Download Chapter 17 Solutions Intermediate Accounting Kieso Weygandt Warfield and more Exercises Accounting in PDF only on Docsity!
CHAPTER 17
Investments
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Debt securities. 1, 2, 3, 13 1 6 (a) Held-to-maturity. 4, 5, 7, 8, 10, 13, 21
(b) Trading. 4, 6, 7, 8, 10, 21
(c) Available-for-sale. 4, 7, 8, 9, 10, 11, 21
- Bond amortization. 8, 9 1, 2, 3 3, 4, 5 1, 2, 3
- Equity securities. 1, 12, 16 1 6 (a) less than 20% 7, 10, 11, 15, 21
(b) 20 – 50% (Equity method).
- Comprehensive income. 22 9 10 9, 11
- Disclosures of investments. 18 10 5, 8, 9, 10, 11
- Fair value option. 25, 26, 27 11,12 19, 20, 21
- Impairments. 24 10,13 18, 22 3
- Transfers between categories.
*9. Derivatives. 28, 29, 30, 31, 32, 33, 34, 35
*This material is dealt with in an Appendix to the chapter.
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Understand the accounting for investments in debt securities.
- Understand the accounting for investments in equity securities.
- Explain the equity and consolidation methods of accounting.
- Evaluate other major issues related to investments in debt and equity securities.
*5. Describe the uses of and accounting for derivatives.
*6. Explain to the accounting for hedges.
*7. Identify special reporting issues for derivatives that cause unique accounting problems.
*8. Describe required fair value disclosures.
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item Description
Level of Difficulty
Time (minutes) P17-9 Gain on sale of investments and comprehensive income. Moderate 20– P17-10 Equity investments. Complex 30– P17-11 Equity securities—statement presentation. Moderate 20– *P17-12 Derivative financial instrument. Moderate 20– *P17-13 Derivative financial instrument. Moderate 20– *P17-14 Free-standing derivative. Moderate 20– *P17-15 Fair value hedge interest rate swap. Complex 30– *P17-16 Cash flow hedge. Moderate 25– *P17-17 Fair value hedge. Moderate 25–
CA17-1 Issues raised about investment securities. Moderate 25– CA17-2 Equity securities. Moderate 25– CA17-3 Financial statement effect of securities. Moderate 20– CA17-4 Investment accounted for under the equity method. Moderate 15– CA17-5 Equity investment. Simple 15– CA17-6 Fair value. Moderate 25–
ANSWERS TO QUESTIONS
- 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. It also includes rights to acquire or dispose of an ownership interest at an agreed-upon 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: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- 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: 5-10, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- Cost of a long-term 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: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- The three types of classifications for debt investments are: Held-to-maturity: 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 short-term price differences. Available-for-sale: Debt investments not classified as held-to-maturity or trading securities.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- A debt investment should be classified as held-to-maturity 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: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- 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: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- Trading and available-for-sale debt securities should be reported at fair value, whereas held-to- maturity debt securities should be reported at amortized cost.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- $3,500,000 X 10% = $350,000; $350,000 ÷ 2 = $175,000. Wheeler would make the following entry:
Cash ($4,000,000 X 8% X 1 / 2 ) ............................................................ 160, Debt Investments ............................................................................... 15, Interest Revenue ($3,500,000 X 10% X 1 / 2 ) ................................ 175,
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
Questions Chapter 17 (Continued)
- Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. An investment (direct or indirect) of 20% 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: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- Under the equity method, the investment is originally recorded at cost, but is adjusted for changes in the investee’s net assets. The investment account is increased (decreased) by the investor’s proportionate share of the earnings (losses) of the investee and decreased by all dividends received by the investor from the investee.
LO: 3, Bloom: K, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- The 20% 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 20% may be able to exercise significant influence based on representation on the board of directors, participation in policy-making processes, material intercompany transactions, interchange of managerial personnel, or technological dependency. Another important consideration is the extent of ownership by 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 investor’s acquisition of its stock; (2) The investor and investee sign an agreement under which the investor surrenders significant shareholder rights; (3) The investor’s ownership share does not result in “significant influence” 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 investor; (4) The investor tries and fails to obtain representation on the investee’s board of directors.
LO: 3, Bloom: K, Difficulty: Simple, Time: 5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- Dividends subsequent to acquisition should be accounted for as a reduction in the Equity Investment account.
LO: 3, Bloom: C, Difficulty: Simple, Time: 1-2, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- Ordinarily, Raleigh Corp. should discontinue applying the equity method and not provide for additional losses beyond the carrying value of $170,000. However, if Raleigh Corp.’s loss is not limited to its investment (due to a guarantee of Borg’s obligations or other commitment to provide further financial support or if imminent return to profitable operations by Borg appears to be assured), it is appropriate for Raleigh Corp. to provide for its entire $186,000 ($620,000 × .30) share of the $620,000 loss.
LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- 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 the circumstances. 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-sale 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: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
Questions Chapter 17 (Continued)
- Reclassification adjustments are necessary to insure that double counting does not result when realized gains or losses are reported as part of net income but also are shown as part of other comprehensive income in the current period or in previous periods.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- When a security is transferred from one category to another, the transfer should be recorded at fair value, which in this case becomes the new basis for the security. Any unrealized gain or loss at the date of the transfer increases or decreases stockholders’ equity. The unrealized gain or loss at the date of the transfer to the trading category is recognized in income.
LO: 4, Bloom: C, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- A debt security is impaired when “it is probable that the investor will be unable to collect all amounts due according to the contractual terms.” When an impairment has occurred, the security is written down to its fair value, which is also the security’s new cost basis. The amount of the writedown is accounted for as a realized loss.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value is therefore a market-based measure.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- The fair value option gives companies the option to report most financial instruments at fair value with all gains and losses related to changes in fair value reported in the income statement. This option is applied on an instrument by instrument basis. The fair value option is generally available only at the time a company first purchases the financial asset or incurs a financial liability. If a company chooses to use the fair value option, it must measure this instrument at fair value until the company no longer has ownership.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
- No. The fair value option is generally available only at the time a company first purchases the financial asset or incurs a financial liability. If a company chooses to use the fair value option, it must measure this instrument at fair value until the company no longer has ownership.
LO: 4, Bloom: C, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
*28. An underlying is a special interest rate, security price, commodity price, index of prices or rates, or other market-related variable. Changes in the underlying determine changes in the value of the derivative. Payment is determined by the interaction of the underlying with the face amount and the number of shares, or other units specified in the derivative contract (these elements are referred to as notional amounts).
LO: 5, Bloom: K, Difficulty: Moderate, Time: 3-5, AACSB: Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication
*29. See illustration below:
Feature
Traditional Financial Instrument (e.g., Trading Security)
Derivative Financial Instrument (e.g., Call Option) Payment Provision Stock price times the number of shares.
Change in stock price (underlying) times number of shares (notional amount). Initial Investment Investor pays full cost. Initial investment is less than full cost. Settlement Deliver stock to receive cash. Receive cash equivalent, based on changes in stock price times the number of shares.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 17-
January 1, 2017
(a) Debt Investments ..................................................... 74,
Cash ................................................................... 74,
December 31, 2017
(b) Cash ($80,000 X .09) ................................................. 7,
Debt Investments ...................................................... 949
Interest Revenue ($74,086 X .11) ...................... 8,
LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 17-
January 1, 2017
(a) Debt Investments ...................................................... 74,
Cash ................................................................... 74,
December 31, 2017
(b) Cash ($80,000 X .09) ................................................. 7,
Debt Investments ...................................................... 949
Interest Revenue ($74,086 X .11) ...................... 8,
December 31, 2017
(c) Fair Value Adjustment ............................................. 465
Unrealized Holding Gain or Loss—Equity
