Chapter 4 - Investments

Question 1

Bond investments (hold to maturity) which cost used to record on the books

Answer 1

Amortized cost (for bonds held until the maturity date)

Question 2

Marketable Debt Securities classified at trading which cost?

Answer 2

Fair value, with holding gains and losses included in earnings

Question 3

Where Common stock dividends should be reported ?

Answer 3

Dividend revenue, under fair value method, should be recognized to the extend of cumulative earnings since acquisition and return of capital beyond that point.

Question 4

Which investments are excluded from fair value option?

Answer 4

Investments in subsidiaries, pension benefit asset/liabilities and assets and liabilities recognized under LEASES.

Question 5

Under the current expected credit losses (CECL) model, how to record the credit loss (available for sale)?

Answer 5

If an available-for-sale debt security has fair value that below amortized cost, the asset must be written down to the lower FV by recording credit loss that recorded to Earnings Section of the income statement

Question 6

Under the current expected credit losses (CECL) model, how to record the credit loss (held-to-maturity)?

Answer 6

Loss is recorded when amortization cost exceeds the present value of the principal and interest expected to be collected.

Question 7

How cash dividends from common stock reports under fair value and equity method?

Answer 7

1. Under fair value - dividends recorded as income and doesn’t effect the investment acct.
2. Under the equity method - receipt of a dividends is recorded as a decrease in the investment account.

Question 8

Under equity method is used to account for investment in common stock, how it affect the investors reported investm income?

Answer 8

Undervalued asset amortization affects both the investment acc (an asset) and investment income acct (a revenue), while cash dividends affect the investmt acct but not the investment income acct (revenue).

Question 9

Per equity method used to invest in common stock, how it will impact undervalued asset amortization and cash dividends

Answer 9

1. Per equity method, undervalued asset amortization will decrease the investor reported investmt income.
2. Cash dividends received will only affect the balance sheet investment account.

Question 10

Preferred Stock dividends recorded as …

Answer 10

Preferred stick ownership does not allow the investor to exercise influence. Preferred stock can only be counted for using the fair value method. Preferred stock dividends recorded as dividends revenue on the income statement.

Question 11

If two or more purchases of stock cause ownership to go up from under 20% , which method to use?

Answer 11

The equity method should used starting on the date significant influence as acquired and going forward. There is no need for retroactive adjustments.

Question 12

Equity method used when ownership which range?

Answer 12

Between 20-50% or if significant influence can be exercised by the investor over the investee.

Question 13

Consolidated method used when ownership which range?

Answer 13

Over 50% control is present, consolidated fin. stmt should be prepared unless control is temporary