Ch 12 SB
Rosa Company purchases debt securities and classifies them as "available-for-sale" securities. How should Rosa recognize changes in the value of the investment?
As unrealized holding gain or loss in other comprehensive income.
Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?
Net income may otherwise appear more volatile than it actually is.
Under U.S. GAAP, which of the following statements regarding the classification of debt investments is correct?
The classification of investments must be reassessed each reporting period.
Equity investments for which the investor does not have significant influence are classified as _____ in the balance sheet.
current assets non-current assets
Equity and debt securities are commonly referred to as ______ instruments.
financial
Characteristics that support classification of investments as trading securities include
frequent and active trading. motivation to realize short-term profits.
Goodwill arising from an investment accounted for under the equity method is
not amortized.
Beginning in 2018, equity adjustments that lack significant influence are accounted for the same way as debt investments classified as
trading securities
Holding bonds during periods in which the fair value of the bonds changes results in
unrealized holding gains and losses
Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. On the date of sale, Markus should recognize a realized gain of _____ in net income. (Assume the debt investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed.)
$2,000
Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of
$520,000 to cash. $20,000 to discounts.
Which reporting method should be used if the investor can exert significant influence over the investee?
Equity method
True or false: If the investee reports a net loss, the equity investment account is not adjusted for additional expenses.
False [If the investee reports a net loss, the investment account is decreased by the investor's share of the investee's net loss, adjusted for additional expenses.]
Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. Assume the investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed. The journal entry to record the sale of the bonds should include these credits:
Investment in AFS - $18,000 Gain on sale of investment - $2,000
Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?"
The investor intends to hold the security until maturity. The investor has the ability to hold the security until maturity.
Lerner Inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. During the year after the acquisition, the undervalued equipment will _____ Lerner's investment revenue by _____.
decrease; $1,500 [($50,000 x .3)/10] [additional depreciation decreases investment revenue]
Dividends earned on an equity investment, when there is a lack of significant influence, are credited to
dividend revenue.
The appropriateness of the classification of debt investments must be reassessed
each reporting date
Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the ___________ method.
equity
The price of a bond is equal to the
present value of future cash receipts.
An investor who purchased corporate bonds that are not publicly traded may estimate the bonds' fair value by determining the
present value of the future cash flows
From an accounting perspective, critical events that investors experience over the life of an investment include
sale of investment changes in fair value receiving dividends
Regarding the valuation of equity investments that lack significant influence beginning in 2018, which of the following statements is correct?
Companies are required to use the fair value through net income method.
How are available-for-sale debt securities reported?
Unrealized gains and losses are reported as part of other comprehensive income when they occur. Realized gains and losses are reported in net income in the period the investment is sold.
Correctly match the account balances related to AFS debt securities with the correct financial statement presentation. a. Other comprehensive income b. Net income c. Accumulated other comprehensive income
a. Current period holding gains or losses b. Realized gains and losses from the sale of AFS securities c. Net fair value adjustments to date - net holding gains and losses to date
Global Company holds a portfolio of equity securities. The company intends to sell the securities during the next accounting period. The company should classify the investment as
current.
January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. How should Smith Co. record the purchase of this investment?
debit investment in North Company $500,000 credit cash $500,000
Silvia Company acquires a 30% interest in Small Company. The fair value of Small's inventory exceeds its carrying value by $100,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:
decrease by $30,000
Dividends cause the investor's investment in the investee's net assets to
decrease.
Cash flows related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the _____ section of the Statement of Cash Flows.
operating
When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the
original cost of the investment.
The price of a bond is equal to
present value of future interest payments plus present value of principal
Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system.
receiving dividends changes in fair value purchase of investment sale of investment
Unrealized holding gains and losses associated with debt investments properly classified as "available for sale" are
recognized as other comprehensive income.
Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to
the initial investment. interest revenue earned on investment.
When fair value of equity investments is not readily determinable
the investor needs to assess annually whether the investment is impaired. the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments. the investor needs to continually evaluate whether fair value is readily determinable.
The choice to classify debt securities as current or non-current depends on
when they are expected to mature or be sold.
Under the equity method, if the investee company reports a net loss, the investment balance will
decrease by the investor's proportionate share of the investee's net loss
Consistent with the equity method, investment income is
based on investee's income times ownership percentage.
Match the correct accounting treatment with the correct transaction. a. Holding gain or loss in other comprehensive income b. Holding gain or loss in income c. No holding gain or loss is recognized
a. Investment in available-for-sale debt securities b. Investment in trading debt securities c. Investment in held-to-maturity debt securities
If the market rate of interest decreases after a bond is purchased, the bond incurs
an unrealized holding gain
If the market rate of interest rises after a bond is purchased, the bond incurs
an unrealized holding loss
All equity investments are initially recorded at
cost
Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at
cost
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with
credit cash $450,000 debit investment in Saddle $450,000
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.
investing
If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using __________ techniques.
present value
If an investment accounted for under the equity method is acquired during the year, income and other adjustments are
recognized for the portion of the year the investment was owned.
Which of the following are common financial instruments that are used to finance or expand a company's operations?
Common stock Corporate bonds Preferred stock
Which of the following scenarios may require additional adjustments under the equity method?
The investor's acquisition cost exceeds the book value of the underlying net assets.
Abbott Inc. owns 30% of the outstanding voting shares of Berta Inc. On the date of acquisition, the fair value of Berta's equipment with a remaining useful life of five years and no residual value exceeded its carrying value by $20,000. During the year after the acquisition, the undervalued equipment will _____ Abbott's investment revenue by _____.
decrease;$1200 [$(20,000 x 0.3)/5 additional depreciation decreases investment revenue]
If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)
held-to-maturity security.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 million and the fair value of the company's net assets is $1.2 million. The difference between the book value and fair value of the net assets is attributed to undervalued land. Adrianna should
not amortize the difference between fair value and book value attributable to land
When fair value of equity investments is not readily determinable,
the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.
Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of
$40,000 to gain from sale of investment. $500,000 to investments in HTM securities.
Ziegler Company owns 40% of Norm Company's outstanding voting stock. During the current year, Norm reported income of $2 million and declared dividends of $1 million. Ziegler should report income from its investment of
$800,000 [$2 million x 40%]
How are equity investments that lack significant influence adjusted?
A fair value adjustment is recorded at the end of every reporting period. Unrealized holding gain or loss is included in net income.
How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?
A valuation allowance account is increased or decreased.
January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018?
credit dividend revenue $5,000 debit cash $5,000
January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale?
credit fair value adjustment $5,000 [To reverse the unrealized holding gain that would have been recorded 12/31.] debit cash $505,000 credit investment in North stock $500,000 [To remove the investment from the balance sheet of Smith] [The gain was already recorded.] [The investment is carried at cost.] [The fair value adjustment account will have a debit balance so a credit is required]
Trading securities typically are classified in the balance sheet as
current assets.
Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale?
debit to discount $2,000 debit to cash $99,000 credit to fair value adjustment $1,000 credit investment in bonds $100,000
Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes
debit to discount on bond investment $100,000 credit to fair value adjustment $80,000. debit to cash $680,000 credit to investment in bonds $700,000 [securities incurred a gain which was already recorded.] [All gains and losses have already been included in net income.]
Additional adjustments under the equity method directly affect which of the following accounts?
investment revenue investment
Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:
decrease by $10,000
Under the equity method, dividends received from the investment
decrease the investment account balance
On July 1, Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle reports income of $200,000 and declares dividends of 50,000. Adrianna should recognize income earned by debiting
investment in Saddle Company for $35,000. [The stock was purchased July 1 so 6/12]