___________________________________________________________________________
1. 12
Student: Securities classified as held to maturity could be reported as either current or long-term
in a classified
balance sheet, depending upon their maturity dates.
True False
2. All investments in debt securities whose fair values are not readily determinable are
carried at historical
cost.
True False
3. Both debt and equity securities can be categorized as trading securities.
True False
4. Net unrealized holding gains (losses) are reported in the income statement for trading
securities.
True False
5. Purchases and sales of securities are always reported as investing activities in a
statement of cash
flows.
True False
6. Routine transfers of debt and equity investments among the trading, available for sale,
and held to
maturity portfolios need not be disclosed in the financial statements.
True False
7. Both trading securities and securities available for sale are reported at their fair values.
True False
8. All securities considered available for sale should be reported as current assets in a
classified balance
sheet.
True False
9. Unrealized gains and losses are included in other comprehensive income for securities
that are classified
as available for sale.
True False
10. When available-for-sale securities are sold, the full amount of any gain or loss
realized on the sale is
included in before-tax net income.
True False
11. Companies must always use the equity method when they hold between 25% and
50% of the common
stock of an investee.
True False
12. The equity method is in many ways a partial consolidation.
True False
13. Under the equity method of accounting for a stock investment, cash dividends
received are considered a
reduction of the investee's net assets.
True False
14. When an equity method investment is sold, a gain or loss is recognized for the
difference between its
selling price and its cost.
True False
15. If an investment is accounted for under the equity method, the investor reduces
investment income and
the investment account for amortization of goodwill acquired in the investment.
True False
16. Selecting the fair value option for an available-for-sale investment is equivalent to
reclassifying that
investment as a trading security.
True False
17. The fair value option can not be elected for significant-influence investments,
because those must be
accounted for under the equity method.
True False
18. Under IAS No. 39, investments for which the investor lacks significant influence use
basically the same
reporting classifications as those used under U.S. GAAP.
True False
19. Under IFRS No. 9, investments for which the investor lacks significant influence use
basically the same
reporting classifications as those used under U.S. GAAP.
True False
20. Under IFRS No. 9, debt investments are classified as either "available for sale" or
"fair value through
profit and loss (FVTPL)."
True False
21. Under IFRS No. 9, debt investments are classified as either "amortized cost" or "fair
value through profit
and loss (FVTPL)."
True False
22. Under IFRS No. 9, equity investments are classified as either "fair value through
other comprehensive
income (FVTOCI)" or "fair value through profit and loss (FVTPL)."
True False
23. Under IAS No. 39, transfers of debt investments equity investments out of the
FVTPL category into AFS
or HTM are permitted under "rare circumstances."
True False
24. Under IFRS No. 9, cost can be used as an estimate of fair value in some
circumstances.
True False
25. Indicate (by letter) the level of stock ownership that most frequently relates to each
concept listed
below.
1. 20% 50% The investor can significantly influence, but not control, the
investee's operating and financial policies. __
__
2. Less
than 20% The reporting of the investment depends on the intent of
management to hold or trade it. __
__
3. More
than 50% The investment is reported at cost, adjusted for subsequent
growth in the investee. __
__
4. Less
than 20% The investment is reported at fair value. __
__
5. 20% 50%
Financial statements are combined as if a single company. __
__
6. More
than 50% The investor controls the investee. __
__
7. Less
than 20%
Unrealized gains and losses are recorded at each reporting
date. __
__
8. More
than 50% The investee is a subsidiary of the investor. __
__
9. More
than 50% Assets and liabilities of the investee are combined with
those of investor for reporting purposes. __
__
10. More
than 50%
The investor does not include an investment account for the
investee in the balance sheet.
__
__
26. Indicate (by letter) the way each of the investments listed below usually should be
accounted for under
U.S. GAAP based on the information provided.
1. Equity
Method Treasury bonds held for their entire life. _
__
_
2. Equity
Method Accounts Receivable. _
__
_
3. Equity
Method Treasury bonds held for short-term profit. _
__
_
4. Trading
Securities
Common stock held for immediate resale. _
__
_
5. Securities
Held to
Maturity
40% of the voting common stock of XYZ Company. _
__
_
6. Trading
Securities 85% of the voting common stock of ABC Corporation. _
__
_
7. None of
the above
25% of the voting common stock of DEF Corporation. _
__
_
8. Consolida
tion
50% of the voting common stock of JMG Corporation. _
__
_
9. Equity
Method
18% of voting common stock of Griggs corporation;
investor's CEO on the board of directors of Griggs Corp; no
other investor owns more than 1%.
_
__
_
10. Securit
ies Held to
Maturity
Corporate bonds to be held for full term of 10 years. _
__
_
27. Match each phrase with the correct term placing the letter designating the best term in
the space provided
by the phrase.
1. Unrealized losses Temporary declines in the fair value of an
available for sale security. __
__
2. Securities available for sale
only
Reported at fair value. __
__
3. Trading securities only
Changes in market value affect
comprehensive income, but not net income. __
__
4. Dividends received
Changes in market value affect net
income. __
__
5. Trading securities and
securities available for sale
Reduces the investment account balance
under the equity method.
__
__
28. Match each phrase with the correct term placing the letter designating the best term in
the space provided
by the phrase.
1. Business model
test
Does not allow the "held-to-maturity" approach for
debt investments. _
__
_
2. Accounting
mismatch
Can be accounted for as "fair value through profit
and loss" or as "fair value through other comprehensive
income" under IFRS No. 9.
_
__
_
3. Equity
investments One of the criteria that must be met under IFRS No.
9 to qualify for use of the amortized cost method. _
__
_
4. IFRS No. 9
Similar to available for sale investments, except
realized gains and losses are not reclassified into net
income.
_
__
_
5. Fair value
through other
comprehensive
income
One of the circumstances in which the fair-value
option can be used under IFRS. _
__
_
29. Match each phrase with the correct term placing the letter designating the best term in
the space provided
by the phrase.
1. Change from the equity
method
Result from a decline in fair value prior to
sale. ___
_
2. Financial instruments Change accounted for prospectively. ___
_
3. Change to the equity
method
Change accounted for retrospectively. ___
_
4. Unrealized gains
Encompass cash, equity securities, and debt
securities ___
_
5. Unrealized losses When related to trading securities, they
increase net income. ___
_
30. Match each phrase with the correct term placing the letter designating the best term in
the space provided
by the phrase.
1. Unrealized holding gains
and losses
Recognized only to the extent of carrying
value under the equity method. _
__
_
2. Impairment of securities
available for sale
Reported in the income statement for
trading securities.
_
__
_
3. Losses of investee
Reduces investment account under the
equity method if its fair value is higher than
its book value.
_
__
_
4. Amortization of a patent
that was obtained in a business
acquisition
Requires positive intent and ability. _
__
_
5. Securities held to maturity
Requires recognition in the income
statement if judged to be other than
temporary.
_
__
_
31. Match each phrase with the correct term placing the letter designating the best term in
the space provided
by the phrase.
1. Dividends Can be required in the future when, at the time an equitymethod investment is made, the fair value of investee's
identifiable net assets exceeds their carrying value.
_
__
_
2. Additional
depreciation
Recognized as revenue for available-for-sale investments,
but not equity-method investments. _
__
_
3. Consolidati
on
Used when investor can significantly influence investee. _
__
_
4. Equity
method
Used when investor has effective control of investee. _
__
_
5. Investor's
share of
investee
income
Recognized as revenue for equity-method investments, but
not for available-for-sale investments. _
__
_
32. The investment category for which the investor's "positive intent and ability to hold"
is important is:
A. Securities reported under the equity method.
B. Trading securities.
C. Securities classified as held to maturity.
D. Securities available for sale.
33. Which of the following investment securities held by Zoogle Inc. may be classified as
held-to-maturity
securities in its balance sheet?
A. Long-term debenture bonds.
B. Common stock.
C. Callable preferred stock.
D. All of the above are correct.
34. Which of the following investment securities held by Zoogle Inc. are not reported at
fair value in its
balance sheet?
A. Common stock held as available for sale securities.
B. Debt securities held to maturity.
C. Preferred stock held as trading securities.
D. All of the above are reported at fair value.
35. Both fair values and subsequent growth of the investee are not as relevant for
investments in which of the
following categories?
A. Securities reported under the equity method.
B. Trading securities.
C. Held-to-maturity securities.
D. Securities available for sale.
36. Which category completely excludes equity securities?
A. Securities available for sale.
B. Consolidating securities.
C. Held-to-maturity securities.
D. Trading securities.
37. In 2009, Osgood Corporation purchased $4 million in ten-year municipal bonds at
face value. On
December 31, 2011, the bonds had a market value of $3,600,000 and Osgood reclassified
the bonds from
held to maturity to trading securities. Osgood's December 31, 2011, balance sheet and the
2011 income
statement would show the following:
A. Option A
B. Option B
C. Option C
D. Option D
Beresford Inc. purchased several investment securities during 2008, its first year of
operations. The
following information pertains to these securities. The fluctuations in their fair values are
not considered
permanent.
38. What balance sheet amount would Beresford report for its total investment securities
at 12/31/10?
A. $637,000
B. $644,500
C. $645,400
D. None of the above is correct.
39. What would be the balance in Beresford's accumulated other comprehensive income
with respect to these
investments in its 12/31/11 balance sheet (ignore taxes)?
A. $55,100
B. $26,500
C. $10,400
D. None of the above is correct.
40. What total unrealized holding gain would Beresford report in its 2011 income
statement relative to its
investment securities?
A. $55,900
B. $36,000
C. $80,900
D. $48,200
41. On January 1, 2011, Rupar Retailers purchased $100,000 of Anand Company bonds
at a discount of
$5,000. The Anand bonds pay 6% interest but were purchased when the market interest
rate was 7%
for bonds of similar risk and maturity. The bonds pay interest semi-annually on January 1
and July 1 of
each year. Rupar accounts for the bonds as a held-to-maturity investment, and uses the
effective interest
method. In Rupar's December 31, 2011 journal entry to record the second period of
interest, Rupar would
record a credit to interest revenue of:
A. $3336.
B. $3325.
C. $3000.
D. $3500.
42. If Dinsburry Company concluded that an investment originally classified as a trading
security would now
more appropriately be classified as held to maturity, Dinsburry would:
A. not reclassify the investment, as original classifications are irrevocable.
B
. reclassify the investment as held to maturity and immediately recognize in net income
all unrealized
gains and losses as of the reclassification date.
C
.
reclassify the investment as held to maturity and treat the fair value as of the date of
reclassification as
the investment's amortized cost basis for future amortization.
D. reclassify the investment as held to maturity, but there would be no income effect.
43. If Ziggy Company concluded that an investment originally classified as held to
maturity would now more
appropriately be classified as available for sale, Ziggy would:
A. not reclassify the investment, as original classifications are irrevocable.
B
. reclassify the investment as available for sale and immediately recognize in net income
any unrealized
gain or loss on the reclassification date.
C
.
reclassify the investment as available for sale and immediately recognize in accumulated
other
comprehensive income any unrealized gain or loss on the reclassification date.
D. need to restate earnings, as the original classification was in error.
44. If Dizbert Company concluded that an investment originally classified as available
for sale would now
more appropriately be classified as held to maturity, Dizbert would:
A. not reclassify the investment, as original classifications are irrevocable.
B
. reclassify the investment as held to maturity and immediately recognize in net income
any unrealized
gain or loss on the reclassification date.
C
.
reclassify the investment as held to maturity and treat the fair value as of the date of
reclassification as
the investment's amortized cost basis for future amortization.
D. need to restate earnings, as the original classification was in error.
45. Securities that are purchased with the intent of selling them in the near future to take
advantage of shortterm price changes are classified as:
A. Securities available for sale.
B. Consolidating securities.
C. Held-to-maturity securities.
D. Trading securities.
46. The income statement reports changes in fair value for which type of securities?
A. Securities reported under the equity method.
B. Trading securities.
C. Held-to-maturity securities.
D. Securities available for sale.
47. Trading securities are most commonly found on the books of:
A. Oil companies.
B. Manufacturing companies.
C. Banks.
D. Foreign subsidiaries.
48. For trading securities, unrealized holding gains and losses are included in earnings:
A. Only at the end of the fiscal year.
B. On each reporting date.
C. Only when they exceed 10% of the underlying investment.
D. Based on a vote of the board of directors.
49. Trading securities, by definition, are properly classified in the balance sheet as:
A. Shareholders' equity.
B. Intangibles.
C. Current assets.
D. Other assets.
50. Holding gains and losses on trading securities are included in earnings because:
A. They measure the success or failure of taking advantage of short-term price changes.
B. The IRS mandates the inclusion.
C. The SEC mandates the inclusion.
D. They measure the book value of the securities in the balance sheet date.
51. In the statement of cash flows, inflows and outflows of cash from buying and selling
trading securities
typically are considered:
A. Investing activities.
B. Operating activities.
C. Financing activities.
D. Noncash financing activities.
52. Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts
for as a trading
security. Thomas Corporation shares are publicly traded on the New York Stock
Exchange, and the
prevailing price on that exchange indicates that Dyckman's investment is worth $20,000.
However,
Dyckman management believes that the stock market is generally overvalued, and their
analysis of
the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry
the Thomas
investment on its balance sheet at:
A. $20,000.
B. $18,000.
C. either $18,000 or $20,000, as either are defensible valuations.
D. $19,000, the midpoint of Dyckman's range of reasonably likely valuations of Thomas.
53. Nichols Enterprises has an investment in 25,000 shares of Elliott Electronics that
Nichols accounts for as
a security available for sale. Elliott shares are publicly traded on the New York Stock
Exchange, and the
Wall Street Journal quotes a price for those shares of $10/share, but Nichols believes the
market has not
appreciated the full value of the Elliott shares and that a more accurate price is $12/share.
Nichols should
carry the Elliott investment on its balance sheet at:
A. $300,000.
B. $250,000.
C. either $250,000 or $300,000, as either are defensible valuations.
D. $275,000, the midpoint of Nichols's range of reasonably likely valuations of Elliott.
54. Anthers Inc. bought the following portfolio of trading securities near the end of
2011.
What amount will be reported in the balance sheet for this portfolio at December 31,
2011, and how will
it be classified?
A. Option A
B. Option B
C. Option C
D. Option D
55. On January 1, 2011, Nana Company paid $100,000 for 8,000 shares of Papa
Company common stock.
These securities were classified as trading securities. The ownership in Papa Company is
10%. Papa
reported net income of $52,000 for the year ended December 31, 2011. The fair value of
the Papa stock
on that date was $45 per share. What amount will be reported in the balance sheet of
Nana Company for
the investment in Papa at December 31, 2011?
A. $284,400.
B. $300,000.
C. $315,600.
D. $360,000.
56. Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2010,
and classified the
stock as available for sale. The market value of the stock declined to $118,000 by
December 31, 2010.
Goofy reclassified this investment as trading securities in December of 2011 when the
market value had
risen to $125,000. What effect on 2011 income should be reported by Goofy for the
Crazy Co. shares?
A. $0.
B. $25,000 net loss.
C. $7,000 net gain.
D. $32,000 net loss.
57. Hobson Company bought the securities listed below during 2010. These securities
were classified
as trading securities. In its December 31, 2010, income statement Hobson reported a net
unrealized loss of $13,000 on these securities. Pertinent data at the end of December,
2011 are as
follows:
What amount of loss on these securities should Hobson include in its income statement
for the year ended
December 31, 2011?
A. $41,000.
B. $54,000.
C. $13,000.
D. $0.
58. What is the effect on a company's cash flows and reported profit from accounting for
an investment as a
trading security versus as an available-for-sale security?
A. Option A
B. Option B
C. Option C
D. Option D
59. The fair value of debt securities not regularly traded can be most reasonably
approximated by:
A. Calculating the discounted present value of the principal and interest payments.
B. Determining the value using similar securities in the NASDAQ market.
C. Using the relative fair value method.
D. Calling a licensed and registered stockbroker.
60. All investments in debt and equity securities that don't fit the definitions of the other
reporting categories
are classified as:
A. Trading securities.
B. Securities available for sale.
C. Held-to-maturity securities.
D. Consolidated securities.
61. Investments in securities available for sale are reported at:
A. Discounted present value.
B. Lower of cost or market.
C. Historical cost.
D. Fair value on the reporting date.
62. All investment securities are initially recorded at:
A. Cost.
B. Present value.
C. Equity value.
D. None of the above is correct.
63. 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?
A. Securities available for sale.
B. Trading securities.
C. Consolidated securities.
D. Held-to-maturity securities.
64. GAAP regarding accounting for certain debt and equity securities generally will
apply to an investment
when the percentage of ownership of another company is:
A. Less than 20%.
B. 20% to 50%.
C. Over 50%.
D. Exactly 100%.
65. When an investor classifies an investment in common stock as securities available for
sale, cash
dividends are classified by the investor as:
A. A return of capital.
B. A loss.
C. A deduction from the investment account.
D. Dividend income.
66. When an equity 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.
67. Investments in securities to be held for an unspecified period of time are reported at:
A. Historical cost.
B. Present value.
C. Lower of cost or market.
D. Fair value.
68. Unrealized holding gains and losses on securities available for sale would have the
following effects on
accumulated other comprehensive income:
A. Option A
B. Option B
C. Option C
D. Option D
69. In the statement of cash flows, inflows and outflows of cash from buying and selling
available for sale
securities are considered:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Noncash financing activities.
70. Unrealized holding gains and losses on securities available for sale would have the
following effects on
retained earnings:
A. Option a
B. Option b
C. Option c
D. Option d
71. Zwick Company bought 28,000 shares of the voting common stock of Handy
Corporation in January
2011. In December, Hart announced $200,000 net income for 2011 and declared and paid
a cash dividend
of $2 per share on the 200,000 shares of outstanding common stock. Zwick Company's
dividend revenue
from Handy Corporation in December 2011 would be:
A. $0.
B. $28,000.
C. $56,000.
D. None of the above is correct.
72. On January 2, 2010, Howdy Doody Corporation purchased 12% of Ranger
Corporation's common stock
for $50,000 and classified the investment as available for sale. Ranger's net income for
the years ended
December 31, 2010 and 2011, were $10,000 and $50,000, respectively. During 2011,
Ranger declared
and paid a dividend of $60,000. There were no dividends in 2010. On December 31,
2010, the fair value
of the Ranger stock owned by Howdy Doody had increased to $70,000. How much
should Howdy Doody
show in the 2011 income statement as income from this investment?
A. $26,000.
B. $7,200.
C. $20,000.
D. $27,200.
73. Jeremiah Corporation purchased securities during 2011 and classified them as
securities available for
sale:
All declines are considered to be temporary. How much gain will be reported by Jeremiah
Corporation in
the December 31, 2011, income statement relative to the portfolio?
A. $0.
B. $16,000.
C. $20,000.
D. None of the above is correct.
74. Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2008
for $50 per share and
classified the investment as securities available for sale. Diamond's market value was $60
per share on
December 31, 2009 and $65 on December 31, 2010. During 2011, Hawk sold all of its
Diamond stock at
$70 per share. In its 2011 income statement, Hawk would report:
A. A gain of $50,000.
B. A gain of $150,000.
C. A gain of $200,000.
D. A gain of $300,000.
75. Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2008 for $800
per share and
classified the investment as securities available for sale. Witt's market value was $400 per
share on
December 31, 2009, and $300 on December 31, 2010. During 2011, Dim sold all of its
Witt stock at $350
per share. In its 2011 income statement, Dim would report:
A. A realized gain of $50,000.
B. A recognition of unrealized losses of $400,000.
C. A loss on the sale of investments of $450,000.
D. A trading gain of $50,000 and an unrealized loss of $500,000.
76. On January 1, 2011, Everglade Company purchased the following securities and
properly accounted for
them as securities available for sale:
All declines in value are considered temporary. What amount should the Everglade
Company report
relative to these securities in its 2009 income statement?
A. $0.
B. $19,000 unrealized gain.
C. $12,000 net unrealized gain.
D. $7,000 unrealized loss.
77. Boulter, Inc. began business on January 1, 2011. At the end of December 2011,
Boulter had the following
investments in equity securities:
All declines in value are deemed to be temporary in nature. How should the
corresponding losses be reflected in the financial statements at December 31, 2011?
A. Option A
B. Option B
C. Option C
D. Option D
78. A weakness of ___(insert from choices below)____ is that firms can increase or
decrease net income by
choosing to sell particular investments with net unrealized gains or unrealized losses:
A. the available-for-sale approach
B. the trading-securities approach
C. both the available-for-sale and trading-securities approaches
D. neither the available-for-sale and trading-securities approaches
79. If an available-for-sale investment is sold for which there are unrealized gains in
accumulated other
comprehensive income (AOCI), a reclassification adjustment affects other comprehensive
income (OCI)
in the period of sale by
A. reducing OCI for the amount of unrealized gains in AOCI.
B. increasing OCI for the amount of unrealized gains in AOCI.
C. no effect on OCI, as OCI only includes the effects of unrealized gains and losses.
D. no effect on OCI, as the realized gain is included in AOCI.
80. If an available-for-sale investment is sold for which there are unrealized losses in
accumulated other
comprehensive income (AOCI), the total effect on total comprehensive income is
A. an increase.
B. a decrease.
C. no effect.
D. can't determine given this information.
81. 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 lists the investment at $100,000 on its balance sheet. Seybert
purchased the Wang
investment for (ignore taxes):
A. $100,000.
B. $120,000.
C. $80,000.
D. cannot be determined from this information.
82. Sloan Company has owned an investment during 2011 that has increased in fair
value. After all closing
entries for 2011 are completed, the effect of the increase in fair value on total
shareholders' equity would
be:
A. higher under the available-for-sale approach than under the trading-securities
approach.
B. lower under the available-for-sale approach than under the trading-securities approach.
C. the same amount under the available-for-sale and trading-securities approaches.
D
. not possible to identify whether the available-for-sale or trading-securities approaches
yield higher
shareholders' equity given this information.
83. When investments are treated as available-for-sale, other comprehensive income
(OCI) also includes the
tax effects associated with unrealized holding gains and losses. As a result:
A
. accumulated other comprehensive income would be increased by the tax benefits
typically associated
with unrealized holding gains.
B.
other comprehensive income typically would be reduced by the tax expense associated
with unrealized
holding gains.
C. accumulated other comprehensive income would not be affected by taxes.
D. none of the above.
84. The Guitar World (TGW) holds an investment that increased in fair value over 2011,
and accounts for
that investment as available for sale. When considering taxes, TGW would:
A. recognize tax expense on the income statement, and probably increase taxes payable.
B. recognize tax expense on the income statement, and probably increase its deferred tax
liability.
C.
reduce accumulated other comprehensive income (AOCI) for tax expense, and probably
increase taxes
payable.
D.
reduce accumulated other comprehensive income (AOCI) for tax expense, and probably
increase its
deferred tax liability.
85. The equity method of accounting for investments in voting common stock is
appropriate when:
A. The investor can significantly influence the investee.
B. The investor has voting control over the investee.
C. The investor intends to hold the common stock indefinitely.
D. The investor is assured of a continued supply of a valuable raw material.
86. Consolidated financial statements are prepared when one company has:
A. Accounted for the investment using the equity method.
B. Accounted for the investment as securities available for sale.
C. Control over another company.
D. None of the above is correct.
87. If Pop Company owns 15% of the common stock of Son Company, then Pop
Company typically:
A. Would record 15% of the net income of Son Company as investment income each
year.
B. Would record dividends received from Son Company as investment revenue.
C. Would increase its investment account by 15% of Son Company income each year.
D. All of the above are correct.
88. If Pop Company exercises significant influence over Son Company and owns 40% of
its common stock,
then Pop Company:
A. Would record dividends received from Son Company as investment revenue.
B. Would increase its investment account when Son Company declares dividends.
C. Would record 40% of the net income of Son Company as investment income each
year.
D. All of the above are correct.
89. When using the equity method to account for an investment, cash dividends received
by the investor from
the investee should be recorded:
A. As a reduction in the investment account.
B. As an increase in the investment account.
C. As dividend income.
D. As a contra item to stockholders' equity.
90. When the equity method of accounting for investments is used by the investor, the
investment account is
increased when:
A. A cash dividend is received from the investee.
B. The investee reports a net income for the year.
C. The investor records additional depreciation related to the investment.
D. The investee reports a net loss for the year.
91. Which of the following increases the investment account under the equity method of
accounting?
A. Decreasing the market price of the investee's stock
B. Dividends paid by the investee that were declared in the previous year
C. Net loss of the investee company
D. None of the above is correct.
92. If the fair value of equity securities is not determinable and the equity method is not
appropriate, the
securities should be reported at:
A. Amortized cost.
B. Cost.
C. Consolidated value.
D. Net present value.
93. When the investor's level of influence changes, it may be necessary to change from
the equity method
to another method. When the level of ownership falls from a range of 20% to 50% to less
than 20%, the
equity method typically would be discontinued and the investment account balance
would be carried over
at:
A. Amortized cost on the date of ownership change.
B. Fair market value on the date of ownership change.
C. Discounted present value on the date of ownership change.
D. The current balance, and this balance would serve as the new "cost".
94. When the investor's level of influence changes, it may be necessary to change to the
equity method from
another method. When the level of ownership rises from less than 20% to a range of 20%
to 50%, the
equity method typically would become appropriate and the investment account balance
should be:
A.
Retrospectively adjusted to the balance that would have existed if the equity method had
been in effect
for prior years.
B. Carried over as is with no adjustment necessary.
C. Carried over at fair market value on date of transfer.
D. Adjusted to reflect amortized cost.
95. On July 1, 2011, Tremen Corporation acquired 40% of the shares of Delany
Company. Tremen paid
$3,000,000 for the investment, and that amount is exactly equal to 40% of the fair value
of identifiable
net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for
2011, and paid
$150,000 quarterly dividends to its shareholders. After all closing entries are made,
Tremen's "Investment
in Delany Company" account would have a balance of:
A. $3,200,000.
B. $3,160,000.
C. $3,000,000.
D. $3,080,000.
96. Which of the following is not true about accounting for investments under IFRS?
A.
IFRS allows proportionate consolidation of investments where two or more investors
have joint
control.
B. IFRS is more restrictive than U.S. GAAP concerning when an investor can elect the
fair value option.
C
. IFRS requires that the accounting policies of an investee be adjusted to correspond to
those of the
investor when applying the equity method.
D. IFRS does not allow use of the equity method where two or more investors have joint
control.
97. Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity
method.
Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31 of
2010 and 2011,
respectively. During 2011 Clor recognized $80,000 of net income and paid dividends of
$30,000.
Assuming that Bloomfield owned the same percentage of Clor throughout 2011, their
percentage
ownership must have been:
A. 15%.
B. 18.75%.
C. 30%.
D. 50%.
98. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on
January 1, 2011. Jack
can significantly influence Jill. On December 10, 2011, Jill declared and paid $1 million
in dividends.
Jill reported a net loss of $6 million for the year. What amount of loss should Jack report
in its income
statement for 2011 relative to its investment in Jill?
A. $1 000,000.
B. $1,200,000.
C. $1,400,000.
D. $1,500,000.
99. Hope Company bought 30% of Faith Corporation in 2011. 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
2011, 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 as available for sale
instead of
using the equity method. What effect would this error have on the investment account and
net income,
respectively, for 2011?
A. Overstated by $1,050,000; understated by $1,050,000.
B. Understated by $1,050,000; understated by $1,050,000.
C. Overstated by $1,200,000; overstated by $1,200,000.
D. Understated by $1,200,000; overstated by $1,050,000.
100.Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on
Jan 1, 2011. On
November 1, 2011, Hack declared and paid $1 million in dividends. On December 31,
Hack reported a
net loss of $6 million for the year. What amount of loss should Sox report on its income
statement for
2011 relative to its investment in Hack?
