Exam 14: Investments in Debt and Equity Securities

King Company purchased 30% of Andei Company for $2,500,000 at the beginning of the current year.Andei earned $400,000 and declared and paid $300,000 of dividends during the current year.Which of the following correctly describes the effect of these transactions on the statement of cash flows of King Company prepared under the indirect method?

For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account?

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?

On January 1,2014,Comas Corporation acquired Partly,Inc.as a long-term investment for $250,000 (a 30 percent common stock interest in Partly).On that date,Partly had net assets with a book value and current market value of $800,000.During 2014,Partly reported net income of $85,000 and declared and paid cash dividends of $20,000.What is the maximum amount of income that Comas should report from this investment for 2014?

Which of the following is true?

On January 1,2013,a company purchased four 5%,$1,000 Esso bonds at 103 as an investment in securities available-for-sale.The bonds pay interest each December 31 and have four years remaining to maturity on the purchase date.The market value of the bonds on December 31,2013,was 107,and on December 31,2014,was 105. The entry to adjust the carrying value of the securities available-for-sale at December 31,2014,will include a

Aloe Company reports its income from its investment in Palm Company under the equity method.Aloe recognized income of $125,000 from its investment in Palm during the current year.Palm declared and paid dividends of which Aloe'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 Aloe Company prepared for the current year under the indirect method would be

The following information is available for an enterprise's security investments as of December 31, 2014: -In June 2015,the enterprise decided to reclassify the Flash bonds as securities available-for-sale.The bonds had a market value of $31,000 at the time of the reclassification. What amount of holding gain or loss is immediately recognized in 2015 earnings?

When an enterprise increases its interest in an investment in equity securities accounted for by the fair value method,and changes to the equity method,what is the initial carrying value for purposes of subsequent application of the equity method?

Fennel owned 40 percent of Actual's common stock,and as a result,accounted for the investment using the equity method.After the fifth year of owning the stock,the investment account had a credit balance.This could only happen if Fennel

On January 2,2014,Nora Co.acquired 2,000 shares of Stonewall Co.common stock for $8,000 and classified these shares as available-for-sale securities.During 2014,Nora received $6,000 of cash dividends.Nora's share of Stonewall's 2014 earnings (net income)was $5,000.The fair value of Stonewall's stock on December 31,2014,was $7 per share.Nora should report what amount in 2014 related to Stonewall Co.?

Jordan,Inc.,loaned Julius Company $40,000 on January 1,2010.The 8 percent,7-year,simple-interest loan note called for annual interest payments each December 31.The note is due December 31,2023.Julius made the required interest payments through December 31,2013.In early January 2014,Julius began to default on some of its other debts and asked Jordan to renegotiate the original debt agreement,including an extension of the maturity date.Jordan refused but could see that the remaining scheduled payments on the loan were in jeopardy. Jordan reevaluated the Julius note and estimated that the remaining interest payments would be only three-fourths of the original amount (based on the original principal amount),and that only one-half of the principal amount would be collected. Jordan uses the interest method to account for interest after recording a note impairment. Required: 1.Record the note impairment on January 1,2014. 2.Provide the December 31,2014,journal entries,assuming the reestimated interest payment is received. 3.The note is revalued on January 1,2015.Jordan not expects to collect only one more payment on the loan,viz.,$10,000 on December 31,2016.No further interest is expected to be collected.Prepare the journal entry on January 1,2015,to record the additional impairment. 4.Prepare journal entries for December 31,2015,and December 31,2016,assuming the new cash flow estimate is realized.

Samba Company acquired 10,000 shares of the common stock of Pati Corp.in July 2014.The following January,Pati announced a $100,000 net income for 2014 and declared a cash dividend of $.50 per share on its 100,000 shares of outstanding common stock.The Samba Company dividend revenue from Pati Corp.in January 2014 would be

The Bertowe Company purchased equity securities at a cost of $500,000 on March 1,2013.These securities were classified as available-for-sale in accordance with management's intention to hold them for more than one year.On December 31,2013,the fair value of the securities was $470,000,and the investment was carried at this value on that balance sheet date.At the end of the third quarter of the next year (September 30,2014),management is considering reclassifying the securities as trading securities,since management likely will sell the securities during 2015.The securities have a market value of $525,000 on September 30,2014.Management also has considered waiting until December 31,2014,the end of the fiscal year,to make the reclassification. Required: 1.What effect will reclassifying the investment on September 30,2014,have on the balance sheet and income statement of the Bertowe Company? 2.How will the effect be different is management waits until December 31 to reclassify the investment from securities available-for-sale to trading securities? 3.Management has considered the idea that reclassification of the securities may be unnecessary,since management is uncertain if they will sell the securities and there is nothing improper regarding the selling of securities classified as available-for-sale.What would be the effect on the financial statement of the company if management elected not to reclassify the securities? 4.Assume the securities have a fair value of $515,000 on December 31,2014,and are sold on May 1,2015,for $510,000. a.What are the effects on 2014 income if the securities are reclassified on September 30,reclassified on December 31,or not reclassified during 2014? b.What would be the effect of the May sale on 2015 income if the securities were reclassified on September 30,reclassified on December 31,or were not reclassified prior to their sale?

Gabriel Co.executed the following long-term investment transactions during the current year. Prepare journal entries with appropriate supporting computations for the year's transactions.

Under the provisions of FASB ASC Topic 825 (Financial Instruments),

On January 2,2013,Bismark Corporation bought 20 percent of Congeal Corporation's capital stock for $60,000 and classified it as available-for-sale securities.Congeal's net incomes for the years ended December 31,2013,and 2014,were $20,000 and $100,000,respectively.During 2014,Congeal declared a dividend of $110,000.No dividends were declared in 2013.On December 31,2014,the fair value of the Congeal stock owned by Bismark had increased to $90,000.How much should Bismark show on its 2014 income statement as income from this investment?

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

An investor that uses the equity method of accounting for its investment in a 40 percent-owned investee that earned $50,000 and paid $8,000 in dividends,made the following entries: Investment in Equity Securities 20,000 Equity in Earnings of Investee 20,000 Cash 3,200 Dividend Revenue 3,200 What effect will these entries have on the parent corporation's statement of financial position?

In March of 2013,Mars Corp.bought 45,000 shares of Elite 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 31,2013.Mars changed the classification of these shares to trading securities in June of 2014 when the market value of this investment in Elite's stock had risen to $345,000.How much should Mars include as a loss on transfer of securities in its determination of net income for 2014?