FAR: Post Assessment: Equity & Debt Investments: 4/11/2018 Flashcards
Pare, Inc. purchased 10% of Tot Co.’s 100,000 outstanding shares of common stock on January 2, Year 1, for $50,000.
On December 31, Year 1, 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 Year 1. Tot reported earnings of $300,000 for Year 1.
What amount should Pare report in its December 31, Year 1, Balance Sheet as investment in Tot?
1) $170,000
2) $200,000
3) $230,000
4) $290,000
200,000
The investor owned 30% only at the very end of the year. Prospective, not retroactive, application of the equity method uses the percentage ownership in effect at the time the equity method became effective and applies this percentage going forward.
On January 10, Year 1, Wayne, Inc., purchased 5,000 of Jason bonds at $60 par per bond. The purchase is a long-term investment and is appropriately reflected in Wayne’s balance sheet in an available-for-sale securities portfolio at December 31, Year 1. The fair value of Wayne’s investment in Jason’s bonds are as follows:
Fair value Date Per bond Total December 15, Year 1 $47 $235,000 December 31, Year 1 46 230,000
On December 15, Year 1, Wayne determined that there had been an other-than-temporary decline in the fair value. What amount should Wayne record as a loss in its income statement for the year ended December 31, Year 1?
1) $0
2) $ 5,000
3) $65,000
4) $70,000
$70,000
The loss realized from an other-than-temporary decline in the fair value of available-for-sale securities is measured as the difference between the cost and fair value on the balance sheet date of the reporting period for which the assessment is made.
Cost $300,000 - FV @ 12/31/X1 $230,000 = $70,000
During Year 1, Anthony Company purchased debt securities as a long-term investment. Pertinent data are as follows:
Security Cost Fair value at 12/31/Y1 A $ 20,000 $ 17,000 B 40,000 30,000 C 90,000 92,000 $150,000 $139,000
Anthony appropriately carries these securities at fair value, and the decline in value of Security B is not considered to be temporary. The change in value of securities A and C is considered to be temporary. Anthony does not elect to use the fair value option in reporting financial assets. The amount of loss on these securities that will appear on Anthony’s balance sheet as a component of “Accumulated other comprehensive income” at 12/31/Y1 should be
1) $ 1,000.
2) $ 3,000.
3) $11,000.
4) $13,000.
$1,000
Since these equity securities were not purchased with the intent to sell them in the near term for a quick profit, they must be classified as available-for-sale securities. Any unrealized gain or loss on available-for-sale securities is to be reported net as a separate component of stockholders’ equity entitled “Accumulated other comprehensive income.” However, in the case of impairment, the security is written down to fair value and the amount of the write-down is reported in earnings as a realized loss. Thus, the $10,000 loss on Security B would go to the income statement while the $1,000 ($3,000 loss on A − $2,000 gain on C) unrealized loss on the remaining portfolio would appear separately in the stockholders’ equity section of Anthony’s balance sheet at 12/31/Y1
On January 2, Year 1, Winn Company purchased as a long-term investment 5,000 bonds of Pyle Corp. at par for $70 per bond. On December 31, Year 1, the fair value of the bonds was $75 per bond.
On December 18, Year 2, Winn needed additional cash for operations and sold all 5,000 bonds for $100 per bond. Winn’s income tax rate was 40% for Year 2.
For the year ended December 31, Year 2, Winn should include in its income from continuing operations a realized gain on disposal of long-term investment of
1) $0.
2) $ 90,000.
3) $125,000
4) $150,000
$150,000
Since these securities were not purchased with the intent to sell in the near term for a quick profit, they must be classified as available-for-sale securities. A realized gain on the disposal of such securities equals the excess of the proceeds (5,000 × $100 = $500,000) over the carrying value before recognition of any unrealized gains or losses (which equals cost) of the investment [5,000 × $70 = $350,000]. Therefore, the realized gain is $150,000 ($500,000 − $350,000). Note that the tax rate (40%) is not used; components of income from continuing operations are reported gross with income tax expense deducted from the total income from continuing operations.
