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Exam 12: Investments

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Question 61

Multiple Choice

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The income statement reports changes in fair value for which type of securities?

A) Securities reported under the equity method.
B) Trading securities
C) Held-to-maturity securities.
D) Securities available for sale.

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

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Question 62

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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 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 their auditors?

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If Jaycom classifies the securities as a...

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Question 63

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Both debt and equity securities can be categorized as trading securities.

Smith buys and sells securities which it typically classifies as available for sale. On December 15, 2009, Smith purchased $500,000 of Jones shares, and elected the fair value option to account for the Jones investment. As of December 31, 2009, the Jones shares had a fair value of $525,000. In the 2009 financial statements, Smith will show (ignore taxes) :

FKG Inc. carries the following investments on its books at December 31, 2009, and December 31, 2010. All securities were purchased during 2009. Required:(1.) Prepare the necessary journal entries for FKG on December 31, 2009, and December 31, 2010. (2.) What net effect would the valuation of these stock investments have on 2009 net income? On 2010 net income?

Required: Write journal entries that Fragrance International recorded at 6/30/05 to (1) record any necessary changes to the fair value adjustment for available-for-sale securities and (2) record any tax effects associated with those changes.

Which category completely excludes equity securities?

On February 2, 2009, MBH Inc. acquired 30% of the voting common stock of Construction Corporation as a long-term investment. Data from Construction Corporation's financial statements for the year ended December 31, 2009, include the following: Net income $150,000 Dividends paid $75,000 Required: Prepare any necessary journal entries for MBH at December 31, 2009, under the equity method of accounting for investments.

All investment securities are initially recorded at:

The Guitar World (TGW) holds an investment that increased in fair value over 2009, and accounts for that investment as available for sale. When considering taxes, TGW would

Cucumber Company concluded at the beginning of 2009 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for their investment as available for sale, rather than using the equity method as they 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. After implementing the change to the available-for-sale method, if financial statements were prepared,

In its 2001 annual report to shareholders, Maytag Corporation included the following disclosures in its income statement and related footnotes: Special Charges and Loss on Securities During the fourth quarter of 2001, 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 2001 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 2000, 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 non-cash. Required: Discuss the possible rationale behind the losses on securities reported by Maytag in 2000 and 2001.

Purchases and sales of securities are always reported as investing activities in a statement of cash flows.

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

Discuss the following questions. Required: What securities must be classified within one of the three categories of held to maturity, available for sale, and trading? (Do not describe how to determine how securities are classified among these three categories.) Identify the four primary recording activities related to investments in securities.

The following transactions occurred during the year for XYZ Corporation: (a.) During the year, trading securities were purchased for $250,000. (b.) During the year, securities available for sale were purchased for $80,000. (c.) During the year, trading securities that are carried on the balance sheet at their fair value of $125,000 were sold for $125,000 cash. (d.) At the end of the year, the trading securities portfolio has an aggregate market value of $142,000 and an aggregate cost of $150,000. Required: Indicate how each of these transactions would affect the statement of cash flows for a corporation. Assume the statement of cash flows is prepared using the indirect method. Each transaction is assumed to be independent of the other transactions.

Seybert Systems accounts for its investment in Wang Engineering as available for sale. Seybert's balance in accumulated other comprehensive income with respect to the Wang investment is a credit balance of $20,000, and they list the investment at $100,000 on their balance sheet. Seybert purchased the Wang investment for (ignore taxes) :

Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity, Dinsburry would:

Securities that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as: