Exam 12: Investments

On July 1, 2018, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. The total book value and total fair value of Mountain's individual net assets on July 1, 2018, are both $700,000. The total fair value of the 30,000 shares of Mountain's common stock on December 31, 2018, is $760,000. Both companies have a January through December fiscal year. The following data pertains to Mountain Corporation during 2018: Dividends declared and paid, Jan. 1-Jun. $30 \quad \$ 12,000$ Dividends declared and paid, Jul. 1-Dec. $31 \quad \$ 12,000$ Net income, January 1 - June $30 \quad \$ 14,000$ Net income, July 1 -December $31 \quad \$ 14,000$ Required: (1.) Prepare the necessary entries for 2018 under the equity method (other than for the purchase). (2.) Prepare any necessary entries for 2018 (other than for the purchase) that would be required if the securities were accounted for under the fair value through net income method.

Which of the following is not true when the fair value option is elected for an investment that would normally be accounted for under the equity method?

In its 2018 annual report to shareholders, Kirby Inc. included the following disclosure regarding its available for sale investments in securities: -In 2017, Kirby made two adjustments to its available for sale investments. Required: Briefly explain the adjustments and why they occurred.

The equity method of accounting for investments in voting common stock is appropriate when:

Net unrealized holding gains (losses) are reported in the income statement for trading securities.

If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because it is viewed as "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year:

When an investor owns 20% to 50% of the voting stock of an investee company, the investor is presumed to exercise significant influence over the investee unless there is evidence to the contrary. Required: (1.) What factors could be evidence of significant influence? (2.) What factors could be evidence of lack of significant influence?

Dim Corporation purchased 1,000 bonds of Witt Corporation in 2015 for $800 per bond and classified the investment as securities available for sale. The value of these holdings was $400 per bond on December 31, 2016, and $300 on December 31, 2017. During 2018, Dim sold all of its Witt bonds at $350 per share. -If Dim records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Dim would record upon sale?

The investment category for which the investor's "positive intent and ability to hold" is important is:

All securities considered available for sale should be reported as current assets in a classified balance sheet.

Bentz Corporation bought and sold several securities during 2018. Listed below is a summary of the transactions: Required: Prepare the journal entries for the above transactions. Show calculations.

Which category of securities is presented on the balance sheet at amortized cost?

On January 1, 2018, Everglade Company purchased the following debt securities and properly accounted for them as securities available for sale: All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2018 statement of other comprehensive income?

An OTT impairment for a debt investment is recognized in net income if fair value declines below the investment's cost and:

On January 1, 2018, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2018, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2018?

Under IFRS No. 9, an investment can be accounted for at amortized cost if:

Under IAS No. 39, which is not a category for accounting for investments?

If Dizbert Company concluded that an investment originally classified as available for sale would now more appropriately be classified as held to maturity, Dizbert would:

Under IAS No. 39, transfers of debt investments out of the FVPL category into AFS or HTM are permitted under "rare circumstances."

Which of the following increases the investment account under the equity method of accounting?