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Exam 13: Investments and Fair Value Accounting

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Question 1

Multiple Choice

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

A) earn interest revenue
B) influence the operations of another company
C) receive dividends
D) realize gains from the increase in market value of the securities

E) B) and D)
F) All of the above

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Question 2

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Temporary investments

A) are reported as current assets
B) include cash equivalents
C) do not include equity securities
D) all of the above

E) B) and C)
F) All of the above

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Question 3

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The investor carrying an investment by the equity method records cash dividends received as an increase in the carrying amount of the investment.

Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.

On April 1, 2011, Albert Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2011, Albert received its first semiannual interest. On February 1, 2011, Albert sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Albert will record on April 1, 2011 for the purchase of the bonds will include:

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

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $2 per share on its $10 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is:

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.

On May 1, 2011, Stanton Company purchased $50,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, 2011, Stanton received its first semiannual interest. On February 1, 2012, Stanton sold $40,000 of the bonds at 103 plus accrued interest. What are the total proceeds from the February 1, 2012 sale?

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

If the proceeds from the sale of bond investments exceeds the carrying amount of the bonds, a gain is realized.

The company whose stock is owned by the parent company is called the

All of the following are disadvantages of fair value use except:

Herberto Company had a net income of $74,000, and other comprehensive loss of $8,500 for 2012. On January 1, 2012, the Retained Earnings balance was $425,000 and the Accumulated Other Comprehensive Income balance was $52,000. Determine the (a) comprehensive income for 2012, (b) Retained Earnings balance on December 31, 2012, and (c) the Accumulated Other Comprehensive Income on December 31, 2012.

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

Investment is certificates of deposit and other securities that do not change in value are reported in the balance sheet as:

It is possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company.

The cost method of accounting for stock

Newville Corporation reported net income of $50,000 in 2012. They have 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 common stock outstanding. During 2012 Newville paid the preferred stockholder's a $6 per share dividend and also paid $20,000 to common shareholders. The market value of Newville's stock is: Preferred - $105 and Common - $10. (1) Calculate Newville's dividend yield. (2) Why does the dividend yield vary widely across firms?

Trading securities should be reported on the financial statements at fair market value.