Investment Risk and Portfolio Management Paper 8

1

A marketable debt security is transferred from available-forsale to held-to-maturity securities. At the transfer date, the security’s carrying amount exceeds its fair value. Assume the fair value option is not elected to report this security. What amount is used at the transfer date to record the security in the held-tomaturity portfolio?






2

Jill Corp. had investments in marketable debt securities purchased on January 1, year 1, for $650,000 that were classified as trading securities and accounted for using the cost adjusted to fair value method. On June 30, year 2, Jill decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments’ fair value was $575,000 at December 31, year 1, $530,000 at June 30, year 2, and $490,000 at December 31, year 2. Jill elects the fair value option for reporting these held-to-maturity securities. What amount of loss from investments should Jill report in its year 2 income statement?






3

Jill Corp. had investments in marketable debt securities purchased on January 1, year 1, for $650,000 that were classified as trading securities and accounted for using the cost adjusted to fair value method. On June 30, year 2, Jill decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments’ fair value was $575,000 at December 31, year 1, $530,000 at June 30, year 2, and $490,000 at December 31, year 2. Jill elects the fair value option for reporting these held-to-maturity securities. What amount should Jill report as net unrealized loss on marketable debt securities in other comprehensive income in its year 2 statement of stockholders’ equity?






4

Grant, Inc. acquired 30% of South Co.’s voting stock for $200,000 on January 2, year 1. Grant’s 30% interest in South gave Grant the ability to exercise significant influence over South’s operating and financial policies. During year 1, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, year 2, and $200,000 for the year ended December 31, year 2. On July 1, year 2, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, year 2. Grant does not elect the fair value option to report this investment. Before income taxes, what amount should Grant include in its year 1 income statement as a result of the investment?






5

Sage, Inc. bought 40% of Adams Corp.’s outstanding common stock on January 2, year 1, for $400,000. The carrying amount of Adams’ net assets at the purchase date totaled $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an eighteen-year life. All inventory was sold during year 1. During year 1, Adams reported net income of $120,000 and paid a $20,000 cash dividend. Assume that Sage uses the equity method to account for this investment. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31, year 1?






6

On January 2, year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod’s stockholders’ equity was $500,000. The carrying amounts of Pod’s identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, year 1 balance sheet, what amount should Kean report as investment in subsidiary?






7

Park Co. uses the equity method to account for its January 1, year 1 purchase of Tun Inc.’s common stock. On January 1, year 1, the fair values of Tun’s FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park’s reported equity in Tun’s year 1 earnings?
Inventory excess
Land excess






8

An investor in common stock received dividends in excess of the investor’s share of investee’s earnings subsequent to the date of the investment. How will the investor’s investment account be affected by those dividends for each of the following investments? Available-forsale securities Equity method investment






9

Peel Co. received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it has classified the stock as available-for-sale or uses the equity method of accounting?
Available-for-sale
Equity






10

On January 1, year 1, Point, Inc. purchased 10% of Iona Co.’s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona’s common stock outstanding on August 1, year 1. During October year 1, Iona declared and paid a cash dividend on all of its outstanding common stock. Point uses the equity method to account for its investment in Iona. How much income from the Iona investment should Point’s year 1 income statement report?






Result

Total Questions:
Correct Answers:
Wrong Answers:
Percentage: