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Exam 12: Investments

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Question 31

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Respond to the following question with the presumption that the guidance provided by the new Accounting Standards Update is being applied. Stanhope Associates holds the following investments: 1. 10 shares of Blackstone equity, held for long-term investment. 2. 10 shares of Erickson equity, held for risk management. 3. 10 shares of AT&E equity, held for immediate resale. 4. 10 bonds issued by Filo Inc., held for long-term investment. 5. 10 bonds of SimSung, held for risk management. 6. 10 bonds issued by Attachi, held for immediate resale. Required: For each investment, indicate: (a) the accounting approach that will be used to account for the investment, and briefly explain why that approach is appropriate, and (b) the effect on earnings of an increase in the fair value of the investment in the period following acquisition of the investment, assuming that Stanhope does not sell the investment. You may group the specific investments if they have the same answers. Identify the investments you are including in the group.

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1-3 all have the same answer. (a) The ac...

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Question 32

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Brown, Inc., purchased an equity investment for the purposes of maximizing its return on investment. How should Brown account for the investment?

A) Amortized cost.
B) FV-NI.
C) FV-OCI.
D) Cost methoD.All equity investments should be accounted for as FV-NI.

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

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Question 33

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A weakness of __________ is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized gains or unrealized losses.

On March 17, 2012, Union Corporation purchased 5,000 shares of AZQ common stock as a long-term investment at $40 per share. On December 31, 2012, and December 31, 2013, the market value of the AZQ stock is $42 and $43, respectively. Required: (1.) What is the appropriate reporting category for this stock? Why? (2.) Prepare the adjusting entry on December 31, 2012. (3.) Prepare the adjusting entry on December 31, 2013.

Under IFRS No. 9, cost can be used as an estimate of fair value in some circumstances.

Unrealized holding gains and losses on securities available for sale would have the following effects on accumulated other comprehensive income:

Net unrealized holding gains (losses) are reported in the income statement for trading securities.

Indicate (by number) the way each of the investments listed below usually should be accounted for under U.S. GAAP based on the information provided.

When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition:

Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2010 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2011, and $300 on December 31, 2012. During 2013, Dim sold all of its Witt stock at $350 per share. In its 2013 income statement, Dim would report:

What gain or loss would be realized if the available for sale securities on Arctic Cat's 3/31/X5 balance sheet were sold immediately for their fair value? Show the journal entry that would record the sale, and show a journal entry to record the effects of the sale on their fair value adjustment at the end of the period (ignore taxes).

Under IAS No. 39, which is not a category for accounting for investments?

If Ziggy Company concluded that an investment originally classified as held to maturity would now more appropriately be classified as available for sale, Ziggy would:

On July 1, 2013, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the fair value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for 2013, and paid $150,000 quarterly dividends to its shareholders. After all closing entries are made, Tremen's "Investment in Delany Company" account would have a balance of:

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols believes it is more likely than not that it will have to sell the Holly bonds before the bonds have a chance to recover their fair value. Before-tax net income for 2013 will be reduced by:

When an impairment of an equity investment that is classified as available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair value and the amount of the write-down is:

Under IAS No. 39, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP.

If an available-for-sale investment is sold for which there are unrealized gains in accumulated other comprehensive income (AOCI) , a reclassification adjustment affects other comprehensive income (OCI) in the period of sale by:

If a debt instrument is viewed as complex, which of the following is most likely not true?

Eastwood Enterprises owns 30,000 shares of the Van Cleef Company (5% of the outstanding equity of Van Cleef). Eastwood is trying to determine Van Cleef's fair value. The relevant facts are as follows: • Eastwood bought the Van Cleef shares earlier in the accounting period for $10/share at a time when the shares were publicly traded on the New York Stock Exchange. • Since Eastwood bought the shares, Van Cleef has been delisted and there is no longer an active market in the Van Cleef shares. • Eastwood's internal valuation specialist estimates the Van Cleef shares to be worth $8/share. Eastwood plans to continue holding the shares, but may someday sell them if their value increases sufficiently. Required: (1) What is the fair value of Eastwood's investment in Van Cleef? Briefly explain your choice of fair value, and relate that choice to the requirements of GAAP regarding fair value measurement. (2) Prepare a journal entry to record any necessary fair value adjustment.