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Students also viewed financial market test bank ch 1 financial market test bank ch 2 financial market test bank ch3 financial market test bank ch 4 Ch05-2 Chapter 02 Conceptual Framework for Financial Reporting (Academic Perspective) Ch14-180205115701 - answers for the practice questions. Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) ASSIGNMENT CLASSIFICATION TABLE ( LEARNING OBJECTIVE) Learning Objectives 1. Understand the accounting for investments in debt securities. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item Description Gain on sale of investments and comprehensive income. Equity investments. Equity presentation. Derivative financial instrument. Derivative financial instrument. derivative. Fair value hedge interest rate swap. Cash flow hedge. Fair value hedge. Level of Difficulty Moderate Complex Moderate Moderate Moderate Moderate Complex Moderate Moderate Time (minutes) Issues raised about investment securities. Equity securities. Financial statement effect of securities. Investment accounted for under the equity method. Equity investment. Fair value. Moderate Moderate Moderate Moderate Simple Moderate Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) ANSWERS TO QUESTIONS 1. A debt security is an instrument representing a creditor relationship with an entity. Debt securities include U.S. government securities, municipal securities, corporate bonds, convertible debt, and commercial paper. Trade accounts receivable and loans receivable are not debt securities because they do not meet the definition of a security. An equity security is described as a security representing an ownership interest such as common, preferred, or other capital stock.
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It also includes rights to acquire or dispose of an ownership interest at an or determinable price, such as warrants, rights, and call options or put options. Convertible debt securities and redeemable preferred stocks are not treated as equity securities. LO: 1, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 2. The variety in bond features along with the variability in interest rates permits investors to shop for exactly the investment that satisfies their risk, yield, and marketability desires, and permits issuers to create a debt instrument best suited to their needs. LO: 1, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 3. Cost of a investment in bonds includes the total consideration to acquire the investment, including brokerage fees and other costs incidental to the purchase. LO: 1, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 4. The three types of classifications for debt investments are: Debt investments that the company has the positive intent and ability to hold to maturity. Trading:Debt investments bought and held primarily for sale in the near term to generate income on price differences. Debt investments not classified as or trading securities. LO: 1, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 5. A debt investment should be classified as only if the company has both: (1) the positive intent and (2) the ability to hold those securities to maturity. LO: 1, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 6.
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Debt investments classified as trading are reported at fair value, with unrealized holding gains and losses reported as part of net income. Any discount or premium is amortized. LO: 1, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 7. Trading and debt securities should be reported at fair value, whereas debt securities should be reported at amortized cost. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only). Gain on Sale of Investments. 13,230 LO: 2, Bloom: AP, Difficulty: Moderate, Time: AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving 15. Marketable equity securities are reported at fair value. Any unrealized holding gain or loss is reported in net income. Nonmarketable securities are reported at cost less impairments. A company is encouraged to adjust for observable price changes subsequent to recording the investment at cost if it can determine prices in orderly transactions for identical investments or from similar investments of the same issuer. LO: 2, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) Questions Chapter 17 (Continued) 16. Significant influence over an investee may result from representation on the board of directors, participation in processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. An investment (direct or indirect) of or more of the voting stock of an investee constitutes significant influence unless there exists evidence to the contrary. LO: 3, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 17.
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Under the equity method, the investment is originally recorded at cost, but is adjusted for changes in the net assets. The investment account is increased (decreased) the proportionate share of the earnings (losses) of the investee and decreased all dividends received the investor from the investee. LO: 3, Bloom: K, Difficulty: Moderate, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 18. The rule is that an investment (direct or indirect) of 20 percent or more of the voting stock of an investee leads to the presumption that an investor has the ability to exercise significant influence over an investee and the equity method should be used. However, there are other factors, when considered, may indicate that ownership of 20 percent or more may not enable an investor to exercise significant influence. An investor with ownership just below may be able to exercise significant influence based on representation on the board of directors, participation in processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership an investor in relation to the concentration of other shareholdings. Factors that could lead to a conclusion of no significant ownership, when ownership is above 20 percent include: (1) The investee opposes the acquisition of its (2) The investor and investee sign an agreement under which the investor surrenders significant shareholder (3) The ownership share does not result in because majority ownership of the investee is concentrated among a small group of shareholders who operate the investee without regard to the views of the (4) The investor tries and fails to obtain representation on the board of directors. LO: 3, Bloom: K, Difficulty: Simple, Time: 5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 19.
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Dividends subsequent to acquisition should be accounted for as a reduction in the Equity Investment account. LO: 3, Bloom: C, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 20. Ordinarily, Raleigh Corp.LO: 3, Bloom: AP, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication 21. Trading securities should be reported at aggregate fair value as current assets. Individual and securities are classified as current or noncurrent depending upon the circumstances.Debt securities identified as should be classified as current or noncurrent, based on maturities and expectations as to sales and redemptions in the following year. LO: 4, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) Questions Chapter 17 (Continued) For a traditional financial instrument, an investor generally must pay the full cost, while derivatives require little initial investment. In addition, the holder of a traditional security is exposed to all risks of ownership, while most derivatives are not exposed to all risks associated with ownership in the underlying. For example, the intrinsic value of a call option only can increase in value. Finally, unlike a traditional financial instrument, the holder of a derivative could realize a profit without ever having to take possession of the underlying. This feature is referred to as net settlement and serves to reduce the transaction costs associated with derivatives.
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LO: 5, Bloom: K, Difficulty: Moderate, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication The purpose of a fair value hedge is to offset the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment. LO: 6, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication The unrealized holding gain or loss on inventory should be reported as income when this inventory is designated as a hedged item in a qualifying fair value hedge. If the hedge meets the special hedge accounting criteria (designation, documentation, and effectiveness), the unrealized holding gain or loss is reported as income. LO: 6, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication Entering into an interest rate swap is likely a setting where the company is hedging the fair value of a debt obligation. The fixed payments received on the swap will offset fixed payments on the debt obligation. As a result, if interest rates decline, the value of the swap contract increases (a gain), while at the same time the debt obligation increases (a loss). The swap is an effective risk management tool in this setting because its value is related to the same underlying (interest rates) that will affect the value of the bond payable. Thus, if the value of the swap goes up, it offsets the loss in the value of the debt obligation. LO: 7, Bloom: C, Difficulty: Moderate, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication A cash flow hedge is used to hedge exposures to cash flow risk, which is exposure to the variability in cash flows. The cash flows received on the hedging instrument (derivative) will offset the cash flows received on the hedged item.
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Generally, the hedged item is a transaction that is planned some time in the future (an anticipated transaction). LO: 6, 7, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication Derivatives used in cash flow hedges are accounted for at fair value on the balance sheet but gains or losses are recorded in equity as part of other comprehensive income. LO: 6, 7, Bloom: K, Difficulty: Simple, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication A hybrid security is a security that has characteristics of both debt and equity and often is a combination of traditional and derivative financial instruments. A convertible bond is a hybrid security because it is comprised of a debt security, referred to as the host security, combined with an option to convert the bond to shares of common stock, the embedded derivative. LO: 7, Bloom: K, Difficulty: Moderate, Time: AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) BRIEF EXERCISE Equity Investments. Cash. Equity Investments. Investment Income X Cash. Equity Investments X LO: 3, Bloom: AP, Difficulty: Simple, Time: AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving BRIEF EXERCISE Fair Value Adjustment Bal. 200 500 Bal. Fair Value Adjustment. In this case, an impairment has occurred and the individual security should be written down. LO: 4, Bloom: AP, Difficulty: Simple, Time: AACSB: Analytic, Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication, Problem Solving BRIEF EXERCISE Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) (a) January 1, 2017 Debt Investments. Cash. December 31, 2017 Interest Receivable X.05).
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Interest Revenue. Fair Value Adjustment Unrealized Holding Gain or (b) January 1, 2017 Debt Investments. Cash. December 31, 2017 Interest Receivable X.05). Interest Revenue. Debt Investment Unrealized Holding Gain or Note: One difference here relates to the third entry. Under the fair value option, the specific investment is adjusted (under general guidance, fair value adjustments are recorded on a portfolio basis an allowance account, Fair Value Adjustment, is used). In addition, under the fair value option, unrealized gains and losses are recorded in income. LO: 4, Bloom: AP, Difficulty: Simple, Time: AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) BRIEF EXERCISE Case 1 The impairment loss is The loss is limited the lower of amortized cost or fair value. Case 2 No impairment results, because the fair value is greater than amortized cost. LO: 4, Bloom: AN, Difficulty: Simple, Time: AACSB: Analytic, Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication, Problem Solving Copyright 2016 John Wiley Sons, Inc. Interest Revenue x (c) January 1, 2018 Cash. Interest Receivable. LO: 1, Bloom: AP, Difficulty: Simple, Time: AACSB: Analytic, Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication, Problem Solving EXERCISE minutes) (a) January 1, 2017 Debt Investments. Cash. 322,744.44 322,744.44 Copyright 2016 John Wiley Sons, Inc. Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) EXERCISE (Continued) (b) December 31, 2017 Interest Receivable. Debt Investments. Interest Revenue X.10). Fair Value Adjustment. Unrealized Holding Gain or 1,481.12 (c) 3,725.56 32,274.44 1,481.12 December 31, 2018 Unrealized Holding Gain or Fair Value Adjustment.
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Kieso, Intermediate Accounting, Solutions Manual (For Instructor Use Only) EXERCISE (Continued) (b) Schedule of Interest Revenue and Bond Discount Amortization Method Bond Purchased to Yield Date Cash Received Interest Bond Discount Carrying Amount Revenue Amortization of Bonds 189,859.68 22,783.16 4,783.16 194,642.84 5,357.16 X.12 (c) December 31, 2018 Interest Receivable. Debt Investments. 4,804.00 Interest Revenue. 22,804.00 (d) December 31, 2018 Interest Receivable. Debt Investments. 4,783.16 Interest Revenue. 22,783.16 LO: 1, Bloom: AP, Difficulty: Moderate, Time: AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving EXERCISE minutes) (a) Fair Value Adjustment Unrealized Holding Gain or (b) The Unrealized Holding Gain or account is reported in the income statement under Other Revenues and Gains. The Fair Value Adjustment account is added to the cost of the Equity Investment account to arrive at fair value. LO: 2, Bloom: AP, Difficulty: Simple, Time: AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving Copyright 2016 John Wiley Sons, Inc. If you continue browsing the site, you agree to the use of cookies on this website. See our User Agreement and Privacy Policy.If you continue browsing the site, you agree to the use of cookies on this website. See our Privacy Policy and User Agreement for details.You can change your ad preferences anytime. Brief. Exercises Exercises Problems. ConceptsQuestions. Brief. ConceptsAnalysisLevel of. Difficulty. TimeE17-1 Investment classifications. E17-2 Entries for held-to-maturity securities. E17-3 Entries for held-to-maturity securities. E17-4 Entries for available-for-sale securities. E17-5 Effective-interest versus straight-line bond amortization. E17-6 Entries for available-for-sale and trading securities. E17-7 Trading securities entries. E17-8 Available-for-sale securities entries and reporting.
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E17-9 Available-for-sale securities entries and financial statementE17-10 Comprehensive income disclosure. E17-11 Equity securities entries. E17-12 Journal entries for fair value and equity methods. E17-13 Equity method. E17-14 Equity investment—trading. E17-15 Equity investments—trading. E17-16 Fair value and equity method compared. E17-17 Equity method. E17-18 Impairment of debt securities. E17-19 Fair value measurement. E17-20 Fair value measurement issues. E17-21 Fair value option. P17-1 Debt securities. P17-2 Available-for-sale debt investments. P17-3 Available-for-sale investments. P17-4 Available-for-sale debt securities. P17-5 Equity securities entries and disclosures. P17-6 Trading and available-for-sale securities entries. P17-7 Available-for-sale and held-to-maturity debt securities entries. P17-8 Fair value and equity methods. P17-9 Financial statement presentation of available-for-saleItem Description. Level of. TimeP17-10 Gain on sale of securities and comprehensive income. P17-11 Equity investments—available-for-sale. P17-12 Available-for-sale securities—statement presentation. CA17-1 Issues raised about investment securities. CA17-2 Equity securities. CA17-3 Financial statement effect of equity securities. CA17-4 Equity securities. CA17-5 Investment accounted for under the equity method. CA17-6 Equity investment.Trading generally reflects activeThe holding gain or loss doesDisclosures regarding accounting policiesThis description shallIn addition, the method used to account for derivativesInstructions to paragraph 4-08(n).Statement of Financial Accounting Standards No. 119, “Disclosure about Derivative. Financial Instruments andFair Value of FinancialInstruments,”(“FAS119”) paragraphsFor purposes of this paragraph, settlement inFor purposes of this paragraph, trading purposes has the same meaning as defined byCommission that include financial statements of fiscal periods ending after June 15, 1997. FR 25215, June 18, 1985; 50 FR 49532, Dec.
3, 1985; 51 FR 3770, Jan. 30,Measurement). The investor ordinarily shall discontinue applying the equity method if the investment (and net advances)Sheet Netting). Unless the conditions in paragraph 210-20-45-1 are met, the fair value of derivative instruments in a lossDebt securitiesAn equity security is described as a security representing an ownership interest such as common,It also includes rights to acquire or dispose of an ownershipHeld-to-maturity: Debt investments that the companyhas the positive intent and ability to holdTrading: Debt investments bought and held primarily for sale in the near term toAvailable-for-sale: Debt investments not classified as held-to-maturity or trading securities.Debt Investments. 15,000Unrealized Holding Gain or Loss—EquityUnrealized holding gains and losses are not recognized for held-to-maturity securities.Fair Value Adjustment (available-for-sale). 60,000Fair Value Adjustment (available-for-sale). 70,000Holdings of less than 20 are then classified into trading and available-for-sale, assumingLess: Brokerage commissions. (1,770). Proceeds from sale. 273,230. Cost of 10,000 shares. (260,000). Cash. 273,230. Equity Investments. 260,000. Gain on Sale of Investments. 13,230However, anyAn investment (direct or indirect) of 20 orThe investment account is increased (decreased) by the investor’sHowever, there are other factors, whenAn investor with ownership just below 20 may be able to exercise significant influence based onAnother important consideration is the extent of ownership by an investor in relation to theFactors that could lead to a conclusion of no significant ownership, when ownership in aboveHowever, if Raleigh Corp.
’s loss is notIndividual held-to-Debt securities identified as available-for-saleEquity securities identifiedas available-for-saleshouldbe classifiedAny unrealized gain or loss atThe unrealized gain or loss atThe amount of the writedown isThe fair value option is generally availableIf a company chooses to use the fair value option, itChanges in the underlying determine changes in the value of theFeature. Traditional Financial InstrumentDerivative Financial InstrumentPayment Provision Stock price times the numberChange in stock price (underlying)Initial Investment Investor pays full cost. Initial investment is less than full cost. Settlement Deliver stock to receive cash. Receive cash equivalent, based onFor a traditional financial instrument, an investor generally must pay the full cost, while derivativesIn addition, the holder of a traditional security is exposed to all risks ofFinally, unlikeThis feature is referred to as net settlement and serves toIf the hedgeThe fixed payments received on the swap will offset fixed payments on the debt obligation. As aThe swap is an effective risk managementThus, if the value of the swap goes up, it offsets the lossGenerally, the hedged item is a transaction that is plannedA convertible bond is a hybridStockholders are assumed to have sufficient capitalIf thinly capitalized, the entity is consideredIn some cases, stockholders do not have theIn some entities, stockholders are shielded from losses related to their primary risks, or theirCash. 74,086. Debt Investments. 949Cash. 74,086. Debt Investments (available-for-sale). 949Unrealized HoldingGain or Loss—EquityCash. 65,118. Debt Investments (held-to-maturity). 446Cash. 50,000Interest Revenue. 2,000Fair Value Adjustment(trading)Cash. 13,200Unrealized HoldingGain or Loss—EquityCash. 13,200Unrealized HoldingGain or Loss—IncomeCash. 300,000. Equity Investments. 54,000. Cash. 18,000Bal. 200Fair Value Adjustment (available-for-sale). 500. Unrealized Holding Gain or Loss—Equity.
500Debt Investments (available-for-sale). 10,000. In this case, an impairment has occurred and the individual security shouldDebt Investments. 300,000. Cash. 300,000Cash. 36,000. Interest Revenue. 36,000Cash. 36,000. Interest Revenue. 36,000Debt Investments. 322,744.44. Cash. 322,744.44Effective-Interest MethodDate. Cash. Received. Interest. Revenue. Premium. Amortized. Carrying AmountCash. 36,000. Debt Investments. 3,725.56. Interest Revenue. 32,274.44Cash. 36,000. Debt Investments. 4,098.11. Interest Revenue. 31,901.89Debt Investments (available-for-sale). 322,744.44. Cash. 322,744.44Cash. 36,000. Debt Investments (available-for-sale). 3,725.56. Fair Value AdjustmentUnrealized HoldingGain or Loss—EquityUnrealized Holding Gain or Loss—Equity. 7,401.89. Fair Value AdjustmentAmortized. Cost Fair Value. Unrealized. Gain (Loss). Previousfair valueStraight-line MethodDate. Bond Discount. Amortization. Carrying AmountEffective-Interest MethodDate. Carrying AmountCash. 18,000.00. Debt Investments. 4,804.00. Interest Revenue. 22,804.00Cash. 18,000.00. Debt Investments. 4,783.16. Interest Revenue. 22,783.16Unrealized Holding Gain or Loss—Income. 5,000Unrealized Holding Gain or Loss—Equity. 5,000The Unrealized. Holding Gain or Loss—Equity account is reported as a part of otherUnrealized Holding Gain or Loss—Income. 1,400. Fair Value Adjustment (trading). 1,400Cash. 9,400. Loss on Sale of Investments. 600. Equity Investments (trading). 10,000Securities Cost Fair Value. Buffaloes Co. stock 20,000 20,500 ( 500). Previousfair valueUnrealized Holding Gain or Loss—Income. 1,000. The unrealized gains and losses resulting from changes in the fair value ofTherefore, theUnrealized Holding Gain or Loss—Equity. 8,000. Fair Value Adjustment (available-for-sale). 8,000. Unrealized Holding Gain or Loss—Equity is reported as other comprehen-The Fair Value Adjustment (available-for-sale)Fair Value AdjustmentUnrealized Holding Gain or Loss—Equity. 1,100As of December 31, 2013. Currentassets.
