,000 Exercise C-5: Accounting for Available-for-Sale Debt Securities 1. August 1: Purchase of AFS Debt Securities o Debit: AFS Securities $50,000 o Credit: Cash $50,000 2. October 30: Receipt of Interest on AFS Securities (Interest = $50,000 × 9% × 90/360 = $1,125) o Debit: Cash $1,125 o Credit: Interest Revenue $1,125 Exercise C-6: Fair Value Adjustment to Available-for-Sale Debt Securities 1. December 31: Fair Value Adjustment for AFS Securities o Debit or Credit Fair Value Adjustment—AFS (based on gain or loss) o Debit or Credit Unrealized Gain or Loss—Equity (depending on increase or decrease in fair value) Exercise C-7: Multiyear Fair Value Adjustments to Available-for-Sale Debt Securities 1. Year-End Fair Value Adjustments o Record fair value adjustments each year to bring AFS securities to fair value, adjusting Unrealized Gain or Loss—Equity. Exercise C-8: Accounting for Stock Investments with Insignificant Influence 1. March 22: Purchase of RPI Stock Debit: Stock Investments $10,000 (1,000 shares × $10) o Credit: Cash $10,000 2. July 1: Receipt of Dividends o Debit: Cash $1,000 (1,000 shares × $1) o Credit: Dividend Revenue $1,000 3. October 8: Sale of Part of RPI Stock (Gain: 50 shares × $5 = $250) o Debit: Cash $750 (50 shares × $15) o Credit: Stock Investments $500 o Credit: Gain on Sale of Investments $250 o Exercise C-9: Financial Statement Impact of Stock Investments • • • Purchase: Increases assets (Stock Investments + $10,000), decreases assets (Cash - $10,000). Dividends: Increases assets (Cash + $1,000), increases equity (Dividend Revenue + $1,000). Sale: Increases assets (Cash + $750), decreases assets (Stock Investments $500), increases equity (Gain on Sale + $250). Exercise C-10: Fair Value Adjustment to Stock Investments 1. December 31: Fair Value Adjustment Entry o Adjust based on fair value changes of the stock investments. Exercise C-11: Reporting Stock Investments on Financial Statements 1. Assets Section on Balance Sheet: o Report short-term stock investments adjusted to fair value. 2. Income Statement Section: o Report unrealized gain/loss in “Other Revenues and Gains” or “Expenses and Losses” if classified as trading. Exercise C-12: Transactions and Fair Value Adjustments for Stock Investments 1. Record each stock transaction: Purchase, receipt of dividends, sale, and fair value adjustment at year-end based on transaction details provided. 2. December 31 Fair Value Adjustment o o Debit: Fair Value Adjustment—Stock $4,400 Credit: Unrealized Gain—Income $4,400