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Exam 12: Investments

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Question 51

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Guido Properties owes First State Bank $60 million under a 7% note with two years remaining to maturity. Due to financial difficulties of Guido, the previous year's interest ($4.2 million) was not received. The bank agrees to settle the note receivable and accrued interest receivable in exchange for land having a fair market value of $44 million. Required: Compute the loss on troubled debt restructuring that the bank would record.

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Question 52

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If the fair value of an available-for-sale investment declines for a reason that is viewed as "other than temporary",

A) the investment is not written down to fair value.
B) the investment is written down to fair value, and the impairment loss is recognized in net income.
C) the investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income.
D) the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.

E) A) and C)
F) B) and C)

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Question 53

Multiple Choice

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All investments in debt and equity securities that don't fit the definitions of the other reporting categories are classified as:

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

Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2009. In December, Hart announced $200,000 net income for 2009 and declared and paid a cash dividend of $2 per share on the 200,000 shares of outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2009 would be:

Investments in securities available for sale are reported at:

On January 1, 2009, Rupar Retailers purchased $100,000 of Anand Company bonds at a discount of $5,000. The Anand bonds pay 6% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semi-annually on January 1 and July 1 of each year. Rupar accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In Rupar's December 31, 2009 journal entry to record their second period of interest, they would record a credit to interest revenue of:

On January 1, 2009, Hoosier Company purchased $930,000 of 10% bonds at face value. The bond market value was $980,000 on December 31, 2009. Required: Prepare the appropriate journal entry on December 31, 2009, to properly value the bonds assuming the bonds are classified as: (1.) Trading securities. (2.) Securities available for sale. (3.) Held-to-maturity securities.

All investments in debt securities whose fair values are not readily determinable are carried at historical cost.

When the investor's level of influence changes, it may be necessary to change from the equity method to another method. When the level of ownership falls from a range of 20% to 50% to less than 20%, the equity method typically would be discontinued and the investment account balance would be carried over at:

Both fair values and subsequent growth of the investee are not as relevant for investments in which of the following categories?

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

Required: Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized gain or loss on available-for-sale securities at 7/1/04?

LaBelle Corporation owns a $6 million whole life insurance policy on the life of its CEO, naming LaBelle as beneficiary. The annual premiums are $95,000 and are payable at the beginning of each year. The cash surrender value of the policy was $56,000 at the beginning of 2009. Required: 1.) Prepare the appropriate 2009 journal entry to record insurance expense and the increase in the investment, assuming the cash surrender value of the policy increased according to the contract to $70,000. 2.) The CEO died at the end of 2009. Prepare the appropriate journal entry.

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

Which of the following is not true about accounting for investments under IFRS?

When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost.

Bourne, Inc acquired 50% of David Webb Enterprises for $5,000,000 on January 1, 2009. The fair value and book value of Webb's identifiable net assets was $8,000,000 on that date. During 2009 Webb recognized net income of $1,000,000 and paid dividends of $1,200,000. Webb had a fair value of $11,000,000 as of December 31, 2009. Required: Determine the amounts that will be associated with the Investment in Webb account and the Goodwill on Bourne's financial statements, assuming Bourne accounts for the Webb investment (1) under the equity method, and (2) under proportionate consolidation as allowed by IFRS.

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

Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2008, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2008. Goofy reclassified this investment as trading securities in December of 2009 when the market value had risen to $125,000. What effect on 2009 income should be reported by Goofy for the Crazy Co. shares?