ACC 312 CH 17
An investee is a company that has
had its common stock purchased by another company.
When trading securities are transferred to available-for-sale securities, the unrealized gain or loss at the time of transfer is
recognized in income.
If an investing company's CEO is on the board of directors for an investee company, the investing company likely has ________ influence over the investee company.
significant
If 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.
A report of net income by the investee company will affect an investor's accounts if the investor uses
the equity method only.
A company that holds less than 20% of another company's equity securities should value the securities using the ________ method in their financial statements.
fair value
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 2020. How much investment revenue should Moorland report for 2020?
$400,000.
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 2020. If Moorland had a beginning balance of $625,000 in their investment account in 2020, their ending balance on December 31, 2020 should be
$705,000.
On October 18, 2020, Hammons Restaurants purchased 8,000 shares of Bronson Food Distributors for $30 per share. On December 6, Hammons sold 2,000 shares of Bronson's stock for $35 per share. On December 31, 2020, the market price of Bronson's stock was $28 per share. On their December 31, 2020 income statement, Hammons Restaurants should report a total gain/loss of __________ related to their Bronson investment.
($2,000)
JT Engineering holds 400 RL Enterprises bonds. The bonds pay $2,000 interest each January and will mature on January 1, 2021. The bonds are classified as available-for-sale and JT sells them on October 1, 2020. If the bond discount amortization for a year was $890, how should JT determine the 2020 discount amortization for the bonds?
(9/12 * $890)
Which of the following most accurately describes the result of using the effective-interest method in amortizing bond premiums and discounts?
A varying amount being recorded as interest income from period to period
What is an acceptable method of recording accrued interest for investments in debt securities purchased between interest payment dates?
Accrued interest is debited to Interest Revenue
Anders Interiors makes an adjustment to comprehensive income and a reduction to stockholders' equity for its available-for-sale securities. Which of the following most likely resulted in these adjustments?
An unrealized holding loss
Which of the following statements about accounting for investments in debt securities classified as trading securities is TRUE?
Any discount or premium is 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 of the carrying value of the investment.
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 are unrealized holding gains and losses reported for equity securities?
As part of net income.
For which of the following securities are unrealized gains and losses reported as other comprehensive income if the fair value option is not elected?
Available-for-sale
Which of the following securities can be classified as either current or long-term assets on a company's balance sheet?
Available-for-sale debt security
Why are held-to-maturity securities reported at amortized cost rather than fair value?
Because fair value is not a relevant means for evaluating cash flows associated with the securities
How should the acquiring company account for an equity security if they have little or no influence over the investee company?
By using the fair value method
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.
Keefe Industries is looking to purchase equity securities from other companies. Which of the following would they most likely purchase?
Common Stock
In order to report the adjustment of each equity security owned, an investment company should provide a report with which of the following columns? Assume all equity securities represent less than 20% of the investee's total stocks.
Cost, Fair Value, and Unrealized Gain (Loss)
Vang Incorporated purchased 40% of Haney Resources' shares of common stock for $632,000 in 2017. In 2018, Haney reported a loss of $457,000. In 2019, they reported a loss of $529,000. In 2020, they reported a loss of $714,000. Based on this, Vang Incorporated would likely do which of the following in 2021?
Discontinue using the equity method and not report additional losses.
Equity securities cannot be classified as held-to-maturity. Why?
Equity securities do not have a maturity date.
Why does the equity method not use the payment of dividends as its basis for recognizing an investee's income?
In years when the investee has a net loss but still pays dividends, recording an increase in revenue based on the payment of dividends fails to account for the true economies of the situation.
For which type of security is fair value NOT a relevant means for evaluating the cash flows associated with that security?
Held-to-maturity securities
Which of the following is classified as a loss in value that is NOT temporary?
Impairment
Why does the FASB believe that trading investments should be reported at fair value on the balance sheet and that any unrealized gains and losses from these securities should be reported in income?
In order to provide existing and prospective stockholders with more relevant information
Where is a reclassification adjustment reported?
In the statement of comprehensive income as other comprehensive income
When a trading security is sold, what happens to the Debt Investments account?
It is reduced by the amortized cost of the security.
What happens if a company chooses to use the fair value option for a security?
It must use fair value for that security until the company no longer owns the security.
When an investment in a held-to-maturity security is reclassified as available-for-sale, the carrying value assigned to the available-for-sale security should be which of the following?
Its fair value at the date of the transfer
When an investment in an available-for-sale security is reclassified as trading because the company anticipates selling the stock in the near future, what should the carrying value assigned to the investment upon entering it in the trading portfolio be?
Its fair value at the date of the transfer
How long are trading securities generally held?
Less than 3 months
Hinton Electronics owns more than 50% of the shares for Hays Motherboards, and they produce both consolidated and parent company financial statements. McNeil Furniture owns more than 50% of the shares of Duke Lumber, and they produce only consolidated financial statements. Why the difference?
McNeil Furniture is likely a U.S. firm, whereas Hinton Electronics is likely a non-U.S. firm.
Which of the following securities could be classified as held-to-maturity?
Municipal bonds
How are unrealized gains and losses on equity securities reported?
On the total portfolio of investments.
Which of the following will affect an investor's accounts when using the equity method but not the fair value method?
Report of net income by the investee company
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.
Which of the following indicates that an investing company has significant influence over an investee company?
The investing company's CEO is on the board of directors for the investee company.
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.
An investor using the equity method of accounting for investments should record its share of the investee's earnings for which of the following periods?
The period in which the earnings are reported by the investee in its financial statements.
Which of the following is true of impairments?
They are evaluated at each reporting date for every investment.
What reporting approach do companies use for available-for-sale securities that reduces the volatility of net income?
They report the securities at fair value on the balance sheet but do not report changes in fair value as part of net income until after the securities are sold.
An investor has purchased less than 20% of the common stock available from each of 12 different investees. As part of their financial statements, they provide a report that details the cost and fair value for each of the investments. What is the purpose of this report?
To calculate the adjustment in fair value in order to determine unrealized gains or losses for each investment
If a company owns more than 50% of another company's shares of common stock, how will financial statement reporting be different for U.S. firms compared to non-U.S. firms?
U.S. firms will provide only consolidated financial statements, whereas non-U.S. firms will often provide both consolidated and parent company financial statements.
The fair value option allows a company to do which of the following?
Value its financial liabilities at fair value
Under which of the following circumstances is the investment account decreased if the investor is using the equity method?
When dividends are paid by the investee.
Gwen is journalizing the purchase of securities. In doing so, she enters a debit to Debt Investments. What can you determine about the classification of these securities based on this information?
You cannot determine classification from this information.
Bowie Glass purchased 17,000 shares of Lenz Framing common stock for $382,500 in 2019. When they created their December 31, 2019 balance sheet, the shares had a fair value of $373,150. On July 3, 2020, Bowie Glass sold all of the Lenz Framing stock for $27.25 per share less $15,000 in brokerage commissions. In their 2020 financial statements, Bowie Glass should report
a realized gain of $65,750.
An investor who has purchased 20% to 50% of the investee's common stock will likely have __________ 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.
The method of reporting unrealized gains and losses on the financial statements is one major difference between
available-for-sale securities and trading securities.
A debt security is transferred from one category to another. Generally accepted 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. The type of transfer being described is a transfer from
available-for-sale to held-to-maturity.
If an investing company considers itself to be a single economic entity with an investee company, it will likely issue ________ financial statements.
consolidated
Adding ________ to the fair value adjustment will provide the total for equity investments.
cost
Gainey Resources purchased $100,000 worth of 8%, $1,000 par value, 10-year term bonds from Camarena Company on July 18, 2017, for $103,200. Beginning in 2019, Camarena has been unable to pay their bond interest payments, and the market price of the bonds has continued to drop. In 2020, the market price of the bonds was $65,700. After testing, Gainey decided that they would likely never recover more than 80% of their initial investment. According to Gainey, these bonds
have suffered impairment.
A company that has its common stock purchased by another company is called a(n)
investee
Equity securities are held as a passive investment if the investor holds ________ of the investee's stocks.
less than 20%
The fair value method of valuation is typically used by an investor when it holds ________ of the investee's equity securities.
less than 20%
Herbst Enterprises purchased equity securities in 2019 and classified them as available-for-sale. They reported an unrealized gain in 2019 and an additional unrealized gain in 2020. They decide to sell the securities in 2021 for $28,000 more than the fair value recorded in 2020. Based on this, Herbst needs to
make a reclassification adjustment for the securities they sold.
A failure to account for the true economies of the investee's situation is one reason that investee companies do not use ________ as its basis for recognizing an investee's income.
payment of dividends