Chapter 12
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.
Other comprehensive income
Current period holding gains or losses
Accumulated other comprehensive income
Net fair value adjustments to date - net holding gains and losses to date
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.
Consistent with the equity method, investment income is
based on investee's income times ownership percentage.
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.
Which of the following are correct regarding the financial statement presentation of HTM securities?
Unrealized holding gains and losses are disclosed in the notes to the financial statements. Gains and losses are shown in net income in the period in which the securities are sold.
Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct?
Von has significant influence over Neumann. Von owns 20-50% of Neumann's voting shares.
Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at
cost
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.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with
debit investment in Saddle $450,000 credit cash $450,000
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 cash $680,000 credit to fair value adjustment $80,000. debit to discount on bond investment $100,000 credit to investment in bonds $700,000
Under the equity method, dividends received from the investment
decrease the investment account balance
Dividends cause the investor's investment in the investee's net assets to
decrease.
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 ____ equity , Correct Unavailable method.
equity
The fair value option can be applied to:
financial liabilities financial assets
Characteristics that support classification of investments as trading securities include
frequent and active trading. motivation to realize short-term profits.
If an investor has the positive intent and ability to hold debt security until it matures, it should be classified as a(n)
held-to-maturity
Holding gain or loss in income
matches Choice, Investment in trading debt securities Investment in trading debt securities
Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in ___ ___ in the period they occur.2
net income
Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as ____ activities in the statement of cash flows.
operating
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 a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using _____ _____, Correct Unavailable techniques.
present value
From an accounting perspective, critical events that investors experience over the life of an investment include
receiving dividends changes in fair value sale of investment
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 sale of investment purchase of investment
Unrealized holding gains and losses associated with debt investments properly classified as "available for sale" are
recognized as other comprehensive income.
Kendrick Company elected the fair value option for its equity method investments. During the current period, the fair value of the investments increased. Kendrick Company should
report the increase as part of net income.
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 Reason: $2 million x 40%
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.
Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period
Northern will report an unrealized holding gain in net income. Northern will make a fair value adjustment of $75,000.
Investments in debt securities classified as trading are reported on the balance sheet at _____ _____
fair value
Bella Company purchased debt securities with a face amount of $500,000 for $480,000 and classifies them as trading securities. During the first year, the company amortized $2,000 of the associated discount. At the end of the period, the fair value is $504,000. Bella should recognize a fair value adjustment of
$22,000.
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 credits of
$40,000 to gain from sale of investment. $500,000 to investments in HTM securities.
Which reporting method should be used if the investor can exert significant influence over the investee?
Equity method
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
Holding gain or loss in other comprehensive income
Investment in available-for-sale debt securities Investment in available-for-sale debt securities
No holding gain or loss is recognized
Investment in held-to-maturity debt securities
Net income
Realized gains and losses from the sale of AFS securities Realized gains and losses from the sale of AFS securities
Which of the following conditions must be present for debt security to be classified as "held-to-maturity?"
The investor has the ability to hold the security until maturity. The investor intends to hold the security until maturity.
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?
credit to fair value adjustment $1,000 credit investment in bonds $100,000 debit to discount $2,000 debit to cash $99,000
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.
investing
Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.
investing
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
Unrealized gains and losses for equity method investments that are carried at fair value are:
reported as part of earnings
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.
Accounting for held-to-maturity, trading, and available-for-sale debt securities differs with respect to
the year-end fair value adjustment.
Jones Financial Institution buys and sells debt securities frequently to maximize short-term gains in market value. Jones should classify its portfolio as
trading securities.
The choice to classify debt securities as current or noncurrent depends on
when they are expected to mature or be sold.
Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be
an increase in other comprehensive income.
