BE17.

13 (LO4) Cameron Company has a portfolio of debt investments that it has

managed as a trading investment. At December 31, 2019, Cameron had the
following balances related to this portfolio: debt investments, £250,000; fair value
adjustment, £10,325 (Dr). Cameron management decides to change its business
model for these investments to a held-for-collection strategy, beginning in
January 2020. Prepare the journal entry to transfer these investments to the
held-for-collection classification.

Exercises

E17.1 (LO1) (Investment Classifications) For the following investments, identify

whether they are:
1. Debt investments—held-for-collection.
2. Debt investments—held-for-collection and selling.
3. Debt investments—trading.
4. Trading equity investments.
5. Non-trading equity investments.
Each case is independent of the other.
a. A bond that will mature in 4 years was bought 1 month ago when the price
dropped. As soon as the value increases, which is expected next month, it
will be sold.
b. 10% of the outstanding shares of Farm-Co are purchased. The company is
planning on eventually getting a total of 30% of its outstanding shares.
c. 10-year bonds were purchased this year. The bonds mature at the first of
next year, and the company plans to sell the bonds if interest rates fall.
d. Bonds that will mature in 5 years are purchased. The company has a
strategy to hold them to collect interest payments and principal of the bonds
at maturity.
e. A bond that matures in 10 years was purchased. The company is investing
money set aside for an expansion project planned 10 years from now.
f. Ordinary shares in a distributor are purchased to meet a regulatory
requirement for doing business in the distributor's region. The investment
will be held indefinitely.
E17.2 (LO1) (Debt Investments) On January 1, 2019, Jennings SA purchased at
par 10% bonds having a maturity value of €300,000. They are dated January 1,
2019, and mature January 1, 2024, with interest receivable December 31 of
each year. The bonds are held to collect contractual cash flows.
Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare the journal entry to record the interest received for 2019.
c. Prepare the journal entry to record the interest received for 2020.
E17.3 (LO1) (Debt Investments) On January 1, 2019, Roosevelt Company
purchased 12% bonds having a maturity value of $500,000 for $537,907.40. The
bonds provide the bondholders with a 10% yield. They are dated January 1,
 2019, and mature January 1, 2024, with interest received December 31 of each
year. Roosevelt's business model is to hold these bonds to collect contractual
cash flows.
Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare a bond amortization schedule.
c. Prepare the journal entry to record the interest received and the
amortization for 2019.
d. Prepare the journal entry to record the interest received and the
amortization for 2020.
E17.4 (LO1) (Debt Investments) Assume the same information as in E17.3 except
that Roosevelt has an active trading strategy for these bonds. The fair value of
the bonds at December 31 of each yearend is as follows.

2019 $534,200 2022 $517,000

2020 $515,000 2023 $500,000
2021 $513,000

Instructions

a. Prepare the journal entry at the date of the bond purchase.

b. Prepare the journal entries to record the interest received and recognition of
fair value for 2019.
c. Prepare the journal entry to record the recognition of fair value for 2020.
d. Discuss how the response to (c) will be different assuming Roosevelt has a
strategy of held-for-collection and selling.
E17.5 (LO1) (Debt Investments) On January 1, 2019, Morgan Company acquires
$300,000 of Nicklaus, Inc., 9% bonds at a price of $278,384. The interest is
payable each December 31, and the bonds mature December 31, 2021. The
investment will provide Morgan Company a 12% yield. The bonds are classified
as held-for-collection.
Instructions

a. Prepare a 3-year schedule of interest revenue and bond discount

amortization. (Round to nearest cent.)
b. Prepare the journal entry for the interest receipt of December 31, 2020, and
the discount amortization.
E17.6 (LO1) (HFCS Debt Securities Entries and Financial Statement
Presentation) At December 31, 2019, the held-for-collection and selling debt
portfolio for Steffi Graf SA is as follows.
 Security Amortized Cost Fair Value Unrealized Gain (Loss)
A €17,500 €15,000 (€2,500)
B  12,500  14,000   1,500
C  23,000  25,500   2,500
Total €53,000 €54,500 1,500
Previous fair value adjustment balance—Dr. 400
Fair value adjustment—Dr. €1,100