Stockholders’equity. Common stock xxx,xxx. Additional paid-in capital xxx,xxx. Retained earnings xxx,xxxCost of security A 17,500. January 20,2014. Cash. 15,100. Loss on Sale of Investments. 2,400. Equity Investments (available-for-sale). 17,500Statementof Comprehensive Income. For the Year Ended December 31,2013. Other comprehensiveincome. Unrealized holding gain 1,100Statementof Comprehensive Income. For the Year Ended December 31,2014. Add: ReclassificationadjustmentforAccumulatedother comprehensive income. Currentperiod other comprehensive. Amount reclassified from accumulatedUnrealized holding gain 42,400The purchase entries will be. January 15,2014. Equity Investments (available-for-sale). 336,980. Cash. 336,980April 1, 2014. Equity Investments (available-for-sale). 263,370. Cash. 263,370. September 10,2014. Equity Investments (available-for-sale). 190,410. Cash. 190,410. Less: Commissions, taxes, and fees (3,850). Net proceeds from sale 136,150. May 20, 2014. Cash. 136,150. Equity Investments (available-for-sale). 134,792. Gain on Sale of Investments. 1,358Securities Cost Fair Value. Vicario Co. 263,370 275,000(2)Unrealized Holding Gain or Loss—Equity. 4,968. Fair Value AdjustmentMarch 18, 2014. Equity Investments (available-for-sale). 260,000. Cash. 260,000. To recordthe dividendrevenuefrom Martinez Fashion. June 30, 2014. Cash. 7,500. To recordthe investmentat fair value. December 31, 2014. Fair Value AdjustmentSituation 2: Journalentries by Monica,Inc. To record the purchase of 30 of Seles Corporation’s common stock. January 1, 2014. Equity Investments (Seles Corp.). 81,000. Since Monica, Inc. obtained significant influence over Seles Corp. Monica, Inc. now employs the equity method of accounting. To recordthe receiptof cash dividends from Seles Corporation. June 15, 2014. Equity Investments (Seles Corp.). 10,800December 31, 2014. Equity Investments (Seles Corp.). 25,500. Investment Income. 25,500Cash. 8,000. Gain on Sale of Investments. 500.
Equity Investments(trading)Fair Value AdjustmentFair Value Adjustment (trading). 7,900. Loss on Sale of Investments. 7,200. Equity Investments (trading). 73,500Cash. 53,800Securities Cost Fair Value. Earnhart Corp., Common 53,800 50,400 (3,400). Martin Inc., Preferred 60,000 58,000 (2,000). Previous fair value adjustment—Cr. (7,900). Unrealized Holding Gain or Loss—Income. 2,500. Fair Value Adjustment (trading). 2,500Equity Investments (available-for-sale). 1,200,000. Cash. 1,200,000. Cash. 42,500. Dividend Revenue. 42,500. December 31,2014. Dividend Revenue. 42,500Fair Value Adjustment (available-for-sale). 150,000. Unrealized HoldingGain or Loss—. Equity. 150,000Equity Investments (Kulikowski). 1,200,000. Equity Investments (Kulikowski Inc.). 42,500. Equity Investment (Kulikowski Inc.). 146,000. Investment Income. 146,000Method Equity Method. Dividend revenue (income statement) 85,000 0. Investmentincome (income statement) 146,000Cash. 180,000. Equity Investments (Edwards Co.). 6,000. Equity Investments (Edwards Co.). 24,000. Investment Income. 24,000. Debt Investments (available-for-sale). 80,000. GAAP indicates that the differenceUnrealized HoldingGain or Loss—Equity. EXERCISE 17-19 (15-20 Minutes)Equity Investments (Arroyo Company). 20,000Unrealized HoldingGain or Loss—EquityUnrealized HoldingGain or Loss—IncomeSale of Investmentin Woods Inc. stock. Investmentin Arroyo CompanystockUnrealized Holding Gain or Loss—Income. 60,000. EXERCISE 17-21 (15-20 minutes). Investmentin Chen Company stockUnrealized HoldingGain or Loss—IncomeCash. 300Call Option. 3,000. Unrealized HoldingGain or Loss—IncomeSemiannualdebtpayment 3,000 3,000. Swap fixed receipt 3,000 3,000. Swap variable rate. Note to instructor: An interest rate swap in which a company changes itsVariable rate X5.8 X6.6. Debt payment 580,000 660,000. Swap variable received (580,000) (660,000). Note to instructor: An interest swap in which a company changes its interestInterest Expense.