Investments
17 – 21
89. At December 31, 2015, Atlanta Company has a stock portfolio valued at $80,000. Its cost
was $66,000. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit
balance of $4,000, which of the following journal entries is required at December 31,
2015?
a. Fair Value Adjustment 14,000
(available-for-sale)
Unrealized Holding Gain or Loss–Equity 14,000
b. Fair Value Adjustment 10,000
(available-for-sale)
Unrealized Holding Gain or Loss–Equity 10,000
c. Unrealized Holding Gain or Loss–Equity 14,000
Fair Value Adjustment 14,000
(available-for-sale)
d. Unrealized Holding Gain or Loss–Equity 10,000
Fair Value Adjustment 10,000
(available-for-sale)
90. Kramer Company’s trading securities portfolio which is appropriately included in current
assets is as follows:
December 31, 2014
Fair Unrealized
Cost Value Gain (Loss)
Catlett Corp. $260,000 $205,000 $(55,000)
Lyman, Inc. 245,000 265,000 20,000
$505,000 $470,000 $(35,000)
Ignoring income taxes, what amount should be reported as a charge against income in
Kramer’s 2014 income statement if 2014 is Kramer’s first year of operation?
a. $0.
b. $20,000 gain.
c. $35,000 loss.
d. $55,000 loss.
91. On its December 31, 2014, balance sheet, Trump Company reported its investment in
available-for-sale securities, which had cost $600,000, at fair value of $550,000. At
December 31, 2015, the fair value of the securities was $585,000. What should Trump
report on its 2015 income statement as a result of the increase in fair value of the
investments in 2015?
a. $0.
b. Unrealized loss of $15,000.
c. Realized gain of $35,000.
d. Unrealized gain of $35,000.
92. During 2014, Woods Company purchased 60,000 shares of Holmes Corporation common
stock for $945,000 as an available-for-sale investment. The fair value of these shares was
$900,000 at December 31, 2014. Woods sold all of the Holmes stock for $17 per share on
December 3, 2015, incurring $42,000 in brokerage commissions. Woods Company should
report a realized gain on the sale of stock in 2015 of
a. $33,000.
b. $75,000.
c. $78,000.
d. $120,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 22
Use the following information for questions 93 and 94.
On its December 31, 2014 balance sheet, Calhoun Company appropriately reported a $10,000
debit balance in its Fair Value Adjustment (available-for-sale) account. There was no change
during 2015 in the composition of Calhoun’s portfolio of equity investments held as available-for-
sale securities. The following information pertains to that portfolio:
Security Cost Fair value at 12/31/15
X $125,000 $160,000
Y 100,000 90,000
Z 175,000 125,000
$400,000 $375,000
93. What amount of unrealized loss on these securities should be included in Calhoun’s
stockholders’ equity section of the balance sheet at December 31, 2015?
a. $35,000.
b. $25,000.
c. $15,000.
d. $0.
94. The amount of unrealized loss to appear as a component of comprehensive income for
the year ending December 31, 2015 is
a. $35,000.
b. $25,000.
c. $15,000.
d. $0.
95. On January 2, 2015 Pod Company purchased 25% of the outstanding common stock of
Jobs, Inc. and subsequently used the equity method to account for the investment. During
2015 Jobs, Inc. reported net income of $840,000 and distributed dividends of $360,000.
The ending balance in the Investment in Pod Company account at December 31, 2015
was $640,000 after applying the equity method during 2015. What was the purchase price
Pod Company paid for its investment in Jobs, Inc?
a. $340,000
b. $520,000
c. $760,000
d. $940,000
96. Ziegler Corporation purchased 25,000 shares of common stock of the Sherman
Corporation for $40 per share on January 2, 2014. Sherman Corporation had 100,000
shares of common stock outstanding during 2015, paid cash dividends of $90,000 during
2015, and reported net income of $300,000 for 2015. Ziegler Corporation should report
revenue from investment for 2015 in the amount of
a. $22,500.
b. $52,500.
c. $75,000.
d. $82,500.
Investments
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Use the following information for questions 97 and 98.
Harrison Company owns 20,000 of the 50,000 outstanding shares of Taylor, Inc. common stock.
During 2015, Taylor earns $1,000,000 and pays cash dividends of $800,000.
97. If the beginning balance in the investment account was $625,000, the balance at
December 31, 2015 should be
a. $1,025,000.
b. $825,000.
c. $705,000.
d. $625,000.
98. Harrison should report investment revenue for 2015 of
a. $400,000.
b. $320,000.
c. $80,000.
d. $0.
Use the following information for questions 99 through 102.
The summarized balance sheets of Goebel Company and Dobbs Company as of December 31,
2014 are as follows:
Goebel Company
Balance Sheet
December 31, 2014
Assets $1,200,000
Liabilities $ 150,000
Capital stock 600,000
Retained earnings 450,000
Total equities $1,200,000
Dobbs Company
Balance Sheet
December 31, 2014
Assets $900,000
Liabilities $205,000
Capital stock 575,000
Retained earnings 120,000
Total equities $900,000
99. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2014
for $175,000 and the fair value method of accounting for the investment were used, the
amount of the debit to Equity Investments (Dobbs) would have been
a. $139,000.
b. $115,000.
c. $175,000.
d. $180,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 24
100. If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2014
for $215,000 and the equity method of accounting for the investment were used, the
amount of the debit to Equity Investments (Dobbs) would have been
a. $270,000.
b. $215,000.
c. $172,500.
d. $208,500.
101. If Goebel Company acquired a 20% interest in Dobbs Company on December 31, 2014
for $145,000 and during 2015 Dobbs Company had net income of $75,000 and paid a
cash dividend of $30,000, applying the fair value method would give a debit balance in the
Equity Investments (Dobbs) account at the end of 2015 of
a. $115,000.
b. $145,000.
c. $160,000.
d. $154,000.
102. If Goebel Company acquired a 30% interest in Dobbs Company on December 31, 2014
for $220,000 and during 2015 Dobbs Company had net income of $75,000 and paid a
cash dividend of $30,000, applying the equity method would give a debit balance in the
Equity Investments (Dobbs) account at the end of 2015 of
a. $220,000.
b. $233,500.
c. $242,500.
d. $211,000.
Use the following information for questions 103 and 104.
Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company’s common
stock for $450,000 on January 2, 2015. During 2015, Darby Company declared dividends of
$75,000 and reported earnings for the year of $300,000.
103. If Blanco Company used the fair value method of accounting for its investment in Darby
Company, its Equity Investment (Darby) account on December 31, 2015 should be
a. $435,000.
b. $495,000.
c. $450,000.
d. $510,000.
104. If Blanco Company uses the equity method of accounting for its investment in Darby
Company, its Equity Investment (Darby) account at December 31, 2015 should be
a. $435,000.
b. $450,000.
c. $495,000.
d. $510,000.
Use the following information for questions 105 and 106.
Brown Corporation earns $480,000 and pays cash dividends of $160,000 during 2014. Dexter
Corporation owns 3,000 of the 10,000 outstanding shares of Brown.
Investments
17 – 25
105. What amount should Dexter show in the investment account at December 31, 2014 if the
beginning of the year balance in the account was $640,000?
a. $784,000.
b. $640,000.
c. $736,000.
d. $960,000.
106. How much investment income should Dexter report in 2014?
a. $160,000.
b. $144,000.
c. $96,000.
d. $480,000.
107. Myers Company acquired a 60% interest in Gannon Corporation on December 31, 2014
for $1,575,000. During 2015, Gannon had net income of $1,000,000 and paid cash
dividends of $250,000. At December 31, 2015, the balance in the investment account
should be
a. $1,575,000.
b. $2,175,000.
c. $2,025,000.
d. $2,325,000.
Use the following information for questions 108 and 109.
Tracy Company owns 4,000 of the 10,000 outstanding shares of Penn Corporation common
stock. During 2015, Penn earns $300,000 and pays cash dividends of $100,000.
108. If the beginning balance in the investment account was $600,000, the balance at
December 31, 2015 should be
a. $600,000.
b. $680,000.
c. $720,000.
d. $800,000.
109. Tracy should report investment revenue for 2015 of
a. $40,000.
b. $80,000.
c. $100,000.
d. $120,000.
110. The following information relates to Windom Company for 2015:
Realized gain on sale of available-for-sale securities $30,000
Unrealized holding gains arising during the period on
available-for-sale securities 60,000
Reclassification adjustment for gains included in net income 20,000
Windom’s 2015 other comprehensive income is
a. $50,000.
b. $70,000.
c. $90,000.
d. $110,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 26
Multiple Choice Answers—Computational
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MULTIPLE CHOICE—CPA Adapted
111. On October 1, 2014, Wenn Company purchased 700 of the $1,000 face value, 8% bonds
of Loy, Inc., for $819,000, including accrued interest of $14,000. The bonds, which mature
on January 1, 2021, pay interest semiannually on January 1 and July 1. Wenn used the
straight-line method of amortization and appropriately recorded the bonds as available-for-
sale. On Wenn’s December 31, 2015 balance sheet, the carrying value of the bonds is
a. $805,000.
b. $798,000.
c. $795,200.
d. $784,000.
112. Valet Corporation began operations in 2015. An analysis of Valet’s equity securities
portfolio acquired in 2015 shows the following totals at December 31, 2015 for trading and
available-for-sale securities:
Trading Available-for-Sale
Securities Securities
Aggregate cost $90,000 $110,000
Aggregate fair value 80,000 95,000
What amount should Valet report in its 2015 income statement for unrealized holding
loss?
a. $25,000.
b. $5,000.
c. $15,000.
d. $10,000.
113. At December 31, 2015, Jeter Corporation had the following equity securities that were
purchased during 2015, its first year of operation:
Fair Unrealized
Cost Value Gain (Loss)
Trading Securities:
Security A $ 85,000 $ 60,000 $(25,000)
B 15,000 20,000 5,000
Totals $100,000 $ 80,000 $(20,000)
Available-for-Sale Securities:
Security Y $ 70,000 $ 80,000 $ 10,000
Z 85,000 55,000 (30,000)
Totals $155,000 $135,000 $(20,000)
Investments
17 – 27
All market declines are considered temporary. Fair value adjustments at December 31,
2015 should be established with a corresponding charge against
Income Stockholders’ Equity
a. $40,000 $ 0
b. $25,000 $30,000
c. $20,000 $20,000
d. $20,000 $ 0
114. On December 29, 2015, James Company sold an equity security that had been
purchased on January 4, 2014. James owned no other equity securities. An unrealized
holding loss was reported in the 2014 income statement. A realized gain was reported in
the 2015 income statement. Was the equity security classified as available-for-sale and
did its 2014 market price decline exceed its 2015 market price recovery?
2014 Market Price
Decline Exceeded 2015
Available-for-Sale Market Price Recovery
a. Yes Yes
b. Yes No
c. No Yes
d. No No
Use the following information for questions 115 through 117.
Rich, Inc. acquired 30% of Doane Corporation’s voting stock on January 1, 2014 for $800,000.
During 2014, Doane earned $320,000 and paid dividends of $200,000. Rich’s 30% interest in
Doane gives Rich the ability to exercise significant influence over Doane’s operating and financial
policies. During 2015, Doane earned $400,000 and paid dividends of $120,000 on April 1 and
$120,000 on October 1. On July 1, 2015, Rich sold half of its stock in Doane for $528,000 cash.
115. Before income taxes, what amount should Rich include in its 2014 income statement as a
result of the investment?
a. $320,000.
b. $200,000.
c. $96,000.
d. $60,000.
116. The carrying amount of this investment in Rich’s December 31, 2014 balance sheet
should be
a. $800,000.
b. $836,000.
c. $896,000.
d. $920,000.
117. What should be the gain on sale of this investment in Rich’s 2015 income statement?
a. $128,000.
b. $110,000.
c. $98,000.
d. $80,000.
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 28
118. On January 1, 2015, Reston Company purchased 25% of Ace Corporation’s common
stock; no goodwill resulted from the purchase. Reston appropriately carries this
investment at equity and the balance in Reston’s investment account was $1,120,000 at
December 31, 2015. Ace reported net income of $700,000 for the year ended December
31, 2015, and paid common stock dividends totaling $280,000 during 2015. How much did
Reston pay for its 25% interest in Ace?
a. $1,015,000.
b. $1,190,000.
c. $1,225,000.
d. $1,365,000.
119. On December 31, 2014, Patel Company purchased equity securities as trading securities.
Pertinent data are as follows:
Fair Value
Security Cost At 12/31/15
A $132,000 $117,000
B 168,000 186,000
C 288,000 263,000
On December 31, 2015, Patel transferred its investment in security C from trading to
available-for-sale because Patel intends to retain security C as a long-term investment.
What total amount of gain or loss on its securities should be included in Patel’s income
statement for the year ended December 31, 2015?
a. $3,000 gain.
b. $17,000 loss.
c. $20,000 loss.
d. $35,000 loss.
Multiple Choice Answers—CPA Adapted
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DERIVATIONS — Computational
No. Answer Derivation
Investments
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, Fifteenth Edition
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DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Investments
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DERIVATIONS — CPA Adapted (cont.)
No. Answer Derivation
BRIEF EXERCISES
BE. 17-120—Investment in debt securities at premium.
On April 1, 2014, West Company purchased $400,000 of 6% bonds for $415,750 plus accrued
interest as an available-for-sale security. Interest is paid on July 1 and January 1 and the bonds
mature on July 1, 2019.
Instructions
(a) Prepare the journal entry on April 1, 2014.
(b) The bonds are sold on November 1, 2015 at 103 plus accrued interest. Amortization was
recorded when interest was received by the straight-line method (by months and round to the
nearest dollar). Prepare all entries required to properly record the sale.
Solution 17-120
Test Bank for Intermediate Accounting, Fifteenth Edition
17 – 32
BE. 17-121—Investment in debt securities at a discount.
On May 1, 2014, Kirmer Corporation purchased $900,000 of 12% bonds, interest payable on
January 1 and July 1, for $843,900 plus accrued interest. The bonds mature on January 1, 2020.
Amortization is recorded when interest is received by the straight-line method (by months and
round to the nearest dollar). (Assume bonds are available for sale.)
Instructions
(a) Prepare the entry for May 1, 2014.
(b) The bonds are sold on August 1, 2015 for $565,000 plus accrued interest. Prepare all entries
required to properly record the sale.
Solution 17-121
BE. 17-122—Investments in equity securities.
Presented below are unrelated cases involving investments in equity securities.
Case I. The fair value of the trading securities at the end of last year was 30% below original
cost, and this was properly reflected in the accounts. At the end of the current year, the fair value
has increased to 20% above cost.
Case II. The fair value of an available-for-sale security has declined to less than forty percent of
the original cost. The decline in value is considered to be other than temporary.
Case III. An equity security, whose fair value is now less than cost, is classified as trading but is
reclassified as available-for-sale.
Instructions
Indicate the accounting required for each case separately.
Investments
17 – 33
Solution 17-122
EXERCISES
Ex. 17-123—Investment in equity securities.
Agee Corporation acquired a 35% interest in Trent Company on January 1, 2015, for $500,000.
At that time, Trent had 1,000,000 shares of its $1 par common stock issued and outstanding.
During 2015, Trent paid cash dividends of $160,000 and thereafter declared and issued a 5%
common stock dividend when the fair value was $2 per share. Trent’s net income for 2015 was
$360,000. What is the balance in Agee’s equity investment account at the end of 2015?
Solution 17-123
Ex. 17-124—Fair value and equity methods. (Essay)
Compare the fair value and equity methods of accounting for investments in stocks subsequent to
acquisition.
Solution 17-124