Exam 13: Investments and Long-Term Receivables

On January 1, 2017, Garcia Company acquired bonds with a face value of $80,000 for $76,066. The bonds carry a stated interest rate of 8% and an effective yield of 10%. Interest is payable on June 30 and December 31, the bonds mature on December 31, 2018, and they are classified as held-to-maturity. Required: Prepare the journal entries necessary by Garcia to record the purchase of bonds and the first two interest receipts using the effective interest method of amortization. Round to the nearest dollar.

Fish Galore Corp. bought 25% of Fin Chaser Corporation's stock for $70,000 on January 1, 2017. During 2017, Fin Chaser earned $25,000 of net income , and Fin Chaser distributed $15,000 of dividends on December 31, 2017. Required: Present all related 2017 entries on Fish Galore Corp.'s books, including the January 1 investment.

On January 1, 2017, Old World Company purchased $300,000 of ten-year 10% bonds of New Company for $340,260. Interest is payable annually. The effective yield on the investment is 8%. What is the balance in Old World's investment in held-to-maturity debt securities account rounded to the nearest dollar, if necessary) at December 31, 2018?

What are the four components necessary to account for investments in held-to-maturity debt securities?

On January 1, 2017, the Widner Company acquired 12% bonds with a face value of $350,000 and classified them as held-to-maturity. The bonds pay interest on June 30 and December 31, and mature on December 31, 2026. Required: a. Assume the bonds were acquired for$312,921 to yield 14%. Prepare an investment discount amortization schedule for the first year of the investment, using the effective interest method. Round all calculations to the nearest dollar. b. Assume the bonds were acquired for $393,618 to yield 10%. Prepare an investment premium amortization schedule for the first year of the investment using the effective interest method. Round all calculations to the nearest dollar.

Which of the following is correct regarding available-for-sale securities?

The carrying value of available-for-sale debt securities is

Under current GAAP for marketable securities, trading securities and available-for-sale securities are reported at their fair value, but held-to-maturity securities are reported at their amortized cost. Required: Explain why there is a difference in the reporting requirements for these three classifications of marketable securities.

Unrealized holding gains and losses occur because a company

Texas Company has a $4,000,000, 8% bank loan from James Bank. On January 1, 2017, the bank loan has three years to maturity. Texas enters into a three-year interest rate swap with Black and White Investments with a $4 million notional amount. The agreement calls for Texas to receive a fixed interest rate of 8% and pay a variable rate based on LIBOR at the beginning of the year. Payments to Black and White are to be made for the net amount at each year-end. At the beginning of 2017, the LIBOR rate is 7.5%. The three-year fixed rate at the end of 2017 is 9%. Required: Prepare the journal entries that Texas would make in 2017 relating to the bank loan and the derivative.

Under U.S. GAAP investments are classified into three categories based upon management's intent. IFRS also divides investments into three classifications, but those classifications are based on the company's business model for managing financial assets and the characteristics of the cash flows of the financial asset.

Investment securities are classified based upon management's intent. This may present difficulties to readers of financial statements because

The Master Company acquired a 40% interest in the Dickerson Company on January 2, 2017, for $1,000,000. During 2017, Dickerson Company paid $100,000 in dividends and reported net income of $270,000. At the end of 2017, the balance in Investment in Dickerson Company should be

Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of shareholders' equity?

On January 1, 2017, A Corp. had the following investments: During the year, A Corp. acquired M Co. stock for $1,000 and classified it as trading. At year-end, the M Co. stock has a fair market value of $1,200. The K Inc. investment on December 31 had a fair market value was $2,500. The S Co. investment had a December 31 market value of $3,500, and the G Inc. bonds had a December 31 market value of $9,850. Required: Indicate the balance sheet classification and where unrealized holding gains/losses would appear on the December 31, 2017 financial statements for each investment.

With consolidation, control generally occurs when the investor owns what percentage of the voting stock of the investee?

Under the equity method, dividends received by the investor should be recorded as

Ringer Company acquired 40% of the outstanding stock of the Leopard Company for $370,000 on January 1, 2017. The purchase price equaled 40% of the book value of Leopard Company. During 2017, Leopard engaged in the following activities: April 7 Declared and paid a cash dividend, $175,000. Dec. 31 Reported annual earnings for 2017, $250,000. Required: Prepare the journal entries that Ringer would need to make in 2017 with respect to its investment in Leopard Company.

For an investment classified as held-to-maturity, any unrealized gains and losses are both reported in the financial statements and also disclosed in the notes to the financial statements.

On July 1, 2017, Rectangle, Inc. purchased Diamond Company's five-year 12% bonds with a face value of $500,000 for $569,000, which included $25,000 of accrued interest. The bonds, which mature on February 1, 2022, are to be held-to-maturity and pay interest on February 1 and August 1. Rectangle uses the straight-line method of amortization. The amount of income that Rectangle would report for the calendar year 2017 as a result of this long- term investment would be