Exam 16: Investing Assets

Trader Trust accepts a $600,000 non-interest bearing 20-year note from Coffee Co. in exchange for cash on 1/1/19. Coffee Co. promises to repay $600,000 at maturity. The market rate on 1/1/19 was 4%. How much cash will Trader loan Coffee in exchange for this note?

If the book value of an investee's net assets are not equal to their fair value, an additional adjustment is required under the equity method of accounting for investments.

Where are changes in fair value for trading debt securities reported?

Testing for impairments of debt investments is a three step process: Measure the impairment loss, determine where to present it, and assess whether there is a reversal needed in later periods.

Which of the following would not be disclosed for available-for-sale securities?

Significant influence is typically gained by an investor company owning more than 50% of the voting shares of the investee company.

What are the three levels of influence that an investor can have over an investee company? What is the appropriate accounting treatment for each level of influence?

L & J purchased common shares of Company A and B for $10,000 and $9,000, respectively on 12/15. L & J intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. L & J does not have significant influence over the investees. Assuming an existing $1,100 credit balance in Fair Value Adjustment - Equity Investments, what is the unrealized gain or loss for these securities and how is it reported?

Eagle Exporters purchased 80,000 of the 200,000 outstanding shares of Giant Distributors for $3,000,000. Eagle has significant influence over Giant and will account for this investment using the equity method. During the year, Giant declared dividends of $100,000 and reported Net Income of $780,000. What is the balance in the Investment in Giant account at year end?

Under the equity method of accounting for investments, dividends received from the investee are credited to Dividend Revenue for the investor.

On January 3, 2019, Sheppard Corporation purchased 25% of Meredith Corporation's common stock for $64,000. The net asset's book value is equal to the fair market value. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $71,000; in 2020, it increased again to $76,000. What would be the balance in the investment account as of December 31, 2020?

What are the primary effects of amortizing a discount on notes receivable?

The appropriate accounting method for equity investments depends on the investor's level of influence over the investee company.

On January 3, 2019, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. Meredith's net income for the years ended December 31, 2019 and 2020 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2019; however, during 2020, the company declared a $70,000 dividend. On December 31, 2019, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $73,000; in 2020, it increased again to $79,000. What will be the carrying value of the investment at the end of December 31, 2020?

Both trading debt securities and held-to-maturity debt securities are valued at fair value.

Skywalker Limited purchased shares of Jedi Jewelers during 2018 for $124,000 and has significant influence. Skywalker elected the fair value option for accounting for this investment. At year-end 2018, 2019, and 2020, this investment had a fair value of $120,000, $130,000, and $135,000, respectively. Record the journal entries for the purchase of this investment and the adjustment to fair value for each of the three years listed.

A Discount on Notes Receivable results from a stated rate of interest that is lower than the prevailing market rate of interest.

Realized gains and losses occur when a company holds securities that experience a change in fair value.

Skywalker Limited purchased an equity investment in Jedi Jewelers during 2018 for $131,000. Skywalker has significant influence over Jedi. Skywalker elected the fair value option for accounting for this investment. At year-end 2018, 2019, and 2020, this investment had a fair value of $120,000, $130,000, and $138,000, respectively. How will this investment be reported on the Balance Sheet at year-end, 2020?

HdG, Inc. accepts a $200,000, 8% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate on the date of issuance of this note was 8%. HdG has a fiscal year end of December 31. How much Interest Revenue will HdG record on March 31, 2020, the first annual installment payment date?