On January 20, 2020, Steffi Graf SA sold security A for €15,100. The sale
proceeds are net of brokerage fees.
Instructions

a. Prepare the adjusting entry at December 31, 2019, to report the portfolio at
fair value.
b. Show the statement of financial position presentation of the investment-
related accounts at December 31, 2019. (Ignore notes presentation.)
c. Prepare the journal entry for the 2020 sale of security A.
E17.7 (LO1) (Fair Value Option) Refer to the information in E17.3 and assume
that Roosevelt elected the fair value option for this held-for-collection investment.
Instructions

a. Prepare any entries necessary at December 31, 2019, assuming the fair
value of the bonds is $540,000.
b. Prepare any entries necessary at December 31, 2020, assuming the fair
value of the bonds is $525,000.
E17.8 (LO1) (Fair Value Option) Presented below is selected information related
to the financial instruments of Dawson Ltd. at December 31, 2019 (amounts in
thousands). This is Dawson Ltd.'s first year of operations.

Carrying Fair Value (at

Amount December 31)
Debt investments (intent is to hold for ¥ 40,000 ¥ 41,000
collection)
Bonds payable  220,000  195,000

Instructions

a. Dawson elects to use the fair value option whenever possible. Assuming
that Dawson's net income is ¥100,000 in 2019 before reporting any financial
instrument gains or losses, determine Dawson's net income for 2019.
b. Record the journal entry, if any, necessary at December 31, 2019, to record
the fair value option for the bonds payable.
E17.9 (LO4) (Comprehensive Income Disclosure) Assume the same information
as E17.6 and that Steffi Graf SA reports net income in 2019 of €120,000 and in
2020 of €140,000. Total holding gains (including any realized holding gain or
loss) equal €40,000 in 2020.
Instructions

a. Prepare a statement of comprehensive income for 2019, starting with net

income.
b. Prepare a statement of comprehensive income for 2020, starting with net
income.
E17.10 (LO2) (Entries for Equity Investments) The following information is
available for Kinney plc at December 31, 2019, regarding its investments.

Investments Cost Fair Value

3,000 ordinary shares of Petty Corporation £40,000 £46,000
1,000 preference shares of Dowe Incorporated  25,000  22,000
£65,000 £68,000

Instructions

a. Prepare the adjusting entry (if any) for 2019, assuming the investments are
classified as trading.
b. Prepare the adjusting entry (if any) for 2019, assuming the investments are
classified as non-trading.
c. Discuss how the amounts reported in the financial statements are affected
by the entries in (a) and (b).
E17.11 (LO2) (Equity Investments) On December 31, 2019, Zurich SA provided
you with the following information regarding its trading investments.

December 31, 2019

Investments (Trading) Cost Fair Unrealized Gain
Value (Loss)
Stargate AG shares €20,000 €19,000 €(1,000)
Carolina Co. shares  10,000   9,000  (1,000)
Vectorman NV shares  20,000  20,600     600 
Total of portfolio €50,000 €48,600  (1,400)
Previous fair value adjustment  –0–  
balance
Fair value adjustment—Cr. €(1,400)

During 2020, Carolina Co. shares were sold for €9,500. The fair value of the
shares on December 31, 2020, was Stargate shares—€19,300; Vectorman
shares—€20,500.
Instructions

a. Prepare the adjusting journal entry needed on December 31, 2019.

b. Prepare the journal entry to record the sale of the Carolina Co. shares
during 2020.
c. Prepare the adjusting journal entry needed on December 31, 2020.
E17.12 (LO2) (Equity Investment Entries and Reporting) Player Corporation
makes an equity investment costing $73,000 and classifies it as non-trading. At
December 31, the fair value of the investment is $67,000.
Instructions

Prepare the adjusting entry to report the investment properly. Indicate the
statement presentation of the accounts in your entry.
E17.13 (LO2) (Equity Investment Entries and Financial Statement
Presentation) At December 31, 2019, the equity investment portfolio for
Wenger, Inc. is as follows.

Investment Cost Fair Value Unrealized Gain (Loss)

A $17,500 $15,000 ($2,500)
B  12,500  14,000  1,500 
C  23,000  25,500  2,500 
Total $53,000 $54,500  1,500 
Previous fair value adjustment balance—Dr.   200 
Fair value adjustment—Dr. $1,300 

On January 20, 2020, Wenger, Inc. sold investment A for $15,300. The sale
proceeds are net of brokerage fees.
Instructions

a. Prepare the adjusting entry at December 31, 2019, to report the portfolio at
fair value.
b. Show the statement of financial position presentation of the investment-
related accounts at December 31, 2019. (Ignore notes presentation.)
c. Prepare the journal entry(ies) for the 2020 sale of investment A.
d. Repeat requirement (a), assuming the portfolio of investments is non-
trading.
E17.14 (LO2) (Equity Investment Entries) Capriati Corporation made the
following cash investments during 2019, which is the first year in which Capriati
invested in securities.
1. On January 15, purchased 9,000 ordinary shares of Gonzalez Company at
$33.50 per share plus commission $1,980.
2. On April 1, purchased 5,000 ordinary shares of Belmont Co. at $52.00 per
share plus commission $3,370.
3. On September 10, purchased 7,000 preference shares of Thep Co. at
$26.50 per share plus commission $4,910.
On May 20, 2019, Capriati sold 3,000 shares of Gonzalez Company at a market
price of $35 per share less brokerage commissions, taxes, and fees of $2,850. The
year-end fair values per share were Gonzalez $30, Belmont $55, and Thep $28. In
addition, the chief accountant of Capriati told you that Capriati Corporation plans to
actively trade these investments.
Instructions

a. Prepare the journal entries to record the above three investment purchases.
b. Prepare the journal entry for the investment sale on May 20.
c. Compute the unrealized gains or losses and prepare the adjusting entries
for Capriati on December 31, 2019.
E17.15 (LO2, 3) (Journal Entries for Fair Value and Equity Methods) Presented
below are two independent situations.
Situation 1: Hatcher Cosmetics acquired 10% of the 200,000 ordinary shares of
Ramirez Fashion at a total cost of $14 per share on March 18, 2019. On June 30,
Ramirez declared and paid a $75,000 cash dividend. On December 31, Ramirez
reported net income of $122,000 for the year. At December 31, the market price of
Ramirez Fashion was $15 per share. The investment is classified as trading.
Situation 2: Holmes, Inc. obtained significant influence over Nadal Corporation by
buying 25% of Nadal's 30,000 outstanding ordinary shares at a total cost of $9 per
share on January 1, 2019. On June 15, Nadal declared and paid a cash dividend of
$36,000. On December 31, Nadal reported a net income of $85,000 for the year.
Instructions

Prepare all necessary journal entries in 2019 for both situations.

E17.16 (LO3) (Equity Method) Gator plc invested £1,000,000 in Demo Co. for
25% of its outstanding shares. Demo Co. pays out 40% of net income in
dividends each year.
Instructions

Use the information in the following T-account for the investment in Demo to
answer the following questions.

Investment in Demo Co.

1,000,000
  130,000
52,000

a. How much was Gator plc's share of Demo Co.'s net income for the year?
b. How much was Gator plc's share of Demo Co.'s dividends for the year?
c. What was Demo Co.'s total net income for the year?
d. What was Demo Co.'s total dividends for the year?
E17.17 (LO2) (Equity Investments—Trading) Feiner Ltd. had purchased 300
shares of Guttman plc for £40 each this year and classified the investment as a
trading investment. Feiner sold 100 shares for £43 each. At year-end, the price
per share had dropped to £35.
Instructions

Prepare the journal entries for these transactions and any year-end adjustments.
E17.18 (LO2) (Equity Investments—Trading) Swanson plc has the following
trading investment portfolio on December 31, 2019.