Test Bank, Chapter 1 1-1

© Cambridge Business Publishers, 2013 Test Bank, Chapter 1 1-1

TEST BANK

CHAPTER 1

Intercorporate Investments: An Overview

MULTIPLE CHOICE

Use the following information on a company’s investments in equity securities to answer questions 1- 4 below.The company’s accounting year ends December 31.Investment Date of acquisition Cost Fair value

12/31/13

Date sold Selling price Ajax Company stock 6/20/13 $40,000 $35,000 2/10/14 $32,000 Bril Corporation stock 5/1/13 20,000 N/A 11/15/13 26,000 Coy Company stock 8/2/13 16,000 16,500 1/17/14 23,000

1.Topic: Accounting for trading securities

LO 1 If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2013 income statement?

• $1,500 gain
• $6,000 gain
• no gain or loss
• $4,500 loss

ANS: a

2.Topic: Accounting for trading securities

LO 1 If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2014 income statement?

• $1,000 loss
• $4,000 loss
• $3,500 gain
• $6,000 loss

ANS: c

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© Cambridge Business Publishers, 2013 1-2Advanced Accounting, 2nd Edition

3.Topic: Accounting for AFS securities

LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities, on the 2013 income statement?

• $1,500 gain
• $6,000 gain
• no gain or loss
• $4,500 loss

ANS: b

4.Topic: Accounting for AFS securities

LO 1 If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities, on the 2014 income statement?

• $6,000 loss
• $4,000 loss
• $3,500 gain
• $1,000 loss

ANS: d

Use the following information to answer questions 5-7 below:

A company holds a $100,000 face value corporate bond, bought January 1, 2013, paying 4% annually on December 31, and maturing December 31, 2016. The company paid $93,070 for the bond, to yield 6%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31.

5.Topic: Accounting for HTM securities

LO 1 What amount will the company report as interest revenue on the bond for 2014?

• $4,000
• $5,584
• $5,679
• $6,000

ANS: c 2 / 4

© Cambridge Business Publishers, 2013 Test Bank, Chapter 1 1-3

6. Topic: Accounting for HTM securities

LO 1 What is the entry to record receipt of interest and principal on December 31, 2016, assuming no impairment on the bond throughout its life?

• Cash 104,000

Interest revenue 5,887 Investment in bond 98,113

• Cash 104,000

Interest revenue 4,000 Investment in bond 100,000

• Cash 106,000

Interest revenue 6,000 Investment in bond 100,000

• Cash 104,000

Interest revenue 5,584 Investment in bond 98,416

ANS: a

7. Topic: Accounting for HTM securities

LO 1 Assume the market value of the bond on December 31, 2013 is $80,000, and no previous impairment has been reported. The decline in value is considered to be other than temporary. What impairment loss is reported on the company’s 2013 income statement?

• $20,000
• $13,070
• $14,654
• $24,000

ANS: c

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© Cambridge Business Publishers, 2013 1-4 Advanced Accounting, 2nd Edition

Use the following information to answer questions 8-11 below:

Peregrine Company acquires 30% of the voting stock of Falcon Corporation for $6,000,000 on January 1, 2014. At the time, the book value of Falcon was $20,000,000. During 2014 Falcon reported net income of $2,000,000 and paid dividends of $500,000. Both companies have December 31 year-ends.

8. Topic: Equity method investments

LO 2 What is the investment balance on Peregrine’s balance sheet on December 31, 2014?

• $6,000,000
• $6,150,000
• $6,600,000
• $6,450,000

ANS: d

9. Topic: Equity method investments

LO 2 Now assume Falcon’s book value at the date of acquisition was $14,000,000, and the excess paid over book value is attributed to previously unrecorded intangibles with an estimated remaining life of 10 years. Straight-line amortization is appropriate. What amount does Peregrine report as equity in net income of Falcon for 2014?

• $ 270,000
• $1,820,000
• $ 420,000
• $ 600,000

ANS: c

10. Topic: Equity method investments

LO 2 Assume the same information as in question 9. What is the investment balance on December 31, 2014, reported on Peregrine’s balance sheet?

• $6,270,000
• $6,150,000
• $7,670,000
• $6,000,000

ANS: a

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