Chapter 17 - Investments

On January 1, 2021, Reston Company purchased 25% of Ace Corporation's common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston's investment account was $1,170,000 at December 31, 2021. Ace reported net income of $700,000 for the year ended December 31, 2021, and paid cash dividends on common stock totaling $280,000 during 2021. How much did Reston pay for its 25% interest in Ace?

$1,065,000

On December 31, 2021, Patel transferred its investment in security C from trading to available-for-sale because Patel intends to retain security C as a long-term investment. What total amount of gain or loss on its securities should be included in Patel's income statement for the year ended December 31, 2021? (Check word doc for portfolio, #31)

$24,000 loss

Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2021 income statement if 2021 is Kramer's first year of operation? (Check word doc for equity securities portfolio, #23)

$25,000 loss

What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2021?

$30,000

At December 31, 2021, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity?

$30,744

The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2021 is

$40,000

During 2020, Woods Company purchased 80,000 shares of Holmes Corporation common stock for $1,260,000 as an equity investment. The fair value of these shares was $1,200,000 at December 31, 2020. Woods sold all of the Holmes stock for $17 per share on December 3, 2021, incurring $56,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2021 of

$44,000

If Blanco Company used the fair value method of accounting for its investment in Darby Company, its Equity Investments (Darby) account on December 31, 2021 should be

$600,000

If Blanco Company uses the equity method of accounting for its investment in Darby Company, its Equity Investments (Darby) account at December 31, 2021 should be

$660,000

At February 1, 2022, Richman Company sold the Carlin bonds for $1,236,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2022 was $1,240,500. Assuming Richman Company has a portfolio of available-for-sale debt investments, what should Richman Company report as a gain (or loss) on the bonds?

($4,500)

Jordan Company 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

Watt Company 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 DEBT INVESTMENTS at $315,000

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

Which of the following is NOT correct in regard to trading securities?

All of these choices are correct (They are held with the intention of selling them in a short period of time. Unrealized holding gains and losses are reported as part of net income. Any discount or premium is amortized)

In accounting for investments in debt securities,

Any discount or premium is amortized

Transfers between categories

Are accounted for at fair value for all transfers

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

Available-for-sale debt securities

Investments in debt securities are generally recorded at

Cost including brokerage and other fees

On August 1, 2021, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2027, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2021 is

Debit DEBT INVESTMENTS (1,200,000) and INTEREST REVENUE (27,000) Credit DISCOUNT ON DEBT INVESTMENTS (36,000) and CASH (1,191,000)

On August 1, 2021, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2021, and mature on April 30, 2026, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2021?

Debit DEBT INVESTMENTS (520,000) and INTEREST REVENUE (12,500) Credit CASH (532,500)

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 investee in its financial statements

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

Held-to-maturity debt securities

When an investor's 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 receipt date

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2021, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2021 and December 31, 2021 by the amortized premiums of $4,248 and $4,392, respectively.

Questions 21 and 22 are based on the following information:

Unrealized holding gains or losses which are recognized in income from debt securities is classified as

Trading

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at 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 remaining 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. During the calendar year 2021, Cosby had net earnings of $300,000 and paid dividends of $30,000. 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

On its December 31, 2020, balance sheet, Trump Company reported its investment in equity securities, which had cost $600,000, at fair value of $560,000. At December 31, 2021, the fair value of the securities was $585,000. What should Trump report on its 2021 income statement as a result of the increase in fair value of the investments in 2021?

Unrealized gain of $25,000

On its December 31, 2020 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2021 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. (Check word doc for portfolio, #26 and #27)

Use the following information for questions 26 and 27.

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2021. During 2021, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000.

Use the following information for questions 28 and 29.

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

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

debit to DEBT INVESTMENTS

GAAP 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

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

fair value plus brokerage fees and other costs incidental to the purchase