Exam 14: Investments in Debt and Equity Securities

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as

On January 1, 2011, Gardner Associates purchased 30 percent of the outstanding shares of stock of Gillen Corp.for $150,000 cash. The investment will be accounted for by the equity method. On that date, Gillen's net assets (book and fair value) were $300,000. Gardner has determined that the excess of the cost of its investment in Gillen over its share of Gillen's net assets is attributable to equipment whose market value exceeds its carrying value by $100,000 and to an operating license whose market value exceeds its carrying value by $100,000. The remaining useful life of the equipment is ten years and the remaining useful life of the operating license is 20 years. Gillen's net income for the year ended December 31, 2011, was $60,000. During 2011, Gardner received $5,000 cash dividends from Gillen. There were no other transactions between the two companies. Compute the amount that would be reported on Gardner Associates' books for the investment in Gillen Corp. at December 31, 2011.

The market rate of interest for a bond issue that sells for more than its par value is

On July 1, 2011, Mountain Systems acquired 8,000 shares of Precision Services' 40,000 outstanding common shares at a cost of $240,000. The book value of Precision's net assets on that date was $880,000. The following data pertain to Precision Services for 2011: Any excess of cost over book value is attributable to depreciable properties the market value of which exceeds the carrying value. The remaining life of the equipment is 10 years.

When an investor purchases sufficient common stock to gain significant influence over the investee, what is the proper accounting treatment of any excess of cost over book value acquired?

On January 2, 2010, Reynolds Corporation bought 15 percent of Scorpio Corporation's capital stock for $60,000 and classified it as available-for-sale securities. Scorpio's net incomes for the years ended December 31, 2010, and 2011, were $20,000 and $100,000, respectively. During 2011, Scorpio declared a dividend of $140,000. No dividends were declared in 2010. On December 31, 2011, the fair value of the Scorpio stock owned by Reynolds had increased to $90,000. How much should Reynolds show on its 2011 income statement as income from this investment?

In March of 2010, Moon Corp. bought 45,000 shares of McMahon Corp.'s listed stock for $450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2010. Moon changed the classification of these shares to trading securities in June of 2011 when the market value of this investment in McMahon's stock had risen to $345,000. How much should Moon include as a loss on transfer of securities in its determination of net income for 2011?

On January 1, 2011, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2011, was $360,000. During 2011, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. Ignoring income taxes, Mets' statement of income for the year ended December 31, 2011, should include "Income From Investment in Pirates Corporation Stock" in the amount of

On January 1, 2011, Young Co. paid $500,000 for 20,000 shares of Montana Co.'s common stock and classified these shares as trading securities. Young does not have the ability to exercise significant influence over Montana. Montana declared and paid a dividend of $.50 a share to its stockholders during 2011. Montana reported net income of $260,000 for the year ended December 31, 2011. The fair value of Montana Co.'s stock at December 31, 2011, is $27 per share. What is the net asset amount (which includes both investments and any related market adjustments) attributable to the investment in Montana that will be included on Young's balance sheet at December 31, 2011?

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 may be unable to exercise significant influence over an investee.

If an investment in stock is reclassified from available-for-sale securities to trading securities, the stock should be recorded on the date it is reclassified at the

A credit balance in the account Market Adjustment--Trading Securities at the end of a year should be interpreted as the net

On August 1, 2010, Colorite Corp. acquired 10,000 of the outstanding shares of Brown Co. On January 2, 2011, Colorite acquired an additional 20,000 shares of Brown Co., which brought the total ownership to 30,000 shares. Using the normal guidelines for percentages of ownership and assuming that Brown Co. had 100,000 shares outstanding during 2010 and 2011, Colorite Corp. should account for the investment in Brown Co. by using the

At the beginning of the year a company had a debit balance in the account Market Adjustment--Trading Securities. During the year the company did not buy or sell any trading securities, but at the end of the year the related market adjustment account had a credit balance. This change indicates that

On January 1, 2011, Mets Inc. purchased 30 percent of the outstanding common stock of Pirates Corporation for $516,000 cash. Mets is accounting for this investment using the equity method. On the date of acquisition, the fair value of Pirates' net assets was $1,240,000. Mets has determined that the excess of the cost of the investment over its share of Pirates' net assets is attributable to goodwill. Pirates' net income for the year ended December 31, 2011, was $360,000. During 2011, Pirates declared and paid cash dividends of $40,000. There were no other transactions between the two companies. On December 31, 2011, the investment in Pirates should be recorded as

When an entity reduces its interest in an investment in equity securities accounted for by the equity method, and changes to the fair value method, what is the initial cost value for purposes of subsequent changes in market value?

Under the provisions of Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--Including an amendment of FASB Statement No. 115,"

EB Company reports its income from its investment in JB Company under the equity method. EB recognized income of $150,000 from its investment in JB during the current year. JB declared and paid dividends of which EB's share was $25,000 during the current year. The effect of these activities on the operating section of the statement of cash flows of EB Company prepared for the current year under the indirect method would be

The equity method of accounting for an investment in the common stock of another company should be used when the investment

Kyle Company reports its income from its investment in Bingham Company under the equity method. Kyle recognized income of $150,000 from its investment in Bingham during the current year. No dividends were declared or paid by Bingham during the year. Kyle would show the $150,000 in its statement of cash flows for the current year prepared under the indirect method as