CHAPTER 17
INVESTMENTS
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
P These questions also appear in the Problem-Solving Survival Guide.
S These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.
MULTIPLE CHOICE—Computational
Answer No. Description
Investments
17 – 3
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 4
BRIEF EXERCISES
Item Description
BE17-120 Investment in debt securities at a premium.
BE17-121 Investment in debt securities at a discount.
BE17-122 Investments in equity securities (essay).
EXERCISES
Item Description
E17-123 Investment in equity securities.
E17-124 Fair value and equity methods (essay).
E17-125 Fair value and equity methods.
E17-126 Comprehensive income calculation.
*E17-127 Fair value hedge.
*E17-128 Cash flow hedge.
PROBLEMS
Item Description
P17-129 Trading equity securities.
P17-130 Trading securities.
P17-131 Available-for-sale securities.
*P17-132 Derivative financial instrument.
*P17-133 Free-standing derivative.
CHAPTER LEARNING OBJECTIVES
1. Identify the three categories of debt securities and describe the accounting and reporting
treatment for each category.
2. Understand the procedures for discount and premium amortization on bond investments.
3. Identify the categories of equity securities and describe the accounting and reporting
treatment for each category.
4. Explain the equity method of accounting and compare it to the fair value method for equity
securities.
5. Describe the accounting for the fair value option and for impairments of debt and equity
investments.
6. Describe the reporting of reclassification adjustments and the accounting for transfers
between categories.
*7. Describe the uses of basic guidelines and accounting for derivatives.
*8. Explain how to account for a fair value hedge.
*9. Explain how to account for a cash flow hedge.
Investments
17 – 5
*10. Identify special reporting issues related to derivative financial instruments that cause
unique accounting problems.
*11. Describe the accounting for variable-interest entities.
*12. Describe the required fair value disclosures.
13. Compare the accounting for investments under GAAP and IFRS.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
Item
Type
Type
Item
Type
Item
Type
Item
Type
Item
Type
Learning Objective 1
1.
TF
3.
TF
21.
MC
23.
MC
P25.
MC
S27.
MC
71.
MC
2.
TF
7.
TF
22.
MC
24.
MC
S26.
MC
70.
MC
Learning Objective 2
4.
TF
31.
MC
36.
MC
41.
MC
75.
MC
80.
MC
85.
MC
5.
TF
32.
MC
37.
MC
42.
MC
76.
MC
81.
MC
111.
MC
6.
TF
33.
MC
38.
MC
72.
MC
77.
MC
82.
MC
120.
BE
S28.
MC
34.
MC
39.
MC
73.
MC
78.
MC
83.
MC
121.
BE
30.
MC
35.
MC
40.
MC
74.
MC
79.
MC
84.
MC
Learning Objective 3
8.
TF
S29.
MC
88.
MC
92.
MC
113.
MC
130.
P
9.
TF
S43.
MC
89.
MC
93.
MC
114.
MC
131.
P
10.
TF
86.
MC
90.
MC
94.
MC
122.
BE
11.
TF
87.
MC
91.
MC
112.
MC
129.
P
Learning Objective 4
12.
TF
46.
MC
95.
MC
100.
MC
105.
MC
115.
MC
124.
E
13.
TF
47.
MC
96.
MC
101.
MC
106.
MC
116.
MC
125.
E
14.
TF
48.
MC
97.
MC
102.
MC
107.
MC
117.
MC
126.
E
S44.
MC
49.
MC
98.
MC
103.
MC
108.
MC
118.
MC
P45.
MC
50.
MC
99.
MC
104.
MC
109.
MC
123.
E
Learning Objective 5
15.
TF
17.
TF
52.
MC
110.
MC
130.
P
16.
TF
51.
MC
53.
MC
Learning Objective 6
18.
TF
54.
MC
56.
MC
58.
MC
119.
MC
129.
P
19.
TF
55.
MC
P57.
MC
59.
MC
122.
BE
130.
P
Learning Objective 7*
60.
MC
61.
MC
62.
MC
63.
MC
132.
P
133.
P
Learning Objective 8*
64.
MC
127.
E
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 6
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS (cont.)
Learning Objective 9*
65.
MC
128.
E
Learning Objective 10*
66.
MC
Learning Objective 11*
67.
MC
68.
MC
69.
MC
Learning Objective 12*
20.
TF
Learning Objective 13- IFRS
1.
TF
3.
TF
5.
TF
7.
MC
9.
SA
2.
TF
4.
TF
6.
MC
8.
MC
10.
SA
Note: TF = True-False E = Exercise
MC = Multiple Choice P = Problem
BE = Brief Exercise
TRUE-FALSE—Conceptual
1. Debt securities include corporate bonds and convertible debt, but not U.S. government
securities.
2. Trading securities are securities bought and held primarily for sale in the near term to
generate income on short-term price differences.
3. Unrealized holding gains and losses are recognized in net income for available-for-sale
debt securities.
4. A company can classify a debt security as held-to-maturity if it has the positive intent to
hold the securities to maturity.
5. Companies do not report changes in the fair value of available-for-sale debt securities as
income until the security is sold.
6. The Fair Value Adjustment account has a normal credit balance.
7. Companies report trading securities at fair value, with unrealized holding gains and losses
reported in net income.
8. Equity security holdings between 20 and 50 percent indicates that the investor has a
controlling interest over the investee.
9. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other compre-
hensive income.
Investments
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10. Significant influence over an investee may be indicated by material intercompany trans-
actions and interchange of managerial personnel.
11. The accounting profession has concluded that an investment of more than 50 percent of
the voting stock of an investee should lead to a presumption of significant influence over
an investee.
12. All cash dividends received by an investor from the investee decrease the investment’s
carrying value under the equity method.
13. Under the fair value method, the investor reports as revenue its share of the net income
reported by the investee.
14. A controlling interest occurs when one corporation acquires a voting interest of more than
50 percent in another corporation.
15. Companies may not use the fair value option for investments that follow the equity method
of accounting.
16. Changes in the fair value of a company‘s available-for-sale debt instruments are included
as part of earnings in any given period.
17. If a decline in a security’s value is judged to be temporary, a company needs to write
down the cost basis of the individual security to a new cost basis.
18. A reclassification adjustment is necessary when a company reports realized gains/losses
as part of net income but also shows unrealized gains/losses as part of other
comprehensive income.
19. If a company transfers held-to-maturity securities to available-for-sale securities, the
unrealized gain or loss is recognized in income.
*20. One requirement related to fair value disclosure is that both the cost and the fair value of
all instruments be reported in the notes to the financial statements.
True-False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 8
d. All of these are debt securities.
Investments
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22. A correct valuation is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. None of these answers are correct.
23. Securities which could be classified as held-to-maturity are
a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.
24. Unrealized holding gains or losses which are recognized in income are from securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. None of these answers are correct.
P25. When an investor’s accounting period ends on a date that does not coincide with an
interest receipt date for bonds held as an investment, the investor must
a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the amount of interest accrued since the last interest receipt date.
b. notify the issuer and request that a special payment be made for the appropriate
portion of the interest period.
c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for
the total amount of interest to be received at the next interest receipt date.
d. do nothing special and ignore the fact that the accounting period does not coincide
with the bond’s interest period.
S26. Debt securities that are accounted for at amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S27. Debt securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses and are included as other comprehensive income and
as a separate component of stockholders’ equity are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S28. Use of the effective-interest method in amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
b. a varying amount being recorded as interest income from period to period.
c. a variable rate of return on the book value of the investment.
d. a smaller amount of interest income over the life of the bond issue than would result
from use of the straight-line method.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 10
S29. Equity securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a separate
component of stockholders’ equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.
30. A requirement for a security to be classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
31. Held-to–maturity securities are reported at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus interest.
d. fair value.
32. Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the
securities to maturity, the entry to record the investment includes
a. a debit to Held-to-Maturity Securities at $300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at $315,000.
d. None of these answers are correct.
33. Which of the following is not correct in regard to trading securities?
a. They are held with the intention of selling them in a short period of time.
b. Unrealized holding gains and losses are reported as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
34. In accounting for investments in debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. None of these answers are correct.
35. Investments in debt securities are generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or premium account.
36. Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to
multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table.
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
Investments
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37. Investments in debt securities should be recorded on the date of acquisition at
a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs incident to the purchase.
d. face value plus brokerage fees and other costs incident to the purchase.
38. An available-for-sale debt security is purchased at a discount. The entry to record the
amortization of the discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. None of these answers are correct.
39. APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on
a debt security, the
a. effective-interest method of allocation must be used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be used but other methods can be
applied if there is no material difference in the results obtained.
d. par value method must be used and therefore no allocation is necessary.
40. Which of the following is correct about the effective-interest method of amortization?
a. The effective-interest method applied to investments in debt securities is different from
that applied to bonds payable.
b. Amortization of a discount decreases from period to period.
c. Amortization of a premium decreases from period to period.
d. The effective-interest method produces a constant rate of return on the book value of
the investment from period to period.
41. When investments in debt securities are purchased between interest payment dates,
preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.
42. Which of the following is not generally correct about recording a sale of a debt security
before maturity date?
a. Accrued interest will be received by the seller even though it is not an interest
payment date.
b. An entry must be made to amortize a discount to the date of sale.
c. The entry to amortize a premium to the date of sale includes a credit to the Premium
on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
S43. When a company has acquired a “passive interest” in another corporation, the acquiring
company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 12
S44. Santo Corporation declares and distributes a cash dividend that is a result of current
earnings. How will the receipt of those dividends affect the investment account of the
investor under each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
P45. An investor has a long-term investment in stocks. Regular cash dividends received by the
investor are recorded as
Fair Value Method Equity Method
a. Income Income
b. A reduction of the investment A reduction of the investment
c. Income A reduction of the investment
d. A reduction of the investment Income
46. When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
a. The investor should always use the equity method to account for its investment.
b. The investor should use the equity method to account for its investment unless circum–
stances indicate that it is unable to exercise “significant influence” over the investee.
c. The investor must use the fair value method unless it can clearly demonstrate the
ability to exercise “significant influence” over the investee.
d. The investor should always use the fair value method to account for its investment.
47. If the parent company owns 90% of the subsidiary company’s outstanding common stock,
the company should generally account for the income of the subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.
48. Koehn Corporation accounts for its investment in the common stock of Sells Company
under the equity method. Koehn Corporation should ordinarily record a cash dividend
received from Sells as
a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
49. Under the equity method of accounting for investments, an investor recognizes its share
of the earnings in the period in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial statements.
Investments
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50. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2014, Cosby had
net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity method of accounting.
What effect would this have on the investment account, net income, and retained
earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
51. Dublin Company holds a 30% stake in Club Company which was purchased in 2015 at a
cost of $3,000,000. After applying the equity method, the Investment in Club Company
account has a balance of $3,040,000. At December 31, 2015 the fair value of the
investment is $3,120,000. Which of the following values is acceptable for Dublin to use in
its balance sheet at December 31, 2015?
I. $3,000,000
II. $3,040,000
III. $3,120,000
a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.
52. The fair value option allows a company to
a. value its own liabilities at fair value.
b. record income when the fair value of its bonds increases.
c. report most financial instruments at fair value at any point of time.
d. All of the above are true of the fair value option.
53. Impairments are
a. based on discounted cash flows for securities.
b. recognized as a realized loss if the impairment is judged to be temporary.
c. based on fair value for available-for-sale investments and on negotiated values for
held-to-maturity investments.
d. evaluated at each reporting date for every investment.
54. A reclassification adjustment is reported in the
a. income statement as an Other revenue or expense.
b. stockholders’ equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders’ equity.
55. When an investment in a held-to-maturity security is transferred to an available-for-sale
security, the carrying value assigned to the available-for-sale security should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 14
56. When an investment in an available-for-sale security is transferred to trading because the
company anticipates selling the stock in the near future, the carrying value assigned to the
investment upon entering it in the trading portfolio should be
a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.
P57. A debt security is transferred from one category to another. Generally acceptable
accounting principles require that for this particular reclassification (1) the security be
transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the
date of transfer currently carried as a separate component of stockholders’ equity be
amortized over the remaining life of the security. What type of transfer is being described?
a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held–to-maturity to available-for-sale
d. Transfer from available-for-sale to held–to-maturity
58. “Gains trading” or “cherry picking” involves
a. moving securities whose value has decreased since acquisition from available-for-sale
to held-to-maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding those
whose value has decreased since acquisition.
d. All of the above are considered methods of “gains trading” or “cherry picking.”
59. Transfers between categories
a. result in companies omitting recognition of fair value in the year of the transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-maturity into
trading.
d. will always result in an impact on net income.
*60. Companies that attempt to exploit inefficiencies in various derivative markets by
attempting to lock in profits by simultaneously entering into transactions in two or more
markets are called
a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.
*61. All of the following statements regarding accounting for derivatives are correct except that
a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways,
depending upon the type of hedge.
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*62. All of the following are characteristics of a derivative financial instrument except the
instrument
a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.
*63. Which of the following are considered equity securities?
I. Convertible debt.
II. Redeemable preferred stock.
III. Call or put options.
a. I and II only.
b. I and III only.
c. II only.
d. III only.
*64. The accounting for fair value hedges records the derivative at its
a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.
*65. Gains or losses on cash flow hedges are
a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.
*66. An option to convert a convertible bond into shares of common stock is a(n)
a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.
*67. All of the following are requirements for disclosures related to financial instruments except
a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes other than
trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net
gain/loss on derivative instruments designated in cash flow hedges.
*68. A variable-interest entity has
a. insufficient equity investment at risk.
b. stockholders who have decision-making rights.
c. stockholders who absorb the losses or receive the benefits of a normal stockholder.
d. All of the above are characteristics of a variable-interest entity.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 16
*69. Under U.S. GAAP, which of the following models may be used to determine if an
investment is consolidated?
Risk-and-reward model Voting-interest approach
a. Yes No
b. No Yes
c. No No
d. Yes Yes
Multiple Choice Answers—Conceptual
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
MULTIPLE CHOICE—Computational
70. On August 1, 2014, Dambro Company acquired 800, $1,000, 9% bonds at 97 plus
accrued interest. The bonds were dated May 1, 2014, and mature on April 30, 2020, with
interest paid each October 31 and April 30. The bonds will be added to Dambro’s
available-for-sale portfolio. The preferred entry to record the purchase of the bonds on
August 1, 2014 is
a. Debt Investments ………………………………………………………. 794,000
Cash ……………………………………………………………… 794,000
b. Debt Investments ………………………………………………………. 776,000
Interest Receivable ……………………………………………………. 18,000
Cash ……………………………………………………………… 794,000
c. Debt Investments ………………………………………………………. 776,000
Interest Revenue ……………………………………………………….. 18,000
Cash ……………………………………………………………… 794,000
d. Debt Investments ………………………………………………………. 800,000
Interest Revenue ……………………………………………………….. 18,000
Discount on Debt Investments …………………………... 24,000
Cash …………………………………………………………….. 794,000
71. Kern Company purchased bonds with a face amount of $800,000 between interest
payment dates. Kern purchased the bonds at 102, paid brokerage costs of $12,000, and
paid accrued interest for three months of $20,000. The amount to record as the cost of
this long-term investment in bonds is
a. $848,000.
b. $828,000.
c. $816,000.
d. $800,000.
Investments
17 – 17
Use the following information for questions 72 and 73.
Patton Company purchased $900,000 of 10% bonds of Scott Company on January 1, 2015,
paying $846,225. The bonds mature January 1, 2025; interest is payable each July 1 and
January 1. The discount of $53,775 provides an effective yield of 11%. Patton Company uses the
effective-interest method and plans to hold these bonds to maturity.
72. On July 1, 2015, Patton Company should increase its Debt Investments account for the
Scott Company bonds by
a. $5,382.
b. $3,084.
c. $2,691.
d. $1,542.
73. For the year ended December 31, 2015, Patton Company should report interest revenue
from the Scott Company bonds of:
a. $95,382.
b. $93,169.
c. $93,078.
d. $90,000.
Use the following information for questions 74 and 75.
Landis Company purchased $2,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2014,
with interest payable on July 1 and January 1. The bonds sold for $2,083,160 at an effective
interest rate of 7%. Using the effective-interest method, Landis Company decreased the
Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2014 and
December 31, 2014 by the amortized premiums of $7,080 and $7,320, respectively.
74. At December 31, 2014, the fair value of the Ritter, Inc. bonds was $2,120,000. What
should Landis Company report as other comprehensive income and as a separate
component of stockholders’ equity?
a. $51,240.
b. $36,840.
c. $14,400.
d. No entry should be made.
75. At April 1, 2015, Landis Company sold the Ritter bonds for $2,060,000. After accruing for
interest, the carrying value of the Ritter bonds on April 1, 2015 was $2,064,960. Assuming
Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis
Company report as a gain or loss on the bonds?
a. ($58,740).
b. ($43,740).
c. ($4,960).
d. $ 0.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 18
76. On August 1, 2014, Fowler Company acquired $300,000 face value 10% bonds of Kasnic
Corporation at 104 plus accrued interest. The bonds were dated May 1, 2014, and mature
on April 30, 2019, with interest payable each October 31 and April 30. The bonds will be
held to maturity. What entry should Fowler make to record the purchase of the bonds on
August 1, 2014?
a. Debt Investments ………………………………………………………. 312,000
Interest Revenue ……………………………………………………….. 7,500
Cash ……………………………………………………………… 319,500
b. Debt Investments ………………………………………………………. 319,500
Cash ……………………………………………………………… 319,500
c. Debt Investments ………………………………………………………. 319,500
Interest Revenue …………………………………………….. 7,500
Cash ……………………………………………………………… 312,000
d. Debt Investments ………………………………………………………. 300,000
Premium on Bonds ……………………………………………………. 19,500
Cash ……………………………………………………………… 319,500
77. On October 1, 2014, Renfro Company purchased to hold to maturity, 3,000, $1,000, 9%
bonds for $2,970,000 which includes $45,000 accrued interest. The bonds, which mature
on February 1, 2023, pay interest semiannually on February 1 and August 1. Renfro uses
the straight-line method of amortization. The bonds should be reported in the December
31, 2014 balance sheet at a carrying value of
a. $2,925,000.
b. $2,927,250.
c. $2,970,000.
d. $2,970,750.
78. On November 1, 2014, Howell Company purchased 800 of the $1,000 face value, 9%
bonds of Ramsey, Incorporated, for $842,000, which includes accrued interest of $12,000.
The bonds, which mature on January 1, 2019, pay interest semiannually on March 1 and
September 1. Assuming that Howell uses the straight-line method of amortization and that
the bonds are appropriately classified as available-for-sale, the net carrying value of the
bonds should be shown on Howell‘s December 31, 2014, balance sheet at
a. $800,000.
b. $830,000.
c. $828,800.
d. $842,000.
79. On November 1, 2014, Horton Company purchased Lopez, Inc., 10-year, 9%, bonds with
a face value of $600,000, for $540,000. An additional $15,000 was paid for the accrued
interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on
July 1, 2021. Horton uses the straight-line method of amortization. Ignoring income taxes,
the amount reported in Horton’s 2014 income statement as a result of Horton’s available-
for-sale investment in Lopez was
a. $10,500.
b. $10,000.
c. $9,000.
d. $8,000.
Investments
17 – 19
80. On October 1, 2014, Menke Company purchased to hold to maturity, 400, $1,000, 9%
bonds for $416,000. An additional $12,000 was paid for accrued interest. Interest is paid
semiannually on December 1 and June 1 and the bonds mature on December 1, 2018.
Menke uses straight-line amortization. Ignoring income taxes, the amount reported in
Menke’s 2014 income statement from this investment should be
a. $9,000.
b. $8,040.
c. $9,960.
d. $10,920.
81. During 2012, Hauke Company purchased 4,000, $1,000, 9% bonds. The carrying value of
the bonds at December 31, 2014 was $3,920,000. The bonds mature on March 1, 2019,
and pay interest on March 1 and September 1. Hauke sells 2,000 bonds on September 1,
2015, for $1,976,000, after the interest has been received. Hauke uses straight-line
amortization. The gain on the sale is
a. $0.
b. $9,600.
c. $16,000.
d. $22,400.
Use the following information for 82 and 83.
On January 3, 2014, Moss Company acquires $300,000 of Adam Company’s 10-year, 10%
bonds at a price of $319,254 to yield 9%. Interest is payable each December 31. The bonds are
classified as held-to-maturity.
82. Assuming that Moss Company uses the effective-interest method, what is the amount of
interest revenue that would be recognized in 2015 related to these bonds?
a. $30,000
b. $31,925
c. $28,734
*d. $28,619
83. Assuming that Moss Company uses the straight-line method, what is the amount of
premium amortization that would be recognized in 2016 related to these bonds?
a. $1,925
b. $1,266
c. $1,380
d. $1,506
Questions 84 and 85 are based on the following information:
Richman Company purchased $900,000 of 8%, 5-year bonds from Carlin, Inc. on January 1,
2014, with interest payable on July 1 and January 1. The bonds sold for $937,422 at an effective
interest rate of 7%. Using the effective interest method, Richman Company decreased the
Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2014 and
December 31, 2014 by the amortized premiums of $3,186 and $3,294, respectively.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 20
84. At December 31, 2014, the fair value of the Carlin, Inc. bonds was $954,000. What should
Richman Company report as other comprehensive income and as a separate component
of stockholders’ equity?
a. $0
b. $6,480
c. $16,578
d. $23,058
85. At February 1, 2015, Richman Company sold the Carlin bonds for $927,000. After
accruing for interest, the carrying value of the Carlin bonds on February 1, 2015 was
$930,375. Assuming Richman Company has a portfolio of available-for-sale debt
investments, what should Richman Company report as a gain (or loss) on the bonds?
a. $0.
b. ($3,375).
c. ($19,683).
d. ($26,433).
86. During 2014 Logic Company purchased 8,000 shares of Midi, Inc. for $30 per share. The
investment was classified as a trading security. During the year Logic Company sold
2,000 shares of Midi, Inc. for $35 per share. At December 31, 2014 the market price of
Midi, Inc.’s stock was $28 per share. What is the total amount of gain/(loss) that Logic
Company will report in its income statement for the year ended December 31, 2014
related to its investment in Midi, Inc. stock?
a. ($16,000)
b. $10,000
c. ($6,000)
d. ($2,000)
Use the following information for questions 87 and 88.
Instrument Corporation has the following investments which were held throughout 2014–2015:
Fair Value
Cost 12/31/14 12/31/15
Trading $600,000 $800,000 $760,000
Available-for-sale 600,000 640,000 720,000
87. What amount of gain or loss would Instrument Corporation report in its income statement
for the year ended December 31, 2015 related to its investments?
a. $40,000 gain.
b. $40,000 loss.
c. $280,000 gain.
d. $160,000 gain.
88. What amount would be reported as accumulated other comprehensive income related to
investments in Instrument Corporation’s balance sheet at December 31, 2014?
a. $80,000 gain.
b. $120,000 gain.
c. $40,000 gain.
d. $240,000 gain.