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1、17-1CHAPTER 17InvestmentsASSIGNMENT CLASSIFICATION TABLE(BY TOPIC)TopicsQuestionsBrief Exercises ExercisesProblems Conceptsfor Analysis 1.Debt securities.1,2,3,1314,7(a)Held-to-maturity.4,5,7,8,10,13,211,31,2,3,51,74(b)Trading.4,6,7,8,10,2141,4(c)Available-for-sale.4,7,8,9,10,11,212,1041,2,3,4,71,4
2、2.Bond amortization.8,91,2,33,4,51,2,3 3.Equity securities.1,12,13,164,7(a)Available-for-sale.7,10,11,15,215,86,8,9,11,12,165,6,8,9,10,11,121,2,3(b)Trading.6,7,8,14,15,2166,7,14,156,81,3(c)Equity method.16,17,18,19,20712,13,16,1785,6 4.Comprehensive income.2291010,12 5.Disclosures of investments.218
3、,95,9,10,11,12 6.Impairments.2410183 7.Transfers betweencategories.231,3,7*8.Derivatives25,26,27,28,29,30,31,3219,20,21,22,23,2413,14,15,16,17,18*9.Variable Interest Entities33,34*This material is dealt with in an Appendix to the chapter.School of Management,HUST17-2ASSIGNMENT CLASSIFICATION TABLE(B
4、Y LEARNING OBJECTIVE)Learning Objectives BriefExercisesExercisesProblems1.Identify the three categories of debtsecurities and describe the accountingand reporting treatment for each category.12.Understand the procedures for discountand premium amortization on bondinvestments.1,2,3,42,3,4,51,2,3,4,73
5、.Identify the categories of equity securitiesand describe the accounting and reportingtreatment for each category.5,6,81,6,7,8,9,11,12,14,15,163,5,6,8,9,10,11,124.Explain the equity method of accountingand compare it to the fair value methodfor equity securities.712,13,16,1785.Describe the disclosur
6、e requirementsfor investments in debt and equityinvestments.9108,9,10,126.Discuss the accounting for impairmentsof debt and equity investments.10187.Describe the accounting for transfer ofinvestment securities between categories.*8.Explain who uses derivatives and why.*9.Understand the basic guideli
7、nesfor accounting for derivatives.*10.Describe the accounting for derivativefinancial instruments.19,20,2113,14,15*11.Explain how to account for a fairvalue hedge.22,23,2416,18*12.Explain how to account for a cashflow hedge.17School of Management,HUST17-3ASSIGNMENT CHARACTERISTICS TABLEItemDescripti
8、onLevel ofDifficultyTime(minutes)E17-1Investment Classifications.Simple510E17-2Entries for held-to-maturity securities.Simple1015E17-3Entries for held-to-maturity securities.Simple1520E17-4Entries for available-for-sale securities.Simple1015E17-5Effective-interest versus straight-line bond amortizat
9、ion.Simple2030E17-6Entries for available-for-sale and trading securities.Simple1015E17-7Trading securities entries.Simple1015E17-8Available-for-sale securities entries and reporting.Simple 510E17-9Available-for-sale securities entries and financial statementpresentation.Simple1015E17-10Comprehensive
10、 income disclosure.Moderate2025E17-11Equity securities entries.Simple2025E17-12Journal entries for fair value and equity methods.Simple1520E17-13Equity method.Moderate2025E17-14Equity investmenttrading.Moderate2025E17-15Equity investmenttrading.Moderate1520E17-16Fair value and equity method compared
11、.Simple1520E17-17Equity method.Simple1015E17-18Impairment of debt securities.Moderate1520*E17-19Call option.Moderate1520*E17-20Call option.Moderate2025*E17-21Put and call options.Moderate1520*E17-22Cash flow hedge.Moderate1520*E17-23Fair value hedge.Moderate1520*E17-24Fair value hedge.Moderate1520P1
12、7-1Debt securities.Moderate3040P17-2Available-for-sale debt securities.Moderate3040P17-3Available-for-sale investments.Moderate2530P17-4Available-for-sale debt securities.Moderate2535P17-5Equity securities entries and disclosures.Moderate2535P17-6Trading and available-for-sale securities entries.Sim
13、ple2535P17-7Available-for-sale and held-to-maturity debt securities entries.Moderate2535P17-8Fair value and equity methods.Moderate2030P17-9Financial statement presentation of available-for-saleinvestments.Moderate2030P17-10Gain on sale of securities and comprehensive income.Moderate2030P17-11Equity
14、 investmentsavailable-for-sale.Complex3545P17-12Available-for-sale securitiesstatement presentation.Moderate2030*P17-13Call optionModerate2025*P17-14Put optionModerate2025*P17-15Put optionModerate2025School of Management,HUST17-4ASSIGNMENT CHARACTERISTICS TABLE(Continued)ItemDescriptionLevel ofDiffi
15、cultyTime(minutes)*P17-16Fair value hedge interest rate swap.Moderate3040*P17-17Cash flow hedge.Moderate2535*P17-18Fair value hedge.Moderate2535CA17-1Issues raised about investment securities.Moderate2530CA17-2Equity securities.Moderate2530CA17-3Financial statement effect of equity securities.Simple
16、2030CA17-4Equity securities.Moderate2025CA17-5Investment accounted for under the equity method.Simple1525CA17-6Equity method.Moderate2535CA17-7Fair valueethics.Moderate2535School of Management,HUST17-5ANSWERS TO QUESTIONS 1.A debt security is an instrument representing a creditor relationship with a
17、n enterprise.Debtsecurities include U.S.government securities,municipal securities,corporate bonds,convertibledebt,and commercial paper.Trade accounts receivable and loans receivable are not debtsecurities because they do not meet the definition of a security.An equity security is described as a sec
18、urity representing an ownership interest such ascommon,preferred,or other capital stock.It also includes rights to acquire or dispose of anownership interest at an agreed-upon or determinable price such as warrants,rights,and calloptions or put options.Convertible debt securities and redeemable pref
19、erred stocks are nottreated as equity securities.2.The variety in bond features along with the variability in interest rates permits investors to shopfor exactly the investment that satisfies their risk,yield,and marketability desires,and permitsissuers to create a debt instrument best suited to the
20、ir needs.3.Cost includes the total consideration to acquire the investment,including brokerage fees andother costs incidental to the purchase.4.The three types of classifications are:Held-to-maturity:Debt securities that the enterprise has the positive intent and ability to holdto maturity.Trading:D
21、ebt securities bought and held primarily for sale in the near term togenerate income on short-term price differences.Available-for-sale:Debt securities not classified as held-to-maturity or trading securities.5.A debt security should be classified as held-to-maturity only if the company has both:(1)
22、thepositive 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 aspart of net income.Since trading securities are held primarily for sale in the near term,anydiscount or premium is not amortiz
23、ed.7.Trading and available-for-sale securities should be reported at fair value,whereas held-to-maturity securities should be reported at amortized cost.8.$1,750,000 X 10%=$175,000;$175,000 2=$87,500.9.Securities Fair Value Adjustment(Available-for-Sale).44,500Unrealized Holding Gain or LossEquity.4
24、4,500$1,802,000 ($1,750,000+$7,500)10.Unrealized holding gains and losses for trading securities should be included in net income forthe current period.Unrealized holding gains and losses for available-for-sale securities should bereported as other comprehensive income and as a separate component of
25、 stockholders equity.Unrealized holding gains and losses are not recognized for held-to-maturity securities.11.(a)Unrealized Holding Gain or LossEquity.70,000Securities Fair Value Adjustment(Available-for-Sale).70,000(b)Unrealized Holding Gain or LossEquity.80,000Securities Fair Value Adjustment(Ava
26、ilable-for-Sale).80,000School of Management,HUST17-6Questions Chapter 17(Continued)12.Investments in equity securities can be classified as follows:1.Holdings of less than 20%(fair value method)investor has passive interest.2.Holdings between 20%and 50%(equity method)investor has significant influen
27、ce.3.Holdings of more than 50%(consolidated statements)investor has controlling interest.Holdings of less than 20%are then classified into trading and available-for-sale,assumingdeterminable fair values.13.Investments in stock do not have a maturity date and therefore cannot be classified as held-to
28、-maturity securities.14.Gross selling price of 10,000 shares at$27.50$275,000Less:Brokerage commissions (1,770)Proceeds from sale 273,230Cost of 10,000 shares(250,000)Gain on sale of stock$23,230Cash.273,230Trading Securities.250,000Gain on Sale of Stock.23,230 15.Both trading and available-for-sale
29、 equity securities are reported at fair value.However,anyunrealized holding gain or loss is reported in net income for trading securities but as othercomprehensive income and as a separate component of stockholders equity for available-for-sale securities.16.Significant influence over an investee ma
30、y result from representation on the board of directors,participation in policy-making processes,material intercompany transactions,interchange ofmanagerial personnel,or technological dependency.An investment(direct or indirect)of 20%ormore of the voting stock of an investee constitutes significant i
31、nfluence unless there existsevidence to the contrary.17.Under the equity method,the investment is originally recorded at cost,but is adjusted forchanges in the investees net assets.The investment account is increased(decreased)by theinvestors proportionate share of the earnings(losses)of the investe
32、e and decreased by alldividends received by the investor from the investee.18.The following disclosures in the investors financial statements are generally applicable to theequity method:(1)The name of each investee and the percentage of ownership of common stock.(2)The accounting policies of the in
33、vestor with respect to investments in common stock.(3)The difference,if any,between the amount in the investment account and the amount ofunderlying equity in the net assets of the investee.(4)The aggregate value of each identified investment based on quoted market price(ifavailable).(5)When investm
34、ents of 20%or more interest are,in the aggregate,material in relation to thefinancial position and operating results of an investor,it may be necessary to presentsummarized information concerning assets,liabilities,and results of operations of theinvestees,either individually or in groups,as appropr
35、iate.19.Dividends in excess of earnings subsequent to acquisition should be accounted for as areduction in the investment in common stock account.School of Management,HUST17-7Questions Chapter 17(Continued)20.Ordinarily,Elizabeth Corp.should discontinue applying the equity method and not provide for
36、additional losses beyond the carrying value of$170,000.However,if Elizabeth Corp.s loss is notlimited to its investment(due to a guarantee of Doles obligations or other commitment to providefurther financial support or if imminent return to profitable operations by Dole appears tobe assured),it is a
37、ppropriate for Elizabeth Corp.to provide for its entire$248,000 share of the$620,000 loss.21.Trading securities should be reported at aggregate fair value as current assets.Individual held-to-maturity and available-for-sale securities are classified as current or noncurrent depending upon thecircums
38、tances.Held-to-maturity securities generally should be classified as current or noncurrent,based on the maturity date of the individual securities.Debt securities identified as available-for-saleshould be classified as current or noncurrent,based on maturities and expectations as to sales andredempt
39、ions in the following year.Equity securities identified as available-for-sale should beclassified as current if these securities are available for use in current operations.22.Reclassification adjustments are necessary to insure that double counting does not result whenrealized gains or losses are r
40、eported as part of net income but also are shown as part of othercomprehensive income in the current period or in previous periods.23.When a security is transferred from one category to another,the transfer should be recorded atfair value,which in this case becomes the new basis for the security.Any
41、 unrealized gain or lossat the date of the transfer increases or decreases stockholders equity.The unrealized gain orloss at the date of the transfer to the trading category is recognized in income.24.A debt security is impaired when“it is probable that the investor will be unable to collect allamou
42、nts due according to the contractual terms.”When an impairment has occurred,the securityis written down to its fair value,which is also the securitys new cost basis.The amount of thewritedown is accounted for as a realized loss.*25.An underlying is a special interest rate,security price,commodity pr
43、ice,index of prices or rates,or other market-related variable.Changes in the underlying determine changes in the value of thederivative.Payment is determined by the interaction of the underlying with the face amount andthe number of shares,or other units specified in the derivative contract(these el
44、ements arereferred to as notional amounts).*26.See illustration below:FeatureTraditional Financial Instrument(e.g.,Trading Security)Derivative Financial Instrument(e.g.,Call Option)Payment ProvisionStock price times the numberof shares.Change in stock price(underlying)times number of shares(notional
45、amount).Initial InvestmentInvestor pays full cost.Initial investment is less than fullcost.SettlementDeliver stock to receive cash.Receive cash equivalent,basedon changes in stock price timesthe number of shares.For a traditional financial instrument,an investor generally must pay the full cost,whil
46、e derivativesrequire little initial investment.In addition,the holder of a traditional security is exposed to all risksof ownership,while most derivatives are not exposed to all risks associated with ownership in theunderlying.For example,the intrinsic value of a call option only can increase in val
47、ue.Finally,unlike a traditional financial instrument,the holder of a derivative could realize a profit without everhaving to take possession of the underlying.This feature is referred to as net settlement and servesto reduce the transaction costs associated with derivatives.School of Management,HUST
48、17-8Questions Chapter 17(Continued)*27.The purpose of a fair value hedge is to offset the exposure to changes in the fair value of arecognized asset or liability or of an unrecognized firm commitment.*28.The unrealized holding gain or loss on available-for-sale securities should be reported as incom
49、ewhen this security is designated as a hedged item in a qualifying fair value hedge.If the hedgemeets the special hedge accounting criteria(designation,documentation,and effectiveness),the unrealized holding gain or losses is reported as income.*29.This is likely a setting where the company is hedgi
50、ng 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 aresult,if interest rates decline,the value of the swap contract increases(a gain),while at thesame time the fixed-rate debt obligation increases(a loss).The