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Question
Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories. What are these two categories? How do we report unrealized holding gains and losses under each of these two categories?
Answer
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Under U.S. GAAP, development expenditures are capitalized, while under IFRS, these expenditures must be expensed immediately.
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The primary objective of the IASB is to develop accounting standards in the U.S.
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In common law countries (such as the U.S., the U.K., and Canada), greater emphasis is placed on public information than in code law countries (such as France and Germany).
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Under what circumstances do we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method.
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Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on January 1, 2015. The market interest rate for bonds of similar risk and maturity is 7%. Interest is received semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2015.
Q:
General Investment Co. (GIC) purchased bonds on January 1, 2015. GIC's accountant has projected the following amortization schedule from purchase until maturity: Date
Cash Paid
Interest Expense
Increase in Carrying Value
Carrying Value 1/1/15 $194,758 6/30/15
$7,000
$7,790
$790
195,548 12/31/15
7,000
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822
196,370 6/30/16
7,000
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7,889
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198,114 6/30/17
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199,039 12/31/17
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961
$200,000 Recording the bond purchase would have what effect on the financial statements?
a. Increase assets.
b. Increase liabilities.
c. Increase assets and liabilities.
d. No effect on total assets and total liabilities.
Q:
Consolidated financial statements are prepared when one company has:
a. Accounted for the investment using the equity method.
b. Accounted for the investment as available-for-sale securities.
c. Control over another company.
d. None of these is correct.
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Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectaculars net income under the equity method?
a. Increase net income by $32,000.
b. Increase net income by $30,000.
c. Increase net income by $2,000.
d. No effect.
Q:
When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:
a. As a reduction in the Investments account.
b. As an increase in the Investments account.
c. As dividend income.
d. As a contra item to stockholders' equity.
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Investments are reported at fair value when a company has a significant influence over another company in which it invests.
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Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year.
Q:
Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided.
Terms:
a. Annuity
b. Future value of a single amount
c. Discount rate
d. Future value of an annuity
e. Interest
f. Compound interest
g. Present value of a single amount
h. Time value of money
i. Simple interest
j. Present value of an annuity
Phrases:
_____ A dollar now is worth more than a dollar later.
_____ A series of equal periodic payments.
_____ Accumulation of a series of equal payments.
_____ Interest earned on the initial investment and on previous interest.
_____ Accumulation of an amount with interest.
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Which three factors are necessary in calculating the present value of a single amount?
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Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a premium?
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Why do some companies issue bonds rather than borrow money directly from a bank?
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Western World has the following selected data ($ in millions): Balance Sheet Data
2015
2014 Total Assets
$2,511
$2,315 Total Liabilities
1,685
1,525 Total Stockholders Equity
826
790 Income Statement Data Sales
$786 Interest Expense
77 Tax Expense
32 Net Income
80 Based on these amounts, calculate the following ratios for Western World in 2015:
1. Debt to equity ratio.
2. Return on assets ratio.
3. Return on equity ratio.
4. Times interest earned ratio.
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Interest Expense [($30,000 - $554.55) x 6% x 1/12]
23 Notes Payable (difference)
557.32 Cash (monthly payment) 704.55 (to record the second monthly payment)
Q:
Interest Expense ($30,000 x 6% x 1/12)
00 Notes Payable (difference)
554.55 Cash (monthly payment) 704.55 (to record the first monthly payment)
Q:
On January 1, 2015, Ripstick Park issues $800,000 of 8% bonds, due in ten years, with interest payable semiannually on June 30 and December 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $856,850.
1. Complete the first three rows of an amortization table through December 31, 2015.
2. Record the bond issue on January 1, 2015, and the first two semi-annual interest payments on June 30, 2015, and December 31, 2015.
Q:
Presented below is a partial amortization schedule for Premium Foods: (1) Period
(2) Cash Paid
(3) Interest Expense
(4) Decrease in Carrying Value
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$2,800
$2,579
$221
85,730 2
2,800
2,572
228
85,502 1. Record the bond issue.
2. Record the first interest payment.
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Regarding a contingent liability, when no amount within a range of potential losses appears more likely than others, we record the maximum amount in the range.
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All states impose a general state sales tax, and many areas include an additional local sales tax.
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Companies are required by law to withhold federal and state income taxes from employees paychecks and remit these taxes to the government.
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Deductions from employee salaries in determining the amount of payroll checks include withholdings for federal and state income taxes, FICA taxes, and the employee portion of insurance and retirement contributions.
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Accounts payable are amounts the company owes to suppliers of merchandise or services that it has bought on credit.
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A line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork.
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We record interest expense in the period in which we pay it, rather than in the period we incur it.