Chapter 16 adaptive

In Year 1, Whiteside Catering purchased 60,000 shares of Roush Organic Foods' common stock for $945,000. On December 31 of Year 1, the fair value of the Roush shares was $900,000. On December 3 of Year 2, Whiteside sold all of their shares of Roush common stock for $17 per share less $42,000 in brokerage commissions. The realized gain on the sale of stock in Year 2 that Whiteside should report is

$33,000 Whiteside sold the Roush shares for (60,000 * $17) - $42,000 = $978,000. Less the initial cost of $945,000, the net realized gain is $978,000 - $945,000 = $33,000.

JT Engineering holds 400 RL Enterprises bonds. The bonds pay $2,000 interest each January and will mature on January 1 of Year 2. The bonds are classified as available-for-sale and JT sells them on October 1 of Year 1. If the bond discount amortization for a year was $890, how should JT determine the Year 2 discount amortization for the bonds?

(9/12 * $890) The 9/12 would come from the bond not being sold until October (the 9th month). The bond has 3 more months until maturity. We know the bond discount amortization for a year is $890, so multiplying that by 9/12 will give the Year 1 discount amortization.

JT Engineering purchases $400,000 in bonds for $420,000. If JT intends to hold the securities to maturity, which of the following must it include in the entry to record the investment?

A debit to Debt Investments of $420,000. Companies generally do not record investments at maturity values with adjustment for separate discount or premium accounts similar to bonds payable.

When journalizing the accrual of interest on held-to-maturity debt securities originally purchased at a discount, how should a company record the payments?

As debits to Interest Receivable and Debt Investments and a credit to Interest Revenue

How would the investing company account for an investment in which they have "passive interest" in the other corporation?

By using the fair value method.

Brookview Publishing purchased 25% of Denton Books' shares of common stock for $113,000 in Year 1. In Year 4, Brookview discontinued its use of the equity method for this stock, but they did not sell the stock. Why might Brookview have done this?

Denton Books reported net losses greater than $452,000 over the three years. The equity method is where an investor purchases 20-50% of an investee's stock. In this case, Brookview purchased 25% of Denton's stock at $113,000. Brookview discontinued this stock because Denton did not make any gains within the three years but yet a loss of $452,000. $452,000 x .25=$113,000.

Which of the following is classified as a loss in value that is NOT temporary?

Impairment

Which of the following statements regarding levels of influence and accounting methods is correct?

Investors that have holdings of 20-50% of an investee's stocks have significant influence with the investee company and use the equity method.

Carla's company purchased a security. This security was then reported using the fair value option. What impact will this have?

The company will have to use the fair value option for that security until it no longer owns the security.

How does the accounting for equity investments between 20% and 50% of the investee company's shares of common stock compare to the accounting for equity investments that are over 50% of the investee company's common stock?

They are different because equity investments between 20% and 50% use the equity method of accounting, whereas equity investments over 50% use the consolidation method of accounting.

Williford Enterprises has purchased common stock from several companies and has classified them as long-term investments. If they receive regular cash dividends from these investments, how will they record the dividends if they use the fair value method vs. the equity method?

They will report dividends as income under the fair value method but as a reduction in the investment under the equity method.

Sweetwater Water Sports owns 35% of Surfside Surf Shop's voting stock. In Year 1, Surfside recorded net income of $300,000 and paid dividends of $30,000. If Sweetwater mistakenly recorded these transactions using the fair value method rather than the equity method, how would this affect the balance of their investment account, net income, and retained earnings, respectively?

Understate, understate, understate Under the fair value method, the investee's net income has no impact on the investor's investment account, net income, and retained earnings; and dividends have no impact on the investment account but increases net income and retained earnings. Under the equity method, the investee's net income should increase the investment account, net income and retained earnings; and dividends will decrease the investment account. Therefore, instead of a $10,500 increase in net income and retained earnings, they should have a $94,500 increase in the investment account and a $105,000 increase in net income and retained earnings. Based on this, all three accounts will be understated.

An investor who has purchased 20% to 50% of the investee's common stock will likely have BLANK over the investee company.

a significant level of influence

If a corporation accounts for a debt security by recognizing unrealized holding gains and losses as other comprehensive income and as a separate component of stockholders' equity, they are likely

available-for-sale debt securities.

A company that has its common stock purchased by another company is called a(n)

investee.

A failure to account for the true economies of the investee's situation is one reason that investee companies do not use BLANK as its basis for recognizing an investee's income.

payment of dividends

"Gains trading" or "cherry picking" involves which of the following?

selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition

an investor has holdings of between 20-50% of an investee company's stocks, they have

significant influence over the investee and use the equity method.

Regarding the impact on stockholders' equity of a transfer of a security from available-for-sale to trading, it is true that the

unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.