Weygandt Financial 2e IFRS Ch12

CHAPTER 12InvestmentsASSIGNMENT CLASSIFICATION TABLELearning ObjectivesQuestionsBriefExercisesDo It!ExercisesAProblemsBProblems1.Discuss why corporationsinvest in debt and sharesecurities.12.Explain the accountingfor debt investments.2, 3, 4112, 31A, 2A1B, 2B3.Explain the accountingfor share investments.5, 6, 7, 8,9, 102, 324, 5, 6, 7, 82A, 3A, 4A,5A2B, 3B, 4B,5B4.Describe the use ofconsolidated financialstatements.115.Indicate how debt andshare investments arereported in financialstatements.12, 13, 14,15, 16, 174, 5, 6,7, 838, 10,11, 121A, 2A, 3A,5A, 6A1B, 2B, 3B,5B, 6B6.Distinguish betweenshort-term and long-terminvestments.18, 195, 7, 8410, 11, 121A, 2A, 3A,5A, 6A1B, 2B, 3B,5B, 6BExplain the form andcontent of consolidatedfinancial statements aswell as how to preparethem.20, 219, 1013, 147A7B*7.Note:19All asterisked Question, Exercises, and Problems relate to material contained in the appendix to thechapter.Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)12-1

ASSIGNMENT CHARACTERISTICS lotted (min.)1AJournalize debt investment transactions and showfinancial statement presentation.Moderate30–402AJournalize investment transactions, prepare adjustingentry, and show statement presentation.Moderate30–403AJournalize transactions and adjusting entry for shareinvestments.Moderate30–404APrepare entries under the cost and equity methods,and tabulate differences.Simple20–305AJournalize share investment transactions and showstatement presentation.Moderate40–506APrepare a statement of financial position.Moderate30–40*7APrepare consolidated worksheet and statement offinancial position when cost exceeds book value.Simple30–401BJournalize debt investment transactions and showfinancial statement presentation.Moderate30–402BJournalize investment transactions, prepare adjustingentry, and show statement presentation.Moderate30–403BJournalize transactions and adjusting entry for shareinvestments.Moderate30–404BPrepare entries under the cost and equity methods,and tabulate differences.Simple20–305BJournalize share investment transactions and showstatement presentation.Moderate40–506BPrepare a statement of financial e consolidated worksheet and statement offinancial position when cost exceeds book value.Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

WEYGANDT FINANCIAL ACCOUNTING, IFRS EDITION, 2eCHAPTER 12INVESTMENTSNumberLOBTDifficultyTime le3–5BE45APSimple2–3BE55, 6ANSimple2–4BE65ANSimple2–3BE75, 6APSimple2–4BE85, 3, 5APSimple8–10EX94CSimple6–8EX105, 6ANSimple4–6EX115, 6ANSimple8–10EX125, �6P1A2, 5, 6ANModerate30–40P2A2, 3, 5, 6ANModerate30–40P3A3, 5, 6ANModerate30–40Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)12-3

INVESTMENTS (Continued)NumberLOBTDifficultyTime (min.)P4A3ANSimple20–30P5A3, 5, 6ANModerate40–50P6A5, 6APModerate30–40*P7A7APModerate20–30P1B2, 5, 6ANModerate30–40P2B2, 3, 5, 6ANModerate30–40P3B3, 5, 6ANModerate30–40P4B3ANSimple20–30P5B3, 5, 6ANModerate40–50P6B5, e10–1512-4Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s ManualQ12-20Q12-21Financial ReportingReal-World FocusDecision-MakingAcross theOrganizationCommunicationBroadening Your PerspectiveQ12-18Q12-19DI12-4*7. Explain the form and content ofconsolidated financial statementsas well as how to prepare them.6. Distinguish between short-termand long-term 05. Indicate how debt and shareinvestments are reported infinancial statements.Q12-73. Explain the accounting for shareinvestments.Q12-3Q12-4E12-9Q12-22. Explain the accounting for debtinvestments.E12-1Comprehension4. Describe the use of consolidated Q12-11financial statements.Q12-1Knowledge1. Discuss why corporations investin debt and share securities.Learning ObjectiveE12-5E12-6E12-7E12-8E12-2E12-3BE12-9 P12-7ABE12-10 2-2BComparative 2-3AP12-4AP12-5AP12-1AP12-2AAnalysisEthics CaseSynthesis EvaluationCorrelation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-Chapter Exercises and ProblemsBLOOM’S TAXONOMY TABLE(For Instructor Use Only)12-5

ANSWERS TO QUESTIONS1.The reasons corporations invest in securities are: (1) excess cash not needed for operations thatcan be invested, (2) for additional earnings, and (3) strategic reasons.2.(a) The cost of an investment in bonds consists of all expenditures necessary to acquire the bonds,such as the market price of the bonds plus any brokerage fees.(b) Interest is recorded as it is earned; that is, over the life of the investment in bonds.3.(a) Losses and gains on the sale of debt investments are computed by comparing the cost ofthe investment to the net proceeds from the sale.(b) Gains and losses are reported in the income statement under other income and expense.4.Kolkata Company is incorrect. The gain is the difference between the net proceeds, exclusive ofinterest, and the cost of the bonds. The correct gain is Rs4,500, or [(Rs45,000 – Rs500) –Rs40,000].5.The cost of an investment in shares includes all expenditures necessary to acquire theinvestment. These expenditures include the actual purchase price plus any commissions orbrokerage fees.6.The entry is:Share Investments .Cash.63,20063,2007.(a) Whenever the investor’s influence on the operating and financial affairs of the associate issignificant, the equity method should be used. The major factor in determining significant influenceis the percentage of ownership interest held by the investor in the investee. The generalguideline for use of the equity method is 20%–50% ownership interest. Companies are required touse judgment, however, rather than blindly follow the 20%–50% guideline.(b) Revenue is recognized by the investor as it is earned by the associate.8.Since Rijo Corporation uses the equity method, the income reported by Pippen Packing ( 80,000)should be multiplied by Rijo’s ownership interest (30%) and the result ( 24,000) should be debited toShare Investments and credited to Revenue from Share Investments. Also, of the total dividenddeclared and paid by Pippen ( 10,000) Rijo will receive 30% or 3,000. This amount should bedebited to Cash and credited to Share Investments.9.Significant influence over an associate may result from representation on the board of directors,participation in policy-making processes, material intercompany transactions. One must also considerwhether the shares held by other shareholders is concentrated or dispersed. An investment(direct or indirect) of 20%–50% of the voting shares of an associate constitutes significant influenceunless there exists evidence to the contrary.12-6Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

Questions Chapter 12 (Continued)10. Under the cost method, an investment is originally recorded and reported at cost. Dividends arerecorded as revenue. In subsequent periods, it is adjusted to fair value and an unrealized gain orloss is recognized and included in income (trading security) or as a separate component ofequity (non-trading security). Under the equity method, the investment is originally recorded andreported at cost; subsequently, the investment account is adjusted during each period forthe investor’s share of the earnings or losses of the associate. The investor’s share of theassociate’s earnings is recognized in the earnings of the investor. Dividends received fromthe associate are reductions in the carrying amount of the investment.11. Consolidated financial statements present the details of the assets and liabilities controlled by theparent company and the total revenues and expenses of the affiliated companies.Consolidated financial statements are especially useful to the shareholders, board of directors, andmanagement of the parent company.12. Companies classify debt investments into two categories1. Trading securities are bought and held primarily for sale in the near term to generate incomeon short-term price differences.2. Held-for-collection securities are debt securities that the investor has the intent and ability tohold to maturity.Share investments are classified either as trading or non-trading securities. Share investmentshave no maturity date and therefore are never classified as held-for-collection securities.Investments recorded under the equity method are reported at their carrying value. The carryingvalue is the cost adjusted for the investor’s share of the associate’s income and dividendsreceived.13. Tina should report as follows:(1) Under current assets in the statement of financial position:Short-term investment, at fair value .(2) Under other income and expense in the income statement:Unrealized loss—income . 70,000 4,00014. Tina should report as follows:(1) Under investments in the statement of financial position:Investments in shares of less than 20% owned companies, at fair value .(2) Under equity in the statement of financial position:Less: Unrealized loss on non-trading securities . 70,000 4,00015. The entry is:Fair Value Adjustment—Non-Trading .Unrealized Gain or Loss—Equity .Copyright 2013 John Wiley & Sons, Inc.10,000Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)10,00012-7

Questions Chapter 12 (Continued)16. The entry is:Fair Value Adjustment—Trading .Unrealized Gain—Income .10,00010,00017. Unrealized Loss—Equity is reported as a deduction from equity. The unrealized loss is not includedin the computation of net income.18. Reporting Unrealized Gains (Losses)—Equity in the equity section serves two important purposes: (1)it reduces the volatility of net income due to fluctuations in fair value, and (2) it still informs thefinancial statement user of the gain or loss that would occur if the securities were sold at fair value.19. No. The investment in Key Corporation shares is a long-term investment because there is nointent to convert the shares into cash within a year or the operating cycle, whichever is longer.*20. (a) The parent company’s investment in the subsidiary’s ordinary shares and the subsidiary’sequity account balances are eliminated.(b) The investment account represents an interest in the assets of the subsidiary. Thestatement of financial position of the subsidiary lists all its assets and liabilities (the netassets). Therefore, there would be a double counting of net assets. Similarly, there would bea double counting in equity because all the ordinary shares of the subsidiary are owned bythe shareholders of the parent.*21. The remaining excess of HK 8,000,000 [HK 318,000,000 – (HK 290,000,000 HK 20,000,000)] should be allocated to goodwill and presented in the consolidated statement offinancial position as an intangible asset—Goodwill.12-8Copyright 2013 John Wiley & Sons, Inc.Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISESBRIEF EXERCISE 12-1Jan. 1July 1Debt Investments .Cash.52,000Cash .Interest Revenue .2,34052,0002,340BRIEF EXERCISE 12-2Aug. 1Dec. 1Share Investments .Cash.35,700Cash .Share Investments .Gain on Sale of Share Investments .40,00035,70035,7004,300BRIEF EXERCISE 12-3Dec. 3131Share Investments (25% X 180,000) .Revenue from Share Investments .45,000Cash (25% X 50,000) .Share Investments .12,50045,00012,500BRIEF EXERCISE 12-4Dec. 31Unrealized Loss—Income .Fair Value Adjustment—Trading( 62,000 – 59,000) .Copyright 2013 John Wiley & Sons, Inc.3,000Weygandt Financial, IFRS, 2/e, Solution’s Manual (For Instructor Use Only)3,00012-9