Intermediate 2 Ch. 17

Changes in the fair value of a company's available-for-sale debt instruments are included as part of earnings in any given period.

True

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. Harrison should report investment revenue for 2018 of a. $480,000. b. $384,000. c. $96,000. d. $0.

a. $480,000.

The fair value option allows a company to a. report most financial instruments at fair value at any point of time. b. record income when the fair value of its bonds increases. c. value its own liabilities at fair value. d. All of these choices are true of the fair value option.

a. report most financial instruments at fair value at any point of time.

Unrealized holding gains or losses which are recognized in income are from debt securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. None of these answers are correct.

c. trading.

A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.

False

Companies may not use the fair value option for investments that follow the equity method of accounting.

False

Debt securities include corporate bonds and convertible debt, but not U.S. government securities.

False

Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.

False

If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income.

False

If a decline in a security's value is judged to be temporary, a company needs to write down the cost basis of the individual security to a new cost basis.

False

The Fair Value Adjustment account has a normal credit balance.

False

The Unrealized Holding Gain/Loss—Income account for equity securities is reported as a part of other comprehensive income.

False

The accounting profession has concluded that an investment of 50 percent or more of the voting stock of an investee should lead to a presumption of only significant influence over an investee.

False

Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.

False

Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.

False

A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.

True

A reclassification adjustment is necessary when a company reports realized gains/losses as part of net income but also shows unrealized gains/losses as part of other comprehensive income.

True

All cash dividends received by an investor from the investee decrease the investment's carrying value under the equity method.

True

Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

True

Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income.

True

One requirement related to fair value disclosure is that both the cost and the fair value of all instruments be reported in the notes to the financial statements.

True

Significant influence over an investee may be indicated by material intercompany trans-actions and interchange of managerial personnel.

True

Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

True

On January 1, 2018, 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, 2018. Ace reported net income of $700,000 for the year ended December 31, 2018, and paid cash dividends on common stock totaling $280,000 during 2018. How much did Reston pay for its 25% interest in Ace? a. $1,065,000. b. $1,240,000. c. $1,275,000. d. $1,415,000

a. $1,065,000.

On November 1, 2018, Horton Company purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $800,000, for $720,000. An additional $24,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2025. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2018 income statement as a result of Horton's available-for-sale investment in Lopez was a. $14,000. b. $13,333. c. $12,000. d. $10,667.

a. $14,000.

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. What should the gain be on sale of this investment in Rich's 2019 income statement? a. $160,000. b. $137,500. c. $122,500. d. $100,000.

a. $160,000

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the straight-line method, what is the amount of premium amortization that would be recognized in 2019 related to these bonds? a. $3,209 b. $2,110 c. $2,300 d. $2,510

a. $3,209

On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/18 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2018 is a. $40,000. b. $30,000. c. $20,000. d. $0.

a. $40,000.

During 2017, 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, 2017. Woods sold all of the Holmes stock for $17 per share on December 3, 2018, incurring $56,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2018 of a. $44,000. b. $100,000. c. $104,000. d. $160,000.

a. $44,000.

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At December 31, 2018, the fair value of the Ritter, Inc. bonds was $3,180,000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity? a. $76,860. b. $55,260. c. $21,600. d. No entry should be made

a. $76,860.

On August 1, 2018, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2023, 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, 2018? a. Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500 b. Debt Investments 532,500 Cash 532,500 c. Debt Investments 532,500 Interest Revenue 12,500 Cash 520,000 d. Debt Investments 500,000 Premium on Bonds 32,500 Cash 532,500

a. Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500

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? Fair Value Method Equity Method a. No Effect Decrease b. Increase Decrease c. No Effect No Effect d. Decrease No Effect

a. No Effect Decrease

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. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income.

a. a reduction of the carrying value of the investment.

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 a. arbitrageurs. b. gamblers. c. hedgers. d. speculators

a. arbitrageurs.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Debt Investments. b. debit to the discount account. c. debit to Interest Revenue. d. None of these answers are correct.

a. debit to Debt Investments.

An option to convert a convertible bond into shares of common stock is a(n) a. embedded derivative. b. host security. c. hybrid security. d. fair value hedge.

a. embedded derivative.

26. Debt securities that are accounted for at amortized cost, not fair value, are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

a. 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 a. 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. b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

a. 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.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are a. securities where a company has holdings of less than 20%. b. securities where a company has holdings of more than 20%. c securities where a company has holdings of between 20% and 50%. d. securities where a company has holdings of more than 50%.

a. securities where a company has holdings of less than 20%.

Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2018, Penn earns $450,000 and pays cash dividends of $150,000. If the beginning balance in the investment account was $900,000, the balance at December 31, 2018 should be a. $900,000. b. $1,020,000. c. $1,080,000. d. $1,200,000.

b. $1,020,000.

Kern Company purchased bonds with a face amount of $1,000,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $15,000, and paid accrued interest for three months of $25,000. The amount to record as the cost of this long-term investment in bonds is a. $1,060,000. b. $1,035,000. c. $1,020,000. d. $1,000,000.

b. $1,035,000.

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. The carrying amount of this investment in Rich's December 31, 2018 balance sheet should be a. $1,000,000. b. $1,045,000. c. $1,120,000. d. $1,150,000.

b. $1,045,000.

On October 1, 2018, Menke Company purchased to hold to maturity, 500, $1,000, 9% bonds for $520,000. An additional $15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2022. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2018 income statement from this investment should be a. $11,250. b. $10,050. c. $12,450. d. $13,650.

b. $10,050.

The following information relates to Windom Company for 2018: Realized gain on sale of available-for-sale debt securities $45,000 Unrealized holding gains arising during the period on available-for-sale debt securities 90,000 Reclassification adjustment for gains included in net income 30,000 Windom's 2018 comprehensive income is a. $75,000. b. $105,000. c. $135,000. d. $165,000

b. $105,000.

At the end of 2018, Hauke Company purchased 6,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2018 was $5,880,000. The bonds mature on March 1, 2023, and pay interest on March 1 and September 1. Hauke sells 3,000 bonds on September 1, 2019, for $2,964,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is a. $0. b. $14,400. c. $24,000. d. $33,600.

b. $14,400.

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of: a. $158,970. b. $155,283. c. $155,130. d. $150,000.

b. $155,283.

Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2018. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. How much investment income should Dexter report in 2018? a. $240,000. b. $216,000. c. $144,000. d. $720,000.

b. $216,000.

On December 31, 2017, Patel Company purchased debt securities as trading securities. Pertinent data are as follows: Fair Value Security Cost At 12/31/18 A $132,000 $119,000 B 172,000 186,000 C 288,000 263,000 On December 31, 2018, 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, 2018? a. $1,000 gain. b. $24,000 loss. c. $25,000 loss. d. $38,000 loss.

b. $24,000 loss.

On October 1, 2018, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2027, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2018 balance sheet at a carrying value of a. $3,900,000. b. $3,903,000. c. $3,960,000. d. $3,961,750.

b. $3,903,000.

On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/18 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 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, 2018? a. $40,000. b. $30,000. c. $20,000. d. $0.

b. $30,000.

Instrument Corporation has the following investment which was held throughout 2018-2019: Fair Value Cost 12/31/18 12/31/19 Equity investment $900,000 $1,200,000 $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2019 related to its investment? a. $60,000 gain. b. $60,000 loss. c. $300,000 gain. d. $240,000 gain.

b. $60,000 loss.

On January 2, 2018 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2018 Jobs, Inc. reported net income of $1,260,000 and distributed dividends of $540,000. The ending balance in the Investment in Pod Company account at December 31, 2018 was $960,000 after applying the equity method during 2018. What was the purchase price Pod Company paid for its investment in Jobs, Inc? a. $510,000 b. $780,000 c. $1,140,000 d. $1,410,000

b. $780,000

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, 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, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At February 1, 2019, Richman Company sold the Carlin bonds for $1,236,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2019 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? a. $0. b. ($4,500). c. ($26,244). d. ($35,244).

b. ($4,500).

At December 31, 2018, Atlanta Company has an equity portfolio valued at $160,000. Its cost was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31, 2018? a. Fair Value Adjustment 28,000 Unrealized Holding Gain or Loss-Income 28,000 b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 c. Unrealized Holding Gain or Loss-Income 28,000 Fair Value Adjustment 28,000 d. Unrealized Holding Gain or Loss-Income 20,000 Fair Value Adjustment 20,000

b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment.

b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.

Use of the effective-interest method in amortizing bond premiums and discounts results in a. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. b. a varying amount being recorded as interest income from period to period. c. a variable rate of return on the book value of the investment. d. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

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

Held-to-maturity securities are reported at a. acquisition cost. b. acquisition cost plus amortization of a discount. c. acquisition cost plus interest. d. fair value.

b. acquisition cost plus amortization of a discount.

Transfers between categories a. result in companies omitting recognition of fair value in the year of the transfer. b. are accounted for at fair value for all transfers. c. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading. d. will always result in an impact on net income

b. are accounted for at fair value for all transfers.

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation.

b. by using the fair value method.

A correct valuation for debt securities is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. None of these answers are correct.

b. held-to-maturity at amortized cost.

When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be a. its original cost. b. its fair value at the date of the transfer. c. the higher of its original cost or its fair value at the date of the transfer. d. the lower of its original cost or its fair value at the date of the transfer.

b. its fair value at the date of the transfer.

Gains or losses on cash flow hedges are a. ignored completely. b. recorded in equity, as part of other comprehensive income. c. reported directly in net income. d. reported directly in retained earnings

b. recorded in equity, as part of other comprehensive income.

All of the following are characteristics of a derivative financial instrument except the instrument a. has one or more underlyings and an identified payment provision. b. requires a large investment at the inception of the contract. c. requires or permits net settlement. d. All of these are characteristics of derivatives.

b. requires a large investment at the inception of the contract.

On November 1, 2018, Howell Company purchased 1,000 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $1,052,500, which includes accrued interest of $15,000. The bonds, which mature on January 1, 2023, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2018, balance sheet at a. $1,000,000. b. $1,037,500. c. $1,036,000. d. $1,052,500.

c. $1,036,000.

Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2018. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. What amount should Dexter show in the investment account at December 31, 2018 if the beginning of the year balance in the account was $960,000? a. $1,176,000. b. $960,000. c. $1,104,000. d. $1,440,000.

c. $1,104,000.

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. Before income taxes, what amount should Rich include in its 2018 income statement as a result of the investment? a. $400,000. b. $250,000. c. $120,000. d. $75,000.

c. $120,000.

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2017. Sherman Corporation had 100,000 shares of common stock outstanding during 2018, paid cash dividends of $150,000 during 2018, and reported net income of $500,000 for 2018. Ziegler Corporation should report revenue from investment for 2018 in the amount of a. $37,500. b. $87,500. c. $125,000. d. $137,500.

c. $125,000.

At December 31, 2018, Jeter Corporation had the following debt securities that were purchased during 2018, its first year of operation: Fair Unrealized Cost Value Gain (Loss) Trading Securities: Security A $ 85,000 $ 65,000 $(20,000) B 15,000 20,000 5,000 Totals $100,000 $ 85,000 $(15,000) Available-for-Sale Securities: Security Y $ 70,000 $ 80,000 $ 10,000 Z 85,000 55,000 (30,000) Totals $155,000 $135,000 $(20,000) All market declines are considered temporary. Fair value adjustments at December 31, 2018 should be established with a corresponding charge against Income Stockholders' Equity a. $40,000 $ 0 b. $25,000 $30,000 c. $15,000 $20,000 d. $15,000 $ 0

c. $15,000 $20,000

Myers Company acquired a 60% interest in Gannon Corporation on December 31, 2017 for $1,775,000. During 2018, Gannon had net income of $1,000,000 and paid cash dividends of $250,000. At December 31, 2018, the balance in the investment account should be a. $1,775,000. b. $2,375,000. c. $2,225,000. d. $2,525,000.

c. $2,225,000.

Kramer Company's equity securities portfolio which is appropriately included in current assets is as follows: December 31, 2018 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. $260,000 $215,000 $(45,000) Lyman, Inc. 245,000 265,000 20,000 $505,000 $480,000 $(25,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2018 income statement if 2018 is Kramer's first year of operation? a. $0. b. $20,000 gain. c. $25,000 loss. d. $45,000 loss.

c. $25,000 loss.

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2018. During 2018, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000. If Blanco Company used the fair value method of accounting for its investment in Darby Company, its Equity Investments (Darby) account on December 31, 2018 should be a. $580,000. b. $660,000. c. $600,000. d. $680,000.

c. $600,000

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2018. During 2018, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000. If Blanco Company uses the equity method of accounting for its investment in Darby Company, its Equity Investments (Darby) account at December 31, 2018 should be a. $580,000. b. $600,000. c. $660,000. d. $680,000.

c. $660,000.

Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. If the beginning balance in the investment account was $750,000, the balance at December 31, 2018 should be a. $1,230,000. b. $990,000. c. $846,000. d. $750,000.

c. $846,000.

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds? a. ($88,110). b. ($65,610). c. ($7,440). d. $ 0.

c. ($7,440).

On August 1, 2018, 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, 2024, 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, 2018 is a. Debt Investments 1,191,000 Cash 1,191,000 b. Debt Investments 1,164,000 Interest Receivable 27,000 Cash 1,191,000 c. Debt Investments 1,164,000 Interest Revenue 27,000 Cash 1,191,000 d. Debt Investments 1,200,000 Interest Revenue 27,000 Discount on Debt Investments 36,000 Cash 1,191,000

c. Debt Investments 1,164,000 Interest Revenue 27,000 Cash 1,191,000

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method a. Income Income b. A reduction of the investment A reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income

c. Income A reduction of the investment

Which of the following is not a debt security? a. Convertible bonds b. Commercial paper c. Loans receivable d. All of these are debt securities.

c. Loans receivable

Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. Accrued interest will be received by the seller even though it is not an interest payment date. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments. d. A gain or loss on the sale is reported as an other revenue or expense.

c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments.

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. a debit to Debt Investments at $300,000. b. a credit to Premium on Debt Investments of $15,000. c. a debit to Debt Investments at $315,000. d. None of these choices are correct.

c. a debit to Debt Investments at $315,000.

When investments in debt securities are sold between interest payment dates, preferably the a. securities account should include accrued interest. b. accrued interest is credited to Interest Expense. c. accrued interest is credited to Interest Revenue. d. accrued interest is debited to Interest Receivable.

c. accrued interest is credited to Interest Revenue.

In accounting for investments in debt securities, a. a discount is reported separately. b. a premium is reported separately. c. any discount or premium is amortized. d. None of these answers are correct.

c. any discount or premium is amortized.

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 a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

c. available-for-sale debt securities.

Investments in debt securities are generally recorded at a. cost including accrued interest. b. maturity value. c. cost including brokerage and other fees. d. maturity value with a separate discount or premium account.

c. cost including brokerage and other fees.

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the a. effective-interest method of allocation must be used. b. straight-line method of allocation must be used. c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. d. par value method must be used and therefore no allocation is necessary.

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

The accounting for fair value hedges records the derivative at its a. amortized cost. b. carrying value. c. fair value. d. historical cost.

c. fair value.

All of the following statements regarding accounting for derivatives are correct except that a. they should be recognized in the financial statements as assets and liabilities. b. they should be reported at fair value. c. gains and losses resulting from speculation should be deferred. d. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.

c. gains and losses resulting from speculation should be deferred.

Investments in debt securities should be recorded on the date of acquisition at a. lower of cost or market. b. market value. c. market value plus brokerage fees and other costs incident to the purchase. d. face value plus brokerage fees and other costs incident to the purchase.

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

Securities which could be classified as held-to-maturity are a. redeemable preferred stock. b. warrants. c. municipal bonds. d. treasury stock.

c. municipal bonds.

"Gains trading" involves a. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses. b. reporting investment securities at fair value but liabilities at amortized cost. c. selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers). d. All of the above are considered methods of "gains trading" or "cherry picking."

c. selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers).

A reclassification adjustment is reported in the a. income statement as an Other revenue or expense. b. stockholders' equity section of the balance sheet. c. statement of comprehensive income as other comprehensive income. d. statement of stockholders' equity.

c. statement of comprehensive income as other comprehensive income.

Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2018, Penn earns $450,000 and pays cash dividends of $150,000. Tracy should report investment revenue for 2018 of a. $60,000. b. $120,000. c. $150,000. d. $180,000.

d. $180,000.

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by a. $8,970. b. $5,140. c. $4,485. d. $2,571.

d. $2,571.

Valet Corporation began operations in 2018. An analysis of Valet's debt securities portfolio acquired in 2018 shows the following totals at December 31, 2018 for trading and available-for-sale debt securities: Trading Available-for-Sale Securities Securities Aggregate cost $180,000 $220,000 Aggregate fair value 160,000 190,000 What amount should Valet report in its 2018 income statement for unrealized holding loss? a. $50,000. b. $10,000. c. $30,000. d. $20,000.

d. $20,000.

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, 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, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At December 31, 2018, 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? a. $0 b. $8,640 c. $22,104 d. $30,744

d. $30,744

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds? a. $50,000 b. $53,208 c. $47,890 d. $47,698

d. $47,698

On October 1, 2017, Wenn Company purchased 800 of the $1,000 face value, 8% bonds of Loy, Inc., for $936,000, including accrued interest of $16,000. The bonds, which mature on January 1, 2024, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Wenn's December 31, 2018 balance sheet, the carrying value of the bonds is a. $920,000. b. $912,000. c. $908,800. d. $896,000.

d. $896,000.

During 2018 Logic Company purchased 10,000 shares of Midi, Inc. for $30 per share. During the year Logic Company sold 2,500 shares of Midi, Inc. for $35 per share. At December 31, 2018 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of unrealized gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2018 related to its investment in Midi, Inc. stock? a. ($20,000) b. $12,500 c. ($7,500) d. ($2,500)

d. ($2,500)

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 a. 10 periods and 10% from the present value of 1 table. b. 10 periods and 8% from the present value of 1 table. c. 20 periods and 5% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table.

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

A requirement for a security to be classified as held-to-maturity is a. ability to hold the security to maturity. b. positive intent. c. the security must be a debt security. d. All of these are required.

d. All of these are required.

Which of the following is not correct in regard to trading securities? a. They are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is amortized. d. All of these choices are correct.

d. All of these choices are correct.

Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2018 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2018? I. $3,000,000 II. $3,040,000 III. $3,120,000 a. I, II, or III. b. I or II only. c. II only. d. II or III only.

d. II or III only.

Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III. Call or put options. a. I and II only. b. I and III only. c. II only. d. III only.

d. III only.

Which of the following is correct about the effective-interest method of amortization? a. The effective-interest method applied to investments in debt securities is different from that applied to bonds payable. b. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. It must be used to amortize a discount or premium unless some other method yields a similar result.

d. It must be used to amortize a discount or premium unless some other method yields a similar result.

On December 29, 2019, James Company sold a debt security that had been purchased on January 4, 2018. James owned no other debt securities. An unrealized holding loss was reported in the 2018 income statement. A realized gain was reported in the 2019 income statement. Was the debt security classified as available-for-sale and did its 2018 market price decline exceed its 2019 market price recovery? 2018 Market Price Decline Exceeded 2019 Available-for-Sale Market Price Recovery a. Yes Yes b. Yes No c. No Yes d. No No

d. No No

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? a. Transfer from trading to available-for-sale b. Transfer from available-for-sale to trading c. Transfer from held-to-maturity to available-for-sale d. Transfer from available-for-sale to held-to-maturity

d. Transfer from available-for-sale to held-to-maturity

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2018, 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? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate

d. Understate, understate, understate

On its December 31, 2017, balance sheet, Trump Company reported its investment in equity securities, which had cost $600,000, at fair value of $560,000. At December 31, 2018, the fair value of the securities was $585,000. What should Trump report on its 2018 income statement as a result of the increase in fair value of the investments in 2018? a. $0. b. Unrealized loss of $15,000. c. Realized gain of $25,000. d. Unrealized gain of $25,000

d. Unrealized gain of $25,000

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements.

d. earnings are reported by the investee in its financial statements.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the a. cost method. b. fair value method. c. divesture method. d. equity method.

d. equity method.

Impairments are a. based on discounted cash flows for securities. b. recognized as a realized loss if the impairment is judged to be temporary. c. based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments. d. evaluated using the CECL model similar to receivables.

d. evaluated using the CECL model similar to receivables