[($74,086 + $949) – $75,500] .......................... 465
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 17-
January 1, 2017
(a) Debt Investments ...................................................... 65,
Cash ................................................................... 65,
June 30, 2017
(b) Cash ($60,000 X .08 X
6
Debt Investments .............................................. 446
Interest Revenue ($65,118 X .06 X
6
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 17-
(a) Debt Investments .................................................... 50,
Cash ................................................................. 50,
(b) Cash......................................................................... 2,
Interest Revenue ............................................. 2,
(c) Unrealized Holding Gain or Loss—Income ........... 2,
Fair Value Adjustment
LO: 1, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 17-
(a) Equity Investments ................................................. 13,
Cash ................................................................. 13,
(b) Cash......................................................................... 1,
Dividend Revenue (400 X $3.25)..................... 1,
(c) Fair Value Adjustment ............................................ 600
Unrealized Holding Gain or Loss—Income
[(400 X $34.50) – $13,200]............................ 600
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 17-
(a) Equity Investments ................................................ 13,
Cash ................................................................. 13,
(b) Cash......................................................................... 1,
Dividend Revenue (400 X $3.25)..................... 1,
(c) No adjustment to fair value is reported because the equity security is
nonmarketable.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
BRIEF EXERCISE 17-
(a) January 1, 2017
Debt Investments ................................................ 10,000,
Cash .............................................................. 10,000,
December 31, 2017
Interest Receivable ($10,000,000 X .05) .............. 500,
Interest Revenue ......................................... 500,
Fair Value Adjustment
Unrealized Holding Gain or Loss—Equity .. 600,
(b) January 1, 2017
Debt Investments ................................................ 10,000,
Cash .............................................................. 10,000,
December 31, 2017
Interest Receivable ($10,000,000 X .05) .............. 500,
Interest Revenue ......................................... 500,
Debt Investment ($10,600,000 - $10,000,000) ..... 600,
Unrealized Holding Gain or Loss—Income 600,
Note: One difference here relates to the third entry. Under the fair value
option, the specific investment is adjusted (under general available-for-sale
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: 5-10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
Unrealized Holding Gain or Loss—
Note: The Debt Investment account is adjusted because the company is using the fair value option.
- E17-1 Investment classifications. Moderate 5– (minutes) - E17-2 Entries for held-to-maturity securities. Simple 10– - E17-3 Entries for held-to-maturity securities. Moderate 15– - E17-4 Entries for available-for-sale securities. Moderate 10– - E17-5 Effective-interest versus straight-line bond amortization. Moderate 20– - E17-6 Entries for equity securities. Simple 10– - E17-7 Equity securities entries. Moderate 10– - E17-8 Equity securities entries and reporting. Simple 5– - Moderate 10– statement presentation. - E17-10 Comprehensive income disclosure. Moderate 20– - E17-11 Equity securities entries. Moderate 20– - E17-12 Journal entries for fair value and equity methods. Moderate 15– - E17-13 Equity method. Moderate 8– - E17-14 Equity investment. Moderate 8– - E17-15 Equity investments Moderate 15– - E17-16 Fair value and equity method compared. Moderate 15– - E17-17 Equity method. Simple 10– - E17-18 Impairment of debt securities. Moderate 15– - E17-19 Fair value measurement. Moderate 15– - E17-20 Fair value measurement issues. Moderate 15– - E17-21 Fair value option. Moderate 15–
- E 17-
- *E17- - 20– Moderate - 15–
- *E17-24 Fair value hedge. Moderate 15–
- *E17-25 Cash flow hedge. Moderate 15–
- *E17-26 Fair value hedge. Moderate 15–
- *E17-27 Call option. Moderate 20–
- *E17-28 Cash flow hedge. Moderate 25– - P17-1 Debt securities. Moderate 20– - P17-2 Available-for-sale debt investments. Moderate 30– - P17-3 Debt and equity investments. Moderate 25– - P17-4 Debt investments. Moderate 25– - P17-5 Equity securities entries and disclosures. Moderate 25– - P17-6 Equity securities entries. Simple 25– - P17-7 Available-for-sale and held-to-maturity debt securities entries. Moderate 25– - P17-8 Fair value and equity methods. Moderate 20–
- BRIEF EXERCISE 17-
- (a) December 31,
- Interest Receivable ($2,000,000 X .06) 120,
- Interest Revenue 120, - December 31,
- Interest Receivable ($2,000,000 X .06) 120,
- (b) December 31,
- Interest Receivable ($2,000,000 X .06) 120,
- Debt Investments ($2,050,000 − $2,000,000) 50, - Income 50, - December 31,
- Interest Receivable ($2,000,000 X .06) 120,
- Unrealized Holding Gain or Loss—Income 20, - ($2,020,000 − $2,000,000)..................... 20, Debt Investments
SOLUTIONS TO EXERCISES
EXERCISE 17-1 (5–10 minutes)
(a) 1. (b) 4. (c) 1. (d) 2. (e) 4. (f) 3.
