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Exam 13: Investments and Fair Value Accounting

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Question 31

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Pepito Company purchased 40% of the outstanding stock of Reyes Company on January 1.Reyes reported net income of $75,000 and declared dividends of $15,000 during the current year.How much would Pepito adjust its investment in Reyes Company under the equity method?

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Question 32

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The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.

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Question 33

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Changes in the value of available­for­sale securities

Skyline,Inc.purchased a portfolio of available-for-sale securities during the current fiscal year.The cost and fair value of this portfolio on December 31,was as follows: $\begin{array}{|l|c|r|r|}\hline \text { Name } & \text { Number of Shares } & \text { Total Cost } & \text { Total Fair Value } \\\hline \text { Blackstone, Inc. } & 400 & \$ 4,000 & \$ 5,200 \\\hline \text { Flagler Company } & 200 & 3,000 & 2,700 \\\hline \text { Patterson Corporation } & 600 & \underline { 7,500} & \underline { 9,800} \\\hline \text { Total } & & \underline {\$ 14,500} &\underline { \$ 17,700}\\\hline\end{array}$ a Provide the journal entry to record the adjustment of the available-for-sale security portfolio to fair value on December 31. b Where will the information from the journal entry be reported on the financial statements?

Under the equity method,a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period.

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock.The market value of the common stock is $80 per share.Edison's dividend yield is

Yankton Company began the year without an investment portfolio.During the year,they purchased investments classified as trading securities at a cost of $13,000.At the end of the year,the market value of the securities was $11,000.The Yankton Company's financial statements for the current year should show

On May 1,Knox Inc.purchases $100,000 of 10-year,6% Madison Corporation bonds dated March 1 at 100 plus accrued interest.What entry would Knox record when purchasing the bonds?

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1.The bonds have an annual interest rate of 6% payable on June 30 and December 31.The entry to record the purchase of the bonds would include a

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest.The bond interest rate is 8% and interest is paid semiannually.The journal entry to record the receipt of interest on the next interest payment date would be

Available-for-sale securities are securities that management expects to sell in the future,but are not actively traded for profit.

LM's, Inc. reported net income for the year ending December 31 of $483,500. Dividends paid during the year totaled $52,900. The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $181,000 at the end of the year. They also hold trading securities with an original cost of $150,000 and a fair value of $147,000. Retained earnings on January 1 was $736,400 and accumulated other comprehensive income on January 1 as $16,200. Calculate the following balances to be reported in the financial statements dated December 31. a. Valuation allowance for available-for-sale securities b. Comprehensive income c. Retained earnings d. Accumulated other comprehensive income

Parker Company owns 83% of the outstanding stock of Tadeo Company.Parker Company is referred to as the

The cost and fair value of the trading securities held by Lindy Company as of December 31 are as follows: $\begin{array}{|l|r|r|r|l|l|}\hline \text { Name } & \begin{array}{c}\text { Number } \\\text { of } \\\text { Shares }\end{array} & \begin{array}{c}\text { Cost } \\\text { per } \\\text { Share }\end{array} & \begin{array}{c}\text { Fair }\\\text { Value } \\\text { per } \\\text { Share }\end{array} & \begin{array}{c}\text { Total } \\\text { Cost }\end{array} & \begin{array}{c}\text { Total } \\\text { Fair } \\\text { Value }\end{array} \\\hline \text { Laurie, Inc. } & 1,200 & \$ 10.50 & \$ 11.05 & & \\\hline \text { Scott Corp. } & 600 & 9.00 & 9.85 & & \\\hline \text { Stephanie Company } & 900 & 4.10 & 4.00 & & \\\hline \text { Timmer Company } & 1,400 & 7.35 & 6.82 & & \\\hline \text { Total } & & & & & \\\hline\end{array}$ a. Complete the table above to find the total cost and fair value for the company's trading securities portfolio. b. Calculate and record the required December 31 adjustment. c. Explain how the adjustment from step b is reported on Lindy's financial statements.

Cash is used for all of the following activities except

Which of the following stock investments should be accounted for using the cost method?

The cost method of accounting for stock

On May 1, Pierce Company purchased $60,000 of Stanton Company’s 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest. -The journal entry Pierce will record on February 1 will include a

It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company.

Yankton Company began the year without an investment portfolio.During the year,it purchased investments classified as available-for-sale securities at a cost of $13,000.At the end of the year,the market value of the securities was $11,000.The Yankton Company's financial statements for the current year should show