Intermediate Accounting Week 11 Smartbook

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

$800,000

Additional adjustments under the equity method directly affect which of the following accounts? (Select all that apply.)

Investment revenue Investment

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

Under the equity method, dividends received from the investment

decrease the investment account balance

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.

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:

$1.1 million

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

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

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

Adjustments help to approximate the effects of consolidation.

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.

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

When they are expected to mature or be sold.

All equity investments are initially recorded at

cost

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

Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale? (Select all that apply.)

credit investment in bonds $100,000 debit to cash $99,000 debit to discount $2,000 credit to fair value adjustment $1,000

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with (Select all that apply.)

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

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.

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.

Under the fair value option, unrealized gains and losses on debt securities are

recognized in net income.

Which of the following is a common special purpose fund?

Petty cash

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.

Net Income

Realized gains and losses from the sale of AFS securities

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.

How are equity investments that lack significant influence adjusted? (Select all that apply.)

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

Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct? (Select all that apply.)

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

Credit losses are due to

an expected decrease in future cash flows due to defaults on interest or principal payments.

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.

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

Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the

equity

Consistent with IFRS No. 9, impairments of debt investments will be accounted for using a

expected credit loss model.

From an accounting perspective, critical events that investors experience over the life of an investment include (Select all that apply.)

receiving dividends sale of investment changes in fair value

Kendrick Company elected the fair value option for its equity method investments. During the current period, the fair value of the investments increased. Kendrick Company should

report the increase as part of net income.

Unrealized gains and losses for equity method investments that are carried at fair value are:

reported as part of earnings

Barber Company acquires 35% of the outstanding shares of Carter Company. Which of the following is correct?

Barber may choose to apply the fair value option.

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.

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

decrease.

Other comprehensive income

Current period holding gains or losses

Holding gain or loss in other comprehensive income

Investment in available-for-sale debt securities

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

cost

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.)

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

Consistent with the equity method, investment income is

based on investee's income times ownership percentage.

The appropriateness of the classification of debt investments must be reassessed

each reporting date

The premium payments of life insurance policies with cash surrender value include (Select all that apply.)

an insurance expense portion an investment portion

Under IFRS, the entire impairment of debt investments are recognized in ______; under U.S. GAAP, if a portion of an impairment is due to noncredit losses, it is recorded in _______.

earnings; OCI

Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system. (Select all that apply.)

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

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

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.

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

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

Credit losses are calculated as the difference between the amortized cost of the debt and

the present value of future cash flows expected to be collected.

Impairments of available-for-sale debt instruments are recognized in other comprehensive income

to the extent that they arise from noncredit losses

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

trading securities

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; $1,200

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

financial assets financial liabilities

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

Equity method

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

False

Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.

Investing

No holding gain or loss is recognized

Investment in held-to-maturity debt securities

Losses arising from credit losses on available-for-sale debt securities are recognized in _____; noncredit losses are recognized in _____.

net income; OCI

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

not amortized.

Holding gain or loss in income

Investment in trading debt securities

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.

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

is irrevocable can be made for some investments and not others

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.

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 _____.

decrease; $1,500

Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to (Select all that apply.)

interest revenue earned on investment. the initial investment.

On July 1, Adrianna Company purchases 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.

The premium payments of life insurance policies with cash surrender value include an insurance expense portion and a(n)

investment portion.

Noncurrent special purpose funds set aside for a future specific use, are typically classified as

investments on the balance sheet.

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

original cost of the investment.

Accumulated other comprehensive income matches

Net fair value adjustments to date - net holding gains and losses to date

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. Assume the investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed. The journal entry to record the sale of the bonds should include these credits: (Select all that apply.)

Investment in AFS - $18,000 Gain on sale of investment - $2,000

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.)

credit dividend revenue $5,000 debit cash $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 investment in North stock $500,000 credit fair value adjustment $5,000

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.)

debit to cash $680,000 debit to discount on bond investment $100,000 credit to investment in bonds $700,000 credit to fair value adjustment $80,000.

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 fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in __________ __________ in the period they occur. (Enter one word per blank.)

Net Income