Accounting ch 12
On January 1, 2024, SteveCo purchased $100,000 of Clear Company bonds at a premium of $8,000. The Clear bonds pay 8% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. SteveCo accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In SteveCo's December 31, 2024, journal entry to record the second period of interest, SteveCoRupar would record a credit to interest revenue of: 3,780 4,000 3,500 3,772
3,772 Periodical intrest receipt= Fv x stated rate x period 100,000 X 8% x 6/12 (june ) = 4,000 Intrest rate 108,000 x 7% x 6/12 = 3,780 Ending carrying value 108,000-4,000+3,780= 107780 107780 x 7% x 6/12 = 3772
Assume that, on January 1, 2024, Shlap Enterprises paid $4,000,000 for its investment in 60,000 shares of Dodger Company Further, assume that Dodger has 150,000 total shares of stock issued and estimates a ten-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2024, the book value of Dodger' identifiable net assets was $8,000,000, and the fair value of Dodger was $12,000,000. The difference between Dodger' fair value and the book value of its identifiable net assets is attributable to $1,500,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Dodger during 2024: Net income$ 800,000 Dividends declared and paid$ 600,000 Market price of common stock on 12/31/2024$ 85/share What amount would Shlap Enterprises report in its year-end 2024 balance sheet for its investment
3,980,000 Investment in dodger = 60,000 / 150,000 = 40% Difference fv vs bv depreciable asstes = 12,000,000-8,000,000-1,500,000= 2,500,000 Cash paid to dodger = 4M (+) net income (800,000 x 40%) = 320,000 (-) dividends (600,000 x 40%) = (240,000) (-) attribute to depreciation assest ((2,500,000)/10 years ) x 40%)) = (100,000) amount shalp reports on year-end 21 balance sheet = 3,980,000
On January 1, 2024, Normal Plastics bought 15% of Model, Incorporated's outstanding bonds for $900,000. On October 1, 2025, the bonds were valued at $1,026,000 and Normal sold half of the amount it purchased. On December 31, 2025, the remaining bonds were valued at $580,000. How much should Normal show on its 2025 income statement from this investment, assuming that it accounts for it as an available-for-sale investment? 0 306000 243000 63000
63000 (bonds- outstanding bonds)/2 (1,026,000-900,000)/2
On January 2, 2024, Garner, Incorporated bought 10% of the outstanding common stock of Moody, Incorporated for $60 million cash. Garner does not exercise significant influence over Moody. At the date of acquisition of the stock, Moody's net assets had a book value and fair value of $180 million. Moody's net income for the year ended December 31, 2024, was $30 million. During 2024, Moody declared and paid cash dividends of $6 million. On December 31, 2024, the fair value of 100% of Moody's stock was $650 million. On December 31, 2024, Garner's investment should be reported at: 65 M 62.4 M 60 M 68 M
65 M 650,000/100X10
On January 2, 2024, Garner, Incorporated bought 30% of the outstanding common stock of Moody, Incorporated for $60 million cash. At the date of acquisition of the stock, Moody's net assets had a book value and fair value of $180 million. Moody's net income for the year ended December 31, 2024, was $30 million. During 2024, Moody declared and paid cash dividends of $6 million. On December 31, 2024, the fair value of 100% of Moody's stock was $650 million. On December 31, 2024, Garner's investment account should be reported at: 60M 65M 67.2 M 71.1 M
67.2 M Cash + share in net investments - share in dividends 60M+ (30%x30M) - (30%x6M) 60M + 9M -1.8M = 67.2 M
On January 2, 2024, Germane, Incorporated bought 30% of the outstanding common stock of Quality, Incorporated for $56 million cash. At the date of acquisition of the stock, Quality's net assets had a book value and fair value of $120 million. Quality's net income for the year ended December 31, 2024, was $30 million. During 2024, Quality declared and paid cash dividends of $10 million. On December 31, 2024, Germane's should report investment revenue of: 30 M 6M 3M 9M
9M Net income of quality inc x % 30M x 30% = 9M
When applying the equity method, an investor should report dividends from the investee as: Dividend revenue A reduction in the investment account. an extraordinary item an increase in the investment account
A reduction in the investment account.
On January 12, Henderson Corporation purchased bonds of Honeycutt Corporation for $73 million and classified the securities as available-for-sale. At the close of the same year, the fair value of the securities is $81 million. Henderson Corporation should report: A gain of $8 million on the income statement. An increase in shareholders' equity of $8 million. An investment of $73 million. None of the choices are correct.
An increase in shareholders equity of $8M (FV securities- purchased bonds) (81M -73M) = 8M
Which of the following statements is not true regarding investments in equity securities? If the investor owns less than 20 percent of outstanding voting common stock, the equity method usually is not used. If the investor owns less than 20 percent of outstanding voting common stock, the securities generally are reported at their fair value. If the investor owns 20-50 percent of the outstanding voting common stock, the equity method always is required. If the investor owns more than 50 percent of the outstanding voting common stock, the financial statements are consolidated.
If the investor owns 20-50 percent of the outstanding voting common stock, the equity method always is required.
Unrealized holding gains and losses for trading securities are: Reported as extraordinary items. Included in the determination of income from operations in the period of the change. Not reported in the income statement nor the balance sheet. Reported as a separate component of the shareholders' equity section of the balance sheet.
Included in the determination of income from operations in the period of the change.
The fair value option Is not available for equity-method investments. Can be traded on exchanges, similar to other options. For debt is available only if anticipated to not be held to maturity. Must be elected when a security is purchased, and is irrevocable.
Must be elected when a security is purchased, and is irrevocable.
Evans Company owns 450 bonds of Frazier Company classified as available-for-sale. During 2024, the fair value of those bonds increased by $9 million. What effect did this increase have on Evans' 2024 financial statements? Shareholders equity decreased net income increased Net assets increased Total assets decreased
Net assets increased
Unrealized holding gains and losses for securities to be held-to-maturity are: not reported in the income statement nor the balance sheet. included in the determination of income from operations in the period of the change. included in accumulated other comprehensive income in the shareholders' equity section of the balance sheet. reported as extraordinary items.
Not reported in the income statement nor the balance sheet.
If Arleo Company concluded that an investment originally classified as held-to-maturity would now more appropriately be classified as available-for-sale, Arleo would: Need to restate earnings, as the original classification was in error. Not reclassify the investment, as original classifications are irrevocable. Reclassify the investment as available-for-sale and immediately recognize in net income any unrealized holding gain or loss on the reclassification date. Reclassify the investment as available-for-sale and immediately recognize in accumulated other comprehensive income any unrealized holding gain or loss on the reclassification date.
Reclassify the investment as available-for-sale and immediately recognize in accumulated other comprehensive income any unrealized holding gain or loss on the reclassification date.
If Reibach Incorporated concluded that an investment originally classified as a trading security would now more appropriately be classified as held-to-maturity, Reibach would: Reclassify the investment as held-to-maturity, but there would be no income effect. Not reclassify the investment, as original classifications are irrevocable. Reclassify the investment as held-to-maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date. Reclassify the investment as held-to-maturity and treat the fair value as of the date of reclassification as the investment's amortized cost basis for future amortization.
Reclassify the investment as held-to-maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date.
The equity method is used when an investor can't control, but can exercise significant influence over the operating and financial policies of the investee. We presume, in the absence of evidence to the contrary, that this is so if: The investor owns between 51% or more of the investee's voting shares. The investor classifies the investment as held-to-maturity. The investor classifies the investment as available-for-sale. The investor owns between 20% and 50% of the investee's voting shares.
The investor owns between 20% and 50% of the investee's voting shares.
Level Company owns bonds of Leader Company classified as held-to-maturity. During 2024, the fair value of those bonds increased by $4 million. Interest was received of $3 million. What effect did the investment have on Level's 2024 financial statements? Net income increased by 7M Total assets increased by 3 M Shareholders equity increased by 4 M Total assets increased by 7 M
Total assets increase by $3M
Level Company owns bonds of Leader Company classified as available-for-sale. During 2024, the fair value of those bonds increased by $4 million. Interest was received of $3 million. What effect would the investment have on Level's 2024 financial statements? Net income increased by 7M Total assets increased by 3 M Shareholders equity increased by 4 M Total assets increased by 7 M
Total assets increase by 7M
Unrealized holding gains and losses for securities available-for-sale are: not reported in the income statement nor the balance sheet. included in the determination of income from operations in the period of the change. included in accumulated other comprehensive income in the shareholders' equity section of the balance sheet. reported as extraordinary items.
included in accumulated other comprehensive income in the shareholders' equity section of the balance sheet.
Fair value is used as the basis for valuation of a firm's debt investments when: the market value is less than cost for the investment. the investment is not classified as held-to-maturity. management's intention is to dispose of the investment within one year. the investment is classified as held-to-maturity.
the investment is not classified as held-to-maturity. Correct
Western Manufacturing Company owns 40% of the outstanding common stock of Eastern Supply Company. During 2024, Western received a $50 million cash dividend from Eastern. What effect did this dividend have on Western's 2024 financial statements? Net income increased total liabilities increased total assets decreased total assets are unchanged
total assets are unchanged
The accounting for unrealized holding gains and losses will be different if the fair value option is elected for all of the following types of investments except: available-for-sale trading security held-to-maturity equity mehtod
trading securities
Unrealized holding gains and losses are included in an investor's earnings for: Trading sales /Securities available-for sale yes no yes yes no yes no no
yes no
Investment securities are reported on a balance sheet at fair value for: Trading sales /Securities available-for sale yes no yes yes no yes no no
yes yes
