Intermediate Chapter 17
A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.
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Both GAAP and IFRS classify debt investments as trading, available-for-sale, and held-tomaturity.
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Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.
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If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income.
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The Fair Value Adjustment account has a normal credit balance.
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A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.
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A reclassification adjustment is necessary when a company reports realized gains/losses as part of net income but also shows unrealized gains/losses as part of other comprehensive income.
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All cash dividends received by an investor from the investee decrease the investment's carrying value under the equity method.
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Changes in the fair value of a company's available-for-sale debt instruments are included as part of earnings in any given period.
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Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.
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Significant influence over an investee may be indicated by material intercompany transactions and interchange of managerial personnel.
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On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the straight-line method, what is the amount of premium amortization that would be recognized in 2019 related to these bonds?
a. $3,209 ($532,090 - $500,000) ÷ 10 = $3,209.
On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/18 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2018 is
a. $40,000. $10,000 + $30,000 = $40,000.
Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. Harrison should report investment revenue for 2018 of
a. $480,000. $1,200,000 × (20,000 ÷ 50,000) = $480,000.
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 Equity Method
a. Fair Value Method-No Effect Equity Method-Decrease
An option to convert a convertible bond into shares of common stock is a(n)
a. embedded derivative.
The fair value option allows a company to
a. report most financial instruments at fair value at any point of time.
Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2018, Penn earns $450,000 and pays cash dividends of $150,000. 104. If the beginning balance in the investment account was $900,000, the balance at December 31, 2018 should be
b. $1,020,000. $900,000 + ($450,000 × .4) - ($150,000 × .4) = $1,020,000.
On October 1, 2018, Menke Company purchased to hold to maturity, 500, $1,000, 9% bonds for $520,000. An additional $15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2022. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2018 income statement from this investment should be
b. $10,050. ($500,000 × .09 × 3/12) - ($20,000 × 3/50) = $10,050.
Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2018. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. How much investment income should Dexter report in 2018?
b. $216,000. $720,000 × .3 = $216,000.
On October 1, 2018, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2027, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2018 balance sheet at a carrying value of
b. $3,903,000. $3,900,000 + ($100,000 × 3/100) = $3,903,000.
On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/18 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 89. What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2018?
b. $30,000. ($405,000 - $375,000) = $30,000.
On January 2, 2018 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2018 Jobs, Inc. reported net income of $1,260,000 and distributed dividends of $540,000. The ending balance in the Investment in Pod Company account at December 31, 2018 was $960,000 after applying the equity method during 2018. What was the purchase price Pod Company paid for its investment in Jobs, Inc?
b. $780,000 X + [($1,260,000 - $540,000) × .25] = $960,000 X + $180,000 = $960,000 X = $780,000.
Match the approach and location where gains and losses from non-trading securities are reported: Location where gains/ Approach losses reported_
b. Approach- IFRS Location where gains/losses reported- Equity
At December 31, 2018, Atlanta Company has an equity portfolio valued at $160,000. Its cost was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31, 2018?
b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 ($160,000 - $132,000) - $8,000 = $20,000 unrealized gain.
Rushia Company has a non-trading investment in the 10%, 10-year bonds of Pear Company. The investment's carrying value is $3,200,000 at December 31, 2017. On January 9, 2018, Rushia learns that Pear Company has lost its primary manufacturing facility in an uninsured fire. As a result, Rushia determines that the investment is impaired and now has a fair value of $2,300,000. In June, 2019, Pear Company has succeeded in rebuilding its manufacturing facility, and its prospects have improved as a result. If Rushia Company determines that the fair value of the investment is now $2,900,000 and is using IFRS for its external financial reporting, which of the following is true?
b. Rushia may record a recovery of $600,000.
Use of the effective-interest method in amortizing bond premiums and discounts results in
b. a varying amount being recorded as interest income from period to period.
When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment
b. by using the fair value method.
A correct valuation for debt securities is
b. held-to-maturity at amortized cost.
When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be
b. its fair value at the date of the transfer.
Gains or losses on cash flow hedges are
b. recorded in equity, as part of other comprehensive income.
Brown Corporation earns $720,000 and pays cash dividends of $240,000 during 2018. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. 101. What amount should Dexter show in the investment account at December 31, 2018 if the beginning of the year balance in the account was $960,000?
c. $1,104,000. $960,000 + ($720,000 × .3) - ($240,000 × .3) = $1,104,000.
Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. Before income taxes, what amount should Rich include in its 2018 income statement as a result of the investment?
c. $120,000. $400,000 × 30% = $120,000.
Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2017. Sherman Corporation had 100,000 shares of common stock outstanding during 2018, paid cash dividends of $150,000 during 2018, and reported net income of $500,000 for 2018. Ziegler Corporation should report revenue from investment for 2018 in the amount of
c. $125,000. $500,000 × (25,000 ÷ 100,000) = $125,000.
Myers Company acquired a 60% interest in Gannon Corporation on December 31, 2017 for $1,775,000. During 2018, Gannon had net income of $1,000,000 and paid cash dividends of $250,000. At December 31, 2018, the balance in the investment account should be
c. $2,225,000. $1,775,000 + ($1,000,000 × .6) - ($250,000 × .6) = $2,225,000.
Kramer Company's equity securities portfolio which is appropriately included in current assets is as follows: December 31, 2018 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. $260,000 $215,000 $(45,000) Lyman, Inc. 245,000 265,000 20,000 $505,000 $480,000 $(25,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2018 income statement if 2018 is Kramer's first year of operation?
c. $25,000 loss. $25,000 (unrealized loss).
Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2018. During 2018, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000. 99. If Blanco Company used the fair value method of accounting for its investment in Darby Company, its Equity Investments (Darby) account on December 31, 2018 should be
c. $600,000. $600,000, acquisition cost.
Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $600,000 on January 2, 2018. During 2018, Darby Company declared dividends of $100,000 and reported earnings for the year of $400,000. If Blanco Company uses the equity method of accounting for its investment in Darby Company, its Equity Investments (Darby) account at December 31, 2018 should be
c. $660,000. $600,000 + ($400,000 × .2) - ($100,000 × .2) = $660,000.
Which of the following is not generally correct about recording a sale of a debt security before maturity date?
c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments.
When investments in debt securities are sold between interest payment dates, preferably the
c. accrued interest is credited to Interest Revenue.
In accounting for investments in debt securities,
c. any discount or premium is amortized.
Investments in debt securities should be recorded on the date of acquisition at
c. market value plus brokerage fees and other costs incident to the purchase.
Securities which could be classified as held-to-maturity are
c. municipal bonds.
A reclassification adjustment is reported in the
c. statement of comprehensive income as other comprehensive income.
Unrealized holding gains or losses which are recognized in income are from debt securities classified as
c. trading.
Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common stock. During 2018, Penn earns $450,000 and pays cash dividends of $150,000. Tracy should report investment revenue for 2018 of
d. $180,000. $450,000 × .4 = $180,000.
Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. 69. On July 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by
d. $2,571. ($1,410,375 × .11/2) - ($1,500,000 × .05) = $2,571.
Valet Corporation began operations in 2018. An analysis of Valet's debt securities portfolio acquired in 2018 shows the following totals at December 31, 2018 for trading and available-for-sale debt securities: Trading Available-for-Sale Securities Securities Aggregate cost $180,000 $220,000 Aggregate fair value 160,000 190,000 What amount should Valet report in its 2018 income statement for unrealized holding loss?
d. $20,000. $180,000 - $160,000 = $20,000.
Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. 81. At December 31, 2018, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity?
d. $30,744 $1,272,000 - ($1,249,896 - $4,248 - $4,392) = $30,744.
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
d. earnings are reported by the investee in its financial statements.
If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the
d. equity method.
Impairments are
d. evaluated using the CECL model similar to receivables.
IFRS requires that Company A consolidate Company B when it controls and owns more than 50% of Company B.
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Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.
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Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
d. 20 periods and 4% from the present value of 1 table.
Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III. Call or put options.
d. III only.
Which of the following is correct about the effective-interest method of amortization?
d. It must be used to amortize a discount or premium unless some other method yields a similar result.
*Ex. 17-123—Fair value hedge. On January 2, 2018, Tylor Company issued a 4-year, $800,000 note at 6% fixed interest, interest payable semiannually. Tylor now wants to change the note to a variable rate note. As a result, on January 2, 2018, Tylor Company enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.6% for the first 6 months on $800,000. At each 6-month period, the variable interest rate will be reset. The variable rate is reset to 6.6% on June 30, 2018. Instructions (a) Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2018. (b) Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2018.
*Solution 17-123 (a) and (b) 6/30/18 12/31/18 Fixed-rate debt $800,000 $800,000 Fixed rate (6% ÷ 2) 3% 3% Semiannual debt payment 24,000 24,000 Swap fixed receipt 24,000 24,000 Net income effect $ 0 $ 0 Swap variable rate 5.6% × ½ × $800,000 $ 22,400 6.6% × ½ × $800,000 0 $ 26,400 Net interest expense $ 22,400 $ 26,400
*Ex. 17-124—Cash flow hedge. On January 2, 2018, Sloan Company issued a 5-year, $12,000,000 note at LIBOR with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 6.8%. Sloan Company decides it prefers fixed-rate financing and wants to lock in a rate of 7%. As a result, Sloan enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $12 million. The variable rate is reset to 7.4% on January 2, 2019. Instructions (a) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2018. (b) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2019.
*Solution 17-124 (a) and (b) 12/31/18 12/31/19 Variable-rate debt $12,000,000 $12,000,000 Variable rate 6.8% 7.4% Debt payment $ 816,000 $ 888,000 Debt payment $ 816,000 $ 888,000 Swap receive variable (816,000) (888,000) Net income effect 0 0 Swap payable—fixed 840,000 840,000 Net interest expense $ 840,000 $ 840,000
*Pr. 17-128—Derivative financial instrument. Hummel Company purchased a put option on Olney common shares on July 7, 2018, for $100. The put option is for 200 shares, and the strike price is $30. The option expires on January 31, 2019. The following data are available with respect to the put option: Date Market Price of Olney Shares Time Value of Put Option September 30, 2018 $32 per share $55 December 31, 2018 $31 per share 23 January 31, 2019 $33 per share 0 Instructions Prepare the journal entries for Hummel Company for the following dates: (a) July 7, 2018—Investment in put option on Olney shares. (b) September 30, 2018— Hummel prepares financial statements. (c) December 31, 2018— Hummel prepares financial statements. (d) January 31, 2019—Put option expires.
*Solution 17-128 July 7, 2018 (a) Put Option ....................................................................................... 100 Cash ................................................................................... 100 September 30, 2018 (b) Unrealized Holding Gain or Loss—Income ................................... 45 Put Option ($100 - $55) ..................................................... 45 December 31, 2018 (c) Unrealized Holding Gain or Loss—Income ................................... 32 Put Option ($55 - $23) ....................................................... 32 January 31, 2019 (d) Loss on Settlement of Put Option .................................................. 23 Put Option ($23 - $0) ......................................................... 23
*Pr. 17-129—Derivative financial instrument. Welch Company purchased a put option on Reese common shares on January 7, 2018, for $225. The put option is for 300 shares, and the strike price is $51. The option expires on July 6, 2018. The following data are available with respect to the put option: Date Market Price of Reese Shares Time Value of Put Option March 31, 2018 $48 per share $120 June 30, 2018 $50 per share 59 July 6, 2018 $46 per share 21 Instructions Prepare the journal entries for Welch Company for the following dates: (a) January 7, 2018—Investment in put option on Reese shares. (b) March 31, 2018— Welch prepares financial statements. (c) June 30, 2018— Welch prepares financial statements. (d) July 6, 2018— Welch settles the put option on the Reese shares.
*Solution 17-129 January 7, 2018 (a) Put Option ....................................................................................... 225 Cash .................................................................................... 225 March 31, 2018 (b) Put Option ....................................................................................... 900 Unrealized Holding Gain or Loss—Income ($3 × 300) ...... 900 Unrealized Holding Gain or Loss—Income .................................... 105 Put Option ($225 - $120) ................................................... 105 June 30, 2018 (c) Unrealized Holding Gain or Loss—Income .................................... 600 Put Option ($2 × 300) ......................................................... 600 Unrealized Holding Gain or Loss—Income .................................... 61 Put Option ($120 - $59) ..................................................... 61 July 6, 2018 (d) Unrealized Holding Gain or Loss—Income .................................... 38 Put Option ($59 - $21) ....................................................... 38 Cash (300 × [$51 - $46])) ............................................................... 1,500 Gain on Settlement of Put Option ($1,500 - $321) ............ 1,179 Put Option* .......................................................................... 321 *Value of Put Option settlement: Put Option 225 900 105 600 61 38 321
Ramirez Company has a held-for-collection investment in the 6%, 20-year bonds of Soto Company. The investment was originally purchased for $1,200,000 in 2014. Early in 2017, Ramirez recorded an impairment of $200,000 on the Soto investment, due to Soto's financial distress. In 2018, Soto returned to profitability and the Soto investment was no longer impaired. What entry does Ramirez make in 2018 under (a) GAAP and (b) IFRS? 10. Under GAAP, Ramirez makes no entry, because impaired investments may not be written up if they recover in value. Under IFRS, Ramirez makes the following entry:
Debt Investments.......................................... 200,000 Recovery of Impairment Loss ............................. 200,000
Companies may not use the fair value option for investments that follow the equity method of accounting.
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Debt securities include corporate bonds and convertible debt, but not U.S. government securities.
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If a decline in a security's value is judged to be temporary, a company needs to write down the cost basis of the individual security to a new cost basis.
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The Unrealized Holding Gain/Loss—Income account for equity securities is reported as a part of other comprehensive income.
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The accounting profession has concluded that an investment of 50 percent or more of the voting stock of an investee should lead to a presumption of only significant influence over an investee.
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Under IFRS, both the investor and the investee should follow the same accounting practices, requiring adjustments be made to the investor's books in order to prepare financial information
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Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.
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Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.
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Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for investments.
GAAP classifies debt investments as trading, available-for-sale, and held-to-maturity (debt investments). IFRS uses held-for-collection (debt investments), and trading (both debt and equity investments), and non-trading equity investment classifications. The accounting for trading investments is the same between GAAP and IFRS. Held-tomaturity (GAAP) and held-for-collection (IFRS) investments are debt investments accounted for at amortized cost. Gains and losses related to available-for-sale debt investments (GAAP) and non-trading equity investments (IFRS) are reported in other comprehensive income. Both GAAP and IFRS use the same test to determine whether the equity method of accounting should be used—that is, significant influence with a general guide of over 20 percent ownership. The basis for consolidation under IFRS is control. Under GAAP, a bipolar approach is used, which is a risk-and-reward model and a voting interest approach. However, under both systems, for consolidation to occur, the investor company must generally own more than 50 percent of another company. GAAP and IFRS are similar in the accounting for the fair value option. That is, the option to use the fair value method must be made at initial recognition, the selection is irrevocable, and gains and losses are reported as part of income. One difference is that GAAP permits the fair value option for equity method investments. While measurement of impairments is similar, GAAP does not permit the reversal of an impairment charge related to available-for-sale debt and equity investments. IFRS allows reversals of impairments for held-for-collection investments.
BE. 17-116—Investment in debt securities at premium. On April 1, 2018, West Company purchased $600,000 of 6% bonds for $623,625 plus accrued interest as an available-for-sale security. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2023. Instructions (a) Prepare the journal entry on April 1, 2018. (b) The bonds are sold on November 1, 2019 at 103 plus accrued interest. Amortization was recorded when interest was received by the straight-line method (by months and round to the nearest dollar). Prepare all entries required to properly record the sale.
Solution 17-116 (a) Debt Investments ............................................................................. 623,625 Interest Revenue ($600,000 × .06 × 3/12) ...................................... 9,000 Cash ................................................................................... 632,625 (b) Interest Revenue [$23,625 × (4 ÷ 63)] ............................................ 1,500 Debt Investments ............................................................... 1,500 Cash ($600,000 × .06 × 1/3) ............................................................ 12,000 Interest Revenue ................................................................ 12,000 Cash ................................................................................................. 618,000 Gain on Sale of Investments .............................................. 1,500 Debt Investments .............................................................. 616,500 $623,625 - [($23,625 ÷ 63) × 19]
BE. 17-117—Investment in debt securities at a discount. On May 1, 2018, Kirmer Corporation purchased $1,500,000 of 12% bonds, interest payable on January 1 and July 1, for $1,406,500 plus accrued interest. The bonds mature on January 1, 2024. Amortization is recorded when interest is received by the straight-line method (by months and round to the nearest dollar). (Assume bonds are available for sale.) Instructions (a) Prepare the entry for May 1, 2018. (b) The bonds are sold on August 1, 2019 for $1,412,500 plus accrued interest. Prepare all entries required to properly record the sale.
Solution 17-117 (a) Debt Investments ............................................................................ 1,406,500 Interest Revenue ($1,500,000 × .12 × 4/12) .................................. 60,000 Cash .................................................................................... 1,466,500 (b) Debt Investments ($93,500 ÷ 68 × 1) ............................................. 1,375 Interest Revenue ................................................................. 1,375 Cash ($1,500,000 × .12 × 1/12) ...................................................... 15,000 Interest Revenue ................................................................. 15,000 Cash ................................................................................................ 1,412,500 Loss on Sale of Investments .......................................................... 14,625 Debt Investments ................................................................ 1,427,125 $1,406,500 + [($93,500 ÷ 68) × 15]
BE. 17-118—Investments in debt securities. Presented below are unrelated cases involving investments in debt securities. Case I. The fair value of the trading securities at the end of last year was 30% below original cost, and this was properly reflected in the accounts. At the end of the current year, the fair value has increased to 20% above cost. Case II. The fair value of an available-for-sale security has declined to less than forty percent of the original cost. The decline in value is considered to be other than temporary. Case III. A debt security, whose fair value is now less than cost, is classified as trading but is reclassified as available-for-sale. Instructions Indicate the accounting required for each case separately.
Solution 17-118 Case I. At the end of last year, the company would have recognized an unrealized holding loss and recorded a Fair Value Adjustment. At the end of the current year, the company would record an unrealized holding gain that would be reported in the other revenue and gains section. The adjustment account would now have a debit balance. Case II. When the decline in value is considered to be other than temporary, the loss should be recognized as if it were realized and earnings will be reduced. The fair value becomes a new cost basis. Case III. The security is transferred at fair value, which is the new cost basis of the security. The Debt Investments (available-for-sale) account is recorded at fair value, and the Unrealized Holding Loss—Income account is debited for the unrealized loss. The Debt Investments (trading) account is credited for cost.
Ex. 17-119—Investment in equity securities. Agee Corporation acquired a 35% interest in Trent Company on January 1, 2018, for $750,000. At that time, Trent had 1,000,000 shares of its $1 par common stock issued and outstanding. During 2018, Trent paid cash dividends of $240,000 and thereafter declared and issued a 5% common stock dividend when the fair value was $2 per share. Trent's net income for 2018 was $540,000. What is the balance in Agee's equity investment account at the end of 2018?
Solution 17-119 Cost $750,000 Share of net income (.35 × $540,000) 189,000 Share of dividends (.35 × $240,000) (84,000) Balance in equity investment account $855,000
Ex. 17-120—Fair value and equity methods. (Essay) Compare the fair value and equity methods of accounting for investments in stocks subsequent to acquisition.
Solution 17-120 Under the fair value method, investments are originally recorded at cost and are reported at fair value. Dividends are reported as other revenues and gains. Under the equity method, investments are originally recorded at cost. Subsequently, the investment account is adjusted for the investor's share of the investee's net income or loss and this amount is recognized in the income of the investor. Dividends received from the investee are reductions in the investment account.
Ex. 17-121—Fair value and equity methods. Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Crane Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Hudson Company. (a) Fair Value Method (b) Equity Method Investment Dividend Investment Investment Transaction Account Revenue Account Revenue ——————————————————————————————————————————— 1. At the beginning of Year 1, Crane bought 30% of Hudson's common stock at its book value. Total book value of all Hudson's common stock was $800,000 on this date. 2. During Year 1, Hudson reported $60,000 of net income and paid $30,000 of dividends. ——————————————————————————————————————————— 3. During Year 2, Hudson reported $30,000 of net income and paid $20,000 of dividends. ——————————————————————————————————————————— 4. During Year 3, Hudson reported a net loss of $10,000 and paid $4,000 of dividends. ——————————————————————————————————————————— 5. Indicate the Year 3 ending balance in the Investment account, and cumulative totals for Years 1, 2, and 3 for dividend revenue and investment revenue.
Solution 17-121 (a) Fair Value Method (b) Equity Method Investment Dividend Investment Investment Transaction Account Revenue Account Revenue ——————————————————————————————————————————————— 1. 240,000 240,000 ——————————————————————————————————————————————— 2. 18,000 18,000 9,000 (9,000) ——————————————————————————————————————————————— 3. 9,000 9,000 6,000 (6,000) ——————————————————————————————————————————————— 4. (3,000) (3,000) 1,200 (1,200) ——————————————————————————————————————————————— 5. 240,000 16,200 247,800 24,000
Ex. 17-122—Comprehensive income calculation. The following information is available for Irwin Company for 2018: Net Income $120,000 Realized gain on sale of available-for-sale debt securities 15,000 Unrealized holding gain arising during the period on available-for-sale debt securities 34,000 Reclassification adjustment for gains included in net income 8,000 Instructions (1) Determine other comprehensive income for 2018. (2) Compute comprehensive income for 2018.
Solution 17-122 (1) 2018 other comprehensive income = $41,000 ($15,000 realized gain + $34,000 unrealized holding gain - $8,000 reclassification adjustment). (2) 2018 comprehensive income = $161,000 ($120,000 + $41,000).
Pr. 17-125—Trading equity securities. Korman Company has the following securities in its portfolio of equity securities on December 31, 2018: Cost Fair Value 5,000 shares of Thomas Corp., Common $151,000 $139,000 10,000 shares of Gant, Common 184,000 190,000 $335,000 $329,000 All of the securities had been purchased in 2018. In 2019, Korman completed the following securities transactions: March 1 Sold 5,000 shares of Thomas Corp., Common @ $32 less fees of $1,500. April 1 Bought 600 shares of Werth Stores, Common @ $45 plus fees of $550. Pr. 17-125 (cont.) The Korman Company portfolio of equity securities appeared as follows on December 31, 2019: Cost Fair Value 10,000 shares of Gant, Common $184,000 $195,500 600 shares of Werth Stores, Common 27,550 25,500 $211,550 $221,000 Instructions Prepare the general journal entries for Korman Company for: (a) the 2018 adjusting entry. (b) the sale of the Thomas Corp. stock. (c) the purchase of the Werth Stores' stock. (d) the 2019 adjusting entry.
Solution 17-125 (a) 12-31-18 Unrealized Holding Gain or Loss—Income ................................... 6,000 Fair Value Adjustment ........................................................ 6,000 ($335,000 - $329,000) (b) 3-1-19 Cash [(5,000 × $32) - $1,500] ....................................................... 158,500 Gain on Sale of Investments .............................................. 7,500 Equity Investments ............................................................. 151,000 (c) 4-1-19 Equity Investments ......................................................................... 27,550 Cash [(600 × $45) + $550] ................................................. 27,550 (d) 12-31-19 Fair Value Adjustment .................................................................... *15,450 Unrealized Holding Gain or Loss—Income ....................... 15,450 * [($221,000 - $211,550) = $9,450 + $6.000 = $15,450]
Pr. 17-126—Equity investments. Perez Company began operations in 2017. Since then, it has reported the following gains and losses for its equity investments in on the income statement: 2017 2018 2019 Gains (losses) from sale of securities $ 15,000 $(20,000) $ 14,000 Unrealized holding losses on valuation of securities (30,000) — (15,000) Unrealized holding gain on valuation of securities — 10,000 — At January 1, 2020, Perez owned the following securities: Cost BKD Common (15,000 shares @ $30) $450,000 LRF Preferred (2,000 shares @ $105) 210,000 During 2020, the following events occurred: 1. Sold 5,000 shares of BKD for $170,000. 2. Acquired 1,000 shares of Horton Common for $40 per share. Brokerage commissions totaled $1,000. At 12/31/20, the fair values for Perez's investments were: BKD Common, $28 per share LRF Preferred, $110 per share Horton Common, $45 per share Instructions (a) Prepare a schedule which shows the balance in the Fair Value Adjustment account at December 31, 2019 (after the adjusting entry for 2019 is made). (b) Prepare a schedule which shows the aggregate cost and fair values for Perez's securities portfolio at 12/31/20. (c) Prepare the necessary adjusting entry based upon your analysis in (b) above.
Solution 17-126 (a) Balance 12/31/17 (result of that year's adjusting entry) $(30,000) Deduct unrealized gain for 2018 10,000 Add: Unrealized loss for 2019 (15,000) Balance at 12/31/19 $(35,000) (b) Aggregate cost and fair value for trading securities at 12/31/20 Cost Fair Value BKD Common 10,000 shares $300,000 $280,000 LRF Preferred 2,000 shares 210,000 220,000 Horton Common, 1,000 shares 41,000 45,000 Total $551,000 $545,000 (c) Adjusting entry at 12/31/20: Fair Value Adjustment .................................................................... 29,000 Unrealized Holding Gain or Loss—Income ........................ 29,000 (Balance at 1/1/20 $35,000 Balance needed at 12/31/20 6,000 Recovery $29,000) *Cost **Fair Value BKD Common: 10,000 shares × $30 BKD Common: 10,000 shares × $28 LRF Preferred: 2,000 shares × $105 LRF Preferred: 2,000 shares × $110 Horton Common: 1,000 shares × $41 Horton Common: 1,000 shares × $45
Pr. 17-127—Equity securities. During the course of your examination of the financial statements of Doppler Corporation for the year ended December 31, 2018, you found a new account, "Investments." Your examination revealed that during 2018, Doppler began a program of investments, and all investment-related transactions were entered in this account. Your analysis of this account for 2018 follows: Doppler Corporation Analysis of Investments Account For the Year Ended December 31, 2018 Date—2018 Debit Credit (a) Harmon Company Common Stock Feb. 14 Purchased 4,000 shares @ $66 per share. $264,000 July 26 Received 400 shares of Harmon Company common stock as a stock dividend. (Memorandum entry in general ledger.) Sept. 28 Sold the 400 shares of Harmon Company common stock received July 26 @ $70 per share. $28,000 (b) Debit Credit Taber Inc., Common Stock Apr. 30 Purchased 20,000 shares @ $40 per share. $800,000 Oct. 28 Received dividend of $1 per share. $20,000 Additional information: 1. The fair value for each security as of the 2018 date of each transaction follow: Security Feb. 14 Apr. 30 July 26 Sept. 28 Dec. 31 Harmon Company $66 $74 $70 $76 Taber Inc. $40 33 Doppler Corp. 25 28 30 33 35 2. All of the investments of Doppler are nominal in respect to percentage of ownership (5% or less). Instructions (1) Prepare any necessary correcting journal entries related to investments (a) and (b). (2) Prepare the entry, if necessary, to record the proper valuation of the equity security portfolio as of December 31, 2018.
