Question

1. On October 1, 20X1, ABC Limited makes available bonds that can be purchased by investors at a market value of 107. Your company buys a bond with a face or maturity value of $200,000 on that date. The bond pays interest annually on September 30 starting in 20X2. When the bond was purchased, the market interest rate was 2% and the stated or coupon interest rate on the bond was 4%. Your company has a year-end on December 31, 20X1. The amount of interest revenue that your company will record for the 20X1 fiscal year ending on December 31, 20X1 would be:

a) $2,140

b) $1,427

c) $2,000

d) $1,070

2. Olde Corp. accounts for its investment in the common shares of Young Inc. under the equity method. Olde Corp. should record a cash dividend received from Young as

a) a reduction of the carrying value of the investment.

b) additional paid-in capital.

c) an addition to the carrying value of the investment.

d) dividend income.

3. On April 1, 20X1 a company purchased a bond that matures on December 31, 20X10 with a maturity amount of $200,000. The bond pays interest semi-annually on June 30 and December 31. The bonds have at a stated interest rate of 6%. When the bond was purchased the market interest rate was 4%. Based on the preceding information and ignoring commissions, the cash paid for the bond plus any accrued interest on March 1 would be which of the following amounts?

a) $235,033

b) $234,033

c) $232,703

d) $233,357

e) None of the above

4. During 20X1 a company purchased 200 shares of Royal Bank at $70 per share and 1,000 shares of Manulife at $18 per share. The company holds the Royal Bank shares for trading purposes, using the FV-NI model and it uses the FV-OCI model for the Manulife shares. By the end of 20X1, the Royal Bank shares are trading at $80 each and the Manulife shares are trading at $15 each. The company uses separate accounts for each investment and for all forms of investment income. Based on the above, the company will record in its financial statements for the year ended December 31, 20X1:

a) An unrealized gain of $2,000 in the income statement and an unrealized loss of $3,000 in other comprehensive income.

b) An unrealized gain of $2,000 in other comprehensive income and an unrealized loss of $3,000 in the income statement.

c) An unrealized loss of $1,000 in other comprehensive income

d) An unrealized loss of $1,000 in the income statement

e) None of the above

5. On January 2, 2019, Hull Corp. purchased 200 of the 1,000 outstanding common shares of Gatineau Ltd. for $120,000. During 2019, Gatineau declared total cash dividends of $20,000 and reported net income for the year of $80,000. If Hull uses the cost model to account for its investment in Gatineau, Hull’s Investment in Gatineau Ltd. account at December 31, 2019 should be

a) $136,000.

b) $132,000.

c) $120,000.

d) $116,000.

6. On its December 31, 2019 balance sheet, Holly Corp. reported a short-term investment in equity securities, under the fair value through net income model, at $660,000. At December 31, 2020, the fair value of the securities was $700,000. What should Holly report on its 2018 income statement as a result of the increase in fair value of the investments during 2020?

a) $0.

b) loss on investments of $40,000.

c) unrealized gain of $40,000.

d) investment income of $40,000.

7. George Inc. owns bonds that are accounted for under the fair value through net income model. On December 31, 2019, the bonds have a carrying value of $124,365. The fair value at that date is $123,000. The entry to record the year-end adjustment is

a) Dr. Investment Income or Loss 1,365

             Cr. FV–NI Investments 1,365

b) Unrealized Holding Loss on FV–OCI Investments

             Cr. FV–NI Investments 1,365

c) FV–NI Investments 1,365

             Cr. Unrealized Holding Gain on FV–NI Investments 1,365

d) No adjustment is required.

8. If Thunder Bay acquired a 20% interest in Fort William on December 31, 2019 for $45,000, and during 2018 Fort William reported net income of $25,000 and paid a total cash dividend of $10,000, applying the equity method would give a debit balance in the Investment in Fort William Corp. account at the end of 2020 of

a) $37,000.

b) $45,000.

c) $48,000.

d) $50,000.

Use the following information to answer questions 9 and 10

On January 1, 2019, on their issue date, Diogenes Inc. purchased 9%, $200,000, 10-year bonds. Interest is paid annually on December 31. Diogenes uses the amortized cost model and the effective-interest method for amortizing premium or discount. The current market rate was 10% for bonds. On December 31, 2019, the bonds have a market value of $185,000.

9. What is the amount paid for the bond on January 1, 2019

a) $178,711

b) $200,000

c)$187,711

d) $185,000

10. How much interest would be recorded in 2019?

a) $771

b) $18,000

c) $20,000

d) $18,771

Answer 1

Answer-1:

Option d is the correct answer

Explanation:

The amount of interest revenue that your company will record for the 20X1 fiscal year ending on December 31, 20X1 would be = $214,000 * 2% * 3/12 = $1,070

Answer-2:

Option a is the correct answer

A reduction of the carrying value of the investment.

Answer-3:

Option c is the correct answer

Answer-4:

Option a is the correct answer

An unrealized gain of $2,000 in the income statement and an unrealized loss of $3,000 in other comprehen income.

Answer-5:

Option c is the correct answer

$120,000

Answer-6:

Option c is the correct answer

Unrealized gain of $40,000.