Module 6 - Nonmonetary Exchange and Investments

On October 1, 200X, Catco acquired 12% of the common stock of Dexco. The firms had no other relationships or transactions. On January 1, 200Y, Catco acquired an additional 18% of Dexco's common stock. There were no other transactions or relationships between the firms during 200Y. What method(s) of accounting would Catco have used for the investment during each of the following periods? October 1-December 31, 200X January 1-December 31, 200Y Fair value Fair value Fair value Equity method Equity method Fair value Equity method Equity method

Fair value Equity method Because Catco owned only 12% of Dexco's common stock during the period October 1-December 31, 200X, it would not have been able to exercise significant influence over Dexco and would have used the fair value method. Because the purchase of an additional 18% of Dexco's common stock would have given it a total of 30%, in the absence of other factors, it would be presumed to have significant influence over Dexco and, therefore, would have used the equity method during the period January 1-December 31, 200Y.

A short-term marketable debt security was purchased on September 1, Year 1, between interest dates. The next interest payment date was February 1, Year 2. On the balance sheet at December 31, Year 1, the debt security should be carried at Fair value plus the accrued interest paid. Fair value. Cost plus the accrued interest paid. Cost.

Fair value. Correct! A short-term marketable debt security would be carried in a trading portfolio. Securities in trading portfolios are carried at fair value.

Cook Company had the following investment portfolio of debt securities that were purchased during Year 2. Stock Classification Cost Fair Value 12-31-Y2 Company R Available-for-sale $30,000 $32,000 Company S Trading $42,000 $46,000 Company T Available-for-sale $15,000 $18,000 Cook elects to use the fair value option for reporting the investment in Company R. Which of the following statements is true? Cook will report an unrealized gain on securities for $6,000 on the Year 2 income statement. Cook may not elect the fair value method for the investment in Company R unless it also uses the fair value method for investments in Companies S and T. Cook will report an unrealized gain in other comprehensive income for $5,000 in Year 2. Cook will report an unrealized gain on securities for $9,000 on the Year 2 income statement.

Cook will report an unrealized gain on securities for $6,000 on the Year 2 income statement. Correct! The fair value option may be elected on an instrument-by-instrument basis. Therefore, it is permissible for Cook to elect the fair value option for its investment in Company R. The investment in Company R would be revalued to fair value at the end of the period, and the resulting unrealized gain or loss would be recognized in earnings for Year 2. The investment in Company S is a trading security, and any unrealized gain is also recognized in earnings for the period. Therefore, Cook would report an unrealized gain of $2,000 for the investment in Company R and $4,000 for the investment in Company S, for a total gain of $6,000 on the Year 2 income statement. The unrealized gain on Investment T security would be reported under the provisions of ASC Topic 320 and included in other comprehensive income for the period.

During 2004, Beam Co. paid $1,000 cash and traded inventory, which had a carrying amount of $20,000 and a fair value of $21,000, for other inventory in the same line of business with a fair value of $22,000.The exchange was made to facilitate sales to their respective customers. What amount of gain (loss) should Beam record related to the inventory exchange? $2,000 $1,000 $0 ($1,000)

$0 There is a $1,000 gain inherent in the transfer of the old (Beam's) inventory item (fair value of $21,000 - carrying amount of $20,000). If Beam's item were sold, gross profit of $1,000 would result. However, under GAAP, exchanges of inventory made to facilitate sales are an exception to fair value measurement. Therefore, no gain or loss is recognized and the inventory received is valued at the book value of the inventory given up plus cash paid, for a total of $21,000. This amount is $1,000 less than the new inventory's fair value because the $1,000 gain is disallowed.

Yola Co. and Zaro Co. are fuel oil distributors. To facilitate the delivery of oil to their customers, Yola and Zaro exchanged ownership of 1,200 barrels of oil without physically moving the oil. Yola paid Zaro $30,000 to compensate for a difference in the grade of oil. On the date of the exchange, cost and market values of the oil were as follows: Yola Co. Zaro Co .Cost $100,000 $126,000 Market values 120,000 150,000 In Zaro's income statement, what amount of gain should be reported from the exchange of the oil? $0 $4,800 $24,000 $30,000

$0 This exchange was made to facilitate a sale of inventory to customers. Under FAS 153, this is one of the exceptions to measuring exchanges of nonmonetary assets at market value. In this case, the exchange is measured at book value; no gain or loss is recognized. The oil received by Zaro would be measured (debited) at book value ($126,000) less cash received ($30,000), or $96,000. Cash would be debited for $30,000. The oil exchanged would be credited for $126,000.No gain or loss is recognized.

On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value 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 current year? $900,000 $950,000 $1,000,000 $1,020,000

$1,020,000 Correct! For investments in debt securities other than those intended to be held-to-maturity, the fair value method is applied. $1,020,000 is the fair value of the investment in bonds and is the appropriate amount for reporting the investment.

Information pertaining to dividends from Wray Corp.'s common stock investments for the year ended December 31, 2017 are as follows: On September 8, 2017, Wray received a $50,000 cash dividend from Seco, Inc., in which Wray owns a 30% interest. A majority of Wray's directors are also directors of Seco. On October 15, 2017, Wray received a $6,000 dividend from King Co. Wray owns a 5% in King Co. Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, 2017 to stockholders of record on December 15, 2017, payable on January 5, 2018. What amount should Wray report as dividend income in its Income Statement for the year ended December 31, 2017? $60,000 $56,000 $10,000 $4,000

$10,000 This answer is correct because it includes the King and Bow dividend.

Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, year 1, for $100,000.During year 1, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During year 2, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1.On July 1, year 2, Lee sold half of its stock in Polk for $66,000 cash. The carrying amount of this investment in Lee's December 31, year 1 Balance Sheet should be $100,000. $104,500. $112,000. $115,000.

$104,500. Correct! $104,500 = $100,000 + .30[$40,000-$25,000] because the equity method is used by Lee, who has significant influence over Polk. Under the equity method, the investor recognizes its share of undistributed earnings in the investee, since acquiring the investment, in its income.

Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January 1, Year 1 for $100,000. During Year 1, Polk earned $40,000 and paid dividends of $25,000.Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During Year 2, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1.On July 1, Year 2, Lee sold half of its stock in Polk for $66,000 cash. Before income taxes, what amount should Lee include in its Year 1 Income Statement as a result of the investment? $40,000 $25,000 $12,000 $7,500

$12,000 $12,000 = .30($40,000). Under the equity method, the investor recognizes its share of investee earnings in its own income. The equity method is used because Lee has significant influence over Polk.

Slad Co. exchanged productive assets with Gil Co. and, in addition, paid Gil $100,000 cash. The following information pertains to this exchange: Assets Carrying amounts Fair values Relinquished by Gil $75,000 $140,000 Relinquished by Slad 40,000 40,000 In Slad's books, the assets acquired should be recorded at what amount? $75,000 $100,000 $140,000 $175,000

$140,000 Asset (new) 140,000 Asset (old book value) 40,000 Cash 100,000 Slad has no gain because the fair value and carrying value of its asset (old) are the same. Slad has given up total consideration worth $140,000 at fair value, for an asset worth $140,000. There is no unrecognized gain on similar assets to diminish the recorded value of the new asset. The entry is the same regardless of whether the exchange has commercial substance because the fair value of assets exchanged equals their book value in total ($140,000). There is no implied gain or loss.

Amble, Inc. exchanged a truck with a carrying amount of $12,000 and a fair value of $20,000 for a truck and $5,000 cash. The fair value of the truck received was $15,000. At what amount should Amble record the truck received in the exchange assuming the exchange lacks commercial substance? $7,000 $9,000 $12,000 $15,000

$15,000 There is an implied gain of $8,000, the difference between the $20,000 fair value of the old asset and its $12,000 book value. Because the proportion of cash received is 25% ($5,000/$20,000), the entire gain is recognized and the acquired asset is recognized at fair value ($15,000). Note that the answer would be the same had there been commercial substance.

Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12. Cobb received a stock dividend of 2,000 shares on March 31 when the carrying amount per share on Roe's books was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15. In Cobb's Income Statement for the year ended October 31, what amount should Cobb report as dividend income? $98,000 $88,000 $18,000 $15,000

$18,000 Correct! Cobb has 10,000 + 2,000 or 12,000 shares at the time of the dividend. The 2,000 shares were received from the stock dividend. Thus, dividend income is 12,000($1.50) = $18,000. The stock dividend itself is not included in dividend income; rather, decreases the cost per share of the investment. However, the stock dividend does raise the number of shares that receive the cash dividend, which is recognized as income.

Bayberry Co. has an asset with a cost of $200,000 and accumulated depreciation of $120,000. Driftwood Co. has an asset with a cost of $250,000 and accumulated depreciation of $160,000. Both assets have a fair value of $100,000. Bayberry and Driftwood find it mutually advantageous to exchange assets, and the exchange results in improved future cash flows for both companies. What amount, if any, is Bayberry's gain on the exchange? $0 $10,000 $20,000 $50,000

$20,000 CORRECT! The gain on the exchange would be the difference between the carrying value of the asset exchanged and the fair value of that asset. Bayberry's carrying value is $80,000 and the fair value is $100,000; therefore, the gain to Bayberry is $20,000.

Pare, Inc. purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2, Year 1, for $50,000. On December 31, Year 1, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during Year 1. Tot reported earnings of $300,000 for Year 1. What amount should Pare report in its December 31, Year 1, Balance Sheet as investment in Tot? $170,000 $200,000 $230,000 $290,000

$200,000 Correct! Once the investor has acquired a sufficient percentage of the stock to use the equity method, it is prospectively applied. In this question, the equity method becomes the required method only at the very end of the year, and Pare would begin applying the equity method beginning on December 31. The ending balance of the investment account is: $50,000 (original investment) + $150,000 (second investment).

On July 1, Year 1, Pell Co. purchased Green Corp. 10-year, 8% bonds with a face amount of $500,000 for $420,000. The bonds mature on June 30, Year 9, and pay interest semiannually on June 30 and December 31. Using the interest method, Pell recorded bond discount amortization of $1,800 for the 6 months ended December 31, Year 1. From this long-term investment, Pell should report Year 1 interest revenue of $16,800. $18,200. $20,000. $21,800

$21,800 Correct! When the interest method of amortization is used, interest revenue is computed directly, and the amount of discount amortization is computed indirectly as follows: Interest revenue - Stated or cash interest = Discount amortizations In this case, the interest revenue cannot be computed directly because the effective or yield rate is not given. However, the stated or cash interest can be computed ($500,000 × 8% × 6/12 = $20,000), and the discount amortization is given ($1,800). Thus, the interest revenue can be computed indirectly, as indicated below. Interest revenue-$20,000=$1,800 Interest revenue=$20,000+$1,800 Interest revenue=$21,800

On October 1, year 14, Park Co. purchased 200 of the $1,000-face-value, 10% bonds of Ott, Inc., for $220,000, including accrued interest of $5,000. The bonds, which mature on January 1, year 21, pay interest semiannually on January 1 and July 1. Park used the straight-line method of amortization and appropriately recorded the bonds as held-to-maturity. On Park's December 31, year 15, balance sheet, the bonds should be reported at $215,000. $214,400. $214,200. $212,000.

$212,000. Correct! Held-to-maturity investments in bonds are reported at amortized cost. The discount or premium at purchase is amortized during the term of the bonds so that the carrying value is equal to face value at maturity. This is the amount to be received at maturity. The purchase price, exclusive of accrued interest, is $215,000 ($220,000 - $5,000). Accrued interest is not included in the investment carrying value. The premium paid on the bonds is $15,000 because the face value of the bonds is $200,000 (200 × $1,000). The term of holding the bonds is from October 1, year 14, to January 1, year 21, a period of six years and three months, or 75 months. The period from purchase to the December 31, year 15, balance sheet is 15 months. Amortization of the premium reduces the investment carrying amount because only face value, which is less than the amount paid for the investment, will be received at maturity. Therefore, the ending year 15 investment carrying value is $212,000 = $215,000 - ($15,000 × 15/75 = $3,000).

Jent Corp. purchased bonds at a discount of $10,000. Jent classified the bonds as available-for-sale and subsequently sold them at a premium of $14,000. At the time of the sale, $2,000 of the discount had been amortized. What amount should Jent report as gain on the sale of bonds? $12,000 $22,000 $24,000 $26,000

$22,000 Correct! The book value at the date of sale was $8,000 below face value ($10,000 original discount - $2,000 amortization). The fair value of the bonds at date of sale was $14,000 above face value ($14,000 premium). Thus, the difference between the price of the bonds at sale and the book value was $22,000 ($8,000 + $14,000). That difference is the gain on sale.

Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14.Plack received a stock dividend of 2,000 shares on April 30 when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15. In its Income Statement, what amount should Plack report as dividend income? $20,000 $24,000 $90,000 $94,000

$24,000 Correct! Because Plack Co. owns only 2% of Ty Corp. stock, it does not have significant influence over Ty and will use fair value to account for its investment. Plank's dividend will be determined by the number of shares of Ty that it owns multiplied by the amount of dividend per share. The calculation is: 2/14 Purchase 10,000 shares 4/30 Stock dividend 2,000 shares 12/15 Total shares owned 12,000 Dividend rate $ 2 Total Dividend income $24,000 The stock dividend would be recorded by Plack as a memorandum entry to adjust the per-share original cost, so it is based on the total 12,000 shares now owned.

Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 2015. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 2015, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 2016, and $200,000 for the year ended December 31, 2016. On July 1, 2016, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 2016. Before income taxes, what amount should Grant include in its 2015 Income Statement as a result of the investment? $15,000 $24,000 $50,000 $80,000

$24,000 Grant uses the equity method because it has significant influence over South. Under the equity method, the investor recognizes its share of the investee earnings in its own income. Thus, Grant will recognize $24,000 (.30 × $80,000) as equity in the earnings of South in its own income.

Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year: Carrying amount of Larkin's investment in Devon at the beginning of the year $200,000 Net income of Devon for the year 600,000 Total dividends paid to Devon's stockholders during the year 400,000 What is the carrying amount of Larkin's investment in Devon at year end? $100,000 $200,000 $250,000 $350,000

$250,000 Larkin's investment in Devon at year-end would be computed as the carrying amount of the investment at the beginning of the year ($200,000) + Larkin's share of Devon's reported net income for the year ($600,000 × .25 = $150,000)-Larkin's share of Devon's dividends paid during the year ($400,000 × .25 = $100,000), or $200,000 + $150,000 = $350,000-$100,000 = $250,000, the correct answer.

On December 31, Ott Co. had investments in equity securities as follows: % Owned Investment Cost Fair value12/31 3% Man Co. $10,000 $ 11,000 19% Kemo, Inc. 9,000 Not readily available 5% Fenn Corp. 11,000 7,000 Ott's December 31 balance sheet should report the equity securities as $30,000. $26,000. $27,000. $21,000.

$27,000 Correct! Investments in equity securities are reported at fair value if the control is not significant and there is a readily determinable fair value. If the control is not significant and there is not a readily determinable fair value, then the entity may elect to use the cost method. In this situation, only the investment in Kemo Inc. qualifies to be reported using the cost method.

On December 31, Ott Co. had investments in equity securities as follows: Cost Fair value Lower of cost or fair value Man Co. $10,000 $ 8,000 $ 8,000 Kemo, Inc. 9,000 11,000 9,000 Fenn Corp. 11,000 9,000 9,000 $30,000 $28,000 $26,000 ================== Ott's December 31 Balance Sheet should report the equity securities as $26,000. $28,000. $29,000. $30,000.

$28,000. Correct! Investments in equity securities are reported at fair value ($28,000).

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker's tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld? $0 $3,000 $10,000 $30,000

$30,000 The book value of the delivery truck is $60,000 ($140,000 − $80,000). Its fair value is $90,000. A gain of $30,000 is therefore implied. Cash was paid and the exchange had commercial substance. Therefore, the gain is fully recognized. If the exchange lacked commercial substance, no gain would be recognized.

A company exchanged land with an appraised value of $50,000 and an original cost of $20,000 for machinery with a fair value of $55,000. Assuming that the transaction has commercial substance, what is the gain on the exchange? $0 $5,000 $30,000 $35,000

$30,000 The gain on an exchange of nonmonetary assets is based on the fair value and book value of the asset exchanged. The land with a fair value of $50,000 is given for machinery. The company is using the land as legal tender. The gain will be the difference between the book value and the fair value of the asset given or $50,000 − $20,000 = $30,000.

On March 4, 2017, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, 2017, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, 2018. On September 30, 2017, LVC's common stock had a market value, ex rights, of $95 per share and the stock rights had a market value of $5 each. What amount should Evan report on its September 30, 2017, Balance Sheet for investment in stock rights? $4,000 $5,000 $10,000 $15,000

$4,000 Correct! The original stock investment cost is allocated to the stock and the rights based on their relative market values. Total market value of the stock is $95,000 and of the rights is $5,000. The original cost of the stock is $80,000. Thus the investment in stock rights is reported at [$5,000/($5,000 + $95,000)]$80,000 = $4,000.

Sage, Inc. bought 40% of Adams Corp.'s outstanding common stock on January 2, Year 1 for $400,000. The investment gave Sage significant influence over Adams. The carrying amount of Adams' net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during Year 1. During Year 1, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its Income Statement from its investment in Adams for the year ended December 31, Year 1? $48,000 $42,000 $36,000 $32,000

$42,000 This is a question on the full equity method. Goodwill on the purchase= price of investment- 40%(fair value of Adams' net assets) = $400,000-.40($900,000 + $90,000 + $10,000) = $400,000- $400,000 = 0 Investment income: 40% of Adams' income: .40($120,000)$48,000Less 40% of excess of fair value of inventory over book value at acquisition. The inventory is sold, and therefore, the cost of goods sold of the investor must be increased by this amount: .40($10,000)(4,000)Less depreciation on 40% of the excess of fair value over book value of equipment: .40($90,000)/18(2,000)Equals amount Sage reports as investment income

On January 1, year 4, Purl Corp. purchased, as a long-term investment, $500,000 face value Shaw, Inc. 8% bonds for $456,200. The bonds were purchased to yield 10% interest. Purl has the positive intent and ability to hold the bonds until maturity on January 1, year 10. The bonds pay interest annually on January 1, and Purl uses the interest method of amortization. What amount (rounded to nearest $100) should Purl report on its December 31, year 5, balance sheet for this long-term investment? $468,000 $466,200 $461,800 $456,200

$468,000 Correct! A held-to-maturity (HTM) investment purchased at a discount increases in value as maturity approaches, at which time the book value of the investment must be the face value of the investment. During the life of an HTM investment, the investor carries and reports the investment at amortized cost. The interest and amortization entries for the two years year 4 and year 5 that lead to the correct ending balance at December 31, year 5, are: December 31, year 4: DR: Interest receivable .08($500,000)40,000 DR: Discount on HTM bonds5,620 CR: Interest revenue .10($456,200)45,620 December 31, year 5: DR: Interest receivable .08($500,000)40,000 DR: Discount on HTM bonds6,182 CR: Interest revenue .10($456,200 + $5,620)46,182 Thus, the ending net investment balance at December 31, year 5, is $456,200 + $5,620 + $6,182 = $468,002, or $468,000 (rounded to the nearest $100 as required by the problem).

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. Green's 30% ownership of common stock gives it significant influence over Axel.In 2004, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations. What amount of dividend revenue should Green report in its Income Statement for the year ended December 31, 2004? $0 $30,000 $60,000 $90,000

$60,000 Only the dividends received on the preferred stock are recognized as revenue: $60,000 = 100% × ($60,000). The common stock investment is accounted for under the equity method, which treats all dividends received as a return of capital. Dividends reduce the investment account under this method.

On December 31, 2005, Vey Co. traded equipment with an original cost of $100,000 and accumulated depreciation of $40,000 for productive equipment with a fair value of $60,000.In addition, Vey received $30,000 cash in connection with this exchange. There is commercial substance to the exchange. What should be Vey's carrying amount for the equipment received at December 31, 2005? $30,000 $40,000 $60,000 $80,000

$60,000 When there is commercial substance to the exchange, the acquired asset is measured at fair value. In this case, the value is $60,000 as given in the problem. This amount also equals the fair value of assets given up in the exchange. The implied fair value of the asset exchanged is $60,000 + $30,000 cash received, or $90,000. The fair value of assets given up is therefore $90,000 less $30,000 cash received, or $60,000. The full journal entry for the exchange is: dr. plant asset 60,000; dr. accumulated depreciation, 40,000; debit cash 30,000; credit plant asset 100,000; credit gain, 30,000. The gain equals the difference between the fair value of the asset exchanged (90,000) and its book value (60,000).

Simpson Co. received dividends from its common stock investments during the year ended December 31 as follows: A cash dividend of $8,000 from Wren Corp., in which Simpson owns a 2% interest. A cash dividend of $45,000 from Brill Corp., in which Simpson owns a 30% interest. This investment is appropriately accounted for using the equity method. A stock dividend of 500 shares from Paul Corp. was received on December 15 when the quoted market value of Paul's shares was $10 per share. Simpson owns less than 1% of Paul's common stock. In Simpson's Income Statement, dividend revenue should be: $58,000. $53,000. $13,000. $8,000.

$8,000. Correct! Only the $8,000 dividend is included in dividend revenue. The dividend on the Brill stock is accounted for under the equity method, which treats all dividends as a reduction in the investment account. The stock dividend is not revenue. Rather, it reduces the per share cost of the investment in Paul stock. No entry is recorded on receipt of a stock dividend.

On June 30, 2005, Finn, Inc. exchanged 2,000 shares of Edlow Corp. $30 par value common stock for a patent owned by Bisk Co. The Edlow stock was acquired in 2003 at a cost of $50,000. At the exchange date, Edlow common stock had a fair value of $40 per share, and the patent had a net carrying amount of $100,000 on Bisk's books. Finn should record the patent at $50,000. $60,000. $80,000. $100,000.

$80,000. The patent is valued at the market value of the stock exchanged, which is $80,000 ($40 × 2,000 shares). In general, the recorded value of purchased intangibles is the value of the consideration given or the value of the intangible, whichever is more reliable. The book value of the seller is not a reliable substitute for market value. There is no reliable amount given for the market value of the patent.

On July 1, year 4, York Co. purchased, as a held-to-maturity investment, $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, year 11, and pay interest annually on January 1. York uses the effective interest method of amortization. On its December 31, year 4, balance sheet, what amount should York report as investment in bonds? $911,300 $916,600 $953,300 $960,600

$911,300 Correct! Initial investment cost: $946,000 - $40,000 = $906,000 Interest revenue for year 4: $906,000(.10)(1/2 year) = $45,300 5,300 Less cash interest for 6 months: $1,000,000(.08)(1/2) = (40,000) Equals amortization of discount (increases investment) Investment in bonds balance at the end of year 4 $911,300 The initial investment cost or balance excludes accrued interest. The bonds were purchased at the halfway point in the interest period. York must pay for half a year's interest and will receive a full year's interest on January 1, year 5. The interest revenue for the year is based on the effective yield of 10%. The difference between interest revenue and the cash interest earned for the second half of year 4 is the growth in the value of the bond over time. The book value of the bond investment at maturity will be $1,000,000. Thus, the discount amortization increases the investment carrying value each year until it reaches $1,000,000.

When an investor does not exert influence over the investee and accounts for an equity investment at fair value, cash dividends received by the investor from the investee should normally be recorded as Dividend income. An addition to the investor's share of the investee's profit. A deduction from the investor's share of the investee's profit. A deduction from the investment account.

Dividend income. Correct! When there is no influence over the investee and the equity investments carried at fair value, cash dividends are recorded as dividend income.

In the absence of other relevant factors, what minimum level of voting ownership is considered to give an investor significant influence over an investee? 10% 20% 50% 100%

20% Correct! The minimum level of voting ownership considered to give an investor significant influence over an investee is 20%. In the absence of other relevant factors, an investor is considered to have significant influence over an investee if it owns 20%-50% of the voting securities of the investee.

Zinc Company does not elect to use the fair value option for reporting financial assets. An unrealized gain, net of tax, on Zinc's held-to-maturity portfolio of marketable debt securities should be reflected in the current financial statements as An extraordinary item shown as a direct increase to retained earnings. A current gain resulting from holding marketable debt securities. A footnote or parenthetical disclosure only. A valuation allowance and included in the equity section of the statement of financial position.

A footnote or parenthetical disclosure only. Correct! An unrealized gain on held-to-maturity securities is disclosed only in the notes to the financial statements. Gains are reflected in the financial statements only when they are realized (i.e., upon sale or for other than temporary declines in value). The year-end financial statements would present the held-to-maturity portfolio at cost. Parenthetical or footnote disclosure would indicate their market value.

Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values.The exchange has commercial substance. As a consequence of the exchange, Sable recognizes A gain equal to the difference between the fair value and carrying amount of the truck given up. A gain determined by the proportion of cash received to the total consideration. A loss determined by the proportion of cash received to the total consideration. Neither a gain nor a loss.

A gain equal to the difference between the fair value and carrying amount of the truck given up. With commercial substance, the exchange is measured at fair value. The full gain is recognized and is equal to the difference between the fair value of the asset given up and its book value. For example, assume the following values: new asset fair value 20, old asset fair value 26, cash received 6, old asset cost 30, old asset accumulated depreciation 9. The full entry is: dr. New Truck 20; dr. Accumulated Depreciation 9; dr. Cash 6; cr. Old Truck 30; cr. Gain 5. The gain equals the old asset's fair value of 26 and its book value of 21 (30 − 9).

Slate Co. and Talse Co. exchanged similar plots of land with fair values in excess of carrying amounts. In addition, Slate received cash from Talse to compensate for the difference in land values. The exchange lacks commercial substance. As a result of the exchange, Slate should recognize A gain equal to the difference between the fair value and the carrying amount of the land given up. A gain in an amount determined by the ratio of cash received to total consideration. A loss in an amount determined by the ratio of cash received to total consideration. Neither a gain nor a loss.

A gain in an amount determined by the ratio of cash received to total consideration. When commercial substance is lacking, gains are recognized in proportion to the amount of cash received.

In an exchange of plant assets, Transit Co. received equipment with a fair value equal to the carrying amount of equipment given up. Transit also contributed cash.The exchange lacks commercial substance. As a result of the exchange, Transit recognized A loss equal to the cash given up. A loss determined by the proportion of cash paid to the total transaction value. A gain determined by the proportion of cash paid to the total transaction value. Neither gain nor loss.

A loss equal to the cash given up. The fair value of the new asset equals the old asset's book value. Because cash was paid, the fair value of the old asset is less than the fair value of the new asset. Therefore, the fair value of the old asset is also less than the old asset's book value resulting in a loss. Using dollar amounts, assume the fair value of the new asset is $10. The book value of the old asset is also $10 by assumption. Assume Transit paid $2 cash. Then the fair value of the old asset is $8 implying a loss of $2, the amount of cash paid. Even without commercial substance, losses are recognized in full.

Which of the following statements describes the proper accounting for losses when nonmonetary assets are exchanged for other nonmonetary assets? A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price. A loss is deferred so that the asset received in the exchange is properly valued. A loss, if any, which is unrelated to the determination of the amount of the asset received should be recorded. A loss can occur only when assets are sold or disposed of in a monetary transaction.

A loss is recognized immediately, because assets received should not be valued at more than their cash-equivalent price. The loss recognized on the exchange equals the book value of the asset transferred less its fair value at the time of the exchange. The fair value is less than book value. The amount recorded for the asset acquired is its fair value, or the fair value of the asset transferred plus or minus cash paid or received, whichever is more reliably determinable. By using the lower fair value of the asset transferred to measure the value of the asset acquired, the asset acquired will not be overstated above its fair value.

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard? As dividend revenue at Guard's carrying value of the stock As dividend revenue at the market value of the stock As a reduction in the total cost of Guard stock owned As a memorandum entry, reducing the unit cost of all Guard stock owned

As a memorandum entry, reducing the unit cost of all Guard stock owned Correct! Under any method used to account for an investment in common stock, the investor records a stock dividend received by a memorandum entry to increase the number of shares owned. Since the cost of the investment does not change, the per share cost of the stock decreases.

Beach Co. determined that the decline in the fair value (FV) of an investment was below the amortized cost and is associated with the credit decline of the issuer (a credit loss). The investment was classified as available-for-sale on Beach's books. Beach Co. does not elect the fair value option to account for these securities. The controller would properly record the decrease in FV by including it in which of the following? Other comprehensive income section of the income statement only Earnings section of the income statement Extraordinary items section of the income statement Accumulated other comprehensive income section of the balance sheet only

Earnings section of the income statement Correct! An available-for-sale security is valued at fair value at the balance sheet date, and any decline associated with credit loss expense should be recorded in the income statement as a loss.

On April 1, North Company issued bonds in the market. Upon issue, South Company acquired 10% of North Company's issue. On November 30, South sold the North Company bonds in the market, and the bonds were acquired by East Company. On December 31, which one of the companies, if any, is an investor? North Company South Company East Company None of the companies is an investor.

East Company Correct! Since East Company owns the bonds on December 31, it is the investor. North Company, the issuer of the bonds, is the investee. Since South Company did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.

Clara Corp. does not elect to use the fair value option to report financial assets. For marketable debt securities included in Clara's held-to-maturity portfolio, which of the following amounts should be included in the period's net income? Credit losses during the period Gains on securities sold during the period Write-off of HTM debt security to the credit allowance III only II only I and II I, II, and III

I and II Correct! This answer is correct because both I and II should be reported on the income statement. Credit losses on held-to-maturity securities are reported in earnings. Gains on securities sold are included as realized gains in the income statement of the applicable period. A write-off does not impact earnings because the HTM security is credited and the allowance for credit loss is debited.

For a debt securities portfolio classified as available-for-sale, which of the following amounts should be included in the period's net income? I. Unrealized temporary losses during the period II. Realized gains during the period III. Changes in the credit loss allowance during the period III only II and III I and II I, II, and III

II and III Correct! Realized gains (from sale or reclassification) on available-for-sale securities are recognized in income for the period as well as the changes in the allowance for credit losses.

Which of the following statements is true concerning the correct accounting for equity investments? An investor must account for (measure) all equity investments using fair value. An investor may elect to account for (measure) some equity investments at fair value. I only. II only. Both I and II. Neither I nor II.

II only. Correct! An investor may elect to use fair value to account for or measure some investments that otherwise would be accounted for using the equity method (Statement II). However, an investor is not required to use fair value to account for all equity investments (Statement I).

Which of the following is true with respect to impairment of available-for-sale securities? If the decline in fair value is considered to be associated with a credit loss, the unrealized losses in OCI are reclassified to earnings. If the decline in fair value is considered to be associated with a credit loss, the unrealized losses are recorded in OCI. If the decline in fair value is not considered to be associated with a credit loss, the unrealized gains in OCI are reclassified to earnings. If the decline in fair value is not considered to be associated with a credit loss, the unrealized gains are recorded in OCI.

If the decline in fair value is considered to be associated with a credit loss, the unrealized losses in OCI are reclassified to earnings. Correct! When the decline in fair value is considered to be associated with the declining credit of the issuer (a credit loss), the unrealized losses in OCI are reclassified to earnings.

How is an impairment loss recognized on the financial statements for a cost method equity investment? In other comprehensive income In current earnings Deferred until recoverable Impairment losses are not recognized on cost method investments.

In current earnings Correct! Impairment losses on equity investments carried at cost are recognized in current earnings.

In which one of the following cases is an investor most likely to use the equity method to carry and report an investment in an investee? Investor owns 15% of the voting stock of the investee and has no other affiliation with the investee. Investor owns 40% of the voting stock of the investee, and the investee is in bankruptcy. Investor is a manufacturing firm that owns 25% of the voting stock of a consulting firm. Investor owns 30% of the voting stock of the investee but is unable to obtain representation on the investee's Board of Directors or obtain significant information from the investee.

Investor is a manufacturing firm that owns 25% of the voting stock of a consulting firm. An investor that owns 25% of the voting stock of an investee, in the absence of evidence to the contrary, is presumed to be able to exercise significant influence over the investee. The fact that the investor and the investee are in different lines of business generally does not mitigate the influence the investor is able to exercise.

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance? It defers any gains and losses. It defers losses to the extent of any gains. It recognizes gains and losses immediately. It defers gains and recognizes losses immediately.

It recognizes gains and losses immediately. Gains and losses from nonmonetary exchanges that have commercial substance are recognized immediately.

An investor purchased a bond as a long-term investment between interest dates at a premium. At the purchase date, the cash paid to the seller is The same as the face amount of the bond. The same as the face amount of the bond plus accrued interest. More than the face amount of the bond. Less than the face amount of the bond.

More than the face amount of the bond Correct! The amount paid by buyer would have been more than the face amount of the bond and would include the premium and the interest accrued since the last interest date.

Solen Co. and Nolse Co. exchanged trucks with fair values in excess of carrying amounts. In addition, Solen paid Nolse to compensate for the difference in truck values.The exchange lacks commercial substance. As a consequence of the exchange, Solen recognizes A gain equal to the difference between the fair value and carrying amount of the truck given up. A gain determined by the proportion of cash paid to the total consideration. A loss determined by the proportion of cash paid to the total consideration. Neither a gain nor a loss.

Neither a gain nor a loss. Solen has an implied gain given that the fair value of its asset exceeds its book value. But when there is no commercial substance, such gains are recognized only when cash is received. Solen paid cash on the exchange.

(This question has been revised from the original to reflect current GAAP.) Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it accounts for the investment at fair value or uses the equity method of accounting? Fair value method Equity method No No Yes Yes Yes No No Yes

No No A dividend never increases the investment account under any accounting method. Under the fair value method, the investee dividends received are recorded by the investor as dividend income, provided that the dividend received is not a liquidating dividend. Since it is not stated otherwise, it can be assumed that the dividend is not liquidating and, under the fair value method, has no effect on the investment account. For the equity method, the dividend is recorded as a decrease in the investment account.

Stock dividends on common stock should be recorded at their fair value by the investor when the related investment is accounted for under which of the following methods? Cost Equity Yes Yes Yes No No Yes No No

No No Correct! Stock dividends are not recognized in the accounts at receipt, at fair value or any other value. Rather, they reduce the cost per share under both methods. The original cost is spread over more shares. The investor's percentage of the firm has not changed as a result of the stock dividend, but the investor has more shares (as do all investors). When the shares received as a dividend are sold, the reduction in cost basis increases the gain or reduces the loss.

When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income? Goodwill amortization related to purchase Cash dividends from investee Yes Yes No Yes No No Yes No

No No Under the equity method of accounting for an investment, neither amortization of goodwill nor dividends from the investee affect the investor's investment income. Goodwill resulting from an investment in another entity (i.e., the excess of the cost of the investment over the investor's share of the fair value of the investee's identifiable assets) is not amortized. Dividends from the investee are not recognized as income; rather, they reduce the investment account.

Which, if any, of the following grants the investor ownership rights? Bond investment Common stock investment Yes Yes Yes No No Yes No No

No Yes Correct! An investment in the bonds of another entity does not give the investor an ownership interest, but an investment in the common stock of another entity does give the investor an ownership interest. An investment in the bonds of another entity establishes a debtor-creditor relationship, not an ownership relationship.

Which of the following is not an indication that an equity security has readily determinable fair value? Sales prices or bid-and-ask quotations are currently available on a securities exchange. Prices or quotations are in a foreign market that has the breadth and scope of the U.S. markets. Prices or quotations for investments are published based on current transactions. Prices must be estimated based on similar securities in inactive markets.

Prices must be estimated based on similar securities in inactive markets. Correct! Prices estimated based on similar securities in an inactive market are an indication that the fair value of the security is not readily determinable.

Which one of the following is not considered an equity investment for investment accounting purposes? Common stock warrants Preferred stock Redeemable preferred stock Common stock options

Redeemable preferred stock Correct! Redeemable preferred stock is not considered an equity security for investment accounting purposes. Redeemable preferred stock, also known as callable preferred stock, may be reacquired by the issuing corporation under prescribed conditions.

Paxton Corporation purchased 100 shares of Swedberg Company's common stock. The purchase is for $40 per share plus brokerage fees of $280. Paxton's entry to record the investment would include Debit Credit A. Cash $4,000 Investment Swedberg $4,000 B. Investment Swedberg $4,280 Cash $4,280 C. Investment Swedberg $4,000 Cash $4,280 Brokerage Fee Expense 280 D. Investment Swedberg $4,000 Cash $4,000 Row A Row B Row C Row D

Row B Correct! The investment in Swedberg is initially measured and recorded at the price paid for the shares including the brokerage fees. The subsequent measurement of an equity investment is at fair value.

An investor purchased a bond classified as a held-to-maturity investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is more than the: Cash paid to seller Face amount of bond A. No Yes B. No No C. Yes No D. Yes Yes Row A. Row B. Row C. Row D.

Row B. Correct! When a bond is purchased at a discount, the price paid is less than face value. Any cash paid to the seller for accrued interest is debited to interest receivable, not to the bond investment. Thus, the carrying value is the portion of the total amount paid attributable to the total bond price, exclusive of accrued interest. The carrying value must be less than the cash paid to the seller, which includes accrued interest.

At December 31, Hull Corp. had the following debt securities that were purchased during the year, its first year of operations: Cost Fair value Unrealized gain (loss) Held-for-trading: Security A $ 90,000 $ 60,000 $(30,000) Security B 15,000 20,000 5,000 Totals $105,000 $80,000 $(25,000) ======================== Available-for-sale: Security Y $ 70,000 $ 80,000 $ 10,000 Security Z 90,000 45,000 (45,000) Totals $160,000$ 125,000 $(35,000) ======================== At December 31, adjustments to fair value should be established with a corresponding charge against IncomeStockholders' equity A. $60,000 $0 B. $30,000 $45,000 C. $25,000 $35,000 D. $25,000 $0 Row A Row B Row C Row D

Row C Correct! The $25,000 decline in value (unrealized loss) on trading securities is recognized in earnings for the year. The $35,000 decline in value (unrealized loss) on securities available-for-sale is recognized in owners' equity, bypassing earnings. The reason for the difference in accounting treatment is that trading securities are held for short-term price appreciation. If the value of the trading portfolio increases or decreases, that gain or loss should be recognized in earnings consistent with the purpose for holding the investments. Securities available-for-sale are held for purposes other than short-term price appreciation. Thus, the increases and decreases in the portfolio market value may not be indicative of the intent of holding the securities. Recognition in earnings each year may cause unwarranted volatility in earnings.

On December 29, year 2, PJ Co. sold a debt security investment that had been purchased on January 4, year 1, PJ owned no other securities. An unrealized loss was reported in the year 1 Income Statement. A realized gain was reported in the year 2 Income Statement. Was the debt security classified as available-for-sale (AFS), and did its year 1 market price decline exceed its year 2 market price recovery? AFS Year 1 market price decline exceeded year 2 market price recovery. A.Yes Yes B.Yes No C.No Yes D.No No Row A Row B Row C Row D

Row D Correct! The security cannot be classified as available-for-sale because the unrealized gains and losses are recognized in the Income Statement. Unrealized gains and losses on available-for-sale securities are recognized in owners' equity, not earnings. The loss in the first year is not related in amount and does not constrain the realized gain in the second year. There is no requirement that in order to recognize a gain in year 2, PJ must first recoup the loss recognized in year 1.

In Year 1, Sloco purchased an equity security for $40,000 and determined that the security had no readily determinable fair value. At the end of Year 2, there were observable price changes in a similar security that indicated that the fair value of Sloco's investment had declined to $36,000. Because of recovery in market conditions in Year 3, there were observable price changes in the similar security, indicating that the value of Sloco's investment is $41,000. What amount, if any, would Sloco recognize as an impairment (loss) or gain in Year 2 and Year 3? Year 2 Year 3 A. $ 0 $ 0 B. ($4,000) $ 0 C. ($4,000) $4,000 D. ($4,000) $5,000 Row A. Row B. Row C. Row D.

Row D. Correct! The impairment loss of $4,000 would be recognized in Year 2, and the gain for recovery of $5,000 in Year 3 would also be recognized. If there are observable transactions from which to determine fair value, then that information should be used to measure the investment.

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? The names and ownership percentages of the other stockholders in the investee company The reason for the company's decision to invest in the investee company The company's accounting policy for the investment Whether the investee company is involved in any litigation

The company's accounting policy for the investment The investor must disclose the accounting policy for the investee. It is possible for the investor to use equity method accounting or elect the fair value option to account for the investee. The users of the financial statement need to know the basis for the equity accounting and if the investment included intercompany profits or other items that could impact the carrying value.

Assume an entity is holding an equity security where there is not a readily determinable fair value. Which of the following is not a factor to consider in the evaluation of potential impairment? A significant deterioration in the earnings performance, credit rating, asset quality, or business outlook of the investee A significant adverse change in the regulatory, economic, or technological environment of the investee The costs associated with gathering data on similar investments, researching valuation methodologies, and the cost to hire a valuation consultant A significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates

The costs associated with gathering data on similar investments, researching valuation methodologies, and the cost to hire a valuation consultant Correct! The costs associated with determining fair value are not taken into consideration when assessing whether fair value is readily determinable. The costs listed in this response are the typical and reasonable costs that the entity would incur to determine fair value.

In which one of the following circumstances would an investor most likely have control of an investee? The investor owns more than 50% of the voting common stock of an investee. The investor owns 100% of the nonvoting preferred stock of an investee. The investor owns 90% of the voting common stock of a foreign investee on which the foreign government imposes significant financial and operating restrictions. The investor owns 100% of the voting common stock of a domestic investee that is in bankruptcy.

The investor owns more than 50% of the voting common stock of an investee. Correct! When an investor owns more than 50% of the voting common stock of an investee, in the absence of constraining conditions (e.g., investee in bankruptcy), the investor has controlling interest in the investee.

Which one of the following is least likely to be a factor in determining how an investment in debt or equity securities is accounted for and reported in financial statements? The nature of the investment The method of payment used to acquire the investment The extent or proportion of the investment securities acquired The purpose for which the investment was made

The method of payment used to acquire the investment Correct! The method of payment used to acquire an investment does not help determine the correct accounting treatment of the investment. While the method of payment determines what will be "credited" upon acquisition of the securities, it will not enter into the subsequent accounting treatment of the investment.

In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 2, Pulham has a receivable from Angles. How should the receivable be reported in Pulham's Year 2 financial statements? None of the receivable should be reported, but the entire receivable should be offset against Angles' payable to Pulham. Seventy percent of the receivable should be separately reported, with the balance offset against 30% of Angles' payable to Pulham. The total receivable should be disclosed separately. The total receivable should be included as part of the investment in Angles without a separate disclosure.

The total receivable should be disclosed separately. Although the equity method is often called a "one-line" consolidation, intercompany receivables remain separate from the investment account. Intercompany profit or loss is eliminated but that affects the income recognized by Pulham, not the receivable.

In year 1, a company reported in other comprehensive income an unrealized holding loss on a debt investment classified as available-for-sale. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following? The unrealized loss should be credited to the investment account. The unrealized loss should be credited to the other comprehensive income account. The unrealized loss should be debited to the other comprehensive income account. The unrealized loss should be credited to beginning retained earnings.

The unrealized loss should be credited to the other comprehensive income account. Correct! The unrealized loss would be credited to the other comprehensive income account to reclassify the holding loss as a realized loss in the income statement for Year 2. For purposes of illustration, assume the available-for-sale (AFS) securities were originally purchased for $5 and that the loss during Year 1 was $1. The related entries would be: Purchase: DR. AFS Securities $5 CR. Cash $5 Year 1 DR. OCI (holding loss) $1 CR. AFS Securities $1 .Year 2: DR. Cash $4 CR. AFS Securities $4 DR. Loss on AFS Securities $1(Income Statement) CR. OCI (holding loss) $1(B/S, Accumulated OCI) The last entry (above) reclassifies the holding loss to recognize a realized loss on sale.

Which of the following describes a factor when an entity can invoke the practicability exception to using fair value when reporting an equity security? There are no bid-and-ask quotations available on a securities exchange or in a publicly reported over-the-counter market. There are sales prices available on a securities exchange or publicly reported in the over-the-counter market. There are prices or quotations in a foreign market that has the breadth and scope of the U.S. markets. There are prices or quotations for investments based on the fair value per share as published based on current transactions.

There are no bid-and-ask quotations available on a securities exchange or in a publicly reported over-the-counter market. Correct! If there are no sources of fair value quotations, including no bid-and-ask quotations in an exchange of over-the-counter markets, then the entity can elect the practicability exception and use the cost method.

The credit losses associated with the impairment of debt securities are not recognized in which of the following circumstances? When the entity has the positive ability and intent to sell the impaired security When the entity has the positive ability and intent to hold the impaired security When the entity has positive ability and intent to hold the impaired security and expects to recover the entire cost basis of the impaired security When the entity has positive ability and intent to hold the impaired security and does not expect to recover the entire cost basis of the impaired security

When the entity has positive ability and intent to hold the impaired security and expects to recover the entire cost basis of the impaired security Correct! This response is correct because when the entity has positive ability and intent to hold the impaired security and expects to recover the entire cost basis of the impaired security, there is no OTTI (other-than-temporary impairment) recognition.

Which of the following kinds of investments can result in the investor obtaining significant influence over an investee? Equity investments Debt investments Yes Yes Yes No No Yes No No

Yes No An investment in equity securities of another entity gives the investor an ownership interest and, therefore, the ability to vote in corporate elections. An investment in the debt of another entity does not give the investor an ownership interest or the right to vote in corporate elections. An investment in the debt of another entity establishes a debtor-creditor relationship, not an ownership relationship.

On April 1, North Company issued bonds in the market. Upon issue, South Company acquired 10% of North Company's issue. On November 30, South sold the North Company bonds in the market; the bonds were acquired by East Company. On December 31, which, if any, of the following companies is an investee? North South East Yes Yes No Yes No No No Yes Yes No No Yes

Yes No No Correct! North is the investee because it issued the bonds, but neither South nor East is an investee. Since East owns the bonds on December 31, it is the investor. Since South did not issue the bonds and does not own the bonds on December 31, it is neither an investor nor an investee.

When an investor acquires sufficient voting common stock of an investee so that it has significant influence, which, if any, of the following kinds of investee data must the investor "capture" at the time the investment is made? Book values of assets & liabilities Fair values of assets & liabilities Yes Yes Yes No No Yes No No

Yes Yes At the time an investor acquires sufficient voting stock of an investee to give it significant influence over the investee, it must "capture" both the book values and fair values of the investee's assets and liabilities in order to apply the equity method of accounting to the investment.

May Co. and Sty Co. exchanged nonmonetary assets. The exchange did not culminate an earning process for either May or Sty (the exchange lacked commercial substance). May paid cash to Sty in connection with the exchange. The book value of the asset exchanged exceeded its fair value for both firms. Therefore, a loss on the exchange should be recognized by May Sty Yes Yes Yes No No Yes No No

Yes Yes The fair value of each asset is less than book value implying that both firms have a loss. Losses are recognized in full regardless of whether there is commercial exchange.

On March 14, Apple Corporation purchased 6,000 shares of Pear Inc. for $25 per share plus a $340 brokerage fee. On June 30, when the shares were trading at $27, Apple prepared an adjustment to fair value and recorded the annual dividend of $0.40 per share. On August 14, Apple sold 4,000 shares of Pear for $29 per share less a brokerage fee of $225. The journal entry at the date of sale would include a debit to cash for $115,775. a debit to cash for $108,000. a credit to investments for $100,000. a credit to gain on the sale of investments for $8,000.

a debit to cash for $115,775. Correct! The entries related to the investment in Pear are as follows: DR: Investment in Pear 150,340 CR: Cash 150,340 (to record the purchase of Pear (($25 × 6,000) + $340) DR: Investment in Pear 11,660 CR: Unrealized gain 11,660 (to adjust investment to fair value of 162,000 ($27 × 6,000)(162,000 - 150,340) DR: Cash 2,400 . CR: Dividend income 2,400 (to record dividend income ($0.40 × 6,000)) DR: Cash 115,775 CR: Investment in Pear 108,000 CR: Gain on sale 7,775 (to record the sale of 4,000 shares of Pear at $29 per share) Cash = (($29 × 4,000) - 225 = 115,775) Investment in Pear = ($27 × 4,000 = 108,000) Gain = (115,775 - 108,000)