Solution 17-127 (1) (a) Harmon — original purchase 4,000 shares stock dividend 400 shares total holding 4,400 shares Total cost of $264,000 ÷ Total shares of 4,400 = $60 cost per share Solution 17-127 (cont.) Sold 400 shares Correct entry: Cash (400 × $70) ............................................................................ 28,000 Equity Investments (400 shares x $60) .............................. 24,000 Gain on Sale of Investments [($70 - $60) x 400 shares] ... 4,000 Entry made: Cash ............................................................................................. 28,000 Equity Investments ........................................................... 28,000 Correction: Equity Investments ....................................................................... 4,000 Gain on Sale of Investments ........................................... 4,000 (b) Taber—should record cash dividend as dividend income. Correct entry: Cash ............................................................................................. 20,000 Dividend Revenue ............................................................ 20,000 Entry made: Cash ............................................................................................. 20,000 Equity Investments ........................................................... 20,000 Correction: Equity Investments ....................................................................... 20,000 Dividend Revenue ............................................................ 20,000 (To properly record dividends under fair value method) (2) Valuation at End of Year: Increase Quantity Cost Fair Value (Decrease) Harmon 4,000 shares $ 240,000 $304,000 $ 64,000 Taber 20,000 shares 800,000 660,000 (140,000) $1,040,000 $964,000 ($ 76,000) Year-end Adjustment: Unrealized Holding Gain or Loss—Income ....................................... 76,000 Fair Value Adjustment ........................................................ 76,000 *Cost **Fair Value Harmon: 4,000 shares x $60 4,000 shares x $76 Taber: 20,000 shares x $40 20,000 shares x $33
Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income.
T
IFRS requires that gains and losses on non-trading equity securities be reported as part of other comprehensive income.
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One requirement related to fair value disclosure is that both the cost and the fair value of all instruments be reported in the notes to the financial statements.
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Under IFRS, impairment charges related to held-for-collection debt securities may be reversed.
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On January 1, 2018, Reston Company purchased 25% of Ace Corporation's common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston's investment account was $1,170,000 at December 31, 2018. Ace reported net income of $700,000 for the year ended December 31, 2018, and paid cash dividends on common stock totaling $280,000 during 2018. How much did Reston pay for its 25% interest in Ace?
a. $1,065,000. $1,170,000 - ($700,000 × 25%) + ($280,000 × 25%) = $1,065,000.
On November 1, 2018, Horton Company purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $800,000, for $720,000. An additional $24,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2025. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2018 income statement as a result of Horton's availablefor-sale investment in Lopez was
a. $14,000. ($800,000 × .09/2) + ($80,000 × 2/80) - $24,000 = $14,000.
During 2017, Woods Company purchased 80,000 shares of Holmes Corporation common stock for $1,260,000 as an equity investment. The fair value of these shares was $1,200,000 at December 31, 2017. Woods sold all of the Holmes stock for $17 per share on December 3, 2018, incurring $56,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2018 of
a. $44,000. [(80,000 × $17) - $56,000] - $1,260,000 = $44,000.
Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. 71. At December 31, 2018, the fair value of the Ritter, Inc. bonds was $3,180,000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity?
a. $76,860. $3,180,000 - ($3,124,740 - $10,620 - $10,980) = $76,860
On August 1, 2018, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2023, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2018?
a. Debt Investments .................................................................. 520,000 Interest Revenue ................................................................... 12,500 Cash .......................................................................... 532,500 Dr. Debt Investments: $500,000 × 1.04 = $520,000 Dr. Interest Revenue: $500,000 × .10/2 × 3/6 = $12,500 Cr. Cash: $520,000 + $12,500 = $532,500.
Rushia Company has a non-trading investment in the 10%, 10-year bonds of Pear Company. The investment's carrying value is $3,200,000 at December 31, 2017. On January 9, 2018, Rushia learns that Pear Company has lost its primary manufacturing facility in an uninsured fire. As a result, Rushia determines that the investment is impaired and now has a fair value of $2,300,000. In June, 2019, Pear Company has succeeded in rebuilding its manufacturing facility, and its prospects have improved as a result. 7. If Rushia Company determines that the fair value of the investment is now $3,900,000 and is using GAAP for its external financial reporting, which of the following is true?
a. Rushia is prohibited from recording the recovery in value of the impaired investment.
Which of the following is not correct in regard to trading securities?
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 amortized. d. All of these choices are correct. Answer: D
Koehn Corporation accounts for its investment in the common stock 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.
A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity. b. positive intent. c. the security must be a debt security. d. All of these are required. Answer: D
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.
An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a
a. debit to Debt Investments.
Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are
a. securities where a company has holdings of less than 20%.
