Flashcards in Chapter 12 Deck (118):
Identify the critical events that companies experience with respect to investments that must be recognized in the accounting system:
1. Sale of investment
2. Changes in fair value
3. Investment revenue is earned
4. Purchase of investment
If an owner has less than 20% ownership, which reporting method is used?
Company does not exert significant influence over investee; classify and report as AFS or trading investment.
If an owner has 20% to 50% ownership, which reporting method is used?
Apply equity method
If an owner has more than 50% ownership, what reporting method is used?
Issue consolidated financial statements
At the time of acquisition, an investment in a discounted bond is recorded at __________.
How do you calculate interest revenue each period?
Outstanding debt balance * Effective interest rate
Significant influence is typically assumed if the investor owns at least _____% of the equity of the investee.
Trading securities typically are classified in the balance sheet as:
Bonds typically provide two sources of cash flows to investors. These are associated with the payment of __________ and __________.
Only realized gains and losses are included in __________.
__________ includes unrealized holding gains and losses that occur during the reporting period.
Other comprehensive income
__________ includes net unrealized holding gains or losses accumulated over the current and prior periods.
Accumulated other comprehensive income
At the end of the accounting period, trading securities must be adjusted to __________.
What is the three-step process to assess and address OTT (other-than-temporary) impairment losses relating to investments:
1. Determine if the investment is impaired
2. Determine whether any impairment is other than temporary
3. Determine how to account for the impairment
Unlike an equity security, a debt security has a __________ date on which it __________.
What are the categories for the purpose of classifying investments in the stock of another company?
1. No significant influence or control
2. Significant influence
The key difference between the three investment categories lies in the reporting of __________ gain and losses.
Investments classified as held-to-maturity, for which the fair value option is not chosen, are reported at __________.
Greene Corporation does not recognize unrealized holding gains and losses for its bond investments. If the company is properly applying U.S. GAAP, its investment must be classified as:
Investment revenue earned on an investment in trading debt securities is calculated based on __________ times the __________ interest rate.
Holding gains and losses with investments properly classified as "available for sale" are:
recognized as other comprehensive income
The "discount on bond investments" account is a __________ account.
If the interest rate paid on a bond exceeds the market interest rate, the bond will sell for an amount that is:
more than its maturity value
Identify the classifications possible for investments in which the investor does not exert significant influence:
1. available-for-sale securities
2. held-to-maturity securities
3. trading securities
The factor that determine accounting for investments is the __________ that the investor has over the investee.
Unrealized holding gains and losses on available-for-sale securities affect __________ income.
What is a parent?
Investor who controls another entity through majority stock ownership
What is a subsidiary?
Company that is controlled by another entity
What is consolidated?
Parent issues financial statements that include the financial statements of the subsidiary
Investments in debt and equity securities are typically classified as trading securities because management acquires them with the intention to:
sell them in the near term
If an investor controls the operating and financial policies of another entity, it should issue _________ financial statements.
What is the accounting treatment for investment in available-for-sale securities?
Holding a gain or loss in other comprehensive income
What is the accounting treatment for investment in trading securities?
Holding gain or loss in income
What is the accounting treatment for investment in held-to-maturity securities?
No holding gain or loss is recognized
Investments that are held for an unspecified period of time can be classified as __________ securities or __________ securities.
What categories for classifying investments in debt securities consistent with IFRS No. 9?
1. Fair value through profit or loss (FVTPL)
2. Amortized cost
After all adjustments, the carrying value of an equity method investment is calculated by adding the investor's share of the investee's __________.
Investments classified as "trading securities" are reported at:
Kuhn Company purchases an investment in equity securities and lacks significant influence. Kuhn may elect to value the investment at __________.
Dividends received on an investment in trading securities are credited to:
An investment in trading securities is initially recorded at:
Securities that are classified as available-for-sale or trading are valued at:
fair market value
The price of a bond is equal to the __________ value of the __________ cash receipts.
What are financial instruments?
2. Accounts Receivable
3. Accounts Payable
4. Evidence of ownership interest in companies
5. Issuer of a stock option
6. Holder of a stock option
The equity method is also referred to as a one-line consolidation because:
1. the equity method views the investor and investee as a single entity
2. the investor reports its equity interest in a single investment account
At the maturity date, the carrying value of a discounted investment should be equal to its __________ amount.
The fair value method represents a departure from the __________ principle.
During the current period, Muenster Company amortized $5,000 of discount relating to its investment in debt securities. The company's amortization next period should be __________ then during the current period.
Consistent with the equity method, investment income is based on:
investee's income times ownership percentage
When AFS securities are sold, the realized gain or loss is calculated as the difference between the cash received and the:
amounts directly associated with the investment
The fair value option can be applied to:
1. financial liabilities
2. financial assets
Identify the information necessary to calculate interest each period:
1. stated interest rate
2. par value of debt instrument
Companies that invest in equity securities of another company can benefit directly through:
2. stock price appreciation
What is the treatment of unrealized gains and losses existing at the time of transfer in AFS or HTM to TRADING?
Included in current net income
What is the treatment of unrealized gains and losses existing at the time of transfer in TRADING to AFS or HTM?
None are recognized because they already have been recognized income
What is the treatment of unrealized gains and losses existing at the time of transfer in HTM to AFS?
Other comprehensive income (part of equity)
What is the unrealized gains and losses existing at the time of transfer in AFS to HTM?
Amortize to net income over remaining life.
Election of the fair value option is __________.
For trading securities, a debit balance in the fair value adjustment is classified as an increase in:
income to date
The appropriateness of the classification of investments must be reassessed:
each reporting period
The market interest rate is determined with reference to investments with similar __________ and __________.
What accounts tend to differ depending on what method is used to account for an investment?
2. Income from investment
3. Retained earnings
Recognizing interest revenue is consistent with the __________ accounting concept.
Goodwill represents the difference between the cost of the investment and the __________ of the underlying net assets.
A commonly used term for writing assets up or down to fair value is:
Holding gains and losses are unrealized because the related investment has not:
Spring Company, a European entity, chooses to early-adopt IFRS No. 9. Spring can classify its investments in equity securities as:
1. fair value through other comprehensive income (FVTOCI)
2. fair value through profit or loss (FVTPL)
Changes to the equity method require financial statement __________.
Revaluations associated with securities that have been sold are adjusted when the:
remaining portfolio is adjusted to fair value
Hedging insulates a company from __________ and ensures that earnings are more __________.
Extensive financial statement disclosures are required because they help financial statement users:
1. assess the quality of fair value measurements
2. understand the effect of fair value measurement
When investments are sold, the investment account is credited for the:
original cost of the investment
Folger Company recognizes a holding gain for investments that are classified as AFS. If the company had classified the investments as trading securities, its total shareholder's equity would be:
A net unrealized holding gain increases:
the carrying value of the investment
At the date of acquisition, the subsidiary's assets are valued at __________.
Derivatives are financial instruments that derive their values from other __________ or __________.
Under the equity method, in addition to recognizing a share of the investee's income and dividends, additional adjustments to the investment account are needed if the expenditure to acquire the investment:
exceeds the book value of the acquired net assets
What are common examples of derivatives?
1. Financial futures
2. Interest swap rates
3. Forward contracts
Other than temporary impairments relating to debt securities may arise from:
1. noncredit losses
2. credit losses
A company's reporting method for its investment in the stock of another company depends on the:
nature of the relationship between the investor and the investee
The fair value method is justifiable because it enhances the __________ of the information provided.
Fair value adjustments for trading securities are typically recognized:
in a separate valuation account
Under the equity method, if the fair value of the investee's inventory exceeds its carrying value, the inventory is assumed to be __________ in the following year.
Recognition of income as a share of the investee's income under the equity method is based on the rationale that the investor's and investee's:
fortunes are sufficiently intertwined
If an investment accounted for under the equity method is acquired during the year, income and other adjustments are recognized for the:
portion of the year the investment was owned
The fair value method is not necessary for valuing held-to-maturity investments because:
1. the investment rarely is sold
2. the principal at maturity does not change
Consistent with IFRS, what test must be made to carry investments in debt securities at "amortized cost"?
1. business model test
2. cash flow characteristics test
The purpose of additional adjustments under the equity method is to adjust for differences between income reported by the investee and what that amount would have been if the company had been __________.
Consistent with IAS No. 39, the __________ method should be used if the fair value of an equity investment cannot be reliably measured.
What balance sheet presentation is acceptable for reporting an investment involving significant influence for which the fair value option was chosen?
1. report the investment as a separate line item
2. combine the investment with equity method investments
Peter Company holds a portfolio of debt instruments classified as HTM securities. If a decline in fair value is judged to be "other than temporary," the company must:
recognize the decline
The year-end fair value adjustment subsequent to a partial sale of an investment portfolio serves the purpose of:
1. removing prior period adjustments relating to sold investments
2. adjusting the unsold portfolio to fair value
Subsequent to a sale of AFS securities, prior period fair value adjustments are reversed:
as part of the current-year fair value adjustment
Amounts that are shared between the parent and subsidiary must be __________.
The proposed Accounting Standards Update proposes these investment categories:
1. Amortized cost
2. Fair value through net income (FV-NI)
3. Fair value through other comprehensive income (FV-OCI)
On average, Smith Company holds its investments for 1 week. Smith should classify its investments as:
Sharon Company invests in Amanda Company, a profitable entity that currently pays no dividends. If the fair value of the company does not change, the investment balance would be:
higher under the equity than the fair value method
Consistent with IFRS, the fair value option is:
permitted only in specific circumstances
T/F: FASB and IASB are jointly revising accounting for financial instruments.
True (This is one of the boards' priority projects)
The cash flows characteristic test requires that contractual cash flows:
consist only of principal and interest payments
Unrealized holding gains and losses recognized in other comprehensive income should be recognized:
net of taxes
Lucky Company invested in debt securities and classified them as HTM. At the end of the accounting period, the value of the investment appreciated by $10,500. The company should:
disclose the fair market value in the notes
If a bond sells for less than its maturity value, the bond sells at a __________.
The choice to classify investment securities as current or non current depends on:
when they are expected to mature or be sold
If the investor's share of an investee's net loss exceeds the investment account balance, the equity method is not applied until:
subsequent income is equal to the unrecognized loss
A change from the equity method may be warranted if the ownership interest:
Changes in the fair value are more relevant for trading securities than for held-to-maturity securities because they provide an indication of:
management's success at trading
For a bond issued at discount, the effective rate of return earned by the investor is:
the same as could have been earned on comparable investments
Consolidated financial statements present financial statements as if there were:
only one company
On the statement of cash flows, trading securities are classified as __________ activities.
T/F: The development of a consistent framework for accounting all financial instruments is one of FASB's long-standing and ongoing projects.
True (FASB started working on this project in 1986. It currently is of high priority to FASB and IASB)
Consistent with IFRS, the fair value method may be chosen to avoid:
Under the equity method, if the investee company reports a net loss, the investment balance will:
decrease by the investor's proportionate share
Neumann Company changes from the equity method to another method. The investment should be recognized at:
the carrying value at the time of change
The fair value of an investment may not be reliably measured if:
the probabilities associated with a range of estimates cannot be reliably estimated
Consistent with IFRS No. 9, the cost method can be used:
only to estimate fair value
The overall objective of derivatives is to: