Ch 12

Ziegler Company owns 40% of Norm Company's outstanding voting stock. During the current year, Norm reported income of $2 mil and declared dividends of $1 mil. Ziegler Company should report income from its investment of

$2 mil x 40% = $800,000

Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. On the date of sale, Markus should recognize a realized gain of _____ in net income. (Assume the debt investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed.)

$2,000

Marian company's records show the following account balances at 2/1/18: on that day, the company sells the investments in HTM securities, $500K; and discount on HTM investment $20K. On that day, the company sells the investment for $520K. The journal entry would include debuts of (select all that apply)

$520K to cash;

Which of the following is correct regarding the purpose of additional adjustments under the equity method? 1. Adjustments help improve financial statement consistency 2. Adjustments help improve financial statement comparability 3. Adjustments help to approximate the effects of consolidation

3. Adjustments help to approximate the effects of consolidation

Match the correct accounting treatment with the correct transaction: A. Holding gain or loss in other comprehensive income B. Holding gain or loss in income C. No holding gain or loss is recognized 1. Investment in held-to-maturity debt securities 2. Investment in trading debt securities 3. Investment in available for sale debt securities

A - 3 B - 2 C - 1

How are equity investments that lack significant influence adjusted?

A fair value adjustment is recorded at the end of every reporting period; Unrealized holding gain or loss is included in net income

How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?

A valuation allowance account is increased or decreased

Financial statement presentation for AFS Net fair value adjustments to date - net holding gains and losses to date

Accumulated other comprehensive income

If the market rate of interest rises after a bond is purchased, the bond incurs

An unrealized holding loss

Regarding the valuation of equity investments that lack significant influence beginning in 2018, which of the following statements is correct?

Companies are required to use the fair value through net income method

Action company sells bond investments classified as trading securities for $99K. The face amount is $100K; unamortized discount is $2K. What must be included in the journal entry to record the sale? (Select all that apply)

DR cash 99K; DR discount on bond investments $2K; CR investment in bonds $100K; Cr fair value adjustment $1K

Jan 1,2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On Dec 31, 2021, the investment in North Company has a fair value of $505,000. On Jan 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale?

Debit cash $505,000; Credit investment in North stock $500,000; credit fair value adjustment $5,000

Which reporting method should be used if the investor can exert significant influence over the investee?

Equity method

At the first me off the accounting period, trading debt securities must be adjusted to ___ value

Fair

Investments in debt securities classified as trading are reported on the balance sheet at _____ _____

Fair value

True or False: If the investee reports a net loss, the equity investment account is not adjusted for additional expenses

False (If the investee reports a net loss, the investment account is decreased by the investor's share of the investee's net loss, adjusted for additional expenses.

Equity and debt securities are commonly referred to as _______________ instruments

Financial

characteristics that support classification of investments as trading securities include (select all that apply)

Frequent and active trading; motivation to realize short term profits

Which of the following are correct regarding the financial statement presentation of HTM securities?

Gains and losses are shown in net income in the period in which the securities are sold

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a

Held-to-maturity security

Cash flows fr using and selling held-to-maturity securities are typically classified as _______ activities on the Statement of Cash Flow

Investing

Financial statement presentation for Realized gains and losses from the sale of AFS securities

Net income

Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?

Net income may appear to be more volatile than it is

In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:

Operating activities

Financial statement presentation for AFS Current period holding gains or losses

Other comprehensive income

If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using _______ _______ techniques

Present value

The price of a bond is equal to

Present value of future interest payments plus present value of principal AND Present value of future cash receipts

An investor who purchased corporate bonds that are not publicly traded may estimate the bonds fair value by determining the

Present value of the future cash flows

Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as _____ securities

Trading

Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct?

Von has significant influence over Neumann; Von owns 20-50% of Neumann's voting shares

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with

debit investment in Saddle $450,000; credit cash $450,000

Dividends cause the investor's investment in the investee's net assets to

decrease

Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would

decrease by $10,000 (40,000 * 25%)

Silvia company acquires a 30% interest in Small Company. The fair value of Small's inventory exceeds its carrying value by $100,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

decrease by $30,000

Under the equity method, if the investee company reports a net loss, the investment balance will

decrease by the investor's proportionate share of the investee's net loss

Under the equity method, dividends received from the investment

decrease the investment account balance

Cash flows from buying and selling AFS debt securities are typically shown on the statement of cash flows in the ______activities section

investing

Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of cash flows

investing

On July 1, Adrianna Company purchased 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle reports income of $200,000 and declares dividends of 50,000. Adrianna should recognize income earned by debiting

investment in Saddle company for $35,000 (200,000*35%*(6/12)

If a company chooses to apply the fair value option to investments that otherwise would be accounted for under the equity method, the election

is irrevocable; can be made for some investments and not others

Cash flows related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the _____ section of the statement of cash flows

operating

When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the:

the original cost of the investment

Bella company purchased debt securities with a face amount of $500K for $480 and classifies them as trading securities. During the first year, the company amortized $2K of the associated discount. At the end of the period, the fair value is $504K. Bella should recognize a fair value adjustment of

$22K

Goofy Inc. bought a sizeable amount of Crazy Cos bonds for $196,000 on May 5, 2020, and classified the investment as AFS. The market value of the bonds declined to $122,000 by December 31, 2020. Goofy reclassified this investment as trading securities in December of 2021 when the market value had risen to $160,000. What effect on 2021 net income should be reported by Goofy for the Crazy Co. bonds?

$36,000 net unrealized holding loss. Explanation: Unrealized holding loss of $74,000 is recorded in an allowance to reduce the investment balance, and as other comprehensive loss, in 2020. When the bonds are reclassified in 2021, the $74,000 in accumulated other comprehensive income is reclassified as an unrealized holding loss in the income statement. In addition, $38,000 unrealized holding gain for 2021 goes directly to the income statement. The net effect on net income in 2021 is a $36,000 unrealized holding loss.

Marian company's records show the following account balances at 2/1/18: on that day, the company sells the investments in HTM securities, $500K; and discount on HTM investment $20K. On that day, the company sells the investment for $520K. The journal entry would include credits of (select all that apply)

$500K to investments in HTM securities; $40K to gain from sale of investments

Gruen Corp aquires a 25% interest in Blau Company for $1 mil. The excess of investment cost over Gruen's share of the book value of Blau's net assets is solely attributable to goodwill. During the year, Blau reports income of $500,000 and declares dividends of $100,000. The carrying value of Gruen's investment at the end of the accounting period will be

Purchase price + share of net income - dividends - depreciation adjustment ($1 mil + (($500,000 - 100,000)* 25%) = $1.1 mil

The investment account associated with Adam Corp's equity method investment shows a balance of $500,000. The investment is sold for $550,000. Adam should

Recognize a gain of $50,000

Unrealized holding gains and losses with debt investments properly classified as "available for sale" are

Recognized as other comprehensive income

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity"? (Select all that apply)

The investor has the ability to hold the security until maturity; the investor intends to hold the security until maturity

Consistent with the equity method, investment income is

based on investee's income times ownership percentage

Barber Company acquires 35% of the outstanding shares of Carter Company. Which of the following is correct? a. Barber must consolidate Carter Company b. Barber must utilize the equity method c. Barber may choose to apply the fair value option

c. Barber may choose to apply the fair value option

Under US GAAP, which of the following statements regarding the classification of debt investments is correct? a. The classification of investments must be reassessed with each change in fair value b. The classification of investments is permanent c. The classification of investments must be reassessed each reporting period

c. The classification of investments must be reassessed each reporting period

Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes (Select all that apply.)

credit to fair value adjustment $80K; debit to discount on bond investment $100K; debit to cash $680K; credit to investment in bonds $700K

Global Company holds a portfolio of equity securities. The company intends to sell the securities during the next accounting period. The company should classify the investment as

current

Abbot Inc. owns 30% of the outstanding voting shares of Berta Inc. On the date of acquistion, the fair value of Berta's equipment with a remaining useful life of five years and no residual value exceeded its carrying value by $20,000. During the year after the acquisition, the undervalued equipment will ______ Abbot's investment revenue by ______

decrease; (20,000*30%/5 years) = $1,200

Equity investment for which the investor does not have significant influence are classified as ____ in the balance sheet.

noncurrent assets; current assets

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 mil and the fair value of the company's net assets is $1.2 mil. The difference between the book value and fair value of the net assets is attributed to undervalued land. Adrianna should

not amortize the difference between fair value and book value attributable to land

Goodwill arising from an investment accounted for under the equity method is

not amortized

If an investment accounted for under the equity method is acquired during the year, income and other adjustments are

recognized for the portion of the year the investment was owned

The carrying value of an equity method investment consists of its initial cost plus

the investor's equity in the investee's undistributed income

Beginning in 2018, equity adjustments that lack significant influence are accounted for the same way as debt investments classified as:

trading securities

Markus Company sells 1,000 bonds of its debt investment in Berta Inc for $20K. The original cost of the 1,000 bonds was $18K. During the prior year, the bonds were reported on the balance sheet at a fair value of $19K. Assume the investment was accounted for as available for sale and all unrealized holding gains and losses have been reversed. The JE to record the sale of the bonds should include these credits: (select all that apply)

Investments in AFS - $18K; Gain on sale of investment - $2K

How are available-for-sale debt securities reported? (Select all that apply)

Realized gains and losses are reported in net income in the period the investment is sold; unrealized gains and losses are reported as part of other comprehensive income when they occur

If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held-to-maturity, Dinsburry would:

Reclassify the investment as held-to-maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date.

Which of the following scenarios may require additional adjustments under the equity method?

The investor's acquisition cost exceeds the book value of the underlying net assets

The choice to classify debt securities as current or noncurrent depends on

When they are expected to be matured or be sold

When an equity method investment is sold

a gain or loss is recognized for the difference between its selling price and its cost.

When fair value of equity investments is not readily determinable (select all that apply) a. The fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments b. the investor needs to assess annually whether the investment is impaired c. the investor needs to continually evaluate whether fair value is readily determinable d. the investor recognizes increases and decreases in the fair value into other comprehensive income

a, b, c

consistent with the equity method, investment income is

based on investee's income times ownership percentage

All equity investments are initially recorded at

cost

Equity investments for which the investor does not have significant influence are classified as ____ in the balance sheet (select all that apply)

current assets; noncurrent assets

January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018? (Select all that apply.)

debit cash $5,000; credit dividend revenue $5,000

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale? (Select all that apply.)

debit cash $505,000; credit fair value adjustment f$5,000; credit investment in North stock $500,000

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. How should Smith Co. record the purchase of this investment? (Select all that apply.)

debit investment in North Company $500,000; credit cash $500,000

Dividends earned on an equity investment, when there is a lack of significant influence, are credited to

dividend revenue

The appropriateness of the classification of debt investments must be reassessed

each reporting date

The fair value option can be applied to: (select all that apply)

financial liabilities, financial assets

Gains and losses relating to debt securities classified as trading are presented in the _______ ________ in the periods in which fair value changes, regardless of whether they are realized or unrealized.

income statement

Under the fair option, unrealized gains and losses on HTM and AFS debt securities are recognized in ______ _______ in the period they occur

net income

Accounting for held-to-maturity, trading, and available for sale debt securities differs with respect to

the year end fair value adjustment

Select all that apply: Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system: a. purchase of investments b. sale of investment c. changes in the riskiness of investment d. changes in fair value e. receiving dividends

a, b, d, e

From an accounting perspective, critical events that investors experience over the life of an investment include (select all that apply): a. changes in fair value b. changes in related cash flows c. receiving dividends d. sale of investment e. changes in effective interest rates

a,c,d

Porter Company classifed its debt investment in Baily Company as an available-for-sale security. Subsequently to the purchase, the fair value of the investment increased by $5K. The result of this increase in value will be

an increase in other comprehensive income

Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at

cost

Lerner owns 30% of the outstanding voting shares of Koerner Inc. On the date of the acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. During the year after the acquisition, the undervalued equipment will ______ Lerner's investment revenue by ____

decrease; (30% x 50,000 / 10years)= $1,500