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Exam 12: Investments

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Question 51

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The following transactions occurred during the year for XYZ Corporation: (a.) During the year, trading securities were purchased for $250,000. (b.) During the year, securities available for sale were purchased for $80,000. (c.) During the year, trading securities that are carried on the balance sheet at their fair value of $125,000 were sold for $125,000 cash. (d.) At the end of the year, the trading securities portfolio has an aggregate fair value of $142,000 and an aggregate cost of $150,000. (e.) At the end of the year the securities available for sale portfolio has an aggregate fair value of $95,000. Required: Indicate how each of these transactions would affect the statement of cash flows for a corporation. Assume the statement of cash flows is prepared using the indirect method. Each transaction is assumed to be independent of the other transactions.

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(a.) The $250,000 cash payment for tradi...

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Question 52

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When a debt security is appropriately carried and reported as securities available for sale, a gain should be reported in the income statement:

A) When the fair value of the security increases.
B) When the present value of the security increases.
C) Only when the Dow Jones Industrial Average increases at least 100 points.
D) Only when the security is sold.

E) None of the above
F) A) and B)

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Question 53

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Seybert Systems accounts for its investment in Wang Engineering as available for sale. Seybert's balance in accumulated other comprehensive income with respect to the Wang investment is a credit balance of $20,000, and Seybert reports the investment at $100,000 on its balance sheet. Seybert purchased the Wang investment for (ignore taxes) :

Krogstad Corporation bought 1,000 shares of Cole Inc. common stock for $90 per share Three months later, the shares were sold for $110 per share. Required: (1.) Prepare the appropriate journal entry to record the purchase of the stock. (2.) Prepare the appropriate journal entry to record the sale of the stock.

Matrix, Inc., acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2018. The fair value and book value of 25% of Neo's identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2018 Neo recognized net income of $500,000 and paid dividends of $400,000. Neo had a total fair value of $10,000,000 as of December 31, 2018. Required: (1.) Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix accounts for that investment as an equity method investment (2.) Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix elects the fair-value option.

Which of the following is not true about the "fair value through other comprehensive income" approach for accounting for investments under IFRS No. 9?

On January 1, 2017, Bactin Corporation acquired 10% of Oakton Company for $100,000. On that date, the total book value and fair value of Oakton's net assets was $900,000. Any difference between cost and fair value is attributable to goodwill. In 2017, Oakton reported net income of $60,000 and paid dividends of $30,000. On January 1, 2018, Bactin Corporation bought another 10% of Oakton for $100,000, and on that date, the book value and fair value of Oakton's net assets still was $900,000 (the fair value of Oakton did not change during 2017). Bactin concluded that its 20% ownership now allowed it to significantly influence Oakton's operations. In 2018, Oakton reported net income of $80,000 and paid dividends of $40,000. Required: Prepare all journal entries for Bactin for 2017 and 2018, assuming no change in fair value of the Oakton stock during that time period.

On April 1, 2018, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick's identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2018, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2018, and paid total dividends for the year $10,000; these dividends were issued quarterly. BigBen's investment in LittleTick will affect BigBen's 2018 net income by:

LaBelle Corporation owns a $6 million whole life insurance policy on the life of its CEO, naming LaBelle as beneficiary. The annual premiums are $95,000 and are payable at the beginning of each year. The cash surrender value of the policy was $56,000 at the beginning of 2018. Required: (1.) Prepare the appropriate 2018 journal entry to record insurance expense and the increase in the investment, assuming the cash surrender value of the policy increased according to the contract to $70,000. (2.) The CEO died at the end of 2018. Prepare the appropriate journal entry.

Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

Accumulated Other Comprehensive Income in the shareholders' equity section of the balance sheet reflects changes in the fair value of securities for which type of securities?

In which investment category are fair values and subsequent growth of an investee not relevant for reporting?

Goofy Inc. bought a sizeable amount of Crazy Co.'s bonds for $150,000 on May 5, 2017, and classified the investment as available for sale. The market value of the bonds declined to $118,000 by December 31, 2017. Goofy reclassified this investment as trading securities in December of 2018 when the market value had risen to $125,000. What effect on 2018 income should be reported by Goofy for the Crazy Co. bonds?

Nichols Enterprises has an investment in 250 bonds of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott bonds are publicly traded, and The Wall Street Journal quotes a price for those bonds of $1,000 per bond, but Nichols believes the market has not appreciated the full value of the Elliott bonds and that a more accurate price is $1,200 per bond. Nichols should carry the Elliott investment on its balance sheet at:

Espana Corporation purchased $100,000 of Hales Inc. 6% bonds at par and classifies its investment as available for sale. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $70,000 during 2018. Espana views this decline as an other-than-temporary impairment. Espana calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses. If Espana accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be reduced by:

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:

Beresford Inc. purchased several investments in debt securities during 2018, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. - What total unrealized holding gain would Beresford report in its 2019 income statement relative to its investments in debt securities?

What is the effect on a company's cash flows and reported profit from accounting for an investment as a trading security as compared to accounting for it as an available-for-sale security?

On January 1, 2018, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $840,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2018, was $80,000. During 2018, Short also paid cash dividends in the amount of $24,000. Required: Compute the amount that would be reported for the investment on American Corporation's financial statements at December 31, 2018.

Hope Company bought 30% of Faith Corporation in the beginning of 2018. Hope's purchase price equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2018, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment using the fair value through net income method instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2018?