Chapter 16

Dublin co holds a 30% stake in club co which was purchased in 2013 at a cost of 3,000,000. After applying the equity method, the investment in club co account has a balance of 3040000. At december 31 2013 the fair value of the investment is 3120000. Which of the following values is acceptable for Dublin to use in its balance sheet at december 31 2013

2 or 3 only (3040000, 3120000)

Jordan Co purchased ten year 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for

20 periods and 4% from the present value of 1 table

which of the following are considered equity securities

3 only call or put options

an investor has a long term investment in stocks. Regular cash dividends received by the investor are recorded as

Income, A reduction of investment

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods

No Effect, Decrease

under U.S. GAAP which of the following models may be used to determine if an investment is consolidated

YES YES

Watt co purchased 300,000 of bonds for 315,000. If Watt intends to hold the securities to maturity the entry to record the investment includes

a debit to held to maturity securities at 315000

Koehn corporation accounts for its investment in the common stock of Sells company under the equity method. Koehn corporation should ordinarily record a cash dividend received from Sells as

a reduction of the carrying value of the investment

use of the effective interest method in amortizing bond premiums and discounts results in

a varying amount being recorded as interest income from period to period

When investment in debt securities are purchased between interest payments dates, preferably the

accrued interest is debited to Interest Revenue

held to maturity securities are reported at

acquisition cost plus amortization of a discount

which of the following is not correct in regard to trading securities

all of these are corect

a requirement for a security to be classified as held to maturity is

all of these are required

in accounting for investments in debt securities that are classifies as trading securities

any discount or premium is not amortized

companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

arbitrageurs

transfers between categories

are accounted for a fair value for all transfers

debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders equity are

available for sale debt securities

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders equity are

available for sale securities where a company has holding of less than 20%

when a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment

by using the fair value method

all of the following are requirements for disclosures related to financial instruments except

combining or netting the fair value of separate financial instruments

investments in debt securities are generally recorded at

cost including brokerage and other fees

an available for sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

debit to available for sale securities

under the equity method of accounting for investments an investor recognizes its share of the earnings in the period in which the

earnings are reported by the invested in its financial statements

APB Opinion No 21 specifies that regarding the amortization of a premium or discount on a debt security the

effective interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained

an option to convert a convertible bond into shares of common stock is an

embedded derivative

if the parent company owns 90% of the subsidiary companies outstanding common stock, the company should generally account for the income of the subsidiary under the

equity method

impairments are

evaluated at each reporting date for every investment

the accounting for fair value hedges records the derivative at its

fair value

all of the following statements regarding accounting for derivatives are correct except that

gains and losses resulting from speculation should be deferred

A correct valuation is

held to maturity at amortized cost

Debt securities that are accounted for at amortized cost, not fair value are

held to maturity debt securities

a variable interest entity has

insufficient equity investment at risk

when an investment in a held to maturity security is transferred to an available for sale security the carrying value assigned to the available for sale security should be

its fair value at the date of the transfer

when an investment in an available for sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment pos entering it in the trading portfolio should be

its fair value at the date of the transfer

which of the following is not a debt security

loans receivable

when an investors accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest reception date

Investments in debt securities should be recorded on the date of acquisition at

market value plus brokerage fees and other costs incident to the purchase

Securities which could be classified as held to maturity are

municipal bonds

gains or losses on cash flow hedges are

recorded in equity as part of other comprehensive income

all of the following are characteristics of a derivative financial instrument except the instrument

requires a large investment at the inception of the contract

gains to trading or cherry picking involves

selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition

a reclassification adjustment is reported in the

statement of comprehensive income as other comprehensive income

which of the following is correct about the effective interest method of amortization

the effective interest method produces a constant rate of return on the book value of the investment from period to period

Which of the following is not generally correct about recording a sale of debt security before maturity date

the entry to amortize a premium to the date of sale includes a credit to the premium on investments in debt securities

when a company holds between 20% and 50% of the outstanding stock of an invested, which of the following statements applies

the investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise significant influence over the investee

Un realized holding gains or losses which are recognized in income are from securities classified as

trading

a debt security is transferred from one cautery to another generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at the fair value at the date of transfer and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders equity be amortized over the reamaining life of the security. What type of transfer is being described

transfer from available for sale to held to maturity

Judd inc owns 35% of cosby corporation. using the calendar year 2012, cosby had net earrings of 300,000 and waif dividends of 300,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively

understate, understate, understate

the fair value option allows a company to

value its own liabilities at fair value