FAR SU 5 - Cash & Investments
An available-for-sale debt security was purchased on September 1, Year 4, between interest dates. The next interest payment date was February 1, Year 5. Because of a permanent decline in fair value, the cost of the debt security substantially exceeded its fair value at December 31, Year 4. On the balance sheet at December 31, Year 4, the debt security should be carried at...? A. Cost plus the accrued interest paid. B. Fair value. C. Fair value plus the accrued interest paid. D. Cost.
B. Fair value. As a result of a permanent decline in fair value, the security should be written down to fair value, and the loss should be treated as a realized loss. Accordingly, the loss will flow through the income statement, and the new cost basis will not be adjusted for increases in the fair value of the security. Interest paid is not added to the fair value because it is part of the cost.
An investor uses the fair value method to account for an investment in common stock. A portion of the dividends received this year were in excess of the investor's share of investee's earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year is...? A. The total amount of dividends received this year. B. The portion of the dividends received this year that were not in excess of the investor's share of investee's earnings subsequent to the date of investment. C. The portion of the dividends received this year that were in excess of the investor's share of investee's earnings subsequent to the date of investment. D. Zero.
C. The portion of the dividends received this year that were in excess of the investor's share of investee's earnings subsequent to the date of investment. Unless the investor accounts for the investment using the equity method, dividends from an investee should be accounted for as dividend income unless a liquidating dividend is received. A liquidating dividend occurs when the total accumulated dividends received by the investor since the date of acquisition exceed the investor's proportionate share of the investee's net accumulated earnings during that time. A liquidating dividend is treated as a reduction in the carrying amount of the investment rather than as dividend income. The portion of the dividends received that were not in excess of the investor's share of investee's earnings subsequent to the date of investment are reported as dividend revenue.
A transaction that is unusual in nature or infrequent in occurrence should be reported as a(n)...? A. Item of other comprehensive income. B. Component of income from continuing operations, net of applicable income taxes. C. Discontinued operations, net of applicable income tax. D. Component of income from continuing operations, but not net of applicable income taxes.
D. Component of income from continuing operations, but not net of applicable income taxes. A material event or transaction that is unusual in nature or infrequent in occurrence must be reported as a separate component of income from continuing operations. Such items must NOT be reported on the face of the income statement net of income taxes.
Company A acquired 30% of Company B's voting rights on January 1, Year 1, and accounts for its investment using the equity method. On January 1, Year 2, Company A sold 60% of its investment in Company B for $150,000. The carrying amount of the investment on January 1, Year 2, before the sale was $210,000. The fair value of the retained investment after the sale was $100,000. What gain or loss, if any, on the disposal of the investment was recognized in the Year 2 income statement prepared under IFRS? A. Gain on disposal of $24,000. B. $0 C. Loss on disposal of $60,000. D. Gain on disposal of $40,000.
D. Gain on disposal of $40,000. Under IFRS, when significant influence is lost, any retained investment is measured at fair value. The gain or loss on the disposal of the investment is calculated as follows: Fair value of retained investment 100,000 (+) Proceeds from disposal of the investment: 150,000 (-) Carrying amount of the investment on the date significant influence is lost: (210,000) ------------------------------------------ Gain on disposal of the investment: 40,000
The decision to elect the fair value option (FVO)...? A. May be applied to a portion of a financial instrument. B. Must be applied to all instruments issued in a single transaction. C. Must be applied only to classes of financial instruments. D. Is irrevocable until the next election date, if any.
D. Is irrevocable until the next election date, if any. The decision to elect the FVO is final and cannot be revoked unless a new election date occurs. For example, an election date occurs when an entity recognizes an investment in equity securities with readily determinable fair values issued by another entity. A second election date occurs when the accounting changes because the investment later becomes subject to equity-method accounting. An original decision to classify the equity securities as available-for-sale may then be revoked at the second election date by choosing the FVO instead of the equity method.
At December 31, Year 1, Kale Co. had the following balances in the accounts it maintains at First State Bank: Checking account #101: 175,000 Checking account #201: (10,000) Money market account: 25,000 90-day certificate of deposit due 2/28/Yr 2: 50,000 180-day certificate of deposit due 3/15/Yr 2: 80,000 Kale classifies investments with original maturities of 3 months or less as cash equivalents. In its December 31, Year 1, balance sheet, what amount should Kale report as cash and cash equivalents?
$240,000. Cash is an asset that must be readily available for use by the business. It normally consists of (1) coin and currency on hand, (2) demand deposits (checking accounts), (3) time deposits (savings accounts), and (4) near-cash assets (e.g., money market accounts). In this case, cash equivalents include investments with original maturities of 3 months or less. The original maturity is the date on which the obligation becomes due. As a result, cash and cash equivalents will be reported as $240,000 ($175,000 - $10,000 + $25,000 + $50,000).
On December 31, Year 4, the last day of its fiscal year, OCI Company purchased 2,000 shares of available-for-sale securities at a price of $10 per share. These securities had a fair value of $24,000 and $30,000 on December 31, Year 5, and December 31, Year 6, respectively. No dividends were paid, and all of the securities were sold on December 31, Year 6. OCI recognizes all holding gains and losses on available-for-sale securities before recognizing realized gain. If OCI's tax rate is 25%, the total after-tax effect on comprehensive income in Year 6 of the foregoing transactions was...?
$4,500. OCI paid $20,000 for the shares. Thus, its after-tax holding gain in Year 5 was $3,000 [($24,000 fair value - $20,000) × (1.0 - .25 tax rate)]. Because the shares were classified as available-for-sale, the $3,000 holding gain was credited to other comprehensive income, not net income. OCI's after-tax holding gain in Year 6 was $4,500 [($30,000 - $24,000) × (1.0 - .25)]. Moreover, its realized after-tax gain in Year 6 included in net income was $7,500 [($30,000 - $20,000) × (1.0 - .25)]. The recognition of these amounts in Year 5 and Year 6 necessitates a reclassification adjustment to prevent double counting. This adjustment to other comprehensive income (a debit) is equal to the realized gain recognized in net income. Accordingly, the after-tax effect on comprehensive income in Year 6 of the sale of the available-for-sale securities is $4,500 ($7,500 realized gain + $4,500 holding gain - $7,500 reclassification adjustment).
Snart Co. had the following balances at December 31, Year 4: Cash in checking account: 35,000 Cash in money market account: 75,000 U.S. Treasury bill, purchased 11/1/Yr 4, maturing 1/31/Yr 5: 350,000 U.S. Treasury bill, purchased 12/1/Yr 4, maturing 3/31/Yr 5: 400,000 Snart's policy is to treat as cash equivalents all highly liquid investments with a maturity of 3 months or less when purchased. What amount should Snart report as cash and cash equivalents in its December 31, Year 4, balance sheet?
$460,000. Cash is an asset that must be readily available for use by the business. It normally consists of (1) coin and currency on hand, (2) demand deposits (checking accounts), (3) time deposits (savings accounts), and (4) near-cash assets (e.g., money market accounts). In this case, cash equivalents include investments with original maturities of 3 months or less. The original maturity is the date on which the obligation becomes due. Accordingly, the amount to be reported as cash and cash equivalents is $460,000 ($35,000 + $75,000 + $350,000).
On January 1, Jennie Corporation purchased 30% of the common stock of Katlee Company for $500,000. The following information relates to Katlee at the date of acquisition. Cash: 50,000 Accounts receivable (net): 250,000 Building (net): 700,000 Land: 100,000 Liabilities: 100,000 Additional information relating to the purchase appears below. - Jennie has the ability to exercise significant influence over Katlee and did not elect the fair value option. - Both the carrying amount and the fair value are the same for receivables, land, and liabilities. The fair value of the building is $900,000. - Jennie depreciates its assets on a straight-line basis. Both tangible and intangible assets are amortized over 10 years. - For the current year, Katlee had net income of $400,000 and declared and paid dividends of $100,000. What amount should Jennie report for its investment in Katlee at the end of the current year?
$584,000. Jennie's investment in Katlee is accounted for using the equity method. Jennie's initial investment is $500,000. To this, Jennie adds its proportional share of Katlee's earnings ($400,000 × 30% = $120,000) and subtracts its proportional share of Katlee's dividend distribution ($100,000 × 30% = $30,000). Jennie also subtracts its proportional share of depreciation on the excess of Katlee's building's fair value over its carrying amount {[($900,000 - $700,000) ÷ 10 years] = $20,000}. Jennie's share is $6,000 ($20,000 × 30%). Jennie's year-end investment in Katlee can thus be calculated as follows: Initial investment: 500,000 Share of earnings: 120,000 Payment of dividends: (30,000) Share of excess depreciation: (6,000) -------------------------------------- Ending balance: 584,000
On January 1, Year 1, Ball, Inc., purchased a $1 million ordinary life insurance policy on its president. The policy year and Ball's accounting year coincide. Additional data are available for the year ended December 31, Year 6: Cash surrender value, 1/1/Yr 6: 43,500 Cash surrender value, 12/31/Yr 6: 54,000 Annual advance premium paid 1/1/Yr 6: 20,000 Dividend received 7/1/Yr 6: 3,000 Ball, Inc., is the beneficiary under the life insurance policy. How much should Ball report as life insurance expense for Year 6?
$6,500. Life insurance expense is equal to the excess of the premiums paid over the increase in cash surrender value and dividends received. Ball's life insurance expense is thus $6,500. Premium: 20,000 (-) Increase in cash surrender value ($54,000 - $43,500): (10,500) (-) Dividend received (3,000) ------------------------------- Life insurance expense: 6,500
On January 1, Welling Company purchased 100 of the $1,000 face value, 8%, 10-year bonds of Mann, Inc. The bonds mature on January 1 in 10 years, and pay interest annually on January 1. Welling purchased the bonds to yield 10% interest. Information on present value factors is as follows: Present value of $1 at 8% for 10 periods: 0.4632 Present value of $1 at 10% for 10 periods: 0.3855 Present value of an annuity of $1 at 8% for 10 periods: 6.7101 Present value of an annuity of $1 at 10% for 10 periods: 6.1446 How much did Welling pay for the bonds?
$87,707. An investment in a bond should be recorded at its fair value, i.e., the present value of its cash flows discounted at the market (yield) rate of interest. The present value of the investment has two components: the value of the periodic cash interest payments and the value of the bond proceeds at maturity. The interest payment at 8% on each bond will be $80 per year for 10 years. Applying a present value factor of 6.1446 (annuity, 10 periods, 10%) gives a present value of the periodic interest payments of $491.57. The proceeds of each bond at maturity of $1,000 are multiplied by a factor of .3855 (10%, 10 periods) for a present value of $385.50. The resulting total price per bond of $877.07 ($491.57 + $385.50) multiplied by 100 bonds gives a total payment of $87,707.
Knob Co. transferred real estate pursuant to a troubled debt restructuring to Mene Corp. in full liquidation of Knob's liability to Mene. Carrying amount of liability liquidated: 150,000 Carrying amount of real estate transferred: 100,000 Fair value of real estate transferred: 90,000 What amount should Knob report as ordinary gain (loss) on transfer of real estate?
($10,000). In a troubled debt restructuring effected as an asset exchange, the asset surrendered in settlement of the troubled debt must first be adjusted from its carrying amount to its fair value, with a gain or loss being recognized. Knob should therefore recognize a $10,000 ordinary loss ($90,000 fair value - $100,000 carrying amount).
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be reported at the end of the year, given no election of the fair value option? - Held-to-Maturity. (Amortized Cost/Fair Value) - Available-for-Sale. (Amortized Cost/Fair Value)
- Held-to-Maturity: Amortized Cost. - Available-for-Sale: Fair Value. Investments in debt securities must be classified as held-to-maturity and measured at amortized cost in the balance sheet if the reporting entity has the positive intent and ability to hold them to maturity. Investments in equity securities are classified as either trading or available-for-sale. Equity securities that are not expected to be sold in the near term should be classified as available-for-sale. These securities should be reported at fair value, with unrealized holding gains and losses (except those on securities designated as being hedged in a fair value hedge) excluded from earnings and reported in OCI.
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements? A. The company's accounting policy for the investment. B. Whether the investee company is involved in any litigation. C. The names and ownership percentages of the other stockholders in the investee company. D. The reason for the company's decision to invest in the investee company.
A. The company's accounting policy for the investment. A company is required to disclose its accounting policies for equity method investees. Disclosures for an investment accounted for under the equity method should also include (1) the names and company's percentage of ownership in each investee; (2) the difference, if any, between the carrying amount of the investment and the underlying equity in the net assets of the investee; and (3) the accounting method applied to the difference.
Company A holds 25% of Company B's voting interests. Which of the following statements is true? A. Under U.S. GAAP, Company A may account for its investment in Company B at fair value or according to the equity method. B. Under U.S. GAAP, Company A must account for its investment in Company B at fair value. C. Under IFRS, Company A may account for its investment in Company B at fair value or according to the equity method. D. Under IFRS, Company A may account for its investment in Company B using the revaluation model or the equity method.
A. Under U.S. GAAP, Company A may account for its investment in Company B at fair value or according to the equity method. Under U.S. GAAP, an entity that is presumed to have significant influence over an investee may elect to adopt the fair value option or the equity method.
When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes...? A. A cash dividend received from the investee. B. A proportionate interest in the net income of the investee. C. Depreciation related to the excess of fair value over the carrying amount of the investee's depreciable assets at the date of purchase by the investor. D. Periodic amortization of the goodwill related to the purchase.
B. A proportionate interest in the net income of the investee. Under the equity method, the investor's share of the investee's net income is accounted for as an addition to the carrying amount of the investment on the investor's books. Losses and dividends are reflected as reductions of the carrying amount.
A reclassification of available-for-sale securities to the held-to-maturity category will result in...? A. The recognition in earnings on the transfer date of an unrealized gain or loss. B. The amortization of an unrealized gain or loss existing at the transfer date. C. The reversal of any unrealized gain or loss previously recognized in other comprehensive income. D. The reversal of any unrealized gain or loss previously recognized in earnings.
B. The amortization of an unrealized gain or loss existing at the transfer date. The unrealized holding gain or loss on the date of transfer for available-for-sale securities transferred to the held-to-maturity category continues to be reported in OCI. However, it is amortized as an adjustment of yield in the same manner as the amortization of any discount or premium. This amortization offsets or mitigates the effect on interest income of the amortization of the premium or discount. Fair value accounting may result in a premium or discount when a debt security is transferred to the held-to-maturity category.
On January 1, Year 6, Roem Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $500,000 increase in the January 1, Year 6, inventory. Assume that the income tax rate for all relevant years is 30%. If Roem issues financial statements for Year 6 only, the cumulative effect of the accounting change on all prior periods should be reported in the year-end...? A. Income statement as a $350,000 cumulative effect of an accounting change. B. Income statement as a $500,000 cumulative effect of an accounting change. C. Retained earnings statement as a $350,000 addition to the beginning balance. D. Retained earnings statement as a $500,000 addition to the beginning balance.
C. Retained earnings statement as a $350,000 addition to the beginning balance. A change from LIFO to FIFO inventory measurement is a change in accounting principle. Hence, it must be applied retrospectively to the financial statements for all periods presented. Its cumulative effect on periods prior to the first period reported is reflected in the carrying amounts of the assets and liabilities and the balance of retained earnings (or other component of equity or net assets) at the beginning of that period. Given that Roem issues single-period statements only, the adjustment should be made directly to the balance of beginning retained earnings for Year 6. Because Roem's inventory under the FIFO assumption would have been $500,000 greater, the aggregate cost of goods sold in prior periods would have been $500,000 less. In prior periods, aggregate net income exclusive of taxes would have been $500,000 greater. Thus, the proper treatment is to credit the beginning balance of retained earnings for the after-tax effect of $350,000 [$500,000 cumulative effect × (1.0 - .30 tax rate)].
On January 31, Year 3, Pack, Inc., split its common stock 2 for 1, and Young, Inc., issued a 5% stock dividend. Both companies issued their December 31, Year 2, financial statements on March 1, Year 3. Should Pack's Year 2 basic earnings per share (BEPS) take into consideration the stock split, and should Young's Year 2 BEPS take into consideration the stock dividend? - Pack's Year 2 BEPS. (Y/N) - Young's Year 2 BEPS. (Y/N)
Pack's Year 2 BEPS: YES. Young's Year 2 BEPS: YES. When a stock dividend, stock split, or reverse split occurs at any time before issuance of the financial statements, restatement of BEPS or DEPS is required for all periods presented. The purpose is to promote comparability of EPS data among reporting periods.
Jay Company acquired a wholly owned foreign subsidiary on January 1. The equity section of the December 31 consolidated balance sheet follows: Common stock: 500,000 Additional paid-in capital: 200,000 Retained earnings: 900,000 Accumulated other comprehensive income: (600,000) Total equity: 1,000,000 The balance in accumulated OCI appropriately represents adjustments in translating the foreign subsidiary's financial statements into U.S. dollars. The consolidated income statement included the excess of cost of investments in certain debt and equity securities over their fair values, which is considered temporary, as follows: Available-for-sale securities: 200,000 Trading securities: 100,000 Ignoring tax effects, the amounts for retained earnings and accumulated OCI in the consolidated statement of financial position for the year ended December 31 are...?
Retained Earnings: 1,100,000 Accumulated OCI: (800,000) The unrealized holding loss on available-for-sale securities does not affect earnings (unless the securities are designated as being hedged in a fair value hedge). Instead, it is debited to OCI. This amount is closed to accumulated OCI, a permanent account reported in the equity section. Accordingly, retained earnings was understated by $200,000, and accumulated OCI was overstated by $200,000. Their amounts should be $1,100,000 and $800,000, respectively.
In Year 1, Chain, Inc., purchased a $1 million life insurance policy on its president, of which Chain is the beneficiary. Information regarding the policy for the year ended December 31, Year 6, follows: Cash surrender value, 1/1/Yr 6: 87,000 Cash surrender value, 12/31/Yr 6: 108,000 Annual advance premium paid 1/1/Yr 6: 40,000 During Year 6, dividends of $6,000 were applied to increase the cash surrender value of the policy. What amount should Chain report as life insurance expense for Year 6?
$19,000. Life insurance expense is equal to the excess of the premiums paid over the increase in the sum of cash surrender value and dividends received. However, the dividends were applied to increase the cash surrender value and were therefore not received. Hence, Chain's life insurance expense is $19,000. Premium: 40,000 (-) Increase in cash surrender value (108,000-87,000): (21,000) Dividends received: 0 --------------------------- Life insurance expense: 19,000
Janson traded stock in Flax Co. held as trading securities during Year 1 as follows: February 3, Yr 1 Number of Shares Purchased (Sold): 1,100 Price Per Share: $11 April 15, Yr 1 Number of Shares Purchased (Sold): 2,500 Price Per Share: $9 May 28, Yr 1 Number of Shares Purchased (Sold): (750) Price Per Share: $13 July 5, Yr 1 Number of Shares Purchased (Sold): 1,400 Price Per Share: $12 September 30, Yr 1 Number of Shares Purchased (Sold): (4,000) Price Per Share: $15 No other transactions took place for Flax during the remainder of the year. At December 31, Year 1, Flax is trading at $10 per share. Janson trades securities on a last in, first out basis. What amount is the net value of the investment in Flax at year end?
$2,500. At each balance sheet date, trading securities are measured at fair value. During the year, Janson purchased 5,000 shares and sold 4,750 shares for an ending balance of 250 shares. At year end, the fair value of each share is $10, so the year-end balance is $2,500 (250 shares × $10 per share).
On July 1, Year 1, Cody Co. paid $1,198,000 for 10%, 20-year bonds with a face amount of $1 million. Interest is paid on December 31 and June 30. The bonds were purchased to yield 8%. Cody uses the effective interest rate method to recognize interest income from this investment. The bonds are properly classified as held-to-maturity. What should be reported as the carrying amount of the bonds in Cody's December 31, Year 1, balance sheet?
$1,195,920. Under the effective interest method, interest income equals the yield or effective interest rate times the carrying amount of the bonds at the beginning of the interest period. The amortization of premium or discount is the difference between this interest income and the periodic cash payments. For Year 1, interest income is $47,920 [$1,198,000 × 8% × (6 months ÷ 12 months)], and interest received is $50,000 [$1,000,000 × 10% × (6 months ÷ 12 months)]. Hence, the carrying amount at year end is $1,195,920 [$1,198,000 - ($50,000 - $47,920)].
Johnstone Company owns 10,000 shares of Breva Corporation's stock; Breva currently has 40,000 shares outstanding. During the year, Breva had net income of $200,000 and paid $160,000 in dividends. At the beginning of the year, there was a balance of $150,000 in Johnstone's equity method investment in Breva Corporation account. At the end of the year, the balance in this account should be...?
$160,000. Johnstone holds 25% (10,000 ÷ 40,000) of Breva's voting common stock. Under the equity method, (1) an investor recognizes its share of the investee's net income as an increase in the investment account: Dr. Investment in Breva (200,000 × 25%): 50,000 Cr. Income -- equity-method investee: 50,000 (2) a dividend from the investee is treated as a return of an investment: Dr. Cash ($160,000 × 25%): 40,000 Cr. Investment in Breva: 40,000 Thus, at the end of the year, the balance in the investment in Breva account is $160,000 ($150,000 + $50,000 - $40,000).
In September Year 1, Cal Corp. made a dividend distribution of one right for each of its 240,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of Cal's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, Year 8, none of the rights had been exercised, and Cal redeemed them by paying each shareholder $0.10 per right. As a result of this redemption, Cal's equity was reduced by...?
$24,000. When rights are issued for no consideration, only a memorandum entry is made. Consequently, neither common stock nor additional paid-in capital is affected by the issuance of rights in a nonreciprocal transfer. The redemption of the rights reduces equity by the amount of their cost (240,000 × $.10 = $24,000).
