intermediate 3 chapter 17

On November 1, 2018, Howell Company purchased 1,000 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $1,052,500, which includes accrued interest of $15,000. The bonds, which mature on January 1, 2023, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2018, balance sheet at

$1,052,500 - $15,000 = $1,037,500 $1,037,500 - ($37,500 × 2/50) =$1,036,000.

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. 81. At December 31, 2018, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity?

$1,272,000 - ($1,249,896 - $4,248 - $4,392) = $30,744.

At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds?

$3,097,440 - $3,090,000=($7,440).

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. 71. At December 31, 2018, the fair value of the Ritter, Inc. bonds was $3,180,000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity

$3,180,000 - ($3,124,740 - $10,620 - $10,980) = $76,860.

On October 1, 2018, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2027, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2018 balance sheet at a carrying value of

$3,900,000 + ($100,000 × 3/100) = 3,903,000.

During 2017, Woods Company purchased 80,000 shares of Holmes Corporation common stock for $1,260,000 as an equity investment. The fair value of these shares was $1,200,000 at December 31, 2017. Woods sold all of the Holmes stock for $17 per share on December 3, 2018, incurring $56,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2018 of

$44,000.

Kern Company purchased bonds with a face amount of $1,000,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $15,000, and paid accrued interest for three months of $25,000. The amount to record as the cost of this long-term investment in bonds is

($1,000,000 × 1.02) + $15,000 = 1,035,000.

For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of

($1,410,375 + $2,571) × .055 = $77,712; $77,571 + $77,712 = $155,283

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.

($1,410,375 × .055) - ($1,500,000 × .05)=2,571.

What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2018?

($405,000 - $375,000) = $30,000.

The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2018 is

($405,000 - $375,000) = $40,000.

On October 1, 2018, Menke Company purchased to hold to maturity, 500, $1,000, 9% bonds for $520,000. An additional $15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2022. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2018 income statement from this investment should be

($500,000 × .09 × 3/12) - ($20,000 × 3/50) = $10,050.

A requirement for a security to be classified as held-to-maturity is

All of these are required.

On August 1, 2018, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2023, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2018?

Dr. Debt Investments: $500,000 × 1.04 = $520,000 Dr. Interest Revenue: $500,000 × .05 × 3/6 = $12,500 Cr. Cash: $520,000 + $12,500 = $532,500. Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500

On August 1, 2018, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2024, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2018 is

Dr. Debt Investments: 1,200 × $1,000 × .97 = $1,164,000 Dr. Interest Revenue: $1,200,000 × .045 × 3/6 = $27,000 Cr. Cash: $1,164,000 +$27,000 = $1,191,000. Debt Investments 1,164,000 Interest Revenue 27,000 Cash 1,191,000

At December 31, 2018, Atlanta Company has an equity portfolio valued at $160,000. Its cost was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31, 2018?

Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000

Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2018 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2018?

II or III only

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Income A reduction of the investment

Which of the following is not a debt security?

Loans receivable

On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/18 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000

Question on the next

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.

On its December 31, 2017, balance sheet, Trump Company reported its investment in equity securities, which had cost $600,000, at fair value of $560,000. At December 31, 2018, the fair value of the securities was $585,000. What should Trump report on its 2018 income statement as a result of the increase in fair value of the investments in 2018?

Unrealized gain of $25,000.

Use of the effective-interest method in amortizing bond premiums and discounts results in

a varying amount being recorded as interest income from period to period

When investments in debt securities are purchased between interest payment dates, preferably the

accrued interest is debited to Interest Revenue.

Held-to-maturity securities are reported at

acquisition cost plus amortization of a discount

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

debit to Debt Investments

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the

equity method

Impairments are

evaluated at each reporting date for every investment

A correct valuation is

held-to-maturity at amortized cost.

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

Securities which could be classified as held-to-maturity are

municipal bonds.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are

securities where a company has holdings of less than 20%.

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

trading

The fair value option allows a company to

value its own liabilities at fair value.