Intermediate Accounting II- Chapter 17 and Chapter 18
Polska, Inc. purchased 400 ordinary shares of Millay Manufacturing as a trading investment for £26,400. During the year, Millay Manufacturing paid a cash dividend of £6.50 per share. At year-end, Milay Manufacturing shares were selling for £69 per share. On the income statement for the year ended December 31, what is the total amount of unrealized gain/loss and dividend revenue reported by Polska, Inc.? a. £2,600 b. £1,200 c. £1,400 d. £3,800
d. £3,800 (400 x £6.50) + [(£69 x 400) - £26,400] = £3,800.
An investor has a long-term investment in ordinary shares. Regular cash dividends received by the investor are recorded as
fair value method: income equity method: a reduction of the investment
Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
fair value method: no effect equity method: decrease
Dumar Corporation purchased 800 ordinary shares of Viking Industries as a trading investment for $14,880. During the year, Viking Industries paid a cash dividend of $3.20 per share. At year-end, Viking's shares were selling for $17.40 per share. On the income statement for the year ended December 31, what is the total amount of unrealized gain/loss and dividend revenue reported by Dumar Corporation? a. $1,600 b. $2,560 c. $960 d. $3,250
a. $1,600 (800 x $3.20) + [($17.40 x 800) - $14,880] = $1,600.
During 2015, Woods Company purchased 20,000 ordinary shares of Holmes Corp. common stock for $315,000 as a non-trading investment. The fair value of these shares was $300,000 at December 31, 2015. Woods sold all of the Holmes shares for $17 per share on December 3, 2016, incurring $14,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2016 of a. $11,000. b. $25,000. c. $26,000. d. $40,000.
a. $11,000. [(20,000 × $17) - $14,000] - $315,000 = $11,000.
On July 1, 2016, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $500,000, for $470,000 (a 10% effective interest rate). Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2026. Horton uses the effective interest method of amortization. Ignoring income taxes, the amount reported in Horton's 2016 income statement as a result of Horton's non-trading investment in Lopez was a. $23,500. b. $21,150. c. $22,500. d. $20,000.
a. $23,500. [($470,000 × .10 × 6/12) = $23,500.
Koehn Corporation accounts for its investment in the ordinary shares of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as A. a reduction of the carrying value of the investment. B. share premium. C. an addition to the carrying value of the investment. D. dividend income.
A. a reduction of the carrying value of the investment.
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 A. arbitrageurs. B. gamblers. C. hedgers. D. speculators.
A. arbitrageurs.
An option to convert a convertible bond into ordinay shares is a(n) A. embedded derivative. B. host security. C. hybrid security. D. fair value hedge.
A. embedded derivative.
Equity investments acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of equity are A. non-trading where a company has holdings of less than 20%. B. trading investments where a company has holdings of less than 20%. C. investments where a company has holdings of between 20% and 50%. D. investments where a company has holdings of more than 50%.
A. non-trading where a company has holdings of less than 20%.
The fair value option allows a company to A. record income when the fair value of its investment increases. B. value its debt investments at fair value in some years but not other years. C. report most financial instruments at fair value by recording gains and losses as a separate component of stockholders' equity. D. All of these answer choices are true of the fair value option.
A. record income when the fair value of its investment increases.
An impairment loss is the difference between the recorded investment and the A. expected cash flows . B. present value of the expected cash flows. C. contractual cash flows. D. present value of the contractual cash flows.
B. present value of the expected cash flows.
Companies account for transfers of investments between categories A. prospectively, at the end of the period after the change in the business model. B. prospectively, at the beginning of the period after the change in the business model. C. retroactively, at the end of the period after the change in the business model. D. retroactively, at the beginning of the period after the change in the business model.
B. prospectively, at the beginning of the period after the change in the business model.
Gains or losses on cash flow hedges are A. ignored completely. B. recorded in equity, as part of other comprehensive income. C. reported directly in net income. D. reported directly in retained earnings.
B. recorded in equity, as part of other comprehensive income.
All of the following are characteristics of a derivative financial instrument except the instrument A. has one or more underlyings and an identified payment provision. B. requires a large investment at the inception of the contract. C. requires or permits net settlement. D. All of these answer choices are characteristics.
B. requires a large investment at the inception of the contract.
Debt investments that are accounted for and reported at amortized cost, are A. debt investments which are managed and evaluated based on a documented risk-management strategy. B. trading debt investments. C. held-for-collection debt investments. D. All of these answer choices are correct.
C. held-for-collection debt investments.
Transfers of investments between classifications are done A. at the end of the accounting period. B. retroactively. C. prospectively. D. None of these answer choices are correct.
C. prospectively.
Amortized cost is the initial recognition amount of the investment minus A. repayments and net of any reduction for uncollectibility. B. cumulative amortization and net of any reduction for uncollectibility. C. repayments plus or minus cumulative amortization and net of any reduction for uncollectibility. D. repayments plus or minus cumulative amortization.
C. repayments plus or minus cumulative amortization and net of any reduction for uncollectibility.
Under IFRS, the fair value option A. must be applied to all instruments the company holds. B. may be selected as a valuation method by the company at any time during the first 2 years of ownership. C. reports all gains and losses in income. D. All of these answer choices are correct.
C. reports all gains and losses in income.
"Gains trading" or "cherry picking" involves A. moving investments whose value has decreased since acquisition from non-trading to held-for-collection in order to avoid reporting losses. B. reporting investments at fair value but liabilities at amortized cost. C. selling investments whose value has increased since acquisition while holding those whose value has decreased since acquisition. D. All of these answer choices are considered methods of "gains trading" or "cherry picking."
C. selling investments whose value has increased since acquisition while holding those whose value has decreased since acquisition.
In accounting for debt investments that are classified as trading investments, A. any unrealized gain (loss) is reported as part of equity. B. a premium is reported separately. C. the fair value is compared to amortized cost to compute any unrealized gain (loss). D. no discount or premium amortization is required.
C. the fair value is compared to amortized cost to compute any unrealized gain (loss).
Sycamore, Inc. purchased €100,000 of 8 percent bonds of Alvarado Industries on January 1, 2015, at a discount, paying €92,278. The bonds mature January 1, 2020, and yield 10 percent; interest is payable each July 1 and January 1. Sycamore manages and evaluates investment performance on a documented risk-management or investment strategy based on fair value information. On December 31, 2015, when the market rate of interest is 12%, and the fair value of the bonds is €89,934, Sycamore will record an unrealized gain/loss of A. €2,344 loss B. €2,958 loss C. €3,603 loss D. €2,958 gain
C. €3,603 loss (€92,278 .05) - (€100,000 x .04) = €614 [(€92,278 + €614) x .05] - (€100,000 x .04) = €645 (€92,278 + €614 + €645) - €89,934 = €3,603 loss.
A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.
TRUE
All dividends received by an investor from the investee decrease the investment's carrying value under the equity method.
TRUE
If a company determines that an investment is impaired, it writes down the amortized cost basis of the individual security to reflect this loss in value.
TRUE
Non-trading equity investments are recorded at fair value, with unrealized gains and losses reported in other comprehensive income.
TRUE
Over the life of a debt investment, interest revenue and the gain on sale are the same using either amortized cost or fair value measurement.
TRUE
The IASB requires that companies classify financial assets into two measurement categories - amortized cost and fair value.
TRUE
The Unrealized Holding Gain or Loss-Income account is reported in the other income and expense section of the income statement.
TRUE
The Unrealized Holding Gain/Loss—Equity account is reported as a part of other compre- hensive income.
TRUE
The fair value option is generally available only at the time a company first purchases the financial asset or incurs a financial liability.
TRUE
Transferring an investment from one classification to another should occur only when the business model for managing the investment changes.
TRUE
The IASB permits which of the following measurement categories for financial assets?
Fair Value: Yes Amortized cost: Yes
Under IFRS, the presumption is that equity investments are
Held-for-trading: yes Held to profit from price changes: yes
Match the investment accounting approach with the correct valuation approach:
Not held-for-collection: fair value Held-for-collection: amortized cost
An investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee.
FALSE
Companies measure debt investments at fair value if the objective of the company's business model is to hold the financial asset to collect the contractual cash flows.
FALSE
Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.
FALSE
The IASB requires that investments meeting the business model (held-for-collection) and contractual cash flow tests be valued at fair value.
FALSE
The gain on sale of debt investments is the excess of the selling price over the fair value of the bonds.
FALSE
Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.
FALSE
Unrealized holding gains or losses on trading investments are reported in A. equity. B. net income. C. other comprehensive income. D. accumulated other comprehensive income.
B. net income.
On its December 31, 2015, statement of financial position, Trump Co. reported its investment in non-trading securities, which had cost $600,000, at fair value of $550,000. At December 31, 2016, the fair value of the securities was $585,000. What should Trump report on its 2016 income statement as a result of the increase in fair value of the investments in 2016? A. $0. B. Unrealized loss of $15,000. C. Realized gain of $35,000. D. Unrealized gain of $35,000.
A. $0. $0 (non-trading investment).
A held-for-collection debt investment is purchased at a premium. The entry to record the amortization of the premium includes a A. Credit to Debt Investments. B. Credit to Interest Receivable. C. Credit to Interest Revenue. D. None of these answers are correct.
A. Credit to Debt Investments.
Under IFRS, A. The accounting for non-trading equity investments deviates from the general provisions for equity investments. B. Realized gains and losses related to changes in the fair value of non-trading equity investments are reported as a part of other comprehensive income and as a component of other accumulated comprehensive income. C. Dividends received in cash are always reported as income on the income statement. D. All of These answer choices are correct.
A. The accounting for non-trading equity investments deviates from the general provisions for equity investments.
At each reporting date, companies adjust debt investments' amortized cost to fair value, with any unrealized holding gain or loss reported as part of their comprehensive income.
FALSE
Instrument Corp. has the following investments which were held throughout 2015-2016: TRADING: cost: $300,000 fair value 12/31/15: $400,000 fair value12/31/16: $380,000 NON-TRADING: cost: $300,000 fair value 12/31/15: $320,000 fair value12/31/16: $360,000 What amount of gain or loss would Instrument Corp. report in its income statement for the year ended December 31, 2016 related to its investments? A. $20,000 gain. B. $20,000 loss. C. $140,000 gain. D. $80,000 gain.
B. $20,000 loss. $400,000 - $380,000 = $20,000 loss.
Held-for-collection investments are reported at A. acquisition cost. B. Amortized cost. C. maturity value. D. fair value.
B. Amortized cost.
At December 31, 2016, Atlanta Co. has a share portfolio valued at $40,000. Its cost was $33,000. If the Fair Value Adjustment account has a debit balance of $2,000, which of the following journal entries is required at December 31, 2016? A. Fair Value Adjustment: 7,000 -> Unrealized Holding Gain or Loss-Equity: 7,000 B. Fair Value Adjustment: 5,000 -> Unrealized Holding Gain or Loss-Equity: 5,000 C. Unrealized Holding Gain or Loss-Equity: 7,000 -> Fair Value Adjustment: 7,000 D. Unrealized Holding Gain or Loss-Equity: 5,000 -> Fair Value Adjustment: 5,000
B. Fair Value Adjustment: 5,000 -> Unrealized Holding Gain or Loss-Equity: 5,000 ($40,000 - $33,000) - $2,000 = $5,000 unrealized gain.
When a company holds between 20% and 50% of the outstanding ordinary shares of an investee, which of the following statements applies? A. The investor should always use the equity method to account for its investment. B. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. C. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. D. The investor should always use the fair value method to account for its investment.
B. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
IFRS requires companies to measure their financial assets based on all of the following except A. The company's business model for managing its financial assets. B. Whether the financial asset is a debt or equity investment. C. The contractual cash flow characteristics of the financial asset. D. All of these answer choices are IFRS requirements.
B. Whether the financial asset is a debt or equity investment.
Transfers between categories A. result in companies omitting recognition of fair value in the year of the transfer. B. are accounted for at fair value for all transfers. C. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading. D. will always result in an impact on net income.
B. are accounted for at fair value for all transfers.
When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment A. by using the equity method. B. by using the fair value method. C. by using the effective interest method. D. by consolidation.
B. by using the fair value method.
Debt investments not held for collection are reported at A. amortized cost. B. fair value. C. the lower of amortized cost or fair value. D. net realizable value.
B. fair value.
All of the following statements regarding accounting for derivatives are correct except that A. they should be recognized in the financial statements as assets and liabilities. B. they should be reported at fair value. C. gains and losses resulting from speculation should be deferred. D. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
C. gains and losses resulting from speculation should be deferred.
Companies account for transfers between investment classifications retroactively, at the end of the accounting period after the change in the business model.
FALSE
Instrument Corp. has the following investments which were held throughout 2015-2016: TRADING: cost: $300,000 fair value 12/31/15: $400,000 fair value12/31/16: $380,000 NON-TRADING: cost: $300,000 fair value 12/31/15: $320,000 fair value12/31/16: $360,000 What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.'s statement of financial position at December 31, 2015? A. $40,000 gain. B. $60,000 gain. C. $20,000 gain. D. $120,000 gain.
C. $20,000 gain. $320,000 - $300,000 = $20,000 gain.
Which of the following is not correct in regard to trading investments? A. They are held with the intention of selling them in a short period of time. B. Unrealized holding gains and losses are reported as part of net income. C. Any discount or premium is not amortized. D. All of these answer choices are correct.
C. Any discount or premium is not amortized.
Which of the following are reported at fair value? A. Debt investments. B. Equity investments. C. Both debt and equity investments. D. None of these answers choices are correct.
C. Both debt and equity investments.
Under IFRS, a company A. Should evaluate every investment for impairment. B. Accounts for an impairment as an unrealized loss, and includes it as a part of other comprehensive income and as a component of other accumulated comprehensive income until realized. C. Calculates the impairment loss on debt investments as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investment's historical effective-interest rate. D. All of these answer choices are correct.
C. Calculates the impairment loss on debt investments as the difference between the carrying amount plus accrued interest and the expected future cash flows discounted at the investment's historical effective-interest rate.
Which of the following is not a financial asset? A. Cash B. Equity investment C. Inventory D. Receivables
C. Inventory
On January 1, 2016, Kam Co. purchases bonds issued by the Central Bank of Midland. Kam purchases debt investments that it plans to manage on a held-for-collection basis (and account for at amortized cost). Kam also manages and evaluates this investment in conjunction with a related liability that is measured at fair value. Kam plans to hold the debt investment until it matures in five years. At December 31, 2016, the amortized cost of this investment is $200,000; its fair value at December 31, 2016, is $226,000. If Kam chooses the fair value option to account for this investment, when must the election be made and at what value will the bond investment be reported on the December 31, 2016 statement of financial position? DATE AMOUNT A. January 1, 2016 $200,000 B. December 31, 2016 $200,000 C. January 1, 2016 $226,000 D. December 31, 2016 $226,000
C. January 1, 2016 $226,000 Fair value option elected at time of purchase; bond investment valued at its fair value.
Bear Co. purchased $500,000 of bonds at par. Bear management has an active trading business model for this investment. At December 31, Bear received annual interest of $20,000, and the fair value of the bonds was $470,400. In Bear Co.'s year-end statement of financial position what amount will be reported for the bond investment and how much total income/loss will be reported on its income statement? A. $500,000 $20,000 B. $470,400 $20,000 C. $470,400 ($9,600) D. $470,400 $49,600
C. Statement of financial position: $470,400 income statement: $(9,600) ($500,000 - $470,400) - $20,000 = ($9,600)
Which of the following is not generally correct about recording a sale of a debt investment before maturity date? A. Accrued interest will be received by the seller even though it is not an interest payment date. B. An entry must be made to amortize a discount to the date of sale. C. The entry to amortize a premium to the date of sale includes a debit to Debt investments. D. A gain on the sale is the excess of the selling price over the book value of the bonds.
C. The entry to amortize a premium to the date of sale includes a debit to Debt investments.
Which of the following statements is true regarding the differences between amortized cost and fair value for debt investments? A. When bonds sold at a discount and are accounted for using amortized cost, interest revenue will be greater than the interest revenue recorded under fair value. B. When bonds sold at a premium and are accounted for using amortized cost, interest revenue will be less than the interest revenue recorded under fair value. C. Under the fair value approach, an unrealized gain or loss is recorded in each year whereas no unrealized gains or losses are recorded under the amortized cost method. D. All of these answer choices are correct.
C. Under the fair value approach, an unrealized gain or loss is recorded in each year whereas no unrealized gains or losses are recorded under the amortized cost method.
Debt investments that meet the business model and contractual cash flow tests are reported at A. net realizable value. B. fair value. C. amortized cost. D. the lower of amortized cost or fair value.
C. amortized cost.
Investments in trading debt investments should be recorded on the date of acquisition at A. face value. B. fair value. C. amortized cost. D. the lower of face value or amortized cost.
C. amortized cost.
An unrealized holding gain or loss on a trading debt investment is the difference between the investment's A. fair value and original cost. B. face value and amortized cost. C. fair value and amortized cost. D. face value and original cost.
C. fair value and amortized cost.
Investments in trading debt investments are generally reported at A. amortized cost. B. face value. C. fair value. D. maturity value.
C. fair value.
The accounting for fair value hedges records the derivative at its A. amortized cost. B. carrying value. C. fair value. D. historical cost.
C. fair value.
A gain on sale of a debt investment is the excess of the selling price over the bonds A. market price. B. fair value. C. face value. D. book value.
D. Book value
Which of the following is correct about the effective-interest method of amortization? A. The effective-interest method applied to debt investments is different from that applied to bonds payable. B. Amortization of a discount decreases from period to period. C. Amortization of a premium decreases from period to period. D. The effective-interest method applies the effective-interest rate to the beginning carrying amount for each interest period.
D. The effective-interest method applies the effective-interest rate to the beginning carrying amount for each interest period.
Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2015, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? A. Understate, overstate, overstate B. Overstate, understate, understate C. Overstate, overstate, overstate D. Understate, understate, understate
D. Understate, understate, understate
If the investor owns 60% of the investee's outstanding ordinary shares, the investor should generally account for this investment under the A. cost method. B. fair value method. C. consolidation equity method. D. consolidation method.
D. consolidation method.
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the A. investor sells the investment. B. investee declares a dividend. C. investee pays a dividend. D. earnings are reported by the investee in its financial statements.
D. earnings are reported by the investee in its financial statements.
Impairments of debt investments are A. based on discounted contractual cash flows. B. recognized as a realized loss if the impairment is judged to be temporary. C. based on fair value for non-trading investments and on negotiated values for held-for-collection investments. D. evaluated at each reporting date for every held-for-collection investment.
D. evaluated at each reporting date for every held-for-collection investment.
Under the fair value option, companies report all gains and losses related to changes in fair value in A. comprehensive income. B. income. C. equity. D. other comprehensive income.
D. other comprehensive income.
Amortized cost is the initial recognition amount of the investment minus cumulative amortization.
FALSE
An impairment loss is the difference between an investment's cost and the expected future cash flows.
FALSE
Royce Company holds a portfolio of debt investments. The debt investments are not held- for-collection but managed to profit from interest rate changes. As a result, it accounts for these investments at fair value. As part of its strategic planning process, completed in the fourth quarter of 2015, Royce management decides to move from its prior strategy—which requires active management—to a held-for-collection strategy for these debt investments. The company will account for this change
Method: prospectively Implementation: 2016
On its December 31, 2015 statement of financial position, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2016 in the composition of Calhoun's portfolio of equity securities held as non-trading securities. The following information pertains to that portfolio: X: cost: $125,000 fair value at 12/31/16: $160,000 Y: cost: $100,000 fair value at 12/31/16: $95,000 Z: cost: $175,000 fair value at 12/31/16: $125,000 TOTAL: cost: $400,000 fair value at 12/31/16: $380,000 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2016 is a. $30,000. b. $20,000. c. $10,000. d. $0.
a. $30,000. $10,000 + $20,000 = $30,000.
Carsen Company purchased $200,000 of 10% bonds of Garrison Co. on January 1, 2016, paying $211,950. The bonds mature January 1, 2026; interest is payable each July 1 and January 1. The discount of $11,950 provides an effective yield of 9%. Carsen's objective is to hold the bonds to collect the contractual cash flows. Carsen Company uses the effective interest method. On July 1, 2016, Carsen Company should decrease its Held-for-Collection Debt Investments account for the Garrison Co. bonds by: a. $462. b. $808. c. $924. d. $1,598.
a. $462. ($200,000 x .05) - ($211,950 x .045) = $462.
On its December 31, 2015 statement of financial position, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2016 in the composition of Calhoun's portfolio of equity securities held as non-trading securities. The following information pertains to that portfolio: X: cost: $125,000 fair value at 12/31/16: $160,000 Y: cost: $100,000 fair value at 12/31/16: $95,000 Z: cost: $175,000 fair value at 12/31/16: $125,000 TOTAL: cost: $400,000 fair value at 12/31/16: $380,000 What amount of unrealized loss on these securities should be included in Calhoun's equity section of the statement of financial position at December 31, 2016? a. $30,000. b. $20,000. c. $10,000. d. $0.
b. $20,000. ($400,000 - $380,000) = $20,000.
Loire Corporation purchased 1,600 ordinary shares of Comma Co. for $52,800. During the year, Comma paid a cash dividend of $13 per share. At year-end, Comma shares were selling for $38 per share. Loire Corporation purchased the shares to meet a non-trading regulatory requirement. What amount of total income will Loire Corporation report in its income statement for the year? a. $-0- b. $20,800 c. $8,000 d. $28,800
b. $20,800 1,600 x $13 = $20,800.
During 2014, Hauke Co. purchased 2,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2015 was $1,950,000. The bonds mature on March 1, 2015, and pay interest on March 1 and September 1. Hauke sells 1,000 bonds on March 1, 2016, for $980,000, after the interest has been received. Hauke uses effective interest amortization (10% effective interest rate). The gain on the sale is a. $0. b. $3,750. c. $5,000. d. $6,250.
b. $3,750. ($1,950,000 × .10 × 2/12) - ($2,000,000 × .09 × 2/12) = $2,500 ($1,950,000 + $2,500) ÷ 2 = $976,250; $980,000 - $976,250 = $3,750.
On October 1, 2016, Menke Co. purchased to hold for collection, 200, $1,000, 9% bonds for $210,000 (an 8% effective interest rate). Interest is paid semiannually on April 1 and October 1 and the bonds mature on October 1, 2017. Menke uses effective interest amortization. Ignoring income taxes, the amount reported in Menke's 2016 income statement from this investment should be a. $4,500. b. $4,200. c. $4,725. d. $4,000.
b. $4,200 ($210,000 × .08 = $4,200.
Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2016, paying $376,100. The bonds mature January 1, 2026; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective- interest method and holds these bonds for collection. For the year ended December 31, 2016, Patton Company should report interest revenue from the Scott Co. bonds of: a. $42,392. b. $41, 409 c. $41,368. d. $40,000.
b. $41, 409 $376,100 × .055 = $20,686 ($376,100 + $686) × .055 = $20,723; $20,686 + $20,723 = $41,409.
Kern Company purchased bonds with a face amount of $400,000. Kern purchased the bonds at 102 and paid brokerage costs of $6,000. The amount to record as the cost of this debt investment is a. $406,000. b. $414,000. c. $408,000. d. $400,000.
b. $414,000. ($400,000 × 1.02) + $6,000 = $414,000.
On August 1, 2016, Renfro Co. purchased to hold for collection, 1,000, $1,000, 9% bonds for $940,000 (a 10% effective interest rate). The bonds, which mature on August 1, 2026, pay interest semiannually on February 1 and August 1. Renfro uses the effective interest method of amortization. The bonds should be reported in the December 31, 2016 statement of financial position at a carrying value of a. $943,333. b. $941,667. c. $940,000. d. $942,000.
b. $941,667. [($940,000 × .10 × 5/12) - ($1,000,000 × .09 × 5/12)] = $1,067. $940,000 + $1,067 = $941,667.
Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2015, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the non-trading Debt Investments account for the Carlin, Inc. bonds on July 1, 2015 and December 31, 2015 by the amortized premiums of $1,062 and $1,098, respectively. At February 1, 2016, Richman Co. sold the Carlin bonds for $309,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2016 was $310,125. Assuming Richman Co. has a portfolio of non-trading debt securities, what should Richman Co. report as a gain (or loss) on the bonds? a. $0. b. ($1,125). c. ($6,561). d. ($8,811).
b. ($1,125). $310,125 - $309,000 = $1,125.
On January 3, 2016, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-for-collection. Assuming that Moss Co. uses the effective- interest method, what is the amount of interest revenue that would be recognized in 2016 related to these bonds? a. $10,000 b. $10,642 c. $9,578 d. $9,540
c. $9,578 ($106,418 x .09) = $9,578.
Sycamore, Inc. purchased €100,000 of 8 percent bonds of Alvarado Industries on January 1, 2015, at a discount, paying €92,278. The bonds mature January 1, 2020, and yield 10 percent; interest is payable each July 1 and January 1. Sycamore has a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms of the financial asset provides specified dates with regard to cash flows that are solely payments of principal and interest. On December 31, 2015, when the market rate of interest is 12%, and the fair value of the bonds is €89,934, Sycamore will record interest revenue of a. €5,396 b. €4,645 c. €4,497 d. €4,614
b. €4,645 (€92,278 x .05) - (€100,000 x .04) = €614 (€92,278 + €614) x .05 = €4,645.
Carsen Company purchased $200,000 of 10% bonds of Garrison Co. on January 1, 2016, paying $211,950. The bonds mature January 1, 2026; interest is payable each July 1 and January 1. The discount of $11,950 provides an effective yield of 9%. Carsen's objective is to hold the bonds to collect the contractual cash flows. Carsen Company uses the effective interest method. For the year ended December 31, 2016, Carsen Company should report interest revenue from the Garrison Co. bonds at: a. $20,000. b. $19,037. c. $19,055. d. $19,076.
c. $19,055. ($200,000 x .05) + [($211,950 - $462) x .045] = $483. $20,000 - ($462 + $483) = $19,055.
Kramer Company's trading investments portfolio which is appropriately included in current assets is as follows: CATLETT CORP.: cost: $250,000 fair value: $200,000 unrealized gain (loss): $(50,000) LYMAN, INC.: cost: $245,000 fair value: $265,000 unrealized gain (loss): $20,000 TOTAL: cost: $295,000 fair value: $465,000 unrealized gain (loss): $(30,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2016 income statement if 2016 is Kramer's first year of operation? a. $0. b. $20,000. c. $30,000. d. $50,000.
c. $30,000. $30,000 (unrealized loss).
On September 1, 2016, Howell Company purchased 600 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $625,000 (an 8% effective interest rate). The bonds, which mature on September 1, 2021, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the effective interest method of amortization and that the bonds are appropriately classified as non-trading, the net carrying value of the bonds should be shown on Howell's December 31, 2016, statement of financial position at a. $600,000. b. $625,000. c. $623,667. d. $622,333.
c. $623,667. ($600,000 × .09 × 4/12) - ($625,000 × .08 × 4/12) = $1,333 $625,000 - $1,333 = $623,667.
Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2015, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the non-trading Debt Investments account for the Ritter, Inc. bonds on July 1, 2015 and December 31, 2015 by the amortized premiums of $1,770 and $1,830, respectively. At April 1, 2016, Landis Co. sold the Ritter bonds for $515,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2016 was $516,875. Assuming Landis Co. has a portfolio of non-trading Debt Investments, what should Landis Co. report as a gain (or loss) on the bonds? a. ($14,685). b. ($10,935). c. ($1,875). d. $0.
c. ($1,875) $516,875 - $515,000 = $1,875.
Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2016, paying $376,100. The bonds mature January 1, 2026; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective- interest method and holds these bonds for collection. On July 1, 2016, Patton Company should increase its Debt Investments account for the Scott Co. bonds by a. $2,392. b. $1,371. c. $1,196. d. $686
d. $686 ($376,100 × .055) - ($400,000 × .05) = $686.
Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2015, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the non-trading Debt Investments account for the Carlin, Inc. bonds on July 1, 2015 and December 31, 2015 by the amortized premiums of $1,062 and $1,098, respectively. At December 31, 2015, the fair value of the Carlin, Inc. bonds was $318,000. What should Richman Co. report as other comprehensive income and as a separate component of equity? a. $0 b. $2,160 c. $5,526 d. $7,686
d. $7,686 $318,000 - ($312,474 - $1,062 - $1,098) = $7,686.
During 2016 Logic Company purchased 4,000 shares of Midi, Inc. for $30 per share. The investment was classified as a trading investment. During the year Logic Company sold 1,000 shares of Midi, Inc. for $35 per share. At December 31, 2016 the market price of Midi, Inc.'s shares was $28 per share. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2016 related to its investment in Midi, Inc. shares? a. ($8,000) b. $5,000 c. ($3,000) d. ($1,000)
d. ($1,000) [($35 - $30) x 1,000] - [($30 - $28) x 3,000] = ($1,000).
Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2015, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the non-trading Debt Investments account for the Ritter, Inc. bonds on July 1, 2015 and December 31, 2015 by the amortized premiums of $1,770 and $1,830, respectively. At December 31, 2015, the fair value of the Ritter, Inc. bonds was $530,000. What should Landis Co. report as other comprehensive income and as a separate component of equity? a. $12,810. b. $9,210. c. $3,600. d. No entry should be made.
d. No entry should be made.
