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Exam 13: Investments and Fair Value Accounting

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Question 1

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When the cost method is used to account for an investment, the carrying value of the investment is affected by

A) the dividend distributions of the investee.
B) the periodic net income of the investee.
C) the earnings and dividend distributions of the investee.
D) neither the earnings nor the dividends of the investee.

E) B) and D)
F) C) and D)

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Question 2

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Prepare the journal entries for the following transactions for Batson Co.

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(a) 11ea8de9_2d77_befa_b636_4f20236cf41a_TB2083_00 (b) No entry (c) 11ea8de9_2d77_befb_b636_850ba42789b6_TB2083_00

Question 3

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On June 1, $40,000 of treasury bonds were purchased between interest dates. The broker commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1?

Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments.

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is:

The equity method causes the investment account to mirror the proportional changes in book value of the investee.

A company that has 25,000 shares of $5.00 par value common stock issued and outstanding paid a dividend of $0.40 per share. The market value of the stock is $16 per share. The company's dividend yield is:

Gerardo Company had a net income of $75,000, and other comprehensive income of $12,500 for 2012. On January 1, 2012, the Retained Earnings balance was $525,000 and the Accumulated Other Comprehensive Income balance was $55,000. Determine the (a) comprehensive income for 2012, (b) Retained Earnings balance on December 31, 2012, and (c) the Accumulated Other Comprehensive Income on December 31, 2012.

Temporary investments

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the

Held-to-maturity securities are reported on the balance sheet at fair market value.

The cumulative effects of other comprehensive income items is included in retained earnings, on the balance sheet.

Investments in stocks that are expected to be held for the long term are listed in the stockholders' equity section of the balance sheet.

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry to record the purchase would include:

Comprehensive income must be reported on the income statement.

Discuss the similarities and differences in reporting trading securities, available-for-sale securities and held-to-maturity securities.

Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit.

Held to maturity securities