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LESSON 3 Suggested solutions Question 1 (20 marks) Multiple choice (2 marks each) a) 2) The brokerage fees are being expensed; therefore, this is a held-for-trading investment. b) 2) The first is recorded at the stated sale price; the second is recorded at its discounted present value. c) 4) €3,500 + €480 = €3,980 This is a held-to maturity investment so brokerage costs are recorded as part of the cost of the investment; payment is made today, although from borrowed funds, so the purchase price is not discounted; interest costs are expensed. 1) €3,302 [This is the PV of €3,500 in 1 year at 6% interest] 3) €3,710 [This is the FV of €3,500 1 year at 6% interest] d) 4) This is a lump-sum purchase scenario. Held-for-trading investments are carried at fair value. At Ahn’s Awnings’ December 31, 20X5 year-end the investment account would have been revalued to fair value. Thus, the balance in the account would be €247,000 [(3,000 + 2,500 + 4,000) × €26 per share]. Thirty percent of the shares were sold; the investment account would be credited in the amount of €74,100 [€247,000 × 30%] The amounts for distractors 1, 2, and 3 are calculated as follows: 1) €62,700 (€22 × 2,850) 2) €67,450 [((€22 + 23 + 26) ÷ 3) * [(3,000 + 2,500 + 4,000) 30%] = (€23.67 × 2,850) 3) €69,450 [(€66,000 + 57,500 + 108,000) × 30%] e) 1) Investments in associates are strategic investments in equity securities that are to be reported using the equity method of accounting. f) 4) It is not necessary that there be an active market in a security for it to be classified as a held-to-maturity investment. g) 3) Opponents of the fair value method of accounting for investments argue that the fair value method results in recognition of revenues prior to an actual exchange transaction. Opponents also argue that the fair value method violates the cost principle. h) 2) A debit to the account investment in associate records the investor’s share of the investee’s profits. i) 3) Revaluation to fair value is not