ACCTG 326- SB Chapter 12

Marian Company's records show the following account balances at February 1: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of

$20,000 to discounts. $520,000 to cash.

Marian Company's records show the following account balances at February 1: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of (Select all that apply.)

$500,000 to investments in HTM securities. $40,000 to gain from sale of investment.

How are available-for-sale debt securities reported?

- Realized gains and losses are reported in net income in the period the investment is sold. - Unrealized gains and losses are reported as part of other comprehensive income when they occur.

Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is

3%. Reason: Interest received uses the stated rate and the bonds are semi-annual so 6%/2

Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.

AFS or HTM to Trading- included in current net income. Trading to AFS or HTM- None are recognized because they already have been recognized in income. HTM to AFS- Other comprehensive income (part of equity). AFS to HTM- Amortize to net income over remaining life

Adjustments must be made to ______ to account for the tax effects of debt investments.

AOCI OCI

Which of the following is true regarding significant influence as it relates to equity securities?

An investor owning less than 20% of voting shares might exert significant influence of a company by having an officer on the board of directors.

Which reporting method should be used if the investor can exert significant influence over the investee?

Equity method

True or false: The 20% ownership threshold dictates the accounting treatment of equity investments regardless of other influences.

False A company could potentially own more than 20% and still not have significant influence. A company could potentially own less than 20% interest and still have significant influence.

True or false: Any unrealized holding gain or loss that exists when a transfer of investment category occurs should be immediately recognized into income.

False Reason: Any unrealized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.

Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?

Net income may otherwise appear more volatile than it actually is.

Parker Company owns 30% of Sandra Company's stock. Which of the following will decrease the investment account?

Parker receives dividends from Sandra Company.

Parker Company owns 30% of Sandra Company's stock. Which of the following will increase the investment account?

Sandra Company reports income.

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?"

The investor has the ability to hold the security until maturity. The investor intends to hold the security until maturity.

Which of the following types of debt investments are reported at fair value?

Trading Available-for-sale

Marlon Company recognizes interest revenue of $5,400 related to its bonds; its periodic bond interest payment receipts are $5,200. The bonds must have issued at:

a discount

Greene Company purchases an investment in bonds issued by Blue Company. Greene intends to hold the bonds until they mature and did not elect the fair value option. Greene should report the investment at

amortized cost

Master Company owns 15% of the outstanding voting stock of Sell Company. Master should

apply the fair value through net income method.

Porter Company classified its investment in the bonds of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5,000. The result of this increase in value will

be an increase in net income.

Which of the following represents a key difference between the three debt investment classifications (HTM, AFS, trading) with respect to financial reporting?

classification of unrealized gains and losses

The "discount on bond investments" account is a

contra-asset account.

Choose the correct debit and credit for the investor's recognition of income reported by the investee when using the equity method.

debit investment account credit investment revenue

If an investee reports a net loss, an investor who properly applies the equity method will

debit loss on investment credit investment

Gee Company accounts for its investment in Fuller Company using the equity method. During the year, Fuller reports a net loss. The net loss will

decrease Gee's investment balance.

Adjustments made to OCI and AOCI to account for the tax effects of unrealized holding gains and losses on available-for-sale debt securities also give rise to ______.

deferred tax liabilities deferred tax assets

Lucky Company invested in debt securities and classified them as HTM. At the end of the accounting period, the value of the investment appreciated by $10,500. The company should

disclose the fair market value in the notes.

For held-to-maturity debt instruments, the difference between fair value and amortized cost must be ______ in a _____to the financial statements.

disclosed; notes

Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the ______ method.

equity

Debt securities that are classified as available-for-sale or trading are valued at

fair market value

For discounted bonds, interest revenue is ______ cash interest each interest period.

greater than

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)

held-to-maturity security

The premium on bond investment

increases the carrying value of the bond to its cost at date of purchase

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by debiting

investment in Saddle Company for $70,000.

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by crediting

investment revenue for $70,000. Reason: Since the equity method is used in this case, dividends would decrease the investment account and income would increase the investment account and investment revenue by $70,000 ($200,000 x 35%)

Goober Company is able to control the operating and financial policies of Stein Company. Goober should

issue consolidated financial statements.

Blum Company invested in debt securities and classified them as "held-to-maturity." At the end of the accounting period, the value of the investment appreciated by $10,500. The company should

not recognize the unrealized gain

Holding gains and losses associated with investments properly classified as held-to-maturity are

not recognized

Holding gains and losses associated with investments properly classified as "trading securities" are

recognized as part of income.

Interest received is calculated based on the ___ interest rate.

stated

Folger Company recognizes an unrealized holding gain for debt investments that are classified as AFS. If the company had classified the investments as trading securities, its total shareholders' equity would be

the same