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Exam 12: Investments

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Question 1

Multiple Choice

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If an available-for-sale investment is sold for which there are unrealized gains in accumulated other comprehensive income (AOCI) , a reclassification adjustment affects other comprehensive income (OCI) in the period of sale by

A) reducing OCI for the amount of unrealized gains in AOCI.
B) increasing OCI for the amount of unrealized gains in AOCI.
C) no effect on OCI, as OCI only includes the effects of unrealized gains and losses.
D) no effect on OCI, as the realized gain is included in AOCI.

E) B) and D)
F) B) and C)

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Question 2

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The O'Hara Group is owed $1,000,000 by Hilton Enterprises under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. O'Hara agrees to restructure the note under terms that yield a present value of $880,000. The journal entry that O'Hara would make to record this transaction would include a loss on troubled debt restructuring of:

A) $0.
B) $80,000.
C) $200,000.
D) $220,000.

E) A) and D)
F) All of the above

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Question 3

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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.

Trading securities, by definition, are properly classified in the balance sheet as:

Gerken Company concluded at the beginning of 2009 that the company's ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $50,000 at the time of the change, and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared,

When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition:

Nichols Enterprises has an investment in 25,000 shares of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott shares are publicly traded on the New York Stock Exchange, and the Wall Street Journal quotes a price for those shares of $10/share, but Nichols believes the market has not appreciated the full value of the Elliott shares and that a more accurate price is $12/share. Nichols should carry the Elliott investment on their balance sheet at:

According to SFAS No. 159, companies can elect the fair value option when accounting for many investments. Required: Describe how accounting for a held-to-maturity investment, an available-for-sale investment, and an equity-method investment is affected by a company electing the fair value option.

Holding gains and losses on trading securities are included in earnings because:

If Ziggy Company concluded that an investment originally classified as held to maturity would now more appropriately be classified as available for sale, Ziggy would:

Jackson Company engaged in the following investment transactions during the current year. Required: Prepare the appropriate journal entries to record the transactions for the year including year-end adjustments. Show calculations.

On January 1, 2009, 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, 2009, was $80,000. During 2009, 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 2009.

Matrix, Inc acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2009. The fair value and book value of 25% of Neo's identifiable net assets was $2,000,000 and $1,600,000 on that date, and the difference was attributable to assets that would be depreciated over 10 years. During 2009 Neo recognized net income of $500,000 and paid dividends of $400,000. Neo had a fair market value of $10,000,000 as of December 31, 2009. Required: Write the journal entries necessary to account for the Neo investment, assuming that Fredo accounts for that investment as (1) an equity method investment, and (2) elects the fair-value option.

If an available-for-sale investment is sold for which there are unrealized losses in accumulated other comprehensive income (AOCI) , the total effect on total comprehensive income is

What total unrealized holding gain would Beresford report in its 2009 income statement relative to its investment securities?

When an equity security is appropriately carried and reported as securities available for sale, a gain should be reported in the income statement:

Dim Corporation purchased one thousand shares of Witt Corporation stock in 2006 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2007, and $300 on December 31, 2008. During 2009, Dim sold all of its Witt stock at $350 per share. On their 2009 income statement, Dim would report:

Routine transfers of debt and equity investments among the trading, available for sale, and held to maturity portfolios need not be disclosed in the financial statements.

From time to time, debt and equity securities must be reclassified when conditions and circumstances surrounding the investment change. Required: Describe the general accounting procedures for reclassifying securities from one category to another - held to maturity, available for sale, or trading.

Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.