LO: 1, Bloom: AN, Difficulty: Moderate, Time: 5-10, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 17-2 (10–15 minutes)
(a) January 1, 2017
Debt Investments .............................................. 300,
Cash ........................................................... 300,
(b) December 31, 2017
Interest Receivable ........................................... 18,
Interest Revenue (6% x 300,000) .............. 18,
(c) January 1, 2018
Cash ................................................................... 18,
Interest Receivable ................................... 18,
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication, Problem Solving
EXERCISE 17-3 (15–20 minutes)
(a) January 1, 2017
Debt Investments .............................................. 322,744.
Cash ........................................................... 322,744.
EXERCISE 17-3 (Continued)
(b) Schedule of Interest Revenue and Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Date
Cash
Received
Interest
Revenue
Premium
Amortized
Carrying Amount
of Bonds
*$300,000 ×.
**$322,744.44 ×.
***Rounded by 45¢.
(c) December 31, 2017
Interest Receivable ............................................. 36,
Debt Investments ......................................... 3,725.
Interest Revenue .......................................... 32,274.
(d) December 31, 2018
Interest Receivable ............................................. 36,
Debt Investments ......................................... 4,098.
Interest Revenue .......................................... 31,901.
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 17-4 (10–15 minutes)
(a) January 1, 2017
Debt Investments ................................................. 322,744.
Cash .............................................................. 322,744.
EXERCISE 17-5 (Continued)
(b) Schedule of Interest Revenue and Bond Discount Amortization
Effective-Interest Method
9% Bond Purchased to Yield 12%
Date
Cash
Received
Interest
Revenue
Bond Discount
Amortization
Carrying Amount
of Bonds
**$185,589 X .12 = $22,270.
**Rounded by $.02.
(c) December 31, 2018
Interest Receivable .................................................. 18,000.
Debt Investments ..................................................... 4,804.
Interest Revenue .............................................. 22,804.
(d) December 31, 2018
Interest Receivable .................................................. 18,000.
Debt Investments ..................................................... 4,783.
Interest Revenue .............................................. 22,783.
LO: 1, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 17-6 (10–15 minutes)
(a) Fair Value Adjustment ($70,000 − $65,000) ............ 5,
Unrealized Holding Gain or Loss—Income .... 5,
(b) The Unrealized Holding Gain or Loss—Income 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: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 17-7 (10–15 minutes)
(a) December 31, 2017
Unrealized Holding Gain or Loss—Income ............ 1,
Fair Value Adjustment ..................................... 1,
(b) During 2018
Cash .......................................................................... 9,
Loss on Sale of Investments ................................... 600
Equity Investments ......................................... 10,
(c) December 31, 2018
Securities Cost Fair Value
Unrealized
Gain (Loss)
Clemson Corp. stock $20,000 $19,100 ($ (900)
Buffaloes Co. stock 20,000 20,500 ( 500)
Total of portfolio $40,000 $39,600 ( (400)
Previous fair value
adjustment balance—Cr.
Fair value adjustment—Dr. ($1,000)
Fair Value Adjustment ............................................... 1,
Unrealized Holding Gain or Loss—Income ....... 1,
LO: 2, Bloom: AP, Difficulty: Moderate, Time: 10-15, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 17-8 (5–10 minutes)
The unrealized gains and losses resulting from changes in the fair value of
equity securities are recorded in an Unrealized Holding Gain or Loss-
Income account that is reported as part of net income. Therefore, the
following adjusting entry should be made at the year-end:
Unrealized Holding Gain or Loss—Income ......................... 8,
Fair Value Adjustment ($73,000 – $65,000) .................. 8,
Unrealized Holding Gain or Loss—Income is reported in the “Other
expenses and losses” section of the income statement. The Fair Value
Adjustment account is a valuation account to the related equity investment
account.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 5-10, AACSB: Analytic, Communication, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Communication, Problem Solving
