Deck 14: Investments in Debt and Equity Securities

Question 1

When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes

A) a proportionate share of the net income of the investee.
B) a cash dividend received from the investee.
C) periodic amortization of an intangible arising from contractual rights acquired in the purchase.
D) depreciation related to the excess of market value over book value of the investee's depreciable assets at the date of purchase by the investor.

Answer 1

A

Question 2

If the combined market value of trading securities at the end of the year is less than the market value of the same portfolio of trading securities at the beginning of the year, the difference should be accounted for by

A) reporting an unrealized loss in security investments in the stockholders' equity section of the balance sheet.
B) reporting an unrealized loss in security investments in the income statement.
C) a footnote to the financial statements.
D) a credit to Investment in Trading Securities.

Answer 2

B

Question 3

Changes in fair value of securities are reported in the income statement for which type of securities?

A) Marketable equity securities
B) Available-for-sale securities
C) Trading securities
D) Held-to-maturity securities

Answer 3

C

Question 4

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as

A) an increase in the investment account.
B) a deduction from the investment account.
C) dividend revenue.
D) a deduction from the investor's share of the investee's profits.

Question 5

At the beginning of the year a company had a debit balance in the account Market Adjustment--Trading Securities. During the year the company did not buy or sell any trading securities, but at the end of the year the related market adjustment account had a credit balance. This change indicates that

A) a loss on the income statement was recognized.
B) a gain on the income statement was recognized.
C) the value of the investment account increased.
D) the value of the investment account decreased.

Question 6

A credit balance in the account Market Adjustment--Trading Securities at the end of a year should be interpreted as the net

A) realized holding loss to date.
B) unrealized holding loss to date.
C) realized holding loss for that year.
D) unrealized holding loss for that year.

Question 7

Which category includes only debt securities?

A) Marketable equity securities
B) Available-for-sale securities
C) Trading securities
D) Held-to-maturity securities

Question 8

If the combined market value of available-for-sale securities at the end of the year is less than the market value of the same portfolio of available-for-sale securities at the beginning of the year, the difference should be accounted for by

A) reporting an unrealized loss in security investments in the stockholders' equity section of the balance sheet.
B) reporting an unrealized loss in security investments in the income statement.
C) a footnote to the financial statements.
D) a credit to Investment in Available-for-Sale Securities.

Question 9

From the following, select the most appropriate basis for the valuation of a new investment when properties or services are exchanged for stock.

A) The par or stated value of the stock received
B) The book value of the property or services exchanged
C) The fair market value of the stock received
D) Either the book value of the property or services exchange or the fair market value of the stock received, whichever is more clearly determinable

Question 10

For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account?

A) Equity method securities
B) Available-for-sale securities
C) Trading securities
D) Held-to-maturity securities

Question 11

Which securities are purchased with the intent of selling them in the near future?

A) Marketable equity securities
B) Available-for-sale securities
C) Trading securities
D) Held-to-maturity securities

Question 12

The equity method of accounting for an investment in the common stock of another company should be used when the investment

A) is composed of common stock and it is the investor's intent to vote the common stock.
B) ensures a source of supply such as raw materials.
C) enables the investor to exercise significant influence over the investee.
D) gives the investor voting control over the investee.

Question 13

When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as

A) a deduction from the investment account.
B) dividend revenue.
C) an addition to the investor's share of the investee's profit.
D) a deduction from the investor's share of the investee's profit.

Question 14

Changes in fair value of securities are reported in the stockholders' equity section of the balance sheet for which type of securities?

A) Marketable equity securities
B) Available-for-sale securities
C) Trading securities
D) Held-to-maturity securities

Question 15

The only significant difference between the provisions of international accounting standards as promulgated by IAS 39 and U.S. accounting standards under FASB Statement No. 115 is

A) IAS 39 requires accounting for all investments in debt securities to be on a fair value basis while SFAS No. 115 does not.
B) IAS 39 allows all unrealized gains and losses on securities valued at fair value to be reported in net income for the period while SFAS No. 115 does not.
C) IAS 39 requires trading securities to be reported on a fair value basis but not securities available for sale.
D) IAS 39 does not permit the reporting of unrealized gains and losses on securities other than trading securities to be recorded as part of equity.

Question 16

Consolidated financial statements are typically prepared when one company has

A) accounted for its investment in another company by the equity method.
B) significant influence over the operating and financial policies of another company.
C) the controlling financial interest in another company.
D) a substantial equity interest in the net assets of another company.

Question 17

A debit balance in the account Market Adjustment--Available-for-Sale Securities at the end of a year should be interpreted as the net

A) unrealized holding gain for that year.
B) realized holding gain for that year.
C) unrealized holding gain to date.
D) realized holding gain to date.

Question 18

FASB Statement No. 115 generally applies when the level of ownership of another company is at what percentage?

A) Less than 20%
B) 20%-30%
C) 30%-50%
D) More than 50%

Question 19

Which of the following is true?

A) Trading securities can be classified as current or noncurrent depending on management's intent.
B) Held-to-maturity securities should not be classified as current under any circumstance.
C) Trading securities should not be classified as current under any circumstance.
D) Available-for-sale securities can be classified as current or noncurrent depending on management's intent.

Question 20

Under the cost method of accounting for unconsolidated investments in common stock, goodwill amortization

A) reduces the investment account.
B) increases the investment account.
C) reduces both investment income and the investment account.
D) is not recorded.

Question 21

Tyler Company began operations in 2010. The company's trading securities portfolio, which did not change in composition during 2011, is as follows:

Ignoring income taxes, what amount should be reported as an unrealized loss on trading securities in Tyler's 2011 income statement?

A) $0
B) $15,000
C) $25,000
D) $40,000

Question 22

On January 2, 2011, Adler Co. acquired 2,000 shares of Boxworth Co. common stock for $8,000 and classified these shares as available-for-sale securities. During 2011, Adler received $6,000 of cash dividends. Adler's share of Boxworth's 2011 earnings (net income) was $5,000. The fair value of Boxworth's stock on December 31, 2011, was $7 per share. Adler should report what amount in 2011 related to Boxworth Co.?

A) Revenue of $6,000
B) Revenue of $12,000
C) A $1,000 decrease in the investment account
D) A $1,000 increase in the investment account

Question 23

On August 1, 2010, Colorite Corp. acquired 10,000 of the outstanding shares of Brown Co. On January 2, 2011, Colorite acquired an additional 20,000 shares of Brown Co., which brought the total ownership to 30,000 shares. Using the normal guidelines for percentages of ownership and assuming that Brown Co. had 100,000 shares outstanding during 2010 and 2011, Colorite Corp. should account for the investment in Brown Co. by using the

A) cost method in 2010 and the equity method in 2011.
B) cost method in 2010, retroactively adjusting the investment account to the equity method at the beginning of 2011, and using the equity method in 2011.
C) equity method for 2010 and 2011.
D) cost method in 2010 and 2011 for the 10,000 shares acquired in 2010, and using the equity method in 2011 for the 20,000 shares acquired in 2011.

Question 24

In March of 2010, Moon Corp. bought 45,000 shares of McMahon Corp.'s listed stock for $450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2010. Moon changed the classification of these shares to trading securities in June of 2011 when the market value of this investment in McMahon's stock had risen to $345,000. How much should Moon include as a loss on transfer of securities in its determination of net income for 2011?

A) $0
B) $45,000
C) $105,000
D) $150,000

Question 25

On January 1, 2011, Young Co. paid $500,000 for 20,000 shares of Montana Co.'s common stock and classified these shares as trading securities. Young does not have the ability to exercise significant influence over Montana. Montana declared and paid a dividend of $.50 a share to its stockholders during 2011. Montana reported net income of $260,000 for the year ended December 31, 2011. The fair value of Montana Co.'s stock at December 31, 2011, is $27 per share. What is the net asset amount (which includes both investments and any related market adjustments) attributable to the investment in Montana that will be included on Young's balance sheet at December 31, 2011?

A) $530,000
B) $540,000
C) $569,000
D) $579,000

Question 26

Edwards Company began business in February of 2010. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2010, balance sheet, Edwards appropriately reported a $4,000 credit balance in its Market Adjustment--Trading Securities account. There was no change during 2011 in the composition of Edward's portfolio of trading securities. Pertinent data are as follows:

What amount of loss on these securities should be included in Edward's income statement for the year ended December 31, 2011?

A) $0
B) $3,000
C) $7,000
D) $11,000

Question 27

On January 1, 2011, Capitech Corporation acquired Logirun, Inc. as a long-term investment for $250,000 (a 30 percent common stock interest in Logirun). On that date, Logirun had net assets with a book value and current market value of $800,000. During 2011, Logirun reported net income of $90,000 and declared and paid cash dividends of $20,000. What is the maximum amount of income that Capitech should report from this investment for 2011?

A) $6,000
B) $21,000
C) $27,000
D) $33,000

Question 28

On January 1, 2011, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2011, was $360,000. During 2011, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. On December 31, 2011, the investment in Pirates should be recorded as

A) $396,000.
B) $468,000.
C) $612,000.
D) $624,000.

Question 29

Martin Co. purchased the following portfolio of available-for-sale securities during 2011 and reported the following balances at December 31, 2011. No sales occurred during 2011. All declines are considered to be temporary.

Martin Co. should report what amount related to the securities transactions in its 2011 income statement?

A) $0
B) $2,000 unrealized loss
C) $10,000 unrealized loss
D) $12,000 unrealized loss

Question 30

If an investment in stock is reclassified from available-for-sale securities to trading securities, the stock should be recorded on the date it is reclassified at the

A) market value at the date of acquisition.
B) book value at the date of reclassification.
C) market value at the date of reclassification.
D) lower-of-cost-or-market value at the date of reclassification.

Question 31

Northwick Company acquired 10,000 shares of the common stock of Shaver Corp. in July 2011. The following January, Shaver announced a $100,000 net income for 2011 and declared a cash dividend of $.50 per share on its 100,000 shares of outstanding common stock. The Northwick Company dividend revenue from Shaver Corp. in January 2011 would be

A) $0.
B) $2,500.
C) $5,000.
D) $10,000.

Question 32

Marino Corporation purchased the following portfolio of trading securities during 2011 and reported the following balances at December 31, 2011. No sales occurred during 2011. All declines are considered to be temporary.

The only transaction in 2012 was the sale of security Z for $34,000 on December 31, 2012. The market values for the other securities at December 31, 2012, were the same as at December 31, 2011. Marino's entry to record the sale of security Z would include a

A) credit of $2,000 to Realized Gain on Sale of Trading Securities.
B) debit of $2,000 to Realized Gain on Sale of Trading Securities.
C) $2,000 debit to Market Adjustment--Trading Securities.
D) $4,000 debit to Market Adjustment--Trading Securities.

Question 33

On April 1, 2011, Ziba Inc. purchased as a temporary investment $100,000, face amount, 10% U.S. Treasury notes; they pay interest semiannually on January 1 and July 1. The notes were purchased at 102. Which of the following entries correctly records this purchase?

A) Trading Securities--10% U.S. Treasury Notes. 100,000 Interest Receivable......................... 2,500
Premium on Trading Securities............... 2,000
Cash..................................... 104,500
B) Trading Securities--10% U.S. Treasury Notes. 102,000 Interest Receivable......................... 2,500
Cash..................................... 104,500
C) Trading Securities--10% U.S. Treasury Notes. 100,000 Interest Receivable......................... 4,500
Cash..................................... 104,500
D) Trading Securities--10% U.S. Treasury Notes. 102,000 Cash..................................... 102,000

Question 34

On August 31, 2011, Stiggins Company purchased the following available-for-sale securities:

On December 31, 2011, Stiggins reclassified its investment in security F from available-for-sale securities to trading securities. What total amount of loss on these securities should be included in Stiggins' income statement for the year ended December 31, 2011?

A) $0
B) $16,000
C) $22,000
D) $28,000

Question 35

Martin Co. purchased the following portfolio of trading securities during 2011 and reported the following balances at December 31, 2011. No sales occurred during 2011. All declines are considered to be temporary.

The carrying value of the portfolio at December 31, 2011, on Martin Co.'s balance sheet would be

A) $222,000.
B) $240,000.
C) $242,000.
D) $252,000.

Question 36

Edwards Company began business in February 2010. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2010, balance sheet, Edwards appropriately reported a $4,000 debit balance in its Market Adjustment--Trading Securities account. There was no change in 2011 in the composition of Edward's portfolio of marketable equity securities held as a temporary investment. Pertinent data are as follows:

What amount should Edwards credit to the Market Adjustment--Trading Securities account at December 31, 2011?

A) $0
B) $3,000
C) $7,000
D) $11,000

Question 37

On January 1, 2011, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2011, was $360,000. During 2011, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. Ignoring income taxes, Mets' statement of income for the year ended December 31, 2011, should include "Income From Investment in Pirates Corporation Stock" in the amount of

A) $68,000.
B) $96,000.
C) $108,000.
D) $120,000.

Question 38

Poster Inc. owns 35 percent of Elliott Corporation. During the calendar year 2011, Elliott had net earnings of $300,000 and paid dividends of $36,000. Poster mistakenly accounted for the investment in Elliott using the cost method rather than the equity method of accounting. What effect would this have on the investment account and net income, respectively?

A) Understate, overstate
B) Overstate, understate
C) Overstate, overstate
D) Understate, understate

Question 39

In January 2011, Henry Corporation acquired 20 percent of the outstanding common stock of Davis Company for $1,120,000. This investment gave Henry the ability to exercise significant influence over Davis. The book value of the acquired shares was $840,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Davis's balance sheet and that had a remaining useful life of ten years. For the year ended December 31, 2011, Davis reported net income of $252,000 and paid cash dividends of $56,000 on its common stock. What is the proper carrying value of Henry's investment in Davis at December 31, 2011?

A) $1,080,800
B) $1,092,000
C) $1,131,200
D) $1,181,600

Question 40

On January 2, 2010, Reynolds Corporation bought 15 percent of Scorpio Corporation's capital stock for $60,000 and classified it as available-for-sale securities. Scorpio's net incomes for the years ended December 31, 2010, and 2011, were $20,000 and $100,000, respectively. During 2011, Scorpio declared a dividend of $140,000. No dividends were declared in 2010. On December 31, 2011, the fair value of the Scorpio stock owned by Reynolds had increased to $90,000. How much should Reynolds show on its 2011 income statement as income from this investment?

A) $3,150
B) $15,000
C) $21,000
D) $51,000

Question 41

Which of the following is true regarding the provisions of IAS 39?

A) IAS 39 does not require unrealized gains and losses on trading securities to be recognized as part of net income.
B) IAS 39 requires gains and losses on available for sale securities to be recognized as part of net income.
C) IAS 39 allows companies to choose between recognizing gains and losses on trading securities as part of net income or as part of stockholders' equity.
D) IAS 39 allows companies to choose between recognizing gains and losses on available-for-sale securities as part of net income or as part of stockholders' equity.

Question 42

When an enterprise increases its interest in an investment in equity securities accounted for by the fair value method, and changes to the equity method, what is the initial carrying value for purposes of subsequent application of the equity method?

A) Book value at the date of the change
B) Original cost plus or minus the net market value change since acquisition
C) Market value at the date of the change
D) The amount that would be reflected in the investment account had the equity method been in use continually since the purchase of the securities

Question 43

The market rate of interest for a bond issue that sells for more than its par value is

A) less than the rate stated on the bond.
B) equal to the rate stated on the bond.
C) higher than the rate stated on the bond.
D) independent of the rate stated on the bond.

Question 44

Benjamin Corporation held the following short-term investments in equity securities classified as trading securities:

The valuation account is a net credit of $8,000 at the end of 2011. What was the original cost per share of the C common stock?

A) $22
B) $26
C) $30
D) $36

Question 45

When an entity reduces its interest in an investment in equity securities accounted for by the equity method, and changes to the fair value method, what is the initial cost value for purposes of subsequent changes in market value?

A) Book value at the date of change
B) Original cost
C) Market value at the date of the change
D) Market value at the date of acquisition

Question 46

LFM owned 40 percent of EMD's common stock, and as a result, accounted for the investment using the equity method. After the fifth year of owning the stock, the investment account had a credit balance. This could only happen if LFM

A) recorded net losses that were more than the net income.
B) distributed dividends in excess of the accumulated earnings.
C) had accumulated income that was less than the additional depreciation that LFM recorded as a result of purchasing the stock when market value of the assets was in excess of book value.
D) experienced any, or a combination, of the conditions described in the three other responses.

Question 47

When an investor purchases sufficient common stock to gain significant influence over the investee, what is the proper accounting treatment of any excess of cost over book value acquired?

A) The excess remains in the asset account until the investment is sold.
B) The excess is immediately charged to expense in the period in which the investment is made.
C) The excess is amortized over the period of time that is reasonable in light of the underlying cause of the excess.
D) The excess is charged to retained earnings at the time the investor resells the common stock.

Question 48

On October 1, Dennis Company purchased $200,000 face value 12% bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities. Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction were $700. At what amount should this acquisition of bonds be recorded?

A) $196,000
B) $196,700
C) $202,000
D) $202,700

Question 49

An investor that uses the equity method of accounting for its investment in a 30 percent-owned investee that earned $50,000 and paid $8,000 in dividends, made the following entries:

What effect will these entries have on the parent corporation's statement of financial position?

A) Investment in subsidiary understated, retained earnings understated.
B) Investment in subsidiary overstated, retained earnings overstated.
C) Investment in subsidiary overstated, retained earnings understated.
D) Financial position will be fairly stated.

Question 50

EB Company reports its income from its investment in JB Company under the equity method. EB recognized income of $150,000 from its investment in JB during the current year. JB declared and paid dividends of which EB's share was $25,000 during the current year. The effect of these activities on the operating section of the statement of cash flows of EB Company prepared for the current year under the indirect method would be

A) an increase of $150,000.
B) a deduction of $150,000.
C) a deduction of $125,000.
D) an increase of $125,000.

Question 51

The following information relates to Rowling Company's short-term investment in equity securities available for sale at the end of 2010 and 2011 (in 000s):

Rowling's net realized and unrealized gains and losses for 2011, respectively, would be

A) $2 realized loss; $8 unrealized loss.
B) $2 realized loss; $16 unrealized loss.
C) $2 realized loss; $16 unrealized gain.
D) $2 realized loss; $8 unrealized gain.

Question 52

Other-than-temporary impairments in the value of equity securities classified as available-for-sale should be made

A) on the individual security level.
B) in the aggregate for each type of security (i.e., common or preferred).
C) either on the individual security level or in the aggregate.
D) in none of these approaches.

Question 53

Ignoring income taxes, choose the correct response below regarding total stockholders' equity resulting from classifying all investments for a firm either as trading securities or securities available-for-sale.

A) Stockholders' equity is greater if the investments are classified as trading securities.
B) Stockholders' equity is greater if the investments are classified as available-for-sale.
C) Stockholders' equity is the same regardless of the classification.
D) If there have been unrealized gains, classification as trading securities results in higher stockholders' equity.

Question 54

A firm purchased bonds to be classified as an investment in securities available-for-sale. The bonds were purchased at a premium. Assume the market price of the bond is volatile. Given these facts, which of the following is correct?

A) Less cash interest is received each year than interest revenue is recognized
B) The ending valuation allowance account balance will depend on ending market value and original cost
C) The ending valuation allowance account balance will depend on ending market value and original cost adjusted for amortization of premium
D) The premium is ignored because the bonds are not classified as held-to-maturity

Question 55

In January of 2011, Clyde Corporation acquired 20% of the outstanding voting common stock of Blake Company for $280,000. This investment enabled Clyde to exercise significant influence over Blake. The book value of the acquired shares was $210,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Blake's balance sheet and that had a remaining useful life of 10 years.
For the year ended December 31, 2011, Blake reported income of $63,000 and paid cash dividends of $14,000 on its common stock. What is the proper carrying value of Clyde's investment in Blake at December 31, 2011?

A) $270,000
B) $273,000
C) $280,000
D) $282,800

Question 56

During 2010, Barney Company purchased marketable equity securities as a short-term investment and classified them as trading securities. The cost and market value at December 31, 2010, were as follows:

Barney sold 1,000 shares of Company Y stock on March 16, 2011, for $25 per share, incurring $1,200 in brokerage commissions and taxes. On the sale, Barney should report a realized loss of

A) $0.
B) $500.
C) $850.
D) $1,700.

Question 57

The following information is available for an enterprise's security investments as of December 31, 2011:

In June 2012, the enterprise decided to reclassify the Costco stock as trading securities. The stock had a market value of $41,000 at the time of the reclassification.
What amount of holding gain or loss is immediately recognized in 2012 earnings?

A) $2,000 gain
B) $1,000 gain
C) $3,000 gain
D) $1,000 loss

Question 58

The following information is available for an enterprise's security investments as of December 31, 2011:

In June 2012, the enterprise decided to reclassify the Wal-Mart bonds as securities available-for-sale. The bonds had a market value of $31,000 at the time of the reclassification.
What amount of holding gain or loss is immediately recognized in 2012 earnings?

A) $2,000 gain
B) $3,000 gain
C) $1,000 gain
D) $1,000 loss

Question 59

The following information is available for an enterprise's security investments as of December 31, 2011:

What is the 2011 holding gain or loss recognized in 2011 earnings and directly to stockholders' equity?

A) Earnings: $4,000 loss; Stockholders' Equity: $4,000 loss
B) Earnings: $4,000 gain; Stockholders' Equity: $4,000 gain
C) Earnings: $4,000 loss; Stockholders' Equity: $4,000 gain
D) Earnings: $4,000 gain; Stockholders' Equity: $4,000 loss

Question 60

Kyle Company reports its income from its investment in Bingham Company under the equity method. Kyle recognized income of $150,000 from its investment in Bingham during the current year. No dividends were declared or paid by Bingham during the year. Kyle would show the $150,000 in its statement of cash flows for the current year prepared under the indirect method as

A) cash from investing activities.
B) a reduction of the investment account.
C) a deduction from net income in the operating activities section.
D) a noncash activity.

Question 61

The equity method of accounting should be applied by an investor to an investment in the voting stock of an investee of 20% or more of the voting stock of the investee. An investment of 20% or more of the voting stock of an investee should lead to the presumption (absent evidence to the contrary) that an investor has the ability to exercise significant influence over an investor. The presumption in applying the equity method is that an investor has significant influence over the operating and financial policies of an investee even though the investor holds 50% or less of the voting stock of the investee.
Required:
Identify events or circumstances that suggest that an investor may be unable to exercise significant influence over an investee.

Question 62

Under the provisions of Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--Including an amendment of FASB Statement No. 115,"

A) the election of the fair value option for investment securities classified as available-for-sale securities would result in unrealized gains and losses on these securities being included in other comprehensive income.
B) the election of the fair value option for investment securities classified as trading securities would result in unrealized gains and losses on these securities being included in other comprehensive income.
C) the election of the fair value option for investment securities classified as held-to-maturity securities would result in unrealized gains and losses on these securities being included in earnings in the income statement.
D) the election of the fair value option for investment securities currently classified as trading, available-for-sale, or held-to-maturity is not available and can only be applied to new securities that an entity purchases.

Question 63

On January 1, 2011, Alsop Corp. acquired 30 percent (13,000 shares) of Stone Services Inc. common stock for $1,300,000 as a long-term investment. Data from Stone's 2011 financial statements include the following:

The market value of Stone Services Inc. common stock on December 31, 2011, was $98 per share. Alsop does not have any other noncurrent investments in securities.
Prepare the necessary journal entries for Alsop's investment in Stone Services Inc. common stock under

Question 64

On January 1, 2010, a company purchased four 6%, $1,000 Conoco bonds at 104 as an investment in securities available-for-sale. The bonds pay interest each December 31 and have four years remaining to maturity on the purchase date. The market value of the bonds on December 31, 2010, was 107, and on December 31, 2011, was 105.
The entry to adjust the carrying value of the securities available-for-sale at December 31, 2011, will include a

A) debit to accumulated gain on securities available-for-sale in the stockholders' equity section.
B) credit to the investment account of $40.
C) debit to realized loss of $40.
D) debit to unrealized loss of $80.

Question 65

Lee Company had the following portfolio of securities at the end of its first year of operations:

Question 66

On January 1, 2011, Gardner Associates purchased 30 percent of the outstanding shares of stock of Gillen Corp.for $150,000 cash. The investment will be accounted for by the equity method. On that date, Gillen's net assets (book and fair value) were $300,000. Gardner has determined that the excess of the cost of its investment in Gillen over its share of Gillen's net assets is attributable to equipment whose market value exceeds its carrying value by $100,000 and to an operating license whose market value exceeds its carrying value by $100,000. The remaining useful life of the equipment is ten years and the remaining useful life of the operating license is 20 years.
Gillen's net income for the year ended December 31, 2011, was $60,000. During 2011, Gardner received $5,000 cash dividends from Gillen. There were no other transactions between the two companies.
Compute the amount that would be reported on Gardner Associates' books for the investment in Gillen Corp. at December 31, 2011.

Question 67

The following transactions of the Snyder Company were completed during the fiscal year just ended:


Prepare the entries necessary to record the above transactions.

Question 68

On July 1, 2011, Mountain Systems acquired 8,000 shares of Precision Services' 40,000 outstanding common shares at a cost of $240,000. The book value of Precision's net assets on that date was $880,000. The following data pertain to Precision Services for 2011:

Any excess of cost over book value is attributable to depreciable properties the market value of which exceeds the carrying value. The remaining life of the equipment is 10 years.

Question 69

The equity method of accounting should be applied by an investor to an investment in the voting stock of an investee of 20% or more of the voting stock of the investee. An investment of 20% or more of the voting stock of an investee should lead to the presumption (absent evidence to the contrary) that an investor has the ability to exercise significant influence over an investor. The presumption in applying the equity method is that an investor has significant influence over the operating and financial policies of an investee even though the investor holds 50% or less of the voting stock of the investee.
Required:
Identify events or circumstances that suggest that an investor has significant influence over an investee.

Question 70

On February 1, 2011, Pyle Inc. had excess cash on hand. The controller suggested to management that the company buy $200,000 of U.S. Treasury bonds selling at 102 and paying 8 percent interest. Interest payments on these bonds are made semiannually on January 1 and July 1.

Question 71

Which of the following is true regarding the provisions of International Accounting Standard No. 39, "Financial Instruments: Recognition and Measurement (amended 2005)?

A) IAS No. 39 applies only to financial assets.
B) IAS No. 39 applies only to financial liabilities.
C) IAS No. 39 applies only to accounting for derivatives and loans and receivables.
D) IAS No. 39 applies to both financial assets and financial liabilities.

Question 72

Turner Enterprises purchased 10,000 shares of stock in Twila Corporation for $12 per share. Turner's broker arranged for Turner to pay only $4 cash per share at the date of purchase with the remaining balance to be paid in monthly installments.
Turner should record the investment by:

A) debiting the investment account for $40,000.
B) debiting the investment account for $120,000.
C) debiting the investment account for $100,000, and crediting a contra account for $60,000.
D) not making an entry until the cost of the securities is paid in full.

Question 73

Webster Inc. carries the following marketable equity securities on its books at December 31, 2010, and 2011. All securities were purchased during 2010 and there were no beginning balances in any market adjustment accounts.

The cost method is used in accounting for all investments in securities.

Question 74

At January 1, 2011, a company had a net valuation allowance account credit balance for investments in securities available-for-sale of $20,000. At December 31, 2011, the total cost of the relevant portfolio was $300,000, and total market value was $275,000. The entry required on December 31, 2011, would reflect a

A) $5,000 decrease in net income.
B) $25,000 decrease in net income.
C) credit of $5,000 to the valuation allowance account.
D) debit of $25,000 to the unrealized loss account.

Question 75

The Financial Accounting Standards Board had several goals in issuing Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and changing the accounting for certain debt and equity securities from a lower-of-cost-or-market basis to a fair value basis. Among these goals was the elimination of what is termed "gains trading."
Explain the meaning of the term "gains trading."

Question 76

In 2011, KZF Inc. purchased stock as follows:

At December 31, 2011, the market values of the securities were as follows:

The investments in common stock are classified by KZF Inc. as available-for-sale securities accounted for by the cost method. The fiscal year of KZF ends on December 31.

Question 77

On July 1, 2011, The Woodward Group purchased for cash 35 percent of the outstanding capital stock of Massey Studios. Both The Woodward Group and Massey Studios have a December 31 year-end. Massey Studios, whose common stock is actively traded in the over-the-counter market, reported its total net income for the year to The Woodward Group and also paid cash dividends on November 15, 2011, to The Woodward Group and its other stockholders.
How should The Woodward Group report the above facts in its December 31, 2011, balance sheet and its income statement for the year then ended? Discuss the rationale for your answer.

Question 78

Investments in debt securities currently are permitted to be classified as held-to-maturity and accounted for at amortized cost if an enterprise has the positive intent and ability to hold these securities to maturity. The held-to-maturity classification is the most restrictive of the three classifications specified in accounting standards. Despite the restrictiveness of the held-to-maturity classification, certain changes in circumstances may occur that would necessitate transferring an investment in a debt security from the held-to-maturity classification without calling into question the investor's general intention to hold other similarly classified investments to maturity.
What types of circumstances would cause an investor in debt securities classified as held-to-maturity to change that classification without calling into question the intent of the investor to hold other similarly classified investments to maturity?

Question 79

Joseph Co. executed the following long-term investment transactions during the current year.

Prepare journal entries with appropriate supporting computations for the year's transactions.

Question 80

The following selected information is available from the financial statements of a large global company:

Required:
Use the financial information above to answer the following questions: