Investments – Practice Problems

Problem #1

Baldy Company paid $500 to purchase a portfolio of debt and equity securities. Baldy Company
intends to actively manage this portfolio in order to make money on day-to-day price fluctuations.
 Dividends and interest received on the securities in the portfolio totaled $50 during the year.
 Securities in the portfolio that were purchased for $200 were sold for $250.
 As of the end of the year, the portfolio is valued at $525.
At what amount will these securities be reported in the balance sheet at the end of the year?

How much investment-related income will be reported in the income statement for the year?

Problem #2

Baddy Company had the following portfolio of available for sale debt securities:
December 31, 2020 December 31, 2021
Securities Cost Fair Value Cost Fair Value
A $200 $300 $200 $350
B 500 950 500 725
C 350 300 250 600
D 400 300 0 0
Total $1,450 $1,850 $950 $1,675

Total cash received from the sale of available-for-sale debt securities was $1,000. What was the
total amount of realized gains during 2021?

Baddy Company’s net income for 2021 was $5,000. What was Baddy’s comprehensive income for
2021?
Problem #3

On January 1, 20X8, Pill Co. acquired 40% of the equity securities of Alarm Co. for $2,600,000.
During 20X8, Alarm paid cash dividends of $300,000 and reported net income of $2,300,000.

What amount will appear in Pill’s December 31, 20X8 balance sheet related to their investment in
Alarm Co?

What amount would appear on Pill’s Income Statement for 20X8 from its investment in Alarm?

Problem #4

On January 1, 20X8, Pill Co. acquired 15% of the equity securities of Alarm Co. for $2,600,000.
During 20X8, Alarm paid cash dividends of $300,000 and reported net income of $2,300,000. The
fair value of Alarm’s securities totaled $2,400,000 on December 31, 20X8.

What amount will appear in Pill’s December 31, 20X8 balance sheet related to their investment in
Alarm Co.?

What amount would appear on Pill’s Income Statement for 20X8 from its investment in Alarm Co.?
Problem #5

At December 31, Year 7, the equity portfolio for Zorro Foods Corp. is as follows.

Security Cost Fair Value

Apple $33,600 $31,000
Banana 175,000 174,000
Crisp 59,400 68,500
Total $268,000 $273,500

On January 20, Year 8, Zorro sold Apple for $31,100.

What is the balance sheet value of the securities on December 31, Year 7?

What number is reported in OCI on December 31, Year 7?

Problem #6
The Brooks Company has the following securities in its portfolio of trading equity securities:

December 31, 20X7 December 31, 20X8

Securities Cost Fair Value Securities Cost Fair Value
Norton 155,000 139,000 Norton - -
Hadley 182,000 190,000 Hadley 182,000 195,500
Bogs - - Bogs 27,000 25,500

Brooks Company’s equity investments represent 5% of the outstanding common stock in each of
these firms.

(a) Total cash received from sale of securities in 20X8 was $165,000. What was the total
amount of realized gains during 20X8?

(b) What is the total amount of unrealized gain/loss Brooks Company will report in the income
statement for 20X8? Assume both Norton and Hadley securities were purchased in 20X7.

(c) What is the total amount of unrealized gain/loss Brooks Company will report as other
comprehensive income in 20X8?

(d) Calculate the value of securities reported on the balance sheet at the end of 20X8.

Conceptual Problems
1.The investment category for which the investor's "positive intent and ability to hold to the end
date" is important is:
a. Securities reported under the equity method.
b. Trading securities.
c. Securities classified as held to maturity.
d. Available for sale debt securities.

2.Which of the following investment securities held by Zoogle Inc. are not reported at fair value in
its balance sheet?
a. Common stock held by a company that management intends to hold for several years.
b. Debt securities held to maturity.
c. Preferred stock held as trading securities.
d. All of these answer choices are reported at fair value.

3.The income statement reports changes in fair value for which type of securities?
a. Securities reported under the equity method
b. Equity securities that represent less than 20% ownership
c. Held to maturity securities
d. Available for sale debt securities

4.Holding gains and losses on trading securities are included in earnings because:
a. They measure the success or failure of taking advantage of short-term price changes.
b. The IRS mandates the inclusion.
c. The SEC mandates the inclusion.
d. They measure the book value of the securities in the balance sheet date.

5.Accumulated Other Comprehensive Income in the shareholders' equity section of the balance
sheet reflects changes in the fair value of securities for which type of securities?
a. Available for sale debt securities
b. Trading securities
c. Consolidated securities
d. Held to maturity securities

6.Which ONE of the following statements BEST describes a CONSOLIDATED balance sheet?
a. A balance sheet that includes the assets and liabilities of both the parent company and all of
the subsidiaries controlled by the parent company
 b. A balance sheet that includes the goodwill of both the parent company and all of the smaller
companies purchased by the parent company
c. A balance sheet that includes not only the assets and liabilities of the parent company but
also the retained earnings of the parent company
d. A balance sheet that reports both the replacement cost and the fair value of all property,
plant, and equipment of the parent company
e. A balance sheet that reports both the interest-bearing and the non-interest-bearing liabilities
of the parent company.

7.For the following investments identify whether they are valued at:
1. Fair value- Net income
2. Fair value- Other comprehensive income
3. Amortized cost

Each case is independent of the other.

(a) Purchase bonds maturing in 20 years. The company intends to use the cash flow generated by
the interest payments on the bond to provide employee bonuses and may sell the bonds prior to
maturity.
(b) An investment grade bond that matures in 8 years was purchased. The company will hold the
bonds until they mature at which time the proceeds will be used to retire maturing debt.
(c) Excess cash was used to purchase preferred stock. The preferred stock may need to be sold
within the next year if a planned expansion is completed.
(d) 15% of the outstanding stock of another company was purchased last year.

8.Which of the following statements accurately fills in the blanks with the most appropriate terms?
(Multiple could be correct).
The ________ investments are carried at ___________ on the balance sheet; with unrealized
holding gains and losses reported in ___________.
 a) Equity; fair value; net income
b) Equity; cost; net income
c) Equity; fair value; OCI
d) Equity; cost; OCI
e) Trading-Debt; fair value, OCI
f) Trading-Debt; fair value; net income
g) Trading-Debt; cost, OCI
h) Trading-Debt; cost; net income
i) Available for sale-Debt; cost, OCI
j) Available for sale -Debt; fair value; net income
k) Available for sale -Debt; fair value, OCI
l) Available for sale -Debt; cost; net income

ANSWERS

Problem #1
Baldy Company paid $500 to purchase a portfolio of debt and equity securities. Baldy Company
intends to actively manage this portfolio in order to make money on day-to-day price fluctuations.
 Dividends and interest received on the securities in the portfolio totaled $50 during the year.
 Securities in the portfolio that were purchased for $200 were sold for $250.
 As of the end of the year, the portfolio is valued at $525.
At what amount will these securities be reported in the balance sheet at the end of the year?
The securities will be recorded at their actual value of $525
How much investment-related income will be reported in the income statement for the year?
Dividend & Interest Revenue: $50
Realized Gain: 250 – 200 = $50
Unrealized Gain: 525 – (500 – 200) = $225
Total Investment-related Income: 50 + 50 + 225 = $325

Problem #2

Baddy Company had the following portfolio of available for sale debt securities:
December 31, 2020 December 31, 2021
Securities Cost Fair Value Cost Fair Value
A $200 $300 $200 $350
B 500 950 500 725
C 350 300 250 600
D 400 300 0 0
Total $1,450 $,1850 $950 $1,675

Total cash received from the sale of available-for-sale debt securities was $1,000. What was the
total amount of realized gains during 2021?
Cost of securities sold: C $100 + D $400 = $500
Proceeds of $1,000 – Cost $500 = $500 Realized Gain

Baddy Company’s net income for 2021 was $5,000. What was Baddy’s comprehensive income for
2021?
2020 Market over cost = 1,850 – 1,450 = $400
2021 Market over cost = 1,675 – 950 = $725
 Change in market spread = $725 – $400 = $325 Unrealized Gain
Comprehensive income = $5,000 + $325 = $5,325

Problem #3

On January 1, 20X8, Pill Co. acquired 40% of the equity securities of Alarm Co. for $2,600,000.
During 20X8, Alarm paid cash dividends of $300,000 and reported net income of $2,300,000.

What amount will appear in Pill’s December 31, 20X8 balance sheet related to their investment in
Alarm Co?

2,600,000 + (2,300,000 x 40%) – (300,000 x 40%) = 3,400,000

Equity Method Investment

2,600,000
Proportionate 920,000 120,000 proportionate
share of net income share of dividends
3,400,000

What amount would appear on Pill’s Income Statement for 20X8 from its investment in Alarm?

2,300,000 x 40% = 920,000

Problem #4
On January 1, 20X8, Pill Co. acquired 15% of the equity securities of Alarm Co. for $2,600,000.
During 20X8, Alarm paid cash dividends of $300,000 and reported net income of $2,300,000. The
fair value of Alarm’s securities totaled $2,400,000 on December 31, 20X8.

What amount will appear in Pill’s December 31, 20X8 balance sheet related to their investment in
Alarm Co?

$2,400,000 (adjusted to fair value)

What amount would appear on Pill’s Income Statement for 20X8 from its investment in Alarm?

(300,000 x 15%) = 45,000 Dividend revenue

(2,400,000 - 2,600,000) = (200,000) Unrealized Loss

Total investment related income (loss): (155,000)

Problem #5

At December 31, Year 7, the equity portfolio for Zorro Foods Corp. is as follows.

Security Cost Fair Value

Apple $33,600 $31,000
Banana 175,000 174,000
Crisp 59,400 68,500
Total $268,000 $273,500

On January 20, Year 8, Zorro sold Apple for $31,100.

What is the balance sheet value of the securities on December 31, Year 7?

