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Exam 12: Investments

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Question 21

Multiple Choice

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Trading securities are most commonly found on the books of:

A) Oil companies.
B) Manufacturing companies.
C) Banks.
D) Foreign subsidiaries.

E) B) and D)
F) None of the above

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Question 22

Multiple Choice

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In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:

A) Investing activities.
B) Operating activities.
C) Financing activities.
D) Noncash financing activities.

E) A) and B)
F) B) and C)

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Question 23

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Eastwood Enterprises owns 30,000 shares of the Van Cleef Company (5% of the outstanding equity of Van Cleef). Eastwood is trying to determine Van Cleef's fair value. The relevant facts are as follows:  Eastwood bought the Van Cleef shares earlier in the accounting period for $10/share at a time when the shares were publicly traded on the New York Stock Exchange.  Since Eastwood bought the shares, Van Cleef has been delisted and there is no longer an active market in the Van Cleef shares.  Eastwood's internal valuation specialist estimates the Van Cleef shares to be worth $8/share. Eastwood plans to continue holding the shares, but may someday sell them if their value increases sufficiently. Required: (1) What is the fair value of Eastwood's investment in Van Cleef? Briefly explain your choice of fair value, and relate that choice to the requirements of SFAS No. 157, "Fair Value Measurement." (2) Write a journal entry to record any necessary fair value adjustment.

Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet?

During 2009, Largent Enterprises purchased stock as follows: May 17, Purchased 1,000 shares of Nugent common stock for $80 per share. July 12, Purchased 400 shares of Alfredo common stock at $60 per share, plus a $600 brokerage commission. Largent accounts for these investments as securities available for sale. At December 31, 2009, the market values of the securities were as follows: Required: (1.) Prepare the journal entries to record the acquisition of the two investments. (2.) Prepare any necessary adjusting entries assuming the stocks are both classified as available for sale securities. $\begin{array} { l c } \text { Security } & \text { Market Value per Share } \\\hline \text { Nugent } & \$ 72 \\\text { Alfredo } & \$ 64\end{array}$

Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchange, and the prevailing price on that exchange indicates that Dyckman's investment is worth $20,000. Yet, Dyckman management believes that the stock market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on their balance sheet at:

The equity method is in many ways a partial consolidation.

On March 17, 2009, Union Corporation purchased 5,000 shares of AZQ common stock as a long-term investment at $40 per share. On December 31, 2009, and December 31, 2010, the market value of the AZQ stock is $42 and $43, respectively. Required: (1.) What is the appropriate reporting category for this stock? Why? (2.) Prepare the adjusting entry on December 31, 2009. (3.) Prepare the adjusting entry on December 31, 2010.

Prepare the journal entry (in thousands) that Kirby made at the end of 2008 to record the information disclosed above.

Hawk Corporation purchased ten thousand shares of Diamond Corporation stock in 2006 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2007 and $65 on December 31, 2008. During 2009, Hawk sold all of its Diamond stock at $70 per share. In its 2009 income statement, Hawk would report:

Fredo, Inc purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2009. Sonny recognized a total of $400,000 of income during 2009, paid $30,000 of dividends to Fredo during 2009, and at December 31, 2009 the market value of the Sonny investment increased to $1,040,000 Required: Write the journal entries necessary to account for the Sonny investment, assuming that Fredo accounts for that investment as (1) an available-for-sale investment, and (2) elects the fair-value option.

When a creditor's receivable becomes impaired due to a troubled debt restructuring, the receivable is remeasured based on the discounted present value of currently expected cash flows at the loan's original effective rate.

Jeremiah Corporation purchased securities during 2009 and classified them as securities available for sale: All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2009, income statement relative to the portfolio?

The fair value option can not be elected for a significant-influence investment, because those must be accounted for under the equity method.

In the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered:

In 2007, Kirby made two adjustments to its available for sale investments. Required: Briefly explain the adjustments and why they occurred.

When an impairment of securities available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair market value and the amount of the write-down is:

Previously, marketable equity securities were reported using a technique referred to as "lower of cost or market." The current accounting standard requires fair value reporting for trading securities and securities available for sale. Some accountants believe that the FASB was inconsistent when Statement No. 115 was released requiring changes in the value of trading securities to be reported in the income statement and balance sheet, while changes in the value of securities available for sale are reported only in the balance sheet. Required: Evaluate the rationale for these two diverse reporting requirements for equity securities. What arguments could be made to support each treatment?

Krogstad Corporation bought 1,000 shares of Cole Inc. for $90 per share plus a brokerage fee of $1,800. Three months later, the shares were sold for $110 per share. The brokerage fee on the sale was $2,200. Required: (1.) Prepare the appropriate journal entry to record the purchase of the stock. (2.) Prepare the appropriate journal entry to record the sale of the stock.

On March 1, 2009, Navy Corporation used excess cash to purchase U.S. Treasury bonds for $103,000 plus accrued interest. The appropriate interest rate is 6%. Interest on these bonds is payable on January 1 and July 1 of each year. Navy's investment is accounted for as held to maturity. The fair value of the Treasury bonds is $104,000 at year end. Required: Prepare the appropriate journal entries to record the transactions for the year, including any year-end adjustments. Show calculations, rounded to the nearest dollar.