F4
On Jan 1 of the current year, Barton paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly traded corp. Barton plans to sell the bonds in the first quarter of the following year. The FV of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the
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In Year 1, Neil Co. held the following investments in common stock: - 25,000 shares of BK's 100,000 outstanding shares. Neil's level of ownership gives it the ability to exercise significant influence over the financial and operating policies of BK. - 6,000 shares of Amal's 309,000 outstanding shares. During Year 1, Neil received the following distributions from its common stock investments: 11/6 - $30,000 cash div from BK 11/11 - $1,500 cash div from Amal 12/26 - 3% common stock div from Amal The closing price of this stock on a national exchange was $15 per share. What amount of div revenue should Neil report for Year 1? A. $1,500 B. $31,500 C. $34,200 D. $4,200
A. $1,500 [The $30,000 cash dividend from BK is a return of capital as is any dividend under the equity method, since the investment account is reduced. The 3% stock dividend from Amal means more shares, representing the same proportional piece of the pie. A stock dividend is not reported as dividend income.]
West Inc. acquired 60% of East Co's outstanding common stock. West paid $800,000 to acquire the stock. West plans to relocate East's company headquarters, which is expected to cost between $100,000 and $300,000. The PV of the probability-adjusted relocation cost is $240,000. What is West's acquisition cost? A. $800,000 B. $1,040,000 C. $1,100,000 D. $900,000
A. $800,000 [Acquisition of stocks does not include any measure of the relocation costs associated with East's company headquarters. (Such costs are accounted for separately from the acquisition.) The investment would be valued at the fair value of the consideration given, which is $800,000.]
Based on an evaluation of current conditions, Beach determined that the decline in the FV of a debt investment was below the amortized cost above the PV of the principal, and interest expected to be collected. The inv was classified as FS on Beach's books. The controller would properly record the credit loss based on the CECL by including it in which? A. Earnings section of the IS and writing down the cost basis to FV B. OCI section of the IS, and writing down the cost basis to FV C. OCI section of the IS only D. Earnings section of the IS, net of tax, and writing down the cost basis to FV
A. Earnings section of the IS and writing down the cost basis to FV [Using the Current Expected Credit Losses model, when an AFS debt security has a FV below amortized cost, the asset is written down to the lower FV by recording a credit loss that is recognized on the I/S. Even though the FV is above the PV of expected cash flows, and AFS security can be sold at any time so the credit loss is limited to the difference between amortized cost and FV.]
During the current year, Cooley Co. had an unrealized gain of $100,000 on a debt investment classified as AFS. Cooley's corporate tax rate is 25%. What amount of the gain should be included in Cooley's net income and OCI at the end of the current year? Net Income OCI A. $0 $75,000 B. $25,000 $75,000 C. $100,000 $0 D. $75,000 $25,000
A. Net Income $0, OCI $75,000 [Unrealized gains/losses (assuming no impairment) on AFS securities are recognized in OCI in the period incurred. The impact of the unrealized G/L will show net of tax, either as an individual line item or in aggregate with other components of OCI. An unrealized gain of $100,000 will appear net of tax in OCI. $100,000*(1 - .25) = $75,000 in OCI. The gain will not appear on the I/S and therefore is not included in net income.]
When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income? A change in market value of investee's common stock Cash dividends from investee A. No No B. Yes No C. Yes Yes D. No Yes
A. No No [Investor records as revenue its "share of the investee's earning" (not dividends received) under the equity method. Dividends from an investee company are recorded by the investor as a reduction in the carrying amount of the investment on the B/S of the investor. Changes in the market value of investee's common stock are not considered income to the parent under the equity method. Under the FV method, receipt of a div is recorded as income and does not affect the inv account.]
Louis, Inc. acquired 40% of the outstanding non-voting preferred stock of Rich Co. What method for recording the investment should Louis use? a. The fair value method. b. The equity method because significant influence must be assumed. c. The equity method if no other investor has more than a 40% interest. d. The equity method if it can acquire an additional 11% by year-end.
A. The fair value method [Significant influence cannot be exercised by holding NON-VOTING stock. The fair value method must be used.]
An investor uses fair value through net income to account for an investment in common stock. Dividends received this year exceeded the investor's share of investee's undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be: A. The portion of the dividends received this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment B. The portion of the dividends received this year that were in excess of the investor's share of investee's undistributed earnings since the date of investment C. Zero D. The total amount of div received this year
A. The portion of the dividends received this year that were not in excess of the investor's share of investee's undistributed earnings since the date of investment [Rule: Dividend revenue, under the fair value method, should be recognized to the extent of cumulative earnings since acquisition and return of capital beyond that point.]
A company incurred the following costs to complete a business combination in the current year: Issuing debt securities $30,000 Registering debt securities 25,000 Legal fees 10,000 Due diligence costs 1,000 What amount should be reported as current-year expenses, not subject to amortization? A. $36,000 B. $11,000 C. $1,000 D. $66,000
B. $11,000 [Legal fees and due diligence costs are expensed in the period incurred. Debt securities create liabilities, and debt security registration costs are capitalized and amortized.]
How should the acquirer recognize a bargain purchase in a business acquisition? A. As a deferred gain that's amortized into earnings over the estimated future periods benefited B. As a gain in earnings at the acquisition date C. As negative goodwill in the statement of financial position D. As goodwill in the statement of financial position
B. As a gain in earnings at the acquisition date [Assets and liabs acquired in a business combination must be valued at their FV. in a bargain purchase where the FV of the net assets acquired is more than the consideration exchanged for the net assets, the difference is recognized as a gain by the acquirer at the time of the acquisition.]
A business combination is accounted for properly as an acquisition. Direct costs of combination, other than registration and issuance costs of equity securities, should be: A. Capitalized as a deferred charge and amortized B. Deducted in determining the net income of the combined corporation for the period in which the costs were incurred C. Deducted directly from the retained earnings of the combined corporation D. Included in the acquisition cost to be allocated to identifiable assets according to their fair values
B. Deducted in determining the net income of the combined corporation for the period in which the costs were incurred [Direct costs are expensed in the period incurred.]
When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income? Undervalued asset amortization related to purchase Cash dividends from investee A. No Yes B. Yes No C. Yes Yes D. No No
B. Yes No [Under the equity method, undervalued asset amortization will decrease the investor's reported investment income, but cash div received will only affect the balance sheet inv account. Rule: Undervalued asset amort. affects both the inv account (an asset) and the inv income account (a rev), while cash divs affect the inv account but not the inv income account.]
Dodd's debt securities at 12/31 included AFS securities with a cost basis of $24,000 and a FV of $30,000. Dodd's income tax rate was 20%. What amount of unrealized G/L should Dodd recognize in its I/S at 12/31? A. $6,000 loss B. $4,800 gain C. $0 D. $6,000 gain
C. $0 [Unrealized gains on AFS securities are recorded in OCI. The entire $6,000 unrealized gain (30,000 FV - 24,000 cost basis) will go in OCI; none of it will be in I/S.]
Sayon issues 200,000 shares of $5 par value common stock to acquire Trask in a combination. The market value of Sayon's CS is $12. Legal fees incurred in the purchase are $110,000. Registration and issuance costs are $35,000. What should be recorded in Sayon's additional paid-in capital account for this business combination? A. $1,545,000 B. $1,400,000 C. $1,365,000 D. $1,255,000
C. $1,365,000 [Registration and issuance costs are recorded as a direct reduction to the stock value in an acquisition method business combination. Direct out-of-pocket costs, such as legal fees, are expensed. Legal & Consulting Expense 110,000 Inv in Trask 2,400,000 Cash 145,000 Common Stock 1,000,000 APIC 1,365,000]
Based on the current expected credit loss model, a company records the following journal entry at year-end related to a five year bond issued by Jenins. Debit Credit Loss 23,000 Debit Unrealized loss - AFS 9,000 Credit Allowance for credit losses 23,000 Credit Valuation allowance 9,000 The security is classified as AFS and has an amortized cost of $250,000 and current FV of $218,000. Based on the journal entry above, the PV of expected FCFs must be closest to: A. $273,000 B. $259,000 C. $227,000 D. $241,000
C. $227,000 [Although the total difference between amortized cost (250,000) and FV (218,000) is 32,000, the credit loss is equal to the difference between amortized cost and the PV of ECF (interest and principal to be received). If the credit loss is recorded at $23,000, the PV must be equal to $250,000 - 23,000, or 227,000. The additional $9,000 difference between the PV and FV is recorded as an unrealized loss in OCI.]
On 11/30, Year 1, Parlor purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw. At 11/31, Year 1, Shaw's BS showed a CV of net assets of $3,000,000. At that date, the FV of Shaw's property, PPE exceeded its CV by $400,000. In its 11/30, Yr 1, consolidated BS, what amount should Parlor report as GW under GAAP? A. $0 B. $400,000 C. $350,000 D. $750,000
C. $350,000 [GW is the difference bt the FV of the subsidiary and the FMV of the net assets acquired. GW = 3,750,000 - 3,400,000 = 350,000]
On January 2, Year 3, Well Co. purchased 10% of Rea's outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. Rea reported net income of $500,000 for Year 3 and paid divds of $150,000. In its 12/31, Year 3 B/S, what amount should Well report as investment in Rea? A. $385,000 B. $400,000 C. $435,000 D. $450,000
C. $435,000 [Even though Well only has 10% ownership, one can presume that Well has significant influence on Rea bc it's the largest single shareholder and has majority on Rea's board of directors. The equity method is the appropriate accounting method. Begin. inv 400,000 + % Rea's income 50,000 (10%*500k) - % Rea's div/withdrawals (15,000) (10%*150,000) = Ending inv 435,000 The inv account bal. of $400k will be increased by the 50k equity in earnings and decreased by the 15k dividends received for a year-end bal. of 435,000.]
An investor in common stock received dividends in excess of the investors share of investees earnings subsequent to the date of the investment. How will the investors investment account be affected by those dividends under each of the following accounting methods? FV method Equity method A. No effect Decrease B. Decrease No effect C. Decrease Decrease D. No effect No effect
C. Decrease Decrease [Under both the FV and equity methods, liquidating dividends reduce the carrying amount of the investment account.]
In Year 1, Lee Co. acquired, at a premium, Enfield, Inc. 10-year bonds classified as a held-to-maturity investment. At Dec 31, Year 2, Enfield's bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds' market value? A. Interest rates have declined since Lee purchased the bonds B. Enfield is expected to call the bonds at a premium, which is less than Lee's carrying amount C. Interest rates have increased since Lee purchased the bonds D. Enfield issued a stock dividend
C. Interest rates have increased since Lee purchased the bonds [If interest rates have increased, then the bonds' interest rate would be less attractive to investors now than when the bonds were originally issued. This would most likely cause a decline in the bonds' market value. Note that because the bond investment is classified as held-to-maturity, the investment will be reported at amortized cost, not fair value.]
A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent company's consolidated balance sheet? A. Decreases in both retained earnings and noncontrolling interest B. A decrease in retained earnings and no effect on noncontrolling interest C. No effect on retained earnings and a decrease in noncontrolling interest D. No effect on either retained earnings or noncontrolling interest
C. No effect on retained earnings and a decrease in noncontrolling interest [The parent's B/S would reflect 70% of the sub's earnings. Receipt of 70% of the div would simply transfer cash from one company to another. The div would be eliminated in consolidation. However, 30% of the div would be paid to the noncontrolling shareholders and would reduce noncontrolling interest on the consolidated BS because under the equity method, the ending noncontrolling interest is calculated as follows: Begin. noncontrolling interest + NCI share of subsidiary net income - NCI share of subsidiary divs = Ending noncontrolling interest]
Information regarding Stone's AFS portfolio of marketable debt securities is as follows: Aggregate cost as of 12/31/Yr 2 $170,000 Market value as of 12/31/Yr 2 148,000 At Dec 31, Yr 1, Stone reported an unrealized loss of $1,500 to reduce inv to market value. This was the first such adjustment made by Stone on these types of securities. There is no expected credit loss on this inv. In its Yr 2 statement of comprehensive income, what amount of unrealized loss should Stone report? A. $22,000 B. $0 C. $30,000 D. $20,500
D. $20,500 [Stone must report a net cumulative loss on its statement of SHE (under "accumulated other comprehensive income") of $22,000 ($148,000 FMV - $170,000 cost). Stone has already reported a $1,500 loss at 12/31/Y1; therefore, an unrealized loss of $20,500 (22,000 - 1,500) should be reported in the statement of comprehensive income (as part of OCI) for year 2.]
Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock. Dubro's stock outstanding at December 31, Year 1, is as follows: 10% cumulative preferred stock $100,000 Common stock 700,000 Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the year ended December 31, Year 1. How much total revenue should Moss record due to its investment in Dubro? A. $50,000 B. $70,000 C. $20,000 D. $22,000
D. $22,000 [Because Moss owns 40% of Dubro's common stock, the equity method is appropriate. Preferred stock: $100,000 * 10% = $10,000 dividends $10,000 dividends * 20% ownership = $2,000 dividends received Common stock: Net Income 60,000 - Preferred div (10,000) NI available to common shareholders 50,000 *40% Moss' percentage owned $20,000 equity in earnings]
Jent purchased bonds at a discount of $10,000. Subsequently, Jent sold these bonds at a premium of $14,000. During the period that Jent held this inv, amort. of the discount amounted to $2,000. What amount should Jent report as gain on the sale of bonds? A. $24,000 B. $26,000 C. $12,000 D. $22,000
D. $22,000 [When a bond is bought at discount, it's purchased for less than the FV of the bond. The discount is reflected in the purchase price and the JE recorded on the date. Assuming the bond had a FV of $100,000, the initial JE would be: Inv in bonds 90,000 Cash 90,000 Over the bond's life, the disct would be amort. and will cause interest rev recorded to be greater than the cash received. This is bc cash received at maturity will be $100,000 even though the inv cost only $90k. The add. 10k represents interest that must be recorded over the life of the bond. During the time it was held, $2k of the disct was amort. The amort. increases the inv in the bonds to $92k. The bonds were then sold for $14k more than FV, which would generate proceeds of $114,000. The difference between the proceeds received the the BV of the bonds would create a gain on sale of $22,000: Cash $114,000 Inv in bonds 92,000 Gain on sale 22,000]
Palmetto Inc. is currently using the equity method to account for its 30% investment in Royal Company. In the acquisition last year of Royal Co. common stock, Palmetto calculated $1,000,000 of goodwill. The correct accounting for this goodwill during the current year is: a. Amortization over the anticipated holding period of the Royal Company stock. b. Amortization over 40 years. c. Test for impairment at year-end. d. No accounting necessary.
D. No accounting necessary [Any goodwill created in an inv accounted for under the equity method is ignored. It's neither amortized nor tested for impairment. The entire inv (using the equity method) is subject to the impairment test.]
Disclosures about the following kinds of risks are required for most financial instruments. Concentration of credit risk Market risk A. No No B. Yes Yes C. No Yes D. Yes No
D. Yes No [Concentration of credit risk: The risk that the other party to the instrument will not perform - must be disclosed. Disclosure of market risk - the risk of loss from changes in market prices - is encouraged, but not required.]