4. The three types of classifications 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.
5. 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.
6. Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income. Any discount or premium is amortized.
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. $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) 160,000 Debt Investments 15,000 Interest Revenue ($3,500,000 X 10% X 1/2) 175,000
9. Fair Value Adjustment (available-for-sale) 89,000 Unrealized Holding Gain or Loss—Equity [$3,604,000 – ($3,500,000 + $15,000)*] 89,000
*See number 8.
10. Unrealized holding gains and losses for trading securities should be included in net income for the current period. Unrealized holding gains and losses for available-for-sale securities should be reported as other comprehensive income and as a separate component of stockholders’ equity. Unrealized holding gains and losses are not recognized for held-to-maturity securities.
11. (a) Unrealized Holding Gain or Loss—Equity 60,000 Fair Value Adjustment (available-for-sale) 60,000
(b) Unrealized Holding Gain or Loss—Equity 70,000 Fair Value Adjustment (available-for-sale) 70,000
14. Selling price of 10,000 shares at $27.50 $275,000 Less: Brokerage commissions (1,770) Proceeds from sale 273,230 Cost of 10,000 shares (260,000) Gain on sale of investments $ 13,230
Cash 273,230 Equity Investments 260,000 Gain on Sale of Investments 13,230
15. Both trading and available-for-sale equity securities are reported at fair value. However, any unrealized holding gain or loss is reported in net income for trading securities but as other comprehensive income and as a separate component of stockholders’ equity for available-for-sale securities.
16. 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.
17. 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.
20. 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 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 the circumstances.
