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Exam 12: Investments

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Question 61

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On January 2, 2012, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2012 and 2013, were $10,000 and $50,000, respectively. During 2013, Ranger declared and paid a dividend of $60,000. There were no dividends in 2012. On December 31, 2012, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2013 income statement as income from this investment?

A) $26,000.
B) $7,200.
C) $20,000.
D) $27,200.

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

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Question 62

Multiple Choice

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Which of the following is not true about accounting for investments under IAS No. 31 under IFRS?

A) IFRS allows proportionate consolidation of investments where two or more investors have joint control.
B) IFRS is more restrictive than U.S.GAAP concerning when an investor can elect the fair value option.
C) IFRS requires that the accounting policies of an investee be adjusted to correspond to those of the investor when applying the equity method.
D) IFRS does not allow use of the equity method where two or more investors have joint control.

E) A) and D)
F) A) and C)

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Question 63

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When the investor's level of influence changes, it may be necessary to change from the equity method to another method. When the level of ownership falls from a range of 20% to 50% to less than 20%, the equity method typically would be discontinued and the investment account balance would be carried over at:

Boulter, Inc. began business on January 1, 2013. At the end of December 2013, Boulter had the following investments in equity securities: All declines in value are deemed to be temporary in nature. How should the corresponding losses be reflected in the financial statements at December 31, 2013?

Bridges Inc. holds a debt investment from RiteCo and had viewed that investment as adversely affected by particular events in the market for RiteCo's products, but without specific information about deterioration of RiteCo's credit quality. However, Bridges just learned that RiteCo is entering bankruptcy. As a result of receiving this information, what is Bridges likely to do with the RiteCo investment?

On January 1, 2013, Rupar Retailers purchased $100,000 of Anand Company bonds at a discount of $5,000. The Anand bonds pay 6% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on January 1 and July 1 of each year. Rupar accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In Rupar's December 31, 2013, journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:

Companies need to consider GAAP regarding fair value measurements when determining the fair value of an investment that distinguishes between various levels of inputs to fair value determination. Required: Describe the various levels of inputs, explaining key aspects that distinguish them, and indicate which level is most preferred and which is least preferred.

Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on January 1, 2013. On November 1, 2013, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2013 relative to its investment in Hack?

If an available-for-sale investment is sold for which there are unrealized losses in accumulated other comprehensive income (AOCI) , the total effect on total comprehensive income is:

When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as:

Under IFRS No. 9, debt investments are classified as either "available for sale" or "fair value through profit and loss (FVTPL)."

Jaycom Enterprises has invested its excess cash in the stock of several different companies and desires to maximize income over the short run. Jaycom is unsure about the appropriate investment policy and thus what reporting practice to follow. Required: What classification procedure and subsequent classification could Jaycom follow in order to meet its objective? How will Jaycom justify its choice to the Jaycom auditors?

The equity method is in many ways a partial consolidation.

Sometimes companies change the extent to which they can significantly influence an investee, such that they have to change to the equity method or from the equity method of accounting for the investment. Required: Describe the adjustments necessary when a company (1) changes to the equity method from another method, and (2) when a company changes from the equity method to another method.

The equity method of accounting for investments in voting common stock is appropriate when:

In its 20X4 annual report to shareholders, Maytag Corporation included the following disclosures in its income statement and related footnotes: CONSOLIDATED STATEMENTS OF INCOME Special Charges and Loss on Securities During the fourth quarter of 20X4, the Company recorded special charges and loss on securities totaling $17.0 million, or $13.5 million after-tax. Special charges of $9.8 million, or $6.2 million after-tax, were associated with a salaried workforce reduction of approximately 250 employees. Cash expenditures for 20X4 related to this charge were $3.7 million. Loss on securities of $7.2 million resulted from the write-down of the remaining investment in a privately held Internet-related company. During the fourth quarter of 20X3, the Company recorded special charges and loss on securities totaling $57.5 million, or $36.5 million after-tax. Special charges of $39.9 million, or $25.3 million after-tax, were associated with terminated product initiatives, asset write-downs, and executive severance costs related to management changes. Loss on securities of $17.6 million, or $11.2 million after-tax, resulted from a lower market valuation of securities of TurboChef Technologies, Inc., and investments in privately held Internet-related Companies ….. The loss on securities charge of $17.6 million was noncash. Required: Discuss the possible rationale behind the losses on securities reported by Maytag in 20X3 and 20X4.

Required: Prepare the journal entry (in thousands) that Kirby made at the end of 2013 to record the information disclosed above.

IFRS No. 9 is a standard that indicates accounting for investments when the investor does not have significant influence over the investee. Required: Explain how equity investments are accounted for under IFRS No. 9. What alternative accounting approaches are available, what determines whether an investment qualifies for each approach, and what are the key features of each approach with respect to accounting for unrealized gains and losses?

Cucumber Company concluded at the beginning of 2013 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment as available for sale, rather than using the equity method as it had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as an available-for-sale investment. At the time of implementing the change to the available-for-sale method, if financial statements were prepared:

When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be: