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Exam 14: Investments

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Question 21

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Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories.What are these two categories? How do we report unrealized holding gains and losses under each of these two categories?

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The two categories are trading securitie...

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Question 22

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Discuss the meaning of consolidated financial statements.When is it appropriate to consolidate financial statements of two companies?

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Question 23

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Under the equity method,the investor includes in net income its portion of the investee's net income.

One of the primary reasons for investing in debt securities includes:

When insignificant influence exists,the investment should be accounted for by the equity method.

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities.At the end of the year,the fair value of the securities was $105,000.How should the investment be reported in the year-end financial statements?

Investments are reported at fair value when a company has a significant influence over another company in which it invests.

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: 11edc649_031c_baf2_a63e_99b6faa5ec9b_TB5910_ Recording the bond purchase would have what effect on the financial statements? A)Increase assets. B)Increase liabilities. C)Increase assets and liabilities. D)No effect on total assets and total liabilities.

The equity method of accounting for investments in voting common stock is appropriate when:

When the investor has significant influence,the receipt of cash dividends is recorded as dividend revenue.

Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income.

Because the carrying value of bonds purchased at a premium increases over time,interest revenue will also increase each semi-annual interest period.

Sandy Sensations purchases twenty,$1,000,7%,10-year bonds issued by Pizza Pier for $21,488 on January 1,2012.The market interest rate for bonds of similar risk and maturity is 6%.Interest is received semi-annually on June 30 and December 31. 1.Record the investment in bonds. 2.Record receipt of the first interest payment on June 30,2012.

On January 1,2012,Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment.The records of Burke Corporation showed the following at December 31,2012: $\begin{array} { | l | l | } \hline \text { Net Income } & \$ 500,000 \\\hline \text { Dividends Paid } & \$ 200,000 \\\hline \text { Market Price per Share } & \$ 38 \\\hline\end{array}$ What amount should Gilman Company report in its December 31,2012,balance sheet for its investment in Burke?

The cash received from interest equals the face value of the investment in bonds times the stated interest rate.

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: $\begin{array}{rrrrr}& \text { Cash } & \text { Interest } & \text { Increase in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value } \\1 / 1 / 12 & & & & \$ 194,758\\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370 \\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & \$ 200,000\end{array}$ GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12.What gain or loss,if any,would GIC record on this date? A)No gain or loss. B)$370 loss. C)$4,000 loss. D)$4,000 gain.

Libby Company purchased equity securities for $100,000 and classified them as trading securities.At the end of the year,the fair value of the securities was $105,000.How should the investment be reported in the year-end financial statements?

On September 1,Investors,Inc.purchases 1,000 shares (insignificant influence)of $1 par value common stock of Hamilton International at $15 per share.On October 15,the investment is sold for $18 per share.Record the purchase and sale of the investment in Hamilton International.

The primary difference in accounting for available-for-sale securities and accounting for trading securities is:

Gains and losses on the sale of equity investments are recorded in the income statement as part of net income.