Intermediate Accounting II - Test 2 (Chapter 16, 17 & 18)

Which of the following statements is incorrect? A) If the investor has significant influence over the investee, the investor must use the equity method of accounting for the investment. B) If the investor has control over the investee, financial statements for the two companies must be consolidated. C) If the investor has no significant influence over the investee, and can readily determine the fair value of the investment, the investor should report the investment at fair value. D) If the investor has no significant influence over the investee company, and the investment has no readily determinable fair value, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income

If the investor has no significant influence over the investee company, and the investment has no readily determinable fair value, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income. Answer: D

Zeng Jewelers purchased 6,000,000 of the outstanding 20,000,000 shares of Angel & Associates. Zeng has significant influence over Angel, so Zeng will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $7,800,000. The difference in fair value is a result of the higher fair value of equipment than its book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, how will Zeng record the difference in net assets for this investment on 12/31? A) The higher fair value will allow Zeng to increase the Investment account and Income from Investment by $20,000 each year. B) The additional depreciation expense will decrease the Income from Investment as well as the Investment account by $6,000. C) The higher fair value will allow Zeng to increase the Investment account and Income from Investment by $6,000 each year. D) The additional depreciation expense will decrease the Income from Investment as well as the Investment account by $20,000.

The additional depreciation expense will decrease the Income from Investment as well as the Investment account by $6,000.

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $700,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. What is the amount of accrued interest paid at the time of purchase? A) $3,500 B) $14,000 C) $4,666.67 D) $7,000

A) $3,500

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $300,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. What is the total amount paid by Ellucian for the City of Westminster bonds? A) $301,500 B) $300,000 C) $298,500 D) $303,000

A) $301,500

HdG, Inc. accepts a $200,000, 8% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate on the date of issuance of this note was 8%. HdG has a fiscal year end of December 31. How much Interest Revenue will HdG record on March 31, 2020, the first annual installment payment date? A) $4,000 B) $16,000 C) $1,333 D) $8,000

A) $4,000

Bateman Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 10-year, $300,000 bonds pay interest of 3% with semiannual payments every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the semi-annual interest payment received by Bateman for these bonds? A) $4,500 B) $9,000 C) $3,750 D) $5,250

A) $4,500

S & C Inc.'s income tax payable is $290,000 and its tax rate is 30%. Assuming no book-tax differences, what is S & C's net income? (Round your answer to the nearest whole dollar.) A) $676,667 B) $87,000 C) $377,000 D) $966,667

A) $676,667

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $800,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What is the present value of this note at inception A) $741,119 B) $446,716 C) $800,000 D) $1,035,523

A) $741,119

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $600,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. Ellucian's fiscal year ends on December 31. What is Ellucian's net interest revenue for 2018? A) $9,000 B) $12,000 C) $3,000 D) $6,000

A) $9,000

On 1/1/19, Lantana Loan Co., a calendar-year company, accepts a 6%, $300,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 10%. In exchange for the note, Diamond agrees to make semi-annual interest payments and repay the full $300,000 at maturity. What is the amount of discount amortized and the amount of Interest Revenue recorded on 6/30/19, the date of the first interest payment? (Round any intermediate calculations and your final answer to the nearest dollar.) A) Discount Amortized, $4,477; Interest Revenue, $13,477 B) Discount Amortized, $4,477; Interest Revenue, $9,000 C) Discount Amortized, $9,000; Interest Revenue, $13,477 D) Discount Amortized, $9,000; Interest Revenue, $9,000

A) Discount Amortized, $4,477; Interest Revenue, $13,477

All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except ________.

A) How long does management intend to hold the investment?

Keller Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. At the time of the acquisition, the book value of Angel's net assets equals their fair market value. Angel declared Net Income of $2,250,000 for the year. How will Angel's Net Income impact Keller's books? A) Keller will increase the Investment account and Income from the Investment for $675,000. B) Keller will increase Cash and increase Income from Investment for $675,000. C) Keller will increase Cash and decrease the Investment Account for $675,000. D) Keller will increase the Investment Account and increase Cash for $675,000.

A) Keller will increase the Investment account and Income from the Investment for $675,000.

Packer Publications purchased $160,000 of the outstanding 400,000 shares of Bear Homes. How should Packer account for this investment? A) Packer should account for this investment using the equity method, as Packer has significant influence over the investee. B) Packer has control over Bear, so it must consolidate all financial statements. C) Packer should classify this investment as an equity investment with no determinable fair value. D) Packer should classify this investment as an equity investment with no significant influence.

A) Packer should account for this investment using the equity method, as Packer has significant influence over the investee.

Brightney purchased common shares of Company A and B for $7,000 and $12,000, respectively on 12/15. Brightney intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Brightney does not have significant influence over the investees. Assuming an existing $1,100 debit balance in Fair Value Adjustment - Equity Investments, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $3,900, reported as part of Net Income B) Unrealized Gain of $5,000, reported as part of Net Income C) Unrealized Gain of $3,900, reported as part of Other Comprehensive Income D) Unrealized Gain of $5,000, reported as part of Other Comprehensive Income

A) Unrealized Gain of $3,900, reported as part of Net Income

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $203,000 and the shares are currently trading for $193,000 at year-end. What is the amount of gain or loss reported at year-end for this investment and where is this gain or loss reported? A) Unrealized Loss of $10,000, reported as part of Net Income. B) Unrealized Loss of $10,000, reported as part of Other Comprehensive Income. C) Unrealized Gain of $10,000, reported as part of Net Income. D) Unrealized Gain of $10,000, reported as part of Other Comprehensive Income.

A) Unrealized Loss of $10,000, reported as part of Net Income.

As of 12/31/20, XYZ Inc. had available-for-sale debt investments with a fair value of $509,000, an amortized cost of $530,000, and a credit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,200. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported? A) Unrealized Loss of $13,800 reported as part of Other Comprehensive Income. B) Unrealized Loss of $28,200, reported as part of Net Income. C) Unrealized Loss of $28,200, reported as part of Other Comprehensive Income. D) Unrealized Loss of $13,800, reported as part of Net Income.

A) Unrealized Loss of $13,800 reported as part of Other Comprehensive Income.

Can impairment losses recorded on held-to-maturity debt investments be reversed at a later date? A) Yes, prior unrealized losses can be reversed, but the reversal is limited to the balance in the account, Allowance for Credit Loss: Held-to-Maturity Debt Investment. B) No, impairment losses cannot be reversed. C) Yes, but only non-credit losses recorded in Other Comprehensive Income. D) Yes, but only credit losses recorded in Other Comprehensive Income.

A) Yes, prior unrealized losses can be reversed, but the reversal is limited to the balance in the account, Allowance for Credit Loss: Held-to-Maturity Debt Investment

Pink Partners holds equity investment with a carrying value of $39,000. The investment has no readily determinable value. The current fair value of the investment is $24,000. There is objective evidence of an impairment. Should an impairment loss be recorded? How much of this loss should be classified in net income and how much should be classified in other comprehensive income? A) Yes, the $15,000 impairment loss should be reported as part of net income. B) No, an impairment loss should not be recorded because this is an equity investment. C) Yes, the $15,000 impairment loss should be split evenly between net income and other comprehensive income. D) Yes, there is an impairment loss of $15,000 which should be reported as Other Comprehensive Income.

A) Yes, the $15,000 impairment loss should be reported as part of net income.

Grey Co. holds a held-to-maturity debt investment at an amortized cost of $50,000. At 12/31/18, the fair value of the investment is $49,000 and the present value of the future cash flows is $48,000. Has an impairment loss occurred? If so, how much is the impairment loss to be recorded? A) Yes, the present value of future cash flows are less than the amortized cost, so an impairment loss for the difference must be recorded, $2,000. B) Yes, the present value of future cash flows are less than the amortized cost, however, the loss cannot be calculated without knowing if this difference is temporary or other-than-temporary. C) No, the fair value of the investment is less than its amortized cost, so an impairment has not occurred. D) There is not enough information to determine if an impairment loss has occurred.

A) Yes, the present value of future cash flows are less than the amortized cost, so an impairment loss for the difference must be recorded, $2,000.

Olympic Corporation purchased a debt security for $500,000 on July 1, 2020 and properly classified it as a trading security. As of the last day of 2020, the fair value of the security was $494,000. The proper journal entry on this date includes ________. A) a credit to Fair Value Adjustment - Trading Debt Investments for $6,000 B) a debit to Fair Value Adjustment - Trading Debt Investments for $494,000 C) a debit to Unrealized Loss - Net Income for $494,000 D) a credit to Unrealized Loss - Net Income for $6,000

A) a credit to Fair Value Adjustment - Trading Debt Investments for $6,000

Investments in debt securities that cannot be readily classified in two reporting categories are classified as ________. A) available-for-sale securities B) trading securities C) held-to-maturity securities D) minority securities

A) available-for-sale securities

The amount of income a company reports in its financial statements is known as ________. A) book income B) net operable income C) taxable income D) revenue income

A) book income

What type of account is Discount on Notes Receivable? A) contra-Asset account B) contra-revenue account C) liability account D) expense account

A) contra-Asset account

Zenith Corporation reports its investments in debt securities at cost. This method of accounting is consistent with the qualitative characteristic of ________ from the conceptual framework. A) faithful representation B) relevance C) both faithful representation and relevance D) neither representation nor relevance

A) faithful representation

Which of the following is not an impairment indicator for investment securities? A) fluctuating stock prices B) deterioration of earnings C) decline in credit rating D) adverse changes in the economy

A) fluctuating stock prices

Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments? A) held-to-maturity B) securities accounted for under the equity method C) trading D) available-for-sale

A) held-to-maturity

Investments in equity securities whereby the investor does not have significant influence over the investees require ________ percentage of ownership in the investees. A) less than 20% B) 20% to 50% C) 51% to 74% D) 75% or greater

A) less than 20%

Altima Corporation actively manages a portfolio of publicly traded stock funded with excess cash. The purpose of the portfolio is to generate gains on sales and the portfolio is reported at fair value. This method of accounting is consistent with the qualitative characteristic of ________ from the conceptual framework. A) relevance B) faithful representation C) both faithful representation and relevance D) neither representation nor relevance

A) relevance

Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid? A) trading security B) held-to-maturity security C) available-for-sale security D) Not enough information to classify this security

A) trading security

Which of the following is a debt security that a company intends to hold only for the short term? A) trading security B) available-for-sale security C) held-to-maturity security D) Not enough information to classify this security.

A) trading security

Pepper Company owns 40% of the common stock and exercises significant influence over Salt Company. Pepper Company ________. A) would decrease its investment account when Salt Company declares dividends B) would record goodwill as investment income each year C) would record dividends received from Salt Company as investment revenue D) would file a consolidated financial statement with Salt Company

A) would decrease its investment account when Salt Company declares dividends

Bonds are priced in the market so that their ________ is the same as the market rate of interest. A) yield B) stated rate C) par value D) discount

A) yield

HdG, Inc. accepts a $500,000, 5% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate at the date of issuance of this note was 5%. What is the annual payment that HdG will receive for this note? A) $25,000 B) $115,487 C) $6,250 D) $109,988

B) $115,487

On January 7, 2018, Webb Industries purchased 1,000 shares of Class A common stock in Bloomberg Corporation for $50,000. Webb does not have significant influence or control over Bloomberg. Although Class A shares are not actively traded, Class B shares are traded and are nearly identical aside from being publicly traded. At the end of 2018, Class B shares are trading for $59 per share. Webb makes the appropriate election to measure the investment based on observable price changes for similar securities. On December 12, 2019, Webb Industries sells the Bloomberg stock for $63,000. What is the gain that is reported on the sale of Bloomberg Corporation in 2019? A) $0 B) $13,000 C) $4,000 D) $9,000

B) $13,000

Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/19. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/19 was 4%. How much Interest Revenue will Trader Trust record on this note in 2019? A) $0, this is a non-interest bearing note receivable. B) $13,511 C) $20,000 D) $13,891

B) $13,511

Betta Group's net income is $400,000 and its tax rate is 25%. Assuming no book-tax differences, what is Betta's taxes payable? (Round your answer to the nearest whole dollar.) A) $100,000 B) $133,333 C) $1,600,000 D) $533,333

B) $133,333

TLR Productions has book income of $450,000, and a tax rate of 35%. Assuming there are no book-tax differences, what is TLR's income tax expense? A) $144,000 B) $157,500 C) $189,000 D) $292,500

B) $157,500

Lyon Group's income before taxes is $420,000 and its tax rate is 40%. Lyon included $30,000 in fines and penalties in the $420,000. There are no other book-tax differences. What is income tax payable for Lyon Group? A) $168,000 B) $180,000 C) $156,000 D) $12,000

B) $180,000

On July 1, Year 1, Fairfield Company purchased $5 million of Hampton Corporation's 6% bonds for $3,932,522. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 25 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1? (Round all calculations to the nearest cent, and your final answer to the nearest dollar.) A) $4,232,522 B) $3,939,823 C) $3,947,124 D) $3,925,221

B) $3,939,823

On January 7, 2018, Webb Industries purchased 1,000 shares of Class A common stock in Bloomberg Corporation for $50,000. Webb does not have significant influence or control over Bloomberg. Although Class A shares are not actively traded, Class B shares are traded and are nearly identical aside from being publicly traded. At the end of 2018, Class B shares are trading for $54 per share. If Webb makes the appropriate election to measure the investment based on observable price changes for similar securities, what Fair Value Adjustment should be made at the end of 2018? A) $0 B) $4,000 debit C) $4,000 credit D) $8,000 credit

B) $4,000 debit

On January 3, 2019, Sheppard Corporation purchased 25% of Meredith Corporation's common stock for $64,000. The net asset's book value is equal to the fair market value. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $71,000; in 2020, it increased again to $76,000. What would be the balance in the investment account as of December 31, 2020? A) $64,000 B) $65,000 C) $71,000 D) $76,000

B) $65,000

On January 3, 2019, Sheppard Corporation purchased 25% of Meredith Corporation's common stock for $65,000. The net asset's book value is equal to the fair market value. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $72,000; in 2020, it increased again to $80,000. What would be the balance in the investment account as of December 31, 2019? A) $65,000 B) $69,500 C) $72,000 D) $80,000

B) $69,500

On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $540,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $493,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $528,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $638,000. What is the gain that is reported on the sale of Bloomberg Corporation in 2019? A) $0 B) $98,000 C) $47,000 D) $35,000

B) $98,000

When must a company generally elect the fair value option for reporting financial assets? A) A company can elect the fair value option at any point in the asset's life, but cannot then revert back to accounting for those assets at cost. B) A company must typically elect the fair value option at acquisition. C) A company can typically choose the cost or fair value for each asset each year at the balance sheet date. D) Companies may not account for assets at fair value. GAAP requires these be recorded at cost.

B) A company must typically elect the fair value option at acquisition.

Sheehan & Co. purchased 35% of the outstanding shares of Jules & Associates. Jules then declared dividends at year end. How will these dividends effect the investment account for Sheehan? A) Dividends received will increase the investment account. B) Dividends received will reduce the investment account. C) Dividends received will have no impact on the investment account; it will increase Cash and Dividend Revenue. D) Dividends received will have no impact on the investment account; it will increase Realized Gain - Net Income.

B) Dividends received will reduce the investment account.

Which of the following statements regarding available-for-sale debt securities is true? A) Fair value adjustments are treated as adjustments to net income. B) Fair value adjustments are treated as adjustments to other comprehensive income. C) Available-for-sale securities are valued on the balance sheet at historical cost. D) Interest revenue and fair value adjustments are netted to determine the effect on net income.

B) Fair value adjustments are treated as adjustments to other comprehensive income.

Which of the following statements best describes the effective tax rate? A) It is the legally imposed rate in a given taxing jurisdiction. B) It can be calculated by dividing income tax expense by book income before taxes. C) It changes annually based on provisions from Congress. D) It is calculated as book income divided by taxable income.

B) It can be calculated by dividing income tax expense by book income before taxes.

