FAR - Cash & Equivalents Flashcards
Review of Difficult MCQs
On January 1, Welling Company purchased 100 of the $1,000 face value, 8%, 10-year bonds of Mann, Inc. The bonds mature on January 1 in 10 years, and pay interest annually on January 1. Welling purchased the bonds to yield 10% interest. Information on present value factors is as follows:
Present value of $1 at 8% for 10 periods
0.4632
Present value of $1 at 10% for 10 periods
0.3855
Present value of an annuity of $1 at 8% for 10 periods
6.7101
Present value of an annuity of $1 at 10% for 10 periods
6.1446
How much did Welling pay for the bonds?
An investment in a bond should be recorded at its fair value, i.e., the present value of its cash flows discounted at the market (yield) rate of interest. The present value of the investment has two components: the value of the periodic cash interest payments and the value of the bond proceeds at maturity. The interest payment at 8% on each bond will be $80 per year for 10 years. Applying a present value factor of 6.1446 (annuity, 10 periods, 10%) gives a present value of the periodic interest payments of $491.57. The proceeds of each bond at maturity of $1,000 are multiplied by a factor of .3855 (10%, 10 periods) for a present value of $385.50. The resulting total price per bond of $877.07 ($491.57 + $385.50) multiplied by 100 bonds gives a total payment of $87,707.
Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel’s operations and uses the equity method to account for the investment in the common stock. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year 1?
Under the equity method, the receipt of a cash dividend from the investee should be credited to the investment account. It is a return of, not a return on, the investment. However, the equity method is not applicable to preferred stock. Thus, Green should report $60,000 of revenue when the preferred dividends are declared.
Election of the fair value option (FVO) for financial assets
Results in recognition of unrealized gains and losses in earnings of a business entity.
A business measures at fair value the eligible items for which the FVO election was made at a specified election date. The unrealized gains and losses on financial assets are reported in earnings at each subsequent reporting date.
On January 2, Well Co. purchased 10% of Rea, Inc.’s outstanding common shares for $400,000, which equaled the carrying amount and the fair value of the interest purchased in Rea’s net assets. Well did not elect the fair value option. Because Well is the largest single shareholder in Rea, and Well’s officers are a majority on Rea’s board of directors, Well exercises significant influence over Rea. Rea reported net income of $500,000 for the year and paid dividends of $150,000. In its December 31 balance sheet, what amount should Well report as investment in Rea?
The equity method should be used because Well Co. exercises significant influence over Rea. The investment in Rea equals $435,000 [$400,000 investment + ($500,000 net income × 10%) – ($150,000 of dividends × 10%)].
Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were included in Long’s other comprehensive income. How would Long classify this investment?
Correct: Available-for-sale debt securities are measured at fair value at each balance sheet date. Unrealized holding gains and losses resulting from the remeasurement to fair value are reported in other comprehensive income (OCI).
Incorrect 1:Unrealized holding gains and losses on trading debt securities are included in earnings, not in other comprehensive income.
Incorrect 2:An investment in marketable equity securities that does not result in significant influence or control over the investee is measured at fair value through net income. Thus, both realized and unrealized holding gains and losses are recognized in net income, not in OCI.
Incorrect 3:Held-to-maturity securities are reported at amortized cost, not at fair value. Realized gains and losses and interest income are included in earnings, not in other comprehensive income.
On July 1, Year 2, York Co. purchased as a long-term investment $1 million 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, Year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, Year 2, balance sheet, what amount should York report as investment in bonds?
$911,300
The bond investment’s original balance was $906,000 ($946,000 price – $40,000 accrued interest) because the carrying amount does not include accrued interest paid. Under the effective interest method, interest income equals the yield or effective interest rate times the carrying amount of the bonds at the beginning of the interest period. The amortization of premium or discount is the difference between this interest income and the periodic cash payments. For Year 2, interest income is $45,300 [$906,000 × 10% × (6 ÷ 12)], and the actual interest is $40,000 [$1,000,000 × 8% × (6 ÷ 12)]. Hence, the carrying amount at year-end is $911,300 [$906,000 + ($45,300 – $40,000)].
On December 31, Ott Co. had investments in equity securities as follows:
Cost: $30,000
Fair Value:$28,000
Ott’s December 31 balance sheet should report the equity securities as:
An investment in equity securities that does not result in significant influence or control over the investee is reported at fair value, and unrealized holding gains and losses are included in earnings. Consequently, the securities should be reported as $28,000.
On October 1, Year 1, Park Co. purchased 200 of the $1,000 face amount, 10% bonds of Ott, Inc., for $220,000, including accrued interest of $5,000. The bonds, which mature on January 1, Year 8, pay interest semiannually on January 1 and July 1. Park used the straight-line method of amortization and appropriately recorded the bonds as a long-term investment. On Park’s December 31, Year 2, balance sheet, the bonds should be reported at
$212,000
The carrying amount of a bond investment does not include the amount of accrued interest paid. Thus, these bonds were initially recorded at $215,000 ($220,000 – $5,000). Under the straight-line method, the $15,000 premium should be amortized over the 75-month period extending from October 1, Year 1, to January 1, Year 8. For the 15 months from October 1, Year 1, through December 31, Year 2, $3,000 of the premium [$15,000 × (15 months ÷ 75 months)] should be amortized. The unamortized premium of $12,000 ($15,000 – $3,000) plus the $200,000 (200 bonds × $1,000 face amount) maturity amount of the bonds equals a carrying amount at December 31, Year 2, of $212,000.
On January 2, Year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod’s equity was $500,000. The carrying amounts of Pod’s identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for Year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in Pod Co.?
$280,000
The purchase price is allocated to the fair value of the net assets acquired, with the remainder allocated to goodwill. The fair value of Kean’s 30% interest in Pod’s net assets is $210,000 [($500,000 + $200,000) × 30%]. Goodwill is $40,000 ($250,000 – $210,000). The equity method requires the investor’s share of subsequent net income reported by the investee to be adjusted for the difference at acquisition between the fair value and the carrying amount of the investee’s net assets when the net assets are sold or consumed in operations. The land is assumed not to be sold, and the equity method goodwill is not amortized or separately reviewed for impairment. Thus, Kean’s share of Pod’s net income is $30,000 ($100,000 declared income × 30%), and the investment account at year-end is $280,000 ($250,000 acquisition balance + $30,000 investment income).
According to the FASB’s conceptual framework, the usefulness of providing information in financial statements is subject to the constraint of
Cost
Grant, Inc., acquired 30% of South Co.’s voting stock for $200,000 on January 2, Year 1, and did not elect the fair value option. The price equaled the carrying amount and the fair value of the interest purchased in South’s net assets. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During Year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the 6 months ended June 30, Year 2, and $200,000 for the year ended December 31, Year 2. On July 1, Year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, Year 2.
In Grant’s December 31, Year 1, balance sheet, what should be the carrying amount of this investment?
$209,000
Grant acquired the investment for $200,000. The investment was debited for Grant’s share of South’s Year 1 earnings ($80,000 × 30% = $24,000) and credited for Grant’s share of Year 1 cash dividends ($50,000 × 30% = $15,000). Grant’s December 31, Year 1, carrying amount for its investment in South is therefore $209,000 ($200,000 + $24,000 – $15,000).
Debt securities held primarily for sale in the near term to generate income on short-term price differences are known as
Correct: Trading Securities
Trading debt securities are bought and held primarily for sale in the near term. They are purchased and sold frequently. They are initially recorded at cost but are remeasured at fair value at each balance sheet date, with the unrealized holding gains or losses recognized in earnings.
Incorrect:Held-to-maturity securities are not held primarily for sale in the near term.
Incorrect:Available-for-sale debt securities are those not classified as trading or held-to-maturity.
Incorrect:A discontinued operation is a major component of an entity that has been disposed of or is classified as held for sale.
Investments classified as held-to-maturity are measured at
Correct: Amortized cost, with no unrealized gains or losses reported. Assuming the fair value option has not been elected, held-to-maturity securities are reported at amortized cost, with no unrealized gains or losses reported.
Incorrect: Replacement cost, with no unrealized gains or losses reported. Held-to-maturity securities are reported at amortized cost, with no unrealized gains or losses reported.
Incorrect: Fair value, with unrealized gains and losses reported in net income. Trading debt securities are reported at fair value, with unrealized gains and losses reported in net income.
Incorrect: Fair value, with unrealized gains and losses reported in other comprehensive income (OCI). Assuming the fair value option has not been elected, available-for-sale debt securities are reported at fair value, with unrealized gains and losses reported in other comprehensive income (OCI).
COGS = ?
COGS using Cost of Sales Formula = ?
Cost of goods sold equals cost of goods manufactured, plus beginning finished goods inventory, minus ending finished goods inventory. Thus, the cost of goods manufactured equals cost of sales, minus beginning finished goods, plus ending finished goods
An investor uses the equity method to account for an investment in common stock. After the date of acquisition, the investment account of the investor is
Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the investee. After the date of acquisition, an equity-based investment in common stock account of an investor is increased by its share of the earnings of the investee, decreased by its share of the losses of the investee, and decreased by its share of cash dividends received from the investee.
