Chapter 17
Information pertaining to dividends from Wray Corp.'s common stock investments for the year ended December 31, 1991, follows: • On September 8, 1991, Wray received a $50,000 cash dividend from Seco, Inc., in which Wray owns a 30% interest. A majority of Wray's directors are also directors of Seco. • On October 15, 1991, Wray received a $6,000 liquidating dividend from King Co. Wray owns a 5% interest in King Co. • Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, 1991, to stockholders of record on December 15, 1991, payable on January 5, 1992. What amount should Wray report as dividend income in its income statement for the year ended December 31, 1991? Answers: a. $60,000 b. $10,000 c. $4,000 d. $56,000
Response Feedback: Dividend income in income statement Reduction of investments in balance sheet Seco dividend (equity method) $ 50,000 King Co. liquidating dividend 6,000 Bow Corp. Dividend receivable ($200,000 × .02) $4,000 $4,000 $ 56,000 D Not B Choice "$4,000" is correct. $4,000 dividend income should be reported in income statement.
Day Co. received dividends from its common stock investments during the year ended December 31, 1989 as follows: • A stock dividend of 400 shares from Parr Corp. on July 25, 1989 when the market price of Parr's shares was $20 per share. Day owns less than 1% of Parr's common stock. • A cash dividend of $15,000 from Lark Corp. in which Day owns a 25% interest. A majority of Lark's directors are also directors of Day. What amount of dividend revenue should Day report in its 1989 income statement? Answers: a. $23,000 b. $0 c. $8,000 d. $15,000
Response Feedback: Choice "$0" is correct, $0 dividend revenue. Rules: 1. Stock dividend (more shares of stock) is not reported as revenue, only a memo entry is made. 2. Cash dividend (under the equity method) reduces the investment account but does not affect revenue.
Day Co. received dividends from its common stock investments during the year ended December 31, 1989 as follows: • A stock dividend of 400 shares from Parr Corp. on July 25, 1989 when the market price of Parr's shares was $20 per share. Day owns less than 1% of Parr's common stock. • A cash dividend of $15,000 from Lark Corp. in which Day owns a 25% interest. A majority of Lark's directors are also directors of Day. What amount of dividend revenue should Day report in its 1989 income statement? Answers: a. $23,000 b. $15,000 c. $8,000 d. $0
Response Feedback: Choice "$0" is correct, $0 dividend revenue. Rules: 1. Stock dividend (more shares of stock) is not reported as revenue, only a memo entry is made. 2. Cash dividend (under the equity method) reduces the investment account but does not affect revenue.
During 1994, Scott Corp. purchased marketable equity securities as available-for-sale investments. Pertinent data follow: Market Value Security Cost at 12/31/94 D $ 36,000 $ 40,000 E 80,000 60,000 F 180,000 186,000 $296,000 $286,000 Scott appropriately carries these securities at market value. The amount of unrealized loss on these securities in Scott's 1994 income statement should be: Answers: a. $20,000 b. $14,000 c. $0 d. $10,000
Response Feedback: Choice "$0" is correct. $0 unrealized loss should be in the income statement. Rule: If unrealized loss on available-for-sale marketable equity securities: If Temporary - 1. Do not record loss in the income statement. 2. Record (debit) difference in other comprehensive income. 3. Record (credit) difference in a valuation (contra) account (a component of the noncurrent asset section of the balance sheet). 4. Subsequent recoveries in market value are debited to the valuation account and credited to other comprehensive income. If Permanent - 1. Record realized loss (debit) in the income statement. 2. Credit the cost of the individual security account.
In 1990, Neil Co. held the following investments in common stock: • 25,000 shares of B & K, Inc.'s 100,000 outstanding shares. Neil's level of ownership gives it the ability to exercise significant influence over the financial and operating policies of B & K. • 6,000 shares of Amal Corp.'s 309,000 outstanding shares. During 1990, Neil received the following distributions from its common stock investments: November 6 − $30,000 cash dividend from B & K. November 11 − $1,500 cash dividend from Amal. December 26 − 3% common stock dividend from Amal. The closing price of this stock on a national exchange was $15 per share. What amount of dividend revenue should Neil report for 1990? Answers: a. $34,200 b. $31,500 c. $4,200 d. $1,500
Response Feedback: Choice "$1,500" is correct, $1,500 dividend revenue should be reported for 1990, representing the cash dividend from Amal. The $30,000 cash dividend from B & K is a return of capital as is any dividend under the equity method, since the investment account is reduced. The 3% stock dividend from Amal means more shares, representing the same proportional piece of the pie. It is not income.
Pear Co.'s income statement for the year ended December 31, 1992, as prepared by Pear's controller, reported income before taxes of $125,000. The auditor questioned the following amounts that had been included in income before taxes: Equity in earnings of Cinn Co. $ 40,000 Dividends received from Cinn 8,000 Adjustments to profits of prior years for arithmetical errors in depreciation (35,000) Pear owns 40% of Cinn's common stock. Pear's December 31, 1992, income statement should report income before taxes of: Answers: a. $85,000 b. $120,000 c. $152,000 d. $117,000
Response Feedback: Choice "$152,000" is correct. The $40,000 equity in earnings of Cinn is properly included in income. Pear owns 40% of Cinn and uses the equity method. Thus, equity in earnings is included in the income statement while dividends received are not. The $35,000 is a prior period adjustment and should be reported as an adjustment to the opening balance of retained earnings, not on the current period income. Income as reported $ 125,000 Dividends received (8,000) Prior period adjustment 35,000 Income before taxes $ 152,000
At year-end, Rim Co. held several investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%, five-year bonds, purchased for $92,000, and equity securities purchased for $35,000. At year-end, the bonds were selling on the open market for $105,000 and the equity securities had a market value of $50,000. What amount should Rim report as trading securities in its year-end balance sheet? Answers: a. $50,000 b. $142,000 c. $127,000 d. $155,000
Response Feedback: Choice "$155,000" is correct. Trading securities, both debt and equity, are to be reported at fair value at the end of the current reporting period. Bonds FMV at year end $105,000 Equities FMV at year end 50,000 Total reportable amount $155,000
The following data pertains to Tyne Co.'s investments in marketable equity securities: Market value Cost 12/31/X2 12/31/X1 Trading $150,000 $155,000 $100,000 Available-for-sale 150,000 130,000 120,000 What amount should Tyne report as net unrealized loss on available-for-sale marketable equity securities at December 31, 20X2, in accumulated other comprehensive income on the balance sheet? Answers: a. $15,000 b. $10,000 c. $20,000 d. $0
Response Feedback: Choice "$20,000" is correct, $20,000 net unrealized loss on available-for-sale securities reported as a separate component of other comprehensive income on the statement of comprehensive income and as a separate component of accumulated other comprehensive income on the balance sheet: Available-for-Sale Portfolio Cost $150,000 12/31/X2 fair value (130,000) Net unrealized loss at 12/31/X2 $ 20,000
The following data pertains to Tyne Co.'s investments in marketable equity securities: Market value Cost 12/31/X2 12/31/X1 Trading $150,000 $155,000 $100,000 Available-for-sale 150,000 130,000 120,000 What amount should Tyne report as net unrealized loss on available-for-sale marketable equity securities at December 31, 20X2, in accumulated other comprehensive income on the balance sheet? Answers: a. $15,000 b. $10,000 c. $0 d. $20,000
Response Feedback: Choice "$20,000" is correct, $20,000 net unrealized loss on available-for-sale securities reported as a separate component of other comprehensive income on the statement of comprehensive income and as a separate component of accumulated other comprehensive income on the balance sheet: Available-for-Sale Portfolio Cost $150,000 12/31/X2 fair value (130,000) Net unrealized loss at 12/31/X2 $ 20,000
Information regarding Stone Co's available-for-sale portfolio of marketable equity securities is as follows: Aggregate cost as of 12/31/X2 $170,000 Market value as of 12/31/X2 148,000 Net realized gains during 20X2 30,000 At December 31, 20X1, Stone reported an unrealized loss of $1,500 to reduce investments to market value. This was the first such adjustment made by Stone on these types of securities. According to SFAS No. 115, in its 20X2 statement of comprehensive income, what amount of unrealized loss should Stone report? Answers: a. $20,500 b. $30,000 c. $0 d. $22,000
Response Feedback: Choice "$20,500" is correct. Stone must report a net cumulative loss on its Statement of Stockholders' Equity (under "Accumulated Other Comprehensive Income") of $22,000 ($148,000 FMV − $170,000 Cost). Stone has already reported a $1,500 loss as of 12/31/X1; therefore, an unrealized loss of $20,500 ($22,000 − $1,500) should be reported in the Statement of Comprehensive Income (as part of other comprehensive income) for the year 20X2.
Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 1993. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 1993, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 1994, and $200,000 for the year ended December 31, 1994. On July 1, 1994, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 1994. In Grant's December 31, 1993, balance sheet, what should be the carrying amount of this investment? Answers: a. $224,000 b. $209,000 c. $230,000 d. $200,000
Response Feedback: Choice "$209,000" is correct, $209,000 carrying amount of investment in 12/31/93 balance sheet. Investment account 100% × 30% = 30% Equity interest Purchase price 1/2/93 $ 200,000 Add: 1993 income 80,000 × 30% = 24,000 Less: 1993 dividends 50,000 × 30% = (15,000) Balance at 12/31/93 209,000 Add: 1994 income - 1/2 yr 100,000 × 30% = 30,000 Balance at 6/30/94 239,000 Percentage sold 50% Cost of half sold 119,500 Selling price 150,000 Gain on sale $ 30,500
Pare, Inc. purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2, 1992, for $50,000. On December 31, 1992, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 1992. Tot reported earnings of $300,000 for 1992. What amount should Pare report in its December 31, 1992, balance sheet as investment in Tot? Answers: a. $200,000 b. $290,000 c. $170,000 d. $230,000
Response Feedback: Choice "$230,000" is correct, $230,000 investment in Tot at 12/31/92. Rule: When two or more purchases of stock cause ownership in an investee to go from less than 20% to more than 20%, the equity method should be used. Total shares Investment in Tot Co. Date outstanding % shares amnt 1st step 1/2/92 100,000 × 10% = 10,000 $ 50,000 2nd step 12/31/92 100,000 × 20% = 20,000 150,000 Total purchase 30% 30,000 200,000 Share of earnings (equity method): ($300,000 earnings × 10%) = 30,000 Investment account at 12/31/92 $ 230,000 Note: Although the equity method is used, the actual ownership percentage (10%) is used for 1992 since the additional 20% was not purchased until 12/31/92 in 1993, 30% of Tot's earnings would be recorded in the investor's investment account.
Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, 2001. Plack received a stock dividend of 2,000 shares on April 30, 2001, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15, 2001. In its 2001 income statement, what amount should Plack report as dividend income? Answers: a. $20,000 b. $90,000 c. $94,000 d. $24,000
Response Feedback: Choice "$24,000" is correct. Dividend income = Number of shares × dividend per share = 12,000 × $2 = $24,000 Receipt of a stock dividend is not revenue. It increases the number of shares held and decreases the cost basis per share.
On January 2, 2002, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod's stockholders' equity was $500,000. The carrying amounts of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for 2002, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, 2002, balance sheet, what amount should Kean report as investment in subsidiary? Answers: a. $280,000 b. $210,000 c. $220,000 d. $270,000
Response Feedback: Choice "$280,000" is correct. Under the equity method, the investment account will be increased by the investor's share of investee's net income (30% × $100,000) and decreased by any dividends declared (none). Thus, the Investment in Pod, at December 31, 2002 is equal to $280,000: $250,000 + $30,000. In order to determine the amount of goodwill, the fair value of the net assets acquired must be determined and then compared with the purchase price: Stockholders' equity $ 500,000 Excess of FMV, land 200,000 Total FMV 700,000 Percentage acquired 30% FMV of net assets acquired 210,000 Purchase price 250,000 Goodwill $ 40,000 Under the equity method, the investment account will be increased by the investor's share of investee's net income (30% × $100,000) and decreased by any dividends declared (none). Thus, the Investment in Pod, at December 31, 2002 is equal to $280,000: $250,000 + $30,000.
Data regarding Ball Corp.'s available-for-sale marketable equity securities follow: Market Cost Value December 31, 1994 $150,000 $130,000 December 31, 1995 150,000 160,000 Differences between cost and market values are considered temporary. The decline in market value was considered temporary and was properly accounted for at December 31, 1994. Ball's 1995 statement of changes in stockholders' equity would report an increase of: Answers: a. $20,000 b. $30,000 c. $10,000 d. $0
Response Feedback: Choice "$30,000" is correct. $30,000 increase in Accumulated Other Comprehensive Income. Rule: Temporary declines in aggregate market values of available-for-sale securities are charged to (decrease) Stockholders' Equity. Subsequent recoveries and/or advances in aggregate market values are credited to (increase) other comprehensive income to reflect fair value. Original cost $ 150,000 Market value 12/31/94 (130,000) 1994 decrease in accumulated OCI $ 20,000 Market value 12/31/95 $ 160,000 Prior fair value (130,000) 1995 increase in accumulated OCI $ 30,000
Grant, Inc. acquired 30% of South Co.'s voting stock for $200,000 on January 2, 1993. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 1993, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 1994, and $200,000 for the year ended December 31, 1994. On July 1, 1994, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 1994. In its 1994 income statement, what amount should Grant report as gain from the sale of half of its investment? Answers: a. $35,000 b. $24,500 c. $30,500 d. $45,500
Response Feedback: Choice "$30,500" is correct, $30,500 gain on sale of half of its investment. Investment account 100% × 30% = 30% Equity interest Purchase price 1/2/93 $ 200,000 Add: 1993 income 80,000 × 30% = 24,000 Less: 1993 dividends 50,000 × 30% = (15,000) Balance at 12/31/93 209,000 Add: 1994 income - 1/2 yr 100,000 × 30% = 30,000 Balance at 6/30/94 239,000 Percentage sold 50% Cost of half sold 119,500 Selling price 150,000 Gain on sale $ 30,500
Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, 20X2, Sun decided to hold the investments indefinitely and accordingly reclassified them from trading to available-for-sale on that date. The investments' market value was $575,000 at December 31, 20X1, $530,000 at June 30, 20X2, and $490,000 at December 31, 20X2. What amount should Sun report as net unrealized loss on available-for-sale marketable equity securities in its 20X2 statement of stockholders' equity? Answers: a. $85,000 b. $160,000 c. $45,000 d. $40,000
Response Feedback: Choice "$40,000" is correct, $40,000 "net unrealized loss on available-for-sale marketable equity securities" in the 20X2 statement of stockholders' equity. Rule: Available-for-sale marketable equity securities are recorded at the fair value, and any temporary difference is reported as "net unrealized loss on available-for-sale marketable equity securities" in the statement of stockholders' equity. Carrying amount 6/30/X2 $ 530,000 FMV December 31, 20X2 (490,000) Net unrealized loss at 12/31/X2 $ 40,000
Sage, Inc. bought 40% of Adams Corp.'s outstanding common stock on January 2, 1991, for $400,000. The carrying amount of Adams' net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during 1991. During 1991, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31, 1991? Answers: a. $42,000 b. $32,000 c. $36,000 d. $48,000
Response Feedback: Choice "$42,000" is correct, $42,000 should be reported in the income statement. Investment in Adams Corp. Carrying amount on Adams' books $ 900,000 Increase in value for: Plant 90,000 Inventory 10,000 Fair market value of Adams 1,000,000 Percent purchased 40% FV of 40% purchased (no goodwill) $ 400,000 Income earned from investment Net income for 1991 $ 120,000 Percent owned 40% Share of income before adjustment 48,000 Amortization of higher plant value ($90,000 × 40% ÷ 18 years) (2,000) Write off extra value of inventory (10,000 × 40%) (4,000) Equity in income of 40% investee $ 42,000
Sun Corp. had investments in marketable equity securities costing $650,000. On June 30, 20X2, Sun decided to hold the investments indefinitely and accordingly reclassified them from trading to available- for-sale on that date. The investments' market value was $575,000 at December 31, 20X1, $530,000 at June 30, 20X2, and $490,000 at December 31, 20X2. What amount of loss from investments should Sun report in its 20X2 income statement? Answers: a. $45,000 b. $85,000 c. $160,000 d. $120,000
Response Feedback: Choice "$45,000" is correct, $45,000 loss should be reported in the 20X2 income statement. Rule: When marketable equity securities are transferred between trading and available-for-sale, the transfer is made at fair value, and the difference (if any) is recorded as unrealized loss and charged to the income statement. The new carrying amount becomes the basis for any future gain or loss. Original cost $650,000 Unrealized I/S loss for 20X1 (75,000) FMV at 12/31/X1 575,000 FMV at 6/30/X2 (530,000) Unrealized loss in 2002 I/S $ 45,000
Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, 2001 for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. During 2001, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its 2001 income statement? Answers: a. $60,000 b. $52,000 c. $56,000 d. $40,000
Response Feedback: Choice "$52,000" is correct. Undervalued Equipment $100,000 × 40% ownership = $40,000 / 5 years = $8,000 Puff's share of Straw's income: $150,000 × 40% = $60,000 Less: Excess fair value amortization (8,000) Equity method investment income $52,000
The following data pertains to Tyne Co.'s investments in marketable equity securities: Market value Cost 12/31/X2 12/31/X1 Trading $150,000 $155,000 $100,000 Available-for-sale 150,000 130,000 120,000 What amount should Tyne report as unrealized gain (loss) in its 20X2 income statement? Answers: a. $65,000 b. $55,000 c. $50,000 d. $60,000
Response Feedback: Choice "$55,000" is correct, $55,000 unrealized holding gain on trading securities reported in 1995 income statement: Trading Portfolio Fair Value 12/31/X2 $155,000 12/31/X1 (100,000) Unrealized gain, reflected in income $ 55,000 Rule: Unrealized gains and losses are reported as follows: trading securities-reported at fair value with unrealized gains and losses included in earnings (along with "realized" gains and losses, if any). Available-for-sale securities-reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income until realized.
The following data pertains to Tyne Co.'s investments in marketable equity securities: Market value Cost 12/31/X2 12/31/X1 Trading $150,000 $155,000 $100,000 Available-for-sale 150,000 130,000 120,000 What amount should Tyne report as unrealized gain (loss) in its 20X2 income statement? Answers: a. $65,000 b. $50,000 c. $60,000 d. $55,000
Response Feedback: Choice "$55,000" is correct, $55,000 unrealized holding gain on trading securities reported in 1995 income statement: Trading Portfolio Fair Value 12/31/X2 $155,000 12/31/X1 (100,000) Unrealized gain, reflected in income $ 55,000 Rule: Unrealized gains and losses are reported as follows: trading securities-reported at fair value with unrealized gains and losses included in earnings (along with "realized" gains and losses, if any). Available-for-sale securities-reported at fair value with unrealized gains and losses reported as a separate component of other comprehensive income until realized.
On July 1, 1992, York Co. purchased as a held-to-maturity investment $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, 1999, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, 1992, balance sheet, what amount should York report as investment in bonds? Answers: a. $911,300 b. $960,600 c. $953,300 d. $916,600
Response Feedback: Choice "$911,300" is correct. The carrying amount of the bonds is $906,000 on July 1, 1992 ($946,000 - $40,000). The discount is amortized for 6 months (July 1 to December 31): Interest revenue ($906,000 x 10% x 6/12) $ 45,300 Interest receivable ($1,000,000 x 8% x 6/12) (40,000) Discount amortized $ 5,300 The carrying amount on December 31, 1992, is $906,000 + $5,300 = $911,300. Choice "$916,600" is incorrect. The discount should be amortized for 6 months, not 1 year. Choice "$953,300" is incorrect. The discount to be amortized is based on a cost of $906,000. The original journal entry is: Investment 906,000* Accrued interest received 40,000 Cash 946,000 * or, investment $1,000,000 and a discount of $94,000. Choice "$960,600" is incorrect. The carrying amount of the bonds is $906,000 on July 1. Only 6 months of amortization is recorded (July 1 to December 31).
On July 2, 19X2, Wynn, Inc., purchased as an available-for-sale security a $1,000,000 face value Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, 19X9, and pay interest annually on January 1. On December 31, 19X2, the bonds had a market value of $945,000. On February 13, 19X3, Wynn sold the bonds for $920,000. In its December 31, 19X2, balance sheet, what amount should Wynn report for available-for-sale investments in debt securities? Answers: a. $910,000 b. $920,000 c. $945,000 d. $950,000
Response Feedback: Choice "$945,000" is correct. The security would be recorded at fair value on July 2, 19X2, or $910,000. Accrued interest is a receivable and does not affect cost. The $90,000 discount is not amortized on short-term investments. On December 31, 19X2, the investment would be adjusted to fair value, $945,000. The unrealized holding gain of $35,000 would be reported as a separate component of other comprehensive income. SFAS 115 para. 12,13 as amended by SFAS 130 para. 33 Choice "$910,000" is incorrect. The investment would be recorded at cost on July 2, 19X2 or $910,000. However, the investment would reflect fair value as of December 31, 19X2. Choice "$920,000" is incorrect. $920,000 reflects the fair value of the investment on the date it was sold, not 12/31/X2. The investment is short-term. Choice "$950,000" is incorrect. The accrued interest of $40,000 at 12/31/X2 would be recorded as interest receivable, not as part of the investment account.
On January 1, 1992, Point, Inc. purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1, 1992. During October 1992, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point's 1992 income statement report? Answers: a. 40% of Iona's 1992 income. b. 10% of Iona's income for January 1 to July 31, 1992, plus 40% of Iona's income for August 1 to December 31, 1992. c. Amount equal to dividends received from Iona. d. 40% of Iona's income for August 1 to December 31, 1992 only.
Response Feedback: Choice "10% of Iona's income for January 1 to July 31, 1992, plus 40% of Iona's income for August 1 to December 31, 1992" is correct. Once a cost method investor becomes an equity method investor, the investment account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment. Thus, 10% of Iona's income from January 1 through July 31 and 40% of Iona's income from August 31 through December 31 must be reported as earnings by Point. Choice "40% of Iona's income for August 1 to December 31, 1992 only" is incorrect. Since Point was an equity basis investor from August 1 through December 31, Point should recognize its share of Iona's income for the entire year at the different levels of investment during the year. Choice "40% of Iona's 1992 income" is incorrect. Once a cost method investor becomes an equity method investor, the investment account must retroactively reflect the proportionate share of investee income recognized at each percentage level investment. Choice "Amount equal to dividends received from Iona" is incorrect. Dividends received by a cost method investor would be recognized as income from the investment. Dividends received by an equity method investor would be a reduction of the investment account. The equity method applies to the entire year of the change so the dividends are not reported as income.
Kale Co. has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Kale purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at: Answers: a. Amortized cost. b. Lower of cost or market c. Cost. d. Fair value.
Response Feedback: Choice "Amortized cost" is correct. Bond investments which are intended to be held until the maturity date are classified as held-to-maturity securities and are reported at their amortized cost. Choice "Cost" is incorrect. Investments in marketable securities are reported at fair value or at their amortized cost, depending on their classification. Choice "Fair Value" is incorrect. Trading securities and available-for-sale securities are reported at their fair value. Choice "Lower of cost or market" is incorrect. The lower of cost or market method has been superseded by the methods specified in SFAS 115.
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be reported at the end of the year? Debt securities classified as: Held-to-maturity Available-for-sale Answers: a. Fair value Amortized cost b. Amortized cost Amortized cost c. Fair value Fair value d. Amortized cost Fair value
Response Feedback: Choice "Amortized cost, Fair value" is correct. According to SFAS 115, debt securities (bonds) classified as held-to-maturity are reported at amortized cost (that is, cost adjusted for amortization of premium or discount; approaches face value). Debt securities classified as available-for-sale are reported at fair value. Note that SFAS 130 changes the treatment of unrealized holding gains and losses from available-for-sale securities.Such gain/loss is excluded from earnings (per SFAS 115), however, per SFAS 130, it is reported as a component of accumulated other comprehensive income. Choice "Amortized cost, Amortized cost" is incorrect. While amortized cost is the appropriate treatment for debt securities classified as held-to-maturity, this is not the correct treatment for securities classified as available-for-sale. Choice "Fair value, Fair value" is incorrect. Fair value is not the appropriate treatment for debt securities classified as held-to-maturity. Choice "Fair value, Amortized cost" is incorrect. Fair value is not the appropriate treatment for debt securities classified as held-to-maturity. Nor is amortized cost the appropriate treatment for debt securities classified as available-for-sale.
Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard? Answers: a. As a memorandum entry reducing the unit cost of all Guard stock owned. b. As dividend revenue at the market value of the stock. c. As dividend revenue at Guard's carrying value of the stock. d. As a reduction in the total cost of Guard stock owned.
Response Feedback: Choice "As a memorandum entry reducing the unit cost of all Guard stock owned" is correct. Band should record the 2% stock dividend received from Guard with a memorandum entry that reduces the unit cost of all Guard stock owned. The total investment in Guard, Inc. will simply be spread over a larger amount of shares, thereby reducing the unit cost of all Guard stock owned. Choices "As dividend revenue at Guard's carrying value of the stock" and "As dividend revenue at the market value of the stock" are incorrect as dividend revenue is not recorded when a stock dividend of the same shares in the same company are received. Choice "As a reduction in the total cost of Guard stock owned" is incorrect. Band Co. uses the equity method to account for its investment in Guard, Inc. The initial investment (or cost) of the total Guard stock owned should not be changed simply because additional shares of stock are obtained. The total investment in Guard, Inc. will now be spread over a larger amount of shares.
Camp Co. purchased various securities during 1994 to be classified as held-to-maturity securities, trading securities, or available-for-sale securities. This question describes a security purchased by Camp. Select from the following list the appropriate category for the security. ∙ $3 million debt security bought and held for the purpose of selling in three years to finance payment of Camp's $2 million long-term note payable when it matures. Answers: a. Trading. b. Available-for-sale. c. Held-to-maturity.
Response Feedback: Choice "Available-for-sale" is correct. Available-for-sale securities are those marketable securities [debt and equity], which will be held longer than a year or operating cycle before disposal. These debt securities will not be held until maturity.
Nola Co. has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Nola has a portfolio of marketable equity securities which it does not intend to sell in the near term. How should Nola classify these securities, and how should it report unrealized gains and losses from these securities? Classify as Report as a Answers: a. Available-for-sale Component of income securities from continuing operations b. Available-for-sale Component of other securities comprehensive income c. Trading securities Component of income from continuing operations d. Trading securities Component of other comprehensive income
Response Feedback: Choice "Available-for-sale, Component of other securities comprehensive income" is correct. Investments in marketable equity securities which the company does not intend to sell in the near term should be classified as available-for-sale. Unrealized gains and losses on available- for-sale securities should be reported as a separate component of other comprehensive income.
When the market value of an investment in debt securities in which the company has a positive intent and ability to hold to maturity exceeds its carrying amount, how should each of the following assets be reported at the end of the year? Long-term Short-term marketable marketable debt securities debt securities Answers: a. Carrying amount Carrying amount b. Market value Market value c. Market value Carrying amount d. Carrying amount Market value
Response Feedback: Choice "Carrying amount, Carrying amount" is correct Marketable debt securities that the company has the intent and ability to hold to maturity, both "long" and "short" term, are reported at carrying amount (amortized cost) unless there is a permanent decline in market value.
Beach Co. determined that the decline in the fair market value (FMV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's books. The controller would properly record the decrease in FMV by including it in which of the following? Answers: a. Other comprehensive income section of the income statement, and writing down the cost basis to FMV. b. Extraordinary items section of the income statement, net of tax, and writing down the cost basis to FMV. c. Other comprehensive income section of the income statement only. d. Earnings section of the income statement and writing down the cost basis to FMV.
Response Feedback: Choice "Earnings section of the income statement and writing down the cost basis to FMV" is correct. When an available-for-sale security is determined to be impaired because of a permanent decline in fair value below cost, the asset must be written down to the lower fair value by recording a loss that is recognized on the income statement. Choice "Other comprehensive income section of the income statement only" is incorrect. The impairment of an available-for-sale security must be recorded on the income statement. Only gains and non-permanent losses on available-for-sale securities are reported in other comprehensive income. Choice "Extraordinary items section of the income statement, net of tax, and writing down the cost basis to FMV" is incorrect. The impairment of an available-for-sale security is reported as a component of income from continuing operations and is not considered an extraordinary item. Choice "Other comprehensive income section of the income statement, and writing down the cost basis to FMV" is incorrect. The impairment of an available-for-sale security must be recorded on the income statement. Only gains and non-permanent losses on available-for-sale securities are reported in other comprehensive income.
Response Feedback: Choice "Fair value, with holding gains and losses included in earnings" is correct. Trading securities are reported at fair value, with holding gains and losses included in earnings. Choice "Lower of cost or market, with holding gains and losses included in earnings" is incorrect. SFAS 115 eliminated the lower of cost or market valuation. Choice "Lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses" is incorrect. SFAS 115 eliminated the lower of cost or market valuation. Choice "Fair value, with holding gains included in earnings only to the extent of previously recognized holding losses" is incorrect. Trading securities are reported at fair value but there is no restriction on the recognition of holding gains.
Response Feedback: Choice "Fair value, with holding gains and losses included in earnings" is correct. Trading securities are reported at fair value, with holding gains and losses included in earnings. Choice "Lower of cost or market, with holding gains and losses included in earnings" is incorrect. SFAS 115 eliminated the lower of cost or market valuation. Choice "Lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses" is incorrect. SFAS 115 eliminated the lower of cost or market valuation. Choice "Fair value, with holding gains included in earnings only to the extent of previously recognized holding losses" is incorrect. Trading securities are reported at fair value but there is no restriction on the recognition of holding gains.
At the end of year 1, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During year 2, all of these securities were sold for $104,500. At the end of year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane's year 2 income statement? Answers: a. Gain of $18,500 b. Loss of $2,000 c. Gain of $16,500 d. Gain of $10,500
Response Feedback: Choice "Gain of $10,500" is correct. Because these are trading securities, the year 2 income statement will be affected by both the realized gain from the securities sold and the unrealized loss on the securities acquired in year 2: Realized gain on securities sold = Sales price - Carrying value = $104,500 - 92,000 = $12,500 Unrealized loss in securities acquired = Year-end market value - Cost = $71,000 - 73,000 = (2,000) Total income statement impact = Realized gain (loss) + Unrealized gain (loss) = $12,500 + (2,000) = $10,500 gain Choice "Loss of $2,000" is incorrect. The gain on the securities sold will affect the year 2 income statement. Realized gains and losses are always reported on the income statement in the period incurred. Choice "Gain of $16,500" is incorrect. Because these are trading securities, the gain on the securities sold is not equal to the difference between the sales price and the original cost of the securities. In year 1, the difference between the cost of $86,000 and the ending fair value of $92,000 would have been recorded on the year 1 income statement as a $6,000 unrealized gain. Then, in year 2, the realized gain on the sale is calculated using the carrying value of $92,000 and the sales price of $104,500 ($104,500 - 92,000 = $12,500 realized gain). Choice "Gain of $18,500" is incorrect. Because these are trading securities, unrealized gains and losses are recorded on the income statement. Therefore, when the securities acquired in year 2 are adjusted to fair value at the end of the year, a $2000 unrealized loss is recorded on the income statement equal to the difference between the ending market value of the securities and their original cost ($71,000 - 73,000). Additionally, the gain on the trading securities sold is not equal to the difference between the sales price and the original cost of the securities. In year 1, the difference between the cost of $86,000 and the ending fair value of $92,000 would have been recorded on the year 1 income statement as a $6,000 unrealized gain. Then, in year 2, the realized gain on the sale is calculated using the carrying value of $92,000 and the sales price of $104,500 ($104,500 - 92,000 = $12,500 realized gain).
Camp Co. purchased various securities during 1994 to be classified as held-to-maturity securities, trading securities, or available-for-sale securities. This question describes a security purchased by Camp. Select from the following list the appropriate category for the security. ∙ U.S. Treasury bonds that Camp has both the positive intent and the ability to hold to maturity. Answers: a. Held-to-maturity b. Trading c. Available-for-sale
Response Feedback: Choice "Held-to-maturity" is correct. Held-to-maturity securities are investments in bonds that will be held until the maturity date. Camp has both the intent and the ability to do so.
On both December 31, 19X1, and December 31, 19X2, Kopp Co.'s only marketable equity security had the same market value, which was below cost. Kopp considered the decline in value to be temporary in 19X1 but other than temporary in 19X2. At the end of both years the security was classified as an available-for-sale asset. Kopp could not exercise significant influence over the investee. What should be the effects of the determination that the decline was other than temporary on Kopp's 19X2 net available-for-sale assets and net income? Answers: a. Decrease in net available-for-sale assets and no effect on net income. b. No effect on net available-for-sale assets and decrease in net income. c. Decrease in both net available-for-sale assets and net income. d. No effect on both net available-for-sale assets and net income.
Response Feedback: Choice "No effect on net available-for-sale assets and decrease in net income" is correct. In 19X1, the security would be written down to fair value. The unrealized holding loss would be reported in other comprehensive income. In 19X2, the unrealized holding loss would be removed from accumulated other comprehensive income and recognized in earnings as a realized loss since the decline is classified as other than temporary in 19X2. This 19X2 entry has no effect on available-for-sale assets and decreases net income by the amount of the realized loss. SFAS 115 para 13, 16, SFAS 130 Choice "No effect on both net available-for-sale assets and net income" is incorrect. In 19X2, the unrealized holding loss would be removed from accumulated other comprehensive income and recognized in earnings as a realized loss. Choice "Decrease in net available-for-sale assets and not effect on net income" is incorrect. In 19X1, the security would be written down to fair value. The unrealized holding loss would be reported in other comprehensive income. In 19X2, the unrealized loss would be removed from accumulated other comprehensive income and recognized in earnings as a realized loss. Choice "Decrease in both net available-for-sale assets and net income" is incorrect. In 19X1, the security would be written down to fair value.
Lee Corp. reported the following available-for-sale marketable equity security on its December 31, 1994, balance sheet: Neu Corp. common stock, at cost $ 100,000 Less: Allowance for decline in market value (20,000) Balance $ 80,000 At December 31, 1995, the market value of Lee's investment in the Neu Corp. stock was $85,000. As a result of the 1995 increase in this stock's market value, Lee's 1995 income statement should report: Answers: a. A realized gain of $5,000. b. No gain or loss. c. An unrealized loss of $15,000. d. An unrealized gain of $5,000.
Response Feedback: Choice "No gain or loss" is correct. No gain or loss should be reported in the income statement. Rule: Available-for-sale marketable securities are carried at market value. Any unrealized loss is charged to other comprehensive income. The valuation account ("allowance for unrealized losses") and accumulated OCI are adjusted each year-end to reflect the current cumulative difference between aggregate cost and aggregate market. In this example, the valuation account and accumulated OCI account (both balance sheet accounts) would be reduced by $5,000 (from $20,000 to $15,000). The rest of the choices are incorrect. The income statement is only affected by gains or losses from trading securities, or on available-for-sale securities if the unrealized loss is considered permanent.
When the equity method is used to account for investments in common stock, which of the following affect(s) the investor's reported investment income? A change in market value of investee's Cash dividends common stock from investee Answers: a. Yes No b. No Yes c. Yes Yes d. No No
Response Feedback: Choice "No, No" is correct. Rule: Investor records as revenue its "share of the investee's earnings" (not "dividends received") under the equity method. Dividends from an investee company are recorded by the investor as a reduction in the carrying amount of the investment on the balance sheet of the investor. Changes in the market value of investee's common stock are not considered income to the parent under the equity method. Under the cost method, receipt of a dividend is recorded as income and does not affect the investment account.
Camp Co. purchased various securities during 1994 to be classified as held-to-maturity securities, trading securities, or available-for-sale securities. This question describes a security purchased by Camp. Select from the following list the appropriate category for the security. ∙ Debt securities bought and held for the purpose of selling in the near term. Answers: a. Trading. b. Held-to-maturity. c. Available-for-sale.
Response Feedback: Choice "Trading securities" is correct. Trading securities are those marketable securities [debt and equity], which will be sold in the near term.
Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles? Answers: a. Loss on exchange of nonmonetary assets with commercial substance b. Loss on exchange of nonmonetary assets without commercial substance c. Unrealized loss on investments in current marketable equity securities held for trading d. Unrealized loss on investments in noncurrent marketable equity securities available for sale
Response Feedback: Choice "Unrealized loss on investments in concurrent marketable equity securities available for sale" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income.
Robin Co. has a marketable equity securities portfolio classified as available-for-sale. None of the holdings enables Robin to exercise significant influence over an investee. The aggregate cost exceeds its aggregate market value. The decline is considered temporary and should be reported as a (an): Answers: a. Valuation allowance in the asset section of the balance sheet. b. Valuation allowance in the noncurrent liability section of the balance sheet. c. Realized loss in the income statement. d. Unrealized loss in the income statement.
Response Feedback: Choice "Valuation allowance in the asset section of the balance sheet" is correct. The temporary decline of an available-for-sale marketable equity securities portfolio below aggregate cost should be reported as a valuation allowance in the asset section of the balance sheet. Rule: Temporary losses on available-for-sale securities (where aggregate cost exceeds aggregate market) should be credited to an asset valuation account and debited direct to other comprehensive income. Choices "Unrealized loss in the income statement" and "Realized loss in the income statement" are incorrect. There is no income statement effect for an available-for-sale portfolio unless the loss is permanent. Choice "Valuation allowance in the noncurrent liability section of the balance sheet" is incorrect. The valuation account is a "contra-asset" (valuation account) and not a liability.
Which of the following must be disclosed for most financial instruments? Carrying value Fair value Answers: a. Yes Yes b. No No c. Yes No d. No Yes
Response Feedback: Choice "Yes, Yes" is correct. Both carrying value (amount) and fair value must be disclosed for most financial instruments (when it is practicable to estimate fair value).
On July 1, 1992, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, 1992, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December 31, 1992, was $120,000, earned evenly throughout the year. In its 1992 income statement, what amount of income from this investment should Denver report? Answers: a. $36,000 b. $18,000 c. $6,000 d. $12,000
Response Feedback: Eagle's 1992 income $ 120,000 Percentage owned − 3,000 out of 10,000 shares × 30% 36,000 Owned for 6 months (7/1/92 to 12/31/92) × 6/12 Income from investment in Eagle $ 18,000 Choice "$18,000" is correct, $18,000 income from investment in Eagle Co. for 1992. Notes: 1. In a purchase, income from an investee is recognized only from date of purchase (in a pooling, it is the whole year). 2. The dividends received reduce the investment account, but do not affect the income. 3. With 30% ownership, significant influence is assumed and the equity method is used.
On January 10, 20X2, Box, Inc. purchased marketable equity securities of Knox, Inc. and Scot, Inc. Box classified both securities as available-for-sale assets over which it could not exercise significant influence. At December 31, 20X2, the cost of each investment was greater than its fair market value. The loss on the Knox investment was considered permanent and that on Scot was considered temporary. How should Box report the effects of these investing activities in its 20X2 income statement? I. Excess of cost of Knox stock over its market value. II. Excess of cost of Scot stock over its market value. Answers: a. A realized loss equal to I only. b. An unrealized loss equal to I plus II. c. An unrealized loss equal to I only. d. No income statement effect.
Response Feedback: Rule: "Available-for-sale equity" securities are carried at fair value. Permanent impairment in value results in a writedown and a charge to income as if the loss was realized. Choice "A realized loss equal to I only" is correct, record a realized loss on the Knox stock because the loss is considered permanent. Choices "An unrealized loss equal to I plus II" and "An unrealized loss equal to I only" are incorrect. The loss on Knox is permanent and therefore a realized loss. The loss on Scot is not permanent and should not be reported on the income statement. Choice "No income statement effect" is incorrect. Realized losses are reflected in current year income.
Moss Corp. owns 20% of Dubro Corp.'s preferred stock and 40% of its common stock. Dubro's stock outstanding at December 31, 1993, is as follows: 10% cumulative preferred stock $100,000 Common stock 700,000 Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the year ended December 31, 1993. How much total revenue should Moss record due to its investment in Dubro? Answers: a. $22,000 b. $50,000 c. $20,000 d. $70,000
Response Feedback: Since Moss owns 40% of Dubro's common stock, the equity method is appropriate. Preferred Stock: $100,000 x 10% = $10,000 dividends x 20% ownership = $2,000 dividends received Common Stock: net income $60,000 less pref'd dividends (10,000) net income available to common shareholders 50,000 Moss' percentage owned x 40% = $20,000 equity in earnings Choice "$22,000" is correct, $20,000 from equity in earnings plus $2,000 from dividend revenue.
