Chapter 12

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

decrease

Interest revenue is calculated based on ________ the interest rate.

effective

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of

$40,000 to gain from sale of investment. $500,000 to investments in HTM securities.

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.

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.

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.

If a bond sells for more than its maturity value, the bond sells at a

premium

The price of a bond is equal to the

present value of future cash receipts.

Interest received is calculated based on the ________ interest rate

stated

At the time of acquisition, debt investments are recorded at

cost

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 otherwise appear more volatile than it actually is.

Which accounting standards require the equity method for use with significant influence investees?

U.S. GAAP and IFRS

James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should

credit dividend revenue

Which of the following are financial instruments?

evidence of ownership interest in companies cash accounts receivable

Equity and debt securities are commonly referred to as _____________ instruments

financial

The fair value option can be applied to:

financial assets financial liabilities

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

investing

The interest rate for debt of similar risk and maturity is referred to as the _____ interest rate.

market

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 million and the fair value of the company's net assets is $1.2 million. 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.

Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as activities in the statement of cash flows.

operating

The price of a bond is equal to

present value of future interest payments plus present value of principal

Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system

sale of investment receiving dividends purchase of investment changes in fair value

When fair value of equity investments is not readily determinable (select all that apply)

the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.

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

trading securities

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of

$520,000 to cash. $20,000 to discounts.

Bella Company purchased debt securities with a face amount of $500,000 for $480,000 and classifies them as trading securities. During the first year, the company amortized $2,000 of the associated discount. At the end of the period, the fair value is $504,000. Bella should recognize a fair value adjustment of

22k

When an equity method investment is sold,

a gain or loss is recognized if the sales price is more or less than the book value

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.

Abbott Inc. owns 30% of the outstanding voting shares of Berta Inc. On the date of acquisition, 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 _____ Abbott's investment revenue by _____.

decrease $(20,000 x 0.3)/5 additional depreciation decreases investment revenue

Lerner Inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of 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 _____. Multiple choice question.

decrease ($50,000 x .3)/10

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 investmen

decrease the investment account balance

Under the equity method, dividends received from the investment

decrease the investment account balance

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

dividend revenue

The appropriateness of the classification of debt investments must be reassessed

each reporting date

If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is

less than its maturity value.

Investors utilize the ______ interest rate to value the stream of cash flows associated with bond investments.

market or effective

If the interest rate paid on a bond exceeds the market interest rate, the bond will sell for an amount that is

more than its maturity value.

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

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.

Which balance sheet presentation is acceptable for reporting an investment involving significant influence for which the fair value option was chosen? (Select all that apply.)

report the investment as a separate line item combine the investment with equity method investments

When the fair value option is chosen for equity investments with significant influence, the company must report the investments on their own line in the balance sheet.

true The investments can be shown on their own line item or combined with other equity investments.

Holding bonds during periods in which the fair value of the bonds changes results in

unrealized holding gains and losses

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

when they are expected to mature or be sold.

Which of the following are common financial instruments that are used to finance or expand a company's operations?

-Common stock -Preferred stock -Corporate bonds

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. -Unrealized holding gains and losses are disclosed in the notes to the financial statements.

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

-The investor has the ability to hold the security until maturity. -The investor intends to hold the security until maturity.

How are available-for-sale debt securities reported?

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

Bonds typically provide two sources of cash flows to investors. These are associated with the payment of

-interest -principal

From an accounting perspective, critical events that investors experience over the life of an investment include

-receiving dividends -changes in fair value -sale of investment

Gruen Corporation aquires a 25% interest in Blau Company for $1 million. 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:

1 mill + ((500,000 - 100,000)*.25))

Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. Margot should recognize the following interest revenue for the first 6-month period: Multiple choice question.

2,750 $110,000 x (5% x 6/12)

Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The rate used to determine interest revenue for the first 6 months on the investment is

7%/2= 3.5

Identify the statement that is correct regarding the purpose of additional adjustments under the equity method.

Adjustments help to approximate the effects of consolidation.

Which of the following statements regarding the initial recognition of debt investments is correct?

All debt investments are initially recorded at cost.

Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is

Interest received uses the stated rate and the bonds are semi-annual so 6%/2

Under U.S. GAAP, which of the following statements regarding the classification of debt investments is correct?

The classification of investments must be reassessed each reporting period.

Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be

an increase in other comprehensive income.

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

an unrealized holding gain

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

an unrealized holding loss

Consistent with the equity method, investment income is

based on investee's income times ownership percentage.

Greenly Company acquired $40,000 face amount bonds of Neumann Company. Greenly can expect to receive the following cash flows from its investment:

interest principal

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

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

Investors utilize the __________ interest rate to value the stream of cash flows associated with bond investments.

market

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

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

-Unrealized holding gains and losses are disclosed in the notes to the financial statements. -Gains and losses are shown in net income in the period in which the securities are sold.

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