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Exam 18: Investing Assets

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Question 41

Multiple Choice

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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 historical cost the fait value adjustment account will have a credit balance.
D) Fair value adjustments are treated as as adjustments to other comprehensive income.

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

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Question 42

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Companies can elect to switch to the fair value option for reporting assets at any point during the assets life.

A) True
B) False

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Question 43

Multiple Choice

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

Accumulated Other Comprehensive Income reflects changes in the fair value of which type of securities?

When should a company use the equity method to account for an investment in another company's common stock?

For securities classified as held-to-maturity,what do companies disclose in the notes to the financial statements?

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

Companies generally provide both qualitative and quantitative disclosures of investing assets in the annual report.

Summarize the the financial disclosure requirements for investments accounted for under the equity method.

On 1/1/16,Lantana Loan Co.,a calendar-year company,accepts a 5%,$500,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors,when the market rate of interest was 10%.In exchange for the note,Diamond agrees to make semi-annual interest payment and repay the full $500,000 at maturity.Complete the amortization table for this note,then complete all journal entries for 2016.

Refer to Sheppard Corporation.Assume that Sheppard purchased 25% of Meredith's common stock for $62,000.All other facts remain the same.What would be the balance in the investment account as of December 31,2017?

For Trading Securities,companies must disclose the amortized cost,the aggregate fair value,the the total unrealized gains and losses reported in net income.

When a note's stated interest rate is less than the market rate,the note is valued at a premium.

If note receivable payment dates do not coincide with a company's fiscal year-end,the company must accrue the amount of interest revenue earned as of the fiscal year-end even though it is not receiving the interest payment on this date.

Grey Co.holds a debt investment at amortized cost of $50,000.At 12/31/15,the fair value of the investment is $55,000 and the present value of the future cash flows is $49,000.Has an impairment loss occurred? If so,how much is the impairment loss to be recorded?

As of 12/31/17,XYZ Inc.had Available-for-Sale debt investments with a fair value of $522,000,an amortized cost of $535,000,and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500.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?

Both realized and unrealized gains and losses for trading equity securities are classified as other income on the income statement.

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

On January 1,Austin Corporation purchased 30% of the outstanding voting common stock of San Marcos Industries common stock for $270,000 cash.On that date,the book value and fair value of San Marcos Industries were $900,000.On June 30,San Marcos paid cash dividends of $20,000 to its shareholders.San Marcos' net income as of December 31 was $120,000.The fair value of the shares on December 31 was $300,000. Prepare the journal entries necessary to record the above transactions on Austin Corporation's books during the year.

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