ACC577 FAR Week 4 Quiz
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.
B.No / No 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.
During Year 1, Anthony Company purchased debt securities and holds the securities as available-for-sale. Pertinent data are as follows: Security Cost / Fair value at 12/31/Y1 A $ 20,000 / $ 17,000 B 40,000 / 30,000 C 90,000 / 92,000 $150,000 / $139,000 Anthony appropriately carries these securities at fair value, and the decline in value of Security B is attributed to credit loss. The change in value of securities A and C is considered to be due to factors other than credit loss. The amount of loss on these securities that will appear on Anthony's balance sheet as a component of "Accumulated other comprehensive income" at 12/31/Y1 should be a. $ 1,000. b. $ 3,000. c. $11,000. d. $13,000.
a. $ 1,000. Correct! Since these debt securities are classified as available-for-sale, any unrealized gain or loss is reported net as a separate component of stockholders' equity entitled "Accumulated other comprehensive income." However, in the case of security B, a credit loss is recognized in earnings and an allowance for credit loss is established. Thus, the $10,000 loss on Security B would go to the income statement while the $1,000 ($3,000 loss on A − $2,000 gain on C) unrealized loss on the remaining portfolio would appear separately in the stockholders' equity section of Anthony's balance sheet at 12/31/Y1.
An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund l. Increases by revenue earned on the investments. ll. Is not affected by revenue earned on the investments. lll. Decreases when the investments are purchased. a. I only b. I and III c. II and III d. III only
a. I only Correct! This answer is correct, only I is true. Businesses occasionally accumulate a fund of cash and/or investments for a specific purpose, such as the retirement of bonds in this problem. These funds are referred to as "sinking funds." The sinking fund is increased when periodic additions are made to the fund and when revenue is earned on the investments held in the fund. When cash is used to purchase investments, the components of the fund change (i.e., cash is invested and replaced by bonds or other securities), but the total fund balance is not affected.
In which one of the following circumstances would an investor most likely have control of an investee? a. The investor owns more than 50% of the voting common stock of an investee. b. The investor owns 100% of the nonvoting preferred stock of an investee. c. The investor owns 90% of the voting common stock of a foreign investee on which the foreign government imposes significant financial and operating restrictions. d. The investor owns 100% of the voting common stock of a domestic investee that is in bankruptcy.
a. 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 of the following are possible ways that gains or losses on changes in the fair value of investments in equity securities may be reported under IFRS requirements? In profit/loss (Income Statement) / In other comprehensive income a. Yes / Yes b. Yes / No c. No / Yes d. No / No
a. Yes / Yes Correct! Under IFRS, changes in fair value may be reported in profit/loss or in other comprehensive income, depending on whether or not the investment is held for trading purposes or not. If an investment in equity securities is held-for-trading purposes (i.e., to make a profit on price appreciation), changes in fair value will be reported through profit/loss. If an investment in equity securities is not held-for-trading purposes, the investor may elect to report changes in fair value through other comprehensive income.
On January 2, Year 1, Saxe Company purchased 20% of Lex Corporation's common stock for $150,000. Saxe Corporation intends to hold the stock indefinitely. This investment did not give Saxe the ability to exercise significant influence over Lex. During Year 1 Lex reported net income of $175,000 and paid cash dividends of $100,000 on its common stock. There was no change in the fair value of the common stock during the Year. The balance in Saxe's investment in Lex Corporation account at December 31, Year 1, should be a. $130,000. b. $150,000. c. $165,000. d. $185,000.
b. $150,000. Correct! The equity method is used when the investor owns 20% or more of the investee's voting stock, unless there is evidence that the investor does not have the ability to exercise significant influence over the investee. Since this is the case, Saxe must carry the stock at fair value. Under this method, dividends received are to be recognized as income to the investor, and the investment account is unaffected. As there has been no change in the fair value, the investment account would still have a balance of $150,000 at 12/31/Y1.
On March 31, year 4, Winn Company traded in an old machine having a carrying amount of $16,800, and paid a cash difference of $6,000 for a new machine having a total cash price of $20,500. The cash flows from the new machine are expected to be significantly different than the cash flows from the old machine. On March 31, year 4, what amount of loss should Winn recognize on this exchange? a. $0 b. $2,300 c. $3,700 d. $6,000
b. $2,300 The cash price of the new machine represents its fair market value (FMV). The FMV of the old machine can be determined by subtracting the cash portion of the purchase price ($6,000) from the total cost of the new machine: $20,500 − $6,000 = $14,500. Since the book value of the machine ($16,800) exceeds its FMV on the date of the trade-in ($14,500), the difference of $2,300 must be recognized as a loss.
When the fair value is determinable, a nonreciprocal transfer of a nonmonetary asset to another entity should be recorded at the a. Fair value of the asset received, but no gain or loss should be recognized on the disposition of the asset. b. Fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. c. Recorded amount of the asset transferred. d. Recorded amount of the asset received.
b. Fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. This answer is correct because ASC Topic 845 requires the recording of nonreciprocal transfers at fair value of the asset transferred when it is determinable.
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 a. III only b. II and III c. I and II d. I, II, and III
b. 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.
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 a. Yes /Yes b. No / Yes c. No / No d. Yes / No
c. 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.
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 names and ownership percentages of the other stockholders in the investee company b. The reason for the company's decision to invest in the investee company c. The company's accounting policy for the investment d. Whether the investee company is involved in any litigation
c. 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. A significant deterioration in the earnings performance, credit rating, asset quality, or business outlook of the investee b. A significant adverse change in the regulatory, economic, or technological environment of the investee c. The costs associated with gathering data on similar investments, researching valuation methodologies, and the cost to hire a valuation consultant d. A significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates
c. 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.
Sun Corp. had investments in marketable debt securities costing $650,000 that were classified as available-for-sale. On June 30, Year 2, Sun decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments' fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. Sun does not elect the fair value option to account for these investments. What amount should Sun report as net unrealized loss on marketable debt securities in its Year 2 statement of stockholders' equity? a. $ 40,000 b. $ 45,000 c. $160,000 d. $120,000
d. $120,000 Correct! When a security is transferred to held-to-maturity from available-for-sale, the unrealized holding gain or loss continues to be reported as a separate component of stockholders' equity. Held-to-maturity securities are carried at amortized cost, and any unrealized holding gains or losses are not reported. Thus, the balance in the "accumulated other comprehensive income" in stockholders' equity on the Year 2 statement of stockholders' equity would be $120,000 ($75,000 amount reported at 12/31/Y1 plus the $45,000 amount reported at June 30, Year 2). The $120,000 will be amortized over the remaining life of the security as an adjustment to yield. The additional decline in value from 6/30/Y2 to 12/31/Y2 would not be reported, as held-to-maturity securities do not report unrealized losses.
Shettleton Corp purchased 1,000 shares of Upstate Co. (Upstate) on April 1, Year 1, for $60 per share. On November 1, Year 1, Upstate declared a two-for-one stock split. Upstate's shares have a readily determinable fair value of $32 and $35 per share on December 31, Year 1 and Year 2, respectively. During Year 2, Upstate paid a dividend of $1.00 per share. What amount of income would Shettleton report on its year 2 income statement related to the investment in Upstate? a. $2,000 b. $3,000 c. $6,000 d. $8,000
d. $8,000 Correct! Shettleton's income statement should include the change in fair value from December 31, Year 1 (2,000 shares × $32 = $64,000) to December 31, Year 2 (2,000 shares × $35 = $70,000) plus the dividends receive in Year 2 (2,000 shares × $1.00 = $2,000) or a total of $8,000.
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? a. As dividend revenue at Guard's carrying value of the stock b. As dividend revenue at the market value of the stock c. As a reduction in the total cost of Guard stock owned d. As a memorandum entry, reducing the unit cost of all Guard stock owned
d. 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.
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 a. Yes / Yes b. Yes / No c. No / Yes d. No / No
d. 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.
Under IFRS, financial instruments should be classified as Tradable / Fair value through profit or loss a. Yes / Yes b. Yes / No c. No / No d. No / Yes
d. No / Yes Correct! because! IFRS classifies instruments as fair value through profit or loss (FVTPL). Held for trading is a category of FVTPL, but tradable is not.
Which of the following is not an indication that an equity security has readily determinable fair value? a. Sales prices or bid-and-ask quotations are currently available on a securities exchange. b. Prices or quotations are in a foreign market that has the breadth and scope of the U.S. markets. c. Prices or quotations for investments are published based on current transactions. d. Prices must be estimated based on similar securities in inactive markets.
d. 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.
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 a. Row A. b. Row B. c. Row C. d. Row D.
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.
In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines. a. When the advertising services in the exchange are similar b. When the fair value of the advertising services received can be reliably measured c. When there is a nonbarter transaction for similar advertising services that can be reliably measured with the same counterparty d. When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty
d. When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5).