chapter 17
On January 2, 2016, Esparza Roasters purchased 50,000 shares of common stock in Benitez Coffee Beans for $1.6 million. This represents 30% of Benitez' shares of common stock. In 2017, Benitez Coffee Beans reported a net loss of $214,000. How would Esparza journalize the net loss information?
Investment Loss $64,200 Equity Investments $64,200
When a company reports realized gains/losses as part of net income but also shows unrealized gains/losses as part of other comprehensive income, a reclassification adjustment will be necessary.
true
The fair value option allows a company to do which of the following?
value its own liabilities at fair value
Dellinger Company declared and distributed a cash dividend out of their current earnings. How will the receipt of those dividends affect the investment account of the investor who uses the fair value method vs. the equity method?
The investment account will be decreased using the equity method but will not change using the fair value method.
Which of the following is true of impairments?
They are evaluated at each reporting date for every investment.
Roger's Company has the following information in 2018: realized gain for AFS securities 45,000 unrealized holding gain 105,000 reclassification adjustment 30,000 What is the 2018 other comprehensive income for Roger's Company?
To determine this answer, add the realized gain and unrealized holding gains, then subtract the reclassification adjustment. In this case: $45,000 + $105,000 - $30,000 =$120,000
Krebs Chemicals prepares monthly financial statements. On their January 31, 2017 balance sheet, they reported an investment of $500,000 in equity securities. The fair value of the securities was $475,000 at the time the balance sheet was created. On their February 28, 2017 balance sheet, the fair value of the securities had risen to $492,500. When Krebs Chemicals prepares their February 28, 2017 income statement, how should they report the increase in fair value of the investments?
Unrealized gains and losses for trading securities are reported on the income statement based on previous gains and losses. Therefore, they will report a gain equal to the difference between the fair value on January 31 and the fair value on February 28. This will be $492,500 - $475,000 = $17,500.
Moorland Industries owns 20,000 of the 50,000 outstanding shares of Paragon Resources' common stock. Paragon had net income of $1 million and paid cash dividends of $800,000 in 2017. How much investment revenue should Moorland report for 2017?
Using the equity method, Moorland should record an increase of $1,000,000 * 40% = $400,000 in the investment account due to Paragon's net income. This is also recorded as investment revenue. Dividends are not recorded as investment revenue in the equity method
held to maturity
amortized
Johnson Incorporated uses the equity method to account for its investment in Mayfield Enterprises common stock. How should Johnson Incorporated account for a dividend received from Mayfield Enterprises?
as a reduction in the carrying value
How are unrealized holding gains and losses reported for equity securities?
as part of net income
How should a company report trading securities?
at fair value, with unrealized holding gains and losses reported as part of net income
Which of the following equations can be used to determine the amount for equity investments?
cost + fair value adjustment
unrealized loss?
credit FV adjustment
Which of the following is the current impairment model used by the FASB for financial instruments?
current expected credit loss model
unrealized gain?
debit FV adjustment
Bethea Financial Services had a debit balance of $32,217 in their Fair Value Adjustment account on December 31, 2017. Based on the valuation of their equity securities on December 31, 2018, they should have a net unrealized gain of $46,398. Based on this, they should ________ Fair Value Adjustment for ________.
debit; $14,181
Andy is journalizing the receipt of interest on securities. In doing so, he enters debits to Interest Receivable and Debt Investments and a credit to Interest Revenue. This entry indicates that the payment was received for securities classified as ________ securities.
held-to-maturity or available-for-sale
When using the equity method, the investor will periodically adjust their investment's value based on the investee's changes in
net assets
How are unrealized gains and losses on equity securities reported?
on the total portfolio of investments
When trading securities are transferred to available-for-sale securities, the unrealized gain or loss at the time of transfer is
recognized in income
Which of the following FASB requirements came about due to the increased volatility of capital introduced by recognizing gains and losses on assets but not liabilities?
recording unrealized holding gains and losses on available-for-sale securities as comprehensive income rather than net income
"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
Which of the following is true of debt securities that are bought and held primarily for sale in the near term?
they are recorded at fair value
Which of the following statements about accounting for investments in debt securities classified as trading securities is TRUE?
Any discount or premium is amortized.
On June 12, 2017, Morley Poultry purchased 8,000 shares of Roque Industries' stocks for $392,000 and classified them as available-for-sale. They recorded a net unrealized gain of $46,500 on their 2017 financial statements, and they sold their shares for $388,000 on November 6, 2018. How would they journalize this sale?
Cash $388,000 Loss on Sale of Investments $4,000 Equity Investments $392,000
Which of the following is true of the equity method of accounting?
Companies can use the fair value option for investments that follow this method
available for sale
FV
trading
FV
On their December 31, 2017, financial statements, Gardiner Resources reported a $15,286 unrealized gain on their equity investments. How would this gain be journalized?
Fair Value Adjustment Unrealized Holding Gain or Loss—Income
On their December 31, 2017, financial statements, Snow Securities reported a $12,774 unrealized gain on their equity securities. How would they journalize this gain?
Fair Value Adjustment Unrealized Holding Gain or Loss—Income
How does the investor company record net income generated by the investee company if the investor company uses the equity method to record the investment?
It records its proportionate share as an increase in its investment account.