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Exam 15: Investments and Fair Value Accounting

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Question 1

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The cost method of accounting for stock

A) recognizes dividends as income
B) is only appropriate as part of a consolidation
C) requires the investment be increased by the reported net income of the investee
D) requires the investment be decreased by the reported net income of the investee

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

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Question 2

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Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semi-annually. The journal entry to record the purchase would be:

A) Debit: Investment in Bonds $101,500; Credit: Cash $101,500
B) Debit: Investment in Bonds $100,000; Credit: Interest Revenue $1,500 and Cash $98,500
C) Debit: Investment in Bonds $100,000 and Interest Receivable $1,500; Credit: Cash $101,500
D) Investment in Bonds $100,000; Credit: Cash $100,000

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

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Question 3

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Which of the following stock investments should be accounted for using the cost method?

If the proceeds from the sale of bond investments exceeds the carrying amount of the bonds, a gain is realized.

Discuss the similarities and differences in reporting trading securities, available-for-sale securities and held-to-maturity securities.

Under the equity method, a stock purchase is recorded at its original cost and is adjusted to fair market value each accounting period.

Prepare the journal entries for the following transactions for Morgan Co.

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

Investment in Bonds are reported on the balance sheet at lower of cost or market.

Newville Corporation reported net income of $50,000 in 2015. They have 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 common stock outstanding. During 2012 Newville paid the preferred stockholder's a $6 per share dividend and also paid $30,000 to common shareholders. The market value of Newville's stock is: Preferred - $105 and Common - $10. (1) Calculate Newville's dividend yield. (2) Why does the dividend yield vary widely across firms?

Match each of the following descriptions to their investment terms.

On April 1, 2011, Albert Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2011, Albert received its first semiannual interest. On February 1, 2012, Albert sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Albert will record on April 1, 2011 for the purchase of the bonds will include:

Any difference between the fair market values of the securities and their cost is a realized gain or loss.

The cost and fair value of the trading securities held by AdBrand Company as of December 31, 2012 are as follows: Required: (1) Complete the table above to find the total cost and fair value for the company's trading securities portfolio. (2) Calculate and record the required December 31, 2012 adjustment. (3) Explain how the adjustment from step (2) is reported on AdBrand's 2012 financial statements.

On January 1, 2014, Blanton Company's Valuation Allowance for Trading Investments account has a debit balance of $23,200. On December 31, 2014, the cost of the trading securities portfolio was $80,000. The fair value was $98,000. Which of the following would Blanton report on the income statement for 2014?

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is:

Ramiro Company purchased 40% of the outstanding stock of Marco Company on January 1, 2015. Marco reported net income of $95,000 and declared dividends of $35,000 during 2015. How much would Ramiro adjust their investment in Marco Company under the equity method?

What is comprehensive income? How is it calculated? What are some examples of items included in other comprehensive income? Where is comprehensive income reported?

Which of the following statements below is not a reason a company may purchase another company's stock?

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include: