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Exam 12: Investments

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Question 1

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On March 17, 2017, Union Corporation purchased 500 bonds of AZQ common as a long-term investment at $400 per bond. On December 31, 2017, and December 31, 2018, the market value of the AZQ bonds is $420 and $430, respectively. Required: (1.) What is the appropriate reporting category for this investment? Why? (2.) Prepare the adjusting entry on December 31, 2017. (3.) Prepare the adjusting entry on December 31, 2018.

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Question 2

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Smith buys and sells securities. On December 15, 2018, Smith purchased $500,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2018, the Jones shares had a fair value of $525,000. In the 2018 financial statements, Smith will report (ignore taxes) :

A) Investment income of $25,000 in its income statement.
B) Other comprehensive income of $25,000.
C) Accumulated other comprehensive income of $525,000.
D) An investment in Jones of $500,000.

E) A) and D)
F) A) and C)

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Question 3

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

In its 20X4 annual report to shareholders, Honemark Corporation included the following disclosures in its income statement and related footnotes: CONSOLIDATED STATEMENTS OF INCOME Special Charges and Loss on Securities During the fourth quarter of 20X4, the Company recorded special charges and loss on debt securities totaling $17.0 million, or $13.5 million after-tax. Special charges of $9.8 million, or $6.2 million after-tax, were associated with a salaried workforce reduction of approximately 250 employees. Cash expenditures for 20X4 related to this charge were $3.7 million. Loss on debt securities of $7.2 million resulted from the write-down of the remaining investment in bonds of an Internet-related company. During the fourth quarter of 20X3, the Company recorded special charges and loss on debt securities totaling $57.5 million, or $36.5 million after-tax. Special charges of $39.9 million, or $25.3 million after-tax, were associated with terminated product initiatives, asset write-downs, and executive severance costs related to management changes. Loss on debt securities of $17.6 million, or $11.2 million after-tax, resulted from a lower market valuation of debt securities of TurboChief Technologies, Inc., and debt investments in bonds of Internet-related Companies ….. The loss on debt securities charge of $17.6 million was noncash. Required: Discuss the possible rationale behind the losses on securities reported by Maytag in 20X3 and 20X4.

Anthers Inc. bought the following portfolio of trading securities near the end of 2018. What amount will be reported in the balance sheet for this portfolio at December 31, 2018, and how will it be classified? $\begin{array} { l l l } & \text { Arnount } & \text { classificatim } \\\text { a. } & \$ 162,000 & \text { Noncurtent Asset } \\\text { b. } & \$ 162,000 & \text { Curtent Asset } \\\text { c. } & \$ 160,000 & \text { Noncurtent Asset } \\\text { d. } & \$ 160,00 0& \text { Current Asset }\end{array}$

Cucumber Company concluded at the beginning of 2018 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment under the fair value through net income method, rather than using the equity method as it had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as fair value through net income. At the time of implementing the change to the fair value through net income method, if financial statements were prepared:

Assume Gibson Company is an equal partner in a joint venture with Glover Company. Each company owns 50% of Pesci Company, and equally shares decision-making authority. Required: Describe how U.S. GAAP and IFRS differ in how they would have Gibson account for this investment.

Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet, depending upon their maturity dates.

FKG Inc. carries the following debt investments on its books at December 31, 2017, and December 31, 2018. All securities were purchased during 2017. Required: (1.) Prepare the necessary journal entries for FKG on December 31, 2017, and December 31, 2018. (2.) What net effect would the valuation of these debt investments have on 2017 net income? (3.) What net effect would the valuation of these debt investments have on 2018 net income?

In early December of 2018, Blue Corp. purchased $40,000 of Yellow Company bonds, which constitutes less than 3% of Yellow's outstanding debt. Blue accounts for the Yellow investment as available for sale. By December 31, 2018, the value of the Yellow investment had fallen to $30,000, and Blue recorded an unrealized holding loss. By December 31, 2019, the value of the Yellow investment had fallen to $15,000, and Blue determined that it is more likely than not that it will need to sell the bonds before their fair value recovers, so Blue recorded an OTT impairment. By December 31, 2020, fair value had recovered to $20,000. -Prepare appropriate entry(s) at December 31, 2018, and indicate how the scenario will affect net income, OCI, and comprehensive income.

On January 2, 2017, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000. Ranger's net income for the years ended December 31, 2017 and 2018, were $10,000 and $50,000, respectively. During 2018, Ranger declared and paid a dividend of $60,000. There were no dividends in 2017. On December 31, 2017, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2018 income statement as income from this investment?

Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2018. Jack can significantly influence Jill. On December 10, 2018, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report in its income statement for 2018 relative to its investment in Jill?

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2018. Nichols calculates that, of the $30,000 decrease in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols is planning to sell the bonds in the near future. Before-tax net income for 2018 will be reduced by:

Which of the following is not an example of a derivative?

On March 25th, 2018 Phillips Corporation purchased bonds of Atlas Corporation for $132 million and classified the securities as trading securities. On December 31st, 2018 these bonds were valued at $150 million. Four months later, on April 3rd, 2019 Phillips Corporation sold these bonds for $140 million. - As part of the multi-step approach to record the 2019 transaction, Phillips Corporation should first update the fair value adjustment by recording:

Fragrance International, a large perfume manufacturer, reported the following in its 2018 annual report to shareholders: ACCUMULATED OTHER COMPREHENSIVE INCOME The components of accumulated other comprehensive income (loss) ("AOCI") included in the accompanying consolidated balance sheets consist of the following: -Prepare summary journal entries that Fragrance International recorded at June 30, 2018, to (1) record the total of any necessary changes to the fair value adjustment for available-for-sale securities and (2) record the total of any tax effects associated with those changes.

At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends. -The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:

Unrealized holding gains and losses on securities available for sale would have the following effects on retained earnings:

If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment:

The cash surrender value of a life insurance policy decreases each year by the portion of the premium paid that is related to the additional year that the insured person is still alive.