Exam 14: Appendix B: Accounting for Investments and Consolidated Financial Statements

Angle Norde holds an 18% equity investment in Tan Zone. Barnard Company holds 33% of Tan Zone's stock. On November 1, Tan Zone declares and pays dividends to its stockholders. How will the dividend affect each company's investment account?

Available-for-sale securities are those that management intends to sell in the near future.

When investments are classified as available-for-sale, market value changes are recognized in the income statement as unrealized gains or losses.

The following is from the financial statement footnotes from Chelsea Retailers: As of December 31, 2019, the Company's marketable securities approximated the fair market values of the securities and the unrealized gains and losses on these securities were not significant. As of December 1, 2019, the Company had recorded an unrealized gain of approximately $2.3 million in comprehensive loss on its investment in a certain private company. In fiscal 2020 the Company sold this investment in its entirety and realized a gain on the sale of $2.9 million. Required a. How did Chelsea classify these marketable securities? How do you know? b. How did the unrealized gain of $2.3 million affect Chelsea's 2019 net income?

In which investment classification do market value changes affect the income statement?

On October 1, Gordon Company purchased $100,000 face value of 10% Strong Company bonds at 98. The brokerage commission was $50. The bonds pay interest each March 31 and September 30. What amount should be recorded as an increase to the bond investment account on October 1?

Under the equity method, if the fair market value of the investee company increases, and the increases are deemed other-than-temporary, the book value of the investment on the investor's balance sheet is adjusted upward to reflect the increase in value.

Jake Corporation purchases an investment in Dempsey, Inc. at a purchase price of $3.5 million cash, representing 25% of the book value of Dempsey, Inc. During the year, Dempsey, Inc. reports net income of $250,000 and pays $50,000 of cash dividends. At the end of the year, the market value of Jake's investment is $3.2 million. Required a. What is the year-end balance of the equity investment account? b. What amount of investment income would be reported by Jake Corporation? c. How are dividends treated in equity method accounting? d. What is the amount of the unrealized gain or loss to be reported for the year?

Under the equity method, the investment account is adjusted to the market value of the stock at the end of the period.