2014 FASB Update Intermediate Accounting (15th Edition) Edit edition

This problem has been solved:

Solutions for Chapter 17…

Accounting:

a. Classification of securities:

1. The bonds so purchased are to be classified as Held-to-Maturity securities. Because, these are hold until they mature on the date.

2. These equity securities are to be classified as trading securities because, these are intended to trade publicly to acquire seasonal inventory.

3. These securities are classified as the Available for sale securities. These are not considered as equity investment securities because the ownership owned by the company is less than 20%.

4. The investment in F Co. are to be classified as Available for sale securities. Because, these are not intended for immediate sale but for a foreseeable future.

5. The investment in the S Co. shares are to be classified as equity method investments. Because, the company holds the ownership of more than 20% and it has the significant influence.

b. Journal entries to record at the end of 2014:

To record the fair value adjustment of the investments in the publicly traded companies:

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
	Fair value adjustment (trading)		120,000
	Unrealized holding gain or loss – Income ($920,000 - $800,000)			120,000
	(To record the adjustment of fair value of the securities)

To record the fair value adjustment of the investments in which the company has the ownership stake.

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
	Fair value adjustment (available for sale)		350,000
	Unrealized holding gain or loss – Income ($1,550,000 - $1,200,000)			350,000
	(To record the adjustment of fair value of the securities)

To record the decline in the value of the securities:

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
	Loss on impairment		150,000
	Equity investments ($50,000 – $200,000)			150,000
	(To record the impairment loss on the securities)

To record the income on the investments in the S Co.

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
	Equity investments		75,000
	Investment income (300,000 * 25%)			75,000
	(To record the investment income on the securities)

To record the dividends received on the investments in the S Co.

Date	Account Title and Explanation	Post. Ref.	Debit ($)	Credit ($)
	Cash		25,000
	Equity investments (100,000 * 25%)			25,000
	(To record the dividends declared on the securities)

Analysis:

The net effect has been arrived due to the fair value adjustments of the securities. This effect is calculated as follows.

$120,000 - $150,000 +$75,000 = $45,000.

The securities available for sale which gives the gain are to be reported as other comprehensive income.

The dividends received under the equity method are to be shown under the investment value by way of deduction.

Principles:

• The held to maturity securities are to be shown at the amortized cost in the balance sheet.

• The securities which are trading or available for sale are may be disposed with in the short span.

• The significant influence of the company over the ownership need to be considered for the classifying the securities as the equity investments or not. If

they have more than 20% of the ownership then they are classified as the equity investments.

• Under the fair value method for the securities available for sale does not report until it receives the dividends or sells the secuirities.