ACC 301 - Chapter 16 Homework
Which of the following securities could be classified as held to maturity?
Municipal bonds
Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2025 with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2025 and December 31, 2025 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2026, Landis sold the Ritter bonds for $3,090,000. After accruing interest, the carrying value of the Ritter bonds April 1, 2026 was $3,097,440. Assuming Landis has a portfolio of Available-for-Sale Debt Securities, what should Landis report as a gain or loss on the bonds?
$(7,440)
Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2025, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2025, Patton Company should increase its Debt Investments account for the Scott Company bonds by
$2,571
Instrument Corporation has the following Investment which was held throughout 2025-2026. Equity Investment: Cost - $900,000 Fair value (12/31/25) - $1,200,000 Fair value (12/31/26) - $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2026 related to this investment, if the fair value method of accounting was used?
$60,000 loss
Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for $13,200 (Fairbanks does not have significant influence.) During the year, Sherman paid a cash dividend of $3,25 per share. At year-end, Sherman Stock was selling for $34.50 per share. Assume the stock is nonmarketable. Prepare Fairbanks' journal entries to record (a) the purchase of the investment, (b) the dividends received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.)
(a) Equity Investments $13,200 (D) Cash $13,200 (C) (b) Cash $1,300 (D) Dividend Revenue $1,300 (C) (c) No entry
On January 1, 2025, Dagwood Company purchased at par 6% bonds having a maturity value of $300,000. They are dated January 1, 2025, and mature January 1, 2030, with interest received on January 1 of each year. The bonds are classified in the held-to-maturity category. (a) Prepare the journal entry at the date of the bond purchase (b) Prepare the journal entry to record the interest revenue on December 31, 2025 (c) Prepare the journal entry to record the interest received on January 1, 2026
(a) January 1: Debt Investments $300,000 (D) Cash $300,000 (C) (b) December 31: interest Receivable $18,000 (D) Interest Revenue $18,000 (C) (c) January 1: Cash $18,000 (D) Interest Receivable $18,000 (C)
Carow Corporation purchased on January 1, 2025, as held-to-maturity investment, $60,000 of the 8%, 5-year bonds of Harrison, Inc. for $65,117, which provides a 6% return. The bonds pay interest semiannually. Prepare Carow's journal entries for (a) the purchase of the investment, and (b) the receipt of semiannual interest and premium amortization. Assume effective-interest amortization is used.
(a) January 1: Debt Investments $65,117 (D) Cash $65,117 (C) (b) June 30: Cash $2,400 (D) Debt Investments $446 (C) Interest Revenue $1,954 (C)
Garfield Company purchased, on January 1, 2025, as held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield's journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.
(a) January 1: Debt Investments $74,086 (D) Cash $74,086 (C) (b) December 31: Cash $7,200 (D) Debt Investments $949 (D) Interest Revenue $8,149 (C)
Garfield Company purchased, on January 1, 2025, as held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield's journal entries for (a) the purchase of investment, (b) the receipt of annual interest and discount amortization, and (c) the year-end fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account.) The bonds have a year-end fair value of $75,500. Assume effective-interest amortization is used.
(a) January 1: Debt Investments $74,086 (D) Cash $74,086 (C) (b) December 31: Cash $7,200 (D) Debt Investments $949 (D) Interest Revenue $8,149 (C) (c) December 31: Fair Value Adjustment $465 (D) Unrealized Holding Gain or Loss - Equity $465 (C)
Hendricks Corporation purchased trading investment bonds for $50,000 at par. At December 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare Hendricks' journal entries for (a) the purchase of the investment, (b) the interest received, and (c) the fair value adjustment. (Assume a zero balance in the Fair Value Adjustment account)
(a) Debt Investments $50,000 (D) Cash $50,000 (C) (b) Cash $2,000 (D) Interest Revenue $2,000 (C) (c) Unrealized Holding Gain or Loss - Income $2,600 (D) Fair Value Adjustment $2,600 (C)
A requirement for a security to be classified as held to maturity is
All of these answer choices are correct
Debt securities may be classified as
All of these answer choices are correct
Investments in debt securities should be recorded on the date of acquisition at
Cost plus brokerage fees and other costs incidental to the purchase
Carrying amount < fair value
Gain
Trading securities are generally for less than
3 months
When an investor company owner 25% of an investee company's common, the investor is said to have
A significant influence over the investee company
Use of the effective-interest method to amortize bond premiums and discounts results in
A varying amount being recorded as interest income from period to period
Held to maturity securities are ported at their
Amortized cost
When an available for sale debt security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security's
Amortized cost
Unrealized holding gains or losses are recognized as other comprehensive income for
Available for sale securities
Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold.
Available-for-Sale Debt Securities
If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the investment in the subsidiary under the
Consolidation method
On August 1, 2025, Dambro Company acquired 1200, $1000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2025, and mature on April 30, 2030, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available for sale portfolio. The entry to record the purchase of the bonds on August 1, 2025 is
Debt Investments $1,164,000 (D) Interest Revenue $27,000 (D) Cash $1,191,000 (C)
Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of
Declines in the fair value of the investment
Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40& of net income in dividends each year. Investment in Sub Co. 1,000,000 110,000 44,000 How much was Parent Co.'s share of Sub Co.'s dividends for the year?
Dividends - $44,000
Accounting and reporting for equity securities where the company has 20% - 50% ownership uses which of the following methods?
Equity
On January 1, 2025, Pennington Corporation purchased 30% of the common shares of Edwards Company for $180,000. During the year, Edwards earned net income of $80,000 and paid dividends of $20,000. Prepare entries for Pennington to record the purchase and any additional entries related to this investment in Edwards Company in 2025.
Equity Investments $180,000 (D) Cash $180,000 (C) (To record purchase of stock) Cash $6,000 (D) Equity Investments $6,000 (C) (To record receipt of dividends) Equity Investments $24,000 (D) Investment Income $24,000 (C) (To record revenue
Zoop Corporation purchased for $300,000 a 30% interest in Murphy, Inc. This investment enables Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of $180,000 and paid dividends of $60,000. Prepare Zoop's journal entries related to this investment.
Equity Investments $300,000 (D) Cash $300,000 (C) (To record the purchase) Equity Investments $54,000 (D) Investment Income $54,000 (C) (To record the net income) Cash $18,000 (D) Equity Investments $18,000 (C) (To record the dividend)
An ownership interest of 30% of the common stock of another corporation should be accounted for using the
Equity method
Cleveland Company has a stock portfolio valued at $4,000. Its cost was $3,300. If the Fair Value Adjustment account has a debit balance of $200, prepare the journal entry at year-end.
Fair Value Adjustment $500 (D) Unrealized Holding Gain or Loss - Income $500 (C)
Debt securities that are bought and held primarily for sale in the near term are reported at
Fair value
An ownership interest of 15% in another company's voting stock should be accounted for using the
Fair value method
A bond that matures in 10 years was purchased. The company has committed the money for an expansion project planned 10 years from now.
Held-to-Maturity Debt Securities
Carrying amount > fair value
Loss
When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must
Make an adjusting entry to debit Interest Receivable and credit Interest Revenue for the amount of interest accrued since the last interest receipt date
Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18, 2025. On June 30, Martinez declared and paid $75,000 cash dividends to all stockholders. On December 31, Martinez reported net income of $122,000 for the year. At December 31, the market price of Martinez Fashion was $15 per share. Prepare all necessary journal entries.
March 18: Equity Investments $260,000 (D) Cash $260,000 (C) June 30: Cash $7,500 (D) Dividend Revenue $7,500 (C) December 31: Fair Value Adjustment $40,000 (D) Unrealized Holding Gain or Loss - Income $40,000 (C)
Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles's 30,000 outstanding shares of common stock at a total cost of $9 per share on January 1, 2025. On June 15, Seles declared and paid cash dividends of $36,000 to all stockholders. On December 31, Seles reported a net income of $85,000 for the year.
March 18: Equity Investments $81,000 (D) Cash $81,000 (C) June 15: Cash $10,800 (D) Equity Investments $10,800 (C) December 31: Equity Investments $25,500 (D) Investment Income $25,500 (C)
Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40& of net income in dividends each year. Investment in Sub Co. 1,000,000 110,000 44,000 How much was Parent Co.'s share of Sub Co.'s net income for the year?
Net Income - $110,000
Santo corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
No effect (fair value method) and decrease (equity method)
10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock.
None of the above
Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.
None of the above
An unrealized holding gain on a company's available for sale securities should be reflected in the current financial statements as
Other comprehensive income and included in the equity section of the balance sheet
Under the equity method, if an investee company generates net income, the investor company
Records it proportionate share as an increase in its investment account
Unrealized gains and losses on available for sale securities are
Reported on the balance sheet
Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40& of net income in dividends each year. Investment in Sub Co. 1,000,000 110,000 44,000 What was Sub Co.'s total dividends for the year?
Total Dividends - $176,000
Parent Co. invested $1,000,000 in Sub Co. for 25% of its outstanding stock. Sub Co. pays out 40& of net income in dividends each year. Investment in Sub Co. 1,000,000 110,000 44,000 What was Sub Co.'s total net income for the year?
Total net income - $440,000
Unrealized holding gains or losses which are recognized in income are from debt securities classified as
Trading
A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold.
Trading Debt Securities
Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.
Trading Debt Securities
Satchel Corporation purchases equity securities costing $73,000. At December 31, the fair value of the portfolio is $65,000. Prepare the adjusting entry to report the securities properly, assuming that the investments purchased represent less than a 5% interest in the other companies.
Unrealized Holding Gain or Loss - Income $8,000 (D) Fair Value Adjustment $8,000 (C)