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Exam 13: Investments and Fair Value Accounting

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Question 31

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Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be

A) debit Cash, $105,000; credit Investment-Evans Company Bonds, $104,500, and Interest Revenue, $500
B) debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000
C) debit Cash, $104,500, and Interest Receivable, $500; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500
D) debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500

E) None of the above
F) A) and C)

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Question 32

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On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry to record the purchase would include a

A) debit to Investments for $132,000
B) credit to Cash for $132,000
C) debit to Investments for $132,240
D) credit to Investments for $240

E) A) and B)
F) B) and D)

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Question 33

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An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

Temporary investments

Match each of the definitions that follow with the appropriate investment term a-j) . -what occurs when a company purchases 50% or more of another company's stock

The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet.

All of the following are disadvantages of fair value use except

LM's, Inc. reported net income for the year ending December 31 of $483,500. Dividends paid during the year totaled $52,900. The company holds available-for-sale securities with an original cost of $162,000 and a fair value of $181,000 at the end of the year. They also hold trading securities with an original cost of $150,000 and a fair value of $147,000. Retained earnings on January 1 was $736,400 and accumulated other comprehensive income on January 1 as $16,200. Calculate the following balances to be reported in the financial statements dated December 31. a) Valuation allowance for available-for-sale securities b) Comprehensive income c) Retained earnings d) Accumulated other comprehensive income

Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the

When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds.

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is

Held-to-maturity securities

On July 5, Winter Company had a market price of $58 per share of common stock. For the prior year, Winter Co. had paid an annual dividend of $3.48 per share. What is the dividend yield for Winter Company?

Match each of the definitions that follow with the appropriate investment term a-j) . -a corporation controlled by another corporation that owns all or the majority of its voting stock

Changes in the value of available­for­sale securities

In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.

Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

Held-to-maturity securities

On January 1, the Valuation Allowance for Trading Investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000. Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments.

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. This purchase represents less than 20% ownership of the Lucas Company. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. Prepare the journal entries for the original purchase, dividend, and sale.