Q9-1. What measure (fair value or amortized cost) is on the balance sheet for (a
ID: 2460605 • Letter: Q
Question
Q9-1. What measure (fair value or amortized cost) is on the balance sheet for (a) trading securities, (b) available-for-sale securities, and (c) held-to-maturity securities?
Q9-2. What is an unrealized holding gain (loss)? Explain.
Q9-3. Where are unrealized holding gains and losses related to trading securities reported in the financial statements? Where are unrealized holding gains and losses related to available-for-sale securities reported in the financial statements?
Q9-4. What does significant influence imply regarding intercorporate investments? Describe the accounting procedures used for such investments.
Q9-5. On January 1 of the current year, Yetman Company purchases 40% of the common stock of Livnat Company for $500,000 cash. This 40% ownership allows Yetman to exert significant influence over Livnat. During the year, Livnat reports $160,000 of net income and pays $120,000 in cash dividends. At year-end, what amount should appear in Yetman’s balance sheet for its investment in Livnat?
Q9-6. What accounting method is used when a stock investment represents more than 50% of the investee company’s voting stock and allows the investor company to “control” the investee company? Explain.
Q9-7. What is the underlying objective of consolidated financial statements?
Q9-8. Finn Company purchases all of the common stock of Murray Company for $375,000 when Murray Company has $150,000 of common stock and $225,000 of retained earnings. If a consolidated balance sheet is prepared immediately after the acquisition, what amounts are eliminated in consolidation? Explain.
Q9-9. Bradshaw Company owns 100% of Dee Company. At year-end, Dee owes Bradshaw $150,000 arising from a loan made during the year. If a consolidated balance sheet is prepared at year-end, how is the $150,000 handled? Explain.
Q9-10. What are some limitations of consolidated financial statements?
Explanation / Answer
1)
2)
A gain from holding an asset and the gain has not yet been reported in the financial statements. As an example, assume that a company purchased land many years ago and continues to hold the land. The land was purchased at a cost of $20,000 but is now appraised at $300,000. Because of the cost principle and the revenue recognition principle, the land will be reported at its cost of $20,000. The holding gain of $280,000 is not realized or reported until the company sells the land.
3)
Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income. A holding gain or loss is the net change in the fair value of a security from one period to another, exclusive of dividend or interest revenue recognized but not received. A valuation account called “Securities Fair Value Adjustment (Trading)” is used instead of debiting or crediting the Trading Securities account.
4)
An investment in financial assets is typically categorized as having ownership of less than 20% in an investee. Such a position would be considered a "passive" investment because in most cases an investor would not have significant influence or control over an investee. At acquisition, the assets (investment in investee) are recorded on the investing firm's (investor) balance sheet at fair value. As time elapses and the fair value of the assets changes, the accounting treatment will be dependent upon the classification of the assets.
An influential investment in an associate is accounted for using the equity method of accounting. The original investment is recorded on the balance sheet at cost (fair value). Subsequent earnings by the investee are added to the investing firm's balance sheet ownership stake (proportionate to ownership), with any dividends paid out by the investee reducing that amount. The dividends received from the investee by the investor however are recorded on the income statement.
When accounting for business combinations the acquisition method is used. Under the acquisition method, both the companies' assets, liabilities, revenues and expenses are combined. If the ownership stake of the parent company is less than 100%, it is necessary to record a minority interest account on the balance sheet to account for the amount of the subsidiary not controlled by the acquiring firm.
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