Intermediate 2 (Ch. 17)

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. $1,410,000 B. $1,140,000 C. $510,000 D. $780,000

D. $780,000

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

A requirement for a security to be classified as held-to-maturity is A. all of these are required. B. the security must be a debt security. C. positive intent. D. ability to hold the security to maturity.

A. all of these are required

Debt securities that are accounted for at amortized cost, not fair value, are A. never-sell debt securities. B. held-to-maturity debt securities. C. trading debt securities. D. available-for-sale debt securities.

B. held-to-maturity debt securities

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value;Equity A. A reduction of the investment; A reduction of the investment B. Income; A reduction of the investment C. A reduction of the investment; Income D. Income; Income

B. Income; A reduction of the investment

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

A. are accounted for at fair value for all transfer

Investments in debt securities are generally recorded at A. cost including brokerage and other fees. B. cost including accrued interest. C. maturity value with a separate discount or premium account. D. maturity value.

A. cost including brokerage and other fees

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

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 circumstances 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 circumstances indicate that it is unable to exercise "significant influence" over the investee.

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. trading debt securities. B. available-for-sale debt securities. C. never-sell debt securities. D. held-to-maturity debt securities.

B. available-for-sale debt securities

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 consolidation. D by using the effective interest method.

B. by using the fair value method

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

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

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. $137,500. B. $37,500. C. $125,000. D. $87,500.

C. $125,000

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. $8,640 B. $22,104 C. $30,744 D. $0

C. $30,744

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-Equity 28,000 B. Unrealized Holding Gain or Loss-Equity 20,000 Fair Value Adjustment 20,000 C. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Equity 20,000 D. Unrealized Holding Gain or Loss-Equity 28,000 Fair Value Adjustment 28,000

C. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Equity 20,000

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. Realized gain of $25,000. C. Unrealized gain of $25,000. D. Unrealized loss of $15,000.

C. Unrealized gain on $25,000

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 more than 20%. B. securities where a company has holdings of between 20% and 50%. C. securities where a company has holdings of less than 20%. D. securities where a company has holdings of more than 50%.

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

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

Instrument Corporation has the following investment which was held throughout 2018-2019: Fair Value Equity investment $900,000 - Cost $1,200,000 - 12/31/18 $1,140,000 - 12/31/19 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. $240,000 gain. B. $60,000 gain. C. $300,000 gain. D. $60,000 loss.

D. $60,000 loss