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Exam 13: Investments and Fair Value Accounting

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Question 1

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The company whose more than 50% stock is owned by the another company is called the

A) controlling company.
B) investee company.
C) subsidiary company.
D) sibling company.

E) None of the above
F) B) and D)

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Question 2

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(1)Discuss factors contributing to the trend to fair value accounting. (2)What are some of the disadvantages associated with using fair value?

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Factors contributing to the trend to fair value accounting include: 1.Current generally accepted accounting principles are a hybrid of varying measurement methods that often conflict with one another. 2.A greater percentage of total assets of many companies consists of financial assets whose fair values can be readily obtained. 3.Fair value is more often used by IFRS (International Financial Reporting Standards). Disadvantages associated with using fair value include: 1.Fair value may not be readily obtainable for some assets. 2.Fair value makes it more difficult to compare companies if they use different methods of determining what fair value is. 3.Using fair values could lead to more fluctuations in accounting reports because fair values usually change from year to year.

Question 3

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To record a bond investment between interest payment periods,Investment in Bonds would be debited and Cash and Interest Revenue would be credited.

Investment in Bonds are reported on the balance sheet at lower of cost or market.

The cumulative effects of other comprehensive income items is included in retained earnings,on the balance sheet.

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies.The investment should be accounted for by the

Define (1)debt securities and (2)equity securities.Include their similarities and differences in your discussion.

Which of the following statements below is not a reason a company may purchase another company's stock?

Unrealized gains and losses on trading securities are not included in the calculation of net income.

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

Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment.

Which of the following is not a reason to invest excess cash in temporary investments?

When bonds held as long-term investments are purchased at a price other than the face value,the premium or discount should be amortized over the remaining life of the bonds.

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

Investment in Bonds is listed on the balance sheet after Bonds Payable.

Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1,2012.Roberts reported net income of $155,000 and declared dividends of $40,000 during 2012.How would these events be reported by Sutton using the cost method?

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 semi-annually.The journal entry to record the purchase would be:

On April 1,2015,ValueTime,Inc.had a market price per common share of $24.For the previous year ValueTime paid a dividend of $1.50 per share.Compute the dividend yield for ValueTime,Inc.

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 semi-annually.The journal entry to record the receipt of interest on the next interest payment date would be:

On May 1,2012,Chase Inc.purchases $60,000 of 10-year,Manus Corporation 8% bonds dated March 1,2012 at 100 plus accrued interest.What entry would Chase record when receiving its semiannual interest on March 1,2013?