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Exam 15:Investments

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Question 1

Multiple Choice

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Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to as the

A) parent
B) minority interest
C) affiliate
D) subsidiary

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

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Question 2

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Following are data for the trading securities held by Lindy Company as of December 31: ​ $\begin{array}{|l|c|c|c|c|c|}\hline\text { Name } & \begin{array}{c}\text { Number of } \\\text { Shares }\end{array} & \begin{array}{c}\text { Cost } \\\text { per Share }\end{array} & \begin{array}{c}\text { Fair Value } \\\text { per Share }\end{array} & \text { Total Cost } & \text { total Fair Value } \\\hline \text { Laurie, Inc. } & 1,200 & \$ 15.00 & \$ 15.40 \\\hline \text { Scott Corp. } & 800 & 8.00 & 8.25 \\\hline \text { Stephanie Company } & 700 & 14.40 & 13.50 \\\hline \text { Timmer Company } & 900 & 12.35 & 10.77 \\\hline \text { Total } & & & \\\hline\end{array}$ ​ (a) Complete the table above to find the total cost and fair value for the company's trading securities portfolio. (b) Calculate and record the required December 31 adjustment. (c) Explain how the adjustment from step (b) is reported on Lindy's financial statements.

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\(\begin{array}{|l|c|c|c|c|c|} \hline\text { Name } & \begin{array}{c} \text { Number of } \\ \text { Shares } \end{array} & \begin{array}{c} \text { Cost } \\ \text { per Share } \end{array} & \begin{array}{c} \text { Fair Value } \\ \text { per Share } \end{array} & \text { Total Cost } & \text { total Fair Value } \\ \hline \text { Laurie, Inc. } & 1,200 & \$ 15.00 & \$ 15.40 & \$ 18,000 & \$ 18,480 \\ \hline \text { Scott Corp. } & 800 & 8.00 & 8.25 & 6,400 & 6,600 \\ \hline \text { Stephanie Company } & 700 & 14.40 & 13.50 & 10,080 & 9,450 \\ \hline \text { Timmer Company } & 900 & 12.35 & 10.77 & \underline{11,115} & {9,6 9 3} \\ \hline \text { Total } & & & & \$ 445,595 & \$ 44,223 \\ \hline \end{array}\) ​ \(\begin{array}{|l|l|l|} \hline \text { (b) } & & \\ \hline \text { Unrealized Loss on Trading Investments } & 1,372 & \\ \hline \text { Valuation Allowance for Trading Investments } & & 1,372 \\ \hline \$ 45,595-\$ 44,223=\$ 1,372 \text { unrealized loss } & & \\ \hline \end{array}\) ​ (c) The unrealized loss will be shown as an "Other Expense" on the income statement and the valuation allowance will be shown as a reduction of the value of the trading investment portfolio (at cost) in the assets section of the balance sheet.

Question 3

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The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee.

The equity method of accounting for investments

Albright Company purchased as a long-term investment $500,000 of Benton Corporation 10-year, 9% bonds. Present entries to record the following selected transactions: (a) Purchased bonds at 93 for $\$ 465,000$ . (b) Sold half the bonds at 98 plus accrued interest of $\$ 4,000$ . The broker deducted $\$ 200$ for brokerage fees and taxes, remitting the balance. The bonds were carried at $\$ 479,000$ at the time of the sale.

Compare and contrast why companies invest cash in short-term temporary investments vs. long-term investments.

Present entries to record the following selected transactions of Masterson Co. (a) Purchased 600 shares of the 100,000 shares outstanding $\$ 10$ par common shares of Dankin Corporation for $\$ 5,100$ . (b) Purchased 3,500 shares of the 10,000 shares no par common shares of Ramon Co. for $\$ 45,700$ . The investment was accounted for by the equity method. (c) Received a cash dividend of $\$ 1$ per share on the Dankin Corporation stock acquired in (a). (d) Received a cash dividend of $\$ 2$ per share on the Ramon Co. stock acquired in (b). (e) Sold 100 shares of the Dankin Corporation shares acquired in (a) for $\$ 2,100$ . (f) Dankin Corporation reported net income of $\$ 30,000$ and Ramon Company's reported net income was $\$ 50,000$ .

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. This purchase represents less than 20% ownership of the Lucas Company. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. ​ Prepare the journal entries for the original purchase, dividend, and sale under the fair value method.

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

Financial statements in which financial data for two or more companies are combined as a single entity are called

When shares of stock held as an investment are sold, the difference between the proceeds and the balance of the investment account is recorded as a(n)

The account Unrealized Gain (Loss) on Available-for-Sale Investments should be included on the

In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.

Investment in Bonds is reported on the balance sheet at lower of cost or market.

Match each of the definitions that follow with the appropriate investment term.

Trading securities are reported on the balance sheet at fair value.

On May 1, Pierce Company purchased $60,000 of Stanton Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest. ​ -The journal entry Pierce will record on February 1 will include a

Unrealized gains and losses on trading securities are not included in the calculation of income from operations.

Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment.

An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale?