(Test Bank) Advanced Accounting

Hamlen, 5

Business

Test Bank

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©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-1 TEST BANK CHAPTER 1 Intercorporate Investments: An Overview MULTIPLE CHOICE 1. Topic: Accounting for equity securities with no significant influence LO 1 A company invests $350,000 in equity securities on November 30, 2023, and classifies them as investments with no significant influence. At December 31, 2023, the company’s year-end, the securities have a fair value of $345,000. On February 1, 2024, the company sells the securities for $360,000. Which statement is true regarding how this information is reported in the company’s financial statements? a. The company’s December 31, 2023 balance sheet reports the securities at $350,000, and a loss of $5,000 is reported on the 2023 income statement. b. The company’s December 31, 2023 balance sheet reports the securities at $345,000, and a gain of $10,000 is reported on the 2024 income statement. c. The company’s December 31, 2023 balance sheet reports the securities at $345,000, and a gain of $15,000 is reported on the 2024 income statement. d. The company’s December 31, 2023 balance sheet reports the securities at $350,000, and no gain or loss appears on the 2023 income statement. ANS: c 2. Topic: Accounting for equity securities with no significant influence LO 1 Which statement is true concerning the reporting for equity investments with no significant influence? a. They are reported at fair value, with any changes in value reported in income. b. They are categorized as either trading or available-for-sale, with unrealized changes in the value of trading securities reported in income, and unrealized changes in the value of AFS securities reported in OCI. c. They are reported at cost, with unrealized changes in value reported in OCI. d. They are reported at fair value, with unrealized changes in value reported in OCI. ANS: a ©Cambridge Business Publishers, 2023 1-2 Advanced Accounting, 5th Edition Use the following information on a company’s investments in equity securities with no significant influence to answer Questions 3 and 4. The company’s accounting year ends December 31. Investment Date of Acquisition Cost Fair Value 12/31/23 Date Sold Selling Price Colt Company stock 9/20/23 $38,000 $37,000 2/10/24 $42,000 Dana Company stock 10/2/23 14,000 14,200 1/17/24 13,000 3. Topic: Accounting for equity investments with no significant influence LO 1 What amount is reported for gain or loss on these securities in 2023 income? a. No gain or loss b. $800 loss c. $3,000 gain d. $1,000 loss ANS: b ($37,000 – $38,000) + ($14,200 – $14,000) = $800 loss 4. Topic: Accounting for equity investments with no significant influence LO 1 What amount is reported for gain or loss on these securities in 2024 income? a. No gain or loss b. $3,000 gain c. $3,800 gain d. $4,000 gain ANS: c ($42,000 – $37,000) + ($13,000 – $14,200) = $3,800 gain 5. Topic: Accounting for equity investments with no significant influence LO 1 A company buys an equity investment for $100 in 2024. The investment has no significant influence. At the end of 2024, the company still holds the investment and it has a market value of $105. In 2025, the company sells the investment for $115. How is this information reported in the company’s 2024 and 2025 income statements? a. $5 gain on the 2024 income statement; $10 gain on the 2025 income statement. b. Does not appear on the 2024 income statement; $15 gain on the 2025 income statement. c. Does not appear on the 2024 income statement; $10 gain on the 2025 income statement. d. $15 gain on the 2024 income statement; does not appear on the 2025 income statement. ANS: a $105 - $100 = $5 gain in 2024; $115 - $105 = $10 gain in 2025. ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-3 6. Topic: Accounting for equity investments with no significant influence LO 1 On December 20, 2024, a company pays $40,000 for an investment in equity securities with no significant influence. On December 31, 2024, the company’s year-end, the stock has a market value of $37,000. The company sells the stock in 2025 for $44,000. On its income statement, the company reports: a. A loss of $3,000 in 2024, and a gain of $7,000 in 2025 b. No gain or loss in 2024, and a gain of $4,000 in 2025 c. A gain of $4,000 in 2024, and no gain or loss in 2025 d. No gain or loss in 2024, and a gain of $7,000 in 2025 ANS: a ($37,000 - $40,000) = $3,000 loss in 2024; ($44,000 - $37,000) = $7,000 gain in 2025. 7. Topic: Accounting for equity investments with no significant influence LO 1 On October 25, 2024, a company pays $35,000 for an investment in equity securities, with no significant influence. On December 31, 2024, the company’s year-end, the stock has a market value of $36,000. The company sells the stock in 2025 for $32,000. How is the company’s 2024 other comprehensive income affected by the above transactions in each year? a. Decrease of $2,000 in 2024, increase of $2,000 in 2025 b. Decrease of $2,000 in 2024, increase of $4,000 in 2025 c. No effect in 2024, increase of $2,000 in 2025 d. No effect on OCI in either year. ANS: d 8. Topic: Accounting for equity investments with no significant influence LO 1 A company has equity investments with no significant influence, purchased for $550,000 and carried at $520,000 at the beginning of 2024. At the end of 2024, the investments have a fair value of $560,000 and are still held by the company. What amount is reported in income and in other comprehensive income for 2024? Income OCI a. $0 $40,000 gain b. $40,000 gain $0 c. $10,000 gain $0 d. $0 $10,000 gain ANS: b $560,000 - $520,000 = $40,000 gain for 2024, reported in income. ©Cambridge Business Publishers, 2023 1-4 Advanced Accounting, 5th Edition Use the following information on a company’s investments in debt securities to answer Questions 9 - 13. The company’s accounting year ends December 31. Investment Date of Acquisition Cost Fair Value 12/31/23 Date Sold Selling Price Colt Company bonds 9/20/23 $38,000 $37,000 2/10/24 $42,000 Dana Company bonds 10/2/23 14,000 14,200 1/17/24 13,000 9. Topic: Accounting for debt investments classified as trading LO 1 If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2023 income? a. No gain or loss b. $800 loss c. $3,000 gain d. $200 gain ANS: b ($37,000 - $38,000) + ($14,200 - $14,000) = $(800) loss 10. Topic: Accounting for debt investments classified as trading LO 1 If the above debt investments are categorized as trading securities, what amount is reported for gain or loss on securities in 2024 income? a. No gain or loss b. $3,000 gain c. $3,800 gain d. $5,000 gain ANS: c ($42,000 - $37,000) + ($13,000 - $14,200) = $3,800 gain 11. Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities in 2023 income? a. No gain or loss b. $800 loss c. $3,000 gain d. $200 gain ANS: a ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-5 12. Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities in 2024 income? a. $3,000 gain b. $3,800 gain c. $2,100 gain d. $3,100 gain ANS: a ($42,000 – $38,000) + ($13,000 – $14,000) = $3,000 gain 13. Topic: Accounting for debt investments classified as AFS LO 1 If the above investments are categorized as available-for-sale securities, what is the net effect on 2024 other comprehensive income? a. $0 b. $3,800 increase c. $ 800 decrease d. $ 800 increase ANS: d Reclassification of 2023 unrealized loss. 14. Topic: Accounting for debt investments classified as trading LO 1 A company has investments in debt securities, acquired at a cost of $300,000, and classified as trading investments. At the beginning of the year, the investments are reported at $340,000. During the year the company sells the investments for $335,000. What amount is reported in income for the year? a. $35,000 gain b. $ 5,000 gain c. $ 5,000 loss d. $40,000 gain ANS: c $335,000 - $340,000 = $5,000 loss ©Cambridge Business Publishers, 2023 1-6 Advanced Accounting, 5th Edition 15. Topic: Accounting for debt investments classified as AFS LO 1 A company has investments in debt securities, classified as available-for-sale. At the beginning of the year, the investments are reported at $500,000, and unrealized gains of $30,000 are reported in accumulated other comprehensive income. During the year, the company sells the securities for $490,000. What amounts are reported in income and in other comprehensive income for the year? Income OCI a. $20,000 gain $30,000 loss b. $10,000 loss $0 c. $30,000 gain $30,000 loss d. $30,000 gain $0 ANS: a The entry to record the sale is: Cash 490,000 Reclassification of gain (OCI) 30,000 Investment in AFS securities 500,000 Gain (income) 20,000 16. Topic: Accounting for debt investments classified as AFS LO 1 A company buys corporate bonds for $100 in 2023. At the end of 2023, the company still holds the investment and it has a market value of $115. In 2024, the company sells the investment for $108. How is this information reported in the company’s 2023 and 2024 income statements if the investment is classified as an AFS investment? a. $15 gain on the 2023 income statement; $7 loss on the 2024 income statement b. Does not appear on the 2023 income statement; $8 gain on the 2024 income statement c. Does not appear on the 2023 income statement; $7 loss on the 2024 income statement d. $8 gain on the 2023 income statement; does not appear on the 2024 income statement ANS: b $108 - $100 = $8 gain ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-7 17. Topic: Accounting for debt investments classified as AFS LO 1 A company invests $500,000 in corporate bonds on April 30, 2024 and classifies them as available-for-sale securities. At December 31, 2024, the company’s year-end, the securities have a fair value of $515,000. On February 1, 2025, the company sells the securities for $510,000. Which statement is true regarding how is this information reported in the company’s financial statements? a. The company’s 2024 balance sheet reports the securities at $515,000 and a gain of $15,000 is reported in 2024 other comprehensive income. b. The company’s 2024 balance sheet reports the securities at $500,000 and a gain of $10,000 is reported on the 2025 income statement. c. The company’s 2024 balance sheet reports the securities at $515,000 and a gain of $10,000 is reported in 2025 other comprehensive income. d. The company’s 2024 balance sheet reports the securities at $500,000 and no gain or loss appears in the 2024 financial statements. ANS: a 18. Topic: Accounting for debt investments classified as AFS LO 1 A company invests $700,000 in corporate bonds in 2023 and classifies them as available-for-sale. At the end of 2023, the fair value of the securities is $650,000. In 2024, the company sells the bonds for $706,000. Which statement is true concerning the entry made to record the sale of the bonds in 2024? a. Other comprehensive income increases by $50,000 and income increases by $6,000. b. There is no effect on other comprehensive income, and income increases by $6,000. c. Other comprehensive income declines by $50,000, and income increases by $6,000. d. Other comprehensive income increases by $6,000, and there is no effect on income. ANS: a The 2024 entry to record the sale is as follows: Cash 706,000 Reclassification of loss (OCI) 50,000 Investment in AFS securities 650,000 Gain (income) 6,000 ©Cambridge Business Publishers, 2023 1-8 Advanced Accounting, 5th Edition 19. Topic: Impairment of debt investments classified as AFS LO 1 A company paid $100,000 for corporate bonds and classified them as AFS. By year-end, the bonds declined in value to $80,000 due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment? a. No adjustment is required. b. The investment account is directly reduced by $20,000 and a $20,000 loss is reported in OCI. c. The investment account is directly reduced by $20,000 and a $20,000 loss is reported in income. d. An allowance account is created to reduce the investment by $20,000, and a $20,000 loss is reported in income. ANS: d 20. Topic: Impairment of debt investments classified as AFS LO 1 Last year, a company paid $80,000 for corporate bonds and classified them as AFS. At the beginning of the current year, these bonds are carried at $85,000. At year-end, their market value is $60,000, due to credit losses. Which statement is true concerning the end-of-year adjustment for this investment? a. No adjustment is required. b. OCI is reduced by $5,000. c. An impairment loss of $25,000 is reported in income. d. The investment account is reduced by $20,000. ANS: b The adjusting entry is as follows: Reclassification of gain on AFS securities (OCI) 5,000 Impairment loss on AFS securities (income) 20,000 Investment in AFS securities 5,000 Allowance for credit losses 20,000 ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-9 21. Topic: Impairment of debt investments classified as AFS LO 1 A U.S. company holds available-for-sale debt securities, purchased for $1,000,000 and carried at $1,500,000. At the end of the current year, the company determines that the fair value of these securities is $1,300,000, and the decline in value is due to an increase in the market rate of interest. How will the adjusting entry to record the decline in value affect income and other comprehensive income? Income OCI a. $300,000 loss No effect b. $200,000 loss No effect c. No effect $200,000 loss d. No effect $300,000 loss ANS: c There is no impairment loss since market value is greater than cost. The entry to record the decline in value is: OCI 200,000 Investment in AFS securities 200,000 22. Topic: Impairment of debt investments classified as AFS LO 1 A U.S. company holds an investment in debt securities, classified as available-for-sale. Unrealized investment gains have been reported in previous years. During the current year, the market value of the investment declines below cost, due to a rise in market interest rates. Which statement below is true concerning this investment? a. The difference between cost and market value is reported in income as a loss. b. The difference between cost and market value is reported in OCI as a loss. c. The difference between carrying value and market value is reported in income as a loss. d. The difference between carrying value and market value is reported in OCI as a loss. ANS: d ©Cambridge Business Publishers, 2023 1-10 Advanced Accounting, 5th Edition 23. Topic: Impairment of debt investments classified as AFS LO 1 A company purchases corporate bonds for $1,000,000 and categorizes them as AFS. At year-end, their market value is $750,000. $100,000 of the decline in value is attributed to a rise in market interest rates, and $150,000 of the decline is attributed to credit losses. Which statement below is true concerning the entry to record the decline in value? a. The investment account, net of its allowance for losses, declines by $100,000. b. An impairment loss of $150,000 is reported in income. c. The investment account is directly reduced by $150,000. d. An impairment loss of $100,000 is reported in income. ANS: b The entry to record the impairment loss is: Impairment loss (income) 150,000 Impairment loss (OCI) 100,000 Allowance for credit losses 150,000 Investment in bonds 100,000 24. Topic: Impairment of debt investments classified as AFS LO 1 A company holds available-for-sale corporate bonds purchased for $100,000. Current value of these securities is $92,000 and the decline in value was recorded as a debit to OCI and a credit to the investment account when the decline occurred. The company determines that the decline in value is due to credit losses. Which statement is true concerning the adjusting entry needed to record this information? a. Debit loss on securities (income) and credit OCI for $8,000. b. Debit OCI and credit investments for $8,000. c. Debit OCI and credit allowance for credit losses for $8,000. d. No entry is made since the securities are already reported at $92,000. ANS: a The adjusting entry is: Impairment loss (income) 8,000 Investment in AFS securities 8,000 Reclassification of loss (OCI) 8,000 Allowance for credit losses 8,000 ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-11 25. Topic: Impairment of debt securities classified as AFS LO 1 A company holds an investment in corporate bonds classified as available-for-sale. At the beginning of the year, this investment is reported at a value of $4,000,000. Gains of $500,000 have been previously reported, and no impairment losses have been reported. At the end of the year, the market value of the investment is $2,000,000, and it is determined that the decline in value is due to credit losses. How is this information reported in the company’s financial statements for the year? a. $500,000 other comprehensive loss; $1,500,000 loss in income b. $2,000,000 loss in income; no change in other comprehensive income c. $2,000,000 other comprehensive loss; not reported in income d. $1,500,000 other comprehensive loss; not reported in income ANS: a The entry to record the impairment loss is: Reclassification of gain on AFS securities (OCI) 500,000 Impairment loss (income) 1,500,000 Investment in AFS securities 500,000 Allowance for credit losses 1,500,000 26. Topic: Impairment testing of debt securities classified as AFS LO 1 An AFS debt security’s market value is less than its original cost. The loss is reported in income when: a. Current market value is at least 50% below cost. b. Current market value is below cost, and it is more likely than not that the investor will sell it before the loss is recovered. c. Current market value is below carrying value and the decline is due to increases in market interest rates. d. Current market value is below carrying value. ANS: b 27. Topic: Impairment of debt securities classified as AFS LO 1 A company has previously recorded in income an impairment loss on debt securities classified as AFS. What can we conclude from this information? a. The loss is attributed to an increase in market rates of interest. b. The loss is attributed to a decline in the ability of the investee to meet required principal and interest payments. c. The amount of the impairment loss directly reduced the investment account. d. The loss was originally recorded in OCI. ANS: b ©Cambridge Business Publishers, 2023 1-12 Advanced Accounting, 5th Edition Use the following information to answer Questions 28-30: A company holds a $100,000 face value corporate bond, bought January 1, 2023, paying 3% annually on December 31, and maturing December 31, 2025. The company paid $102,884 for the bond, to yield 2%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31. Round answers to the nearest dollar. 28. Topic: Accounting for HTM securities LO 1 What amount will the company report as interest revenue on the bond for 2024? a. $3,000 b. $2,058 c. $2,039 d. $2,000 ANS: c 2023 investment amortization = (3% x $100,000) – (2% x $102,884) = $942 2024 interest revenue = ($102,884 – $942) x 2% = $2,039 29. Topic: Accounting for HTM securities LO 1 What is the approximate net entry to record receipt of interest and principal on December 31, 2025, assuming no impairment on the bond throughout its life? a. Cash 103,000 Interest revenue 2,020 Investment in bond 100,980 b. Cash 103,000 Interest revenue 3,000 Investment in bond 100,000 c. Cash 102,000 Interest revenue 2,000 Investment in bond 100,000 d. Cash 103,000 Interest revenue 116 Investment in bond 102,884 ANS: a 2023 investment amortization = (3% x $100,000) – (2% x $102,884) = $942; new investment balance = $102,884 – $942 = $101,942 2024 investment amortization = (3% x $100,000) – (2% x $101,942) = $962; new investment balance = $101,942 – $962 = $100,980 2025 interest revenue = 2% x $100,980 = $2,020 Small discrepancy due to rounding to nearest dollar. ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-13 30. Topic: Impairment of HTM securities LO 1 Assume the market value of the bond on December 31, 2023 is $70,000, and no previous impairment has been reported. The decline in value is due to credit losses. What impairment loss is reported on the company’s 2023 income statement? a. $30,000 b. $32,884 c. $31,942 d. $27,000 ANS: c Amortized cost (book value) at the end of 2023, after interest revenue is recorded, is $101,942. Therefore, the impairment loss is $70,000 – $101,942 = $31,942, reported in income. Use the following information to answer Questions 31 – 33: On January 1 of the current year, Ola Company paid $405,000 for a $400,000 face value 3% corporate bond yielding 2.8%, interest paid annually on December 31, and classified it as held-to-maturity. No impairment losses are reported. Ola’s reporting year ends December 31. 31. Topic: Accounting for HTM securities LO 1 On its income statement for the current year, Ola reports interest revenue on the corporate bond of: a. $12,000 b. $11,200 c. $12,340 d. $11,340 ANS: d 2.8% x $405,000 = $11,340 32. Topic: Accounting for HTM securities LO 1 On its balance sheet as of the end of the current year, Ola reports the investment at: a. $400,000 b. $405,000 c. $404,340 d. $405,660 ANS: c $405,000 + [$11,340 – (3% x $400,000)] = $404,340 ©Cambridge Business Publishers, 2023 1-14 Advanced Accounting, 5th Edition 33. Topic: Accounting for HTM securities LO 1 On its balance sheet as of the end of the following year, Ola reports the investment at: a. $406,338 b. $403,662 c. $403,680 d. $400,000 ANS: b $404,340 + [($404,340 x 2.8%) – (3% x $400,000)] = $403,662 34. Topic: Accounting for HTM securities LO 1 A company invests in a 5-year debt security at a discount. The security is classified as HTM. Using the effective interest method, the company will report interest revenue on this security that is: a. Increasing over the years b. Decreasing over the years c. Equal each year d. Decreasing in the first and second year and increasing in the remaining years ANS: a 35. Topic: Accounting for HTM securities LO 1 A company invests in a 5-year debt security and classifies it as HTM. Market rates of interest for this type of investment decline while the company holds the security. Which statement is true? a. The company reports an unrealized loss on its income statement. b. The investment balance reported on the balance sheet is higher than the investment’s market value. c. The investment balance reported on the balance sheet is lower than the investment’s market value. d. The company reports an unrealized gain in OCI. ANS: c ©Cambridge Business Publishers, 2023 Test Bank, Chapter 1 1-15 36. Topic: Impairment of HTM investments LO 1 A held-to-maturity debt investment with a carrying value of $5,000,000 is determined to be impaired due to concerns about the investee’s ability to pay principal and interest. The investment’s current market value is $4,000,000. The bonds were originally sold at par. Which statement is true? a. A $1,000,000 loss is reported in OCI. b. A $1,000,000 loss is reported in income. c. No loss is reported. d. The investment account is directly reduced by $1,000,000. ANS: b 37. Topic: Impairment testing of investments LO 1 Which investments in debt securities and equity securities with no significant influence must be tested for impairment, if the investor does not elect the fair value option? a. All b. Trading and AFS debt securities and HTM securities c. AFS and HTM debt securities d. Equity securities ANS: c 38. Topic: Accounting for debt investments LO 1 Which unrealized gain affects a company’s earnings per share, if the investor does not elect the fair value option? a. Unrealized gain on HTM securities b. Unrealized gain on trading debt securities c. Unrealized gain on AFS debt securities d. Unrealized gain on trading and AFS debt securities ANS: b Use the following information to answer questions 39-42: Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 at the beginning of the current year. At the time, the book value of Fenton was $20,000,000. During the year, Fenton reported net income of $2,400,000 and other comprehensive income of $100,000. Fenton did not declare any dividends. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.