Exam 12: Investments

All investment securities are initially recorded at:

Eastwood Enterprises owns 300 bonds of the Van Cleef Company (5% of the outstanding debt of Van Cleef). Eastwood is trying to determine Van Cleef's fair value. The relevant facts are as follows: • Eastwood bought the Van Cleef bonds earlier in the accounting period for $1,000/bond at a time when the bonds were publicly traded. • Since Eastwood bought the bonds, Van Cleef has been delisted and there is no longer an active market in the Van Cleef bonds. • Eastwood's internal valuation specialist estimates the Van Cleef bonds to be worth $800/bond. Eastwood plans to continue holding the bonds, but may someday sell them if their value increases sufficiently. Required: (1) What is the fair value of Eastwood's investment in Van Cleef? Briefly explain your choice of fair value, and relate that choice to the requirements of GAAP regarding fair value measurement. (2) Prepare a journal entry to record any necessary fair value adjustment.

When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be:

Companies need to consider GAAP regarding fair value measurements when determining the fair value of an investment that distinguishes between various levels of inputs to fair value determination. Required: Describe the various levels of inputs, explaining key aspects that distinguish them, and indicate which level is most preferred and which is least preferred.

From time to time, debt securities must be reclassified when conditions and circumstances surrounding the investment change. Required: Describe the general accounting procedures for reclassifying securities from one category to another-held to maturity, available for sale, or trading.

Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.

Discuss the following questions. Required: What securities must be classified within one of the three categories of held to maturity, available for sale, and trading? (Do not describe how to determine how securities are classified among these three categories.) Identify the four primary recording activities related to investments in securities.

Newjohn Company owns stock in several affiliated companies. Investments in some of these affiliates are accounted for as fair value through net income while some are accounted for using the equity method. Required: (1.) What factors determine which method should be used? (2.) What events are recorded when the equity method is used? (3.) What events are recorded when the securities are accounted for as fair value through net income?

At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends. -The amount of purchased goodwill is:

Under IFRS No. 9, which is not a category for accounting for investments?

When an impairment of an investment that is classified as available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair value and the amount of the write-down is:

Which of the following is not true about derivatives?

Which of the following is not a reason to consider a decline in the fair value of a debt investment to be "other than temporary"?

In 2016, Osgood Corporation purchased $4 million of 10-year municipal bonds at face value. On December 31, 2018, the bonds had a fair value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2018, balance sheet and the 2018 income statement would show the following:

Routine transfers of debt investments among the trading, available for sale, and held to maturity portfolios need not be disclosed in the financial statements.

If an available-for-sale investment is sold for which there are unrealized holding losses in accumulated other comprehensive income (AOCI), the total effect on total comprehensive income is:

Unrealized holding gains and losses are included in other comprehensive income for securities that are classified as available for sale.

If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company intends to sell the investment:

All investments in debt securities that don't fit the definitions of the other reporting categories are classified as:

Hawk Corporation purchased 1,000 Diamond Corporation bonds in 2015 for $500 per bond and classified the investment as securities available for sale. The value of the Diamond investment was $600 per bond on December 31, 2016, and $650 on December 31, 2017. During 2018, Hawk sold all of its Diamond investment at $700 per bond. If Hawk records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Hawk would record upon sale?