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Exam 12: Investments

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Question 61

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On July 1, 2018, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of Mountain Corporation at a cost of $140,000. Clearwater will have significant influence over the financial and operating policies of Mountain. Mountain had 30,000 shares of outstanding common stock. Assume the total book value and fair value of net assets is $650,000. Both companies have a January through December fiscal year. The following data pertains to Mountain Corporation during 2018: $\begin{array}{ll}\text { Dividends declared and paid, Jan. 1-June 30 } & \$ 12,000 \\\text { Dividends declared and paid, Jul. 1-Dec. 31 } & \$ 12,000\end{array}$ Net Income, January 1 - June $30 \quad \$ 14,000$ Net Income, July 1 -December $31 \quad \$ 18,000$ Required: (1.) Prepare the entry to record the original investment in Mountain. (2.) Compute the goodwill (if any) on the acquisition. (3.) Prepare the necessary entries (other than acquisition) for 2018 under the equity method.

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Question 62

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In early December of 2018, Blue Corp. purchased $40,000 of Yellow Company bonds, which constitutes less than 3% of Yellow's outstanding debt. Blue accounts for the Yellow investment as available for sale. By December 31, 2018, the value of the Yellow investment had fallen to $30,000, and Blue recorded an unrealized holding loss. By December 31, 2019, the value of the Yellow investment had fallen to $15,000, and Blue determined that it is more likely than not that it will need to sell the bonds before their fair value recovers, so Blue recorded an OTT impairment. By December 31, 2020, fair value had recovered to $20,000. -Prepare appropriate entry(s) at December 31, 2019, and indicate how the scenario will affect net income, OCI, and comprehensive income.

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Blue now must record an OTT impairment. ...

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Question 63

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Bonds that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as:

On January 12th, 2018 Jefferson Corporation purchased bonds of Rose Corporation for $73 million and classified the securities as available-for-sale. On December 31st, 2018 these bonds were valued at $67 million. Eight months later, on October 3rd, 2019 Jefferson Corporation sold these bonds for $87 million. - As part of the multi-step approach to record the 2019 transaction, Jefferson Corporation should next take the second step of:

In early December of 2018, Blue Corp. purchased $40,000 of Yellow Company bonds, which constitutes less than 3% of Yellow's outstanding debt. Blue accounts for the Yellow investment as available for sale. By December 31, 2018, the value of the Yellow investment had fallen to $30,000, and Blue recorded an unrealized holding loss. By December 31, 2019, the value of the Yellow investment had fallen to $15,000, and Blue determined that it is more likely than not that it will need to sell the bonds before their fair value recovers, so Blue recorded an OTT impairment. By December 31, 2020, fair value had recovered to $20,000. -Prepare appropriate entry(s) at December 31, 2020, and indicate how the scenario will affect net income, OCI, and comprehensive income.

Selecting the fair value option for an available-for-sale investment is equivalent to reclassifying that investment as a trading security.

Which of the following is not true about accounting for an equity investment under IFRS No. 9?

The Guitar World (TGW) holds an investment that increased in fair value over 2018, and accounts for that investment as available for sale. When considering taxes, TGW would:

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2022, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2018. Nichols calculates that, of the $30,000 decrease in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. - Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols calculates that the bonds have incurred credit losses. Before-tax net income for 2018 will be reduced by:

Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet?

Under IFRS No. 9, debt investments are classified as either "amortized cost," or "fair value through profit and loss (FVPL)," or "fair value through other comprehensive income (FVOCI)."

Under IFRS No. 9, equity investments are classified as either "fair value through other comprehensive income (FVOCI)" or "fair value through profit and loss (FVPL)."

During 2018, Largent Enterprises purchased bonds as follows: May 17, Purchased 100 Nugent bonds for $800 per bond. July 12, Purchased 40 Alfredo bonds at $600 per bond, plus a $600 brokerage commission. Largent accounts for these investments as securities available for sale. At December 31, 2018, the market values of the securities were as follows: $\begin{array} { l c } \text { Security } & \text { Market Value per Bond } \\\hline \text { Nugent } & \$ 720 \\\text { Alfredo } & \$ 640\end{array}$ Required: (1.) Prepare the journal entries to record the acquisition of the two investments. (2.) Prepare any necessary adjusting entries assuming the bonds are both classified as available for sale securities.

Jackson Company engaged in the following investment transactions during the current year. Required: Prepare the appropriate journal entries to record the transactions for the year including year-end adjustments. Show calculations.

On January 1, 2018, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. The ownership in Papa Company is 10%. Nana Company does not have significant influence over Papa Company. Papa reported net income of $52,000 for the year ended December 31, 2018. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2018?

In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:

If an available-for-sale investment is sold for which there are unrealized holding gains in accumulated other comprehensive income (AOCI) , a reclassification adjustment affects other comprehensive income (OCI) in the period of sale by:

Dim Corporation purchased 1,000 bonds of Witt Corporation in 2015 for $800 per bond and classified the investment as securities available for sale. The value of these holdings was $400 per bond on December 31, 2016, and $300 on December 31, 2017. During 2018, Dim sold all of its Witt bonds at $350 per share. -In its 2018 income statement, Dim would report:

Boulter, Inc. began business on January 1, 2018. At the end of December 2018, Boulter had the following investments in debt securities: All declines in value are deemed to be temporary in nature. How should the corresponding losses be reflected in the financial statements at December 31, 2018?

On March 1, 2018, Navy Corporation used excess cash to purchase U.S. Treasury bonds for $103,000 plus accrued interest. The bonds were purchased at face value. The appropriate interest rate is 6%. Interest on these bonds is payable on January 1 and July 1 of each year. Navy's investment is accounted for as held to maturity. The fair value of the Treasury bonds is $104,000 at year-end. Required: Prepare the appropriate journal entries to record the transactions for the year, including any year-end adjustments. Show calculations, rounded to the nearest dollar.