Test 1 Review - Chapter 17 Investments

On its December 31, 2017, balance sheet, Trump Company reported its investment in equity securities, which had cost $600,000, at fair value of $560,000. At December 31, 2018, the fair value of the securities was $585,000. What should Trump report on its 2018 income statement as a result of the increase in fair value of the investments in 2018?

Unrealized gain of $25,000 Equity Securities!!! $585,000 - $560,000 = $25,000 unrealized gain

When investments in debt securities are sold between interest payment dates, preferably the

accrued interest is credited to Interest Revenue

On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Total Portfolio:Cost 405,000 Fair Value 475,000 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2018 is

$10,000 + $30,000 = $40,000.

Jordan Company 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

20 periods and 4% from the present value of 1 table.

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, 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, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At December 31, 2018, the fair value of the Ritter, Inc. bonds was $3,180,000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity?

= $76,860 Fair Value - Carrying Amount $3,180,000 - ($3,124,740 - $10,620 - $10,980) = $76,860.

Watt Company 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 debit to Debt Investments at $315,000

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

Trading

Use of the effective-interest method in amortizing bond premiums and discounts results in

a varying amount being recorded as interest income from period to period

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

arbitrageurs

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements.

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the

effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities

When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

its fair value at the date of the transfer

An option to convert a convertible bond into shares of common stock is a

embedded derivative

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds?

$47,698 ($532,090 × .09) - ($500,000 × .10) = ($2,112) - 2017 Amortization ($532,090 - $2,112) × .09 = $47,698 - 2018 Interest Revenue.

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, 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, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds?

($7,440) $3,097,440 - $3,090,000 = $7,440.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

Debit to Debt Investments

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. The carrying amount of this investment in Rich's December 31, 2018 balance sheet should be

$1,000,000 + $120,000 - ($250,000 × 30%) = $1,045,000.

Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. Before income taxes, what amount should Rich include in its 2018 income statement as a result of the investment?

$120,000 Revenue- net income $400,000 × 30% = $120,000.

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At December 31, 2018, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity?

$30,744 Fair Value - Carrying Amount $1,272,000 - ($1,249,896 - $4,248 - $4,392) = $30,744

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2018. During 2018, 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, 2018 should be

$600,000 + ($400,000 × .2) - ($100,000 × .2) = $660,000.

Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2018. 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, 2018 if the beginning of the year balance in the account was $960,000?

$960,000 + ($720,000 × .3) - ($240,000 × .3) = $1,104,000.

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; 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, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by

($1,410,375 × .11/2) - ($1,500,000 × .10/2) = $2,571.

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the straight-line method, what is the amount of premium amortization that would be recognized in 2019 related to these bonds?

($532,090 - $500,000) ÷ 10 = $3,209.

When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be

its fair value at the date of the transfer.