Ch. 13

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:

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

On July 1, 2016, Aldrich Company purchased as an available-for-sale security $200,000 face value, 9% U.S. Treasury notes for $194,000. The notes mature July 1, 2017, and pay interest semiannually on January 1 and July 1. The notes were sold on December 1, 2016, for $199,000. Aldrich normally uses straight-line amortization on all of its notes. In its income statement for the year ended December 31, 2016, what amount should Aldrich report as a gain on the sale of the available-for-sale security?

$2500

On January 1, 2016, Parke Company accepted a $36,000 non-interest-bearing 3-year note from a major customer in exchange for used equipment. The equipment had originally cost Parke $200,000 and had a book value of $20,000 on the date of the sale. At the 12% imputed interest rate for this type of loan, the present value of the note is $25,500 at January 1, 2016. Parke uses the effective interest rate. What is the carrying value of the note receivable on Parke's December 31, 2016, balance sheet?

$28,560

On January 2, 2016, Portela Inc. bought 30% of the outstanding common stock of Bracero Corporation for $258,000 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 $150,000. Bracero's property, plant, and equipment has a remaining life of 10 years. Bracero's net income for the year ended December 31, 2016, was $180,000. During 2016, Bracero declared and paid cash dividends of $20,000. On December 31, 2016, Portela should have carried its investment in Bracero in the amount of:

$301,500

On January 1, 2016, Weaver Company purchased as held-to-maturity debt securities $500,000 face value of Park Corporation's 8% bonds for $456,200. The bonds were purchased to yield 10% interest and pay interest annually. The bonds mature on January 1, 2021. Weaver uses the effective interest method of amortization. What amount should Weaver report on its December 31, 2016, balance sheet as an investment in held-to-maturity debt securities?

$461,820

In 2015, Cromwell Corporation purchased bonds of Oliver Company at par for $300,000 and classified the investment as available-for-sale. In 2016, the market value declined to $200,000. In 2017, the market value of the Fleming stock rose to $230,000, and the stock was sold. How much should Cromwell record as a realized gain or loss in its determination of net income for 2017?

$70,000

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 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.

When the market value of a company's portfolio of available-for-sale securities is lower than its cost, the difference should be:

Accounted for as a valuation allowance deducted from the asset to which it relates.

For investments in held-to-maturity debt securities:

unrealized holding gains and losses are disclosed in the notes to the financial statements and interest income and realized gains and losses on sales are included in net income

Morgan Inc. and Parker Company are considering entering into a joint venture arrangement. Under IFRS, Morgan Inc. and Parker Company,

May account for the joint venture using a proportionate consolidation.

An impairment loss on an available-for-sale equity security:

May be reversed under IFRS

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:

Present value using the borrower's incremental interest rate.

Under IFRS:

Unrealized gains and losses on investments measured at fair value are presented on the income statement and 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

When bonds carry a stated interest rate above the prevailing market interest rate for securities with a similar amount of risk the bonds will sell at _____. When the effective interest method is used, premium amortizations result in _____.

a premium; interest income being lower than cash received for interest

Willow Co. owns one security classified as a trading security. The investment was purchased at the beginning of the year for $10,000. At December 31 of the current year the investment is valued at its fair value of $9,200. 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

A(n) _____ represents a creditor relationship with another company; a(n) _____ represents an ownership interest in another company.

debt security; equity security

When a company owns 25% of the voting stock of the investee, the _____ method is used to account for the investment.

equity

The _____ is the amount that would be received if a security was sold in an orderly transaction between market participants.

fair value

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 fair value and equity method?

fair value no effect; equity method decrease

A security in a portfolio of available-for-sale securities is transferred to the trading category. The security should be transferred between the corresponding portfolios at:

fair value, regardless of its cost

When an investment in available-for-sale securities is sold:

gains and losses are reported on the income statement

Investments reported on the balance sheet at amortized cost include:

held-to-maturity securities

Companies purchase the securities of other corporations to:

improve its competitive position and obtain additional income by investing excess cash

When accounting for an investment in available-for-sale securities:

interest and dividend income are included in net income of the current period

When a company owns 55% of the voting stock of the investee, the investor:

issues consolidated financial statements

For investments in trading securities, which of the following items are included in net income of the current period?

loss on sale, unrealized loss from change in fair value, dividend income

When bonds are purchased at a discount, the stated interest rate is _____ the prevailing rate for securities with a similar amount of risk. When the effective interest method is used, discount amortizations result in _____.

lower than; interest income being higher than cash received for interest

Investments in minority passive securities are categorized based on _____. The _____ category is for securities purchased and held principally to sell in the near term.

management intent; trading

Which of the following is correct regarding recognition of interest income and amortization of premium and discounts on investments in bonds held to maturity? a) 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. b) The straight-line method may be used for financial reporting purposes if it is also used for tax reporting purposes.

neither

Under the equity method, dividends received (or receivable) are _____ account whenever they are paid (or declared) by the investee and the effect of all inter-company items of revenue and expense are _____ to avoid "double counting".

recorded as a reduction in the carrying value of the investment; removed from the investor's accounts

Gains and losses on sales of investments in trading securities are:

reported in the income statement

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:

the investment's fair value, the investment's cost, the allowance for change in fair value of investment

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?

to apply the effective interest method to determine subsequent interest income