Exam 18: Investing Assets

Which of the following statements is incorrect in regards to the equity method of accounting for investments?

Skywalker Limited purchased shares of Jedi Jewelers during 2015 for $124,000.Skywalker elected the fair value option for accounting for this investment.At year end 2015,2016,and 2017,this investment had a fair value of $120,000,$130,000,and $135,000,respectively.What is the amount of unrealized gain or loss reported on this investment at year-end 2017?

Which of the following is not a consideration for a company in determining whether to disclose more detail by security type?

For available-for-sale equity securities,realized gains/losses are reported in net income.

Pink Partners holds an available-for-sale equity investment with a carrying value of $40,000.The current fair value of the investment is $24,000.There is objective evidence of this impairment and the impairment is other-than-temporary.Should an impairment loss be recorded? How much of this loss should be classified in net income and how much should be classified in other comprehensive income?

Falcon Corporation purchased 15% of Shadowvale Enterprises for $1,500,000 on January 1,Year 1.Shadowvale recognized $600,000 in net income and paid $100,000 in dividends to its shareholders.At December 31,Year 1,the market value of the Shadowvale investment had increased to $1,560,000. Required: 1.Prepare the necessary journal entries to account for the investment in Shadowvale,assuming that Falcon accounts for the investment as an available for sale investment. 2.Prepare the necessary journal entries to account for the investment in Shadowvale,assuming that Falcon accounts for the investment using the fair value option.

List and discuss the three categories of investing securities.

For securities classified as available-for-sale,what do companies disclose in the notes to the financial statements?

If a security is not classified as held-to-maturity or trading,then it is classified as an available-for-sale security.

Which of the following statements is correct about the fair value option under IFRS?

Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16.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 $1,300,000.Prepare all necessary journal entries for Crush related to this investment.Then,calculate the ending balance in the Investment in Carly account.

Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16.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 $1,300,000.What is the balance in the Investment in Carly account at year end?

The yield is the actual return investors receive on investments in bonds.

On September 30,2016,Angel Outfitters invested in 10-year,$200,000,5% bonds of ABC Co.These bonds were dated January 1,2016,and pay interest annually on December 31.Angel paid face value plus accrued interest for these bonds,and intends to hold these bonds until maturity.Which of the following is the correct journal entry to record this investment?

Jules & Associates purchased the bonds of Jay Bird Retailers during the year.Jules intends to hold onto these bonds to collect all principal and interest,but due to financial constraints,will most likely have to sell this investment on the open market within the next year.How should Jules classify this investment?

Debt securities represent an investment by one company into the common or preferred shares of another company.

Only debt securities can be classified as held-to-maturity securities.

Joss Enterprises invested in shares of Angel Athletics.Joss intends to sell these shares for a profit in the very near future.How should Joss classify this investment?

Price Enterprises invested in the bonds of Greater Glouster on January 1,2015.These 10-year,$100,000 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?

What key questions must be addressed when accounting for investments in debt and equity securities?