Deck 16: Investing Assets

Question 1

Debt securities represent an investment by one company into the common or preferred shares of another company.

Answer 1

False

Question 2

Both trading debt securities and held-to-maturity debt securities are valued at fair value.

Answer 2

False

Question 3

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

A) How long does management intend to hold the investment?
B) Is the fair value of the equity investment readily determinable?
C) How is return on equity impacted by this investment?
D) How much control does the investor have over the investee company for this equity investment?

Answer 3

C

Question 4

Bonds are priced such that their yield will be the same as the stated rate of interest.

Question 5

Altima Corporation actively manages a portfolio of publicly traded stock funded with excess cash. The purpose of the portfolio is to generate gains on sales and the portfolio is reported at fair value. This method of accounting is consistent with the qualitative characteristic of ________ from the conceptual framework.

A) relevance
B) faithful representation
C) both faithful representation and relevance
D) neither representation nor relevance

Question 6

Equity securities are an investment in the common or preferred shares of another company.

Question 7

Companies classify debt securities in one of two ways: available-for-sale or held-to-maturity.

Question 8

Zenith Corporation reports its investments in debt securities at cost. This method of accounting is consistent with the qualitative characteristic of ________ from the conceptual framework.

A) faithful representation
B) relevance
C) both faithful representation and relevance
D) neither representation nor relevance

Question 9

Companies determine the cost of held-to-maturity debt securities as the present value of the future cash flows, discounted at the stated rate of interest.

Question 10

What key questions must be addressed when accounting for investments in debt and equity securities?

Question 11

How do the qualitative characteristics of relevance and faithful representation relate to the measurement bases used for investments?

Question 12

A company reports unrealized gains or losses from trading debt securities in other comprehensive income.

Question 13

Companies determine the cost of held-to-maturity debt securities as the present value of the future cash flows, discounted at the market rate of interest.

Question 14

A separate fair value adjustment account is typically used to reflect the difference between the fair value and the cost of the investment so as to avoid excessive changes in the investment account itself.

Question 15

Bonds are priced in the market so that their ________ is the same as the market rate of interest.

A) yield
B) stated rate
C) par value
D) discount

Question 16

Investments in securities of other companies are classified as either debt securities or equity securities.

Question 17

Available-for-sale debt securities are reported at fair value, with unrealized gains or losses reported in other comprehensive income.

Question 18

Changes in the fair value of trading debt securities are reported in other comprehensive income.

Question 19

Only debt securities can be classified as held-to-maturity securities.

Question 20

Yield is the actual return investors receive on investments in bonds.

Question 21

Which of the following statements regarding trading debt securities is false?

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

Question 22

Where are changes in fair value for trading debt securities reported?

A) as operating income or loss on the income statement
B) as income or loss from peripheral activities on the income statement
C) as a component of accumulated other comprehensive income on the balance sheet
D) as a prior period adjustment to retained earnings on the balance sheet

Question 23

Realized gains and losses occur when a company holds securities that experience a change in fair value.

Question 24

If a debt security is not classified as held-to-maturity or trading, then it is classified as an available-for-sale security.

Question 25

Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 2%. The effective rate of interest for similar bonds on the date of investment was 6%. Did Goo Goo purchase the bonds at a discount or premium?

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

Question 26

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

A) $100,000
B) $94,000
C) $104,000
D) $116,351

Question 27

Investments in debt securities that cannot be readily classified in two reporting categories are classified as ________.

A) available-for-sale securities
B) trading securities
C) held-to-maturity securities
D) minority securities

Question 28

Price Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 60 year, $600000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

A) $600,000
B) $582,000
C) $624,000
D) $463,934

Question 29

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

A) $4,232,522
B) $3,939,823
C) $3,947,124
D) $3,925,221

Question 30

Which of the following statements regarding available-for-sale debt securities is true?

A) Fair value adjustments are treated as adjustments to net income.
B) Fair value adjustments are treated as adjustments to other comprehensive income.
C) Available-for-sale securities are valued on the balance sheet at historical cost.
D) Interest revenue and fair value adjustments are netted to determine the effect on net income.

Question 31

Cassa & Associates purchased the bonds of JayBird. These bonds pay 6% interest semi-annually. The effective rate of interest at the date of investment was 3%. Did Cassa & Associates purchase these bonds at a discount or premium?

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

Question 32

Which of the following is a debt security that a company intends to hold only for the short term?

A) trading security
B) available-for-sale security
C) held-to-maturity security
D) Not enough information to classify this security.

Question 33

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

A) $301,500
B) $300,000
C) $298,500
D) $303,000

Question 34

Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid?

A) trading security
B) held-to-maturity security
C) available-for-sale security
D) Not enough information to classify this security.

Question 35

Jules & Associates purchased the bonds of Jay Bird Retailers during the year. Jules intends to hold onto these bonds to collect all principal and interest, but due to financial constraints, will most likely have to sell this investment on the open market within the next year. How should Jules classify this investment?

A) held-to-maturity debt investment
B) available-for-sale equity investment
C) trading debt investment
D) available-for-sale debt investment

Question 36

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

A) $4,500
B) $9,000
C) $3,750
D) $5,250

Question 37

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

A) $9,178
B) $8,000
C) $6,000
D) $6,883

Question 38

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

A) $9,000
B) $12,000
C) $3,000
D) $6,000

Question 39

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

A) $3,500
B) $14,000
C) $4,666.67
D) $7,000

Question 40

A company generally classifies securities as available-for-sale when it plans to actively buy and sell securities with the objective of generating a gain on the sale.

Question 41

On September 30, 2019, Angel Outfitters invested in 10-year, $900,000, 7% bonds of ABC Co. These bonds were dated January 1, 2019, and pay interest annually on December 31. Angel paid face value plus accrued interest for these bonds, and intends to hold these bonds until maturity. Which of the following is the correct journal entry to record this investment?

A) $$\begin{array} { | l | r | r | } \hline \text { Held-to-Maturity Debt Investment - Cost } & 900,000 & \\\hline \text { Interest Receivable } & 47,250 & \\\hline \text { Cash } & & 947,250 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Held-to-Maturity Debt Investment - Cost } & 900,000 & \\\hline \text { Discount on Held-to-Maturity Investment } & 47,250 & \\\hline \text { Cash } & & 947,250 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Available-for-Sale Debt Investment - Cost } & 900,000 & \\\hline \text { Discount on Held-to-Maturity Investment } & 47,250 & \\\hline \text { Cash } & & 947,250 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Available-for-Sale Debt Investment - Cost } & 900,000 & \\\hline \text { Discount on Available-for-Sale Investment } & 47,250 & \\\hline \text { Cash } & & 947,250 \\\hline\end{array}$$

Question 42

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

A) $11,967
B) $12,500
C) $25,000
D) $14,360

Question 43

The appropriate accounting method for equity investments depends on the investor's level of influence over the investee company.

Question 44

On January 1, Seahawk Company purchased $770,000 of 12% bonds at face value. At December 31, the market value of the bonds was $810,000.
Required:
Prepare the fair value adjusting entry on December 31 of the current year assuming that the bonds are classified as:
1. Trading securities
2. Available-for-sale securities
3. Held-to-maturity securities

Question 45

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

A) $1,792,146
B) $1,830,000
C) $1,810,000
D) $2,000,000

Question 46

Unrealized gains and losses from fair value adjustments for equity investments with no significant influence and a readily determinable fair value are reported as part of other comprehensive income, while gains and losses from the sale of these investments are reported in net income.

Question 47

Eagles Auto invested in bonds of ABC, which it intends to hold until maturity 1/1/22. These 5-year bonds were dated 1/1/17, had a face value of $75,000, and pay 4% interest annually on 12/31. Eagles purchased these bonds when the market rate of interest was 3%. Complete the entire amortization table for this investment and record all entries for the life of the investment, rounding all values to the nearest dollar. (Use Excel to determine the purchase price.)

Question 48

Where are changes in fair value for available for sale securities reported?

A) as operating income or loss on the income statement
B) as income or loss from peripheral activities on the income statement
C) as a component of accumulated other comprehensive income on the balance sheet
D) as a prior period adjustment to retained earnings on the balance sheet

Question 49

How are debt and equity investments classified when the company does not exercise significant influence?

Question 50

Leotis Asset Management invested in the bonds of DEF Co. on 1/1/16. Leotis intends to hold the bonds until maturity. These 5-year bonds had a face value of $900,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $861,614. Which of the following is the correct journal entry to record the receipt of the interest payment on 6/30/16?

A) $$\begin{array} { | l | r | r | } \hline \text { Interest Receivable } & 22,500 \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & & 16,742 \\\hline \text { Interest Revenue } & & 5,758 \\\hline\end{array}$$
B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 22,500 \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & 3,348 & \\\hline \text { Interest Revenue } & & 25,848 \\\hline\end{array}$$
C) $$\begin{array} { | l | r | r | } \hline \text { Interest Receivable } & 45,000 \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & & 4,819 \\\hline \text { Interest Revenue } & & 40,181 \\\hline\end{array}$$
D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 45,000 & \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & 6,697 & \\\hline \text { Interest Revenue } & & 51,697 \\\hline\end{array}$$

Question 51

Olympic Corporation purchased a debt security for $500,000 on July 1, 2020 and properly classified it as a trading security. As of the last day of 2020, the fair value of the security was $494,000. The proper journal entry on this date includes ________.

A) a credit to Fair Value Adjustment - Trading Debt Investments for $6,000
B) a debit to Fair Value Adjustment - Trading Debt Investments for $494,000
C) a debit to Unrealized Loss - Net Income for $494,000
D) a credit to Unrealized Loss - Net Income for $6,000

Question 52

Significant influence is typically gained by an investor company owning more than 50% of the voting shares of the investee company.

Question 53

On January 1, Year 1 Alcorn Corporation purchased $95,000 of 9% bonds at face value. The bonds are classified as a held-to-maturity investment. The bonds pay interest semiannually on January 1 and July 1. On December 31, Year 1, the fair value of the bonds is $98,000. Alcorn's fiscal year ends on December 31.
Required:
1. Prepare the journal entries to record the acquisition of the bonds and the first two interest payments. Include any year-end adjusting entries.
2. If the bonds were classified as an available for sale security, what additional adjusting entry would be made on December 31?

Question 54

During 2018, Arnold Corporation purchased $6.2 million of 10 year municipal bonds at face value. On December 31, 2020, the bonds had a market value of $6,900,000. Arnold reclassified the bonds from held-to-maturity to trading securities. Arnold's balance sheet and income statement for December 31, 2020 will reflect which of the following?

A) $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Investment in } \\\text { municipal bonds }\end{array} & \begin{array} { c } \text { Income statement } \\\text { gain on investments }\end{array} \\\hline \$ 6,200,000 & \$ 0 \\\hline\end{array}$$
B) $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Investment in } \\\text { municipal bonds }\end{array} & \begin{array} { c } \text { Income statement } \\\text { Unrealized gain on } \\\text { investments }\end{array} \\\hline \$ 6,200,000 & \$ 700,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | c | } \hline\begin{array} { c } \text { Investment in } \\\text { municipal bonds }\end{array} & \begin{array} { c } \text { Income statement } \\\text { gain on investments }\end{array} \\\hline \$ 6,900,000 & \$ 0 \\\hline\end{array}$$
D) $$\begin{array} { | c | c | } \hline \begin{array} { c } \text { Investment in } \\\text { municipal bonds }\end{array} & \begin{array} { c } \text { Income statement } \\\text { Unrealized gain on } \\\text { investments }\end{array} \\\hline \$ 6,900,000 & \$ 700,000 \\\hline\end{array}$$

Question 55

Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments?

A) held-to-maturity
B) securities accounted for under the equity method
C) trading
D) available-for-sale

Question 56

As of 12/31/20, XYZ Inc. had available-for-sale debt investments with a fair value of $505,000, an amortized cost of $542,000, and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,200. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?

A) Unrealized Loss of $37,000, reported as part of Other Comprehensive Income.
B) Unrealized Loss of $44,200, reported as part of Net Income.
C) Unrealized Loss of $44,200, reported as part of Other Comprehensive Income.
D) Unrealized Loss of $37,000, reported as part of Net Income.

Question 57

Cross Clothiers invested $200,000 in a debt security that it properly classified as a trading security on 12/20/20. At 12/31/20, this trading security had a fair value of $201,500. Record the journal entries needed for this investment assuming this is the first and only trading debt security for Cross Clothiers.

Question 58

As of 12/31/20, XYZ Inc. had available-for-sale debt investments with a fair value of $509,000, an amortized cost of $530,000, and a credit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,200. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?

A) Unrealized Loss of $13,800 reported as part of Other Comprehensive Income.
B) Unrealized Loss of $28,200, reported as part of Net Income.
C) Unrealized Loss of $28,200, reported as part of Other Comprehensive Income.
D) Unrealized Loss of $13,800, reported as part of Net Income.

Question 59

Spike's Auto invested in bonds of DEF, which it intends to hold until maturity 1/1/22. These 5-year bonds were dated 1/1/17, had a face value of $100,000, and pay 4% interest annually on 12/31. Spike's purchased these bonds when the market rate of interest was 6%. Complete the entire amortization table for this investment and record all entries for the life of the investment, rounding all values to the nearest dollar.

Question 60

What types of gains and losses from investments must companies report?

Question 61

Falcon Wholesalers purchased equity securities during 2019 and 2020, with no significant influence in any of the investments. It had not purchased equity securities prior to 2019, and has purchased no other equity securities besides the following:
Purchase Purchase Fair Value Fair Value Date Selling
$$\begin{array} { c c c c c c c } \text { Security } & \begin{array} { c } \text { Purchase } \\\text { Date }\end{array} & \begin{array} { c } \text { Purchase } \\\text { Price }\end{array} & \begin{array} { c } \text { Fair Value } \\\mathbf { 1 2 / 3 1 / 1 9 }\end{array} & \begin{array} { c } \text { Fair Value } \\\mathbf { 1 2 / 3 1 / 2 0 }\end{array} & \begin{array} { c } \text { Date } \\\text { Sold }\end{array} & \begin{array} { c } \text { Selling } \\\text { Price }\end{array} \\\hline 1 & 12 / 3 / 19 & \$ 20,000 & \$ 22,000 & \text { N/A } & 1 / 3 / 20 & \$ 21,000 \\2 & 12 / 10 / 19 & 24,000 & 18,000 & \text { N/A } & 1 / 7 / 20 & 20,000 \\3 & 12 / 4 / 20 & 16,000 & \text { N/A } & 19,000 & 1 / 9 / 21 & 19,000 \\4 & 12 / 13 / 20 & 33,000 & \text { N/A } & 37,000 & 1 / 8 / 21 & 42,000\end{array}$$
Prepare all necessary journal entries for 2019 and 2020 related to these securities.

Question 62

For equity securities where the investor does not have significant influence, and the equity has a readily determinable fair value, realized gains/losses are reported in net income.

Question 63

Rhoads purchased common shares of Company A and B for $10,000 and $10,000, respectively on 12/15. Rhoads intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $18,000, respectively. Assuming Rhoads has no significant influence over the investee companies, what is the unrealized gain or loss for these securities and how is it reported?

A) Unrealized Loss of $1,000, Unrealized Gain of $8,000, both reported as part of Net Income
B) Unrealized Gain of $7,000, reported as part of Other Comprehensive Income
C) Unrealized Loss of $1,000, Unrealized Gain of $8,000, both reported as part of Other Comprehensive Income
D) Unrealized Gain of $7,000, reported as part of Net Income

Question 64

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

A) $0
B) $4,000 debit
C) $4,000 credit
D) $8,000 credit

Question 65

If an investor company has control over an investee company, the investment is valued at the fair value of the stock on the balance sheet date.

Question 66

Companies report equity investments with no significant influence and no readily determinable fair value at their historical cost.

Question 67

If an investor company has significant influence over an investee company, the investment is valued at the fair value of the stock on the balance sheet date.

Question 68

PM Distributors began Year 2 with Equity Investments of $8,100 (which consisted of a single investment) as well as a debit balance of $1,000 in the Fair Value Adjustment - Equity Investments account. PM does not have significant influence over the investee, and the investment has a readily determinable fair value. This trading security was sold for $9,100 during Year 2. How much was the gain or loss for the sale of this investments and how is it recorded?

A) No gain or loss reported, as the investment was sold for the adjusted fair value
B) Unrealized Gain of $1,000, reported as part of Other Comprehensive Income
C) Realized Loss of $1,000, reported as part of Net Income
D) Realized Gain of $1,000, reported as part of Net Income

Question 69

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

A) $0
B) $13,000
C) $4,000
D) $9,000

Question 70

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

A) Unrealized Gain of $3,900, reported as part of Net Income
B) Unrealized Gain of $5,000, reported as part of Net Income
C) Unrealized Gain of $3,900, reported as part of Other Comprehensive Income
D) Unrealized Gain of $5,000, reported as part of Other Comprehensive Income

Question 71

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

A) Unrealized Gain of $1,100, reported as part of Net Income
B) Unrealized Gain of $6,100, reported as part of Net Income
C) Unrealized Gain of $1,100, reported as part of Other Comprehensive Income
D) Unrealized Gain of $6,100, reported as part of Other Comprehensive Income

Question 72

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

A) $0
B) $101,000
C) $50,000
D) $37,000

Question 73

Which of the following is a difference between U.S. GAAP and IFRS in accounting for equity investments with no significant influence and a readily determinable fair value?

A) IFRS requires all equity securities to be reported at cost, and allows companies to report gains and losses only when those securities are sold.
B) Under IFRS, equity investments with no significant influence and a readily determinable fair value are reported at fair value.
C) Under IFRS, unrealized gains and losses can be reported as part of other comprehensive income instead of net income, if elected.
D) IFRS requires companies to report all equity securities at adjusted cost.

Question 74

Investments in equity securities whereby the investor does not have significant influence over the investees require ________ percentage of ownership in the investees.

A) less than 20%
B) 20% to 50%
C) 51% to 74%
D) 75% or greater

Question 75

Texan Textiles invested in two equity securities in December 2018. Neither investment represented significant influence. The company's fair value adjustment account has a balance of $0. The following information related to these securities:
$$\begin{array} { c c c c } \text { Security } & \text { Purchase Date } & \text { Cost } & \text { Fair Value - 12/31/18 } \\\hline 1 & 12 / 1 / 18 & \$ 27,300 & \$ 32,500 \\2 & 12 / 3 / 18 & 44,600 & 37,750\end{array}$$
Record journal entries needed for December relating to these securities.

Question 76

What is the initial reporting basis for all equity investment securities?

A) Cost
B) Discounted Present Value
C) Fair Value
D) Equity Value

Question 77

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

A) $0
B) $98,000
C) $47,000
D) $35,000

Question 78

Both realized and unrealized gains and losses for equity securities with no significant influence and a readily determinable fair value are classified as other income on the income statement.

Question 79

Which of the following statements is incorrect?

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

Question 80

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

A) $204,000
B) $266,000
C) $270,000
D) $336,000