D105 - Unit 3
During Year 1, Company A purchased 26,000 shares of Company B common stock for $260,000. The fair value of the shares was $320,000 at December 31, Year 1. Company A sold all of the Company B stock for $10.25 per share on May 1, Year 2, incurring $8,000 in brokerage commissions. Which amount should Company A report as a realized gain or loss on the sale of stock in Year 2?
$1,500 realized loss ($10.25 x 26,000 -$8,000) - $260,000 = ($1,500)
A company reports net income for the year of $75,000. Other available information is as follows: Realized gain on sale of available-for-sale securities: $45,000 Unrealized holding gains on available-for-sale securities: $30,000 Unrealized holding gains on trading securities: $30,000 Which amount represents the the company's comprehensive net income?
$105,000 $105,000 = $75,000 + $30,000. Comprehensive net income includes net income plus unrealized gains and losses on available-for-sale securities.
During 2020, Grambling Company purchased 10,000 shares of Southern Corp. common stock for $215,000 as a passive interest investment. The fair value of these shares was $289,000 at December 31, 2020. During 2020, Grambling sold all of the Southern stock for $226,000. What realized gain on sale of stock in 2020 should Grambling Company report?
$11,000 The realized gain on sale of stock is computed as: $226,000 (Selling Price) - $215,000 (Cost) = $11,000.
During Year 1, Company A purchased an investment of 4,000 shares of Company B common stock for $248,000, plus $6,000 of brokerage fees. Company A sold all of the Company B stock for $68 per share on December 31, Year 2, when the fair value was $268,000 at the close of business that same day. Which amount should be recorded for the realized gain on the sale of stock in Year 2?
$18,000 ($68 x 4,000 = $272,000 - ($248,000 + $6,000) = $18,000). This is the net proceeds minus the cost of investment.
Company A has a 10% ownership in Company B. Company B was purchased on January 1, Year 1, at a cost of $3,000,000. At the end of Year 1, Company B reports net income of $500,000 and paid total dividends of $40,000. Which value should be used for the investment in Company B on Company A's balance sheet at the end of Year 1?
$3,000,000 Since the ownership in Company B is less than 20%, the investment is carried at cost.
Dublin Company holds a 30% stake in Club Company which was purchased in 2021 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, 2021 the fair value of the investment is $3,120,000. What is an acceptable value for Dublin to use in its balance sheet at December 31, 2021?
$3,040,000 and $3,120,000 If a company chooses to use the fair value option, it must measure this instrument at fair value until the company no longer has ownership. $3,040,000 and $3,120,000 are both acceptable representing Fair Value.
1 / 1 Foucault Company owns 40,000 of the 100,000 outstanding shares of Mango Inc. common stock. During 2020, Mango earns $640,000 and pays cash dividends of $480,000. If the beginning balance in Foucault's investment account was $430,000, what is the balance at December 31, 2020?
$494,000 The balance of investment account is the following: $430,000 (Beginning Investment Balance) + ($640,000 (Net Income) x (40,000 /100,000)) - ($480,000 (Dividends) x 40,000 / 100,000) = $494,000.
During Year 1, Company A purchases an investment of 10,000 shares of Company B common stock for $780,000, plus $10,000 of brokerage fees. Company A sold all of the company B stock for $84 per share when the fair value was $810,000 at the close of the business day. Which amount should be recorded for the realized gain on the sale of stock in Year 2?
$50,000 ($84 x 10,000) - ($780,000 + $10,000) = $50,000.
During 2020, Jackson Company purchased 17,000 shares of Monticello Corp. common stock for $382,500 as a passive interest investment. The fair value of these shares was $373,150 at December 31, 2020. Jackson sold all of the Monticello stock for $27.25 per share on July 3, 2021, incurring $15,000 in brokerage commissions. Which realized gain on the sale of stock in 2021 should Jackson Company report?
$65,750.00 The realized gain on sale of stock is computed as: ($27.25 x 17,000) Selling Price - $382,500 (Cost) - $15,000 (Brokerage Fees) = $65,750.
On August 1, Year 1, Company A acquires $650,000 face value 10% bonds of Company B at 105 plus accrued interest. The bonds are dated May 1, Year 1 and mature on April 30, Year 6, with interest payable each October 31 and April 30. The bonds will be held to maturity. Which amount should Company A use to record the purchase of the bonds on August 1, Year 1, in the Debt Investments account?
$682,500 This is the face value added to the premium. $650,000 x 1.05 = $682,500
1 / 1 Savannah Corporation purchased 35,000 shares of common stock of the Boulet Corporation for $50 per share on January 2, 2020. During 2020, Boulet Corporation had 140,000 shares of common stock outstanding, paid cash dividends of $120,000, and reported net income of $320,000. Which amout should Savannah Corporation report as revenue from investment for 2020?
$80,000 The revenue from investment is the following: (35,000 /140,000) x $320,000 (Net Income) = $80,000.
How long are trading securities generally held for?
0-3 months Trading securities are generally held for less than 3 months
Which method should be used to measure impairment of available-for-sale debt investments?
Actual selling price Impairments of available-for-sale debt investments can be measured using actual selling price.
A parent company owns 90% of the subsidiary company's outstanding common stock. How should the company account for the income of the subsidiary?
An increase to the equity investment account Holdings of more than 50% need to use the equity method, and an increase in net income is proportionately shared by increasing the equity investment account.
Which is accurate in accounting for investments in debt securities for discounts or premiums?
Any discount or premium is amortized. In accounting for investments in debt securities, any discount or premium is amortized.
Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. How should Koehn Corporation ordinarily record a cash dividend received from Sells?
As a reduction of the carrying value of the investment All cash dividends received by the investor from investee also decrease the investment's carrying amount.
Kretsmart accounts for its investment in the common stock of Quiet Flag Industries using the equity method and needs to record net income from that company. How should that income be recorded?
As an addition to the carrying value of the investment Net income that is proportionately shared by the investor is accounted for as an addition to the carrying value of the investment.
Which debt securities recognize the unrealized holding gains or losses as other comprehensive income?
Available-for-sale securities Debt securities, also known as available-for-sale securities, recognize unrealized holding gains and losses as other comprehensive income and as a separate component of stockholders' equity.
A company transfers its securities from held-to-maturity to available-for-sale. Which impact from unrealized gains/losses will stem from this transfer?
Change in stockholders' equity The change increases or decreases stockholders' equity by the unrealized gains/losses at the date of transfer.
What accounting method should be applied when there is an ownership interest of 90% of the common stock of another corporation?
Consolidated method An ownership interest of 90% of the common stock of another corporation should be accounted for using consolidation.
What are investments in debt securities generally recorded at?
Cost including brokerage and other fees Investments in debt securities are generally recorded at cost including brokerage commissions and taxes.
Which item is used to calculate impairments of held-to-maturity debt investments?
Current expected credit loss model Impairment of debt investments are measured using the current expected credit loss (CECL) model.
An investor uses the equity method and has an investee that has generated net income. How should this income be recorded by the investor?
Debit the proportionate share to the equity investment account The equity investment account would be debited, and the investment income account would be credited to reflect the proportionate share of the investee's net income.
An available-for-sale debt security is purchased at a discount. What is included in an entry to record the amortization of the discount?
Debit to Debt Investments For an available-for-sale debt security purchased at a discount, the entry to record the amortization of the discount includes a debit to Debt Investments.
Which security can be classified as a held-to-maturity security?
Debt security A debt security has a maturity date and can be classified as held-to-maturity.
What are debt securities that are bought and held primarily for sale in the near term reported at?
Fair value Debt securities that are bought and held primarily for sale in the near term are reported at fair value. They are also known as Trading Securities.
Which valuation method is used to record securities which are categorized as trading securities?
Fair value Trading securities are recorded at fair value on the balance sheet.
A company transfers available-for-sale securities to trading securities. Which measurement basis should be used to determine the cost basis?
Fair value at transfer date When transferring securities from available-for-sale to trading, the measurement basis is the fair value at the date of transfer.
What is accurate about the effective-interest method of amortization?
It must be used to amortize a discount or premium unless some other method yields a similar result. The effective-interest method of amortization must be used to amortize a discount or premium unless some other method yields a similar result.
What does the fair value option allow a company to do?
Its fair value at the date of the transfer When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be its fair value at the date of the transfer.
When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, what should the carrying value assigned to the available-for-sale debt security be?
Its fair value at the date of the transfer When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be its fair value at the date of the transfer.
Under the equity method, if an investee company generates net income, which transaction should the investor company make?
Records its proportionate share as an increase in its investment account The investor's proportionate share of the earnings (losses) of the investee periodically increases (decreases) the investment's carry amount.
Which equity securities should be accounted for using the equity method?
Securities where a company has holdings between 20% and 50% The investor has significant influence but not controlling influence, so the equity method should be used.
Which equity securities are acquired by a corporation and accounted for by recognizing unrealized holding gains or losses?
Securities where a company has holdings of less than 20% Securities where a company has holdings of less than 20% are equity securities that are acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses.
What does "gains trading" involve?
Selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers)
In which section is a reclassification adjustment reported?
Statement of comprehensive income as other comprehensive income The FASB prefers to show the reclassification amount in the accumulated other comprehensive income and in the notes of the financial statements.
When a company holds between 20% and 50% of the outstanding stock of an investee, what is true?
The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. When a company holds between 20% and 50% of the outstanding stock of an investee, the investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
What is accurate about transfers between categories?
They are accounted for at fair value for all transfers. Transfer between categories are accounted for at fair value for all transfers.
What is true about Impairments?
They are evaluated using the CECL model similar to receivables. Similar to Receivables, companies use the current expected credit loss (CECL) model to measure impairment of receivables.
Company A owns 35% of Company B. During the calendar year, Company B had net earnings of $300,000 and paid dividends of $30,000. Company A mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. There was no adjustment for fair value. How will this error impact the investment account for Company A?
Understate it by $94,500 (35% x $300,000) - (35% x $30,000) = $94,500 The investment account would increase by this amount using the equity method.
On its December 31, 2020, balance sheet, Estes Co. reported its investment in trading securities, which had cost $500,000, at fair value of $475,000. At December 31, 2021 the fair value of the securities was $492,500. What should Estes Co. report on its 2021 income statement as a result of the increase in fair value of the investments in 2021?
Unrealized gain of $17,500 A holding gain or loss is the net change in the fair value of a security from one period to another. The unrealized gain is computed as follows: $492,500 - $475,000 = $17,500
Which statement describes the accounting treatment for the transfer of debt securities from available-for-sale to held-to-maturity?
Unrealized gains or losses at the date of transfer are amortized over the remaining life of the securities. Unrealized gains or losses at the date of transfer are a separate component of stockholders' equity and are amortized over the remaining life of the securities.
When the parent treats the investment as a subsidiary, how does the parent generally prepare their financial statements?
Using consolidated financial statements When the parent treats the investment as a subsidiary, the parent generally prepares consolidated financial statements. Consolidated financial statements treat the parent and subsidiary corporations as a single economic entity.
Under the equity method of accounting for investments, when should an investor recognizes its share of the earnings?
When earnings are reported by the investee in its financial statements Under the equity method of accounting for investments, an investor should recognize its share of the earnings in the period when earnings are reported by the investee in its financial statements.