Exam 16: Investing Assets

On January 7, 2018, Webb Industries purchased 1,000 shares of Class A common stock in Bloomberg Corporation for $50,000. Webb does not have significant influence or control over Bloomberg. Although Class A shares are not actively traded, Class B shares are traded and are nearly identical aside from being publicly traded. At the end of 2018, Class B shares are trading for $54 per share. If Webb makes the appropriate election to measure the investment based on observable price changes for similar securities, what Fair Value Adjustment should be made at the end of 2018?

On January 1, Year 1 Alcorn Corporation purchased $95,000 of 9% bonds at face value. The bonds are classified as a held-to-maturity investment. The bonds pay interest semiannually on January 1 and July 1. On December 31, Year 1, the fair value of the bonds is $98,000. Alcorn's fiscal year ends on December 31. Required: 1. Prepare the journal entries to record the acquisition of the bonds and the first two interest payments. Include any year-end adjusting entries. 2. If the bonds were classified as an available for sale security, what additional adjusting entry would be made on December 31?

If a company has elected the fair value option, where are gains and losses resulting from adjusting these accounts to fair value reported?

Crush Enterprises purchased 200,000 of the 400,000 outstanding shares of Carly Casualties for $4,400,000 on 1/1/19. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,200,000. What is the balance in the Investment in Carly account at year end?

On July 1, Year 1, Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,792,146 plus accrued interest to yield 8%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 5, the bonds had a fair value of $1,810,000. On March 1, Year 6, Walters sold the bond for $1,830,000. At what amount should Walters report the bond in its December 31, Year 5 balance sheet if it is classified as an available-for-sale security?

Cox Corporation invested in the bonds of Latif Industries on January 1, 2018. These 10 year, $100,000 bonds pay interest of 6% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

Price Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 60 year, $600000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

On July 1, Year 1, Fairfield Company purchased $5 million of Hampton Corporation's 6% bonds for $3,932,522. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 25 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1? (Round all calculations to the nearest cent, and your final answer to the nearest dollar.)

A separate fair value adjustment account is typically used to reflect the difference between the fair value and the cost of the investment so as to avoid excessive changes in the investment account itself.

What types of gains and losses from investments must companies report?

Cross Clothiers invested $200,000 in a debt security that it properly classified as a trading security on 12/20/20. At 12/31/20, this trading security had a fair value of $201,500. Record the journal entries needed for this investment assuming this is the first and only trading debt security for Cross Clothiers.

Yield is the actual return investors receive on investments in bonds.

For trading securities, companies must disclose the amortized cost, the aggregate fair value, the total unrealized gains and losses reported in net income.

Kelemen Asset Management invested in the bonds of DEF Co. on 1/1/19. Kelemen intends to hold the bonds until maturity. These 5-year bonds had a face value of $500,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $478,674. How much interest revenue will Kelemen record on 6/30/19?

Packer Publications purchased $160,000 of the outstanding 400,000 shares of Bear Homes. How should Packer account for this investment?

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok has significant influence over Yoda. Ewok purchased the shares for $210,000 and the shares are currently trading for $195,000 at year-end. Record the journal entries needed to purchase the investment, and then adjust it to fair value. Then, show how this investment will be reported on the balance sheet at year-end.

If a company elects to use the fair value option for a financial asset at the initial acquisition date, unrealized gains and losses at year-end are reported as part of other comprehensive income.

How do the qualitative characteristics of relevance and faithful representation relate to the measurement bases used for investments?

On January 1 of the current year, Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock. Beta owns 10% of Gamma Company. Gamma reported net income of $66,000 for December 31 of the current year. The fair value of the Gamma stock on that date was $27. What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31?

Which of the following is not an impairment indicator for investment securities?