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Questions and Answers of Accounting

Briefly describe how to determine and record the gain or loss on the sale of an investment in available-for-sale securities.
When are investments in bonds held to maturity purchased at a premium? How does the amortization of a premium under the effective interest method affect interest revenue?
When are investments in bonds held to maturity purchased at a discount? How does the amortization of a discount under the effective interest method affect interest revenue?
Briefly describe the two methods available to determine interest revenue and account for premiums and discounts on investments in bonds held to maturity.
Briefly describe how to record the transfer of an investment in a debt security (a) From the held-to-maturity category to the available-for-sale category, and (b) From the available-for-sale category
Show the balance sheet disclosures of an investment in available-for-sale securities that a company classifies as current and has a fair value in excess of cost.
Discuss the rationale behind the use of the equity method for an investment in common stock.
Briefly describe the accounting for an investment in common stock under the equity method.
Identify the facts and circumstances that would preclude an investor from using the equity method, even if it owns more than a 20% investment in an investee.
Discuss the appropriate accounting treatment to use when (a) An investor acquires enough additional common stock during a year to change from using the fair value method to using the equity method,
Why is the cash surrender value of a life insurance policy on which the company is the beneficiary carried as an investment? How does the company determine the increase in this amount and the amount
What is a fund? Distinguish between a fund and an appropriation of retained earnings.
(Multiple Choice)1. On its December 31, 2006 balance sheet, Fay Company appropriately reported a $2,000 credit balance in its Allowance for Change in Value of Investment. There was no change during
Midwest Bank invests in trading securities. At the beginning of December 2007, the bank held no trading securities. During December of 2007, it entered into the following trading securities
Southern Bank invests in trading securities and prepares quarterly financial statements. At the beginning of the fourth quarter of 2007, the bank held as trading securities 200 shares of Company E
On December 31, 2006 Marsh Company held 1,000 shares of X Company common stock in its portfolio of long-term investments in available-for-sale securities. The stock had cost $15 per share and has a
At the beginning of 2007 Ace Company had the following portfolio of investments in available-for-sale securities (common stock):During 2007 the following transactions occurred:May 3 Purchased C
At the end of 2006 Terry Company prepared the following schedule of investments in available-for-sale securities (common stock):During 2007, the following transactions occurred:June 8 Purchased O
On March 31, 2007 the Brodie Corporation acquired bonds with a par value of $400,000 for $425,800. The bonds are due December 31, 2012, carry a 12% annual interest rate, pay interest on June 30 and
On January 1, 2007 the Kelly Corporation acquired bonds with a face value of $500,000 for $483,841.79, a price that yields a 10% effective annual interest rate. The bonds carry a 9% stated rate of
On November 1, 2006 the Reid Corporation acquired bonds with a face value of $700,000 for $673,618.61. The bonds carry a stated rate of interest of 10%, were purchased to yield 11%, pay interest
On January 1, 2007 Rodgers Company purchased $200,000 face value, 10%, three-year bonds for $190,165.35, a price that yields a 12% effective annual interest rate. The bonds pay interest semiannually
On January 1, 2007 Lynch Company acquired 13% bonds with a face value of $50,000. The bonds pay interest on June 30 and December 31 and mature on December 31, 2009. Lynch Company paid $51,229.35, a
The Glover Corporation purchased bonds with a face value of $300,000 for $307,493.34 on January 1, 2007. The bonds carry a face rate of interest of 12%, pay interest semiannually on June 30 and
On December 31, 2006 the Leslie Company held an investment in bonds of Kaufmann Company which it categorized as being held to maturity. At that time, the 8%, $100,000 face value bonds had a carrying
The Miller Corporation acquired 30% of the outstanding common stock of the Crowell Corporation for $160,000 on January 1, 2007 and obtained significant influence. The purchase price of the shares was
On January 1, 2007 the Field Company acquired 40% of the North Company by purchasing 8,000 shares for $144,000 and obtained significant influence. On the date of acquisition, Field calculated that
On January 1, 2007 Jones acquires a 30% interest in Fink Company by purchasing 3,000 of its 10,000 common shares for $16 per share and obtains significant influence. On the date of acquisition, the
On January 1, 2006 the Taylor Corporation purchased $20,000 of the Kalanda Corporation’s 12% convertible bonds for $19,760. The bonds pay interest semiannually each December 31 and June 30 and are
On March 2, 2007 the Dawson Corporation acquired 5,000 common shares, representing a 1% interest in the Foreman Corporation, for $60,000. On May 1, 2007 Foreman issued a 20% stock dividend, and on
The Westford Corporation purchases life insurance policies on its officers, and these policies all carry a cash surrender value clause. At the beginning of 2007, Westford paid $13,300 in life
The following information is available concerning the Nunan Corporation’s sinking fund:Jan. 1, 2007 Established a sinking fund to retire an outstanding bond issue by contributing $425,000Feb. 3,
Anglar Company has a $3 million 7% bank loan from Castle Rock Bank. On January 1, 2007, when the $3 million loan has three years remaining, Anglar contracts with Susan Investment Bank to enter into a
The investment manager of 4th National Bank invests some of the bank’s financial resources in trading securities. During the last quarter of 2007 the following transactions occurred in regard to
The 8th State Bank prepares interim financial statements and follows an investment strategy of investing in trading securities. At the beginning of the third quarter of 2007, the bank held the
Holly Company invests its excess cash in marketable securities. At the beginning of 2007 it had the following portfolio of investments in available-for-sale securities:During 2007, the following
The Noonan Corporation prepares quarterly financial statements and invests its excess funds in marketable securities. At the end of 2006 Noonan's portfolio of investments available for sale
Manson Incorporated reported the following current asset on its December 31, 2006 balance sheet:Temporary investment in available-for-sale securities (at cost) ...... $63,475Less: Allowance for
The following information relates to the Starr Company’s Investment in Available-for-Sale Bonds account for 2007:Jan. 1 Purchased $30,000 face value of Bradford Company 8% bonds at 97 to yield
During 2007 the Dana Company decided to begin investing its idle cash in marketable securities. The information contained below relates to Dana’s 2007 marketable security transactions:Feb. 3
During the first quarter of 2007 the Payne Corporation entered into the following transactions:Jan. 1 Acquired 150 shares of Block Corporation common stock for $20 per share, 200 shares of Bridle
Premium Amortization on Bond Investment and Partial Sale of the Investment Using the Effective Interest Method On January 1, 2007 the Hyde Corporation purchased bonds with a face value of $300,000
The Tudor Company acquired $500,000 of Carr Corporation bonds for $487,706.69 on January 1, 2007. The bonds carry an 11% stated interest rate, pay interest semiannually on January 1 and July 1, were
On October 1, 2006 the Jenkins Corporation bought bonds with a face value of $200,000 for $199,175, which included accrued interest. The bonds are due December 31, 2008 and carry a face rate of
The Mercer Corporation acquired $400,000 of the Park Company’s bonds on June 30, 2006 for $409,991.12. The bonds carry a 12% stated interest rate, pay interest semiannually on June 30 and December
On January 1, 2007 the Mark Corporation purchased bonds with a face value of $500,000 for $475,413.60. The bonds are due December 31, 2009, carry a 10% stated rate, and were purchased to yield 12%.
On January 1, 2006 Snow Corporation purchased 20% of the 200,000 outstanding shares of common stock of Garvey Company for $4.00 per share as a long-term investment. The purchase price of the shares
On January 1, 2007 Doe Company purchased 3,000 of the 10,000 common shares outstanding of the Ray Company for $15 per share and obtained significant influence. Doe amortizes its patents over 10
The Harper Corporation acquired 80,000 of the 200,000 outstanding shares of the Moore Corporation on April 1, 2007 for $400,000 and obtained significant influence. The following information
On January 1, 2007 the Easton Corporation acquired 30% of the outstanding common shares of Feeley Corporation for $140,000, and 25% of the outstanding common shares of Holmes Company for $82,500 and
On January 1, 2007 Lion Company paid $600,000 for 10,000 shares of Wolf Company’s voting common stock, which was a 10% interest in Wolf. Lion does not have the ability to exercise significant
On January 1, 2006 Kehoe Corporation insured the lives of its president, vice president, controller, and treasurer for $100,000 each. The annual premium on each policy is $4,200, payable on January 1
Danburg Company has a $5 million 9% bank loan outstanding with its local bank. On January 1, 2007, when the loan has four years remaining, Danburg contracts with Bradford Investment Bank to enter
FASB Statement No. 115 changed accounting principles with respect to certain marketable securities. An important part of this Statement is the distinction between investments categorizedas trading,
Cane Company has two portfolios of investments in marketable equity securities. It classifies one as trading securities and the other as available-for-sale securities. Cane does not have the ability
FASB Statement No. 115 was issued to change accounting methods and procedures with respect to investments in debt and equity securities. An important part of the Statement concerns the distinction
The most common method of accounting for unconsolidated subsidiaries is the equity method.RequiredAnswer the following questions with respect to the equity method.1. Under what circumstances does a
Walker Company has an investment portfolio of equity securities available for sale. Walker does not own more than 5% of the outstanding voting stock for any of the securities in the portfolio. At the
Houston Company has a portfolio of investments in available-for-sale securities that it classifies as a noncurrent asset. Houston owns less than 5% of the outstanding voting stock of each company’s
The following are four unrelated situations involving investments in available-for-sale securities:Situation IA portfolio of available-for-sale securities with an aggregate fair value in excess of
For the past five years, Herbert has maintained an investment (properly accounted for and reported upon) in Broome amounting to a 10% interest in the voting common stock of Broome. The purchase price
Victoria Company has investments in equity securities classified as trading and available for sale. At the beginning of the year, the aggregate market value of each portfolio exceeded its cost.
Refer to the financial statements and related notes of The Coca-Cola Company in Appendix A of this book.Required1. Was the fair value of the company’s available-for-sale securities higher or lower
You are an accountant for the Davanzo Company. The president of the company calls you into her office and says, “I want to ask you about two issues. First, we need to sell one of our investments to
Briefly explain the meaning of the four factors that are involved in the computation of a company’s periodic charge for depreciation.
What is the depreciation base?
What is the objective of accounting for depreciation?
Explain how recording depreciation affects a company’s (a) Income statement, (b) Balance sheet, and (c) Statement of cash flows.
Does recording depreciation generate funds for the replacement of the asset? Explain.
Under what circumstances is depreciation a fixed cost or a variable cost?
What are the primary causes of depreciation? For each cause, indicate which depreciation method may be most appropriate. Would it be desirable to require all companies to use the same method?
Under what circumstances are accelerated methods of depreciation most appropriate?
Compare the group and composite methods of depreciation.
Under what circumstances is an asset’s depreciation amount not included in total in a company’s current income statement?
In a year in which the cost of replacing an asset rises, should a company record depreciation for that asset? Why?
A company should use an accelerated depreciation method because of the large decline in the value of an asset early in its life. Evaluate this statement.
The manager of a utility stated that since its transmission lines are kept in good condition by regular repairs and maintenance and their efficiency remains constant, the lines do not depreciate. Do
What disclosures of depreciation are required in a company’s financial statements and the accompanying notes?
Why might depreciation on a company’s financial statements be different from depreciation the company computed for income tax purposes?
How does a company’s depletion for income tax purposes vary from its depletion for financial reporting purposes?
(Multiple Choice)1. A method that excludes residual value from the base for the depreciation calculation isa. Straight-lineb. Sum-of-the-years€™-digitsc. Double-declining-balanced.
The Gruman Company purchased a machine for $220,000 on January 2, 2004. It made the following estimates:Service life ...... 5 years or 10,000 hoursProduction ...... 200,000 unitsResidual value ....
The Sorter Company purchased equipment for $200,000 on January 2, 2007. The equipment has an estimated service life of eight years and an estimated residual value of $20,000.RequiredCompute the
Reveille, Inc. purchased Machine #204 on April 1, 2007 and placed the machine into production on April 3, 2007. The following information is relevant to Machine #204: Price ...................
The Nickle Company purchased an asset for $17,000 on January 2, 2007. The asset has an expected residual value of $1,000. The depreciation expense for 2007 and 2008 is shown next for three
The Burrell Company purchased a machine for $20,000 on January 2, 2007. The machine has an estimated service life of five years and a zero estimated residual value. The asset earns income before
On January 1, 2006, the Emming Corporation purchased some machinery. The machinery has an estimated life of 10 years and an estimated residual value of $5,000. The depreciation on this machinery was
The Loban Company purchased four cars for $9,000 each, and expects that they would be sold in three years for $1,500 each. The company uses group depreciation on a straight-line basis.Required1.
The Wilcox Company acquires four machines that have the following characteristics:Required1. Prepare journal entries to record the acquisition and the first year's depreciation, assuming that the
On January 2, 2007, Lapar Corporation purchased a machine for $50,000. Lapar paid shipping expenses of $500, as well as installation costs of $1,200. The company estimated that the machine would have
On May 10, 2007, the Horan Company purchased equipment for $25,000. The equipment has an estimated service life of five years and zero residual value. Assume that straight-line depreciation is
On January 1, 2003, the Vallahara Company purchased machinery for $650,000 which it installed in a rented factory. It is depreciating the machinery over 12 years by the straight-line method to a
The Dinkle Company purchased equipment for $50,000. The equipment has an estimated residual value of $5,000 and an expected useful life of 10 years. The company uses straight-line depreciation for
The Bailand Company purchased a building for $210,000 that had an estimated residual value of $10,000 and an estimated service life of 10 years. The company purchased the building four years ago, and
The Feller Company purchased a site for a limestone quarry for $100,000 on January 2, 2007. It estimates that the quarry will yield 400,000 tons of limestone. It estimates that its retirement
The Lorton Company acquired land containing coal. Lorton will restore the land to a condition suitable for recreational use after it has extracted the coal. Geological surveys estimate that the
The Winsey Company purchased equipment on January 2, 2007 for $700,000. The equipment has the following characteristics:Estimated service life ... 20 years ... Estimated residual value ...
The Lord Company purchased a machine on January 2, 2007 for $70,000. The machine had an expected residual value of $10,000, an expected life of eight years or 24,000 hours, and a capacity to produce
The Sayers Company purchased a building for $250,000 on January 2, 2007. The building has an expected residual value of $20,000 at the end of its expected life of 20 years.RequiredPrepare a schedule
The Tubbs Company purchased a machine for $8,000 that has an estimated residual value of $1,000 and a life of three years.Required1. Compute the depreciation rate under the

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