(Test Bank) Advanced Accounting

Hamlen,Huefner,Largay, 4

Business

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Author(s): Hamlen, Huefner, Largay

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TEST BANK Advanced Accounting 4e Hamlen, Huefner, Largay CHAPTER 1 Intercorporate Investments: An Overview MULTIPLE CHOICE 1. Topic: Accounting for equity securities with no significant influence LO 1 A company invests $ 300,000 in equity securities on November 30, 2019, and classifies them as investments with no significant influence . At December 31, 201 9, the company’s year -end, the securities have a fair value of $ 310,000. On February 1, 20 20, the company sells the sec urities for $ 295,000. Which statement is true regarding how this information is reported in the company’s financial statements? a. The company’s December 31, 2019 balance sheet reports the securities at $ 300,000, and a gain of $10,000 is reported on the 201 9 income statement. b. The company’s December 31, 2019 balance sheet reports the securities at $ 310,000, and a loss of $5,000 is reported on the 20 20 income statement. c. The company’s December 31, 2019 balance sheet reports the securities at $ 310,000, and a loss of $15,000 is reported on the 20 20 income statement. d. The company’s December 31, 2019 balance sheet reports the securities at $ 300,000, and no gain or loss appears on the 2019 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 rep orted 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 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 Va lue 12/31/ 19 Date Sold Selling Price Colt Company stock 9/20/1 9 $38,000 $37,000 2/10/ 20 $42,000 Dana Company stock 10/2/1 9 14,000 14,200 1/17/ 20 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 2019 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 20 20 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 20 20. The investment has no significant influence. At the end of 20 20, the company still holds the investment and it has a market value of $115. In 20 21, the company sells the investment for $108. How is this information reported in the company’s 20 20 and 20 21 income statements? a. $15 ga in on the 20 20 income statement; $7 loss on the 20 21 income statement. b. Does not appear on the 20 20 income statement ; $8 gain on the 20 21 income statement. c. Does not appe ar on the 20 20 income statement; $7 loss on the 20 21 income statement. d. $8 gain on the 20 20 income statement; d oes not appear on the 2021 income statement. ANS: a 6. Topic: Accounting for equity investments with no significant influence LO 1 On December 20, 20 20, a company pays $40,000 for an investment in equity securities with no significant influence . On December 31, 20 20, the company’s year -end, the stock has a market value of $3 7,000. The company sells the stock in 20 21 for $4 4,000. On its income statement, the company reports: a. A loss of $3,000 in 20 20, and a gain of $ 7,000 in 20 21 b. No gain or loss in 20 20, and a gain of $ 4,000 in 20 21 c. A gain of $ 4,000 in 20 20, and no gain or loss in 20 21 d. No gain or loss in 20 20, and a gain of $ 7,000 in 20 21 ANS: a 7. Topic: Accounting for equity investments with no significant influence LO 1 On October 25, 2020, a company pays $35,000 for an investment in equity securities, with no significant influence. On December 31, 2020, the company’s year -end, the stock as a market value of $36,000. The company sells the stock in 2021 for $32,000. How is the company ’s 2020 other comprehensive income affected by the above transactions in each year ? a. Increase of $1,000 in 2020, decrease of $1,000 in 2021 b. Increase of $1,000 in 2020, decrease of $4,000 in 2021 c. No effect in 2020, decrease of $3,000 in 2021 d. No effect on OCI in either year. ANS: d Use the following information on a company’s investments in debt securities to answer Questions 8 - 11. The company’s accounting year ends December 31. Investment Date of Acquisition Cost Fair Value 12/31/ 19 Date Sold Selling Price Colt Company bonds 9/20/1 9 $38,000 $37,000 2/10/ 20 $42,000 Dana Company bonds 10/2/1 9 14,000 14,200 1/17/ 20 13,000 8. 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 20 19 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 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 20 20 income? a. No gain or loss b. $3,000 gain c. $3,800 ga in d. $5,000 gain ANS: c ($42,000 - $37,000) + ($13,000 - $14,200) = $3,800 gain 10. 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 201 9 income? a. No gain or loss b. $800 loss c. $3,000 gain d. $200 gain ANS: a 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 reporte d as gain or loss on securities in 20 20 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 12. Topic: Accounting for debt investments classified as AFS LO 1 A company buys corporate bonds for $100 in 201 9. At the end of 201 9, the company still holds the investment and it has a market value of $115. In 20 20, the company sells the investment for $108. How is this information reported in the company’s 201 9 and 20 20 income statements if the investment is classified as an AFS investment ? a. $15 gai n on the 201 9 income statement; $7 lo ss on the 20 20 income statement b. Does not appe ar on the 201 9 income statement; $8 ga in on the 20 20 income statement c. Does not appe ar on the 201 9 income statement; $7 lo ss on the 20 20 income statement d. $8 gain on the 201 9 income statement; d oes not appe ar on the 20 20 income statement ANS: b $108 - $100 = $8 gain 13. Topic: Accounting for debt investments classified as AFS LO 1 A company invests $400,000 in corporate bonds on April 30, 20 20 and classifies them as available - for-sale securities. At December 31, 20 20, the company’s year -end, the securities have a fair value of $410,000. On February 1, 2021, the company sells the securities for $396,000. Which statement is true regarding how is t his information reported in the company’s financial statements? a. The company’s 20 20 balance sheet reports the securities at $410,000 and a gain of $10,000 is reported in 20 20 other comprehensive income. b. The company’s 20 20 balance sheet repo rts the se curities at $400,000 and a loss of $4,000 is reported on the 20 21 income statement. c. The company’s 20 20 balance sheet rep orts the securities at $410,000 and a loss of $4,000 is reported in 20 21 other comprehensive income. d. The company’s 20 20 balance sh eet rep orts the securities at $400,000 and no gain or loss appears in the 20 20 financial statements. ANS: a 14. Topic: Accounting for debt investments classified as AFS LO 1 A company invests $700,000 in corporate bonds in 201 9 and classifies them as available -for-sale. At the end of 201 9, the fair value of the securities is $650,000. In 20 20, the company sells the bonds for $706,000. Which statement is true concerning the entry made to record the sale of the bonds in 2020 ? 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 20 20 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 15. 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 16. Topic: Impairment of debt investments classified as AFS LO 1 A company paid $100,000 for corporate bonds and classified them as AFS. These bonds are currently carried at $102,000. At year -end, their market value is $90,000, 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 $2,000. c. An impairment loss of $12,000 is reported in income. d. The investment account is reduced by $10,000. ANS: b The adjusting entry is as follows: Reclassification of gain on AFS securities (OCI) 2,000 Impairment loss on AFS securities (income) 10,000 Investment in AFS securities 2,000 Allowance for credit losses 10,000 17. 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. Decrease $300,000 Decrease $300,000 b. Increase $ 300,000 No effect c. No effect Increase $ 200,000 d. No effect Decrease $ 200,000 ANS: d There is no impairment loss since market value is greater than market value. The entry to record the decline in value is : OCI 200,000 Investment in AFS securities 200,000 18. 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 $1 50,000 is reported in income. c. The investment account is directly reduced by $1 50,000. 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 19. Topic: Impairment of debt securities classified as AFS LO 1 A company holds available -for-sale corporate bonds purchased for $100,000. Current value of these securities is $ 95,000 and the decline in value was properly recorded in OCI when the decline occurred. The company now 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. No entry is made since the securities are already reported at $ 95,000. b. Debit OCI and credit investments for $ 5,000. c. Debit OCI and credit allowance for credit losses for $ 5,000. d. Debit loss on securities (income) and credit OCI for $ 5,000. ANS: d The adjusting entry is: Impairment loss (income) 5,000 Investment in AFS securities 5,000 Reclassification of loss (OCI) 5,000 Allowance for credit losses 5,000 20. Topic: Impairment of debt securities classified as AFS LO 1 A company holds an investment in corporate bonds classified as AFS. At the beginning of 20 20, this investment is repo rted at a value of $4,000,000. Gains of $500,000 have been previously reported, and no impairm ent losses have been reported. At the end of 20 20, 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 2020 financial statements ? a. $500,000 other comprehensive loss; $1,500,000 los s in income b. $2,000,000 loss in income ; no chang e in other comprehensive income c. $2,000,000 other comprehensive loss; not r eported in income d. $1,500,000 other comprehensive loss; not report ed in income ANS: a The entry to record the impairment loss is: Reclassification of gain on AFS securities (OCI) 500,000 Impairment l oss (income) 1,500,000 Investment in AFS securities 500,000 Allowance for credit losses 1,500,000 21. 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 22. 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 Use the f ollowing information to answer Q uestions 23-25: A company holds a $100,000 face value corporate bond, bought January 1, 20 19, paying 3% annually on December 31, and maturing December 31, 20 21. 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. 23. Topic: Accounting for HTM securities LO 1 What amount will the company report as interest revenue on the bond for 2020? a. $3,000 b. $2,058 c. $2,039 d. $2,000 ANS: c 2019 investment amortization = (3% x $100,000) – (2% x $102,884) = $942 2020 interest revenue = ( $102,884 – $942) x 2% = $2,039 24. Topic: Accounting for HTM securities LO 1 What is the approximate net entry to record receipt of interest and principal on December 31, 2021, 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 Inter est 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 2019 investment amortization = (3% x $100,000) – (2% x $102,884) = $942; new investment balance = $102,884 – $942 = $101,942 2020 investment amortization = (3% x $100,000) – (2% x $101,942) = $962; new investment balance = $101,942 – $962 = $100,98 0 Small discrepancy due to rounding to nearest dollar. 25. Topic: Impairment of HTM securities LO 1 Assume the market value of the bond on December 31, 201 9 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 201 9 income statement? a. $30,000 b. $32,884 c. $31,942 d. $27,000 ANS: c Amortized cost (book valu e) at the end of 201 9, after interest revenue is recorded, is $101,942. Therefore the impairment loss is $70,000 – $101,942 = $31,942 , reported in income. Use the f ollowing information to answer Q uestions 26 – 28: On January 1, 20 19, Ola Company paid $388,900 for a $400,000 face value 3% corporate bond yielding 4%, interest paid annually on December 31, and classifie d it as held -to-maturity. Ola’s reporting year ends December 31. 26. Topic: Accounting for HTM securities LO 1 On its 201 9 income statement, Ola reports interest revenue on the corporate bond of : a. $12,000 b. $11,667 c. $15,556 d. $16,000 ANS: c 4% x $388,900 = $15,556 27. Topic: Accounting for HTM securities LO 1 On its 201 9 balance sheet, Ola reports the invest ment at : a. $389,678 b. $392,965 c. $400,000 d. $392,456 ANS: d $388,900 + [$15,556 – (3% x $400,000)] = $392,456 28. Topic: Accounting for HTM securities LO 1 On its 20 20 balance sheet, Ola reports the investment at : a. $395,981 b. $397,296 c. $396,154 d. $398,231 ANS: c $392,456 + [(392,456 x 4%) – (3% x $400,000)] = $396,154 29. 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 30. 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 inves tment 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 31. Topic: Impairment of HTM investments LO 1 A held -to-maturity debt investment with a book value of $ 6,000,000 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. Assume the bonds were originally sold at par. Which statement is true? a. A $2,000,000 loss is reported in income. b. A $2,000 ,000 loss is reported in OCI. c. No loss is reported. d. The investment account is directly reduced by $2,000,000. ANS: a 32. Topic: Impairment testing of investments LO 1 Which investments in debt securities and equity securities with no significant influence must be tested for impairment? a. All b. Trading and AFS debt securities and HTM securities c. AFS and HTM debt securities d. Equity securities ANS: c 33. Topic: Accounting for debt investments LO 1 Which unrealized gain affects a company’s earnings per share? 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 34-37: Exeter Company acquires 35% of the voting stock of Fenton Corporation for $ 7,000,000 on January 1, 2020. At the time, the book value of Fenton was $ 20,000,000. During 20 20, Fenton reported net income of $3,000 ,000 and declared and paid dividends of $ 500,000. 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. 34. Topic: Equity method investments LO 2 What is the investment balance on Exeter’s balance sheet on December 31, 20 20? a. $7,000,000 b. $7,875 ,000 c. $9,000 ,000 d. $8,050,000 ANS: b $7,000,000 + [35% x ( $3,000 ,000 – $500,000) ] = $7,875 ,000 35. Topic: Equity method investments LO 2 Now assume Fenton’s b ook value at the date of acquisition was $ 15,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of five years. Straight -line amortization is appropriate. What amount does Exeter report as equity in net income of Fenton for 20 20? a. $ 700,000 b. $3,000 ,000 c. $ 927,500 d. $1,050,000 ANS: a Intangibles = $7,000,000 – (35% x $15,000,000) = $1,750 ,000 Amortization = $1,750 ,000/ 5 = $350,000 ($3,000 ,000 x 35%) – $350 ,000 = $700,000 36. Topic: Equity method investments LO 2 Assume the same information as in question 35. What is the investment balance on December 31, 20 20, reported on Exeter’s balance sheet? a. $7,550 ,000 b. $7,525 ,000 c. $7,700,000 d. $7,000,000 ANS: b $7,000,000 + $700,000 – (35% x $500,000) = $7,525 ,000 37. Topic: Equity method investments LO 2 Now assume Exeter’s 2020 ending inventory contains $ 125,000 in merchandise purchased from Fenton , at a markup of 25% on cost. What is the impact on 20 20 equity in net income? a. $8,750 lower b. $25,000 lower c. $35,000 lower d. None ANS: a [$125,000 – ($125,000/1. 25)] x 35% = $8,750 38. Topic: Equity method investment s LO 2 Monroe Company owns 40% of the voting stock of Nartal Industries, acquired at book value. Nartal reports income of $600,000 for 20 20. Nartal regularly sells merchandise to Monroe at a markup of 30% on cost. Monroe’s 20 20 beginning inventory includes $156,000 purchased from Nartal. Its 2020 ending inventor y includes $260,000 purchased from Nartal. Monroe uses the equity method to report its investment in Nartal. Equity in net income of Nartal for 2020 is: a. $249,600 b. $230,400 c. $216,000 d. $264,000 ANS: b 40% x [$600,000 + ($156,000 – ($156,000/1.3)) – ($260,000 – ($260,000/1.3))] = $230,400 39. Topic: Equity method investments LO 2 Acton Company uses the equity method to report its investment in 35% of the stock of Bates Company. Its original investment cost exceeded 35% of the book value of Bates by a large amount. Acton is computing equity in net income of Bates for the current y ear, which is five years after the acquisition. Which situation below requires Acton to adjust the equity in net income number for the current year, for write -offs of basis differences ? Attribute the difference to : a. Goodwill b. Brand names with indefi nite life c. Databases with a 3 -year life d. Plant assets with a 20 -year life ANS: d