A. $1,100,000.
B. $2,400,000.
C. $1,500,000.
D. $1,600,000.
101.Assume that, on 1/1/11, Matsui Co. paid $1,200,000 for its investment in 60,000
shares of Yankee Inc.
Further, assume that Yankee has 200,000 total shares of stock issued. The book value and
fair value of
Yankee's identifiable net assets were both $4,000,000 at 1/1/11. The following
information pertains to
Yankee during 2011:
What amount would Matsui report in its year-end 2011 balance sheet for its investment in
Yankee?
A. $1,320,000
B. $1,260,000
C. $1,242,000
D. None of the above is correct.
102.Gerken Company concluded at the beginning of 2011 that the company's ownership
interest in DillCo
had increased to the point that it became appropriate to begin using the equity method to
account for the
investment. The balance in the investment account is $50,000 at the time of the change,
and accountants
working with company records determined that the balance would have been $75,000 if
the account
had been adjusted for investee net income and dividends as prescribed by the equity
method. After
implementing the change to the equity method, if financial statements were prepared,
A. net income and retained earnings will be higher by $25,000.
B. net income will be unchanged, and retained earnings will be higher by $25,000.
C. net income and retained earnings will be higher by $75,000.
D. the accounts will be unchanged, because no adjustment is necessary.
103.On April 1, 2011, 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 2011, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income
for 2011,
and paid a total of $10,000 of dividends to shareholders. BigBen's investment in
LittleTick will affect
BigBen's 2011 net income by:
A. a loss of $10,500.
B. earnings of $4,500.
C. earnings of $1,125.
D. earnings of $3,450.
104.Cucumber Company concluded at the beginning of 2011 that the company's
ownership interest in
PickelCo had decreased to the point that it became appropriate to begin accounting for its
investment as
available for sale, rather than using the equity method as it had been doing. The balance
in the investment
account is $75,000 at the time of the change, and accountants working with company
records determined
that the balance would have been $50,000 if the investment had been accounted for as an
available-forsale investment. At the time of implementing the change to the available-for-sale method,
if financial
statements were prepared,
A. net income and retained earnings will be lower by $25,000.
B. net income will be unchanged, and retained earnings will be lower by $25,000.
C. the accounts will be unchanged, because no adjustment is necessary.
D. other comprehensive income and accumulated other comprehensive income will be
lower by $25,000.
105.When the equity method of accounting for investments is used by the investor, the
amortization of
additional depreciation due to differences between book values and fair values of investee
assets on the
date of acquisition:
A. Reduces the investment account and increases investment revenue.
B. Increases the investment account and increases investment revenue.
C. Reduces the investment account and reduces investment revenue.
D. Increases the investment account and reduces investment revenue.
106.On January 1, 2011, Green Corporation purchased 20% of the outstanding voting
common stock of
Gold Company for $300,000. The book value of the acquired shares was $275,000. The
excess of cost
over book value is attributable to an intangible asset on Gold's books that was
undervalued and had a
remaining useful life of five years. For the year ended December 31, 2011, Gold reported
net income of
$125,000 and paid cash dividends of $25,000. What is the carrying value of Green's
investment in Gold at
December 31, 2011?
A. $295,000.
B. $300,000.
C. $315,000.
D. $320,000.
At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45
million. At the time
of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of
Sky Tech's
depreciable assets was $15 million in excess of their book value. For this year, Sky Tech
reported a net
income of $75 million and declared and paid $15 million in dividends.
107.The amount of purchased goodwill is:
A. $18 million.
B. $30 million.
C. $60 million.
D. None of the above is correct.
108.The total amount of additional depreciation to be recognized by SBC over the
remaining life of the assets
is:
A. $4.5 million.
B. $15 million.
C. $27 million.
D. None of the above is correct.
109.Assume that, on 1/1/11, Sosa Enterprises paid $5,100,000 for its investment in
36,000 shares of Orioles
Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an
8 year
remaining useful life and straight-line depreciation with no residual value for its
depreciable assets.
At 1/1/11, the book value of Orioles' identifiable net assets was $7,000,000, and the fair
value of Orioles
was $10,000,000. The difference between Orioles' fair value and the book value of its
identifiable net
assets is attributable to $1,800,000 of land and the remainder to depreciable assets.
Goodwill was not part
of this transaction.
The following information pertains to Orioles during 2011:
What amount would Sosa Enterprises report in its year-end 2011 balance sheet for its
investment in
Orioles Co.?
A. $3,200,000
B. $3,180,000
C. $3,135,000
D. $3,027,000
110.Smith buys and sells securities which it typically classifies as available for sale. On
December 15, 2011,
Smith purchased $500,000 of Jones shares, and elected the fair value option to account
for the Jones
investment. As of December 31, 2011, the Jones shares had a fair value of $525,000. In
the 2011 financial
statements, Smith will show (ignore taxes):
A. investment income of $25,000 in its income statement.
B. other comprehensive income of $25,000.
C. accumulated other comprehensive income of $525,000.
D. an investment in Jones of $500,000.
111.Which of the following is not true about the fair value option?
A. The fair value option is irrevocable.
B. The fair value option must be elected for all shares of an investment in a particular
company.
C.
Electing the fair value option for held-to-maturity investments simply reclassifies those
investments as
trading securities.
D. All of the above are true.
112.Which of the following is not true when the fair value option is elected for an
investment that would
normally be accounted for under the equity method?
A. No journal entry need be made to recognize the investor's portion of the investee's net
income.
B. Unrealized gains and losses on that investment are recognized in net income.
C. No journal entry need be made to recognize the investor's portion of dividends paid by
the investee.
D. All of the above are true.
113.Under IAS No. 39: which is not a category for accounting for investments?
A. Fair value through profit and loss.
B. Fair value through other comprehensive income.
C. Held-to-maturity.
D. Available-for-sale.
114.Under IFRS No. 9: which is not a category for accounting for investments?
A. Fair value through profit and loss.
B. Fair value through other comprehensive income.
C. Held-to-maturity.
D. Amortized cost.
115.Which of the following is NOT true about the "fair value through profit and loss"
approach for
accounting for investments under IFRS?
A. Allowed under both IAS No. 39 and IFRS No. 9.
B. Includes unrealized gains in earnings.
C. Requires reclassification of realized gains from other comprehensive income.
D. Not vulnerable to other-than-temporary impairments.
116.Which of the following is NOT true about the "fair value through other
comprehensive income" approach
for accounting for investments under IFRS No. 9?
A. Allowed for debt investments.
B. Includes unrealized gains in other comprehensive income.
C. Does not require reclassification of realized gains from other comprehensive income.
D. Allowed for equity investments.
117.Wang Corporation purchased $100,000 of Hales Inc 6% bonds at par with the intent
and ability to
hold the bonds until they matured in 2015, so Wang classifies its investment as held to
maturity.
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 2011. Wang 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
Wang accounts for
the Hales bonds under IFRS, before-tax net income for 2011 will be reduced by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
118.If the fair value of a held-to-maturity investment declines for a reason that is viewed
as "other than
temporary" because the company intends to sell the investment,
A. the investment is not written down to fair value.
B.
the investment is written down to fair value, and the entire impairment loss is recognized
in net
income.
C
.
the investment is written down to fair value, and the entire impairment loss is recognized
in
accumulated other comprehensive income.
D.
the investment is treated the same way it would be treated if the decline in fair value was
viewed as
temporary.
119.If the fair value of a held-to-maturity investment declines for a reason that is viewed
as "other than
temporary" because the company has incurred a credit loss on the investment,
A
. the investment is written down to fair value, and only the non-credit-loss component of
the impairment
loss is recognized in net income.
B.
the investment is written down to fair value, and the entire impairment loss is recognized
in net
income.
C.
the investment is written down to fair value, and only the credit-loss component of the
impairment loss
is recognized in net income.
D.
the investment is written down to fair value, but none of the impairment loss is
recognized in net
income.
120.If the fair value of a trading security declines for a reason that is viewed as "other
than temporary",
A. the investment is not written down to fair value.
B.
the investment is written down to fair value, and a special "impairment loss" is
recognized in net
income.
C.
the investment is written down to fair value, and the impairment loss is recognized in
accumulated
other comprehensive income.
D.
the investment is treated the same way it would be treated if the decline in fair value was
viewed as
temporary.
121.When an impairment of an equity investment that is classified as available for sale
occurs for a reason
that is judged to be "other than temporary," the investment is written down to its fair
value and the
amount of the write-down is:
A. Recorded as a deferred credit.
B. Included in income.
C. Recorded as deferred asset.
D. Treated as unrealized.
122.An OTT impairment for an equity investment is recognized if fair value declines
below amortized cost
and
A. The company has incurred non-credit losses.
B. The company does not have the intent and ability to hold the investment until fair
value recovers.
C. The company lacks intent to hold the investment until fair value recovers.
D. The company has incurred credit losses.
123.If the fair value of a debt investment that is classified as an available-for-sale
investment declines for a
reason that is viewed as "other than temporary" because it is viewed as "more likely than
not" that the
investor will be required to sell the investment prior to recovering the amortized cost of
the investment
less any credit losses arising in the current year,
A. the investment is not written down to fair value.
B. the investment is written down to fair value, and the impairment loss is recognized in
net income.
C.
the investment is written down to fair value, and the impairment loss is recognized in
accumulated
other comprehensive income.
D. the investment is written down to fair value, and only the credit loss is included in net
income.
124.If the fair value of a debt investment that is classified as an available-for-sale
investment declines for a
reason that is viewed as "other than temporary" because the company has incurred a
credit loss on the
investment,
A
. the investment is written down to fair value, and only the non-credit-loss component of
the impairment
loss is recognized in net income.
B.
the investment is written down to fair value, and the entire impairment loss is recognized
in net
income.
C.
the is investment written down to fair value, and only the credit-loss component of the
impairment loss
is recognized in net income.
D.
the investment is written down to fair value, but none of the impairment loss is
recognized in net
income.
125.Which of the following is NOT a reason to consider a decline in the fair value of a
debt investment to
be "other than temporary"?
A. The investor determines that a credit loss exists on the investment.
B. The investor intends to sell the investment.
C
. The investor believes it is "more likely than not" that the investor will be required to sell
the investment
prior to recovering the amortized cost of the investment less any credit losses arising in
the current year.
D. The investor intends to hold the investment to maturity.
Nichols Corporation purchased $100,000 of Holly Inc 6% bonds at par with the intent
and ability to
hold the bonds until they matured in 2015, so Nichols classifies its investment as held to
maturity.
Unfortunately, a combination of problems at Holly and in the debt market caused the fair
value of the
Holly investment to decline to $70,000 during 2011. Nichols 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.
126.Assume that Nichols concludes that the Holly bonds are other-than-temporarily
impaired because Nichols
is planning to sell the bonds in the near future. Before-tax net income for 2011 will be
reduced by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
127.Assume that Nichols concludes that the Holly bonds are other-than-temporarily
impaired because Nichols
believes it is more likely than not that it will have to sell the Taylor bonds before the
bonds have a chance
to recover their fair value. Before-tax net income for 2011 will be reduced by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
128.Assume that Nichols concludes that the Holly bonds are other-than-temporarily
impaired because Nichols
calculates that the bonds have incurred credit losses. Before-tax net income for 2011 will
be reduced
by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
129.Dicker Furriers purchased one thousand shares of Loose Corporation stock on
January 10, 2010, for $800
per share and classified the investment as securities available for sale. Loose's market
value was $400
per share on December 31, 2010, and the decline in value was viewed as temporary. As of
December 31,
2011, Dicker still owned the Loose stock whose market value has declined to $100 per
share. The decline
is due to a reason that's judged to be other than temporary. Dicker's December 31, 2011,
balance sheet
and the 2011 income statement would show the following:
A. Option A
B. Option B
C. Option C
D. Option D
130.Which of the following is not an example of a derivative?
A. Interest rate swap.
B. Cash.
C. Stock option.
D. Forward contract.
131.Which of the following is not true about derivatives?
A. Large losses on derivative investments have been reported in the press.
B. Derivatives are so named because their value is derived from some underlying
measure.
C. Derivatives are useful instruments for managing risk.
D. Accounting for derivatives is fully resolved and no additional rules or interpretations
are likely.
132.Prepare the appropriate journal entries to record the transactions for the year,
including any year-end
adjustments. Show calculations, rounded to the nearest dollar.
On March 1, 2011, Navy Corporation used excess cash to purchase U.S. Treasury bonds
for $103,000
plus accrued interest. The appropriate interest rate is 6%. Interest on these bonds is
payable on January
1 and July 1 of each year. Navy's investment is accounted for as held to maturity. The fair
value of the
Treasury bonds is $104,000 at year end.
Required:
133.(1.) Prepare the appropriate journal entry to record the acquisition of the bonds.
(2.) Record the first two interest payments (ignore year-end accruals).
On January 1, 2011, Wildcat Company purchased $93,000 of 10% bonds at face value.
The bonds are to
be held to maturity. The bonds pay interest semiannually on January 1, and July 1.
Required:
134.On January 1, 2011, Hoosier Company purchased $930,000 of 10% bonds at face
value. The bond market
value was $980,000 on December 31, 2011.
Required:
Prepare the appropriate journal entry on December 31, 2011, to properly value the bonds
assuming the
bonds are classified as:
(1.) Trading securities.
(2.) Securities available for sale.
(3.) Held-to-maturity securities.
135.FKG Inc. carries the following investments on its books at December
31, 2010, and December 31, 2011. All securities were purchased during
2010.
Required:
(1.) Prepare the necessary journal entries for FKG on December 31, 2010, and December
31, 2011.
(2.) What net effect would the valuation of these stock investments have on 2009 net
income? On 2011
net income?
136.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.
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 market value
of $142,000 and
an aggregate cost of $150,000.
Required:
137.Prepare the appropriate journal entries to record the transactions for the year
including year-end
adjustments. Show calculations.
Jackson Company engaged in the following investment transactions during the current
year.
Required:
138.Eastwood Enterprises owns 30,000 shares of the Van Cleef Company (5% of the
outstanding equity of
Van Cleef). Eastwood is trying to determine Van Cleef's fair value. The relevant facts are
as follows:
Eastwood bought the Van Cleef shares earlier in the accounting period for $10/share at a
time when the
shares were publicly traded on the New York Stock Exchange.
Since Eastwood bought the shares, Van Cleef has been delisted and there is no longer an
active market
in the Van Cleef shares.
Eastwood's internal valuation specialist estimates the Van Cleef shares to be worth
$8/share. Eastwood
plans to continue holding the shares, but may someday sell them if their value increases
sufficiently.
Required:
(1) What is the fair value of Eastwood's investment in Van Cleef? Briefly explain your
choice of fair
value, and relate that choice to the requirements of GAAP regarding fair value
measurement.
(2) Prepare a journal entry to record any necessary fair value adjustment.
139.On March 17, 2010, Union Corporation purchased 5,000 shares of AZQ common
stock as a long-term
investment at $40 per share. On December 31, 2010, and December 31, 2011, the market
value of the
AZQ stock is $42 and $43, respectively.
Required:
(1.) What is the appropriate reporting category for this stock? Why?
(2.) Prepare the adjusting entry on December 31, 2010.
(3.) Prepare the adjusting entry on December 31, 2011.
In its 2011 annual report to shareholders, Kirby Inc. included the following
disclosure regarding its available for sale investments in securities:
Required:
140.Prepare the journal entry (in thousands) that Kirby made at the end of 2011 to record
the information
disclosed above.
141.In 2010, Kirby made two adjustments to its available for sale investments.
Required: Briefly explain the adjustments and why they occurred.
Fragrance International, a large perfume manufacturer, reported the following in its 2011
annual report to
shareholders:
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) ("AOCI")
included in the accompanying consolidated balance sheets consist of the following:
CONSOLIDATED STATEMENTS OF CASH FLOWS
Investments sold during 2011 originally cost $3.0 million.
142.Required:
What was the after-tax realized gain or loss on the sale of available-for-sale securities in
2011? Assume a
40% tax rate.
143.Required:
Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized gain
or loss on
available-for-sale securities at 7/1/10?
144.Required:
Prepare journal entries that Fragrance International recorded at 6/30/11 to (1) record any
necessary
changes to the fair value adjustment for available-for-sale securities and (2) record any
tax effects
associated with those changes.
145.Bentz Corporation bought and sold several securities during 2011. Listed below is a
summary of the
transactions:
Required: Prepare the journal entries for the above transactions. Show calculations.
146.(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.
Krogstad Corporation bought 1,000 shares of Cole Inc. for $90 per share plus a brokerage
fee of $1,800.
Three months later, the shares were sold for $110 per share. The brokerage fee on the sale
was $2,200.
Required:
147.(1.) Prepare the journal entries to record the acquisition of the two investments.
(2.) Prepare any necessary adjusting entries assuming the stocks are both classified as
available for sale
securities.
During 2011, Largent Enterprises purchased stock as follows:
May 17, Purchased 1,000 shares of Nugent common stock for $80 per share.
July 12, Purchased 400 shares of Alfredo common stock at $60 per share, plus a $600
brokerage
commission.
Largent accounts for these investments as securities available for sale. At December 31,
2011, the market
values of the securities were as follows:
Required:
Arctic Cat Inc., the snowmobile manufacturer, reported the following in its 2005 annual
report to
shareholders:
NOTE B - SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of municipal bonds
and money market
funds and are classified as follows at March 31:
Trading securities consist of $54,608,000 and $41,707,000 invested in various money
market funds at
March 31, 2005 and 2004, respectively, while the remainder of trading securities and
available-for-sale
securities consist primarily of A-rated or higher municipal bond investments. The
amortized cost and fair
value of debt securities classified as available-for-sale was $3,105,000 and $3,196,000, at
March 31,
2005. The unrealized gain on available-for-sale debt securities is reported, net of tax, as a
separate
component of shareholders' equity.
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended March 31,
Accumulated Other Comprehensive Income changed by the following amounts:
In its 2004 annual report, Arctic Cat disclosed that "The contractual maturities of
available-for-sale debt
securities at March 31, 2004, are $3,573,000 within one year and $3,340,000 from one
year through five
years."
148.Required:
Assume Arctic Cat did not purchase any trading securities during 2005. Write a journal
entry to record
any unrealized holding gains or losses on trading securities during 2005.
149.Required:
How much did Arctic Cat actually receive from the sale of available-for-sale securities
during 2005?
150.Required:
What gain or loss would be realized if the available for sale securities on Arctic Cat's
3/31/05 balance
sheet were sold immediately for their fair value? Show the journal entry that would
record the sale, and
show a journal entry to record the effects of the sale on their fair value adjustment at the
end of the period
(ignore taxes).
151.Fredo, Inc purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2011.
Sonny recognized
a total of $400,000 of income during 2009, paid $30,000 of dividends to Fredo during
2009, and at
December 31, 2011 the market value of the Sonny investment increased to $1,040,000.
Required: Prepare the journal entries necessary to account for the Sonny investment,
assuming that
Fredo accounts for that investment as (1) an available-for-sale investment, and (2) elects
the fair-value
option.
152.On February 2, 2011, MBH Inc. acquired 30% of the voting common stock of
Construction Corporation
as a long-term investment. Data from Construction Corporation's financial statements for
the year ended
December 31, 2011, include the following:
Required: Prepare any necessary journal entries for MBH at December 31, 2011, under
the equity
method of accounting for investments.
153.Compute the amount that would be reported for the investment on American
Corporation's financial
statements at December 31, 2011.
On January 1, 2011, 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, 2011, was $80,000. During 2011, Short also paid cash dividends in the
amount of $24,000.
Required:
154.On January 1, 2011, 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, 2011, was $80,000. During 2011, Short also paid cash dividends in the
amount of $24,000.
Required:
Prepare the journal entries necessary to record the above information on American
Corporation's books
during 2011.
155.How should Silverwood report the above information in its year-end income
statement and balance sheet?
Discuss the rationale for your answer.
On July 1, 2011, Silverwood Company purchased for cash 35% of the voting common
stock of
Yellowstone Corporation. Both companies have a December 31 fiscal year-end.
Yellowstone
Corporation, which is publicly traded on an organized stock exchange, reported its net
income for the
year to Silverwood and paid a dividend to Silverwood during the year.
Required:
156.(1.) Prepare the necessary entries for 2011 under the equity method (other than for
the purchase).
(2.) Prepare any necessary entries for 2011 (other than for the purchase) that would be
required if the
securities are classified as available for sale.
On July 1, 2011, Clearwater Inc. purchased 6,000 shares of the outstanding common
stock of Mountain
Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common
stock. The total
book value and total fair value of Mountain's individual net assets on July 1, 2011 are
both $700,000. The
total fair value of the 30,000 shares of Mountain's common stock on December 31, 2011
is $760,000.
Both companies have a January through December fiscal year. The following data pertain
to Mountain
Corporation during 2011:
Required:
157.Matrix, Inc acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2011. 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
2011 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, 2011.
Required: Prepare the journal entries necessary to account for the Neo investment,
assuming that Fredo
accounts for that investment as (1) an equity method investment, and (2) elects the fairvalue option.
158.Bourne, Inc acquired 50% of David Webb Enterprises for $5,000,000 on January 1,
2011. The total
fair value and book value of Webb's identifiable net assets was $8,000,000 on that date.
During 2011
Webb recognized net income of $1,000,000 and paid dividends of $1,200,000. Webb had
a fair value of
$11,000,000 as of December 31, 2011.
Required: Determine the amounts that will be associated with the Investment in Webb
account and the
Goodwill on Bourne's financial statements, assuming Bourne accounts for the Webb
investment (1) under
the equity method, and (2) under proportionate consolidation as allowed by IFRS.
159.(1.) Prepare the entry to record the original investment in Mountain.
(2.) Compute the goodwill (if any) on the acquisition.
(3.) Prepare the necessary entries (other than acquisition) for 2011 under the equity
method.
On July 1, 2011, Clearwater Inc. purchased 6,000 shares of the outstanding common
stock of
Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding
common
stock. Assume the total book value and fair value of net assets is $650,000. Both
companies have a
January through December fiscal year. The following data pertain to Mountain
Corporation during
2011:
Required:
160.On January 1, 2010, 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 2010, Oakton reported net income of $60,000 and
paid dividends
of $30,000. On January 1, 2011, 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 2010). Bactin concluded that its 20% ownership now allowed it to
significantly
influence Oakton's operations. In 2011, Oakton reported net income of $80,000 and paid
dividends of
$40,000.
Required:
Prepare all journal entries for Bactin for 2010 and 2011, assuming no change in fair value
of the Oakton
stock during that time period.
161.1.) Prepare the appropriate 2011 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 2011. Prepare the appropriate journal entry.
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 2011.
Required:
In early December of 2011, Blue Corp purchased $40,000 of Yellow Company common
stock, which
constitutes less than 3% of Yellow's outstanding shares. Blue accounts for the Yellow
investment as
available for sale. By December 31, 2011, the value of the Yellow investment had fallen
to $30,000,
and Blue recorded an unrealized loss. By December 31, 2012, the value of the Yellow
investment had
fallen to $15,000, and Blue determined that it can no longer assert that it has both the
intent and ability
to hold the shares long enough for their fair value to recover, so Blue recorded an OTT
impairment. By
December 31, 2013, fair value had recovered to $20,000.
162.Required:
Prepare appropriate entry(s) at December 31, 2011, and indicate how the scenario will
affect net income,
OCI, and comprehensive income.
163.Required:
Prepare appropriate entry(s) at December 31, 2012 and indicate how the scenario will
affect net income,
OCI, and comprehensive income.
164.Required:
Prepare appropriate entry(s) at December 31, 2013, and indicate how the scenario will
affect net income,
OCI, and comprehensive income.
Instructions: The following answers point out the key phrases that should appear in
students' answers.
They are not intended to be examples of complete student responses. It might be helpful
to provide
detailed instructions to students on how brief or in-depth you want their answers to be.
165.Describe the general accounting procedures for reclassifying securities from one
category to another held to maturity, available for sale, or trading.
From time to time, debt and equity securities must be reclassified when conditions and
circumstances
surrounding the investment change.
Required:
166.Evaluate the rationale for these two diverse reporting requirements for equity
securities. What arguments
could be made to support each treatment?
Previously, marketable equity securities were reported using a technique referred to as
"lower of cost or
market." The current accounting standard requires fair value reporting for trading
securities and securities
available for sale. Some accountants believe that the FASB was inconsistent when GAAP
was issued
requiring changes in the value of trading securities to be reported in the income statement
and balance
sheet, while changes in the value of securities available for sale are reported only in the
balance sheet.
Required:
167.During the fourth quarter of 2001, the Company recorded special charges and loss on
securities totaling
$17.0 million, or $13.5 million after-tax. Special charges of $9.8 million, or $6.2 million
after-tax, were
associated with a salaried workforce reduction of approximately 250 employees. Cash
expenditures for
2001 related to this charge were $3.7 million. Loss on securities of $7.2 million resulted
from the writedown of the remaining investment in a privately held Internet-related company.
During the fourth quarter of 2000, the Company recorded special charges and loss on
securities totaling
$57.5 million, or $36.5 million after-tax. Special charges of $39.9 million, or $25.3
million after-tax,
were associated with terminated product initiatives, asset write-downs and executive
severance costs
related to management changes. Loss on securities of $17.6 million, or $11.2 million
after-tax, resulted
from a lower market valuation of securities of TurboChef Technologies, Inc. and
investments in privately
held Internet-related Companies .. The loss on securities charge of $17.6 million was
non-cash.
Required:
Discuss the possible rationale behind the losses on securities reported by Maytag in 2000
and 2001.
In its 2001 annual report to shareholders, Maytag Corporation included the following
disclosures in its
income statement and related footnotes:
CONSOLIDATED STATEMENTS OF INCOME
Special Charges and Loss on Securities
168.Companies need to consider GAAP regarding fair value measurements when
determining the fair value
of an investment which distinguishes between various levels of inputs to fair value
determination.
Required:
Describe the various levels of inputs, explaining key aspects that distinguish them, and
indicate which
level is most preferred and which is least preferred.
169.What classification procedure and subsequent classification could Jaycom follow in
order to meet its
objective? How will Jaycom justify its choice to the Jaycom auditors?
Jaycom Enterprises has invested its excess cash in the stock of several different
companies and desires to
maximize income over the short-run. Jaycom is unsure about the appropriate investment
policy and thus
what reporting practice to follow.
Required:
170.What factors determine which method should be used?
What events are recorded when the equity method is used?
What events are recorded when the securities are accounted for as available for sale?
Newjohn Company owns stock in several affiliated companies. Investments in some of
these affiliates are
accounted for as securities available for sale while some are accounted for using the
equity method.
Required:
171.What securities must be classified within one of the three categories of held to
maturity, available for
sale, and trading? (Do not describe how to determine how securities are classified among
these three
categories.) Identify the four primary recording activities related to investments in
securities.
Discuss the following questions.
Required:
172.What factors could be evidence of significant influence?
What factors could be evidence of lack of significant influence?
When an investor owns 20% to 50% of the voting stock of an investee company, the
investor is presumed
to exercise significant influence over the investee unless there is evidence to the contrary.
Required:
173.What is the significance of owning more than 50% of the voting common stock of
another company?
Many corporations own more than 50% of the voting stock in other corporations.
Sometimes these
affiliated companies operate within the same industry, and many times the companies are
in unrelated
industries.
Required:
174.Sometimes companies change the extent to which they can significantly influence an
investee, such that
they have to change to the equity method or from the equity method of accounting for the
investment.
Required:
Describe the adjustments necessary when a company (1) changes to the equity method
from another
method, and (2) when a company changes from the equity method to another method.
175.Assume Gibson company is an equal partner in a joint venture with Glover company.
Each company
owns 50% of Pesci company, and equally shares decision making authority.
Required:
Describe how U.S. GAAP and IFRS differ in how they would have Gibson account for
this
investment.
176.According to GAAP, companies can elect the fair value option when accounting for
many investments.
Required:
Describe how accounting for a held-to-maturity investment, an available-for-sale
investment, and an
equity-method investment is affected by a company electing the fair value option.
177.IFRS No. 9 is a standard that indicates accounting for investments when the investor
does not have
significant influence under the investee.
Required:
Explain how debt investments are accounted for under IFRS No. 9. What alternative
accounting
approaches are available, what determines whether an investment qualifies for each
approach, and what
are the key features of each approach with respect to accounting for unrealized gains and
losses?
178.IFRS No. 9 is a standard that indicates accounting for investments when the investor
does not have
significant influence under the investee.
Required:
Explain how equity investments are accounted for under IFRS No. 9. What alternative
accounting
approaches are available, what determines whether an investment qualifies for each
approach, and what
are the key features of each approach with respect to accounting for unrealized gains and
losses?
12 Key
1. TRUE
2. FALSE
3. TRUE
4. TRUE
5. FALSE
6. FALSE
7. TRUE
8. FALSE
9. TRUE
10. TRUE
11. FALSE
12. TRUE
13. TRUE
14. FALSE
15. FALSE
16. TRUE
17. FALSE
18. TRUE
19. FALSE
20. FALSE
21. TRUE
22. TRUE
23. TRUE
24. TRUE
25. 20% - 50% :: The investor can significantly influence, but not control, the investee's operating and financial
policies. and Less than
20% :: The reporting of the investment depends on the intent of management to hold or trade it. and 20% - 50% :: The
investment is reported
at cost, adjusted for subsequent growth in the investee. and Less than 20% :: The investment is reported at fair value.
and More than
50% :: Financial statements are combined as if a single company. and More than 50% :: The investor controls the
investee. and Less
than 20% :: Unrealized gains and losses are recorded at each reporting date. and More than 50% :: The investee is a
subsidiary of the
investor. and More than 50% :: Assets and liabilities of the investee are combined with those of investor for reporting
purposes. and More than
50% :: The investor does not include an investment account for the investee in the balance sheet.
26. Securities Held to Maturity :: Treasury bonds held for their entire life. and None of the above :: Accounts
Receivable. and Trading
Securities :: Treasury bonds held for short-term profit. and Trading Securities :: Common stock held for immediate
resale. and Equity
Method :: 40% of the voting common stock of XYZ Company. and Consolidation :: 85% of the voting common stock
of ABC
Corporation. and Equity Method :: 25% of the voting common stock of DEF Corporation. and Equity Method ::
50% of the voting common
stock of JMG Corporation. and Equity Method :: 18% of voting common stock of Griggs corporation; investor's CEO
on the board of directors
of Griggs Corp; no other investor owns more than 1%. and Securities Held to Maturity :: Corporate bonds to be held
for full term of 10 years.
27. Unrealized losses :: Temporary declines in the fair value of an available for sale security. and Trading securities
and securities available
for sale :: Reported at fair value. and Securities available for sale only :: Changes in market value affect
comprehensive income, but not net
income. and Trading securities only :: Changes in market value affect net income. and Dividends received ::
Reduces the investment account
balance under the equity method.
28. IFRS No. 9 :: Does not allow the "held-to-maturity" approach for debt investments. and Equity investments :: Can
be accounted for as "fair
value through profit and loss" or as "fair value through other comprehensive income" under IFRS No. 9. and Business
model test :: One of
the criteria that must be met under IFRS No. 9 to qualify for use of the amortized cost method. and Fair value through
other comprehensive
income :: Similar to available for sale investments, except realized gains and losses are not reclassified into net income.
and Accounting
mismatch :: One of the circumstances in which the fair-value option can be used under IFRS.
29. Unrealized losses :: Result from a decline in fair value prior to sale. and Change from the equity method ::
Change accounted for
prospectively. and Change to the equity method :: Change accounted for retrospectively. and Financial
instruments :: Encompass cash, equity
securities, and debt securities and Unrealized gains :: When related to trading securities, they increase net income.
30. Losses of investee :: Recognized only to the extent of carrying value under the equity method. and Unrealized
holding gains
and losses :: Reported in the income statement for trading securities. and Amortization of a patent that was obtained
in a business
acquisition :: Reduces investment account under the equity method if its fair value is higher than its book value. and
Securities held to
maturity :: Requires positive intent and ability. and Impairment of securities available for sale :: Requires recognition
in the income statement if
judged to be other than temporary.
31. Additional depreciation :: Can be required in the future when, at the time an equity-method investment is made, the
fair value of investee's
identifiable net assets exceeds their carrying value. and Dividends :: Recognized as revenue for available-for-sale
investments, but not equitymethod investments. and Equity method :: Used when investor can significantly influence investee. and
Consolidation :: Used when investor
has effective control of investee. and Investor's share of investee income :: Recognized as revenue for equity-method
investments, but not for
available-for-sale investments.
32. C
33. A
34. B
35. C
36. C
37. B
38. A
39. C
40. B
41. A
42. D
43. C
44. C
45. D
46. B
47. C
48. B
49. C
50. A
51. B
52. A
53. B
54. D
55. D
56. B
57. A
58. C
59. A
60. B
61. D
62. A
63. A
64. A
65. D
66. D
67. D
68. D
69. C
70. C
71. C
72. B
73. A
74. C
75. C
76. A
77. C
78. A
79. A
80. C
81. C
82. C
83. B
84. D
85. A
86. C
87. B
88. C
89. A
90. B
91. D
92. B
93. D
94. A
95. D
96. D
97. C
98. B
99. B
100. A
101. C
102. B
103. A
104. C
105. C
106. C
107. A
108. A
109. D
110. A
111. B
112. C
113. B
114. C
115. C
116. A
117. B
118. B
119. C
120. D
121. B
122. B
123. B
124. C
125. D
126. D
127. D
128. B
129. A
130. B
131. D
132.
133.
134.
135.
(d.) The $8,000 unrealized loss will be added to net income in arriving at cash flows from operations.
(c.) The $125,000 decrease in trading securities will be added to net income in arriving at cash flows from operations.
(b.) The $80,000 will be shown as an investing cash outflow.
136. (a.) The $250,000 cash payment for trading securities will be reflected as an increase in the balance of trading
securities and deducted from
net income in arriving at cash flows from operations.
137.
(2) This is an available-for-sale investment, so the fair value adjustment would appear as follows:
138. (1) The fair value of the investment is $8/share x 30,000 shares = $240,000. The internal valuation specialist's
valuation (considered a level
3 input per GAAP regarding fair value measurement) is used because there is no longer a reliable market quote
(considered a level 1 input per
GAAP regarding fair value measurement).
139.
140.
141. The first entry was to record the additional unrealized loss $3,564 thousand that Kirby had incurred from holding
these securities. This raised
the accumulated unrealized holding loss to $11,097 thousand on these investments. The second adjustment indicates the
recognition (realization)
of that accumulated loss. This occurred because Kraut either wrote off the investment or sold it at the end of the year.
142. $1.7 million gain before taxes ($4.7 proceeds - $3.0 securities). Taxes would be $0.68 million ($1.7 million x .4
tax rate). Thus, the after-tax
gain would be $1.02 million.
143. $4.833 million unrealized gain. At a 40% tax rate, the after-tax unrealized gain is 60% of the total. Therefore, $2.9
million is 60% of the total.
Total is $2.9/.6 = $4.833 million.
144.
145.
146.
147.
148.
149. $130,000 (i.e., $3,703,000 cash flow - $3,573,000 maturity).
150. Arctic would report a $91,000 gain (gross of tax). This is the difference between the amortized cost of the
investments ($3,105,000) and their
fair value ($3,196,000), or $91,000. The transaction would be recorded as follows:
151.
152.
153.
154.
155. The Silverwood Company should follow the equity method of accounting for this investment. Because Silverwood
owns 35% of the
voting stock of Yellowstone, the presumption of significant influence exists. 35% of Yellowstone's net income would be
added to Silverwood's
Investment account balance. Adjustments would also be made, if appropriate, to reflect additional depreciation. The
investment account's adjusted
balance would be reported as a long-term investment in the asset section of the balance sheet. 35% of Yellowstone's net
income, minus any
additional depreciation, would be reflected in Silverwood's income statement. Since the equity method is appropriate
for this investment, the
dividends would not be included in income, but would be deducted from the Investment account.
156.
157.
158. First note that, at purchase, fair value of Webb is $5,000,000/50% = $10,000,000, implying total goodwill of
$10,000,000 - $8,000,000 =
$2,000,000. All of the price differential is attributable to goodwill, because fair value of identifiable net assets equals
their book value on the date
of purchase. Goodwill is not amortized.
159.
160.
161.
This adjustment has no effect on net income, but it reduces OCI and comprehensive income by $10,000.
162. Blue must record an unrealized loss of $10,000 to account for the fact that the fair value of Yellow's shares has
fallen from the original cost of
$40,000 to $30,000.
On the income statement, the $25,000 will be shown as an OTT impairment loss. OCI will be increased by the $10,000
reclassification, such that
the net effect on comprehensive income is $15,000.
Blue also must reclassify the 2011 unrealized loss out of OCI and remove the fair value adjustment, making the
following entry that reverses the
2011 entry:
163. Blue now must record an OTT impairment. To reduce the investment from its original cost of $40,000 to $15,000,
Blue makes the following
entry:
164. Subsequent to recording the OTT impairment, Blue continues to treat the investment as AFS, but with an
amortized cost of $15,000. Given
an increase in fair value to $20,000 during 2013, Kettle records a $5,000 unrealized gain, with no effect on net income
but an increase of $5,000 to
OCI and comprehensive income:
165. When a security is reclassified between two categories, the security is transferred at fair value on the date of
transfer. Any unrealized holding
gain or loss at reclassification should be accounted for in a manner consistent with the classification into which the
security is being transferred.
Reclassifications are quite unusual, so when they occur, footnote disclosures should describe the circumstances that
resulted in the transfer.
166. When securities are actively managed, as trading securities are, with the express intent of profiting from shortterm price changes, the gains
and losses that result from holding securities during market price changes are appropriate measures of success or lack
of success in that endeavor.
On the other hand, securities available for sale are held for reasons other than profiting from short-term price changes
so holding gains and losses
are appropriately included in income only when realized upon sale of the investment. Also, unrealized gains and losses
prior to sale may cancel
one another out.
167. As indicated in the footnote, Maytag held investments in securities of TurboChef Technologies. These may have
been treated as trading
securities, in which case reductions in their values would have been recorded as a loss against income in 2000.
Alternatively, this loss could result
from permanent impairments in value, even if these were not treated by Maytag as trading securities. In addition,
Maytag had investments in
privately held Internet-related companies. The portion of the 2000 and 2001 losses on securities related to these
investments seem to have resulted
from permanent impairments. Note that the footnote disclosure indicates these were non-cash losses, thereby ruling out
these losses having
occurred as a result of Maytag selling the securities at a loss.
168. GAAP regarding fair value measurement distinguishes among three levels of inputs for fair value determination,
where level 1 includes
readily observable fair values (for example, from a securities exchange), level 2 inputs includes other observable
amounts (for example, quoted
values for similar items, or important inputs like interest rates), and level 3 inputs are unobservable, like the company's
own assumptions. Level 1
is most preferred; level 3 least preferred.
169. If Jaycom classifies the securities as available for sale, none of the market value changes would be reflected in net
income. However, all
market value changes would be reflected in net income if Jaycom classifies these securities as trading. This
demonstrates how some generally
accepted accounting principles can potentially be used to manipulate earnings. To maximize income the company could
classify securities that
have decreased in value as available for sale while classifying as trading securities those that have increased in value.
One way to justify this
would be to argue that securities that were increasing in value could be sold at any time. The managers could also argue
that they held declining
securities indefinitely or until they felt the decline was over. However, appropriate accounting procedures require that
an investor assign a
reporting classification to each security at acquisition, with the classification chosen based on the company's intent at
that time. Reasons for
transfers between classifications must be explained in footnote disclosures.
The equity method requires that a proportionate share of dividends and reported earnings be recorded as adjustments to
respectively decrease and
increase the investment account, with the proportion of reported revenue included in net income of the parent.
Differences between the price paid
for the investment and the underlying book value must be analyzed and amortized, if appropriate.
The acquisition of the subsidiary is recorded the same way under both methods. If accounted for as securities available
for sale, dividends are
recorded as revenue by the parent, and the investment is recorded at fair market value at each balance sheet date.
170. In order to use the equity method, Newjohn must be able to exercise significant influence over the affiliated
company. If the ownership is
less than 20%, then the lack of significant influence would generally be presumed and the equity method would be
inappropriate. If Newjohn can
control the investee, generally represented by an ownership interest greater than 50%, then consolidation would be
appropriate.
recording the sale of securities
recording interest and dividends; and
recording changes in value of the securities;
recording the purchase;
The four major recording activities are:
171. The three categories listed apply to all investments in debt securities and investments in equity securities with a
readily determinable fair
value that are not accounted for under the equity method or using consolidation procedures. In other words, equity
securities where the investor
owns less than 20% of the voting stock are included in one of these three categories. Held to maturity securities must be
debt securities. Trading
and available for sale securities may be debt or equity securities.
Investor is unable to obtain the information necessary to apply the equity method.
Majority ownership is concentrated among a small group of investors.
Investor tries and fails to obtain representation on the board of investee.
Some factors indicating lack of significant influence:
Participation in the policy setting process of the company.
Material intercompany transactions.
Representation on the board of directors.
172. Some factors indicating significant influence:
173. When a firm owns more than 50% of the voting stock in another corporation, then consolidation procedures are
required. Owning more than
50% of an investee company ensures, in most cases, that the parent company has control of the management decisions
of the subsidiary by holding
over half of the votes at stockholder meetings. Control involves the presence of two essential characteristics: (1) ability
to guide the subsidiary's
ongoing activities and (2) ability to derive benefit from that power. This usually means that the corporation can choose
several board members and
can control policy making.
174. (1) When it becomes necessary to change to the equity method from another method, the investment account
should be retroactively adjusted
to the balance that would have existed if the equity method always had been used, and retained earnings would be
adjusted for the offsetting
effect. (2) When it becomes necessary to change from the equity method to another method, no adjustment is made to
the carrying amount of
the investment. The equity method is simply discontinued and the new method is applied from then on. The investment
account balance when
the equity method is discontinued would serve as the new "cost" basis for writing the investment up or down to market
value in the next set of
financial statements.
175. IFRS require that accounting policies of investees be adjusted to correspond to those of the investor when
applying the equity method.
U.S. GAAP has no such requirement. Also, IFRS allow investors to account for a joint venture using either the equity
method or "proportionate
consolidation," whereby the investor combines its proportionate share of the investee's accounts with its own accounts
on an item-by-item basis.
U.S. GAAP generally requires that the equity method be used to account for joint ventures.
176. When a company elects the fair value option for held-to-maturity or available-for-sale investments, it simply
reclassifies those investments
as trading securities and accounts for them in that fashion. When a company elects the fair value option for a
significant-influence investment that
normally would be accounted for under the equity method, that investment is not reclassified as a trading security.
Rather, the investment still
appears on the balance sheet as a significant-influence investment, but the amount that is accounted for at fair value is
indicated on the balance
sheet either parenthetically on a single line that includes the total amount of significant-influence investment or on a
separate line. As with trading
securities, unrealized gains and losses are included in earnings in the period in which they occur.
177. Investments in debt securities are classified as either "Amortized Cost" or FVTPL ("Fair Value through Profit &
Loss"). Debt in the
amortized cost classification is accounted for at amortized cost, so unrealized gains and losses are not recognized
(unless an other-than-temporary
impairment is recognized). To be included in the amortized cost category, a debt investment has to meet both (a) the
"cash flow characteristics"
test (which requires that the debt instrument consist of only principal and interest payments) and (b) the "business
model test" (which requires that
the objective of the company's business model is to hold the investment to collect the contractual cash flows rather than
to sell the investment at
a gain). If debt isn't classified in "amortized cost," it is classified in FVTPL, and unrealized gains and losses are
recognized as soon as they occur,
similar to accounting for trading securities under U.S. GAAP.
178. Investments in equity securities are classified as either "FVTPL" ("Fair Value through Profit & Loss") or
"FVTOCI" ("Fair Value through
Other Comprehensive Income). If the equity is held for trading, it must be classified as FVTPL, but otherwise the
company can irrevocably elect
to classify it as FVTOCI. Under FVTPL, unrealized gains and losses are recognized as soon as they occur, similar to
accounting for trading
securities under U.S. GAAP. Under FVTOCI, unrealized gains and losses are included in OCI, similar to AFS
accounting under U.S. GAAP.
However, unlike AFS, realized gains and losses are not reclassified out of OCI and into net income when the
investment is later sold. Rather, the
accumulated gain or loss associated with a sold investment is just transferred from AOCI to retained earnings (both
shareholders' equity accounts),
without passing through the income statement.
12 Summary
Category # of Questions
AACSB: Analytic 73
AACSB: Diversity 16
AACSB: Reflective thinking 105
Blooms: Analysis 16
Blooms: Application 58
Blooms: Comprehension 28
Blooms: Knowledge 71
Blooms: Synthesis 5
Learning Objective: 12-01 Demonstrate how to identify and account for investments classified for reporting purposes
as held-tomaturity.
19
Learning Objective: 1202 Demonstrate how to identify and account for investments classified for reporting purposes as trading securities. 32
Learning Objective: 12-03 Demonstrate how to identify and account for investments classified for reporting purposes
as availablefor-sale securities. 57
Learning Objective: 1204 Explain what constitutes significant influence by the investor over the operating and financial policies of the
investee.
8
Learning Objective: 12-05 Demonstrate how to identify and account for investments accounted for under the equity
method. 26
Learning Objective: 1206 Explain the adjustments made in the equity method when the fair value of the net assets underlying an investment
exceeds their
book value at acquisition.
16
Learning Objective: 12-07 Explain how electing the fair value option affects accounting for investments. 8
Learning Objective: 12-08 Discuss the primary differences between U.S. GAAP and IFRS with respect to investments.
17
Learning Objective: Appendix A 1
Learning Objective: Appendix B 16
Learning Objective: derivatives 2
Level of Learning: Easy 37
Level of Learning: Hard 60
Level of Learning: Medium 74
Spiceland - Chapter 12 186