FAR 3 Flashcards
An investor purchased a bond classified as a held-to-maturity investment between interest dates at a discount.
At the purchase date, the carrying amount of the bond is more than the
When a bond is purchased at a discount, the price paid is less than face value. Any cash paid to the seller for accrued interest is debited to interest receivable, not to the bond investment. Thus, the carrying value is the portion of the total amount paid attributable to the total bond price, exclusive of accrued interest.
The carrying value must be less than the cash paid to the seller, which includes accrued interest.
On October 1, 2004, Park Co. purchased 200 of the $1,000 face value, 10% bonds of Ott, Inc., for $220,000, including accrued interest of $5,000.
The bonds, which mature on January 1, 2011, pay interest semiannually on January 1 and July 1. Park used the straight-line method of amortization and appropriately recorded the bonds as held-to-maturity.
On Park’s December 31, 2005 Balance Sheet, the bonds should be reported at:
Held-to-maturity investments in bonds are reported at amortized cost. The discount or premium at purchase is amortized during the term of the bonds so that the carrying value is equal to face value at maturity. This is the amount to be received at maturity.
The purchase price, exclusive of accrued interest, is $215,000 ($220,000-$5,000). Accrued interest is not included in the investment carrying value. The premium paid on the bonds is $15,000 because the face value of the bonds is $200,000 (200 x $1,000). The term of holding the bonds is from October 1, 2004 to January 1, 2011, a period of six years and three months or 75 months. The period from purchase to the December 31, 2005 Balance Sheet is 15 months. Amortization of the premium reduces the investment carrying amount because only face value, which is less than the amount paid for the investment, will be received at maturity.
Therefore, the ending 12/31/05 investment carrying value is $212,000 = $215,000-($15,000/75)15.
On January 1, 2004, Purl Corp. purchased, as a long-term investment, $500,000 face value Shaw, Inc. 8% bonds for $456,200. The bonds were purchased to yield 10% interest. Purl has the positive intent and ability to hold the bonds until maturity on January 1, 2010. The bonds pay interest annually on January 1, and Purl uses the interest method of amortization.
What amount (rounded to nearest $100) should Purl report on its December 31, 2005 Balance Sheet for this long-term investment?
A held-to-maturity (HTM) investment purchased at a discount increases in value as maturity approaches, at which time the book value of the investment must be the face value of the investment. During the life of an HTM investment the investor carries and reports the investment at amortized cost.
Thus, the ending investment balance at December 31, 2005 is $456,200 + $5,620 + $6,182 = $468,002, or $468,000 (rounded to the nearest $100 as required by the problem).
Dec 14
Interest receivable .08($500,000) 40,000
Investment in HTM bonds 5,620
Interest revenue .10($456,200) 45,620 Dec 15 Interest receivable .08($500,000) 40,000
Investment in HTM bonds 6,182
Interest revenue .10($456,200 + $5,620) 46,182
On December 29, 2005, BJ Co. sold an equity security investment that had been purchased on January 4, 2004. BJ owned no other marketable equity security.
An unrealized loss was reported in the 2004 Income Statement. A realized gain was reported in the 2005 Income Statement.
Was the marketable equity security classified as available-for-sale (AFS), and did its 2004 market price decline exceed its 2005 market price recovery?
The security cannot be classified as available-for-sale because the unrealized gains and losses are recognized in the Income Statement. Unrealized gains and losses on available-for-sale securities are recognized in owners’ equity, not earnings.
On July 1, 2004, York Co. purchased, as a held-to-maturity investment, $1,000,000 of Park, Inc.’s 8% bonds for $946,000, including accrued interest of $40,000.
The bonds were purchased to yield 10% interest. The bonds mature on January 1, 2011 and pay interest annually on January 1. York uses the effective interest method of amortization.
In its December 31, 2004 Balance Sheet, what amount should York report as investment in bonds?
Initial investment cost: $946,000-$40,000 =
$906,000
Interest revenue for 2004: $906,000(.10)(1/2 year) = $45,300
Less cash interest for 6 months: $1,000,000(.08)(1/2) = (40,000)
Equals amortization of discount (increases investment)
5,300
Investment in bonds balance at the end of 2004
$911,300
Jent Corp. purchased bonds at a discount of $10,000. Jent classified the bonds as available-for-sale and subsequently sold them at a premium of $14,000. At the time of the sale, $2,000 of the discount had been amortized.
What amount should Jent report as gain on the sale of bonds
The book value at the date of sale was $8,000 below face value ($10,000 original discount-$2,000 amortization). The market value of the bonds at date of sale was $14,000 above face value ($14,000 premium). Thus, the difference between the price of the bonds at sale and the book value was $22,000 ($8,000 + $14,000). That difference is the gain on sale.
A marketable equity security is transferred from the held for trading portfolio to the available-for-sale portfolio. At the transfer date, the security’s cost exceeds its market value.
What amount is used at the transfer date to record the security in the available-for-sale portfolio?
Reclassifications between the two investment categories are always recorded at market value. The reclassification is treated as if the security in the old classification was sold, and the security in the new classification was purchased.
Which, if either, of the following statements concerning the transfer of investments between categories under IFRS No. 9 is/are correct?
Statement I is correct; Statement II is not correct. Only investments in debt securities may be transferred between categories; equity securities may not be transferred between categories (Statement I). When investments are transferred between categories, financial statements of prior periods presented for comparative purposes must be restated (Statement II).
Inco, Inc., a U.S. entity, has elected to prepare financial statements in accordance with IFRS to provide to its foreign suppliers. Inco has the following information concerning an investment in the bonds of Tryco, Inc., as of December 31, 2011:
Par value $100,000
Original cost 108,000
Current premium 3,500
Fair value 105,000
Inco’s business model is to regularly invest in debt to receive the cash flow provided by interest and the repayment of principal on maturity. The bonds are not associated with any other asset or liability. Which one of the following is the amount at which Inco should report its investment in Tryco in its December 31, 2011 IFRS-based Statement of Financial Position?
Under IFRS No. 9, investments in debt securities made under an entity’s business model plan to make and hold such investments solely to receive cash from interest and principal repayment, and when there is no accounting mismatch, should be reported at amortized cost. Amortized cost is par value ($100,000) plus the unamortized premium ($3,500), or $100,000 + $3,500 = $103,500, the correct answer.
Lee, Inc. acquired 30% of Polk Corp.’s voting stock on January 1, 2004 for $100,000. During 2004, Polk earned $40,000 and paid dividends of $25,000. Lee’s 30% interest in Polk gives Lee the ability to exercise significant influence over Polk’s operating and financial policies.
During 2005, Polk earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2005, Lee sold half of its stock in Polk for $66,000 cash.
What should the gain on sale of this investment in Lee’s 2005 Income Statement be?
$12,250, the correct gain amount, and the amount equals the proceeds of $66,000 less the carrying value of the 1/2 of the investment sold.
Lee uses the equity method because it has significant influence over the investee. The equity method requires that the investor recognize its share of undistributed earnings of the investee in its own income.
The carrying value of the portion of the investment sold reflects 1/2 of the entire income of the investee for 2005, but only the first dividend. The second dividend was declared after the sale and thus could not have affected the investment carrying value on the date of sale.
The carrying value of the entire investment at the date of sale equals:
$100,000 + .30[$40,000-$25,000 + .5($50,000)-$15,000] = $107,500.
The gain, therefore, equals: $66,000-.5($107,500) = $12,250
Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 2, 2004.
Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During 2004, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 2005, and $200,000 for the year ended December 31, 2005. On July 1, 2005, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 2005.
Before income taxes, what amount should Grant include in its 2004 Income Statement as a result of the investment?
Grant uses the equity method because it has significant influence over South. Under the equity method, the investor recognizes its share of the investee earnings in its own income.
Thus, Grant will recognize $24,000 (.30 x $80,000) as equity in the earnings of South, in its own income.
Pare, Inc. purchased 10% of Tot Co.’s 100,000 outstanding shares of common stock on January 2, 2004, for $50,000.
On December 31, 2004, Pare purchased an additional 20,000 shares of Tot for $150,000. There was no goodwill as a result of either acquisition, and Tot had not issued any additional stock during 2004. Tot reported earnings of $300,000 for 2004.
What amount should Pare report in its December 31, 2004, Balance Sheet as investment in Tot?
This question is difficult because it is easy to forget that once the investor has acquired a sufficient percentage of the stock to use the equity method, which is retroactively applied to earlier periods for which the holdings were not sufficient to use the equity method. In these earlier periods, only the actual ownership percentage is applied.
In this question, the equity method becomes the required method only at the very end of the year. So, only the 10% is used in applying the equity method for the purpose of recognizing income, which in turn increases the investment account.
The ending balance of the investment account is then: $50,000 (original investment) + $150,000 (second investment) + $30,000 (.10 x $300,000, which is the equity in earnings of the investee) = $230,000.
U.S. entities, Joco, Inc. and Vico, Inc., formed a corporate joint venture, JoViCo, Inc., with each holding a 50% ownership interest. Joco contributed $100,000 cash and equipment that had an original cost of $50,000, accumulated depreciation of $5,000, and a fair value of $48,000. At which one of the following amounts will Joco record its investment in the JoViCo joint venture?
The investment of the equipment should be recorded at its carrying value ($50,000-$5,000 = $45,000). Therefore, the total investment should be recorded at $100,000 cash + $45,000 equipment = $145,000.
Jacko, Co., a 50% owner of Venture Co., a jointly controlled entity, contributed to Venture a nonmonetary asset with an original cost of $200,000, accumulated depreciation of $50,000, and a fair value of $180,000. Under IFRS, which one of the following is the amount of gain, if any, Jacko should recognize on its contribution to Venture Co.?
A gain should be recognized by Jacko for the share of ownership held by others (50%) attributable to the excess of the fair value of the asset over its carrying value. The excess of fair value ($180,000) over carrying value ($200,000-$50,000 = $150,000) is $30,000 ($180,000- $150,000). Therefore, Jacko should recognize .50 x $30,000 = $15,000 as a gain.
On March 4, 2004, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share.
On September 26, 2004, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, 2005. On September 30, 2004, LVC’s common stock had a market value, exrights, of $95 per share and the stock rights had a market value of $5 each.
What amount should Evan report on its September 30, 2004, Balance Sheet for investment in stock rights?
The original stock investment cost is allocated to the stock and the rights based on their relative market values. Total market value of the stock is $95,000, and of the rights is $5,000. The original cost of the stock is $80,000. Thus the investment in stock rights is reported at [$5,000/($5,000 + $95,000)]$80,000 = $4,000.
