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Exam 15:Investments

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Question 51

True/False

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Accounting for the sale of stock is the same for both the fair value and the equity methods of accounting for investments.

A) True
B) False

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Question 52

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On June 1, $50,000 of treasury bonds were purchased between interest dates. The broker commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to the Investment-Treasury Bonds account?

A) $50,000
B) $50,500
C) $49,500
D) $53,000

E) C) and D)
F) B) and D)

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Question 53

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On September 1, Parsons Company purchased $84,000, 10-year, 7% government bonds at 100 plus accrued interest. The semi-annual interest payment dates are June 30 and December 31. Interest calculations are done by the month. (a) Journalize the entry to record the bond purchase. (b) Journalize the receipt of interest on December 31 of the first year. (c) Journalize the sale of the bonds on February 1 of the second year for $\$ 82,000$ plus accrued interest.

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

If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment.

On April 1, Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a

Yankton Company began the year without an investment portfolio. During the year, it 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. Yankton Company's financial statements for the current year should show

The income statement for Hudson Company reported net income of $345,000 for the year ended December 31 before considering the following: $\bullet$ During the year the company purchased trading securities. $\bullet$ At year end, the fair value of the investment portfolio was $23,000 less than cost. $\bullet$ The balance of Retained Earnings was $823,000 on January 1. $\bullet$ Hudson Company paid $43,000 in cash dividends during the year. Calculate the balance of Retained Earnings on December 31.

Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and liabilities.

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to

Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale under the fair value method would include a

The income statement for Dodson Corporation reported net income of $22,400 for the year ended December 31 before considering the following: $\bullet$ During the year the company purchased available-for-sale securities. $\bullet$ At year end, the fair value of the investment portfolio was $2,100 more than cost. $\bullet$ The balance of Retained Earnings was $83,000 on January 1. $\bullet$ Dodson Corporation paid $9,000 in cash dividends during the year. Calculate the balance of Retained Earnings on December 31.

Journalize the entries to record the following selected equity investment transactions completed by Flurry Company during the current year. Flurry's purchase represents less than 20% of the total outstanding Braxter stock. ​

When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price.

On May 1, Cedar Inc. purchases $150,000 of 10-year, Knox Corporation 8% bonds dated March 1 at 100 plus accrued interest. What entry would Cedar record when receiving its semiannual interest on March 1?

Interest revenue on bonds is reported

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?

Skyline, Inc. purchased a portfolio of trading securities during the current fiscal year. The cost and fair value of this portfolio on December 31 was as follows: ​ $\begin{array} { | l | c | r | r | } \hline \text { Name } & \text { Number of Shares } & \text { Total Cost } & \text { Total Fair Value } \\\hline \text { Alcon, Inc. } & 1,200 & \$ 16,000 & \$ 15,000 \\\hline \text { Easton Company } & 700 & 23,000 & 21,500 \\\hline \text { Panther Company } & 300 & 9,000 & 9,200 \\\hline \text { Total } & & \$ 48,000 & \$ 45,700 \\\hline\end{array}$ ​ (a) Provide the journal entry to record the adjustment of the trading security portfolio to fair value on December 31. (b) Where will the information from the journal entry be reported on the financial statements?

Any gains or losses on the sale of bonds normally would be reported in the Other revenue (loss) section of the income statement.