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Exam 12: Investments

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Question 71

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Hope Company bought 30% of Faith Corporation in the beginning of 2013. Hope's purchase price equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2013, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2013?

A) Overstated by $1,050,000; understated by $1,050,000.
B) Understated by $1,050,000; understated by $1,050,000.
C) Overstated by $1,200,000; overstated by $1,200,000.
D) Understated by $1,200,000; overstated by $1,050,000.

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

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Question 72

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During 2013, Largent Enterprises purchased stock as follows: May 17, Purchased 1,000 shares of Nugent common stock for $80 per share. July 12, Purchased 400 shares of Alfredo common stock at $60 per share, plus a $600 brokerage commission. Largent accounts for these investments as securities available for sale. At December 31, 2013, the market values of the securities were as follows: Required: (1.) Prepare the journal entries to record the acquisition of the two investments. (2.) Prepare any necessary adjusting entries assuming the stocks are both classified as available for sale securities.

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Question 73

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Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

All investments in debt securities whose fair values are not readily determinable are carried at historical cost.

On July 1, 2013, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. The total book value and total fair value of Mountain's individual net assets on July 1, 2013, are both $700,000. The total fair value of the 30,000 shares of Mountain's common stock on December 31, 2013, is $760,000. Both companies have a January through December fiscal year. The following data pertains to Mountain Corporation during 2013: Required: (1.) Prepare the necessary entries for 2013 under the equity method (other than for the purchase). (2.) Prepare any necessary entries for 2013 (other than for the purchase) that would be required if the securities are classified as available for sale.

Assume Gibson Company is an equal partner in a joint venture with Glover Company. Each company owns 50% of Pesci Company, and equally shares decision-making authority. Required: Describe how U.S. GAAP and IFRS differ in how they would have Gibson account for this investment.

Jackson & Sons purchased a debt investment that meets the characteristics of a simple debt instrument. Jackson is holding the debt for resale in the near future. How should Jackson account for the investment?

Assume that, on January 1, 2013, Sosa Enterprises paid $3,000,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2013, the book value of Orioles' identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Orioles during 2013: What amount would Sosa Enterprises report in its year-end 2013 balance sheet for its investment in Orioles Co.?

Assume that, on January 1, 2013, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at January 1, 2013. The following information pertains to Yankee during 2013: What amount would Matsui report in its year-end 2013 balance sheet for its investment in Yankee?

If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company intends to sell the investment:

When the equity method of accounting for investments is used by the investor, the investment account is increased when:

If the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at:

The amount of purchased goodwill is:

Which of the following is not true about the fair value option?

Under IFRS No. 9, debt investments are classified as either "amortized cost" or "fair value through profit and loss (FVTPL)."

Which of the following is not true about how the proposed ASU treats impairments?

Which of the following is not a reason to consider a decline in the fair value of a debt investment to be "other than temporary"?

Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchange, and the prevailing price on that exchange indicates that Dyckman's investment is worth $20,000. However, Dyckman management believes that the stock market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on its balance sheet at:

When an investor owns 20% to 50% of the voting stock of an investee company, the investor is presumed to exercise significant influence over the investee unless there is evidence to the contrary. Required: (1.) What factors could be evidence of significant influence? (2.) What factors could be evidence of lack of significant influence?

On January 1, 2013, American Corporation purchased 25% of the outstanding voting shares of Short Supplies common stock for $210,000 cash. On that date, Short's book value and fair value were both $840,000. The equity method is deemed appropriate for this investment. Short's net income reported on December 31, 2013, was $80,000. During 2013, Short also paid cash dividends in the amount of $24,000. Required: Prepare the journal entries necessary to record the above information on American Corporation's books during 2013.