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Exam 13: Investments and Fair Value Accounting

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Question 41

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Under the equity method, a stock purchase is recorded at its original cost and is adjusted to fair market value each accounting period.

A) True
B) False

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Question 42

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In general, consolidated financial statements should be prepared

A) when a corporation owns more than 20% of the common stock of another company
B) when a corporation owns more than 50% of the common stock of another company
C) only when a corporation owns 100% of the common stock of another company
D) whenever the market value of the stock investment is significantly lower than its cost

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

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Question 43

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

Albright Company purchased as a long-term investment $500,000 of Benton Corporation 10-year, 9% bonds. Present entries to record the following selected transactions:

What is comprehensive income? How is it calculated? What are some examples of items included in other comprehensive income? Where is comprehensive income reported?

Investments in bonds that management intends to hold to maturity are called trading securities.

Present entries to record the following selected transactions of Masterson Co.

The equity method is usually more appropriate for accounting for investments where the purchaser does have significant influence over the investee.

The financial statements resulting from combining parent and subsidiary statements are called consolidated statements.

Blanton Corporation purchased 12% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives?

Growth firms generally pay regular dividends to stockholders.

Held-to-Maturity securities

Yankton Company began the year without an investment portfolio. During the year they purchased investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. The Yankton Company's financial statements for the current year should show

Mangrill, Inc. reported net income for the year ending December 31, 2012 of $483,500. Dividends paid during the year totaled $42,900. The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $171,000 at the end of the year. They also hold trading securities with an original cost of $150,000 and a fair value of $147,000. Retained Earnings on January 1, 2012 was $736,400 and Accumulated Other Comprehensive Income on January 1, 2012 was $16,200. Required: Calculate the following balances to be reported in the financial statements dated December 31, 2012. (1) Valuation Allowance for Available-for-Sale securities (2) Comprehensive Income (3) Retained Earnings (4) Accumulated Other Comprehensive Income

In order to maintain the original value of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.

Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be:

The amortization of discounts or premiums are recorded as part of interest income on the income statement.

On May 1, 2011, Stanton Company purchased $50,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2011, Stanton received its first semiannual interest. On February 1, 2012, Stanton sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Stanton will record on February 1, 2012, will include:

For accounting purposes, the method used to account for investments in common stock is determined by

Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method.