Chapter 17

The fair value option allows a company to a. value its own liabilities at fair value. b. record income when the fair value of its bonds increases. c. report most financial instruments at fair value by recording gains and losses as a separate component of stockholders' equity. d. All of the above are true of the fair value option.

a

A correct valuation is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. none of these.

b

Held-to-maturity securities are reported at a. acquisition cost. b. acquisition cost plus amortization of a discount. c. acquisition cost plus amortization of a premium. d. fair value.

b

Patton Company purchased $600,000 of 10% bonds of Scott Co. on January 1, 2013, paying $564,150. The bonds mature January 1, 2023; interest is payable each July 1 and January 1. The discount of $35,850 provides an effective yield of 11%. Patton Company uses the effectiveinterest method and plans to hold these bonds to maturity. For the year ended December 31, 2013, Patton Company should report interest revenue from the Scott Co. bonds of: a. $63,588. b. $62,113. c. $62,052. d. $60,000.

b

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be a. its original cost. b. its fair value at the date of the transfer. c. the higher of its original cost or its fair value at the date of the transfer. d. the lower of its original cost or its fair value at the date of the transfer.

b

A reclassification adjustment is reported in the a. income statement as an Other revenue or expense. b. stockholders' equity section of the balance sheet. c. statement of comprehensive income as other comprehensive income. d. statement of stockholders' equity.

c

Myers Co. acquired a 60% interest in Gannon Corp. on December 31, 2012 for $1,260,000. During 2013, Gannon had net income of $800,000 and paid cash dividends of $200,000. At December 31, 2013, the balance in the investment account should be a. $1,260,000. b. $1,740,000. c. $1,620,000. d. $1,860,000.

c

A requirement for a security to be classified as held-to-maturity is a. ability to hold the security to maturity. b. positive intent. c. the security must be a debt security. d. All of these are required.

d

On January 3, 2012, Moss Co. acquires $400,000 of Adam Company's 10-year, 10% bonds at a price of $425,672 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Co. uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2013 related to these bonds? a. $40,000 b. $42,568 c. $38,312 d. $38,160

d

Harrison Co. owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2013, Taylor earns $1,200,000 and pays cash dividends of $960,000. If the beginning balance in the investment account was $750,000, the balance at December 31, 2013 should be a. $1,230,000. b. $990,000. c. $846,000. d. $750,000.

c

Securities which could be classified as held-to-maturity are a. redeemable preferred stock. b. warrants. c. municipal bonds. d. treasury stock.

c

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2010. Sherman Corporation had 100,000 shares of common stock outstanding during 2013, paid cash dividends of $120,000 during 2013, and reported net income of $400,000 for 2013. Ziegler Corporation should report revenue from investment for 2013 in the amount of a. $30,000. b. $70,000. c. $100,000. d. $110,000.

c

Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III. Call or put options. a. I and II only. b. I and III only. c. II only. d. III only.

d

The following information relates to Windom Company for 2013: Realized gain on sale of available-for-sale securities $30,000 Unrealized holding gains arising during the period on available-for-sale securities 70,000 Reclassification adjustment for gains included in net income 20,000 Windom's 2013 other comprehensive income is a. $50,000. b. $80,000. c. $100,000. d. $120,000.

b

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation.

b

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method a. Income Income b. A reduction of the investment A reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income

c

In accounting for investments in debt securities that are classified as trading securities, a. a discount is reported separately. b. a premium is reported separately. c. any discount or premium is not amortized. d. none of these.

c

Unrealized holding gains or losses which are recognized in income are from securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. none of these.

c

Patton Company purchased $600,000 of 10% bonds of Scott Co. on January 1, 2013, paying $564,150. The bonds mature January 1, 2023; interest is payable each July 1 and January 1. The discount of $35,850 provides an effective yield of 11%. Patton Company uses the effectiveinterest method and plans to hold these bonds to maturity. On July 1, 2013, Patton Company should increase its Debt Investments account for the Scott Co. bonds by a. $3,588. b. $2,056. c. $1,794. d. $1,028.

d

Brown Corporation earns $600,000 and pays cash dividends of $200,000 during 2012. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. How much investment revenue should Dexter report in 2012? a. $200,000. b. $180,000. c. $120,000. d. $600,000.

