Exam 14: Investments in Debt and Equity Securities

Which category includes only debt securities?

On January 2, 2011, Adler Co. acquired 2,000 shares of Boxworth Co. common stock for $8,000 and classified these shares as available-for-sale securities. During 2011, Adler received $6,000 of cash dividends. Adler's share of Boxworth's 2011 earnings (net income) was $5,000. The fair value of Boxworth's stock on December 31, 2011, was $7 per share. Adler should report what amount in 2011 related to Boxworth Co.?

LFM owned 40 percent of EMD's common stock, and as a result, accounted for the investment using the equity method. After the fifth year of owning the stock, the investment account had a credit balance. This could only happen if LFM

On February 1, 2011, Pyle Inc. had excess cash on hand. The controller suggested to management that the company buy $200,000 of U.S. Treasury bonds selling at 102 and paying 8 percent interest. Interest payments on these bonds are made semiannually on January 1 and July 1.

Which of the following is true?

Consolidated financial statements are typically prepared when one company has

The equity method of accounting should be applied by an investor to an investment in the voting stock of an investee of 20% or more of the voting stock of the investee. An investment of 20% or more of the voting stock of an investee should lead to the presumption (absent evidence to the contrary) that an investor has the ability to exercise significant influence over an investor. The presumption in applying the equity method is that an investor has significant influence over the operating and financial policies of an investee even though the investor holds 50% or less of the voting stock of the investee. Required: Identify events or circumstances that suggest that an investor has significant influence over an investee.

Under the cost method of accounting for unconsolidated investments in common stock, goodwill amortization

When an enterprise increases its interest in an investment in equity securities accounted for by the fair value method, and changes to the equity method, what is the initial carrying value for purposes of subsequent application of the equity method?

For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account?

In January 2011, Henry Corporation acquired 20 percent of the outstanding common stock of Davis Company for $1,120,000. This investment gave Henry the ability to exercise significant influence over Davis. The book value of the acquired shares was $840,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Davis's balance sheet and that had a remaining useful life of ten years. For the year ended December 31, 2011, Davis reported net income of $252,000 and paid cash dividends of $56,000 on its common stock. What is the proper carrying value of Henry's investment in Davis at December 31, 2011?

Ignoring income taxes, choose the correct response below regarding total stockholders' equity resulting from classifying all investments for a firm either as trading securities or securities available-for-sale.

Wallace, Inc., loaned Grommit Company $40,000 on January 1, 2007. The 8 percent, 7-year, simple-interest loan note called for annual interest payments each December 31. The note is due December 31, 2023. Grommit made the required interest payments through December 31, 2010. In early January 2011, Grommit began to default on some of its other debts and asked Wallace to renegotiate the original debt agreement, including an extension of the maturity date. Wallace refused but could see that the remaining scheduled payments on the loan were in jeopardy. Wallace reevaluated the Grommit note and estimated that the remaining interest payments would be only three-fourths of the original amount (based on the original principal amount), and that only one-half of the principal amount would be collected. Wallace uses the interest method to account for interest after recording a note impairment. Required:

In January of 2011, Clyde Corporation acquired 20% of the outstanding voting common stock of Blake Company for $280,000. This investment enabled Clyde to exercise significant influence over Blake. The book value of the acquired shares was $210,000. The excess of cost over book value was attributed to an identifiable intangible asset that was undervalued on Blake's balance sheet and that had a remaining useful life of 10 years. For the year ended December 31, 2011, Blake reported income of $63,000 and paid cash dividends of $14,000 on its common stock. What is the proper carrying value of Clyde's investment in Blake at December 31, 2011?

Other-than-temporary impairments in the value of equity securities classified as available-for-sale should be made

Lee Company had the following portfolio of securities at the end of its first year of operations:

On April 1, 2011, Ziba Inc. purchased as a temporary investment $100,000, face amount, 10% U.S. Treasury notes; they pay interest semiannually on January 1 and July 1. The notes were purchased at 102. Which of the following entries correctly records this purchase?

When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes

Which of the following is true regarding the provisions of International Accounting Standard No. 39, "Financial Instruments: Recognition and Measurement (amended 2005)?

Changes in fair value of securities are reported in the income statement for which type of securities?