________ differences between book income and taxable income result in an effective tax rate that differs from the statutory tax rate. A) Temporary B) Permanent C) Short-term D) Long-term

B) Permanent

Media Corporation incurred $25,000 in expenses associated with tax-exempt income this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income less than taxable income. C) Permanent difference; book income greater than taxable income. D) Temporary difference; book income greater than taxable income.

B) Permanent difference; book income less than taxable income.

Cassa & Associates purchased the bonds of JayBird. These bonds pay 6% interest semi-annually. The effective rate of interest at the date of investment was 3%. Did Cassa & Associates purchase these bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.

B) These bonds were purchased at a premium because the stated rate exceeds the market rate

Skywalker Limited purchased shares of Jedi Jewelers during 2018 for $124,000. Skywalker elected the fair value option for accounting for this investment. At year end 2018, 2019, and 2020, this investment had a fair value of $120,000, $134,000, and $137,000, respectively. What is the amount of unrealized gain or loss reported on this investment at year-end 2020? A) Unrealized Gain of $17,000 B) Unrealized Gain of $3,000 C) Unrealized Loss of $10,000 D) Unrealized Gain of $14,000

B) Unrealized Gain of $3,000

L & J purchased common shares of Company A and B for $10,000 and $9,000, respectively on 12/15. L & J intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. L & J does not have significant influence over the investees. Assuming an existing $1,100 credit balance in Fair Value Adjustment - Equity Investments, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $1,100, reported as part of Net Income B) Unrealized Gain of $6,100, reported as part of Net Income C) Unrealized Gain of $1,100, reported as part of Other Comprehensive Income D) Unrealized Gain of $6,100, reported as part of Other Comprehensive Income

B) Unrealized Gain of $6,100, reported as part of Net Income

Under the equity method, cash dividends received by the investor from the investee should be treated as ________. A) an adjustment to other comprehensive income B) a reduction in the investment account C) an increase in the investment account D) dividend income

B) a reduction in the investment account

Which of the following must be disclosed for available-for-sale securities? A) the name of the investee and the percentage ownership B) amortized cost basis C) market price D) difference between the carrying value of the investment and the amount of underlying equity in net assets

B) amortized cost basis

Where are changes in fair value for trading debt securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet

B) as income or loss from peripheral activities on the income statement

Which of the following would not be disclosed for available-for-sale securities? A) aggregate fair value B) date of acquisition C) amortized cost basis D) any impairment loss and where reported

B) date of acquisition

Which of the following must be disclosed for held-to-maturity securities? A) the name of the investee and the percentage ownership B) net carrying amount C) total gains and losses accumulated in other comprehensive income D) difference between the carrying value of the investment and the amount of underlying equity in net assets

B) net carrying amount

The amount of income that a company reports on its tax return is known as ________. A) refundable income B) taxable income C) deductible income D) net income

B) taxable income

On July 1, Year 1, Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,792,146 plus accrued interest to yield 8%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 5, the bonds had a fair value of $1,810,000. On March 1, Year 6, Walters sold the bond for $1,830,000. At what amount should Walters report the bond in its December 31, Year 5 balance sheet if it is classified as an available-for-sale security? A) $1,792,146 B) $1,830,000 C) $1,810,000 D) $2,000,000

C) $1,810,000

Trader Trust accepts a $500,000 non-interest bearing 20-year note from Coffee Co. in exchange for Cash on 1/1/19. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/19 was 4%. What is the carrying value of this note on the balance sheet on 12/31/19? A) $500,000 B) $228,193 C) $237,321 D) $262,679

C) $237,321

On January 1 of the current year, Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock. Beta owns 10% of Gamma Company. Gamma reported net income of $66,000 for December 31 of the current year. The fair value of the Gamma stock on that date was $27. What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31? A) $204,000 B) $266,000 C) $270,000 D) $336,000

C) $270,000

Crush Enterprises purchased 200,000 of the 400,000 outstanding shares of Carly Casualties for $4,400,000 on 1/1/19. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,200,000. What is the balance in the Investment in Carly account at year end? A) $4,937,500 B) $4,975,000 C) $4,912,500 D) $4,962,500

C) $4,912,500

On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $520,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $470,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $507,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $621,000. What is the amount of the fair value adjustment on December 31, 2018?

C) $50,000

TNT Corporation's income tax payable is $230,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's income before taxes? (Round your answer to the nearest whole dollar.) A) $69,000 B) $230,000 C) $766,667 D) $328,571

C) $766,667

Which of the following is(are) the primary effect(s) of amortizing a discount on notes receivable? A) It increases the interest revenue so that the corporation's effective rate of return is brought up to the higher market rate. B) It reduces the discount and increases the carrying value of the note receivable until the carrying value is equal to the face value of the note. C) Both A and B are the primary effects of amortizing a discount. D) None of the above are accurate.

C) Both A and B are the primary effects of amortizing a discount.

Caesar Corporation reports municipal interest income on their financial statements. What (if any) book-tax difference will result? A) Temporary difference; book income greater than taxable income. B) Temporary difference; taxable income greater than book income. C) Permanent difference; book income greater than taxable income. D) No difference; municipal interest is taxable income.

C) Permanent difference; book income greater than taxable income

Olympics Inc. recorded a dividends received deduction on their tax return this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income less than taxable income. C) Permanent difference; book income greater than taxable income. D) Temporary difference; book income greater than taxable income

C) Permanent difference; book income greater than taxable income.

Dante Inc. reported fines and penalties on their income statement this year. What (if any) book-tax difference will result? A) Temporary difference; book income less than taxable income. B) Permanent difference; book income greater than taxable income. C) Permanent difference; book income less than taxable income. D) No difference; fines and penalties are tax deductible.

C) Permanent difference; book income less than taxable income.

Which of the following statements is incorrect in regard to the equity method of accounting for investments? The fair value option approach is not used. A) The investment account is increased by the percentage of the investee's net income. B) The investment account is decreased by the percentage of the investee's dividends declared. C) The investment account is adjusted to fair value at the end of the reporting period. D) The investment account is decreased by the percentage of the investee's net loss.

C) The investment account is adjusted to fair value at the end of the reporting period.

When should a company use the equity method to account for an investment in another company's common stock? A) The investor intends to hold the common stock for an indefinite period. B) The investor has voting control over the investee. C) The investor exerts significant influence over the investee. D) The investor exerts managerial control over the investee.

C) The investor exerts significant influence over the investee.

If a note's stated interest rate is equal to the prevailing market rate of interest, which of the following is true? A) The note's face value is less than the note's present value. B) The note's face value is more than the note's present value. C) The note's face value and present value are equal. D) There is not enough information provided to make this determination.

C) The note's face value and present value are equal.

Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 2%. The effective rate of interest for similar bonds on the date of investment was 6%. Did Goo Goo purchase the bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.

C) These bonds were purchased at a discount because the market rate exceeds the stated rate.

If a company has elected the fair value option, where are gains and losses resulting from adjusting these accounts to fair value reported? A) Unrealized Gains are reported as part of Other Comprehensive Income while Unrealized losses are reported as part of Net Income. B) Unrealized Gains are reported as part of Net Income, while Unrealized Losses are reported as part of Other Comprehensive Income. C) Unrealized Gains and Losses are both reported as part of Net Income. D) Unrealized Gains and Losses are both reported as part of Other Comprehensive Income.

C) Unrealized Gains and Losses are both reported as part of Net Income.

As of 12/31/20, XYZ Inc. had available-for-sale debt investments with a fair value of $505,000, an amortized cost of $542,000, and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,200. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported? A) Unrealized Loss of $37,000, reported as part of Other Comprehensive Income. B) Unrealized Loss of $44,200, reported as part of Net Income. C) Unrealized Loss of $44,200, reported as part of Other Comprehensive Income. D) Unrealized Loss of $37,000, reported as part of Net Income.

C) Unrealized Loss of $44,200, reported as part of Other Comprehensive Income.

Where are changes in fair value for available for sale securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet

C) as a component of accumulated other comprehensive income on the balance sheet

When a note receivable is issued at a discount, ________. A) the face value of the note equals the proceeds B) the carrying value of the note decreases over the life of the note receivable C) the market rate of interest exceeds the stated rate D) the amount of discount amortized decreases each year over the life of the note

C) the market rate of interest exceeds the stated rate

Cox Corporation invested in the bonds of Latif Industries on January 1, 2018. These 10 year, $100,000 bonds pay interest of 6% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds? A) $100,000 B) $94,000 C) $104,000 D) $116,351

D) $116,351

Kelemen Asset Management invested in the bonds of DEF Co. on 1/1/19. Kelemen intends to hold the bonds until maturity. These 5-year bonds had a face value of $500,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $478,674. How much interest revenue will Kelemen record on 6/30/19? A) $11,967 B) $12,500 C) $25,000 D) $14,360

D) $14,360

On 1/1/19, Lantana Loan Co., a calendar-year company, accepts a 4%, $200,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 6%. In exchange for the note, Diamond agrees to make semi-annual interest payments and repay the full $200,000 at maturity. How much cash will Diamond receive in exchange for this note? A) $200,000 B) $196,000 C) $189,308 D) $189,166

D) $189,166

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $204,000 and the shares are currently trading for $190,000 at year-end. What is the carrying value of this investment on the balance sheet of Ewok? A) $204,000 B) $14,000 C) $394,000 D) $190,000

D) $190,000

Trader Trust accepts a $600,000 non-interest bearing 20-year note from Coffee Co. in exchange for cash on 1/1/19. Coffee Co. promises to repay $600,000 at maturity. The market rate on 1/1/19 was 4%. How much cash will Trader loan Coffee in exchange for this note? A) $600,000 B) $24,000 C) $277,193 D) $273,832

D) $273,832

Eagle Exporters purchased 80,000 of the 200,000 outstanding shares of Giant Distributors for $3,000,000. Eagle has significant influence over Giant and will account for this investment using the equity method. During the year, Giant declared dividends of $100,000 and reported Net Income of $780,000. What is the balance in the Investment in Giant account at year end? A) $2,648,000 B) $2,728,000 C) $3,352,000 D) $3,272,000

D) $3,272,000

Purrfect Pet Industries' income before taxes is $810,000 and its tax rate is 50%. Purrfect Pet included $50,000 of fully deductible inter-corporate dividends received in the $810,000. There are no other book-tax differences. What is the income tax payable for Purrfect Pet? A) $405,000 B) $430,000 C) $25,000 D) $380,000

D) $380,000

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $750,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What will be the interest revenue recorded on June 30, Year 1? A) $37,500 B) $45,000 C) $75,000 D) $41,688

D) $41,688

HdG, Inc. accepts a $800,000, 7% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate at the date of issuance of this note was 7%. How much Interest Revenue will HdG record on December 31, 2019, the end of its fiscal year? A) HdG will not record Interest Revenue until it receives the first installment payment on this note on March 31, 2020. B) $28,000 C) $56,000 D) $42,000

D) $42,000

Price Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 60 year, $600000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds? A) $600,000 B) $582,000 C) $624,000 D) $463,934

D) $463,934

TNT Corporation's income tax payable is $240,000 and its tax rate is 30%. Assuming no book-tax differences, what is TNT's net income? (Round your answer to the nearest whole dollar.) A) $72,000 B) $240,000 C) $800,000 D) $560,000

D) $560,000

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $100,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $114,720 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method. A) $9,178 B) $8,000 C) $6,000 D) $6,883

D) $6,883

On January 3, 2019, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $74,000; in 2020, it increased again to $76,000. What will be the balance in the investment account at the end of December 31, 2019? A) $62,000 B) $92,000 C) $76,000 D) $74,000

D) $74,000

Bosworth Corporation accepted a 5-year note receivable from Steelman Company on January 1, Year 1. The maturity value of the note is $800,000. The note has a stated interest rate of 10%. However, the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. What will be the note balance at December 31, Year 1? A) $741,119 B) $745,586 C) $800,000 D) $750,321

D) $750,321

On January 3, 2019, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $73,000; in 2020, it increased again to $79,000. What will be the carrying value of the investment at the end of December 31, 2020? A) $62,000 B) $73,000 C) $135,000 D) $79,000

D) $79,000

Which of the following statements regarding trading debt securities is false? A) If a trading debt security is purchased at a premium, the premium must be amortized on a periodic basis. B) Fair value adjustments are treated as adjustments to net income. C) If the fair value of trading debt securities is less than the amortized cost, the fair value adjustment account will have a credit balance. D) Fair value adjustments are treated as adjustments to other comprehensive income.

D) Fair value adjustments are treated as adjustments to other comprehensive income.

Skywalker Limited purchased an equity investment in Jedi Jewelers during 2018 for $131,000. Skywalker has significant influence over Jedi. Skywalker elected the fair value option for accounting for this investment. At year-end 2018, 2019, and 2020, this investment had a fair value of $120,000, $130,000, and $138,000, respectively. How will this investment be reported on the Balance Sheet at year-end, 2020? A) Investment in Jedi - $138,000 B) Investment in Jedi - $130,000, plus Fair Value Adjustment - Fair Value Option - $7,000 C) Investment in Jedi - $131,000 D) Investment in Jedi - $131,000, plus Fair Value Adjustment - Fair Value Option - $7,000

D) Investment in Jedi - $131,000, plus Fair Value Adjustment - Fair Value Option - $7,000

JayBird Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. At the time of the acquisition, the book value of Angel's net assets equals their fair market value. Angel declared dividends of $276,000 during the year. How will JayBird record the last transaction? A) JayBird will increase the investment account by $82,800. B) JayBird will increase Dividend Revenue by $82,800. C) JayBird will increase Dividend Revenue by $276,000. D) JayBird will decrease the investment account by $82,800

D) JayBird will decrease the investment account by $82,800.

PM Distributors began Year 2 with Equity Investments of $8,100 (which consisted of a single investment) as well as a debit balance of $1,000 in the Fair Value Adjustment - Equity Investments account. PM does not have significant influence over the investee, and the investment has a readily determinable fair value. This trading security was sold for $9,100 during Year 2. How much was the gain or loss for the sale of this investments and how is it recorded? A) No gain or loss reported, as the investment was sold for the adjusted fair value B) Unrealized Gain of $1,000, reported as part of Other Comprehensive Income C) Realized Loss of $1,000, reported as part of Net Income D) Realized Gain of $1,000, reported as part of Net Income

D) Realized Gain of $1,000, reported as part of Net Income

If a company elects the fair value option to account for equity securities, what will be recorded differently when there is no significant influence? A) Unrealized Gains and Losses will now be reported as part of Net Income instead of Other Comprehensive Income. B) Dividends received from the investee will now be credited to Dividend Revenue instead of as a reduction to the investment account. C) A proportionate share of net income will no longer need to be recorded for these equity securities. D) There is no difference in accounting for equity securities with no significant influence as these are already accounted for using the fair value method.

D) There is no difference in accounting for equity securities with no significant influence as these are already accounted for using the fair value method.

Rhoads purchased common shares of Company A and B for $10,000 and $10,000, respectively on 12/15. Rhoads intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $18,000, respectively. Assuming Rhoads has no significant influence over the investee companies, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Loss of $1,000, Unrealized Gain of $8,000, both reported as part of Net Income B) Unrealized Gain of $7,000, reported as part of Other Comprehensive Income C) Unrealized Loss of $1,000, Unrealized Gain of $8,000, both reported as part of Other Comprehensive Income D) Unrealized Gain of $7,000, reported as part of Net Income

D) Unrealized Gain of $7,000, reported as part of Net Income

Which of the following would not be disclosed for trading securities? A) aggregate fair value B) gross realized gains and losses C) amortized cost basis D) any impairment loss and where reported

D) any impairment loss and where reported

Jules & Associates purchased the bonds of Jay Bird Retailers during the year. Jules intends to hold onto these bonds to collect all principal and interest, but due to financial constraints, will most likely have to sell this investment on the open market within the next year. How should Jules classify this investment? A) held-to-maturity debt investment B) available-for-sale equity investment C) trading debt investment D) available-for-sale debt investment

D) available-for-sale debt investment

Which of the following is not a consideration for a company in determining whether to disclose more detail by security type? A) geographic concentration B) economic characteristic C) business sector D) total return on investment to date

D) total return on investment to date