b

Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During 2013, Penn earns $360,000 and pays cash dividends of $120,000. If the beginning balance in the investment account was $720,000, the balance at December 31, 2013 should be a. $720,000. b. $816,000. c. $864,000. d. $960,000.

b

Investments in debt securities are generally recorded at a. cost including accrued interest. b. maturity value. c. cost including brokerage and other fees. d. maturity value with a separate discount or premium account.

c

Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows: December 31, 2012 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. $250,000 $205,000 $(45,000) Lyman, Inc. 245,000 265,000 20,000 $495,000 $470,000 $(25,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2012 income statement if 2012 is Kramer's first year of operation? a. $0. b. $20,000. c. $25,000. d. $45,000.

c

Which of the following is not a debt security? a. Convertible bonds b. Commercial paper c. Loans receivable d. All of these are debt securities.

c

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Available-for-Sale Securities. b. debit to the discount account. c. debit to Interest Revenue. d. none of these.

a

Debt securities that are accounted for at amortized cost, not fair value, are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

a

During 2012, Woods Company purchased 40,000 shares of Holmes Corp. common stock for $630,000 as an available-for-sale investment. The fair value of these shares was $600,000 at December 31, 2012. Woods sold all of the Holmes stock for $17 per share on December 3, 2013, incurring $28,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2013 of a. $22,000. b. $50,000. c. $52,000. d. $80,000.

a

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a. available-for-sale securities where a company has holdings of less than 20%. b. trading securities where a company has holdings of less than 20%. c securities where a company has holdings of between 20% and 50%. d. securities where a company has holdings of more than 50%.

a

Harrison Co. owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2013, Taylor earns $1,200,000 and pays cash dividends of $960,000. Harrison should report investment revenue for 2013 of a. $480,000. b. $384,000. c. $96,000. d. $0.

a

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income.

a

Landis Co. purchased $1,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2012, with interest payable on July 1 and January 1. The bonds sold for $1,041,580 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the available-for-sale Debt Investments account for the Ritter, Inc. bonds on July 1, 2012 and December 31, 2012 by the amortized premiums of $3,540 and $3,660, respectively. At December 31, 2012, the fair value of the Ritter, Inc. bonds was $1,060,000. What should Landis Co. report as other comprehensive income and as a separate component of stockholders' equity? a. $25,620. b. $18,420. c. $7,200. d. No entry should be made.

a

On August 1, 2012, Fowler Company acquired $600,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2012, and mature on April 30, 2017, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2012? a. Debt Investments ................................................................. 624,000 Interest Revenue.................................................................. 15,000 Cash......................................................................... 639,000 b. Debt Investments ................................................................. 639,000 Cash......................................................................... 639,000 c. Debt Investments ................................................................. 639,000 Interest Revenue ...................................................... 15,000 Cash......................................................................... 624,000 d. Debt Investments ................................................................. 600,000 Premium on Bonds............................................................... 39,000 Cash......................................................................... 639,000

a

On January 1, 2013, Reston Co. purchased 25% of Ace Corp.'s common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston's investment account was $960,000 at December 31, 2013. Ace reported net income of $600,000 for the year ended December 31, 2013, and paid common stock dividends totaling $240,000 during 2013. How much did Reston pay for its 25% interest in Ace? a. $870,000. b. $1,020,000. c. $1,050,000. d. $1,170,000.

a

On January 3, 2012, Moss Co. acquires $400,000 of Adam Company's 10-year, 10% bonds at a price of $425,672 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Co. uses the straight-line method, what is the amount of premium amortization that would be recognized in 2014 related to these bonds? a. $2,568 b. $1,688 c. $1,840 d. $2,008

a

On November 1, 2012, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $500,000, for $450,000. An additional $15,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2019. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2012 income statement as a result of Horton's available-forsale investment in Lopez was a. $8,750. b. $8,333. c. $7,500. d. $6,666.

a

On its December 31, 2012 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment (available-for-sale) account. There was no change during 2013 in the composition of Calhoun's portfolio of equity investments held as available-forsale securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/13 X $125,000 $160,000 Y 100,000 85,000 Z 175,000 125,000 $400,000 $370,000 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2013 is a. $40,000. b. $30,000. c. $10,000. d. $0.

a

On its December 31, 2012, balance sheet, Trump Co. reported its investment in availablefor- sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2013, the fair value of the securities was $585,000. What should Trump report on its 2013 income statement as a result of the increase in fair value of the investments in 2013? a. $0. b. Unrealized loss of $15,000. c. Realized gain of $35,000. d. Unrealized gain of $35,000.

a

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? Fair Value Method Equity Method a. No Effect Decrease b. Increase Decrease c. No Effect No Effect d. Decrease No Effect

a

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 a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date. b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

a

At December 31, 2013, Atlanta Co. has a stock portfolio valued at $120,000. Its cost was $99,000. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit balance of $6,000, which of the following journal entries is required at December 31, 2013? a. Fair Value Adjustment 21,000 (available-for-sale) Unrealized Holding Gain or Loss-Equity 21,000 b. Fair Value Adjustment 15,000 (available-for-sale) Unrealized Holding Gain or Loss-Equity 15,000 c. Unrealized Holding Gain or Loss-Equity 21,000 Fair Value Adjustment 21,000 (available-for-sale) d. Unrealized Holding Gain or Loss-Equity 15,000 Fair Value Adjustment 15,000 (available-for-sale)

b

During 2010, Hauke Co. purchased 3,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2012 was $2,940,000. The bonds mature on March 1, 2017, and pay interest on March 1 and September 1. Hauke sells 1,500 bonds on September 1, 2014, for $1,482,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is a. $0. b. $7,200. c. $12,000. d. $16,800.

b

Instrument Corp. has the following investments which were held throughout 2012-2013: Fair Value Cost 12/31/12 12/31/13 Trading $450,000 $600,000 $570,000 Available-for-sale 450,000 480,000 540,000 What amount of gain or loss would Instrument Corp. report in its income statement for the year ended December 31, 2013 related to its investments? a. $30,000 gain. b. $30,000 loss. c. $210,000 gain. d. $120,000 gain.

b

Kern Company purchased bonds with a face amount of $600,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $9,000, and paid accrued interest for three months of $15,000. The amount to record as the cost of this long-term debt investment is a. $636,000. b. $621,000. c. $612,000. d. $600,000.

b

On December 31, 2012, Patel Co. purchased equity investments as trading securities. Pertinent data are as follows: Fair Value Investment Cost At 12/31/13 A $132,000 $117,000 B 168,000 186,000 C 288,000 268,000 On December 31, 2013, Patel transferred its investment in security C from trading to available-for-sale because Patel intends to retain security C as a long-term investment. What total amount of gain or loss on its securities should be included in Patel's income statement for the year ended December 31, 2013? a. $3,000 gain. b. $17,000 loss. c. $20,000 loss. d. $35,000 loss.

b

On January 2, 2013 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2013 Jobs, Inc. reported net income of $630,000 and distributed dividends of $270,000. The ending balance in the Equity Investments account at December 31, 2013 was $480,000 after applying the equity method during 2013. What was the purchase price Pod Company paid for its investment in Jobs, Inc? a. $255,000 b. $390,000 c. $570,000 d. $705,000

b

On October 1, 2012, Menke Co. purchased to hold to maturity, 500, $1,000, 9% bonds for $520,000. An additional $15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2016. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2012 income statement from this investment should be a. $11,250. b. $10,050. c. $12,450. d. $13,650.

b

On October 1, 2012, Renfro Co. purchased to hold to maturity, 2,000, $1,000, 9% bonds for $1,980,000 which includes $30,000 accrued interest. The bonds, which mature on February 1, 2021, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2012 balance sheet at a carrying value of a. $1,950,000. b. $1,951,500. c. $1,980,000. d. $1,980,500.

b

On its December 31, 2012 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment (available-for-sale) account. There was no change during 2013 in the composition of Calhoun's portfolio of equity investments held as available-forsale securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/13 X $125,000 $160,000 Y 100,000 85,000 Z 175,000 125,000 $400,000 $370,000 What amount of unrealized loss on these securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2013? a. $40,000. b. $30,000. c. $10,000. d. $0.

b

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2012 for $600,000. During 2012, Doane earned $240,000 and paid dividends of $150,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2013, Doane earned $300,000 and paid dividends of $90,000 on April 1 and $90,000 on October 1. On July 1, 2013, Rich sold half of its stock in Doane for $396,000 cash. The carrying amount of this investment in Rich's December 31, 2012 balance sheet should be a. $600,000. b. $627,000. c. $672,000. d. $690,000.

b

Richman Co. purchased $600,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2012, with interest payable on July 1 and January 1. The bonds sold for $624,948 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the available-for-sale Debt Investments account for the Carlin, Inc. bonds on July 1, 2012 and December 31, 2012 by the amortized premiums of $2,124 and $2,196, respectively. At February 1, 2013, Richman Co. sold the Carlin bonds for $618,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2013 was $620,250. Assuming Richman Co. has a portfolio of available-for-sale debt investments, what should Richman Co. report as a gain (or loss) on the bonds? a. $0. b. ($2,250). c. ($13,122). d. ($17,622).

b

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows: Goebel Company Balance Sheet December 31, 2012 Assets $1,200,000 Liabilities $ 150,000 Capital stock 600,000 Retained earnings 450,000 Total equities $1,200,000 Dobbs Company Balance Sheet December 31, 2012 Assets $900,000 Liabilities $225,000 Capital stock 555,000 Retained earnings 120,000 Total equities $900,000 If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2011 for $135,000 and during 2013 Dobbs Company had net income of $75,000 and paid a cash dividend of $30,000, applying the fair value method would give a debit balance in the Equity Investments (Dobbs) account at the end of 2013 of a. $111,000. b. $135,000. c. $150,000. d. $144,000.

b

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows: Goebel Company Balance Sheet December 31, 2012 Assets $1,200,000 Liabilities $ 150,000 Capital stock 600,000 Retained earnings 450,000 Total equities $1,200,000 Dobbs Company Balance Sheet December 31, 2012 Assets $900,000 Liabilities $225,000 Capital stock 555,000 Retained earnings 120,000 Total equities $900,000 If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2012 for $210,000 and during 2013 Dobbs Company had net income of $75,000 and paid a cash dividend of $30,000, applying the equity method would give a debit balance in the Equity Investments (Dobbs) account at the end of 2013 of a. $210,000. b. $223,500. c. $232,500. d. $201,000.

b

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows: Goebel Company Balance Sheet December 31, 2012 Assets $1,200,000 Liabilities $ 150,000 Capital stock 600,000 Retained earnings 450,000 Total equities $1,200,000 Dobbs Company Balance Sheet December 31, 2012 Assets $900,000 Liabilities $225,000 Capital stock 555,000 Retained earnings 120,000 Total equities $900,000 If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2012 for $225,000 and the equity method of accounting for the investment were used, the amount of the debit to Equity Investments (Dobbs) would have been a. $285,000. b. $225,000. c. $180,000. d. $202,500.

b

Transfers between categories a. result in companies omitting recognition of fair value in the year of the transfer. b. are accounted for at fair value for all transfers. c. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading. d. will always result in an impact on net income.

b

Use of the effective-interest method in amortizing bond premiums and discounts results in a. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. b. a varying amount being recorded as interest income from period to period. c. a variable rate of return on the book value of the investment. d. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

b

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment.

b

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be a. its original cost. b. its fair value at the date of the transfer. c. the lower of its original cost or its fair value at the date of the transfer. d. the higher of its original cost or its fair value at the date of the transfer.

b

"Gains trading" or "cherry picking" involves a. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses. b. reporting investment securities at fair value but liabilities at amortized cost. c. selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition. d. All of the above are considered methods of "gains trading" or "cherry picking."

c

APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the a. effective-interest method of allocation must be used. b. straight-line method of allocation must be used. c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. d. par value method must be used and therefore no allocation is necessary.

c

At December 31, 2013, Jeter Corp. had the following equity securities that were purchased during 2013, its first year of operation: Fair Unrealized Cost Value Gain (Loss) Trading Securities: Security A $ 95,000 $ 60,000 $(35,000) B 15,000 20,000 5,000 Totals $110,000 $ 80,000 $(30,000) Available-for-Sale Securities: Security Y $ 70,000 $ 80,000 $ 10,000 Z 85,000 55,000 (30,000) Totals $155,000 $135,000 $(20,000) All market declines are considered temporary. Fair value adjustments at December 31, 2013 should be established with a corresponding charge against Income Stockholders' Equity a. $50,000 $ 0 b. $35,000 $30,000 c. $30,000 $20,000 d. $30,000 $ 0

c

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2013. During 2013, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000. If Blanco Company used the fair value method of accounting for its investment in Darby Company, its Equity Investments (Darby) account on December 31, 2013 should be a. $580,000. b. $660,000. c. $600,000. d. $680,000.

c

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2013. During 2013, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000. If Blanco Company uses the equity method of accounting for its investment in Darby Company, its Equity Investments (Darby) account at December 31, 2013 should be a. $580,000. b. $600,000. c. $660,000. d. $680,000.

c

Brown Corporation earns $600,000 and pays cash dividends of $200,000 during 2012. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. What amount should Dexter show in the investment account at December 31, 2012 if the beginning of the year balance in the account was $800,000? a. $980,000. b. $800,000. c. $920,000. d. $1,200,000.

c

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

c

Instrument Corp. has the following investments which were held throughout 2012-2013: Fair Value Cost 12/31/12 12/31/13 Trading $450,000 $600,000 $570,000 Available-for-sale 450,000 480,000 540,000 What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.'s balance sheet at December 31, 2012? a. $60,000 gain. b. $90,000 gain. c. $30,000 gain. d. $180,000 gain.

c

Investments in debt securities should be recorded on the date of acquisition at a. lower of cost or market. b. market value. c. market value plus brokerage fees and other costs incident to the purchase. d. face value plus brokerage fees and other costs incident to the purchase.

c

Landis Co. purchased $1,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2012, with interest payable on July 1 and January 1. The bonds sold for $1,041,580 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the available-for-sale Debt Investments account for the Ritter, Inc. bonds on July 1, 2012 and December 31, 2012 by the amortized premiums of $3,540 and $3,660, respectively. At April 1, 2013, Landis Co. sold the Ritter bonds for $1,030,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2013 was $1,033,750. Assuming Landis Co. has a portfolio of available-for-sale Debt Investments, what should Landis Co. report as a gain or loss on the bonds? a. ($29,370). b. ($21,870). c. ($3,750). d. $ 0.

c

On August 1, 2012, Dambro Co. acquired 400, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2012, and mature on April 30, 2018, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-forsale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2012 is a. Debt Investments ................................................................. 397,000 Cash......................................................................... 397,000 b. Debt Investments ................................................................. 388,000 Interest Receivable............................................................... 9,000 Cash......................................................................... 397,000 c. Debt Investments ................................................................. 388,000 Interest Revenue.................................................................. 9,000 Cash......................................................................... 397,000 d. Debt Investments ................................................................. 400,000 Interest Revenue.................................................................. 9,000 Discount on Debt Investments.................................. 12,000 Cash ........................................................................ 397,000

c

On November 1, 2012, Howell Company purchased 900 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $948,000, which includes accrued interest of $13,500. The bonds, which mature on January 1, 2017, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2012, balance sheet at a. $900,000. b. $934,500. c. $933,120. d. $948,000.

c

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2012 for $600,000. During 2012, Doane earned $240,000 and paid dividends of $150,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2013, Doane earned $300,000 and paid dividends of $90,000 on April 1 and $90,000 on October 1. On July 1, 2013, Rich sold half of its stock in Doane for $396,000 cash. Before income taxes, what amount should Rich include in its 2012 income statement as a result of the investment? a. $240,000. b. $150,000. c. $72,000. d. $45,000.

c

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2012 for $600,000. During 2012, Doane earned $240,000 and paid dividends of $150,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2013, Doane earned $300,000 and paid dividends of $90,000 on April 1 and $90,000 on October 1. On July 1, 2013, Rich sold half of its stock in Doane for $396,000 cash. What should be the gain on sale of this investment in Rich's 2013 income statement? a. $96,000. b. $82,500. c. $73,500. d. $60,000.

c

The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2012 are as follows: Goebel Company Balance Sheet December 31, 2012 Assets $1,200,000 Liabilities $ 150,000 Capital stock 600,000 Retained earnings 450,000 Total equities $1,200,000 Dobbs Company Balance Sheet December 31, 2012 Assets $900,000 Liabilities $225,000 Capital stock 555,000 Retained earnings 120,000 Total equities $900,000 If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2012 for $195,000 and the fair value method of accounting for the investment were used, the amount of the debit to Equity Investments (Dobbs) would have been a. $135,000. b. $111,000. c. $195,000. d. $180,000.

c

Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes a. a debit to Held-to-Maturity Securities at $300,000. b. a credit to Premium on Investments of $15,000. c. a debit to Held-to-Maturity Securities at $315,000. d. none of these.

c

When investments in debt securities are purchased between interest payment dates, preferably the a. securities account should include accrued interest. b. accrued interest is debited to Interest Expense. c. accrued interest is debited to Interest Revenue. d. accrued interest is debited to Interest Receivable.

c

Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. Accrued interest will be received by the seller even though it is not an interest payment date. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities. d. A gain or loss on the sale is not extraordinary.

c

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described? a. Transfer from trading to available-for-sale b. Transfer from available-for-sale to trading c. Transfer from held-to-maturity to available-for-sale d. Transfer from available-for-sale to held-to-maturity

d

Dublin Co. holds a 30% stake in Club Co. which was purchased in 2013 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2013 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2013? I. $3,000,000 II. $3,040,000 III. $3,120,000 a. I, II, or III. b. I or II only. c. II only. d. II or III only.

d

During 2012 Logic Company purchased 6,000 shares of Midi, Inc. for $30 per share. The investment was classified as a trading security. During the year Logic Company sold 1,500 shares of Midi, Inc. for $35 per share. At December 31, 2012 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2012 related to its investment in Midi, Inc. stock? a. ($12,000) b. $7,500 c. ($4,500) d. ($1,500)

d

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the a. cost method. b. fair value method. c. divesture method. d. equity method.

d

Impairments are a. based on discounted cash flows for securities. b. recognized as a realized loss if the impairment is judged to be temporary. c. based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments. d. evaluated at each reporting date for every investment.

d

Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for a. 10 periods and 10% from the present value of 1 table. b. 10 periods and 8% from the present value of 1 table. c. 20 periods and 5% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table.

d

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2012, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate

d

On December 29, 2013, James Co. sold an equity security that had been purchased on January 4, 2012. James owned no other equity securities. An unrealized holding loss was reported in the 2012 income statement. A realized gain was reported in the 2013 income statement. Was the equity security classified as available-for-sale and did its 2012 market price decline exceed its 2013 market price recovery? 2012 Market Price Decline Exceeded 2013 Available-for-Sale Market Price Recovery a. Yes Yes b. Yes No c. No Yes d. No No

d

On October 1, 2012, Wenn Co. purchased 800 of the $1,000 face value, 8% bonds of Loy, Inc., for $936,000, including accrued interest of $16,000. The bonds, which mature on January 1, 2019, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-forsale. On Wenn's December 31, 2013 balance sheet, the carrying value of the bonds is a. $920,000. b. $912,000. c. $908,800. d. $896,000.

d

Richman Co. purchased $600,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2012, with interest payable on July 1 and January 1. The bonds sold for $624,948 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the available-for-sale Debt Investments account for the Carlin, Inc. bonds on July 1, 2012 and December 31, 2012 by the amortized premiums of $2,124 and $2,196, respectively. At December 31, 2012, the fair value of the Carlin, Inc. bonds was $636,000. What should Richman Co. report as other comprehensive income and as a separate component of stockholders' equity? a. $0 b. $4,320 c. $11,052 d. $15,372

d

Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During 2013, Penn earns $360,000 and pays cash dividends of $120,000. Tracy should report investment revenue for 2013 of a. $48,000. b. $96,000. c. $120,000. d. $144,000.

d

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements.

d

Valet Corp. began operations in 2013. An analysis of Valet's equity securities portfolio acquired in 2013 shows the following totals at December 31, 2013 for trading and available-for-sale securities: Trading Available-for-Sale Securities Securities Aggregate cost $90,000 $110,000 Aggregate fair value 70,000 95,000 What amount should Valet report in its 2013 income statement for unrealized holding loss? a. $35,000. b. $5,000. c. $15,000. d. $20,000.

d

Which of the following is correct about the effective-interest method of amortization? a. The effective interest method applied to investments in debt securities is different from that applied to bonds payable. b. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.

d

Which of the following is not correct in regard to trading securities? a. They are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is not amortized. d. All of these are correct.

d