Exam 12: Investments

If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity, Dinsburry would:

Assume that, on January 1, 2018, Sosa Enterprises paid $3,000,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2018, the book value of Orioles' identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Orioles during 2018: What amount would Sosa Enterprises report in its year-end 2018 balance sheet for its investment in Orioles Co.?

If an investment is accounted for under the equity method, the investor reduces investment income and the investment account for amortization of goodwill acquired in the investment.

Stanhope Associates accounts for the following investments under IFRS No. 9: 1. 10 shares of Blackstone equity, held for long-term investment, no election of FVOCI. 2. 10 shares of Erickson equity, held for risk management, election to classify as FVOCI. 3. 10 shares of AT&E equity, held for immediate resale. 4. 10 bonds (consisting of only interest and principal) issued by Filo Inc., held for long-term collection of cash flows. 5. 10 bonds (consisting of only interest and principal) of SimSung, held for risk management but also might be sold 6. 10 bonds (consisting of only interest and principal) issued by Attachi, held for immediate resale. Required: For each investment, indicate: (a) the accounting approach that will be used to account for the investment, and briefly explain why that approach is appropriate, and (b) the effect on earnings of an increase in the fair value of the investment in the period following acquisition of the investment, assuming that Stanhope does not sell the investment. You may group the specific investments if they have the same answers. Identify the investments you are including in the group.

If Pop Company owns 15% of the common stock of Son Company, then Pop Company typically:

The fair value of debt securities not regularly traded can be most reasonably approximated by:

Under IFRS No. 9, a debt investment can be accounted for at amortized cost if the debt agreement includes only interest and principal and the investor intends to hold it to collect contractual cash flows.

On January 2, 2018, MBH Inc. acquired 30% of the voting common stock of Construction Corporation as a long-term investment. Data from Construction Corporation's financial statements for the year ended December 31, 2018, include the following: Net income $150,000 Dividends paid $75,000 Required: Prepare any necessary journal entries for MBH at December 31, 2018, under the equity method of accounting for investments.

Under IFRS No. 9, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP.

Unrealized holding gains and losses on trading securities are included in earnings because:

When investments are treated as available-for-sale, other comprehensive income (OCI) also includes the tax effects associated with unrealized holding gains and losses. As a result:

If the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at:

Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method. Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31, 2017 and 2018, respectively. During 2018 Clor recognized $80,000 of net income and paid dividends of $30,000. Assuming that Bloomfield owned the same percentage of Clor throughout 2018, their percentage ownership must have been:

Gerken Company concluded at the beginning of 2018 that the company's ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $50,000 at the time of the change, and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared:

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2018. Nichols calculates that, of the $30,000 decrease in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. - Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols believes it is more likely than not that it will have to sell the Holly bonds before the bonds have a chance to recover their fair value. Before-tax net income for 2018 will be reduced by:

Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2018. Sonny recognized a total of $400,000 net income during 2018, paid $30,000 of dividends to Fredo during 2018, and at December 31, 2018, the market value of the Sonny investment increased to $1,040,000. Required: Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo (1) lacks significant influence or (2) has significant influence over the operating and financial policies of the investee.

Dyckman Dealers has an investment in Thomas Corporation bonds which Dyckman accounts for as a trading security. Thomas Corporation's bonds are publicly traded and the prevailing market price indicates that Dyckman's investment is worth $20,000. However, Dyckman management believes that the bond market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on its balance sheet at:

On January 12th, 2018 Jefferson Corporation purchased bonds of Rose Corporation for $73 million and classified the securities as available-for-sale. On December 31st, 2018 these bonds were valued at $67 million. Eight months later, on October 3rd, 2019 Jefferson Corporation sold these bonds for $87 million. - As part of the multi-step approach to record the 2019 transaction, Jefferson Corporation should first update the fair value adjustment on the date of sale by recording:

For trading securities, unrealized holding gains and losses are included in earnings:

Jaycom Enterprises has invested its excess cash in the bonds of several different companies and desires to maximize income over the short run. Jaycom is unsure about the appropriate investment policy and thus what reporting practice to follow. Required: What classification procedure and subsequent classification could Jaycom follow in order to meet its objective? How will Jaycom justify its choice to the Jaycom auditors?