Acct ch. 13

On July 1, 2016, Aldrich Company purchased as an available-for-sale security $200000 face value, 9% U.S. Treasury notes for $194000. The notes mature July 1, 2017, and pay interest semiannually on Jan. 1 and July 1. the notes were sold on Dec. 1, 2016, for $199000. Aldrich normally uses straight-line amortization on all of its notes. In its income statement for the year ended Dec. 31, 2016, what amount should Aldrich report as a gain on the sale of the available-for-sale security? A. $2500 B. $6000 C. $5000 D. $3500

A. $2500

In 2015, Cromwell corp. bought 30000 shares of Fleming Corp. listed stock for $300000 and classified the investment as available-for-sale. In 2016, the market value declined to $200000. In 2017, the market value of the Fleming stock rose to $230000, and the stock was sold. How much should Cromwell record as a realized gain or loss in its determination of net income for 2017? A. $70000 loss B. $30000 gain C. $0 D. $100,000 loss

A. $70000 loss

When an investor acquires enough additional common stock during a year to change from using the fair value method to using the equity method: A. A retrospective adjustment is made by debiting the Investment account and crediting Retained Earnings for its previous percentage of investee income (less dividends) for the period from the original date of acquisition to the date that significant influence was obtained. B. The unrealized holding gain/loss account is reported as part of net income in the year in which the additional investment is made. C. The investor applies the equity method prospectively from the beginning of the year in which the additional investment is made. D. The investment is still accounted for under the fair value method, but disclosures must be provided which show the effect of using the equity method.

A. A retrospective adjustment is made by debiting the Investment account and crediting Retained Earnings for its previous percentage of investee income (less dividends) for the period from the original date of acquisition to the date that significant influence was obtained.

Under IFRS, minority passive investments are: A. Classified based on the company's business model for managing financial assets and the characteristics of the contractual cash flows of the financial asset. B. Reported on the balance sheet only as long-term assets C. Divided into categories including trading, measured at fair value, and amortized cost. D. All of the choices are correct.

A. Classified based on the company's business model for managing financial assets and the characteristics of the contractual cash flows of the financial asset.

Companies purchase the securities of other corporations to: I. Improve its competitive position II. Obtain additional income by investing excess cash A. I and II B. II only C. I only D. Neither I nor II

A. I and II

For investments in Held-to-maturity debt securities: I. Unrealized holding gains and losses are disclosed in the notes to the financial statements II. Interest income and realized gains and losses on sales are included in net income. A. I and II B. II only C. I only D. Neither I nor II

A. I and II

A company receives a note in exchange for property and it cannot determine either the fair value of the property or the fair value of the note. When will the borrower;s incremental rate be used? I. To apply the effective interest method to determine subsequent interest income II. To determine the future value of the note A. I only B. II only C. I and II D. Neither I nor II

A. I only

For investments in trading securities, which of the following items are included in net income of the current period? I. Loss on sale II. Unrealized loss from change in fair value III. Dividend income A. I, II, and III B. I and II only C. II only D. I and III only

A. I, II, and III

A noninterest-bearing note receivable is exchanged for property for which there is no clearly determinable fair value. The note also does not have a clearly determinable fair value. In this circumstance, the note is recorded at its: A. Present value using the borrower's incremental interest rate. B. Future value using the borrower's incremental interest rate. C. Present value using the seller's incremental interest rate. D. Future value using the seller's incremental interwst rate.

A. Present value using the borrower's incremental interest rate.

A company owns a life insurance policy on which the company is the beneficiary. If the insurance policy allows a portion of accumulated premiums to build up as a savings plan, A. The portion of the yearly premium that does not increase the cash surrender value of the policy is recorded as insurance expense. B. The savings plan, or cash surrender value, is forfeited to the insurance company when the policy is canceled. C. The amount of cash surrender value of the life insurance policy is included as a long-term liability on the balance sheet. D. All of the choices are correct.

A. The portion of the yearly premium that does not increase the cash surrender value of the policy is recorded as insurance expense.

When an investment in available-for-sale securities is sold, A. gains and losses are reported on the income statement B. any gain or loss is measured as the selling price plus the cost of an equity security or plus the amortized cost of a debt security. C. a reclassification adjustment is optional and may be done to reverse the cumulative balance in the allowance for change in fair value of investment. D. all of the choices are correct.

A. gains and losses are reported on the income statement

Cash dividends declared out of current earnings were distributed to an investor. How will the investor's investment account be affected by those dividends under each of the following accounting methods? A. Fair value method: Decrease, Equity Method: No Effect B. Fair value method: No Effect, Equity Method: Decrease C. Fair value method: No effect, Equity Method: no effect D. Fair Value Method: Decrease, Equity Method: Decrease

B. Fair value method: No effect, Equity Method: Decrease

An impairment loss on an available-for-sale equity security: I. May be reversed under IFRS II. May be reversed under U.S. GAAP III. Will not arise because available-for-sale securities are reported on the balance sheet at amortized cost. A. I and II only B. I only C. II only D. III only

B. I only

Investments reported on the balance sheet at amortized cost include: I. Held-to-maturity securities II. Available-for-sale securities II. Trading Securities A. I and III only B. I only C. II only D. I and II only

B. I only

When accounting for an investment in available-for-sale securities, A. Gaines and losses on sale of investment are reported as a component of other comprehensive income of the current period B. Interest and dividend income are included in net income of the current period C. Unrealized holding gains and losses resulting from changes in the fair value of the securities are included in net income of the current period. D. All of the choices are correct.

B. Interest and dividend income are included in net income of the current period

Morgan Inc. and Parker Comp. are considering entering into a joint venture arrangement. Under IFRS, Morgan Inc. and Parker Comp. , A. Must account for the joint venture using the equity method. B. May account for the joint venture using proportionate consolidation. C. May account for the joint venture using the fair value method, the equity method, or a proportionate consolidation. D. May account for the joint venture using the fair value method.

B. May account for the joint venture using proportionate consolidation.

The method that recognizes that a material economic relationship exists between the investor and the investee is: A. The fair value method B. The equity method C. A consolidation D. The amortized cost method

B. The equity method

Willow Co. owns one security which is classified as an available-for-sale security. The investment was purchased at the beginning of the year for $10000. at December 31 of the current year, the investment's fair value is $9200. Which of the following is correct regarding Willow's investment? A. Willow will report a loss as part of its net income for the year. B. Willow will debit an Unrealized Holding Loss account which is included in other comprehensive income. C. Willow will report the security at $10000 in the Dec. 31 balance sheet. D. All of the choices are correct.

B. Willow will debit an Unrealized Holding Loss account which is included in other comprehensive income.

On Jan. 2, 2016, Portela Inc. bought 30% of the outstanding common stock of Bracero Corp. for $258000 cash. Portela accounts for this investment by the equity method. At the date of acquisition of the stock, Bracero's property, plant, and equipment had a fair value in excess of its book value of $150000. Bracero's property, plant, and equipment has a remaining life of 10 years. Bracero's net income for the year ended Dec. 31, 2016, was $180000. During 2016, Bracerodeclared and paid cash dividends of $20000. On Dec. 31, 2016, Portela should have carried its investment in Bracero in the amount of: A. $312000 B. $258000 C. $301500 D. $306000

C. $301500

When the market value of a company's portfolio of available-for-sale securities is lower than its cost, the difference should be: A. Accounted for as a liability B. Disclosed and described in a note to the financial statements but not accounted ofr C. accounted for as an addition in the shareholders equity section of the balance sheet D. Accoounted for as a valuation allowance deducted from the asset to which it relates.

C. fair value at date of transfer, regardless of its cost.

On Jan. 1, 2016, Parke Comp. accepted a $36000 non-interest-bearing 3-year note from a major customer in exchange for used equipment. The equipment had originally cost Parke $200000 and had a book value of $20000 on the date of the date of the sale. At the 12% imputed interest rate for this type of loan, the present value of the note is $25500 at Jan. 1, 2016. Parke uses the effective interest rate. What is the carrying value of the note receivable on Parke's Dec. 31, 2016, balance sheet? A. $29000 B. $36000 C. $32500 D. $28560

D. $28560

On Jan. 1, 2016, Weaver company purchased as held-to-maturity debt securities $500000 face value of Park Corp. 8% bonds for $456200. The bonds were purchased to yield 10% interest and pay interest annually. the bonds mature on Jan. 1, 2021. Weaver uses the effective interest method of amortization. What amount should Weavre report on its Dec. 31, 2016, balance sheet as an investment in held-to-maturity debt securities? A. $456200 B. $450580 C. $466200 D. $461820

D. $461820

When an investment in available-for-sale securities that a company classifies as current and has a fair value in excess of cost, a disclosure must be provided that shows: A. the allowance for change in fair value of investment B. The investment's fair value C. The investment's cost D. All of the choices are correct.

D. All of the choices are correct

Willow Co. owns one security classified as a trading security. The investment was purchased at the beginning of the year for $10000. At dec. 31 of the current year, the investment is valued at its fair value of $9200. Which of the following is correct regarding Willow's investment? A. Willow may credit the allowance for change in fair value of investment to reflect any change in fair value. B. Willow may credit the Investment in Trading Securities account to reflect any change in fair value. C. Fair value was determined as the number of units of the security times the quoted selling price on a stock exchange. D. All of the choices are correct.

D. All of the choices are correct.

Any unrealized holding gain or loss on the date of transfer will continue to be reported as a separate component of accumulated other comprehensive income and amortized over the remaining life of the security as an adjustment of interest income when an investment in a debt security is transferred. A. From the available-for-sale category to the trading category. B. From the trading category to the available-for-sale category. C. From the held-to-maturity category to the available-for-sale category. D. From the available-for-sale category to the held-to-maturity category.

D. From the available-for-sale category to the held-to-maturity category.

Under IFRS: I. Unrealized gains and losses on investments measured at fair value are presented on the income statement. II. If an equity security is not held for trading, a company may, at initial recognition elect to have subsequent changes in fair value reported in other comprehensive income. A. I and II B. II only C. I only D. Neither I nor II

D. Neither I nor II

Which of the following is correct regarding recognition of interest income and amortization of premium and discounts on investments in bonds held to maturity? I. Under the effective interest method, the current market rate of interest is multiplied by the face amount of the bond investment at the beginning of the period to determine the amount of interest income. II. The straight-line method may be used for financial reporting purposes if it is also used for tax reporting purposes. A. II only B. I and II C. I only D. neither I nor II

D. neither I nor II