Reported at fair value: $273,500 on 12/31 Year 7

What number is reported in OCI on December 31, Year 7?

OCI = 0; 5,500 (273,500-268,000) would be recognized in net income since it’s an equity security

Problem #6
The Brooks Company has the following securities in its portfolio of trading equity securities:

December 31, 20X7 December 31, 20X8

Securities Cost Fair Value Securities Cost Fair Value
Norton 155,000 139,000 Norton - -
Hadley 182,000 190,000 Hadley 182,000 195,500
Bogs - - Bogs 27,000 25,500

Brooks Company’s equity investments represent 5% of the outstanding common stock in each of
these firms.

(e) Total cash received from sale of securities in 20X8 was $165,000. What was the total
amount of realized gains during 20X8?

Proceeds – cost, 165,000 – 155,000 = 10,000 realized gain

(f) What is the total amount of unrealized gain/loss Brooks Company will report in the
income statement for 2018? Assume both Norton and Hadley securities were
purchased in 2017.

FV Adjustment

2017:
8,000 Difference between $337k cost and $329k FV
(FV is lower)

FV Adjustment
8,000 Balance carried over from PY

plug 2018:
12,000 Difference between $209k cost and $221k FV
(FV is higher)

Plug: 20,000 which represents an increase in FV of investment and

unrealized gain.

Alternately:

(25,500 – 27,000) + (195,500 – 190,000) + ((165,000 – 139,000) – 10,000) = 20,000

Brooks already recognized $8,000 gain (190,000 – 182,000) in 2017 related to Hadley.
 (g) What is the total amount of unrealized gain/loss Brooks Company will report as other
comprehensive income in 20X8?

0. Unrealized gain/loss is recognized in NI since this is an equity security

(h) Calculate the value of securities reported on the balance sheet at the end of 20X8.

221,000 (195,500 + 25,500)

Conceptual Problems

The investment category for which the investor's "positive intent and ability to hold to the end date"
is important is:
a. Securities reported under the equity method.
b. Trading securities.
c. Securities classified as held to maturity.
d. Available for sale debt securities.

Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its
balance sheet?
a. Common stock held by a company that management intends to hold for several years.
b. Debt securities held to maturity.
c. Preferred stock held as trading securities.
d. All of these answer choices are reported at fair value.

The income statement reports changes in fair value for which type of securities?
a. Securities reported under the equity method
b. Equity securities that represent less than 20% ownership
c. Held to maturity securities
d. Available for sale debt securities

Holding gains and losses on trading securities are included in earnings because:
a. They measure the success or failure of taking advantage of short-term price changes.
b. The IRS mandates the inclusion.
c. The SEC mandates the inclusion.
d. They measure the book value of the securities in the balance sheet date.
Accumulated Other Comprehensive Income in the shareholders' equity section of the balance sheet
reflects changes in the fair value of securities for which type of securities?
a. Available for sale debt securities
 b. Trading securities
c. Consolidated securities
d. Held to maturity securities
Which ONE of the following statements BEST describes a CONSOLIDATED balance sheet?
a. A balance sheet that includes the assets and liabilities of both the parent company and
all of the subsidiaries controlled by the parent company
b. A balance sheet that includes the goodwill of both the parent company and all of the smaller
companies purchased by the parent company
c. A balance sheet that includes not only the assets and liabilities of the parent company but
also the retained earnings of the parent company
d. A balance sheet that reports both the replacement cost and the fair value of all property,
plant, and equipment of the parent company
e. A balance sheet that reports both the interest-bearing and the non-interest-bearing liabilities
of the parent company

For the following investments identify whether they are valued at:
1. Fair value- Net income
2. Fair value- Other comprehensive income
3. Amortized cost

Each case is independent of the other.

(a) Purchase bonds maturing in 20 years. The company intends to use the cash flow generated by
the interest payments on the bond to provide employee bonuses and may sell the bonds prior to
maturity.
(b) An investment grade bond that matures in 8 years was purchased. The company will hold the
bonds until they mature at which time the proceeds will be used to retire maturing debt.
(c) Excess cash was used to purchase preferred stock. The preferred stock may need to be sold
within the next year if a planned expansion is completed.
(d) 15% of the outstanding stock of another company was purchased last year.

(a) 2
(b) 3
(c) 1
(d) 1

Which of the following statements accurately fills in the blanks with the most appropriate terms?
(Multiple could be correct).
The ________ investments are carried at ___________ on the balance sheet; with unrealized
holding gains and losses reported in ___________.
a) Equity; fair value; net income
b) Equity; cost; net income
c) Equity; fair value; OCI
d) Equity; cost; OCI
e) Trading-Debt; fair value, OCI
f) Trading-Debt; fair value; net income
g) Trading-Debt; cost, OCI
h) Trading-Debt; cost; net income
i) Available for sale-Debt; cost, OCI
j) Available for sale -Debt; fair value; net income
k) Available for sale -Debt; fair value, OCI
l) Available for sale -Debt; cost; net income