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Flashcards in IVES Deck (67)
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1

An investor uses the cost adjusted for fair value method to account for an investment in common stock that is carried in an available-for-sale portfolio. A portion of the dividends received this year were in excess of the investor's share of investee's earnings subsequent to the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be 

The portion of the dividends received this year that were not in excess of the investor's share of investee's earnings subsequent to the date of investment. 

2

The following information pertains to Lark Corp.'s available-for-sale securities portfolio:

                              December 31 

                        year 2                  year I 

Cost                 $200,000           $200,000

Market value      240,000              180,000

Lark does not elect to use the fair value option for reporting financial assets. Differences between cost and market values are considered to be temporary. The decline in market value was properly accounted for at December 31, year I. What is the amount of "Unrealized gain (loss) on marketable equity securities," component of other comprehensive income, for the year ended to December 31, year 2?

$60,000

3

On January I, year 2, Miller Company purchased 25% of Wall Corporation's common stock; no goodwill resulted from the purchase. Miller uses the equity method to account for this investment, and the balance in Miller's investment account was $190,000 at December 31, year 2. Wall reported net income of $120,000 for the year ended December 31, year 2 and paid common stock dividends totaling $48,000 during year 2.

How much did Miller pay for its 25% interest in Wall? 

$172,000

4

On its December 31, year I balance sheet, the Noble Corporation reported the following as investments in long-term marketable equity securities:

Investment in long-term marketable equity securities at market $300,000 

Less

Adjustment to reflect decline in market value of marketable equity securities 28,000

At December 31, year I, the market valuation of the portfolio was $298,000. Noble does not elect to use the fair value option of reporting financial assets. What should Noble report on its year I Statement of Income as a result of the increase in the market value of the investments in year I? 

$0

5

In January year 2, Farley Corporation acquired 20% of the outstanding common stock of Davis Company for $800,000. This investment gave Farley the ability to exercise significant influence over Davis. The book value of the acquired shares was $600,000. The excess of cost over book value was attributed to an identifiable intangible asset which was undervalued on Davis's balance sheet and which had a remaining useful life of 10 years. For the year ended December 31, year 2, Davis reported net income of $180,000 and paid cash dividends of $40,000 on its common stock. Assume Farley uses the equity method to account for this investment. What is the proper carrying value of Farley's investment in Davis at December 31, year 2? 

$808,000

6

Anchor Co. owns of 40% Main Co.'s common stock outstanding and 75% of Main's noncumulative preferred stock outstanding. Anchor exercises significant influence over Main's operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. Anchor does not elect the fair value option for reporting its investment in Main. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main? 

$75,000

7

An investor uses the equity method to account for an investment in common stock. Assuming the fair value option of reporting financial assets is not elected, after the date of acquisition, the investment account of the investor would 

Be increased by its share of the earnings of the investee, and decreased by its share of the losses of the investee.

8

During year I Anthony Company purchased marketable equity securities as long-term investment. Pertinent data are as follows: Security        Cost          Market value at 12/31/Y1

A                  $ 20,000       $17,000

B                      40,000       30,000

C                      90,000       92,000

                      $150,000    $139,000

Anthony appropriately carries these securities at their fair market value, and the decline in value of Security a is not considered to be temporary. The decline in value of securities A and C is considered to be temporary. Anthony does not elect to use the fair value option in reporting financial assets. The amount of loss on these securities that will appear on Anthony's balance sheet as a component of "Accumulated other comprehensive income" at should be 

$1,000

9

A marketable equity security is transferred from the available-for-sale portfolio to the trading securities portfolio. At the transfer date, the security's cost exceeds its market value. What amount is used at the transfer date to record the security in the trading portfolio? 

Market value, regardless of Whether the decline in market value below cost is considered permanent or temporary.

10

Endo Inc, reports under IFRS. Which statement regarding fair value through profit or loss (FVTPL) is true?

a. An election can be made to use the fair value through profit or loss (FVTPL) method for held-to-maturity security requiring the security to be recorded at cost and subsequently measured at amortized cost.

b. An asset that is classified as fair value through profit or loss (FVTPL) is remeasured to fair value each reporting period and the profit or loss is recognized in income for the period. 

c. An asset that is classified as fair value through profit or loss (FVTPL) is remeasured to fair value each reporting period and the profit or loss is recognized in other comprehensive income.

d. An election can be made to use the fair value through profit or loss (FVTPL) method when an equity security has no active market. 

An asset that is classified as fair value through profit or loss (FVTPL) is remeasured to fair value each reporting period and the profit or loss is recognized in income for the period. 

11

Lee, Inc. acquired 30% of Polk Corp.'s voting stock on January I, year I, for $100,000. Lee uses the equity method to account for its investment in Polk. During year I, Polk earned $40,000 and paid dividends of $25,000. Lee's 30% interest in Polk gives Lee the ability to exercise significant influence over Polk's operating and financial policies. During year 2, Polk earned $50,000 and paid dividends of $15,000 on April I and $15,000 on October I. Polk's income was earned evenly throughout the year. On July I, year 2, Lee sold half of its stock in Polk for $66,000 cash. What should be the gain on sale of this investment in Lee's year 2 income statement? 

$12,250

12

On January I, year I, Grade Company paid $300,000 for 20,000 shares of Medium Company's common stock which represents a I 15%, investment in Medium. Grade does not have the ability to exercise significant influence over Medium. Medium declared and paid a dividend of $1 a share to its stockholders during year I. Medium reported net income of $260,000 for the year ended December 31, year I, and had a market value of $300,000 at December 31, year I. The balance in Grade's balance sheet account "Investment in Medium Company" at December 31, year I, should be 

$300,000

13

Beach Co. determined that the decline in the fair value (FV) of an investment was below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach's bocks. Beach Co. does not elect the fair value option to account for these securities. The controller would properly record the decrease in EV by including it in which of the following?

a. Extraordinary items section of the income statement and writing down the cost basis to FV.

b. Other comprehensive income section of the income statement, and writing down the cost basis to FV.

c. Earnings section of the income statement and writing down the cost basis to FV.

d. Other comprehensive income section of the income statement only.

Earnings section of the income statement and writing down the cost basis to FV. 

14

Information pertaining to dividends from Wray Corp.'s common stock investments for the year ended December 31, year 2, follows:

On September 8, year 2, Wray received a $50,000 cash dividend from Saco, Inc., in which Wray owns a 30% interest. A majority of Wray's directors are also directors of Seco. The equity method of accounting is used.

On October 15, year 2, Wray received $6,000 liquidating dividend from King Co. Wray owns a 5% interest in King Co.

Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, year 2, to stockholders of record on December 15, year 2, payable on January 5, year 3.

What amount should Wray report as dividend income in its income statement for the year ended December 31, year 2?

$4,000

15

Cook Company had the following investment portfolio of stocks that were purchased during year 2.

Stock              Classification           Cost             Fair Value 12-31-Y2

Company R     Available-for-sale     $30,000      $32,000

Company S     Trading                    $42,000      $46,000

Company T     Available-for-sale     $15,000       $18,000

Cook elects to use the fair value option for reporting the investment in Company R. Which of the following statements is true?

a. Cook may not elect the fair value method for the investment in Company R unless it also uses the fair value method for investments in Companies S and T.

b. Cook will report an unrealized gain on securities for $6,000 on the year 2 income statement.

c. Cook will report an unrealized gain on securities for $9,000 on the year 2 income statement.

d. Cook will report an unrealized gain in other comprehensive income for $5,000 in year 2. 

Cook will report an unrealized gain on securities for $6,000 on the year 2 income statement. 

16

On December 29, year 2, Co. sold a marketable equity security that had been purchased on January 4, year I. owned no other marketable equity security. An unrealized loss was reported as components of "Other comprehensive income" and "Accumulated other comprehensive income" in the year I balance sheet. A realized gain was reported in the year 2 income statement. Cc. did not elect to use the fair value option in reporting financial assets. Was the marketable equity security classified as a trading security and did its year I market price decline exceed its year 2 market price recovery?

    Trading               year I market price decline exceeded year

                                2 market price recovery

a. Yes                        Yes

b. Yes                        No

c. No                          Yes

d. No                          No

No                          No

17

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In year 2, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel's operations. Green uses the equity method to account for its investment in Axel. What amount of dividend revenue should Green report in its income statement for the year ended December 31, year 2? 

$60,000

18

 In year I, Wallace Corporation purchased marketable securities, and at 12/31/YI, had the following marketable equity securities:

                                       Cost         Market      Unrealized gain (loss) 

In trading portfolio:                     

Security X                       $80,000   $50,000     $(30,000)

Security Y                         15,000      20,000           5,000

Totals                             $95,000    $70,000      $(25,000)

In available-for-sale portfolio:      

Security Q                     $60,000    $70,000         $10,000

Security R                        90,000      45,000          (45,000)

TotaIs                            $150,000   $115,000        $(35,000)

Wallace does not elect the fair value option for reporting financial assets.  At December 31, year I, what amounts should be charged to        Net income    Other comorehensive income

a.     $ 0                  $60,000

b.     $25,000          $0

c.     $25,000         $35,000

d.     $60,000         $0

 $25,000         $35,000

19

On January 10, year I, Wayne, Inc., purchased 5,000 shares of Jason Corporation's common stock at $60 per share. The purchase is a long-term investment and is less than 20% of Jason's outstanding shares. This investment is appropriately reflected in Wayne's balance sheet in an available-for-sale securities portfolio at December 31, year I. The market value of Wayne's investment in Jason's common stock was as follows:

                                        Market value

Date                          Per share    Total

December I5, year I   $47             $235,000

December 31, year I     46               230,000

On December I5, year I, Wayne determined that there had been an other than temporary decline in the market value. What amount should Wayne record as loss in its income statement for the year ended December 31, year I? 

$70,000

20

On December 31, year I, Ott Co. had investments in marketable equity securities as follows:

                            Cost       Market value   

Mann Co.            $10,000    $ 8,000

Kama, Inc.              9,000      10,000

Fenn Corp.            11,000        9,000

                          $30,000    $27,000        

The Mann investment is classified as held-to-maturity, while the remaining securities are classified as available-for-sale. Ott does not elect the fair value option for reporting financial assets. Ott's December 31, year I balance sheet should report total marketable equity securities as

$29,000 

21

The market price of the common stock of an investee company increased during the year. How will the investor's investment account be affected by the increase in market price of that common stock under each of the following accounting methods?

   Cost adiusted for fair value method    Equity method

a.    No effect                                           No effect

b.    No effect                                          Increase

c.    Increase                                            No effect

d.    Increase                                            Increase 

 Increase                                            No effect

22

On April I, year 2, Calico Corp. purchases 10,000 shares of stock in Linwood Corporation for $60 per share, representing 5% of the outstanding shares of Linwood. Calico classifies the investment as an available-for-sale security. During year 2, Linwood pays a dividend of $.30 per share. On December 31, year 2, the Linwood shares are valued at $62 per share. Calico elects to use the fair value option for reporting its investment in Linwood. What is the amount that Calico will record as unrealized gain on the securities in its year 2 income statement? 

$20,000

23

Gil Co. began operations on January 3, year I. The following information was extracted from Gil Co.'s December 31, year I balance sheet:

Noncurrent assets: $96,450

Long-term investments in marketable equity securities Stockholders' equity:

   Accumulated other comprehensive income:  

      Net unrealized loss on investments in marketable equity securities (less tax benefit of 4,800) (15,000)

Gil Co. did not elect to use the fair value option for reporting financial assets. Historical cost of the long-term investments in marketable equity securities was 

$116,250

24

During year I, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500 and properly classified the investment as available-for-sale. The market value of this investment was $29,500 at December 31, year I. Wall did not elect to use the fair value option for reporting financial assets. Wall sold all of the Hemp common stock for $14 per share on December I5, year 2, incurring $1,400 in brokerage commissions and taxes. On the sale, Wall should report a realized loss of 

$4,900

25

The equity method of accounting for an investment in the common stock of another company should be used when the investment 

Enables the investor to exercise significant influence over the investee. 

26

On July I, year 2, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December I5, year 2, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December 31, year 2, was $120,000, earned evenly throughout the year. Denver uses the equity method to account for its shares in Eagle. In its year 2 income statement, what amount of income from this investment should Denver report? 

$18,000

27

Velma Corporation does not elect to use the fair value option for reporting financial assets. The market value of Velma's available-for-sale securities portfolio is lower than its cost. How should Velma report this difference? 

Accounted for separately in other comprehensive income.

28

On January 2, year I, Troquel Corporation bought 15% of Zafacon Corporation's capital stock for $30,000. Troquel accounts for this investment by the cost adjusted for fair value method and carries the securities in an available-for-sale portfolio. Zafacon's net income for the years ended December 31, year I, and December 31, year 2, was $10,000 and $50,000, respectively. During year 2, Zafacon declared a dividend of $70,000. No dividends were declared in year I. How much should Troquel show on its year 2 income statement as income from this investment? 

$9,000

29

At the end of year I, Lane Co. held trading securities that cost $86,000 and which had a year-end market value of $92,000. During year 2, all of these securities were sold for $104,500. At the end of year 2, Lane had acquired additional trading securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these stock activities on Lane's year 2 income statement? 

Gain of $10,500

30

On both December 31, year I, and December 31, year 2, Leman Co.'s only marketable equity security had the same fair value, which was below cost. Leman considered the decline in value to be temporary in year I but other than temporary in year 2. At the end of both years the security was classified as a noncurrent asset. Leman considers the investment to be available-for-sale. Assume that Leman does not elect the fair value option to account for its available-for-sale securities. What should be the effects of the determination that the decline was other than temporary on Leman's year 2 net noncurrent assets and net income? 

No effect on net noncurrent assets and a decrease in net income.