Chap 12 Intermediate II
How are equity investments that lack significant influence adjusted?
- Unrealized holding gain or loss is included in net income. - A fair value adjustment is recorded at the end of every reporting period.
Ziegler Company owns 40% of Norm Company's outstanding voting stock. During the current year, Norm reported income of $2 million and declared dividends of $1 million. Ziegler should report income from its investment of
2million x 40%
Identify the statement that is correct regarding the purpose of additional adjustments under the equity method.
Adjustments help to approximate the effects of consolidation.
Which of the following are correct regarding the financial statement presentation of HTM securities?
Gains and losses are shown in net income in the period in which the securities are sold. Unrealized holding gains and losses are disclosed in the notes to the financial statements.
Under U.S. GAAP, which of the following statements regarding the classification of debt investments is correct?
The classification of investments must be reassessed each reporting period.
Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?
The investor intends to hold the security until maturity. The investor has the ability to hold the security until maturity.
Marlon Company recognizes interest revenue of $5,400 related to its bonds; its periodic bond interest payment receipts are $5,200. The bonds must have issued at:
a discount
How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?
a valuation allowance account is increased or decreased.
Greene Company purchases an investment in bonds issued by Blue Company. Greene intends to hold the bonds until they mature and did not elect the fair value option. Greene should report the investment at
amortized cost
Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be
an increase in other comprehensive income.
The premium payments of life insurance policies with cash surrender value include
an investment portion an insurance expense portion
Merkel Company invested in Sub Company and is able to exert significant influence over the operating and financial policies of Sub Company. Merkel should
apply the equity method
Consistent with the equity method, investment income is
based on investee's income times ownership percentage.
Porter Company classified its investment in the bonds of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5,000. The result of this increase in value will
be an increase in net income.
Unless information to the contrary exists, an investor is assumed to have significant influence over the investee company if the investor holds an ownership interest
between 20% and 50%
An investment in trading debt securities is initially recorded at
cost
Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at
cost
Trading securities typically are classified in the balance sheet as
current assets
Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. The journal entry to record the interest for the first 6-month period includes
debit cash $3,000 Reason: $100,000 x 3% credit premium on bond investment $250 Reason: $3,000 - $2,750 credit interest revenue $2,750 Reason: $110,000 x 2.5%
Dividends cause the investor's investment in the investee's net assets to
decrease
Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:
decrease by $10,000 ($40,000 X 25%)
Under the equity method, dividends received from the investment
decrease the investment account balance
The fair value option can be applied to:
financial assets financial liabilities
For discounted bonds, interest revenue is ____ cash interest each interest period
greater than
If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)
held-to-maturity security.
During the current period, Muenster Company amortized $5,000 of discount relating to its investment in debt securities. The company's amortization next period should be ______ the current period.
higher than
Gains and losses relating to debt securities classified as trading are presented in the _____ _______ in the periods in which fair value changes, regardless of whether they are realized or unrealized
income statement
Over the life of the investment, amortization of a discount
increases each period.
The premium on bond investment
increases the carrying value of the bond to its cost at date of purchase
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.
investing
Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.
investing
Additional adjustments under the equity method directly affect which of the following accounts?
investment investment revenue
The premium payments of life insurance policies with cash surrender value include an insurance expense portion and a(n)
investment portion.
Investors utilize the _______ interest rate to value the stream of cash flows associated with bond investments. (Enter only one word.)
market OR effective
Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in ___ ____ in the period they occur. (Enter one word per blank.)
net income
Goodwill arising from an investment in associate is
not amortized
Blum Company invested in debt securities and classified them as "held-to-maturity." At the accounting period, the value of the investment appreciated by $10,500. The company should
not recognize the unrealized gain.
If a bond sells for more than its maturity value, the bond sells at a
premium
The price of a bond is equal to
present value of future interest payments plus present value of principal
Interest received is calculated based on the _____ interest rate.
stated
A key factor determining the accounting for equity investments is
the extent to which the investor can influence the investees activities.
When fair value of equity investments is not readily determinable
the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments. the investor needs to continually evaluate whether fair value is readily determinable. the investor needs to assess annually whether the investment is impaired.
When fair value of equity investments is not readily determinable,
the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.
Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as ________ securities.
trading
Beginning in 2018, equity adjustments that lack significant influence are accounted for the same way as debt investments classified as
trading securities
The choice to classify debt securities as current or noncurrent depends on
when they are expected to mature or be sold.
Gruen Corporation aquires a 25% interest in Blau Company for $1 million. The excess of investment cost over Gruen's share of the book value of Blau's net assets is solely attributable to goodwill. During the year, Blau reports income of $500,000 and declares dividends of $100,000. The carrying value of Gruen's investment at the end of the accounting period will be:
$1.1 million Reason: 1 mill + ((500,000 - 100,000)*.25))
Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of
$20,000 Discount $520,000 Cash
Bella Company purchased debt securities with a face amount of $500,000 for $480,000 and classifies them as trading securities. During the first year, the company amortized $2,000 of the associated discount. At the end of the period, the fair value is $504,000. Bella should recognize a fair value adjustment of
$22,000
January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale?
- credit fair value adjustment $5,000 - credit investment in North stock $500,000 - debit cash $505,000
Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is
3%. Reason: Interest received uses the stated rate and the bonds are semi-annual so 6%/2
On December 31, 2021, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and a carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and December 31. The journal entry to record the interest payment on December 31, 2021 includes
Debit cash $2500 debit discount on bond investment $350 Reason:$2850 - $2500 credit interest revenue $2,850 Reason: $95,000 x 0.03 = $2,850
Von Company properly applies the equity method in accounting for its investment in Neumann Inc., (investing 20% of common stock.) Which of the following statements are correct?
Von has significant control over Neumann Inc Von owns 20% of the voting rights in Neumann Inc
If the market rate of interest decreases after a bond is purchased, the bond incurs
an unrealized holding gain
If the market rate of interest rises after a bond is purchased, the bond incurs
an unrealized holding loss
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with (Select all that apply.)
credit cash $450,000 debit investment in Saddle $450,000
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should
credit dividend revenue
January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018?
credit dividend revenue $5,000 debit cash $5,000
The appropriateness of the classification of debt investments must be reassessed
each reporting date
An important factor that determines accounting for equity investments is
influence or control over the investee entity.
Global Company holds a portfolio of equity securities. The company intends to sell the securities during the next accounting period. The company should classify the investment as
noncurrent
Equity investments for which the investor does not have significant influence are classified as _____ in the balance sheet. (Select all that apply).
noncurrent current
When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the
original cost of the investment.
Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to
the initial investment interest revenue earned on investment.
The carrying value of an equity method investment consists of its initial cost plus
the investor's equity in the investee's undistributed income
Regarding the valuation of equity investments that lack significant influence beginning in 2018, which of the following statements is correct?
Companies are required to use the fair value through net income method.
If the investee reports a net loss, the equity investment account is not adjusted for additional expenses.
False Reason: If the investee reports a net loss, the investment account is decreased by the investor's share of the invetee's net loss, adjusted for additional expenses.
Holding gains and losses associated with investments properly classified as held-to-maturity are
NOT recognized
Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?
Net income may otherwise appear more volatile than it actually is.
Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The rate used to determine interest revenue for the first 6 months on the investment is
3.5% Reason: (7%/2 =3.5%)
Rosa Company purchases debt securities and classifies them as "available-for-sale" securities. How should Rosa recognize changes in the value of the investment?
As unrealized holding gain or loss in other comprehensive income.
Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system. (Select all that apply.)
sale of investment receiving dividends changes in fair value purchase of investment
Investments that are properly classified as held-to-maturity should be carried at
Amortized cost
Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of
$500,000 to investments in HTM securities. $40,000 to gain from sale of investment.
Abbott Inc. owns 30% of the outstanding voting shares of Berta Inc. On the date of acquisition, the fair value of Berta's equipment with a remaining useful life of five years and no residual value exceeded its carrying value by $20,000. During the year after the acquisition, the undervalued equipment will _____ Abbott's investment revenue by _____.
decrease; $1,200 (($20,000 X 30%)/5 years)
Lerner inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. During the year after the acquisition, the undervalued equipment will ______ Lerner's investment revenue by ________.
decrease; $1500
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 million and the fair value of the company's net assets is $1.2 million. The difference between the book value and fair value of the net assets is attributed to undervalued land. Adrianna should
not amortize the difference between fair value and book value attributable to land.
Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the _____ method.
equity
At the end of the accounting period, trading debt securities must be adjusted to _____ value
fair
