CHAPTER 3

INVESTMENTS

Intermediate Accounting
Kieso, Weygandt, and Warfield

Chapter
17-1
 Learning
Learning Objectives
Objectives
1. Identify the three categories of debt securities and describe the
accounting and reporting treatment for each category.
2. Understand the procedures for discount and premium amortization on
bond investments.
3. Identify the categories of equity securities and describe the accounting
and reporting treatment for each category.
4. Explain the equity method of accounting and compare it to the fair
value method for equity securities.
5. Describe the accounting for the fair value option.
6. Discuss the accounting for impairments of debt and equity
investments.
7. Explain why companies report reclassification adjustments.
8. Describe the accounting for transfer of investment securities between
Chapter categories.
17-2
 Investments
Investments

Investments in Investments in Other Reporting

Debt Securities Equity Securities Issues

Held-to-maturity Holdings of less than Impairment of value

securities 20%
Reclassification
Available-for-sale Holdings between 20% adjustments
securities and 50%
Transfers between
Trading securities Holdings of more than categories
50%
Fair value
Fair value option controversy
Summary

Chapter
17-3
 Investment
Investment Accounting
Accounting Approaches
Approaches

Different motivations for investing:

To earn a high rate of return.

To secure certain operating or financing

arrangements with another company.

Chapter
17-4
 Investment
Investment Accounting
Accounting Approaches
Approaches

Companies account for investments based on

 the type of security (debt or equity) and

 their intent with respect to the

investment.
Illustration 17-1

Chapter
17-5
 Investments
Investments in
in Debt
Debt Securities
Securities

Debt securities (creditor relationship):

Type Accounting
Category
U.S. government
securities Held-to-maturity
Municipal Trading
securities
Available-for-sale
Corporate bonds
Convertible debt
Commercial paper
Chapter LO 1 Identify the three categories of debt securities and
17-6
describe the accounting and reporting treatment for
 Investments
Investments in
in Debt
Debt Securities
Securities

Accounting for Debt Securities by Category

Illustration 17-2

Chapter LO 1 Identify the three categories of debt securities and

17-7
describe the accounting and reporting treatment for
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Classify a debt security as held-to-maturity

only if it has both
(1) the positive intent and

(2) the ability to hold securities to maturity.

Accounted for at amortized cost, not fair value.

Amortize premium or discount using the effective-

interest method unless the straight-line method
yields a similar result.

Chapter LO 2 Understand the procedures for discount

17-8
and premium amortization on bond
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Illustration: KC Company purchased $100,000 of 8

percent bonds of Evermaster Corporation on January 1,
2009, at a discount, paying $92,278. The bonds mature
January 1, 2014 and yield 10%; interest is payable each
July 1 and January 1. KC records the investment as
follows:

January 1, 2009
Held-to-Maturity Securities 92,278

Cash 92,278

Chapter LO 2 Understand the procedures for discount

17-9
and premium amortization on bond
 Held-to-Maturity
Held-to-Maturity Securities
Securities
Illustration 17-3
Schedule of
Interest
Revenue and
Bond
Discount
Amortization—
Effective-
Interest Method

Chapter LO 2
17-10
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Illustration: KC Company records the receipt of the

first semiannual interest payment on July 1, 2009, as
follows:

July 1, 2009
Cash 4,000
Held-to-Maturity Securities 614
Interest Revenue
4,614

Chapter LO 2 Understand the procedures for discount

17-11
and premium amortization on bond
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Illustration: KC is on a calendar-year basis, it accrues

interest and amortizes the discount at December 31,
2009, as follows:

December 31, 2009

Interest Receivable 4,000

Held-to-Maturity Securities 645
Interest Revenue
4,645

Chapter LO 2 Understand the procedures for discount

17-12
and premium amortization on bond
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Reporting of Held-to-Maturity Securities

Illustration 17-4

Chapter LO 2 Understand the procedures for discount

17-13
and premium amortization on bond
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Illustration: Assume that KC Company sells its

investment in Ever master bonds on November 1,
2013, at 99,750 plus accrued interest. KC records this
discount amortization as follows:

November 1, 2013

Held-to-Maturity Securities 635

Interest Revenue
635

$952 x 4/6 = $635

Chapter LO 2 Understand the procedures for discount
17-14
and premium amortization on bond
 Held-to-Maturity
Held-to-Maturity Securities
Securities

Computation of the realized gain on sale.

Illustration 17-5

Cash 102,417
Interest Revenue (4/6 x $4,000)
2,667
Held-to-Maturity Securities
Chapter
17-15 99,683 LO 2
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Companies report available-for-sale securities
at
 fair value, with
 unrealized holding gains and losses reported
as part of comprehensive income (equity).

Any discount or premium is amortized.

Chapter LO 2 Understand the procedures for discount

17-16
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Single Security): Graff Corporation
purchases $100,000, 10 percent, five-year bonds on
January 1, 2009, with interest payable on July 1 and
January 1. The bonds sell for $108,111, which results in
a bond premium of $8,111 and an effective interest rate
of 8 percent. Graff records the purchase of the bonds
on January 1, 2009, as follows.
Available-for-Sale Securities 108,111
Cash
108,111

Chapter LO 2 Understand the procedures for discount

17-17
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration 17-6
Schedule of
Interest
Revenue and
Bond
Premium
Amortization—
Effective-
Interest Method

Chapter
17-18
LO 2
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Single Security): The entry to record
interest revenue on July 1, 2009, is as follows.

Cash 5,000
Available-for-Sale Securities
676
Interest Revenue
4,324

Chapter LO 2 Understand the procedures for discount

17-19
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Single Security): At December 31, 2009,
Graff makes the following entry to recognize interest
revenue.
Interest Receivable 5,000
Available-for-Sale Securities
703
Interest Revenue
4,297
Graff reports revenue for 2009 of $8,621 ($4,324 + $4,297).

Chapter LO 2 Understand the procedures for discount

17-20
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Single Security): To apply the fair value
method to these debt securities, assume that at year-
end the fair value of the bonds is $105,000 and that the
carrying amount of the investments is $106,732. Graff
makes the following entry.

Unrealized Holding Gain or Loss—Equity 1,732

Securities Fair Value Adjustment (AFS)
1,732

Chapter LO 2 Understand the procedures for discount

17-21
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Portfolio of Securities): Webb
Corporation has two debt securities classified as
available-for-sale. The following illustration identifies the
amortized cost, fair value, and the amount of the
unrealized gain or loss. Illustration 17-7

Chapter LO 2 Understand the procedures for discount

17-22
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Portfolio of Securities): Webb makes
an adjusting entry to a valuation allowance on
December 31, 2010 to record the decrease in value and
to record the loss as follows.

Unrealized Holding Gain or Loss—Equity 9,537

Securities Fair Value Adjustment (AFS)
9,537
Webb reports the unrealized holding loss of $9,537 as other
comprehensive income and a reduction of stockholders’
equity.
Chapter LO 2 Understand the procedures for discount
17-23
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Sale of Available-for-Sale Securities
If company sells bonds before maturity date:

Must make entry to remove the,

 Cost in Available-for-Sale Securities and
 Securities Fair Value Adjustment accounts.

Any realized gain or loss on sale is reported in

the “Other expenses and losses” section of the
income statement.

Chapter LO 2 Understand the procedures for discount

17-24
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Sale of Available-for-Sale Securities):
Webb Corporation sold the Watson bonds (from
Illustration 17-7) on July 1, 2011, for $90,000, at which
time it had an amortized cost of $94,214.
Illustration 17-8

Cash 90,000
Loss on Sale of Securities 4,214
Available-for-Sale Securities
Chapter 94,214for discount
LO 2 Understand the procedures
17-25
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Sale of Available-for-Sale Securities):
Webb reports this realized loss in the “Other expenses
and losses” section of the income statement. Assuming
no other purchases and sales of bonds in 2011, Webb on
December 31, 2011, prepares the information:
Illustration 17-9

Chapter LO 2 Understand the procedures for discount

17-26
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Illustration (Sale of Available-for-Sale Securities):
Webb records the following at December 31, 2011.
Illustration 17-9

Securities Fair Value Adjustment (AFS) 4,537

Unrealized Holding Gain or Loss—Equity
Chapter LO 2 Understand the procedures4,537
for discount
17-27
and premium amortization on bond
 Debt
Available-for-Sale
Available-for-Sale Securities
Securities Securitie
s
Financial Statement Presentation
Illustration 17-10

Chapter LO 2 Understand the procedures for discount

17-28
and premium amortization on bond
 Debt
Trading
Trading Securities
Securities Securitie
s
Companies report trading securities at
 fair value, with
 unrealized holding gains and losses reported
as part of net income.

Any discount or premium is amortized.

Chapter LO 2 Understand the procedures for discount

17-29
and premium amortization on bond
 Debt
Trading
Trading Securities
Securities Securitie
s
Illustration: On December 31, 2010, Western
Publishing Corporation determined its trading
securities portfolio to be as follows:
Illustration 17-11

Chapter LO 2 Understand the procedures for discount

17-30
and premium amortization on bond
 Debt
Trading
Trading Securities
Securities Securitie
s
Illustration: At December 31, Western Publishing
makes an adjusting entry:
Illustration 17-11

Securities Fair Value Adjustment (Trading) 3,750

Unrealized Holding Gain or Loss—Income
Chapter LO 2 Understand the procedures3,750
for discount
17-31
and premium amortization on bond
 Debt
Trading
Trading Securities
Securities Securitie
s
BE17-4: (Trading Securities) Hendricks Corporation
purchased trading investment bonds for $50,000 at
par. At December 31, Hendricks received annual
interest of $2,000, and the fair value of the bonds was
$47,400.
Instructions:
(a) Prepare the journal entry for the purchase of the
investment.
(b) Prepare the journal entry for the interest
received.
(c) Prepare the journal entry for the fair value
Chapter LO 2 Understand the procedures for discount
17-32
adjustment. and premium amortization on bond
 Debt
Trading
Trading Securities
Securities Securitie
s
BE17-4: Prepare the journal entries for (a) the
purchase of the investment, (b) the interest received,
and (c) the fair value adjustment.

(a) Trading securities 50,000

Cash

(b) 50,000
Cash 2,000
Interest revenue

(c) 2,000
Unrealized Holding Loss - Income 2,600
Securities Fair Value Adj.- Trading

Chapter
17-33 2,600 LO 2 Understand the procedures for discount
and premium amortization on bond
 Investments
Investments in
in Equity
Equity Securities
Securities

Represent ownership of capital stock.

Cost includes:
 price of the security, plus
 broker’s commissions and fees related to purchase.

The degree to which one corporation (investor)

acquires an interest in the common stock of another
corporation (investee) generally determines the
accounting treatment for the investment subsequent
to acquisition.
Chapter LO 3 Identify the categories of equity securities and
17-34
describe the accounting and reporting treatment for
 Investments
Investments in
in Equity
Equity Securities
Securities
Ownership Percentages

0 --------------20% ------------ 50% -------------- 100%

SFAS 115 APBO 18, SFAS 141,
SFAS 142 SFAS 142

No Significant Control
significant influence usually
influence usually exists
usually exists
exists
Investment Investment Investment valued on
valued using valued using parent’s books using
Fair Value Equity Cost Method or Equity
Method Method Method (investment
eliminated in
Consolidation)
Chapter LO 3 Identify the categories of equity securities and
17-35
describe the accounting and reporting treatment for
 Investments
Investments in
in Equity
Equity Securities
Securities
Accounting and Reporting for Equity Securities by
Illustration 17-13
Category

Chapter LO 3 Identify the categories of equity securities and

17-36
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Accounting Subsequent to Acquisition

Market Price Market Price

Available Unavailable
Value and report the Value and report the
investment using investment using
the fair value the cost method.*
method.

* Securities are reported at cost. Dividends are recognized

when received and gains or losses only recognized on sale of
securities.
Chapter LO 3 Identify the categories of equity securities and
17-37
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Upon acquisition, companies record available-for-sale
securities at cost.
Illustration: On November 3, 2010 Republic Corporation
purchased common stock of three companies, each
investment representing less than a 20 percent interest.

Chapter LO 3 Identify the categories of equity securities and

17-38
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Illustration: Republic records these investments on
November 3, 2010, as follows.

Available-for-Sale Securities 718,550

Cash
718,550
On December 6, 2010, Republic receives a cash dividend
of $4,200 from Campbell Soup Co.

Cash 4,200
Dividend revenue
4,200
Chapter LO 3 Identify the categories of equity securities and
17-39
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Illustration: Republic’s available-for-sale equity
security portfolio on December 31, 2010:
Illustration 17-14

Chapter LO 3 Identify the categories of equity securities and

17-40
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Illustration: On December 31, 2010, Republic records
the net unrealized gains and losses related to changes in
the fair value of available-for-Sale equity securities in an
Unrealized Holding Gain or Loss—Equity account.

Unrealized Holding Gain or Loss—Equity 35,550

Securities Fair Value Adjustment (AFS)
35,550

Chapter LO 3 Identify the categories of equity securities and

17-41
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Illustration: On January 23, 2011, Republic sold all of its
Northwest Industries, Inc. common stock receiving net
proceeds of $287,220. Illustration 17-15

Cash 287,220
Available-for-Sale Securities
259,700
Chapter Gain
LO 3on Sale the
Identify of Stock
categories of equity securities and
17-42
27,520
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Illustration: On February 10, 2011, Republic purchased
20,000 shares of Continental Trucking at a price of
$12.75 per share plus brokerage commissions of $1,850
(total cost, $256,850).

Illustration 17-16

Chapter LO 3 Identify the categories of equity securities and

17-43
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%

Available-for-Sale Securities
Illustration 17-16

Illustration:

Securities Fair Value Adjustment (AFS) 99,800

Unrealized Holding Gain or Loss—Equity
99,800
Chapter LO 3 Identify the categories of equity securities and
17-44
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%
P17-6: McElroy Company has the following portfolio of
securities at September 30, 2010, its last reporting date.
Trading Securities Cost Fair Value
Horton, I nc. common (5,000 shares) $ 215,000 $ 200,000
Monty, I nc. pref erred (3,500 shares) 133,000 140,000
Oakwood Corp. common (1,000 shares) 180,000 179,000

On Oct. 10, 2010, the Horton shares were sold at a price

of $54 per share. In addition, 3,000 shares of Patriot
common stock were acquired at $54.50 per share on
Nov. 2, 2010. The Dec. 31, 2010, fair values were: Monty
$106,000, Patriot $132,000, and the Oakwood common
$193,000.
Chapter LO 3 Identify the categories of equity securities and
17-45
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%
P17-6: Prepare the journal entries to record the sale,
purchase, and adjusting entries related to the trading
securities in the last quarter of 2010.
Portfolio at September 30, 2010

Chapter LO 3 Identify the categories of equity securities and

17-46
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%
P17-6: Prepare the journal entries to record the sale,
purchase, and adjusting entries related to the trading
securities in the last quarter of 2010.
October 10, 2010 (Horton):
Cash (5,000 x $54) 270,000
Trading securities
Gain on sale
215,000
November 2, 2010 (Monty):
55,000
Trading securities (3,000 x $54.50) 163,500
Cash

Chapter 163,500
LO 3 Identify the categories of equity securities and
17-47
describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%
P17-6: Portfolio at December 31, 2010

December 31, 2010:

Unrealized holding loss - Income 36,500
Securities fair value adj. - Trading
Chapter LO 3 Identify the categories of equity securities and
17-48 36,500 describe the accounting and reporting treatment for
 Holdings
Holdings of
of Less
Less Than
Than 20%
20%
P17-6: How would the entries change if the
securities were classified as available-for-sale?

The entries would be the same except that the

Unrealized Holding Gain or Loss—Equity account is

used instead of Unrealized Holding Gain or Loss—
Income.

The unrealized holding loss would be deducted from

the stockholders’ equity section rather than charged
to the income statement.
Chapter LO 3 Identify the categories of equity securities and
17-49
describe the accounting and reporting treatment for
 Holdings
Holdings Between
Between 20%
20% and
and 50%
50%

An investment (direct or indirect) of 20 percent or

more of the voting stock of an investee should lead
to a presumption that in the absence of evidence to
the contrary, an investor has the ability to exercise
significant influence over an investee.

In instances of “significant influence,” the investor

must account for the investment using the equity
method.

Chapter LO 4 Explain the equity method of accounting and

17-50
compare it to the fair value method for equity
 Holdings
Holdings Between
Between 20%
20% and
and 50%
50%

Equity Method
Record the investment at cost and subsequently
adjust the amount each period for
 the investor’s proportionate share of the
earnings (losses) and
 dividends received by the investor.

If investor’s share of investee’s losses exceeds the carrying

amount of the investment, the investor ordinarily should
discontinue applying the equity method.
Chapter LO 4 Explain the equity method of accounting and
17-51
compare it to the fair value method for equity
 Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
E17-17: (Equity Method) On January 1, 2010,
Meredith Corporation purchased 25% of the common
shares of Pirates Company for $200,000. During the
year, Pirates earned net income of $80,000 and paid
dividends of $20,000.
Instructions: Prepare the entries for Meredith to record
the purchase and any additional entries related to this
investment in Pirates Company in 2010.

Chapter LO 4 Explain the equity method of accounting and

17-52
compare it to the fair value method for equity
 Holdings
Holdings Between
Between 20%
20% and
and 50%
50%
E17-17: Prepare the entries for Meredith to record the
purchase and any additional entries related to this
investment in Pirates Company in 2010.

Investment in Stock 200,000

Cash

200,000 in Stock
Investment 20,000
Investment Revenue ($80,000 x 25%)

20,000
Cash 5,000
Investment in Stock ($20,000 x 25%)

Chapter
17-53
5,000 LO 4 Explain the equity method of accounting and
compare it to the fair value method for equity
 Holdings
Holdings of
of More
More Than
Than 50%
50%

Controlling Interest - When one corporation

acquires a voting interest of more than 50 percent
in another corporation
 Investor is referred to as the parent.

 Investee is referred to as the subsidiary.

 Investment in the subsidiary is reported on the

parent’s books as a long-term investment.
 Parent generally prepares consolidated financial
statements.
Chapter LO 4 Explain the equity method of accounting and
17-54
compare it to the fair value method for equity
 Fair
Fair Value
Value Option
Option

Companies have 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.

 Applied on an instrument-by-instrument basis.

 Fair value option is generally available only at the

time a company first purchases the financial asset
or incurs a financial liability.

 Company must measure this instrument at fair

value until the company no longer has ownership.
Chapter
17-55 LO 5 Describe the accounting for the fair value
 Fair
Fair Value
Value Option
Option

Available-for-Sale Securities
Illustration: Hardy Company purchases stock in Fielder
Company during 2010 that it classifies as available-for-sale.
At December 31, 2010, the cost of this security is $100,000;
its fair value at December 31, 2010, is $125,000. If Hardy
chooses the fair value option to account for the Fielder
Company stock, it makes the following entry at December
31, 2010.
Investment in Fielder Stock 25,000
Unrealized Holding Gain or Loss—Income
25,000

Chapter
17-56 LO 5 Describe the accounting for the fair value
 Fair
Fair Value
Value Option
Option

Equity Method
Illustration: Durham Company holds a 28 percent stake in
Suppan Inc. Durham purchased the investment in 2010 for
$930,000. At December 31, 2010, the fair value of the
investment is $900,000. Durham elects to report the
investment in Suppan using the fair value option. The entry
to record this investment is as follows.

Unrealized Holding Gain or Loss—Income 30,000

Investment in Suppan Stock
30,000

Chapter
17-57 LO 5 Describe the accounting for the fair value
 Fair
Fair Value
Value Option
Option

Financial Liabilities
Illustration: Edmonds Company has issued $500,000 of
6% bonds at face value on May 1, 2010. Edmonds chooses
the fair value option for these bonds. At December 31,
2010, the value of the bonds is now $480,000 because
interest rates in the market have increased to 8 percent.
The value of the debt securities falls because the bond is
paying less than market rate for similar securities. Under
the fair value option, Edmonds makes the following entry.

Bond payable 20,000

Unrealized holding gain or loss-Income
Chapter 20,000
17-58 LO 5 Describe the accounting for the fair value
 Other
Other Reporting
Reporting Issues
Issues

Impairment of Value
Impairments of debt and equity securities are
 losses in value that are determined to be
other than temporary,
 based on a fair value test, and

 are charged to income.

Chapter
17-59 LO 6 Discuss the accounting for impairments of debt and equity
 Other
Other Reporting
Reporting Issues
Issues

Reclassification Adjustments
The reporting of changes in unrealized gains or losses in
comprehensive income is straightforward unless a company
sells securities during the year.
In that case, double counting results when the company
reports realized gains or losses as part of net income but
also shows the amounts as part of other comprehensive
income in the current
period or in previous periods.
To ensure that gains and losses are not counted twice when
a sale occurs, a reclassification adjustment is necessary.
Chapter
17-60 LO 7 Explain why companies report reclassification
 Other
Other Reporting
Reporting Issues
Issues

Reclassification Adjustments
Illustration: Open Company has the following two
available-for-sale securities in its portfolio at the end of 2009
(its first year of operations).
Illustration 17-19

Chapter
17-61 LO 7 Explain why companies report reclassification
 Other
Other Reporting
Reporting Issues
Issues

Reclassification Adjustments
Illustration: If Open Company reports net income in 2009
of $350,000, it presents a statement of comprehensive
income as follows.
Illustration 17-20

Chapter
17-62 LO 7 Explain why companies report reclassification
 Other
Other Reporting
Reporting Issues
Issues

Reclassification Adjustments
Illustration: During 2010, Open Company sold the Lehman
Inc. common stock for $105,000 and realized a gain on the
sale of $25,000 ($105,000 – $80,000). At the end of 2010,
the fair value of the Woods Co. common stock increased an
additional $20,000, to $155,000.
Illustration 17-21

Chapter
17-63 LO 7 Explain why companies report reclassification
 Other
Other Reporting
Reporting Issues
Issues

Reclassification Adjustments
Illustration: In addition, Open realized a gain of $25,000
on the sale of the Lehman common stock. Comprehensive
income includes both realized and unrealized components.
Therefore, Open recognizes a total holding gain (loss) in
2010 of $20,000, computed as follows.
Illustration 17-22

Chapter
17-64 LO 7 Explain why companies report reclassification
 Other
Other Reporting
Reporting Issues
Issues

Reclassification Adjustments
Illustration: Open reports net income of $720,000 in 2010,
which includes the realized gain on sale of the Lehman
securities. Illustration 17-23

Chapter
17-65 LO 7 Explain why companies report reclassification
 Other
Other Reporting
Reporting Issues
Issues

Transfers Between Categories

Illustration 17-30

* Assumes that adjusting entries to report changes in fair value for the current period
are not yet recorded.

Chapter LO 8 Describe the accounting for transfer

17-66 of investment securities between
 Other
Other Reporting
Reporting Issues
Issues

Transfers Between Categories

Illustration 17-30

Chapter **According to GAAP, these types of LO 8 Describe the accounting for transfer
17-67 transfers should be rare. of investment securities between
 Other
Other Reporting
Reporting Issues
Issues

Fair Value Controversy

Measurement Based on Intent

Gains Trading

Liabilities Not Fairly Valued

Subjectivity of Fair Values

Chapter LO 8 Describe the accounting for transfer

17-68 of investment securities between
  The accounting for trading, available-for-sale, and held-to-
maturity securities is essentially the same between iGAAP and
U.S. GAAP.
 Gains and losses related to available-for-sale securities are
reported in other comprehensive income under U.S. GAAP.
Under iGAAP, these gains and losses are reported directly in
equity.
 Both iGAAP and U.S. GAAP use the same test to determine
whether the equity method of accounting should be used.

Chapter Reclassification in and out of trading securities is prohibited
17-69
under iGAAP. It is not prohibited under U.S. GAAP, but this type
  Under iGAAP, both the investor and an associate company
should follow the same accounting policies.
 The basis for consolidation under iGAAP is control. Under both
systems, for consolidation to occur, the investor company
must generally own 50 percent of another company.
 iGAAP and U.S. GAAP are similar in the accounting for the fair
value option.
 U.S. GAAP does not permit the reversal of an impairment
charge related to available-for-sale debt and equity
Chapter investments. iGAAP permits reversal for available-for-sale debt
17-70
securities and held-to-maturity securities.