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Exam 16: Investing Assets

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Question 21

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Which of the following statements regarding available-for-sale debt securities is true?

A) Fair value adjustments are treated as adjustments to net income.
B) Fair value adjustments are treated as adjustments to other comprehensive income.
C) Available-for-sale securities are valued on the balance sheet at historical cost.
D) Interest revenue and fair value adjustments are netted to determine the effect on net income.

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

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Question 22

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Leotis Asset Management invested in the bonds of DEF Co. on 1/1/16. Leotis intends to hold the bonds until maturity. These 5-year bonds had a face value of $900,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $861,614. Which of the following is the correct journal entry to record the receipt of the interest payment on 6/30/16?

A) $\begin{array} { | l | r | r | } \hline \text { Interest Receivable } & 22,500 \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & & 16,742 \\\hline \text { Interest Revenue } & & 5,758 \\\hline\end{array}$
B) $\begin{array} { | l | r | r | } \hline \text { Cash } & 22,500 \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & 3,348 & \\\hline \text { Interest Revenue } & & 25,848 \\\hline\end{array}$
C) $\begin{array} { | l | r | r | } \hline \text { Interest Receivable } & 45,000 \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & & 4,819 \\\hline \text { Interest Revenue } & & 40,181 \\\hline\end{array}$
D) $\begin{array} { | l | r | r | } \hline \text { Cash } & 45,000 & \\\hline \text { Held-to-Maturity Debt Investment - DEF Bonds } & 6,697 & \\\hline \text { Interest Revenue } & & 51,697 \\\hline\end{array}$

E) A) and C)
F) A) and D)

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Question 23

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For held-to-maturity securities, companies must disclose the amortized cost, the aggregate fair value, the total unrealized gains and losses reported in net income.

Companies generally provide both qualitative and quantitative disclosures of investing assets in the annual report.

IFRS allows companies to use the fair value option for all assets except investments being accounted for using the equity method.

HdG, Inc. accepts a $500,000, 5% note from Aberdeen Unlimited on April 1, 2019, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning March 31, 2020. The market rate at the date of issuance of this note was 5%. What is the annual payment that HdG will receive for this note?

If an investor company has significant influence over an investee company, the investment is valued at the fair value of the stock on the balance sheet date.

Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $203,000 and the shares are currently trading for $193,000 at year-end. What is the amount of gain or loss reported at year-end for this investment and where is this gain or loss reported?

ABC accepts a $400,000, 9%, two-year note from DEF on July 1, 2019, and lends cash to DEF. This note matures on June 30, 2021, and requires annual installment payments each June 30 until maturity. The market rate of interest on the date of issue was 9%. Calculate the required annual payment and complete the amortization table for this note receivable, and then complete all necessary journal entries for 2019, 2020, and 2021. ABC is a calendar-year company that files financial statements annually.

Quantitative disclosures for investing assets include the nature and extent of risks arising from financial assets.

Eagles Auto invested in bonds of ABC, which it intends to hold until maturity 1/1/22. These 5-year bonds were dated 1/1/17, had a face value of $75,000, and pay 4% interest annually on 12/31. Eagles purchased these bonds when the market rate of interest was 3%. Complete the entire amortization table for this investment and record all entries for the life of the investment, rounding all values to the nearest dollar. (Use Excel to determine the purchase price.)

Companies report equity investments with no significant influence and no readily determinable fair value at their historical cost.

On January 7, 2018, Webb Industries purchased an equity investment in Bloomberg Corporation for $520,000. Webb does not have significant influence or control over Bloomberg. Bloomberg Corporation stock is not actively traded and does not have a readily determinable fair value. At December 31, 2018, a Level 2 fair value of $470,000 is available based on a comparable security in the same industry as Bloomberg Corporation. At December 31, 2018, a Level 3 fair value of $507,000 is available based on a cash flow model of Bloomberg Corporation. On December 12, 2019, Webb Industries sells the Bloomberg stock for $621,000. What is the amount of the fair value adjustment on December 31, 2018?

Companies classify debt securities in one of two ways: available-for-sale or held-to-maturity.

Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments?

Changes in the fair value of trading debt securities are reported in other comprehensive income.

Rhoads purchased common shares of Company A and B for $10,000 and $10,000, respectively on 12/15. Rhoads intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $18,000, respectively. Assuming Rhoads has no significant influence over the investee companies, what is the unrealized gain or loss for these securities and how is it reported?

If a note's stated interest rate is equal to the prevailing market rate of interest, which of the following is true?

If interest payment dates associated with notes receivable do not coincide with a company's fiscal year-end, the company must accrue the amount of interest revenue earned as of the fiscal year-end even though it is not receiving the interest payment on this date.

When should a company use the equity method to account for an investment in another company's common stock?