Unit 2 Quiz Flashcards
During Year 1, Company A purchases an investment of 10,000 shares of Company B common stock for $780,000, plus $10,000 of brokerage fees. Company A sold all of the company B stock for $84 per share when the fair value was $810,000 at the close of the business day.
Which amount should be recorded for the realized gain on the sale of stock in Year 2?
$50,000
($84 x 10,000) – ($780,000 + $10,000) = $50,000.
Which valuation method is used to record securities which are categorized as trading securities?
Fair Value
Company A owns 35% of Company B. During the calendar year, Company B had net earnings of $300,000 and paid dividends of $30,000. Company A mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. There was no adjustment for fair value.
How will this error impact the investment account for Company A?
Understate it by $94,500
(35% x $300,000) - (35% x $30,000) = $94,500 The investment account would increase by this amount using the equity method.
Company A has a 10% ownership in Company B. Company B was purchased on January 1, Year 1, at a cost of $3,000,000. At the end of Year 1, Company B reports net income of $500,000 and paid total dividends of $40,000.
Which value should be used for the investment in Company B on Company A’s balance sheet at the end of Year 1?
$3,000,000
Since the ownership in Company B is less than 20%, the investment is carried at cost.
A parent company owns 90% of the subsidiary company’s outstanding common stock.
How should the company account for the income of the subsidiary?
An increase to the equity investment account
Holdings of more than 50% need to use the equity method, and an increase in net income is proportionately shared by increasing the equity investment account.
Which statement describes the accounting treatment for the transfer of debt securities from available-for-sale to held-to-maturity?
- Unrealized gains or losses at the date of transfer are amortized over the remaining life of the securities.
- Unrealized gains or losses at the date of transfer are recognized in income.
- Realized gains or losses at the date of transfer are amortized over the remaining life of the securities.
- Realized gains or losses at the date of transfer are recognized in income.
Unrealized gains or losses at the date of transfer are a separate component of stockholders’ equity and are amortized over the remaining life of the securities.
Which security can be classified as a held-to-maturity security?
Common stock
Call warrant
Class A stock
Debt security
Debt Security
A debt security has a maturity date and can be classified as held-to-maturity.
Which item is used to calculate impairments of held-to-maturity debt investments?
Current expected credit loss model
Discounted cash flows
Selling price
Fair value test
Current expected credit loss model (CECL)
Impairment of debt investments are measured using the current expected credit loss (CECL) model.
During Year 1, Company A purchased 26,000 shares of Company B common stock for $260,000. The fair value of the shares was $320,000 at December 31, Year 1. Company A sold all of the Company B stock for $10.25 per share on May 1, Year 2, incurring $8,000 in brokerage commissions.
Which amount should Company A report as a realized gain or loss on the sale of stock in Year 2?
$1,500 realized loss
($10.25 x 26,000 -$8,000) - $260,000 = ($1,500)
Which equity securities should be accounted for using the equity method?
Securities where a company has holdings between 20% and 50%
The investor has significant influence but not controlling influence, so the equity method should be used.
