Chapter 12 Smartbook

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

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

What are common financial instruments that are used to finance or expand a company's operations?

Common stock Preferred stock Corporate bonds

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

Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period,

Report an unrealized holding gain in net income Make a fair value adjustment of $75,000

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

They own 20-50% of Neumann's voting shares. Von has significant influence over Neumann.

How are equity investments that lack significant influence adjusted?

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

What is correct regarding the financial presentation of HTM securities?

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

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

All equity investments are initially recorded at

cost

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

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

held to maturity security

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

original cost of the investment

The price of a bond is equal to the

present value of future cash receipts

The price of a bond is equal to

present value of future interest payments plus present value of principal

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

present value techniques

When fair value of equity investments is not readily determinable

the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments the investor needs to continually evaluate whether fair value is readily determinable the investor needs to assess annually whether the investment is impaired

When fair value of equity investments is not readily determinable,

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

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

trading securities