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Appendix 13.1: Summary of IFRS 9, Financial Instruments

Appendix 13.1: Summary of IFRS 9, Financial Instruments

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Chapter 13



Marketable Securities and Derivatives



value included in net income in the period they occur, with one exception. That exception permits a firm to designate an investment in equity securities as “not held for trading,” measured

at fair value with changes in fair value included in other comprehensive income. The designation is irrevocable and the unrealized gains and losses on these equity securities are not reclassified out of accumulated other comprehensive income if and when the securities are sold.



SOLUTIONS TO SELF-STUDY PROBLEMS

SUGGESTED SOLUTION TO PROBLEM 13.1 FOR SELF-STUDY

(General Electric Capital Services and Sapra Company; accounting for an investment in

bonds.)

a. See Exhibit 13.7.

b.

Date of Purchase

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record the purchase of bonds for $105,346.



105,346

105,346



End of First Year

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To accrue interest revenue for the first year after purchase.



6,321

6,321



End of First Year

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record cash received at end of the first year and the reduction in Marketable Securities.



8,000

8,000



GECS could combine the last two entries as follows:

End of First Year

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



© Cengage Learning 2014



EXHIBIT 13.7



Period

(1)

1 ..............

2 ..............

3 ..............



8,000

6,321

1,679



Amortization Table for $100,000 Bonds with a Stated Interest

Rate of 8% and a Market Required Yield of 6%

Marketable

Securities at

Beginning of

Period

(2)



Interest

Revenue

at 6% per

Period

(3)



$105,346

103,667

101,887



$6,321

6,220

6,113



Cash

Received

(4)

$



8,000

8,000

108,000



Portion of

Cash Received

Reducing

Carrying Value

(5)

$



(1,679)

(1,780)

(101,887)



Marketable

Securities

at End of

Period

(6)

$103,667

101,887

0



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Solutions to Self-Study Problems



SUGGESTED SOLUTION TO PROBLEM 13.2 FOR SELF-STUDY

(Conlin Corporation; accounting for available-for-sale and trading securities.)

a.

(1)



(2)



(3)



(4)



(5)



(6)



February 2, 2013

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record acquisition of Security A.

July 15, 2013

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record acquisition of Security B.

November 27, 2013

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record acquisition of Security C.

December 31, 2013

Unrealized Loss on Securities A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To measure Security A at fair value with the unrealized loss included in

other comprehensive income.

December 31, 2013

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized Gain on Security B . . . . . . . . . . . . . . . . . . . . . . . . . . .

To measure Security B at fair value with the unrealized gain included in

other comprehensive income.

December 31, 2013

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized Gain on Security C . . . . . . . . . . . . . . . . . . . . . . . . . . .

To measure Security C at fair value with the unrealized gain included in other

comprehensive income.



40,000

40,000



75,000

75,000



90,000

90,000



2,000

2,000



4,000

4,000



3,000

3,000



Entries (4), (5), and (6) above could be combined as follows:

December 31, 2013

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Unrealized Gain on Marketable Securities . . . . . . . . . . . . . . . . .

To measure the portfolio of marketable available-for-sale securities to fair

value with the net unrealized gain included in other comprehensive income.

(7)



September 6, 2014

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized Gain on Security B (OCI) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Realized Gain on Sale of Marketable Securities . . . . . . . . . . . . . . . .

To record the sale of Security B, reversing the previously recognized unrealized gain in other comprehensive income, which will, when closed to accumulated other comprehensive income, remove from that account the increase

in shareholders’ equity. The realized gain will appear in net income and will,

when closed to retained earnings, increase shareholders’ equity. The net

effect on shareholders’ equity over the entire transaction is an increase of

$3,000. Comprehensive income will have been $4,000 in 2013 and negative

$1,000 in 2014, netting to $3,000 over the two-year period.



5,000

5,000



78,000

4,000

79,000

3,000



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Chapter 13



(8)



(9)



Marketable Securities and Derivatives



December 31, 2014

Unrealized Loss on Security A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To measure Security A at fair value with the unrealized loss included in

other comprehensive income.

December 31, 2014

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized Gain on Security C . . . . . . . . . . . . . . . . . . . . . . . . . . .

To measure Security C at fair value with the unrealized gain included in other

comprehensive income.



5,000

5,000



1,000

1,000



Entries (8) and (9) could be combined as follows:

December 31, 2014

Net Unrealized Loss on Marketable Securities . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



4,000

4,000



b. The first three journal entries are identical. The unrealized gain or loss accounts in entries

(4), (5), (6), (8), and (9) are income statement accounts when the firm classifies the securities as trading securities. Entry (7) is as follows:

(7)



September 6, 2014

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Realized Loss on Sale of Marketable Securities . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record sale of trading security for less than its carrying value at the time

of sale.



78,000

1,000

79,000



SUGGESTED SOLUTION TO PROBLEM 13.3 FOR SELF-STUDY

(Accounting for a forward foreign exchange contract as a fair value hedge.)

a. The purchase commitment and the forward currency contract are mutually unexecuted

contracts as of June 30, 2013. U.S. GAAP and IFRS do not currently require firms to

recognize mutually unexecuted contracts in the accounts.

b. The change in the value of the undiscounted cash flows related to the purchase commitment and the forward contract is $900 [= (10,000 × $1.73) – (10,000 × $1.64)]. The present

value of $900 discounted at 8% for six months is $865 [= $900/(1 + 0.08/2)].

December 31, 2013

Loss on Firm Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitment to Purchase Inventory . . . . . . . . . . . . . . . . . . . . . . .

To record a loss on a previously unrecognized firm commitment because

the U.S. dollar decreased in value relative to the British pound. The loss is

included in net income.

December 31, 2013

Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gain on Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To measure the forward contract (an asset) at fair value and recognize a gain

in net income.



865

865



865

865



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Solutions to Self-Study Problems



c.

June 30, 2014

Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitment to Purchase Inventory . . . . . . . . . . . . . . . . . . . . . . .

To recognize interest on the commitment because of the passage of time;

$35 = 0.04 × $865.

June 30, 2014

Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record interest on the forward foreign exchange contract because of the

passage of time; $35 = 0.04 × $865.



35

35



35

35



d. The change in the value of the purchase commitment and the forward contract due to

exchange rate changes is $200 [= (10,000 × $1.75) – (10,000 × $1.73)].

June 30, 2014

Loss on Firm Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitment to Purchase Inventory . . . . . . . . . . . . . . . . . . . . . . .

To record a loss on the purchase commitment because the value of the U.S.

dollar declined relative to the British pound. The loss is included in net

income.

June 30, 2014

Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gain on Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record the increase in the fair value of the forward contract (an asset)

because the U.S. dollar declined in value relative to the British pound. The

gain is included in net income.



200

200



200

200



e.

June 30, 2014

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commitment to Purchase Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record the amount paid in U.S. dollars to acquire £10,000 ($17,500 =

10,000 × 1.75), to eliminate the balance in the Commitment to Purchase

Inventory account of $1,100 (= $865 + $35 + $200), and to record the

acquisition cost of the inventory ($16,400).



16,400

1,100

17,500



f.

June 30, 2014

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

To record cash received from the counterparty and eliminate the balance in

the Forward Contract account of $1,100 (= $865 + $35 + $200).



1,100

1,100



g. Great Deal would not recognize changes in the fair value of the purchase commitment.

Each of the entries related to changes in the fair value of the derivative and involving income statement accounts in parts b to d would instead affect Other Comprehensive Income, which the firm would close to Accumulated Other Comprehensive Income.

Assuming the hedge was highly effective, any balance in Accumulated Other Comprehensive Income related to the forward contract on June 30, 2014, would affect the income

statement on this date.



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h. To treat this hedge as a fair value hedge, Great Deal must intend to fix the amount it pays

for the inventory. Perhaps Great Deal has committed to resell the inventory to a customer

on June 30, 2014, for a fixed price in U.S. dollars and wants to protect its expected profit

margin from the sale. To treat this hedge as a cash flow hedge, Great Deal must intend to

fix the amount of cash it pays to the British supplier.



KEY TERMS AND CONCEPTS

Marketable securities

Investments in securities

Debt securities held to maturity or held-tomaturity investments

Trading securities or financial assets at fair

value through profit or loss

Available-for-sale securities or available-forsale financial assets

Amortized cost

Derivative

Forward foreign exchange contract



Interest rate swap

Forward commodity contract

Underlyings

Notional amounts

Counterparty

Net settlement

Hedge accounting

Fair value hedge

Cash flow hedge

Fair value option



QUESTIONS, EXERCISES, AND PROBLEMS

QUESTIONS

1. Review the meaning of the terms and concepts listed above in Key Terms and Concepts.

2. Distinguish between the following pairs of terms:

a. Debt securities classified as “held-to-maturity” versus “available for sale.”

b. Equity securities classified as “trading” versus “available for sale.”

c. Amortized cost versus fair value of debt securities.

d. Unrealized gain or loss on trading securities versus on available-for-sale securities.

e. Realized gain or loss on trading securities versus on available-for-sale securities.

3. What is the reasoning for including unrealized gains and losses on trading securities in

income but including unrealized gains and losses on available-for-sale securities in Other

Comprehensive Income?

4. “Reporting marketable available-for-sale securities at fair value on the balance sheet but

not including the unrealized gains and losses in income is inconsistent and provides an

opportunity for earnings management.” Do you agree? Why or why not?

5. When is a derivative also an accounting hedge? When is it not also an accounting hedge?

6. Distinguish between a fair value hedge and a cash flow hedge.

7. “Recognizing a derivative classified as a fair value hedge of a firm commitment as an asset

but not recognizing the commitment that the derivative is hedging as a liability is inconsistent.” Do you agree? Why or why not?

8. Both U.S. GAAP and IFRS require the immediate recognition in net income of unrealized

gains and losses on derivatives classified as fair value hedges. Both U.S. GAAP and IFRS

delay recognition in net income of unrealized gains and losses on derivatives classified as

cash flow hedges. What is the likely rationale for these different treatments?



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Questions, Exercises, and Problems



9. Suggest reasons why a firm would acquire a derivative and not treat it as an accounting

hedge.

10. “Adopting the fair value option for marketable securities collapses the accounting methods

discussed in this chapter to a single accounting method.” Do you agree? Why or why not?



EXERCISES

11. Classifying securities. Firms that do not elect the fair value option classify marketable securities along two dimensions:

■ Purpose of investment: held-to-maturity debt securities, trading securities, or availablefor-sale securities.

■ Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

a. A forest products company plans to construct a pulp-processing plant beginning in

April of next year. It issues common stock for $200 million on December 10 of this

year to help finance construction. The company invests this $200 million in U.S. treasury bonds to generate income until it needs the cash for construction.

b. An electric utility has bonds payable outstanding for $100 million that mature in five

years. The electric utility acquires U.S. Treasury bonds with a maturity value of $100

million in five years. The firm plans to use the proceeds from the Treasury bonds to

repay its own outstanding bonds.

c. A bank acquires bonds of the state of New York to earn tax-exempt interest revenue.

The bank plans to sell the bonds when it needs cash for ongoing operating needs.

d. A pharmaceutical company acquires common stock of a biogenetic startup company

that conducts research in human growth hormones. The pharmaceutical company hopes

the investment will lead to a joint venture in the future.

e. A bank maintains a department that regularly purchases and sells securities. This

department acquires common stock of Nissan Motors because it thinks the market

price does not fully reflect favorable news about Nissan.

f. A U.S. computer company has bonds outstanding that are payable in Swiss francs and

mature in installments over the next five years. The computer company purchases a

Swiss winery’s bonds, denominated in Swiss francs, that mature in seven years. The computer company will sell a portion of the bonds of the Swiss winery each year to obtain

the Swiss francs needed to repay its franc-denominated bonds.

12. Accounting principles for marketable securities and derivatives. For each of the items a to

d below, describe the accounting treatment using one of the following four approaches,

assuming that the firm does not elect the fair value option:

(1) Measured at fair value with changes recognized in net income.

(2) Measured at amortized cost.

(3) Measured at fair value with changes recognized initially in other comprehensive

income.

(4) Measurement depends on whether firm uses hedge accounting.

a. A derivative judged to be effective used to hedge forecasted sales.

b. Derivatives appearing as liabilities. These derivatives do not hedge assets or liabilities or

forecasted transactions.

c. Debt securities that the firm has purchased with the ability to hold to maturity. After

the current year, the firm’s intent to hold the securities until maturity is uncertain. The

firm frequently buys and sells debt of this sort.

d. Marketable equity securities held for an indefinite period as available-for-sale securities.



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13. Accounting for bonds held to maturity. Murray Company acquired $100,000 face value of

the outstanding bonds of Campbell Company on January 1, 2013. The bonds pay interest

semiannually on June 30 and December 31 at an annual rate of 6% and mature on December 31, 2016. The market priced these bonds on January 1, 2013, to yield 8% compounded

semiannually. Murray Company classifies these bonds as held-to-maturity securities.

a. Compute the amount that Murray Company paid for these bonds, excluding commissions and taxes.

b. Prepare an amortization table for these bonds similar to that in Exhibit 13.2.

c. Give the journal entries that Murray Company would make to account for these bonds

during 2013.

d. Give the journal entries that Murray Company would make to account for these bonds

on December 31, 2016.

14. Accounting for bonds held to maturity. Kelly Company acquired $500,000 face value of the

outstanding bonds of Steedly Company on January 1, 2013. The bonds pay interest semiannually on June 30 and December 31 at an annual rate of 7% and mature on December

31, 2015. The bonds were priced on the market on January 1, 2013, to yield 6% compounded semiannually. Kelly Company classifies these bonds as held-to-maturity securities.

a. Compute the amount that Kelly Company paid for these bonds, excluding commissions

and taxes.

b. Prepare an amortization table for these bonds similar to that in Exhibit 13.2.

c. Give the journal entries that Kelly Company would make to account for these bonds

during 2013.

d. Give the journal entries that Kelly Company would make to account for these bonds on

December 31, 2015.

15. Accounting for available-for-sale securities. Events related to Elston Corporation’s investments of temporarily excess cash appear below. The firm classifies these investments as

available-for-sale securities and does not adopt the fair value option.



Security

A...........

B...........



Fair Value on

December 31



Date

Acquired



Acquisition

Cost



2013



2014



Date Sold



Selling

Price



10/15/2013

11/2/2013



$28,000

$49,000



$25,000

$55,000





$53,000



2/10/2014

7/15/2015



$24,000

$57,000



Elston received no dividends on Security A. It received dividends on Security B of $1,000

on December 31, 2013, and $1,200 on December 31, 2014. Give all journal entries related

to these securities during 2013, 2014, and 2015, including journal entries related to the

following:

a. Acquisition of securities.

b. Receipt of dividends.

c. Remeasurement on December 31.

d. Sale of securities.

16. Accounting for available-for-sale securities. Events related to Simmons Corporation’s investments of temporarily excess cash appear below. The firm classifies these investments as

available-for-sale securities and does not elect the fair value option.



Security

S ..........

T ..........

U..........



Fair Value on

December 31



Date

Acquired



Acquisition

Cost



2013



2014



Date Sold



Selling

Price



6/13/2013

6/13/2013

6/13/2013



$12,000

$29,000

$43,000



$13,500

$26,200





$15,200

$31,700





2/15/2015

8/22/2015

10/11/2013



$14,900

$28,500

$39,000



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Questions, Exercises, and Problems



None of these three securities paid dividends. Give all journal entries related to these securities during 2013, 2014, and 2015, including journal entries related to the following:

a. Acquisition of securities.

b. Remeasurement on December 31.

c. Sale of securities.

17. Working backward from data on marketable securities transaction. (Adapted from a problem by S. A. Zeff.) During 2013, Fischer/Black Company purchased equity securities classified as available-for-sale securities. On May 22, 2014, the company recorded the following

correct journal entry to record the sale of the equity securities:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Realized Loss (included in net income) . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized Holding Loss (Other Comprehensive Income) . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



16,000

5,000

3,000

18,000



a. What was the acquisition cost of these securities in 2013?

b. What was the market price of these securities at the end of 2013?

c. What is the total amount of securities gain or loss that Fischer/Black reports on the

income statement for 2014?

18. Working backward from data on marketable securities transaction. (Adapted from a problem by S. A. Zeff.) On December 12, 2013, Canning purchased 2,000 shares of Werther. By

December 31, the market price of these shares had dropped by $1,000. On March 2, 2014,

Canning sold the 2,000 shares for $18,000 and reported a realized gain on the transaction

of $4,000.

a. What was the acquisition cost of these securities if Canning had accounted for them as

trading securities?

b. What was the acquisition cost of these securities if Canning had accounted for them as

available-for-sale securities?

19. Reconstructing events from journal entries. Give the likely transaction or event that would

result in making each of the independent journal entries that follow:

a.

Unrealized Loss on Available-for-Sale Securities . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



4,000

4,000



b.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Realized Loss on Sale of Available-for-Sale Securities. . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .



1,100

200

1,300



c.

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unrealized Gain on Available-for-Sale Securities . . . . . . . . . . . . . . .



750

750



d.

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Realized Gain on Sale of Available-for-Sale Securities . . . . . . . . . . .



1,800

1,700

100



20. Reconstructing transactions involving short-term available-for-sale securities. During 2013,

Zeff Corporation sold marketable securities for $14,000 that had a carrying value of



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Chapter 13



Marketable Securities and Derivatives



$13,000 at the time of sale. The financial statements of Zeff Corporation reveal the following information with respect to available-for-sale securities:

December 31



Balance Sheet

Marketable Securities at Fair Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net Unrealized Gain on Available-for-Sale Securities. . . . . . . . . . . . . . . . . . . . .



2013



2012



$195,000

$ 10,000



$187,000

$ 12,000

2013



Income Statement

Realized Gain on Sale of Available-for-Sale Securities . . . . . . . . . . . . . . . . . . . .



$4,000



a. What was the acquisition cost of the marketable securities sold?

b. What was the unrealized gain on the securities sold at the time of sale?

c. What was the unrealized gain during 2013 on securities still held by the end of 2013?

d. What was the cost of marketable securities purchased during 2013?

21. Accounting for forward currency contract as a fair value hedge. On September 1, 2013,

Turner Corporation places an order with a Japanese supplier for manufacturing equipment

for delivery on June 30, 2014. The purchase is denominated in Japanese yen in the amount

of ¥5,200,000. Turner Corporation purchases a forward currency contract on September

1, 2013, for the purchase of ¥5,200,000 at a forward exchange rate for settlement on June

30, 2014, of $1 = ¥102. Turner Corporation designates the forward contract as a fair value

hedge. The forward exchange rate on December 31, 2013, for settlement on June 30, 2014,

is $1 = ¥100, and the actual exchange rate on June 30, 2014, is $1 = ¥95. The following

summarizes this information:



Date

September 1, 2013 . . .

December 31, 2013 . . .

June 30, 2014 . . . . . .



Type of Exchange Rate

Forward Rate for June 30, 2014,

Settlement

Forward Rate for June 30, 2014,

Settlement

Actual



Exchange

Rate



Amount in

Japanese

Yen



Equivalent

U.S. Dollar

Amount



$1 = ¥102



¥5,200,000



$50,980



$1 = ¥100



¥5,200,000



$52,000



$1 = ¥95



¥5,200,000



$54,737



a. Using a discount rate of 8% per year, what is the fair value of the forward contract on

December 31, 2013? Is the amount an asset or a liability?

b. What amount would Turner Corporation report on its December 31, 2013, balance

sheet related to its commitment to purchase the equipment?

c. What is the fair value of the forward contract on June 30, 2014, just before settling the

transaction?

d. Give the journal entry on June 30, 2014, to purchase the equipment.

e. Give the journal entry on June 30, 2014, to settle the forward contract.

22. Accounting for forward currency contract as a cash flow hedge. On October 1, 2013, Biddle

Corporation purchases equipment from a supplier in France on account at a purchase

price of €40,000 and denominates the transaction in euros. Biddle Corporation must pay

the €40,000 on March 31, 2014. To protect its cash flows, Biddle Corporation purchases a

forward currency contract on October 1, 2013, for €40,000 at a forward exchange rate for

settlement on March 31, 2014, of €1 = $1.32. Biddle Corporation designates the forward

contract as a cash flow hedge. The forward exchange rate on December 31, 2013, for settlement on March 31, 2014, is €1 = $1.35, and the actual exchange rate on March 31, 2014,

is €1 = $1.40. Ignore discounting of cash flows in this exercise. The following summarizes

this information:



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Questions, Exercises, and Problems



Date

October 1, 2013 . . . . .

December 31, 2013 . . .

June 30, 2014 . . . . . .



Exchange

Rate



Amount in

Euros



Equivalent

U.S. Dollar

Amount



€1 = $1.32



€40,000



$52,800



€1 = $1.35



€40,000



$54,000



€1 = $1.40



€40,000



$56,000



Type of Exchange Rate

Forward Rate for March 31, 2014,

Settlement

Forward Rate for March 31, 2014,

Settlement

Actual



a. What is the fair value of the forward contract on December 31, 2013? Is the amount an

asset or a liability?

b. What amount would Biddle Corporation report on its December 31, 2013, balance sheet

for its Note Payable to the supplier?

c. What is the fair value of the forward contract on March 31, 2014, just before settling

the transaction?

d. Give the journal entry on March 31, 2014, to pay cash to the supplier.

e. Give the journal entry on March 31, 2014, to settle the forward contract.



PROBLEMS

23. Journal entries and financial statement presentation of short-term available-for-sale securities. The following information summarizes data about Dostal Corporation’s marketable

securities held as current assets and classified as available-for-sale securities:

Fair Value

Security

A

B

C

D

E



............

............

............

............

............



Date

Acquired



Acquisition

Cost



Date

Sold



Selling

Price



Dec. 31,

2013



Dec. 31,

2014



2/5/2013

8/12/2013

1/22/2014

2/25/2014

3/25/2014



$60,000

$25,000

$82,000

$42,000

$75,000



6/5/2014





6/5/2014





$72,000





$39,000





$66,000

$20,000











$20,000

$79,000



$80,000



a. Give all journal entries relating to these marketable equity securities during 2013 and

2014, assuming the accounting period is the calendar year.

b. Provide a suitable presentation of marketable securities in the balance sheet and related

notes on December 31, 2013.

c. Provide a suitable presentation of marketable securities in the balance sheet and related

notes on December 31, 2014.

24. Journal entries and financial statement presentation of long-term available-for-sale securities. The following information summarizes data about Rice Corporation’s investments in

equity securities held as noncurrent assets and classified as available-for-sale securities:

Fair Value

Security

A

B

C

D

E



............

............

............

............

............



Date

Acquired



Acquisition

Cost



Date

Sold



Selling

Price



Dec. 31,

2013



Dec. 31,

2014



3/5/2013

5/12/2013

3/22/2014

5/25/2014

5/25/2014



$40,000

$80,000

$32,000

$17,000

$63,000



10/5/2014





10/5/2014





$52,000





$16,000





$45,000

$70,000











$83,000

$27,000



$67,000



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Chapter 13



Marketable Securities and Derivatives



a. Give all journal entries relating to these equity securities during 2013 and 2014, assuming the accounting period is the calendar year.

b. Provide a suitable presentation of investments in securities in the balance sheet and

related notes on December 31, 2013.

c. Provide a suitable presentation of investments in securities in the balance sheet and

related notes on December 31, 2014.

25. Analysis of financial statement disclosures for available-for-sale securities. Exhibit 13.8

reproduces data about marketable equity securities classified as available-for-sale securities by Moonlight Mining Company. Assume that Moonlight held no current marketable

securities at the end of 2013, sold no current marketable securities during 2014, purchased

no noncurrent marketable securities during 2014, and transferred no noncurrent marketable securities to the current portfolio during 2014. The income statement for 2014 shows

a realized loss on sale of noncurrent marketable securities of $3,068,000.

a. What amount of net unrealized gain or loss on noncurrent marketable securities appears

on the balance sheet for the end of 2013?

b. What amount of net unrealized gain or loss on noncurrent securities appears on the

balance sheet for the end of 2014?

c. What were the proceeds from the sale of noncurrent marketable securities during 2014?

d. What amount of unrealized gain or loss on marketable securities appears on the income

statement for 2014?



EXHIBIT 13.8



Moonlight Mining Company

Data on Marketable Equity Securities

(amounts in thousands of US$)

(Problem 25)



© Cengage Learning 2014



Marketable Equity Securities

At December 31, 2014:

Current Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Noncurrent Marketable Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

At December 31, 2013:

Noncurrent Marketable Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . .



Acquisition

Cost



Fair

Value



$ 7,067

$ 6,158



$ 4,601

$ 8,807



$21,685



$11,418



26. Effect of various methods of accounting for marketable equity securities. Information related

to marketable equity securities of Callahan Corporation appears on the next page.



Security

G.......

H.......

I .......



Acquisition

Cost in

2013



Dividends

Received

During

2013



Fair Value

on Dec. 31,

2013



Selling

Price in

2014



Dividends

Received

During 2014



Fair Value

on Dec. 31,

2014



$18,000

25,000

12,000

$55,000



$ 800

1,500

1,000

$3,300



$16,000

24,000

14,000

$54,000



$14,500

26,000



$40,500



$ 200

500

1,500

$2,200







$17,000

$17,000



a. Assume these securities are trading securities. Indicate the nature and amount of income

recognized during 2013 and 2014 and the presentation of information about these securities on the balance sheet on December 31, 2013 and 2014.

b. Repeat part a assuming these securities are available-for-sale securities held as temporary investments of excess cash by Callahan Corporation.

c. Repeat part a assuming these securities represent long-term investments by Callahan

Corporation held as available-for-sale securities.



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Appendix 13.1: Summary of IFRS 9, Financial Instruments

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