Kern Company purchased bonds with a face amount of $1,000,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $15,000, and paid accrued interest for three months of $25,000. The amount to record as the cost of this long-term investment in bonds is
b. $1,035,000. ($1,000,000 × 1.02) + $15,000 = $1,035,000.
Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash The carrying amount of this investment in Rich's December 31, 2018 balance sheet should be
b. $1,045,000. $1,000,000 + $120,000 - ($250,000 × 30%) = $1,045,000.
The following information relates to Windom Company for 2018: Realized gain on sale of available-for-sale debt securities $45,000 Unrealized holding gains arising during the period on available-for-sale debt securities 90,000 Reclassification adjustment for gains included in net income 30,000 Windom's 2018 comprehensive income is
b. $105,000. $45,000 + $90,000 - $30,000 = $105,000.
At the end of 2018, Hauke Company purchased 6,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2018 was $5,880,000. The bonds mature on March 1, 2023, and pay interest on March 1 and September 1. Hauke sells 3,000 bonds on September 1, 2019, for $2,964,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is
b. $14,400. Discount amortization: $120,000 × 8/50 = $19,200 ($5,880,000 + $19,200) ÷ 2 = $2,949,600; $2,964,000 - $2,949,600 = $14,400 gain.
Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of:
b. $155,283. $1,410,375 × .11/2 = $77,571 (July 2018) ($1,410,375 + $2,571) × .11/2 = $77,712; $77,571 + $77,712 = $155,283.
On December 31, 2017, Patel Company purchased debt securities as trading securities. Pertinent data are as follows: Fair Value Security Cost At 12/31/18 A $132,000 $119,000 B 172,000 186,000 C 288,000 263,000 On December 31, 2018, Patel transferred its investment in security C from trading to available-for-sale because Patel intends to retain security C as a long-term investment. What total amount of gain or loss on its securities should be included in Patel's income statement for the year ended December 31, 2018?
b. $24,000 loss. *$14,000 - **$13,000 - ***$25,000 = $24,000 loss. *($186,000 - $172,000) **($119,000 - $132,000) ***($263,000 - $288,000)
The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2018 are as follows: Goebel Company Balance Sheet December 31, 2018 Assets $2,400,000 Liabilities $ 300,000 Capital stock 1,200,000 Retained earnings 900,000 Total equities $2,400,000 Dobbs Company Balance Sheet December 31, 2018 Assets $1,800,000 Liabilities $410,000 Capital stock 1,150,000 Retained earnings 240,000 Total equities $1,800,000 If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2018 for $290,000 and during 2019 Dobbs Company had net income of $150,000 and paid a cash dividend of $60,000, applying the fair value method would give a debit balance in the Equity Investments (Dobbs) account at the end of 2019 of
b. $290,000. $290,000, acquisition cost.
The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2018 are as follows: Goebel Company Balance Sheet December 31, 2018 Assets $2,400,000 Liabilities $ 300,000 Capital stock 1,200,000 Retained earnings 900,000 Total equities $2,400,000 Dobbs Company Balance Sheet December 31, 2018 Assets $1,800,000 Liabilities $410,000 Capital stock 1,150,000 Retained earnings 240,000 Total equities $1,800,000 If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2018 for $430,000 and the equity method of accounting for the investment were used, the amount of the debit to Equity Investments (Dobbs) would have been
b. $430,000. $430,000, acquisition cost.
The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2018 are as follows: Goebel Company Balance Sheet December 31, 2018 Assets $2,400,000 Liabilities $ 300,000 Capital stock 1,200,000 Retained earnings 900,000 Total equities $2,400,000 Dobbs Company Balance Sheet December 31, 2018 Assets $1,800,000 Liabilities $410,000 Capital stock 1,150,000 Retained earnings 240,000 Total equities $1,800,000 If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2018 for $440,000 and during 2019 Dobbs Company had net income of $150,000 and paid a cash dividend of $60,000, applying the equity method would give a debit balance in the Equity Investments (Dobbs) account at the end of 2019 of
b. $467,000. $440,000 + ($150,000 × .3) - ($60,000 × .3) = $467,000.
Instrument Corporation has the following investment which was held throughout 2018- 2019: Fair Value Cost 12/31/18 12/31/19 Equity investment $900,000 $1,200,000 $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2019 related to its investment?
b. $60,000 loss. $1,200,000 - $1,140,000 = $60,000 loss.
Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At February 1, 2019, Richman Company sold the Carlin bonds for $1,236,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2019 was $1,240,500. Assuming Richman Company has a portfolio of available-for-sale debt investments, what should Richman Company report as a gain (or loss) on the bonds?
b. ($4,500). $1,240,500 - $1,236,000 = $4,500.
When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
Held-to-maturity securities are reported at
b. acquisition cost plus amortization of a discount.
Transfers between categories
b. are accounted for at fair value for all transfers.
When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be
b. its fair value at the date of the transfer.
All of the following are characteristics of a derivative financial instrument except the instrument
b. requires a large investment at the inception of the contract.
On November 1, 2018, Howell Company purchased 1,000 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $1,052,500, which includes accrued interest of $15,000. The bonds, which mature on January 1, 2023, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2018, balance sheet at
c. $1,036,000. $1,052,500 - $15,000 = $1,037,500 $1,037,500 - ($37,500 × 2/50) = $1,036,000.
Rich, Inc. acquired 30% of Doane Corporation's voting stock on January 1, 2018 for $1,000,000. During 2018, Doane earned $400,000 and paid dividends of $250,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2019, Doane earned $500,000 and paid cash dividends of $150,000 on April 1 and $150,000 on October 1. On July 1, 2019, Rich sold half of its stock in Doane for $660,000 cash. What should the gain be on sale of this investment in Rich's 2019 income statement?
c. $122,500. $1,045,000 - ($150,000 × 30%) + ($500,000 × 50% × 30%) = $1,075,000. $660,000 - ($1,075,000 ÷ 2) = $122,500.
The summarized balance sheets of Goebel Company and Dobbs Company as of December 31, 2018 are as follows: Goebel Company Balance Sheet December 31, 2018 Assets $2,400,000 Liabilities $ 300,000 Capital stock 1,200,000 Retained earnings 900,000 Total equities $2,400,000 Dobbs Company Balance Sheet December 31, 2018 Assets $1,800,000 Liabilities $410,000 Capital stock 1,150,000 Retained earnings 240,000 Total equities $1,800,000 95. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2018 for $350,000 and the fair value method of accounting for the investment were used, the amount of the debit to Equity Investments (Dobbs) would have been
c. $350,000. $350,000, acquisition cost.
Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. 93. If the beginning balance in the investment account was $750,000, the balance at December 31, 2018 should be
c. $846,000. $750,000 + [($1,200,000 - $960,000) × (20,000 ÷ 50,000)] = $846,000.
Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds?
c. ($7,440). $3,097,440 - $3,090,000 = $7,440.
On August 1, 2018, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2024, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2018 is
c. Debt Investments .................................................................. 1,164,000 Interest Revenue ................................................................... 27,000 Cash .......................................................................... 1,191,000 Dr. Debt Investments: 1,200 × $1,000 × .97 = $1,164,000 Dr. Interest Revenue: $1,200,000 × .09/2 × 3/6 = $27,000 Cr. Cash: $1,164,000 + $27,000 = $1,191,000.
An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method
c. Fair Value Method-Income Equity Method-A reduction of the investment
At December 31, 2018, Jeter Corporation had the following debt securities that were purchased during 2018, its first year of operation: Fair Unrealized Cost Value Gain (Loss) Trading Securities: Security A $ 85,000 $ 65,000 $(20,000) B 15,000 20,000 5,000 Totals $100,000 $ 85,000 $(15,000) Available-for-Sale Securities: Security Y $ 70,000 $ 80,000 $ 10,000 Z 85,000 55,000 (30,000) Totals $155,000 $135,000 $(20,000) All market declines are considered temporary. Fair value adjustments at December 31, 2018 should be established with a corresponding charge against Income Stockholders' Equity
c. Income-$15,000 Stockholders' Equity-$20,000
Which of the following is not a debt security?
c. Loans receivable
Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes
c. a debit to Debt Investments at $315,000.
Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are
c. available-for-sale debt securities.
Investments in debt securities are generally recorded at
c. cost including brokerage and other fees.
GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the
c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.
The accounting for fair value hedges records the derivative at its
c. fair value.
All of the following statements regarding accounting for derivatives are correct except that
c. gains and losses resulting from speculation should be deferred.
"Gains trading" involves
c. selling securities whose value has increased since acquisition (winners) while holding those whose value has decreased since acquisition (losers).
On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. 79. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds?
d. $47,698 ($532,090 × .09) - ($500,000 × .10) = ($2,112) - 2017 Amortization ($532,090 - $2,112) × .09 = $47,698 - 2018 Interest Revenue.
On October 1, 2017, Wenn Company purchased 800 of the $1,000 face value, 8% bonds of Loy, Inc., for $936,000, including accrued interest of $16,000. The bonds, which mature on January 1, 2024, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-forsale. On Wenn's December 31, 2018 balance sheet, the carrying value of the bonds is
d. $896,000. $936,000 - $16,000 = $920,000 $920,000 - ($120,000 × (15/75) ) = $896,000.
During 2018 Logic Company purchased 10,000 shares of Midi, Inc. for $30 per share. During the year Logic Company sold 2,500 shares of Midi, Inc. for $35 per share. At December 31, 2018 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of unrealized gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2018 related to its investment in Midi, Inc. stock?
d. ($2,500) [($35 - $30) × 2,500] - [($30 - $28) × 7,500] = ($2,500).
On December 29, 2019, James Company sold a debt security that had been purchased on January 4, 2018. James owned no other debt securities. An unrealized holding loss was reported in the 2018 income statement. A realized gain was reported in the 2019 income statement. Was the debt security classified as available-for-sale and did its 2018 market price decline exceed its 2019 market price recovery? 2018 Market Price Decline Exceeded 2019 Available-for-Sale Market Price Recovery
d. Available-for-Sale-No 2018 Market Price Decline Exceeded 2019 Market Price Recovery-No
Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2018 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2018? I. $3,000,000 II. $3,040,000 III. $3,120,000
d. II or III only.
A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?
d. Transfer from available-for-sale to held-to-maturity
Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2018, 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?
d. Understate, understate, understate
On its December 31, 2017, balance sheet, Trump Company reported its investment in equity securities, which had cost $600,000, at fair value of $560,000. At December 31, 2018, the fair value of the securities was $585,000. What should Trump report on its 2018 income statement as a result of the increase in fair value of the investments in 2018?
d. Unrealized gain of $25,000. $585,000 - $560,000 = $25,000 unrealized gain.
