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Exam 12: Investments

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Question 41

Multiple Choice

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Cortez Associates purchased a debt investment that meets the characteristics of a simple debt instrument. Cortez intends to hold the debt for purposes of maximizing its return on investment. How should Cortez account for the investment?

A) Amortized cost.
B) FV-NI.
C) FV-OCI.
D) Cost methoD.A simple debt investment that is held for purposes of maximizing return on investment is fulfilling an investment purpose, so should be accounted for as FV-OCI.

E) A) and C)
F) B) and D)

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Question 42

Multiple Choice

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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.

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

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Question 43

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Prepare appropriate entry(s) at December 31, 2015, and indicate how the scenario will affect net income, OCI, and comprehensive income.

FKG Inc. carries the following investments on its books at December 31, 2012, and December 31, 2013. All securities were purchased during 2012. Required: (1.) Prepare the necessary journal entries for FKG on December 31, 2012, and December 31, 2013. (2.) What net effect would the valuation of these stock investments have on 2012 net income? On 2013 net income?

Cain Corporation owns $10,000 of IBM bonds. Some bonds are held for immediate sale, but others are held in terms of long-term appreciation. Which of the following is true about how Cain should account for this investment?

Matrix, Inc., acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2013. 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 2013 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, 2013. Required: (1.) Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix accounts for that investment as an equity method investment. (2.) Prepare the journal entries necessary to account for the Neo investment, assuming that Matrix elects the fair-value option.

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:

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

What would be the balance in Beresford's accumulated other comprehensive income with respect to these investments in its 12/31/2013 balance sheet (ignore taxes) ?

Trading securities, by definition, are properly classified in the balance sheet as:

In 2011, Osgood Corporation purchased $4 million in 10-year municipal bonds at face value. On December 31, 2013, 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, 2013, balance sheet and the 2013 income statement would show the following:

On January 1, 2013, Hoosier Company purchased $930,000 of 10% bonds at face value. The bond market value was $980,000 on December 31, 2013. Required: Prepare the appropriate journal entry on December 31, 2013, to properly value the bonds assuming the bonds are classified as: (1.) Trading securities. (2.) Securities available for sale. (3.) Held-to-maturity securities.

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:

On January 1, 2012, 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 2012, Oakton reported net income of $60,000 and paid dividends of $30,000. On January 1, 2013, 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 2012). Bactin concluded that its 20% ownership now allowed it to significantly influence Oakton's operations. In 2013, Oakton reported net income of $80,000 and paid dividends of $40,000. Required: Prepare all journal entries for Bactin for 2012 and 2013, assuming no change in fair value of the Oakton stock during that time period.

The Guitar World (TGW) holds an investment that increased in fair value over 2013, and accounts for that investment as available for sale. When considering taxes, TGW would:

Holding gains and losses on trading securities are included in earnings because:

Both fair values and subsequent growth of the investee are not as relevant for investments in which of the following categories?

On July 1, 2013, 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: How should Silverwood report the above information in its year-end income statement and balance sheet? Discuss the rationale for your answer.

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

Under IAS No. 39, transfers of debt investments out of the FVTPL category into AFS or HTM are permitted under "rare circumstances."