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Exam 12: Investments

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Question 81

Multiple Choice

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In the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered:

A) Operating activities.
B) Financing activities.
C) Investing activities.
D) Noncash financing activities.

E) None of the above
F) A) and B)

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Question 82

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On July 1, 2013, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding common stock. Assume the total book value and fair value of net assets is $650,000. Both companies have a January through December fiscal year. The following data pertains to Mountain Corporation during 2013: Required: (1.) Prepare the entry to record the original investment in Mountain. (2.) Compute the goodwill (if any) on the acquisition. (3.) Prepare the necessary entries (other than acquisition) for 2013 under the equity method.

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Question 83

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On January 1, 2013, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2013, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2013?

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

Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized gain or loss on available-for-sale securities at 7/1/2012?

Previously, marketable equity securities were reported using a technique referred to as "lower of cost or market." The current accounting standard requires fair value reporting for trading securities and securities available for sale. Some accountants believe that the FASB was inconsistent when GAAP was issued requiring changes in the value of trading securities to be reported in the income statement and balance sheet, while changes in the value of securities available for sale are reported only in the balance sheet. Required: Evaluate the rationale for these two diverse reporting requirements for equity securities. What arguments could be made to support each treatment?

Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2010 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2011, and $65 on December 31, 2012. During 2013, Hawk sold all of its Diamond stock at $70 per share. In its 2013 income statement, Hawk would report:

How much did Arctic Cat actually receive from the sale of available-for-sale securities during 20X5?

When investments are treated as available-for-sale, other comprehensive income (OCI) also includes the tax effects associated with unrealized holding gains and losses. As a result:

Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2013. Sonny recognized a total of $400,000 net income during 2013, paid $30,000 of dividends to Fredo during 2013, and at December 31, 2013, the market value of the Sonny investment increased to $1,040,000. Required: Prepare the journal entries necessary to account for the Sonny investment, assuming that Fredo accounts for that investment as (1) an available-for-sale investment, and (2) elects the fair-value option.

Bentz Corporation bought and sold several securities during 2013. Listed below is a summary of the transactions: Required: Prepare the journal entries for the above transactions. Show calculations.

Purchases and sales of securities are always reported as investing activities in a statement of cash flows.

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols calculates that the bonds have incurred credit losses. Before-tax net income for 2013 will be reduced by:

Anthers Inc. bought the following portfolio of trading securities near the end of 2013. What amount will be reported in the balance sheet for this portfolio at December 31, 2013, and how will it be classified?

Investments in securities available for sale are reported at:

In 2012, Kirby made two adjustments to its available for sale investments. Required: Briefly explain the adjustments and why they occurred.

Hobson Company bought the securities listed below during 2012. These securities were classified as trading securities. In its December 31, 2012, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of December 2013 is as follows: What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2013?

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:

Jackson Company engaged in the following investment transactions during the current year. Required: Prepare the appropriate journal entries to record the transactions for the year including year-end adjustments. Show calculations.

Under IFRS No. 9, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP.