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Exam 14: Investments

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Question 1

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Investments are reported at fair value when a company has an insignificant influence over another company in which it invests.

A) True
B) False

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Question 2

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The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investment by stockholders and payment of dividends.

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B) False

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Question 3

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Under what circumstances do we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method.

When significant influence exists,the investment should be accounted for by the equity method.

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: What is the annual market interest rate on the bonds? A)4%. B)3.5%. C)7%. D)8%.

When using the equity method to account for an investment,cash dividends received by the investor from the investee should be recorded:

Investments in debt securities are classified for reporting purposes in one of three categories.List these three categories and explain which investments are included in each category.Also briefly describe how the reporting differs for each category.

On January 1,2012,Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment.Gilman can exercise significant influence over Burke and properly records the investment using the equity method.The records of Burke Corporation showed the following at December 31,2012: $\begin{array} { | l | l | } \hline \text { Net Income } & \$ 500,000 \\\hline \text { Dividends Paid } & \$ 200,000 \\\hline \text { Market Price per Share } & \$ 38 \\\hline\end{array}$ What amount should Gilman Company report in its December 31,2012,balance sheet for its investment in Burke?

One of the primary reasons for investing in equity securities includes:

Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate.

Because the carrying value of bonds purchased at a discount increases over time,interest revenue will also increase each semi-annual interest period.

The statement of comprehensive income is a statement that includes net income plus investment by stockholders less payment of dividends.

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: $\begin{array}{rrrrr}& \text { Cash } & \text { Interest } & \text { Increase in } & \text { Carrying } \\\text { Date } & \text { Paid } & \text { Expense } & \text { Carrying Value } & \text { Value }\\1/1/12&&&&\$194,758\\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370 \\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & \$ 200,000\end{array}$ GIC purchased the bonds for: A)$200,000. B)$194,758. C)$242,000. D)Cannot be determined from the given information.

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: $\begin{array} { r r r c c } { \begin{array} { c } \text { Date } \\\end{array} } & \begin{array} { c } \text { Cash } \\\text { Paid }\end{array} & \begin{array} { c } \text { Interest } \\\text { Expense }\end{array} & \begin{array} { c } \text { Increase in } \\\text { Carrying Value }\end{array} & \begin{array} { c } \text { Carrying } \\\text { Value }\end{array} \\1 / 1 / 12 & && & \$ 194,758 \\6 / 30 / 12 & \$ 7,000 & \$ 7,790 & \$ 790 & 195,548 \\12 / 31 / 12 & 7,000 & 7,822 & 822 & 196,370 \\6 / 30 / 13 & 7,000 & 7,855 & 855 & 197,225 \\12 / 31 / 13 & 7,000 & 7,889 & 889 & 198,114 \\6 / 30 / 14 & 7,000 & 7,925 & 925 & 199,039 \\12 / 31 / 14 & 7,000 & 7,961 & 961 & \$ 200,000\end{array}$ GIC purchased the bonds: A)At par. B)At a discount. C)At a premium. D)Cannot be determined from the given information.

How can an investor benefit from an equity investment that does not pay dividends?

Which of the following investment securities held by Zoogle Inc.may be classified as held-to-maturity securities in its balance sheet?

California Designs is diversifying its investment portfolio by making a small investment (less than 5%)in the common stock of Oregon Outfitters.California Designs engages in the following transactions relating to its investment: 1.Record each of these transactions,including the December 31 adjustment to fair value. 2.Calculate the balance of the Investments account on December 31.

Athletic Accessories has the following transactions related to investments in common stock. 1.Record each of these transactions,including an entry on December 31 to adjust the investment to fair value. 2.Calculate the balance of the investment account on December 31.

When the investor has insignificant influence,the receipt of cash dividends is recorded as dividend revenue.

When the equity method of accounting for investments is used by the investor,the Investments account increases when: