ACCN 3100 Intermediate Accounting Chapter 12 Reading
Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. On the date of sale, Markus should recognize a realized gain of _____ in net income. (Assume the debt investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed.)
$2,000
Marian Company's records show the following account balances at 2/1/18: 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. Investment 500k Cash 520k Discount 20k - Investment 500k - Gain 40k
Marian Company's records show the following account balances at 2/1/18: 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 (Select all that apply.)
$520,000 to cash. $20,000 to discounts.
Correctly match the account balances related to AFS debt securities with the correct financial statement presentation. 1. Other comprehensive income 2. Net income 3. Accumulated other comprehensive income
1. Current period holding gains or losses 2. Realized gains and losses from the sale of AFS securities 3. Net fair value adjustments to date - net holding gains and losses to date
Match the correct accounting treatment with the correct transaction. 1. Holding gain or loss in other comprehensive income 2.Holding gain or loss in income 3.No holding gain or loss is recognized
1. Investment in available-for-sale debt securities 2.Investment in trading debt securities 3. Investment in held-to-maturity debt securities
How are equity investments that lack significant influence adjusted? (Select all that apply.)
> A fair value adjustment is recorded at the end of every reporting period. > Unrealized holding gain or loss is included in net income.
How are available-for-sale debt securities reported? (Select all that apply.)
> Unrealized gains and losses are reported as part of other comprehensive income when they occur. > Realized gains and losses are reported in net income in the period the investment is sold.
How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?
A valuation allowance account is increased or decreased.
Rosa Company purchases debt securities and classifies them as "available-for-sale" securities. How should Rosa recognize changes in the value of the investment?
As unrealized holding gain or loss in other comprehensive income.
Which of the following are common financial instruments that are used to finance or expand a company's operations? (Select all that apply.)
Common stock Preferred stock Corporate bonds
Regarding the valuation of equity investments that lack significant influence beginning in 2018, which of the following statements is correct?
Companies are required to use the fair value through net income method.
Which reporting method should be used if the investor can exert significant influence over the investee?
Equity method
Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. Assume the investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed. The journal entry to record the sale of the bonds should include these credits: (Select all that apply.)
Investment in AFS - $18,000 Gain on sale of investment - $2,000
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.
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.
Investments that are properly classified as held-to-maturity should be carried at
amortized cost.
Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be
an increase in other comprehensive income.
If the market rate of interest decreases after a bond is purchased, the bond incurs
an unrealized holding gain
If the market rate of interest rises after a bond is purchased, the bond incurs
an unrealized holding loss
All equity investments are initially recorded at
cost
Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at
cost
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should
credit dividend revenue
January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale? (Select all that apply.)
credit investment in North stock $500,000 debit cash $505,000 credit fair value adjustment $5,000
January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018? (Select all that apply.)
debit cash $5,000 credit dividend revenue $5,000 Smith lacks significant influence only owning 5% of North so they do not record a portion of net income.
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
January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. How should Smith Co. record the purchase of this investment? (Select all that apply.)
debit investment in North Company $500,000 credit cash $500,000
Under the equity method, dividends received from the investment
decrease the investment account balance
Dividends cause the investor's investment in the investee's net assets to
decrease.
The appropriateness of the classification of debt investments must be reassessed
each reporting date
Equity and debt securities are commonly referred to as ________ instruments. (Enter only one word.)
financial
The fair value option can be applied to: (Select all that apply.)
financial assets financial liabilities
Characteristics that support classification of investments as trading securities include (Select all that apply.)
frequent and active trading. motivation to realize short-term profits.
Gains and losses relating to debt securities classified as trading are presented in the in the ________ ________ periods in which fair value changes, regardless of whether they are realized or unrealized. (Enter one word per blank.)
income statement
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.
investing
Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.
investing
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. Since the equity method is used in this case, dividends would decrease the investment account and income would increase the investment account by $70,000 ($200,000 x 35%)
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. 200x0.35
Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in ________ ________ in the period they occur. (Enter one word per blank.)
net income
Global Company holds a portfolio of equity securities. The company intends to sell the securities during the next accounting period. The company should classify the investment as
noncurrent.
Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as ________ activities in the statement of cash flows. (Enter only one word.)
operating
Cash flows related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the _____ section of the Statement of Cash Flows.
operating
When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the
original cost of the investment.
Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes (Select all that apply.)
credit to investment in bonds $700,000 debit to cash $680,000 credit to fair value adjustment $80,000. debit to discount on bond investment $100,000
Equity investments for which the investor does not have significant influence are classified as _____ in the balance sheet. (Select all that apply).
current assets noncurrent assets
At the end of the accounting period, trading debt securities must be adjusted to ________ value. (Enter only one word.)
market
If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using ________ ________ techniques.
present value
The price of a bond is equal to the
present value of future cash receipts.
The price of a bond is equal to
present value of future interest payments plus present value of principal
An investor who purchased corporate bonds that are not publicly traded may estimate the bonds' fair value by determining the
present value of the future cash flows
When fair value of equity investments
the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.
When fair value of equity investments is not readily determinable,
the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.
Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as ________ securities.
trading
Beginning in 2018, equity adjustments that lack significant influence are accounted for the same way as debt investments classified as
trading securities
The choice to classify debt securities as current or noncurrent depends on
when they are expected to mature or be sold.
Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period, (Select all that apply.)
Northern will make a fair value adjustment of $75,000. Northern will report an unrealized holding gain in net income.
Under U.S. GAAP, which of the following statements regarding the classification of debt investments is correct?
The classification of investments must be reassessed each reporting period.
Von Company properly applies the equity method in accounting for its investment in Neumann Inc., (investing 20% of common stock.) Which of the following statements are correct? (Select all that apply.)
Von owns 20% of the voting rights in Neumann Inc Von has significant control over Neumann Inc
Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale? (Select all that apply.)
credit investment in bonds $100,000 debit to cash $99,000 debit to discount $2,000 credit to fair value adjustment $1,000
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with (Select all that apply.)
debit investment in Saddle $450,000 credit cash $450,000
Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to (Select all that apply.)
the initial investment. interest revenue earned on investment.
When fair value of equity investments is not readily determinable (select all that apply)
> the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments. > the investor needs to assess annually whether the investment is impaired. > the investor needs to continually evaluate whether fair value is readily determinable.
Which of the following are correct regarding the financial statement presentation of HTM securities? (Select all that apply.)
Unrealized holding gains and losses are disclosed in the notes to the financial statements. Gains and losses are shown in net income in the period in which the securities are sold.
