Exam 11: Financial Instruments: Investments in Bonds and Equity Securities

Which of the following investments need not be tested for impairment?

A company has defaulted on its most recent interest payment to a company holding its bonds. The bonds have been accounted for as amortized cost investment. The company must now recognize a loss equal to the present value of the company's expected credit losses over the next 12 months.

It is not possible to have significant influence over another corporation without owning at least 25% of the outstanding voting shares.

On January 1, 2001, MNO purchased 30 percent of the 10,000 shares of the outstanding common shares, of RST for $60,000 cash (and properly computed goodwill of $5,000 amortizable over 10 years). On December 31, 2001, RST reported net income of $40,000 and declared a cash dividend of $2 per share. Select the appropriate combination below for the December 31, 2001, account balances to be reported by MNO. balance sheet -dec-31,2001 income statment-2001 Investment Account Investment Revenue 1 \ 60,000 \ 6,000 2 \ 65.500 \ 5,500 3 \ 65.500 \ 11,500 4 \ 65.500 \ 12,000

On January 1^st, 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC's managerial involvement, for $600,000. On that date, DEF's net assets had a fair value equivalent to their book values. During 2011 and 2012, DEF Inc. earned income and paid dividends as follows: Income Dividends 2011 \ 120,000 \ 20,000 2012 \ 180,000 \ 30,000 -Assuming that ABC adheres to IFRS, what effect (if any) would there be as on ABC's 2012 income as a result of this investment?

On April 1, 2014, a company purchased a $20,000, 7.2 percent bond; interest is payable annually each September 31. The bond is accounted for using the cost method and was purchased for $20,800 including accrued interest. The accounting period ends December 31. Give the adjusting entry at the end of 2014.

Under IFRS, Investments in Associates may be accounted for using either the Cost or Equity Methods.

Steens Corp. acquired a 30% interest in Proctor Co. on January 1, 2015, for $900,000. At that time, Proctor had 2 million of its no-par common shares issued and outstanding. During 2015, Proctor paid cash dividends of $340,000 and thereafter declared and issued a 5% common stock dividend when the market value was $2 per share. Proctor's net income for 2015 was $720,000. What should be the balance in Steen's investment account at the end of 2015?

Drabble, Inc. owns 40 percent of the outstanding stock of Gilliam Company. During 2014, Drabble received a $4,000 cash dividend from Gilliam. What effect did this have on Drabble's 2014 financial statements? (Assume that Drabble has substantial influence over Gilliam )

On January 1, 2016, Snow Co. purchased 25% of Right Corp.'s common shares; no goodwill resulted from the purchase. Snow appropriately carries this investment at equity and the balance in Snow's investment account was $190,000 at December 31, 2016. Right reported net income of $120,000 for the year ended December 31, 2016, and paid common dividends totalling $48,000 during 2016. Calculate how much Snow paid for its 25% interest in Right.

In the rare instances where fair value may not be determined using level 1, 2 or 3 inputs, an investment may be valued at cost.

On December 1, 2008, CXC purchased 200,000 shares representing 45 percent of the outstanding shares of PTC for cash of $2,500,000. As a result of this purchase, CXC has the ability to exercise significant influence over the operating and financial policies of PTC. 45 percent of the net income of PTC amounted to $20,000 for the month of December and $350,000 for the year ended December 31, 2008. On January 15, 2009, cash dividends of $0.30 per share were paid to shareholders of record on December 31, 2008. Calculate CXC's Investment in PTC to be should be shown in CXC's December 31, 2008, balance sheet.

ABC Inc purchased shares of DEF Inc as follows: June 30^th, 2013 4,000 shares @ $3 per share $12,000 June 30^th, 2014 3,000 shares @ $4 per share $12,000 June 30^th, 2015 3,000 shares @ $6 per share $18,000 The shares are considered to be passive investments. ABC Inc. has a December 31^st, year-end. The market value of the DEF shares at each year-end was as follows: December 31^st, 2013 $3.50 per share December 31^st, 2014 $5.00 per share December 31^st, 2015 $5.50 per share On July 1^st, 2015, ABC sold half its shares in DEF Inc. for $6.50 per share. -The total gain or loss realized on the sale of the shares was:

When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as:

FGH purchased a $100,000, 6 percent bond at 104 plus $2,000 accrued interest. The bond pays semi-annual interest on each 6/30 and 12/31. FGH paid a brokerage fee of $1,500. What entry should FGH make to record this long-term investment? FGH adheres to ASPE. 1) investment in FVTPL securities Cash 101,500 2) nuestment in FVTPL securities 101,500 Brokerage expense 104,000 Cash 1,500 3) Inestment in FVTPL securities 105,500 Investment rec eivable 2,000 Cash 107,500 4) investment in FVTPL securities 105,500 Interest receivable 2,000 Cash 107,500

ABC Inc purchased shares of DEF Inc as follows: June 30^th, 2013 4,000 shares @ $3 per share $12,000 June 30^th, 2014 3,000 shares @ $4 per share $12,000 June 30^th, 2015 3,000 shares @ $6 per share $18,000 The shares are considered to be passive investments. ABC Inc. has a December 31^st, year-end. The market value of the DEF shares at each year-end was as follows: December 31^st, 2013 $3.50 per share December 31^st, 2014 $5.00 per share December 31^st, 2015 $5.50 per share On July 1^st, 2015, ABC sold half its shares in DEF Inc. for $6.50 per share. -When a company holds between 20% and 50% of the outstanding shares of an investee, which of the following statements applies:

The equity method and consolidation will often yield the same retained earnings and comprehensive income figures, since the adjustments made under each are similar.

On January 1, 2015, IB Corporation purchased 30 percent of the outstanding common shares, no-par, of CXT at $2 per share. CXT data on this date were as follows Book Value Market Value Assets not subject to depreciation \ 20,000 \ 24,000 Assets subject to depreciation (10 year life) 30,000 40,000 Liabilities 14,000 Same Stockholders' equity (40,000 shares outstanding) 36,000 Additional data for CXT, at end of accounting period December 31, 2015: (Significant influence is in existence) 2015 net income was $10,000; total 2015 cash dividends declared and paid was $4,000. Required: 1. The goodwill purchased was $_____________________. 2. Give the required entries to account for this investment during 2015: January 1, 2015: December 31, 2015 Income: (Assume no entry is required for the assets not subject to depreciation): 3. The following amounts should be reported on the 2015 financial statements of IBC: (a) Income statement: Investment revenue $____________________. (b) Balance sheet: Investment, CXT $___________________.

Under the equity method of accounting for an investment, an investor recognizes its share of earnings in the period in which the investee declares a dividend.

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as: