3bsolutionsD - APPENDIX D Reporting and Analyzing...

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Appendix D-1 APPENDIX D Reporting and Analyzing Investments Study Objectives 1. Identify the reasons corporations invest in stocks and debt securities. 2. Explain the accounting for debt investments. 3. Explain the accounting for stock investments. 4. Describe the purpose and usefulness of consolidated financial statements. 5. Indicate how debt and stock investments are valued and reported in the financial statements. 6. Distinguish between short-term and long-term investments. Summary of Questions by Study Objectives and Bloom’s Taxonomy Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT Questions 1. 1 K 5. 3 K 9. 3 C 13. 5 C 17. 5 K 2. 2 K 6. 3 AP 10. 3 C 14. 5 C 18. 5 C 3. 2 C 7. 3 K 11. 4 K 15. 5 AP 19. 6 C 4. 2 C 8. 3 C 12. 5 K 16. 5 AP Brief Exercises 1. 2 AP 3. 3 AP 5. 6 AN 7. 6 AN 8. 6 AP 2. 3 AP 4. 5 AP 6. 5 AP Exercises 1. 2 AP 3. 3 AP 5. 3 AP 7. 5, 6 AN 8. 5, 6 AN 2. 3 AN 4. 3 AP 6. 5, 6 AP Problems: Set A 1. 2. 3. 4. 3 AN 6. 6 AP 2, 5, 6 AN 2, 3, 5, 6 AN 3, 5, 6 AN 5. 3, 5, 6 AN
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Appendix D-2 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) PD-1 Journalize debt investment transactions and show financial statement presentation. Moderate 30–40 PD-2 Journalize investment transactions, prepare adjusting entry, and show financial statement presentation. Moderate 30–40 PD-3 Journalize transactions, prepare adjusting entry for stock investments, and show balance sheet presentation. Moderate 30–40 PD-4 Prepare entries under cost and equity methods, and prepare memorandum. Simple 20–30 PD-5 Journalize stock transactions, and show balance sheet presentation. Moderate 40–50 PD-6 Prepare a balance sheet. Moderate 30–40
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Appendix D-3 ANSWERS TO QUESTIONS 1. Companies invest because (1) they have excess cash for a short period of time, or (2) they want to generate investment income or (3) they have strategic reasons such as controlling a competitor or supplier or entering a new industry. 2. (a) The cost of an investment in bonds consists of the market price of the bonds plus any brokerage fees. (b) Interest is recorded as it is earned; that is, over the life of the investment in bonds. 3. (a) Losses and gains on the sale of debt investments are computed by comparing the cost of the securities to the net proceeds from the sale. (b) Losses are reported in the income statement under other expenses and losses whereas gains are reported under other revenues and gains. 4. Nickle Company is incorrect. The gain is the difference between the net proceeds, exclusive of interest, and the cost of the bonds. The correct gain is $3,000 [($45,000 – $2,000) – $40,000]. 5. The cost of an investment in stock includes all expenditures necessary to acquire the investment. These expenditures include the actual purchase price plus any commissions or brokerage fees. 6. Brokerage fees are part of the cost of the investment. Therefore, the entry is: Stock Investments .......................................................................................... 76,500 Cash ....................................................................................................... 76,500 7. (a) Whenever the investor’s influence on the operating and financial affairs of the investee is significant, the equity method should be used. The major factor in determining significant influence is the percentage of ownership interest held by the investor in the investee. The
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