Advanced: Chapter 10 Questions
The following information was extracted from Gil Co.'s December 31 balance sheet: Noncurrent assets: Available-for-sale debt securities (carried at fair value) - $96,450 Equity: Accumulated other comprehensive income (OCI) Unrealized holding gains and losses on available-for-sale debt securities - (19,800) Historical cost of the available-for-sale debt securities was
$116,250
Pear Co.'s income statement for the year ended December 31, as prepared by Pear's controller, reported income before taxes of $125,000. The auditor questioned the following amounts that had been included in income before taxes: Pear owns 40% of Cinn's common stock, and no acquisition differentials are relevant. Pear's December 31 income statement should report income before taxes of
$152,000
At year end, Rim Co. held several investments with the intent of selling them in the 8%, 5-year bonds, purchased for $92,000, and short- near term. The investments consisted of $100,000, term notes purchased for $35,000. At year end, the bonds were selling on the open market for $105,000, and the short-term notes had a market value of $50,000. What amount should Rim report as trading securities in its year-end balance sheet?
$155,000
On July 1, Year 1, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, Eagle paid $40,000 in dividends to its common shareholders. Eagle's net income for the year ended December 31, Year 1, was $120,000, earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment should Denver report?
$18,000
Janson traded stock in Flax Co. marketableele equity securities during Year 1 as follows: No other transactions took place for Flax during the remainder of the year. At December 31, Year 1, Flax is trading at $10 per share. Janson trades securities on a last in, first out basis. What amount is the net value of the investment in Flax at year end?
$2,500
During Year 6, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500. They represent 2% of ownership in Hemp Corp. The fair value of this investment was $29,500 at December 31, Year 6. Wall sold all of the Hemp common stock for $14 per share on December 15, Year 7, incurring $1,400 in brokerage commissions and taxes. In its income statement for the year ended December 31, Year 7, Wall should report a recognized loss of
$2,900
Pare, Inc., purchased 10% of Tot Co.'s 100,000 outstanding shares of common stock on January 2 for $50,000. On December 31, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no equity method goodwill or other acquisition differential as a result of either purchase, and Tot did not issue any additional stock for the year. What amount should Pare report in its during the year. Tot reported earnings of $300,000 December 31 balance sheet as investment in Tot?
$200,000
Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year: What is the carrying amount of Larkin's investment in Devon at year end?
$250,000
On December 31, Ott Co. had investments in equity securities as follows: Ott's December 31 balance sheet should report the equity securities as
$28,000
On January 2, Year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod's equity was $500,000. The carrying amounts of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for Year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in Pod Co.?
$280,000
Data regarding Ball Corp.'s investment available-for-sale debt securities follow: Differences between cost and fair values are not due to credit losses. The decline in fair value was properly accounted for at December 31, Year 3. Ball's Year 4 statement of changes in equity should report an increase of
$30,000
The following information pertains to Lark Corp.'s available-for-sale debt securities: Differences between cost and fair values are not due to credit losses. The decline in fair value was properly accounted for at December 31, Year 2. Ignoring tax effects, by what amount should other comprehensive income (OCI) be credited at December 31, Year 3?
$30,000
Sage, Inc., bought 40% of Adams Corp.'s outstanding voting common stock on January 2 for $400,000, which equaled a proportionate share of the fair value of the net assets. The carrying amount of the net assets at the purchase date was $900,000. Fair values and carrying amounts werei the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during the year. During the year, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31?
$42,000
On January 2, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for $400,000, which equaled the carrying amount and the fair value of the interest purchased in Rea's net assets. Well did not elect the fair value option. Because Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors, Well exercises significant influence over Rea. Rea reported net income of $500,000 for the year and paid dividends of $150,000. In its December 31 balance sheet, what amount should Well report as investment in Rea?
$435,000
On October 1, Bordeaux, Inc., a calendar year-end firm, invested in a derivative designed to hedge the risk of changes in fair value of certain assets, currently valued at $1.5 million. The hedge was determined to be highly effective. On December 31, the fair value of the hedged assets decreased by $350,000, and the fair value of the derivative increased by $345,000. Bordeaux should recognize a net effect on earnings for the year of
$5,000
Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations and uses the equity method to account for the investment in the common stock. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year 1?
$60,000
On January 2, investment 10,000 Mill Corp. bonds Year 1, Adam Co. purchased as a long-term for $40 per bond. These securities were properly classified as available for sale. On December 31, bond, resulting in an unrealized holding loss. On Year 1, the market price of the bonds was $35 per for $30 per bond. For the year ended January 28, Year 2, Adam sold 8,000 of the bonds December 31, Year 2, Adam should report a realized loss on disposal of a long-term investment of
$80,000
On December 1, Wall Company purchased trading debt securities. Pertinent data are as follows: On December 31, Wall reclassified its investment in security C from trading to available-for-sale because Wall intends to retain security C. What net loss on its securities should be included in Wall's incomelen statement for the year ended December 31?
$9,000
On July 2, Year 4, Wynn, Inc., purchased as a short-term investment a $1 million face-value Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February 13, Year 5, Wynn sold the bonds for $920,000. In its December 31, Year 4, balance sheet, what amount should Wynn report for the bond if it is classified as an available-for-sale security?
$945,000
On January 1, Point, Inc., purchased 10% of lona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of lona's common stock outstanding on August 1. During October, lona declared and paid a cash dividend on all of its outstanding common stock. How much income from the lona investment should Point's income statement report?
40% of lona's income for August 1 to December 31.
A derivative financial instrument is best described as
A contract that has its settlement value tied to an underlying notional amount.
Investments classified as held-to-maturity debt securities should be measured at
Amortized cost.
Band Co. uses the equity method to account for its investment in Guard, Inc., common stock. How should Band record a 2% stock dividend received from Guard?
As a memorandum entry reducing the unit cost of all Guard stock owned.
Under the measurement alternative for an investment in equity securities, the investment is measured at
Cost minus subsequent impairment, plus or minus changes resulting from observable price changes for the identical or a similar investment of the same issuer.
Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment balance if it uses the fair value method or the equity method of accounting?
Fair Value - No Equity - No
A measurement alternative may be elected for an investment in equity securities if the
Fair value of the investment is not readily determinable and the investment does not result in control or significant influence over the investee.
An entity should report an investment in marketable equity securities that does not result in significant influence or control over the investee at
Fair value, with holding gains and losses included in earnings.
is included in current earnings if the derivative arising from the decrease in fair value of a derivative When the hedge is highly effective, a loss qualifies and is designated as a
Fair-Value Hedge - Yes Cash-Flow Hedge - No
at $2.53 per pound for delivery in 90 days. This purchase 400,000 pounds of Colombian coffee binding agreement with Hernandez Company to Garcia Corporation has entered into a contract is accounted for as a
Firm commitment.
Neron Co. has two derivatives related to two different financial instruments, instrument A and instrument B, both of which are debt instruments. The derivative related to instrument A is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. Neron experienced gains in the value of instruments A and B due to a change in interest rates. Which of the gains should be reported by Neron in its income statement?
Gain in Value of Debt Instrument A: Yes Gain in Value of Debt Instrument B: Yes
When the equity method is used to account for investments in common stock, which of the following affects the investor's reported investment income?
Goodwill Amortization Related to the Purchase - No Cash Dividends from Investee - No
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be measured at the end of the year, given no election of the fair value option?
Held to Maturity - Amortized Cost Available for Sale - Fair Value
Investments in debt securities may be classified as I. Available-for-sale securities II. Held-to-maturity securities III. Trading securities
I, II, and III.
For available-for-sale debt securities included in noncurrent assets, which of the following amounts should be included in the period's net income? I. Unrealized holding losses during the period II. Realized gains during the period III. Changes in fair value during the period
Il only.
An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the investment account of the investor is
Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee.
X Company owns 15% of the voting stock of Y Co. and 25% of the voting stock of Z Co. X has elected the fair value option. Under what circumstances should X account for each investment using the equity method?
Investment in Y - Only if X has the ability to exercise significant influence over Y Investment in Z - Only if X has the ability to exercise significant influence over Z
A corporation that uses the equity method of accounting for its investment in a 40%-owned investee that earned $20,000 and paid $5,000 in dividends made the following entries: What effect will these entries have on the parent's statement of financial position?
Investment overstated, retained earnings overstated.
The decision to elect the fair value option (FVO)
Is irrevocable until the next election date, if any.
The present value of cash flows expected to be collected from an available-for-sale security less than its amortized cost basis. This impairment recognized in
Net income as a credit loss.
Election of the fair value option (FVO) for financial assets
Results in recognition of unrealized gains and losses in earnings of a business entity.
Jay Company acquired a wholly owned foreign subsidiary on January 1. The equity section of the December 31 consolidated balance sheet follows: The balance in accumulated OCI appropriately represents adjustments in translating the foreign subsidiary's financial statements into U.S. dollars. The consolidated income statement included the excess of cost of investments in certain debt and equity securities over their fair values, which is not due to credit losses, as follows: Available-for-sale debt securities - $200,000 Equity securities - $100,000 Ignoring tax effects, the amounts for retained earnings and accumulated OCI in the consolidated statement of financial position for the year ended December 31 are
Retained Earnings - $1,100,000 Accumulated OCI - $(800,000)
If the reporting entity has not elected the fair value option, the equity method of accounting for investments in common stock
Should be used in accounting for investments in common stock of corporate joint ventures.
Which of the following is an election date for the purpose of determining whether to elect the fair value option (FVO)?
The accounting for an equity investment changes because the entity no longer consolidates a subsidiary.
A transfer of available-for-sale debt securities to the held-to-maturity category results in
The amortization of an unrealized gain or loss existing at the transfer date.
A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company's annual financial statements?
The company's accounting policy for the investment.
The criterion for determining whether an entity may apply the equity method is the ability to exercise significant influence over the investee. An investor who owns 30% of the voting common stock of the investee is most likely to exercise significant influence when
The majority ownership of the investee is spread among a large group of shareholders who have objectives with respect to the investee that differ from those of the investor.
In its financial statements, Pulham Corp. uses the equity method of accounting for its 30% ownership of Angles Corp. At December 31, Year 4, Pulham has a receivable from Angles. How should the receivable be reported in Pulham's Year 4 financial statements?
The total receivable should be disclosed separately.
In Year 1, a company reported in other comprehensive income an unrealized holding loss on an investment in available-for-sale debt securities. During Year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following?
The unrealized loss should be credited to the other comprehensive income account.
On January 1, Year 1, Mega Corp. acquired 10% of the outstanding voting stock of Penny, Inc.HUS On January 2, Year 2, Mega gained the ability to exercise significant influence over financial and operating control of Penny by acquiring an additionalhiue 20% of Penny's outstanding stock. Mega did not elect the fair value option for its investment in Penny. The two purchases were made at prices proportionate to the value assigned to Penny's net assets, which equaled their carrying amounts. Hence, no adjustment to investment income for acquisition differentials is necessary. For the years ended December 31, Year 1 and Year 2, Penny reported the following: In Year 2, what amounts should Mega report as current year investment income and as an adjustment, before income taxes, to Year 1 investment income?
Year 2 Investment Income: $195,000 Adjustment to Year 1 Investment Income: $0
