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20 Cards in this Set
- Front
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24. Unrealized holding gains or losses which are recognizedin income are from debt securities classified as: |
TRADING |
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26. Debtsecurities that are accounted for at amortized cost, not fair value, are: |
HELD-TO-MATURITY DEBT SECURITIES |
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27. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are: |
AVAILIABLE-FOR-SALE DEBT SECURITIES |
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29. Equitysecurities acquired by a corporation which are accounted for by recognizingunrealized holding gains or losses are: |
securities where a company has holdings of less than 20% |
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33. TRADING DEBT SECURITIES |
1. they are held with the intention of selling them in a short period of time 2. Unrealized holding gains and losses are reported as part of net income 3. Any discount or premium is amortized |
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38. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a: |
debit to Debt Investments Explanation: When a company purchase debt securities at discount, the carrying value of debt securities is less than the face value. Through amortization, the carrying value should be equal to the face value. In other words, the amortization of the discount will increase the carrying value. Thus, journal entry looks as follows. Dr. Debt Investments $$$ Cr. Interest Revenue $$$ |
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41. When investments in debt securities are sold betweeninterest payment dates, preferably the: |
accrued interest is credited to Interest Revenue |
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44. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
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Fair Value Method No Effect Equity Method Decrease Explanation: There are twoaccounting methods for equity investments: Fair value method for holding lessthan 20% and equity method for more or equal to 20%. In addition, if a companyholds more than 50%, it has to consolidate those subsidiaries. Thus, basicallythis question asks how to account for cash dividends from equity investmentholding less than 20% ownership versus more than 20% ownership. Journal entryless than holding 20% Dr. Cash $$$ Cr. Dividends revenue $$$ - No impact on the investments Journal entrymore than or equal to 20% Dr. Cash $$$ Cr. Equity Investment $$$ - Decrease the equity investment |
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48. Koehn Corporation accounts for itsinvestment in the common stock of Sells Company under the equity method. KoehnCorporation should ordinarily record a cash dividend received from Sells as |
a reduction of the carrying value of the investment |
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67. On August 1, 2018, Dambro Companyacquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds weredated May 1, 2018, and mature on April 30, 2024, with interest paid eachOctober 31 and April 30. The bonds will be added to Dambro’s available-for-saleportfolio. The preferred entry to record the purchase of the bonds on August 1, 2018 is
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DebtInvestments 1,164,000
Interest Revenue 27,000 Cash 1,191,000 Explanation:Purchasing debt securities between interest dates. Pay and recognize accruedinterest at the purchase. Dr. DebtInvestments $1,164,0001 Cr.Interest Revenue $27,0002 Cr. Cash $1,191,0003 1. 1,200 × $1,000 × .972. $1,200,000 × .09 × 3/12 (from 04/31 – 08/01)3. $1,164,000 + $27,000 |
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69. PattonCompany purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018,paying $1,410,375. The bonds mature January 1, 2028; interest is payable eachJuly 1 and January 1. The discount of $89,625 provides an effective yield of11%. Patton Company uses the effective-interest method and plans to hold thesebonds to maturity.
OnJuly 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by: |
$2, 571 |
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70. Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.
Forthe year ended December 31, 2018, Patton Company should report interest revenuefrom the Scott Company bonds of:
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$ 155,283 Explanation: OnDec. 31, 2018 to recognize accrued interest revenue Dr. Interest Receivable $75,000 Dr. Debt Investments $2,712 Cr.Interest Revenue 77,712 Thus, InterestRevenue for 2018 = $77,571 + $77,712 = $155,283 |
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79. On January 3, 2017, Moss Company acquires $500,000 of Adam Company’s 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity.
Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds? |
$46,698 Dr. Interest Receivable $50,000 Cr. Debt Investments $2,302 Cr.Interest Revenue $47,698 |
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81. Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively.
At December 31, 2018, the fair value of the Carlin,Inc. bonds was $1,272,000. What should Richman Company report as othercomprehensive income and as a separate component of stockholders’ equity? |
$30,744 Explanation:Availablefor Sale Debt Securities => Companies report available-for-sale securities at i. fair value, with ii. unrealized holding gains and lossesreported as other comprehensive income, a separate component of stockholder’sequity, until realized. Fair ValueAdjustment account is used to record the difference between fair value andamortized cost (the carrying value of bonds). The carryingvalue of bonds at 12/31/18 = $1,249,896 – $4,248 – $4,392 = $1,241,256. Unrealized holding gains (The fairvalue is greater than the amortized cost) = $1,272,000 - $1,241,256= $30,744 Dr. UnrealizedHolding Gain or Loss—Equity $30,744 Cr. Fair ValueAdjustment $30,744 |
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82. Richman Company purchased $1,200,000 of 8%, 5-year bonds fromCarlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1.The bonds sold for $1,249,896 at an effective interest rate of 7%. Using theeffective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc.bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248and $4,392, respectively. At February 1, 2019, Richman Company sold theCarlin bonds for $1,236,000. After accruing for interest, the carrying value ofthe Carlin bonds on February 1, 2019 was $1,240,500. Assuming Richman Companyhas a portfolio of available-for-sale debt investments, what should RichmanCompany report as a gain (or loss) on the bonds? |
($4,500) Explanation: Saleof available-for-sale debt investments If company sells bonds beforematurity date: i. It must make entries to remove fromthe Debt Investments account the amortized cost of bonds sold. ii. Any realized gain or loss on sale isreported in the income statement. · Amortized cost = $1,240,500· Sellingprice of bonds = $1,236,000· Realized loss on sale of bond = $1,236,000- $1,240,500 = ($4,500) Dr.Cash $1,236,000 Dr.Loss on Sale of Investment $4,500 Cr. Debt Investment $1,240,500 |
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83. During 2018 Logic Company purchased 10,000 shares of Midi, Inc. for $30 per share. During the year Logic Company sold 2,500 shares of Midi, Inc. for $35 per share. At December 31, 2018 the market price of Midi, Inc.’s stock was $28 per share. What is the total amount of unrealized gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2018 related to its investment in Midi, Inc. stock?
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($2,500) Explanation:
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85. At December 31, 2018,Atlanta Company has an equity portfolio valued at $160,000. Its cost was$132,000. If the Securities Fair Value Adjustment has a debit balance of$8,000, which of the following journal entries is required at December 31,2018?
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Fair Value Adjustment 20,000
Unrealized Holding Gain or Loss-Income 20,000 |
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89. On its December 31, 2017 balance sheet,Calhoun Company appropriately reported a $10,000 debit balance in its FairValue Adjustment account. There was no change during 2018 in the composition ofCalhoun’s portfolio of debt investments held as available-for-sale debtsecurities. The following information pertains to that portfolio:
Security: X, Y, Z Cost: $130,000, $100,000, $175,000 = $405,000 Fair Value at 12/31/18: $160,000 , $90,000, $125,000 = $375,000 Whatamount of unrealized loss on these debt securities should be included inCalhoun's stockholders' equity section of the balance sheet at December 31,2018? |
$30,000 |
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93. Harrison Company owns 20,000 of the 50,000outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns$1,200,000 and pays cash dividends of $960,000. If thebeginning balance in the investment account was $750,000, the balance atDecember 31, 2018 should be: |
$846,000 Explanation: 20,000 shares /50,000 shares *100%= 40% è Holdingbetween 20% and 50% (Equity Method) Thebalance of equity investment as of December 31, 2018 = $750,000 + ($1,200,000 –960,000)*40%= $846,000 (Adjusted cost) |
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94. Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock. During 2018, Taylor earns $1,200,000 and pays cash dividends of $960,000. Harrisonshould report investment revenue for 2018 of: |
$480,000 Explanation: Investment revenue for 2018 reportedby Harrison = $1,200,000 × 40% = $480,000 |
