Test bank accounting 25th editon warren chapter 15 investments and fair valuae accounting

Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period... Assuming that Wendell Company purchased the

Chapter 15 Investments and Fair Value Accounting

8 When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price

14 Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market

value each accounting period

16 Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments

20 It is not possible for one company to influence the operating policies of another company unless it owns

more than 50% interest in that company

True False

21 The equity method is usually more appropriate for accounting for investments where the purchaser does not

have significant influence over the investee

True False

22 When bonds held as long-term investments are purchased at a price other than the face value, the premium

or discount should be amortized over the remaining life of the bonds

25 Held-to-maturity securities maturing beyond a year are reported as noncurrent assets

31 Available-for-sale securities are securities that management expects to sell in the future, but are not actively

traded for profit

35 Investments in stocks that are expected to be held for the long term are listed in the stockholder's equity section of the balance sheet

True False

36 In order to maintain the original value of a trading security, the fair value adjustments are debited or

credited to the account Valuation Allowance for Trading Investments

44 The cumulative effects of other comprehensive income items is included in retained earnings, on the balance sheet

A are reported as current assets

B include cash equivalents

C do not include equity securities

D all of the above

47 Which of the following is not a reason to invest excess cash in temporary investments?

A earn interest revenue

B influence the operations of another company

C cash and cash equivalents

D held to maturity securities

49 Long-term investments are held for all of the listed reasons below except

A to earn the interest or dividend income

B for its long-term gain potential

C to influence over another business entity

D to meet current cash needs

50 Temporary investments such as in trading securities are

A recorded at cost but reported at fair market value

B recorded at cost and reported at cost

C recorded at cost but reported at lower of cost or fair market value

D recorded at fair market value and reported at fair market value

51 On June 1, $50,000 of treasury bonds were purchased between interest dates The broker commission was

$500 The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1 What is the total cost to be debited to the Investment - Treasury Bonds account?

52 On June 1, $40,000 of treasury bonds were purchased between interest dates The broker commission was

$600 The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1 How much interest revenue will be recorded on July 1?

53 Interest revenue on bonds is reported

A as an addition to the Investment in Bonds account

B as part of Comprehensive Income but not as part of Net Income

C as part of other income

D as part of operating income

54 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

55 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 receipt of interest on the next interest payment date would be:

A Debit: Cash $4,000; Credit: Interest Revenue $4,000

B Debit: Cash $4,000; Credit: Interest Receivable $4,000

C Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500

D Debit: Cash $2,500; Credit: Interest Revenue $2,500

56 Ruben Company purchased $100,000 of Evans Company bonds at 100 Ruben later sold the bonds at

$104,500 plus $500 in accrued interest The journal entry to record the sale of the bonds would be:

A Debit: Cash $105,000; Credit: Investment in Bonds $104,500 and Interest Revenue $500

B Debit: Cash $105,000; Credit: Investment in Bonds $100,000 and Gain on Sale of Investments $5,000

C Debit: Cash $104,500 and Interest Receivable $500; Credit: Investment in Bonds $100,000, Gain on Sale of Investments $4,500 and Interest Revenue $500

D Debit: Cash $105,000; Credit: Investment in Bonds $100,000; Gain on Sale of Investments $4,500 and Interest Revenue $500

Stock Investments - Saxton Company 4,500

B Stock Investments - Saxton Company 4,780

Cash 4,780

C Stock Investments - Saxton Company 4,500

Brokerage Fee Expense 280

A Interest Receivable debit $2,000

B Investment in Bonds debit $202,000

C Cash debit $200,000

D Interest Revenue credit $2,000

59 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:

A a credit to Interest Payable for $2,000

B a debit to Investments - Tetter Company for $52,000

C a debit for Cash of $50,000

D a debit to Investments - Tetter Company for $50,000

60 On May 1, 2014, Stanton Company purchased $60,000 of Harris Company’s 12% bonds at 100 plus accrued interest of $2,400 On June 30, 2014, Stanton received its first semiannual interest On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest

The journal entry Stanton will record on June 30, 2014, will include:

A a credit to Interest Revenue for $2,400

B a debit to Cash for $3,600

C a credit to Cash for $2,400

D a credit to Interest Receivable for $1,200

61 On May 1, 2014, Stanton Company purchased $60,000 of Harris Company’s 12% bonds at 100 plus accrued interest of $2,400 On June 30, 2014, Stanton received its first semiannual interest On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest

The journal entry Stanton will record on February 1, 2015, will include:

A a credit to Interest Revenue for $1,500

B a credit to Gain on Sale of Investments for $1,500

C a credit to Cash for $52,500

D a credit to Interest Receivable for $600

62 On May 1, 2014, Stanton Company purchased $60,000 of Harris Company’s 12% bonds at 100 plus accrued interest of $2,400 On June 30, 2014, Stanton received its first semiannual interest On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest

What are the total proceeds from the February 1, 2015 sale?

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

A investments of less than 20%

B investments between 20 % and 50%

C investments of less than 20% and investments between 20% and 50%

D all stock investments should be accounted for using the cost method

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

stock?

A earning a return on excess cash

B sustain the other company's stock price

C gaining control of another company's operations

D developing or maintaining business relationships

65 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

67 Held to maturity securities

A are reported at fair market value

B include stocks as well as bonds

C may be reported as current or noncurrent assets

D all of the above

68 The equity method of accounting for investments

A requires a year-end adjustment to revalue the stock to lower of cost or market

B requires the investment to be reported at its original cost

C requires the investment be increased by the reported net income of the investee

D requires the investment be increased by the dividends paid by the investee

69 Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies The investment should be accounted for by the

A prior period adjustment

B operating income and losses

C paid-in capital addition

D gain or loss

73 Which one of the following items below would not affect the investor's income for the period?

A interest received on a temporary investment in bonds

B dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock

C dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock

D interest received on a long-term investment in bonds

74 Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method Assuming that Wendell Company purchased the stock several years ago, the balance

in the investment account would be equal to the cost of the

A investment only

B investment plus Wendell’s share of Porter’s net income earned since the investment was purchased

C investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased

D investment plus Wendell’s share of Porter’s net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased

75 Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment Subsequently, Worton Corporation reported net income and declared and paid cash dividends What journal entry would Blanton Corporation use to record the dividends it receives?

A debit Investment in Worton Corporation; credit Cash

B debit Cash; credit Dividend Revenue

C debit Investment in Worton Corporation; credit Income of Worton Corporation

D debit Cash; credit Investment in Worton Corporation

76 Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment Subsequently, Worton Corporation reported net income and declared and paid cash dividends What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

A debit Investment in Worton Corporation; credit Cash

B debit Cash; credit Dividend Revenue

C debit Investment in Worton Corporation; credit Income of Worton Corporation

D debit Cash; credit Investment in Worton Corporation

77 Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in

recording this investment Tomas Corporation reported a $20,000 net loss Zach Company's entry would include a

A Credit to cash for $9,000

B Debit to the investment account for $9,000

C Credit to the investment account for $9,000

D Credit to a loss account for $9,000

79 Gale Company owns 87% of the outstanding stock of Leonardo Company Leonardo Company is referred

81 In general, consolidated financial statements should be prepared

A when a corporation owns more than 20% and less than 40% of the common stock of another company

B when a corporation owns more than 50% of the common stock of another company

C only when a corporation owns 100% of the common stock of another company

D whenever the market value of the stock investment is significantly lower than its cost

83 For accounting purposes, the method used to account for investments in common stock is determined by

A the amount paid for the stock by the investor

B whether the acquisition of the stock by the investor was "friendly" or "hostile."

C the extent of an investor's influence over the operating and financial affairs of the investee

D whether the stock has paid dividends in past years

84 When the cost method is used to account for an investment, the carrying value of the investment is affected

by

A the dividend distributions of the investee

B the periodic net income of the investee

C the earnings and dividend distributions of the investee

D neither the earnings nor the dividends of the investee

85 The company whose more than 50% stock is owned by the another company is called the

B a parent–subsidiary relationship exists

C the company whose stock is owned must be liquidated

D the cost method should be used to account for the investment

87 Yankton Company began the year without an investment portfolio During the year they purchased

investments classified as trading securities at a cost of $13,000 At the end of the year, the market value of the securities was $11,000 The Yankton Company's financial statements for the current year should show

A a loss of $2,000 on the income statement and net trading securities of $13,000 on the balance sheet

B no loss on the income statement and net trading securities of $13,000 on the balance sheet

C no loss on the income statement, net trading securities of $11,000 and an unrealized loss of $2,000 as a stockholders’ equity adjustment on the balance sheet

D a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet

88 Yankton Company began the year without an investment portfolio During the year they purchased

investments classified as available-for-sale securities at a cost of $13,000 At the end of the year, the market value of the securities was $11,000 The Yankton Company's financial statements for the current year should show

A a loss of $2,000 on the income statement and available-for-sale securities of $13,000 on the balance sheet

B no loss on the income statement and available-for-sale securities of $13,000 on the balance sheet

C no loss on the income statement, available-for-sale securities of $11,000 and an unrealized loss of $2,000 as

a stockholders’ equity adjustment on the balance sheet

D a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet

89 The account Unrealized Gain (Loss) on Available-For-Sale Securities should be included in the

A Income statement as Other Revenue (Expenses)

B Balance sheet as an adjustment to the asset account

C Balance sheet as an adjustment to Stockholders' Equity

D Statement of Retained Earnings

90 The account Unrealized Gain (Loss) on Trading Securities should be included in the

A Income statement as Other Revenue (Expenses)

B Balance sheet as an adjustment to the asset account

C Balance sheet as an adjustment to Stockholders' Equity

D Statement of Retained Earnings

91 The account Valuation Allowance for Trading Securities is found on the:

A Income statement as Other Revenue (Expenses)

B Balance sheet as an adjustment to the asset account

C Balance sheet as an adjustment to Stockholders' Equity

D Statement of Retained Earnings

92 Held-to-Maturity securities

A are reported at their fair market value on the balance sheet date

B include both stocks and bonds

C are primarily purchased to earn interest revenue

D all of the above

93 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?

A an Unrealized Loss on Trading Investments of $5,200

B an Unrealized Gain on Trading Investments of $5,200

C an Unrealized Gain on Trading Investments of $18,000

D an Unrealized Loss on Trading Investments of $18,000

94 All of the following are disadvantages of fair value use except:

A fair values may not be readily obtainable

B fair values may cause more fluctuations as change occurs from period to period

C comparability between companies may be impacted by different fair value measurement

D fair values can only be used on balance sheet accounts

95 All of the following are factors contributing to the trend for regulators to adopt accounting principles using

fair value concepts except:

A a greater percentage of total assets existing as receivables and securities

B pressure on regulators to adopt an international set of accounting principles and standards

C hybrid measurement methods within GAAP that conflict with each other

D the ease of applying market values to assets and liabilities

96 Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its

$20 par common stock The market value of the common stock is $80 per share Edison’s dividend yield is:

97 A company that has 25,000 shares of $5.00 par value common stock issued and outstanding paid a

dividend of $0.40 per share The market value of the stock is $16 per share The company’s dividend yield is:

98 Which of the following is not a part of comprehensive income?

A foreign currency items

B cash flows from stock investments

C unrealized gains and losses

D pension liability adjustments

99 Which of the following would be considered an “Other Comprehensive Income” item?

A net income

B extraordinary loss related to flood

C gain on disposal of discontinued operations

D unrealized loss on available-for-sale securities

100 Companies may report comprehensive income on each of the statements below except

A income statement

B separate statement of comprehensive income

C statement of cash flows

D retained earnings statement

101 On February 12, Addison, Inc purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee On August 22, Lucas paid a $0.42 dividend per share On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee The journal entry for the sale would include:

A a debit to Cash for $111,840

B a credit to Investments for $112,000

C a credit to Loss on Sale for $23,680

D a debit to Cash for $112,000

102 On February 12, Addison, Inc purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee On August 22, Lucas paid a $0.42 dividend per share On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee The journal entry to record the purchase would include:

A a debit to Investments for $132,000

B a credit to Cash for $132,000

C a debit to Investments for $132,240

D a credit to Investments for $240

103 Purchased $400,000 of ABC Co 5% bonds at 100 plus accrued interest of $4,500 Sold $250,000 of bonds at 97 The journal entry for the purchase would include:

A a credit to Interest Receivable for $4,500

B a credit to Interest Revenue for $4,500

C a debit to Interest Receivable for $4,500

D a debit to Interest Revenue for $4,500

104 Purchased $400,000 of ABC Co 5% bonds at 100 plus accrued interest of $4,500 Sold $250,000 of bonds at 97 plus accrued interest The journal entry for the sale would include:

A a debit to Cash for $242,500

B a credit to Loss on Sale for $7,500

C a credit to Gain on Sale for $7,500

D a debit to Cash for $244,300

105 Match each of the following investment terms with the appropriate definition below

1 Preferred and common stock that represent

ownership in a company and do not have a fixed

2 Securities not held for trading or to maturity or

other strategic reasons Equity Securities

3 Notes and bonds that pay interest and have a

4 When using this, dividends are treated as a

reduction of the investment Equity Method

5 Debt investments that a company intends to

keep until their maturity date Debt Securities

6 Debt and equity securities purchased and sold

to earn short-term profits from changes in the

8 The method of reporting an investment that

represents less than 20% of the voting stock of

9 The company whose stock is purchased by

another entity

Business Combination

10 What occurs when a company

purchases 50% or more of another company’s

106 Match each of the following investment terms with the appropriate definition below

1 Combined reporting of a corporation and

other corporations it controls Parent Company

2 The method for accounting for investments of

20 - 50% in another company’s stock

Valuation Allowance

for Investments

3 Measurement of the rate of return to

stockholders based on cash dividends Subsidiary Company

4 Recognition of changes in the fair value of

short-term investments Equity Method

5 A corporation controlled by another

corporation that owns all or the majority of its

6 The market price that would be received if an

investment were sold Dividend Yield

7 A balance sheet account where the fair value

adjustment for investments is reported

9 The value assigned to held-to-maturity

10 A corporation owning all or the majority of

the voting stock of another corporation Cost Method

107 Define (1) debt securities and (2) equity securities Include their similarities and differences in your discussion

108 On May 1, 2015, Chase Inc purchases $60,000 of 10-year, 6% Manus Corporation bonds dated March 1,

2015 at 100 plus accrued interest What entry would Chase record when purchasing the bonds?

109 On May 1, 2015, Chase Inc purchases $60,000 of 10-year, Manus Corporation 6% bonds dated March 1,

2015 at 100 plus accrued interest What entry would Chase record when receiving its semiannual interest on September 1?

110 On May 1, 2012, Chase Inc purchases $60,000 of 10-year, Manus Corporation 8% bonds dated March 1,

2012 at 100 plus accrued interest What entry would Chase record when receiving its semiannual interest on March 1, 2013?

111 On October 1, 2012, Marcus Corporation purchased $20,000 of 6% bonds of Roberts Corporation, due in 8 1/2 years The bonds were purchased at a price of $17,561 plus interest of $300 accrued from July 1, 2012, the date of the last semi-annual interest payments Journalize the purchase

(2) Journalize the receipt of interest on December 31, 2012

(3) Journalize the February 1, 2013 sale of the bonds for $82,000 plus accrued interest

113 Journalize the entries to record the following selected bond investment transactions for Southwest Bank:

(1) Purchased $400,000 of Daytona Beach 5% bonds at 100 plus accrued interest of $4,500

(3) Sold $250,000 of the bonds at 97, plus accrued interest of $1,800

114 On February 12, Addison, Inc purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee On August 22, Lucas paid a $0.42 dividend per share On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee

115 On January 2, Todd Company acquired 40% of the outstanding stock of McGuire Company for

$205,000 For the year ending, December 31, McGuire earned income of $48,000 and paid dividends of

represents a less than 10% ownership interest in the company

117 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?

119 Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1,

2012 Roberts reported net income of $155,000 and declared dividends of $40,000 during 2012 How would these events be reported by Sutton using the cost method?

February 2 Purchased for cash 500 shares of Braxter Co.stock for $34 per share plus a $250 brokerage commission

June 17 Sold 100 shares of Braxter Co stock for $40 per share less a $100 brokerage commission

121 On March 1, 2011, Chase Inc purchases 35% of the outstanding shares of Glory Corporation stock for

$325,000 On December 31, 2011, Glory reports net income of $162,000 On January 15, 2012, Glory pays total dividends to stockholders of $33,000

Required: Journalize the three transactions described above

122 On January 1, 2015, Valuation Allowance for Trading Investment has a zero balance On December 31,

2015, the cost of trading securities portfolio was $64,200, and the fair value was $67,000

123 Skyline, Inc purchased a portfolio of trading securities during 2012 The cost and fair value of this portfolio on December 31, 2012, was as follows:

Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31, 2012

Where will the information from the journal entry be reported on the financial statements?

Provide the journal entry to record the adjustment of the available-for-sale security portfolio to fair value on December 31, 2012

Where will the information from the journal entry be reported on the financial statements?

125 The income statement for Hudson Company reported net income of $345,000 for the year ended December

31, 2012 before considering the following:

During the year the company purchased trading securities At year end, the fair value of the investment portfolio was $23,000 less than cost

The balance of retained earnings was $823,000 on December 31, 2011 Hudson Company paid $43,000 in cash dividends in 2012 Calculate the balance of retained earnings on December 31, 2012

126 The income statement for Dodson Corporation reported net income of $22,400 for the year ended

December 31, 2012 before considering the following:

During the year the company purchased available-for-sale securities At year end, the fair value of the

investment portfolio was $2,100 more than cost

The balance of retained earnings was $83,000 on December 31, 2011 Dobson Corporation paid $9,000 in cash dividends in 2012 Calculate the balance of retained earnings on December 31, 2012

130 Gerardo Company had a net income of $75,000, and other comprehensive income of $12,500 for

2012 On January 1, 2012, the Retained Earnings balance was $525,000 and the Accumulated Other

Comprehensive Income balance was $55,000 Determine the (a) comprehensive income for 2012, (b) Retained Earnings balance on December 31, 2012, and (c) the Accumulated Other Comprehensive Income on December

131 Herberto Company had a net income of $74,000, and other comprehensive loss of $8,500 for 2012 On January 1, 2012, the Retained Earnings balance was $425,000 and the Accumulated Other Comprehensive Income balance was $52,000 Determine the (a) comprehensive income for 2012, (b) Retained Earnings

balance on December 31, 2012, and (c) the Accumulated Other Comprehensive Income on December 31, 2012

133 On August 1, 2011, Airport Company sold Paxton Company $1,000,000 of 10-year, 6% bonds, dated July

1 at 100 plus accrued interest On March 1, 2012, Paxton sold half of the bonds for $520,000 plus accrued interest Present entries to record the following transactions:

Paxton

Company:

(2) Receipt of first semiannual interest amount on December 31, 2011

134 Journalize the entries to record the following selected transactions of Oliver Co.:

(a) Purchased $100,000 of Kruse Co 8% bonds at par value plus accrued interest of $2,000

(b) Received first semiannual interest payment

(c) Sold the bonds at 97 plus accrued interest of $1,500

(b) Sold half the bonds at 98 plus accrued interest of $4,000 The broker deducted $200 for brokerage fees and taxes, remitting the

balance The bonds were carried at $479,000 at the time of the sale

136 Prepare the journal entries for the following transactions for Batson Co

(a) Batson Co purchased 1,200 shares of the total of 100,000 outstanding

shares of Michael Corp stock for $20.75 per share plus a $70 commission

(b) Michael’s total earnings for the period are $84,000

(c) Michael paid a total of $40,000 in cash dividends to shareholders of record

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

(a) Morgan Co purchased 32,000 shares of the total of 100,000 outstanding shares of Gordon Corp stock for $10 per share plus a $400

commission

(b) Gordon Corp.'s total earnings for the period are $80,000

(c) Gordon Corp paid a total of $45,000 in cash dividends

138 Present entries to record the following selected transactions of Masterson Co

(a) Purchased 600 shares of the 100,000 shares outstanding $10 par common shares of Dankin Corporation for $5,100

(b) Purchased 3,500 shares of the 10,000 shares no par common shares of Ramon Co for $45,700 The investment was accounted for by

the equity method

(c) Received a cash dividend of $1 per share on the Dankin Corporation stock acquired in (a)

(d) Received a cash dividend of $2 per share on the Ramon Co stock acquired in (b)

(e) Sold 100 shares of the Dankin Corporation shares acquired in (a) for $2,100

(f) Dankin Corporation reported net income of $30,000 and Ramon Company’s reported net income was $50,000

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

(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.

Required:

(1) Complete the table above to find the total cost and fair value for the company’s available-for-sale 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.

143 (1) Discuss factors contributing to the trend to fair value accounting

(2) What are some of the disadvantages associated with using fair value?

(1) Calculate Newville’s dividend yield

(2) Why does the dividend yield vary widely across firms?

145 Mangrill, Inc reported net income for the year ending December 31, 2012 of $483,500 Dividends paid during the year totaled $42,900 The company holds available-for-sale securities with an original cost of

$162,000 and a fair value of $171,000 at the end of the year They also hold trading securities with an original cost of $150,000 and a fair value of $147,000 Retained Earnings on January 1, 2012 was $736,400 and Accumulated Other Comprehensive Income on January 1, 2012 was $16,200

Required:

Calculate the following balances to be reported in the financial statements dated December 31, 2012

(1) Valuation Allowance for Available-for-Sale securities

Chapter 15 Investments and Fair Value Accounting Key

8 When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price

14 Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market

value each accounting period

16 Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments

20 It is not possible for one company to influence the operating policies of another company unless it owns

more than 50% interest in that company

FALSE

21 The equity method is usually more appropriate for accounting for investments where the purchaser does not

have significant influence over the investee

FALSE

22 When bonds held as long-term investments are purchased at a price other than the face value, the premium

or discount should be amortized over the remaining life of the bonds

25 Held-to-maturity securities maturing beyond a year are reported as noncurrent assets

31 Available-for-sale securities are securities that management expects to sell in the future, but are not actively

traded for profit

35 Investments in stocks that are expected to be held for the long term are listed in the stockholder's equity section of the balance sheet

FALSE

36 In order to maintain the original value of a trading security, the fair value adjustments are debited or

credited to the account Valuation Allowance for Trading Investments

44 The cumulative effects of other comprehensive income items is included in retained earnings, on the balance sheet

A are reported as current assets

B include cash equivalents

C do not include equity securities

D all of the above

47 Which of the following is not a reason to invest excess cash in temporary investments?

A earn interest revenue

B influence the operations of another company

C cash and cash equivalents

D held to maturity securities

49 Long-term investments are held for all of the listed reasons below except

A to earn the interest or dividend income

B for its long-term gain potential

C to influence over another business entity

D to meet current cash needs

50 Temporary investments such as in trading securities are

A recorded at cost but reported at fair market value

B recorded at cost and reported at cost

C recorded at cost but reported at lower of cost or fair market value

D recorded at fair market value and reported at fair market value

51 On June 1, $50,000 of treasury bonds were purchased between interest dates The broker commission was

$500 The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1 What is the total cost to be debited to the Investment - Treasury Bonds account?

52 On June 1, $40,000 of treasury bonds were purchased between interest dates The broker commission was

$600 The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1 How much interest revenue will be recorded on July 1?

53 Interest revenue on bonds is reported

A as an addition to the Investment in Bonds account

B as part of Comprehensive Income but not as part of Net Income

C as part of other income

D as part of operating income

54 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

55 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 receipt of interest on the next interest payment date would be:

A Debit: Cash $4,000; Credit: Interest Revenue $4,000

B Debit: Cash $4,000; Credit: Interest Receivable $4,000

C Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500

D Debit: Cash $2,500; Credit: Interest Revenue $2,500

56 Ruben Company purchased $100,000 of Evans Company bonds at 100 Ruben later sold the bonds at

$104,500 plus $500 in accrued interest The journal entry to record the sale of the bonds would be:

A Debit: Cash $105,000; Credit: Investment in Bonds $104,500 and Interest Revenue $500

B Debit: Cash $105,000; Credit: Investment in Bonds $100,000 and Gain on Sale of Investments $5,000

C Debit: Cash $104,500 and Interest Receivable $500; Credit: Investment in Bonds $100,000, Gain on Sale of Investments $4,500 and Interest Revenue $500

D Debit: Cash $105,000; Credit: Investment in Bonds $100,000; Gain on Sale of Investments $4,500 and

Stock Investments - Saxton Company 4,500

B Stock Investments - Saxton Company 4,780

Cash 4,780

C Stock Investments - Saxton Company 4,500

Brokerage Fee Expense 280

A Interest Receivable debit $2,000

B Investment in Bonds debit $202,000

C Cash debit $200,000

D Interest Revenue credit $2,000