Exam 14: Investments

On January 1,2012,Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment.The records of Burke Corporation showed the following at December 31,2012: Net Income \ 500,000 Dividends Paid \ 200,000 Market Price per Share \ 38 What amount should Gilman Company report in its December 31,2012,balance sheet for its investment in Burke?

Gains and losses on the sale of equity investments are recorded in the income statement as part of net income.

When insignificant influence exists,the investment should be accounted for by the equity method.

Investments are reported at fair value when a company has a significant influence over another company in which it invests.

Because the carrying value of bonds purchased at a premium increases over time,interest revenue will also increase each semi-annual interest period.

On September 1,Investors,Inc.purchases 1,000 shares (insignificant influence)of $1 par value common stock of Hamilton International at $15 per share.On October 15,the investment is sold for $18 per share.Record the purchase and sale of the investment in Hamilton International.

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities.At the end of the year,the fair value of the securities was $105,000.How should the investment be reported in the year-end financial statements?

Under the equity method,the investor includes in net income its portion of the investee's net income.

Sandy Sensations purchases twenty,$1,000,7%,10-year bonds issued by Pizza Pier for $21,488 on January 1,2012.The market interest rate for bonds of similar risk and maturity is 6%.Interest is received semi-annually on June 30 and December 31. 1.Record the investment in bonds. 2.Record receipt of the first interest payment on June 30,2012.

Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income.

The cash received from interest equals the face value of the investment in bonds times the stated interest rate.

The primary difference in accounting for available-for-sale securities and accounting for trading securities is:

When the investor has significant influence,the receipt of cash dividends is recorded as dividend revenue.

One of the primary reasons for investing in debt securities includes:

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: Cash Interest Increase in Carrying Date Paid Expense Carrying Value Value 1/1/12 \ 194,758 6/30/12 \ 7,000 \ 7,790 \ 790 195,548 12/31/12 7,000 7,822 822 196,370 6/30/13 7,000 7,855 855 197,225 12/31/13 7,000 7,889 889 198,114 6/30/14 7,000 7,925 925 199,039 12/31/14 7,000 7,961 961 \ 200,000 GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12.What gain or loss,if any,would GIC record on this date? A)No gain or loss. B)$370 loss. C)$4,000 loss. D)$4,000 gain.

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?

Discuss the meaning of consolidated financial statements.When is it appropriate to consolidate financial statements of two companies?

General Investment Co.(GIC)purchased bonds on January 1,2012.GIC's accountant has projected the following amortization schedule from purchase until maturity: 11edc649_031c_baf2_a63e_99b6faa5ec9b_TB5910_ 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.

Libby Company purchased equity securities for $100,000 and classified them as trading securities.At the end of the year,the fair value of the securities was $105,000.How should the investment be reported in the year-end financial statements?

The equity method of accounting for investments in voting common stock is appropriate when: