Chapter 17 - Difficult

During 2012, Moxey Company purchased 10,000 shares of Hanover Corp. common stock for $415,000 as an available-for-sale investment. The fair value of these shares was $389,000 at December 31, 2012. During 2013, Moxey sold all of the Hanover stock for $426,000. Moxey Company should report a realized gain on the sale of stock in 2013 of $26,000. $37,000. $11,000. $25,000.

$11,000.

The following information relates to Baggett Company for 2012: Accumulated other comprehensive income, beg. balance $45,000 Unrealized holding gains arising during the period on available-for-sale securities 105,000 Reclassification adjustment for gains included in net income 30,000 Baggett's 2012 other comprehensive income is $150,000. $180,000. $120,000. $75,000.

$120,000. $45,000 plus $105,000 less $30,000 reclassification results in $120,000.

Mitchell Company. owns 40,000 of the 100,000 outstanding shares of Pitts Inc. common stock. During 2013, Pitts earns $640,000 and pays cash dividends of $480,000. If the beginning balance in Mitchell's investment account was $430,000, the balance at December 31, 2013 should be $430,000. $494,000. $686,000. $366,000

$494,000. $430,000 plus ($640,000 X 40%) less ($480,000 X 40%) equals $494,000.

During 2012, Martin Company purchased 17,000 shares of Mount Vernon Corp. common stock for $382,500 as an available-for-sale investment. The fair value of these shares was $373,150 at December 31, 2012. Martin sold all of the Mount Vernon stock for $27.25 per share on December 3, 2013, incurring $15,000 in brokerage commissions. Martin Company should report a realized gain on the sale of stock in 2013 of $90,100. $75,100. $80,750. $65,750.

$65,750. Net proceeds of ($463,250 less $15,000) $448,250 less $382,500 results in a realized gain of $65,750.

Yellowtail Company's trading securities portfolio which is appropriately included in current assets is as follows: December 31, 2012 Cost Fair Value Unrealized Gain (Loss) Arlington Corp. $453,000 $423,000 $(30,000) Downs, Inc. 242,000 265,000 23,000 $695,000 $688,000 $(7,000) Ignoring income taxes, what amount should be reported as a charge against income in Yellowtail's 2012 income statement if 2012 is Yellowtail's first year of operation? $30,000. $0. $23,000. $7,000.

$7,000. The net unrealized loss on Yellowtail's portfolio of trading securities results in a charge against income of $7,000.

Gise Corporation purchased 35,000 shares of common stock of the Wagner Corporation for $52 per share on January 2, 2010. During 2012, Wagner Corporation had 140,000 shares of common stock outstanding, paid cash dividends of $88,000, and reported net income of $320,000. Gise Corporation should report revenue from investment for 2012 in the amount of $80,000. $22,000. $0. $58,000.

$80,000. DON'T KNOW THIS CALCULATION!!

Trading securities are generally held for less than: 12 months. 3 months. 1 month. 6 months.

3 months.

Examples of the ability to exercise significant influence over an investee include all of the following except: All of the options are examples of significant influence. interchange of managerial personnel. technological dependency. material intercompany transactions.

All of the options are examples of significant influence.

All of the following are part of comprehensive income except: All of the options are part of comprehensive income. unrealized holding gains on available-for-sale-securities. a reclassification adjustment for gains included in net income. realized gains on sale of available-for-sale-securities.

All of the options are part of comprehensive income.

A requirement for a security to be classified as held-to-maturity is ability to hold the security to maturity. positive intent. All of these are required. the security must be a debt security.

All of these are required. Since options, a, b, and c, are all requirements for a security to be classified as held-to-maturity, d is the most correct.

Derivatives may be used to manage all of the following types of risk except changes in: hydrocarbon prices. foreign currencies. Derivatives can be used be used to manage risk for changes in all of the above investments. oil prices.

Derivatives can be used to manage risk for changes in all of the above investments. Derivatives can protect against changes in oil prices, foreign currencies, and hydrocarbon prices.

Which of the following statements related to impairments of investments is correct? The amount of any write-down in value is accounted for as a recognized loss. If the decline in value is considered temporary, the cost of the individual security is not written down to a new cost basis. Subsequent increases/decreases in the fair value of impaired available-for-sale securities are not included as other comprehensive income. A bankruptcy being experienced by an investee is an example of a temporary loss in value.

If the decline in value is considered temporary, the cost of the individual security is not written down to a new cost basis. A temporary decline in the value of an investment is not an impairment; therefore a new cost basis is not necessary.

Which of the following statements related to impairments of investments is not correct? Subsequent increases/decreases in the fair value of impaired available-for-sale securities are included as other comprehensive income. If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis. A bankruptcy being experienced by an investee is an example of a permanent loss in value. The amount of any write-down in value is accounted for as a realized loss.

If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis.

The Option Premium Formula is: Market Price at Issuance - Option Price Time Value - Extrinsic Value Intrinsic Value + Time Value Option Price + Time Value

Intrinsic Value + Time Value The Option Premium Formula is Option Premium = Intrinsic Value + Time Value.

Which of the following is not a characteristic which would qualify an economic interest as a variable-interest entity? Stockholders have insufficient equity capital at risk. The holding is less than 50% of the outstanding stock of the economic interest. Stockholders are shielded from losses or their returns are capped or must be shared with other parties. Stockholders do not have decision-making rights.

The holding is less than 50% of the outstanding stock of the economic interest. Voting interest is not a characteristic which would qualify an economic interest as a variable-interest entity.

Which of the following is not a disclosure required under the equity method? The aggregate value of each identified investment based on quoted market price. The difference between the amount in the investment account and the amount of underlying equity in the investee's net assets. The accounting policies of the investor related to investments. The name of the investor and the percentage of ownership.

The name of the investor and the percentage of ownership.

Select the correct statement regarding the impact on stockholders' equity of a transfer from available-for-sale to trading. The unrealized gain or loss at the date of transfer is recognized in income. The unrealized gain or loss at the date of transfer carried as a separate component of stockholders' equity is amortized over the remaining life of the security. The separate component of stockholders' equity is increased or decreased by the unrealized gain or loss at the date of transfer. The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.

The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity. The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.

Select the correct statement regarding the impact on stockholders' equity of a transfer from trading to available-for-sale. The unrealized gain or loss at the date of transfer is recognized in income. The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity. The unrealized gain or loss at the date of transfer carried as a separate component of stockholders' equity is amortized over the remaining life of the security. The separate component of stockholders' equity is increased or decreased by the unrealized gain or loss at the date of transfer.

The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity. The unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.

A debt security is transferred from one category to another. Generally accepted accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described? Transfer from available-for-sale to held-to-maturity Transfer from trading to available-for-sale Transfer from available-for-sale to trading Transfer from held-to-maturity to available-for-sale

Transfer from available-for-sale to held-to-maturity he type of transfer being described is a transfer from available-for-sale to held-to-maturity.

On its December 31, 2012, balance sheet, Draper Co. reported its investment in trading securities, which had cost $300,000, at fair value of $275,000. At December 31, 2013, the fair value of the securities was $292,500. What should Draper report on its 2013 income statement as a result of the increase in fair value of the investments in 2013? Realized gain of $17,500. Unrealized gain of $17,500. Unrealized loss of $7,500. $0.

Unrealized gain of $17,500.

Which of the following is not true with regard to accounting for cash flow hedges? All of the above are true with regard to accounting for cash flow hedges. No entry is required at the inception of futures contract. Cash flow hedges are reported at fair value on the balance sheet. Unrealized holding gains and losses on cash flow hedges are reported in net income.

Unrealized holding gains and losses on cash flow hedges are reported in net income. Unrealized holding gains and losses on cash flow hedges are reported as a component of other comprehensive income.

A convertible bond consists of two parts: an embedded derivative and a bifurcated security. a bifurcated security and a risk management security. a hybrid security and a host security. a host security and an embedded derivative.

a host security and an embedded derivative. A convertible bond consists of two parts: a host security and an embedded derivative.

When an investor company owns 25% of an investee company's common stock, the investor is said to have: little or no influence over the investee company. a controlling interest over the investee company. a significant influence over the investee company. a minor influence over the investee company.

a significant influence over the investee company.

Debt securities may be classified as: all of these. held-to-maturity. trading. available-for-sale.

all of these.

Held-to-maturity securities are reported at their: fair value. net realizable value. historical cost. amortized cost.

amortized cost.

Unrealized holding gains or losses are recognized as other comprehensive income for: held-to-maturity securities. long-term securities. available-for-sale securities. trading securities.

available-for-sale securities.

The unrealized gain (loss) at the date of transfer is recognized in income for transfers from: available-for-sale to trading. available-for-sale to held-to-maturity. available-for-sale to trading and from available-for-sale to held-to-maturity. held-to-maturity to available-for-sale.

available-for-sale to trading.

When an available-for-sale equity security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security's: cost. fair value. book value. par value.

cost.

Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of: dividends paid by the investee. All of the options would decrease the investment account. the losses of the investee. declines in the fair value of the investment.

declines in the fair value of the investment.

An ownership interest of 30% of the common stock of another corporation should be accounted for using the: equity method. cost method. fair value method. consolidated method.

equity method.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the fair value method. equity method. divesture method. cost method.

equity method. Holdings of more than 50% are accounted for under the equity method.

An ownership interest of 15% in another company's voting stock should be accounted for using the: consolidation method. fair value method. equity method. cost method.

fair value method.

Companies base impairment for debt and equity securities on a(n) intrinsic value test. discounted cash flow test. fair value test. equity test.

fair value test. Impairment for debt and equity securities is based on a fair value test.

Debt securities that are bought and held primarily for sale in the near term are reported at: fair value. cost. amortized cost. net realizable value.

fair value.

Transfers between categories of investments are accounted for at: fair value. cost. amortized cost. book value.

fair value.

Derivatives should be reported on the balance sheet at: cost. amortized cost. fair value. Derivatives should not be reported on the balance sheet.

fair value. Derivatives are reported on the balance sheet at fair value.

A correct valuation is none of these. trading securities at amortized cost. held-to-maturity securities at amortized cost. available-for-sale securities at amortized cost.

held-to-maturity securities at amortized cost. A correct valuation is held-to-maturity securities at amortized cost.

Recovery of impairment is not permitted by IFRS for held-for-collection securities. is permitted by US GAAP for held-to-maturity securities. is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities. is prohibited by both IFRS and US GAAP for any debt security.

is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities.

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be its original cost. the lower of its original cost or its fair value at the date of the transfer. its fair value at the date of the transfer. the higher of its original cost or its fair value at the date of the transfer.

its fair value at the date of the transfer. The carrying value assigned to the available-for-sale security should be its fair value at the date of the transfer.

Investments in debt securities should be recorded on the date of acquisition at lower of cost or market. market value. market value plus brokerage fees and other costs incidental to the purchase. face value plus brokerage fees and other costs incidental to the purchase.

market value plus brokerage fees and other costs incidental to the purchase. Investments in debt securities should be recorded on the date of acquisition at market value plus brokerage fees and other costs incidental to the purchase.

When a put option contract is purchased, no journal entry is required. the contract is recorded as an asset at the exercise price. the contract is recorded as an asset at the current market price. the contract is recorded as a liability if the exercise price is less than the current market price.

no journal entry is required. When a put option contract is purchased, the exercise price equals the current market price so no entry is necessary at the purchase date.

Unrealized gains and losses on held-to-maturity securities are: None of these. reported on the balance sheet. reported on the income statement. not reported because these securities are reported at their amortized cost.

not reported because these securities are reported at their amortized cost.

An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as an extraordinary item shown as a direct increase to retained earnings. a current gain resulting from holding securities. other comprehensive income and included in the equity section of the balance sheet. a note or parenthetical disclosure only.

other comprehensive income and included in the equity section of the balance sheet. An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as other comprehensive income and included in the equity section of the balance sheet.

The unrealized holding gain or loss on trading securities is reported as: other comprehensive income. an addition to (deduction from) the trading securities account balance. a separate component of stockholders' equity. part of net income.

part of net income.

Under the equity method, if an investee company generates net income, the investor company: does not recognize any share of the net income. records its proportionate share as an unrealized gain. records its proportionate share of the net income as dividend income. records its proportionate share as an increase in its investment account.

records its proportionate share as an increase in its investment account.

Unrealized gains and losses on available-for-sale securities are: reported on the balance sheet. not reported because these securities are reported at their amortized cost. None of these. reported on the income statement.

reported on the balance sheet.

The unrealized gains and losses on available-for-sale securities are: None of these. reported on individual securities. reported on the portfolio of investments. not reported at all.

reported on the portfolio of investments.

Unrealized holding gains or losses which are recognized in income are from securities classified as none of these. available-for-sale. trading. held-to-maturity.

trading. Unrealized holding gains or losses which are recognized in income are from securities classified as trading.