ACCT316 Lecture Notes - Lecture 17: Equity Method, Book Value
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1. Sork Inc. has a portfolio of marketable securities classified as available-for-sale securities. At the end of the year, the fair values of the securities exceeded their costs. How should Sork report the unrealized gains on its portfolio of marketable securities in the statement of stockholdersâ equity?
I. Only the cumulative amount of net gains are reported in the statement of stockholdersâ equity.
II. Only current period changes in the value of the investment are reported in the statement of stockholdersâ equity.
III. A correct journal entry to report unrealized gains would be an increase to the investment and an increase to other comprehensive income.
Multiple Choice
a. I and III only
b. II and III only
c. I only
d. III only
2. During 20X9, Alpha Co. purchased debt securities classified as trading securities. At the end of 20X9, the market value of Alphaâs investment in debt securities exceeded the amortized cost. Alpha should report the debt securities on its 20X9 balance sheet at
Multiple Choice
a. Amortized cost
b. Market value
c. Cost
d. Lower of cost or market
3. Misk Co. purchased the following securities during 20X7 to be classified as held-to-maturity securities, trading securities, or available-for-sale securities:
I. Debt securities bought and held for the purposes of reselling in the near future.
II. U.S. Treasury bonds that Misk intends and is able to hold to maturity.
III. Convertible preferred stock that Misk does not intend to sell in the near future.
Which of above securities purchased by Misk should be classified as available-for-sale securities?
Multiple Choice
a. I and II only
b. I and III only
c. III only
d. None of the above
4. Data regarding Rock Corp.âs available-for-sale securities follows:
| Cost | Market Value | ||||||
| December 31, 20X7 | $ | 80,000 | $ | 65,000 | |||
| December 31, 20X8 | $ | 80,000 | $ | 90,000 | |||
Differences between cost and market values are considered temporary. Rock does not elect the fair value option of accounting for available-for-sale securities.
Rockâs accumulated other comprehensive income would be
Multiple Choice
a. $0
b. $10,000
c. $25,000
d. $15,000
Hurricane Inc. purchased a portfolio of available-for-sale securities in 2016, its first year of operations. The cost and fair value of this portfolio on December 31, 2016, was as follows:
| 1 | Name | Number of Shares | Total Cost | Total Fair Value |
| 2 | Tornado Inc. | 830.00 | $14,857.00 | $16,185.00 |
| 3 | Tsunami Corp. | 1,230.00 | 31,488.00 | 34,809.00 |
| 4 | Typhoon Corp. | 2,170.00 | 44,268.00 | 43,834.00 |
| 5 | Total | $90,613.00 | $94,828.00 |
On June 12, 2017, Hurricane purchased 1,400 shares of Rogue Wave Inc. at $50 per share plus a $80 brokerage commission.
Required:
| A. | Provide the journal entries to record the following (refer to the Chart of Accounts for exact wording of account titles and be sure to enter the year as part of the date):
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| B. | How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities? |
Chart of Accounts
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| General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Journal
Shaded cells have feedback.
A. Provide the journal entries. Refer to the Chart of Accounts for exact wording of account titles. Be sure to enter the year as part of the date.
How does grading work?
PAGE 10
JOURNAL
Score: 33/51
| DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | |
|---|---|---|---|---|---|
| 1 | ? | ? | |||
| 2 | ? | ||||
| 3 | ? | ? | |||
| 4 | ? |
Points:
6.47 / 10
Feedback
Check My Work
1. The gain or loss is the difference between the portfolio cost and its fair value. The offset account for the gain or loss entry is the valuation allowance account.
2. Increase the investment and decrease Cash for the purchase price (Shares x Per share amount) plus brokerage fee.
Final Question
Shaded cells have feedback.
B. How are unrealized gains and losses treated differently for available-for-sale securities than for trading securities?
Unrealized gains and losses for available-for-sale securities are accumulated over time and reported as a credit (positive) or debit (negative) balance in the Stockholdersâ Equity section. As a result, the changes in fair valueare not reflected on the income statement, as is the case with trading securities. Bypassing the income statement issupported on the grounds that available-for-sale securities will be held for alonger time than trading securities; thus, fluctuations in market prices havea greater opportunity to âcancel outâ over time.
Points:
5 / 5