ACC 3100 Practice 2 Test PDF

Preview

Summary

Practice final exam ACC 3100...

Description

1.

In 2019, Osgood Corporation purchased $8.2 million worth of 10-year municipal bonds at face value. On December 31, 2021, the bonds had a fair value of $4,300,000 and Osgood reclassified the bonds from held-to-maturity to trading securities. Osgood's December 31, 2021, balance sheet and the 2021 income statement would show the following:

a. b. c. d.

Investment in bonds (TS) $4,300,000 $4,300,000 $8,200,000 $8,200,000

Income statement loss on investments $ 0 $3,900,000 $3,900,000 $ 0

Explanation 8.2-4.3=3.9 loss The unrealized holding loss ($3,900,000) on transfer to a new category of trading securities is included in income.

Theasset shel df ort r adi ngar er ecogni z edatf ai rval ue,I fsecur i t i esar econver t edf r om l ong t er m( Hel df orMat ur i t y)t oTr adi ngsecur i t i esar eval uedatl owerofcostorFai rmar ketval ueand di ffer encei sr ecogni z edasLossorpr ofit ,Upononsal eofsecur i t i eshel df ort r adi ngt henetpr ofitor l ossi sr ecogni sed.Hencet heanswerwoul dbe( b)

2. Beresford Inc. purchased several investments in debt securities during 2020, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.

Held-to-Maturity Securities: ABC Co. Bonds Trading Securities: DEF Co. Bonds GEH Inc. Bonds IJK Inc. Bonds Available-for-Sale Securities: LMN Co. Bonds

Fair Value 12/31/2020 $375,000

Fair Value 12/31/2021 $400,000

Amortized Cost 12/31/2020 $367,500

Fair Value 12/31/2020 $ 48,000 $ 47,000 $ 44,000

Fair Value 12/31/2021 $ 59,500 $ 77,000 $ 38,500

Cost $ 66,000 $ 39,000 $ 32,900

Fair Value 12/31/2020 $130,500

Fair Value 12/31/2021 $150,400

Cost $140,000

Amortized Cost 12/31/2021 $360,000

What balance sheet amount would Beresford report for the total of its investments in bonds at 12/31/2020? Explanation The held-to-maturity securities are reported at amortized cost, and the others are reported at fair value. 367500+48000+47000+44000+130500=$637,000

3. On January 1, 2021, Rupar Retailers purchased $120,000 of Anand Company bonds at a discount of $3,000. The Anand bonds pay 7% interest but were purchased when the market interest rate was 9% for bonds of similar risk and maturity. The bonds pay interest semiannually on June 30 and December 31 of each year. Rupar accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In Rupar's December 31, 2021, journal entry to record the second period of interest, Rupar would record a credit to interest revenue of: Explanation Interest

=(0.09/2)*(120000-3000+1,065)=5,313

Purchase value of bond = $120,000 - $3,000 = $117,000 Interest revenue recorded on 01.07.2016 = $117,000*9%*6/12 = $5,265 Interest received on 01.07.2016 =$120,000*7%*6/12 = $4,200 Discount amortized on 01.07.2016 = $5,265 - $3,000 = $2,265 Carrying value of bond on 01.07.2016 = $117,000 + $2,265 = $119,265

Rupar would record credit to interest revenue on 31.12.2016 = $119,265 *7%* 6/12 =$ Hence first option is correct.

1/1/2021

6/30/2021

Investment in bonds

$ 120,000

Discount on bond investment

$

Cash

$ 117,000

Cash (0.07/2) × ($120,000)

$

4,200

Discount on bond investment (difference)

$

1,065

$

4,200

$

1,113

Interest revenue (0.09/2) × ($120,000 − $3,000) 12/31/2021 Cash (0.07/2) × ($120,000) Discount on bond investment (difference) Interest revenue (0.09/2) × ($120,000 − $3,000 + $1,065)

$

5,265

$

5,313

4. 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:

-Reclassify the investment as held-to-maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date.

5. If Ziggy Company concluded that an investment originally classified as held-to-maturity would now more appropriately be classified as available-for-sale, Ziggy would

Reclassify the investment as available-for-sale and immediately recognize in accumulated other comprehensive income any unrealized holding gain or loss on the reclassification date.

6. Trading securities, by definition, are properly classified in the balance sheet as: Current assets.

7.

Dyckman Dealers has an investment in Thomas Corporation bonds that Dyckman accounts for as a trading security. Thomas Corporation's bonds are publicly traded and the prevailing market price indicates that Dyckman's investment is worth $20,000. However, Dyckman management believes that the bond market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on its balance sheet at: $20,000.

The small investment in equities and bonds must be valued at market value and must not be accounted for in-accordance with the speculation of the company. So the market value here is $20,000 and must be valued at this price irrespective of the management valuation.

8. Anthers Inc. bought the following portfolio of trading securities near the end of 2021. Security A B C

Cost $ 80,000 60,000 22,000

Fair value 12/31/2021 $ 84,000 54,000 22,000

What amount will be reported in the balance sheet for this portfolio at December 31, 2021, and how will it be classified?

a. b. c. d.

Amount $162,000 $162,000 $160,000 $160,000

Classification Noncurrent Asset Current Asset Noncurrent Asset Current Asset

3,000

Explanation $84,000 + $54,000 + $22,000 = $160,000

9. Zwick Company bought 23,500 shares of the voting common stock of Handy Corporation in January 2021. In December, Handy announced $209,600 net income for 2021 and declared and paid a cash dividend of $8.00 per share on all 201,500 shares of its outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2021 would be:

$188,000.

Explanation

Ownership share = 23,500/201,500 = 12%, so the equity method is not appropriate. 23,500 shares × $8.00 per share = $188,000

10. Hawk Corporation purchased 1,000 Diamond Corporation bonds in 2018 for $500 per bond and classified the investment as securities available-for-sale. The value of the Diamond investment was $600 per bond on December 31, 2019, and $650 per bond on December 31, 2020. During 2021, Hawk sold all of its Diamond investment at $700 per bond. If Hawk records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Hawk would record upon sale?

A debit of $200,000.

Explanation In 2019-2021, Hawk accumulated an unrealized gain and fair value adjustment of ($650 -500) x 1,000 shares = $150,000. An additional increase of {($700 -650) x 1,000 shares =} $50,000 occurred in 2018, so the total gain realized in the income statement would be $200,000.

Entries upon sale of Diamond bonds Entry 1 – Updating the fair value adjustment Need to move from a fair-value adjustment of $150,000 to $200,000

FV Adjustment $150,000 ? $200,000

Balance on 12/31/2020 ±Adjustment needed to update fair value Balance needed on date of sale

12/31/2020 Change needed Balance on date of sale

Fair-Value Adjustment $150,000 $50,000 $200,000

Fair value adjustment Gain on investments (unrealized, OCI)

$50,000 $50,000

Entry 2 – Reverse previously recognized unrealized holding gains and losses Reclassification adjustment—OCI Fair value adjustment (account balance)

$200,000 $200,000

Entry 3 – Record the sale transaction Cash Investment in bonds (AFS) Gain on investments (NI)

$700,000 $500,000 $200,000

11. Dim Corporation purchased 1,000 bonds of Witt Corporation in 2018 for $800 per bond and classified the investment as securities available-for-sale. The value of these holdings was $400 per bond on December 31, 2019, and $300 per bond on December 31, 2020. During 2021, Dim sold all of its Witt bonds at $350 per bond. In its 2021 income statement, Dim would report:

A loss on the sale of investments of $450,000.

As part of year-end fair value adjustment, Dim would remove any previously recorded fair value adjustment and accumulated other comprehensive income associated with the Witt investment. Explanation

($800 cost − $350 fair value) per bond × 1,000 bonds = $450,000 loss.

12. On July 1, 2021, Tremen Corporation acquired 45% of the shares of Delany Company. Tremen paid $3,010,000 for the investment, and that amount is exactly equal to 45% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,100,000 for 2021, and paid $150,000 of dividends each quarter to its shareholders. After all closing entries are made for the year ended December 31, 2021, Tremen's "Investment in Delany Company" account would have a balance of:

$3,122,500.

Explanation use equity method because is more than 20%

$3,010,000 + (45%)(1/2 of the year)($1,100,000 − $600,000) = $3,122,500

13.Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method. Bloomfield carried the Clor investment at $150,700 and $165,650 at December 31, 2020, and December 31, 2021, respectively. During 2021 Clor recognized $75,650 of net income and paid dividends of $20,850. Assuming that Bloomfield owned the same percentage of Clor throughout 2021, its percentage ownership must have been: (Round your answer to the nearest whole percent):

27%.

Explanation

$150,700 + X% ($75,650 − $20,850) = $165,650. X% = 27%. 14. At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends. The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:

million. Explanation

(in millions) FV in excess of book value Share of ownership Additional depreciation, in total 15*30%=4.5

$ 15 30% $4.5

$4.5

15. Assume that, on January 1, 2021, Sosa Enterprises paid $3,000,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2021, the book value of Orioles' identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Orioles during 2021: USE EQUITY METHOD 36000/120000=30%

Net income Dividends declared and paid Market price of common stock on 12/31/2021

$600,000 $360,000 $ 80/share

What amount would Sosa Enterprises report in its year-end 2021 balance sheet for its investment in Orioles Co.?

$3,027,000. Explanation 7,000,000-1,000,000=3 mill-1.8 from land=1.2 mill

This is $3,000,000 + (30% × $600,000 net income) − (30% × $360,000 dividends) − (30% × $1,200,000/8 yrs. of additional depreciation).

16. Dicker Furriers purchased 1,000 bonds of Loose Corporation on January 10, 2020, for $800 per bond and classified the investment as securities available-for-sale. Loose's market value was $400 per bond on December 31, 2020, and the decline was due to a noncredit loss. As of December 31, 2021, Dicker still owned the Loose bonds whose market value had declined to $100 per bond. The additional decline is due to a credit loss of $300 per bond. During 2021 Dicker determined for the first time that it was more likely than not that it would have to sell the Loose investment before fair value recovers. Dicker's December 31, 2021, balance sheet and the 2021 income statement would show the following:

a. b. c. d.

Investment in Loose bonds $ 100,000 $ 100,000 $ 800,000 $ 500,000

Explanation

Income statement loss on investments $ 700,000 $ 300,000 $ 0 $ 300,000

The investment would be carried at fair value. Because it is more likely than not that the investment will have to be sold before fair value recovers, the entire $700 of loss would be included in net income, including $400 from 2020 that is reclassified from AOCI to net income. 17. On January 12, 2021, Jefferson Corporation purchased bonds of Rose Corporation for $73 million at par and classified the securities as available-for-sale. On December 31, 2021, these bonds were valued at $67 million. Nine months later, on October 3, 2022, Jefferson Corporation sold these bonds for $87 million. As part of the multistep approach to record the 2022 transaction, Jefferson Corporation should next take the second step of:

Reversing total accumulated unrealized holding gains of $14 million. Explanation

2021 unrealized holding loss of $6 million offset by 2022 unrealized holding gain of $20 million = $14 million accumulated unrealized holding gain. Alternatively, the accumulated unrealized holding gain from date of purchase to date of sale is $87 million (sale) – $73 million = $14 million accumulated unrealized holding gain.

18. Loreal-American Corporation purchased several marketable securities during 2021. At December 31, 2021, the company had the investments in bonds listed below. None was held at the last reporting date, December 31, 2020, and all are considered securities available-for-sale.

Cost Short term: Blair, Inc. ANC Corporation Totals

$ $

504,000 462,000 966,000

Long term: Drake Corporation$ 504,000 Aaron Industries 708,000 Totals $1,212,000

Fair Value $

Unrealized Holding Gain (Loss)

393,000 504,000 897,000

$

572,000 672,000 $1,244,000

$

$ $

$

$

(111,000) 42,000 (69,000) 68,000 (36,000) 32,000

Required: 1. Prepare appropriate adjusting entries at December 31, 2021.

2. What amount would be reported in the income statement at December 31, 2021, as a result of the adjusting entry? Explanation

1.

Need to move from a fair value adjustment of $0 to ($37,000):

Balance on 1/1/2021 ± Adjustment needed to update fair value Balance needed on 12/31/2021 ($32,000 − $69,000)

Fair Value Adjustment

Fair Value Adjustment $ 0 ? ($ 37,000)

1/1/2021 Change needed 12/31/2021

0 37,000 37,000

2. None. Accumulated net holding gains and losses for securities available-for-sale are reported as a component of shareholders' equity (in accumulated other comprehensive income), and changes in the balance are reported as other comprehensive income or loss in the statement of comprehensive income rather than as part of net income. This statement can be reported either (a) as a combined statement of comprehensive income that includes net income and other comprehensive income, or (b) as a separate statement of comprehensive income.

19. Mills Corporation acquired as a long-term investment $240 million of 6% bonds, dated July 1, on July 1, 2021. Company management has classified the bonds as an available-for-sale investment. The market interest rate (yield) was 4% for bonds of similar risk and maturity. Mills paid $280 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2021, was $270 million. Required: 1. & 2. Prepare the journal entry to record Mills’ investment in the bonds on July 1, 2021 and interest on December 31, 2021, at the effective (market) rate.

Explanation interest calculation Cash (3% × $240 million) = $7.2 Interest revenue (2% × $280) = $5.6 3. At what amount will Mills report its investment in the December 31, 2021, balance sheet?

The amortized cost of the bonds is $240 + ($40 – $1.6) = $278.4.

Investment in bonds $240.0 Plus: Premium on bond investment ($40 – $1.6 million) 38.4 Amortized cost $278.4 Therefore, to adjust to fair value of $270, Tanner-UNF would need a fair value adjustment of $270 – $278.4 = ($8.4). Fair Value Adjustment Balance on 7/1/2021 $ 0 ± Adjustment needed to update fair value ? Balance needed on 12/31/2021 ($270 − $278.4) ($ 8.4)

Fair Value Adjustment 7/1/2021 0 Change needed 8.4 12/31/2021 8.4 Mills would record the following journal entry:

Loss on investments (unrealized, OCI) Fair value adjustment

8.4 8.4

4. Suppose Moody’s bond rating agency upgraded the risk rating of the bonds, and Mills decided to sell the investment on January 2, 2022, for $290 million. Prepare the journal entries required on the date of sale.

Step 1) Updating the Fair Value adjustment: Need to move from a Fair Value adjustment from ($8.4) to $11.6:

Fair Value Adjustment Balance on 12/31/2021 ($ 8.4) ± Adjustment needed to update fair value ? Balance needed on 1/2/2022 ($290 − 278.4) $ 11.6

Fair Value Adjustment 12/31/2021 8.4 Change needed 20.0 1/2/2022 11.6

Fair Value adjustment, AFS investment Gain on investments (unrealized, OCI)

Step 2) Recording any reclassification adjustment

20 20

Need to move from a Fair Value adjustment from $11.6 to $0: Fair Value Adjustment $ 11.6 ?

Balance on 1/2/2022 ± Reclassification adjustment

Balance needed to close fair value adjustment

$

0

Fair Value Adjustment 1/2/2022 11.6 Change needed 11.6 1/2/2022 0

Reclassification adjustment—OCI (to balance) Fair Value adjustment, AFS investment

11.6 11.6

Step 3) Recording the sale transaction: Note: The gain included in NI equals the difference between the proceeds ($290 million) and the carrying value of the investment ($278.4 million). It also equals the amount of unrealized gain that had accumulated in AOCI and was removed from AOCI with the reclassification adjustment.

20. At December 31, 2021, Hull-Meyers Corp. had the following investments that were purchased during 2021, its first year of operations: Amortized cost Fair Value Trading Securities: Security A Security B

$

900,000 105,000

$

1,005,000

$1,010,000

$

$

$

700,000 900,000 1,600,000

Securities to Be Held-toMaturity: Security E $ Security F

490,000 615,000

Totals Securities Available-forSale: Security C Security D Totals

Totals

$

1,105,000

$

910,000 100,000

780,000 915,000 $1,69...