Intermediate Acc II Ch16
12) Which of the following would not be disclosed equity securities? A) Fair Value B) Amortized Cost C) Gross unrealized holding gains and losses D) Total realized gains and losses
Answer: B
19) What affect do unrealized holding gains and losses on available for sale securities have on retained earnings? A) Gains Losses No change Increase B) Gains Losses No change Decrease C) Gains Losses Increase No change D) Gains Losses Increase Decrease
Answer: C
4) Which of the following is not an impairment indicator investment securities? A) fluctuating stock prices B) deterioration of earnings C) decline in credit rating D) adverse changes in the economy
Answer: A
22) Under the equity method, cash dividends received by the investor from the investee should be treated as ________. A) an adjustment to other comprehensive income B) a reduction in the investment account C) an increase in the investment account D) dividend income
Answer: B
14) Ryan Corporation purchased 10,000 shares of Acme Stock. It plans to hold them for a short time and then sell them at a gain. It should classify these securities as ________. A) available for sale securities B) held-to-maturity securities C) trading securities D) minority securities
Answer: C
12) What is the initial reporting basis for all investment securities? A) Cost B) Discounted Present Value C) Fair Value D) Equity Value
Answer: A
13) Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $210,000 and the shares are currently trading for $195,000 at year-end. What is the amount of gain or loss reported at year-end for this investment and where is this loss reported? A) Unrealized Loss of $15,000, reported as part of Net Income. B) Unrealized Loss of $15,000, reported as part of Other Comprehensive Income. C) Unrealized Gain of $15,000, reported as part of Net Income. D) Unrealized Gain of $15,000, reported as part of Other Comprehensive Income.
Answer: A
8) Pink Partners holds an available-for-sale equity investment with a carrying value of $40,000. The current fair value of the investment is $24,000. There is objective evidence of this impairment and the impairment is other-than-temporary. Should an impairment loss be recorded? How much of this loss should be classified in net income and how much should be classified in other comprehensive income? A) Yes, the $16,000 impairment loss should be reported as part of net income. B) No, an impairment loss should not be recorded because this is an equity investment. C) Yes, the $16,000 impairment loss should be split evenly between net income and other comprehensive income. D) Yes, there is an impairment loss of $16,000. However, there is not enough information to determine if this loss should be recorded in Net Income or as part of Other Comprehensive Income.
Answer: A Explanation: A) Impairment Loss = $40,000 - $24,000 = $16,000
9) When must a company generally elect the fair value option for reporting assets? A) A company can elect the fair value option at any point in the assets life, but can not then revert back to accounting for those assets at cost. B) A company must typically elect the fair value option at acquisition. C) A company can typically choose the cost or fair value for each asset each year at the balance sheet date. D) Companies may not account for assets at fair value. GAAP requires these be recorded at cost.
Answer: B
15) Skywalker Limited purchased shares of Jedi Jewelers during 2015 for $124,000. Skywalker elected the fair value option for accounting for this investment. At year end 2015, 2016, and 2017, this investment had a fair value of $120,000, $130,000, and $135,000, respectively. What is the amount of unrealized gain or loss reported on this investment at year-end 2017? A) Unrealized Gain of $11,000 B) Unrealized Gain of $5,000 C) Unrealized Loss of $4,000 D) Unrealized Gain of $10,000
Answer: B Explanation: B) Unrealized Gain is the difference in Fair Value from 2017 ($135,000) and 2016 ($130,000), or $5,000.
5) Can impairment losses recorded on investment assets be reversed at a later date? A) Yes, all impairment loss can be reversed. B) No, impairment losses cannot be reversed. C) Yes, but only non-credit losses recorded in Other Comprehensive Income. D) Yes, but only credit losses recorded in a previous period can be reversed.
Answer: C
11) If a company elects the fair value option to account for Trading Equity securities, what will be recorded differently for these trading securities? A) Unrealized Gains and Losses will now be reported as part of Net Income instead of Other Comprehensive Income. B) Dividends received from the investee will now be credited to Dividend Revenue instead of as a reduction to the investment account. C) A proportionate share of net income will no longer need to be recorded for these trading securities. D) There is no difference in accounting for Trading securities as these are already accounted for using the fair value method.
Answer: D
19) Refer to Sheppard Corporation. Assume that Sheppard purchased 25% of Meredith's common stock for $62,000. All other facts remain the same. What would be the balance in the investment account as of December 31, 2016? A) $62,000 B) $66,500 C) $70,000 D) $80,000
Answer: B Explanation: B) $62,000 + ($18,000 × 25%) = $66,500
24) Cross Clothiers invested $200,000 in a debt security that it properly classified as a trading security on 12/20/17. At 12/31/17, this trading security had a fair value of $201,500. Record the journal entries needed for this investment assuming this is the first and only trading debt security for Joss.
Answer: 12/20 Trading Debt Investment - Cost 200,000 Cash 200,000 12/31 Fair Value Adjustment - Trading Debt Inv. 1,500 Unrealized Gain - Net Income 1,500
11) Bateman Enterprises invested in the bonds of Greater Glouster on January 1, 2015. These 10-year, $100,000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the semi-annual interest payment received by Bateman for these bonds? A) $1,500 B) $3,000 C) $2,000 D) $4,000
Answer: A
11) How are transfers between portfolios (i.e. from trading to available-for-sale) accounted for? A) Transfers between portfolios are accounted for at fair value on the date of the transfer. B) Transfers between portfolios are not allowed under U.S. GAAP. C) Transfers between portfolios are accounted for based on the initial cost of the investment. D) Transfers between portfolios are accounted for based on the most recently reported fair value of the investments.
Answer: A
12) Keller Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Keller has significant influence over Angel, so Keller will account for this investment using the equity method. Angel declared Net Income of $1,250,000 for the year. How will Angel's Net Income impact Keller's books? A) Keller will increase the Investment account and Income from the Investment for $375,000. B) Keller will increase Cash and increase Income from Investment for $375,000. C) Keller will increase Cash and decrease the Investment Account for $375,000. D) Keller will increase the Investment Account and increase Cash for $375,000.
Answer: A
12) Which of the following is a debt or equity security that a company intends to hold only for the short term? A) trading security B) available-for-sale security C) held-to-maturity security D) Not enough information to classify this security.
Answer: A
13) Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments? A) held-to-maturity B) securities accounted for under the equity method C) trading D) available for sale
Answer: A
13) Refer to Bosworth Corporation. What will be the note balance at December 31, Year 1? A) $703,426 B) $704,439 C) $798,474 D) $750,000
Answer: A
15) Where are changes in fair value for trading securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet
Answer: A
16) Investments in debt and equity securities that cannot be readily classified in the other reporting categories are classified as ________. A) securities available for sale B) trading securities C) held to maturity securities D) minority securities
Answer: A
19) On September 30, 2016, Angel Outfitters invested in 10-year, $200,000, 5% bonds of ABC Co. These bonds were dated January 1, 2016, and pay interest annually on December 31. Angel paid face value plus accrued interest for these bonds, and intends to hold these bonds until maturity. Which of the following is the correct journal entry to record this investment? A) Held-to-Maturity Debt Investment - Cost 200,000 Interest Receivable 7,500 Cash 207,500 B) Held-to-Maturity Debt Investment - Cost 200,000 Discount on Held-to-Maturity Investment 7,500 Cash 207,500 C) Available-for-Sale Debt Investment - Cost 200,000 Discount on Held-to-Maturity Investment 7,500 Cash 207,500 D) Available-for-Sale Debt Investment - Cost 200,000 Discount on Available-for-Sale Investment 7,500 Cash 207,500
Answer: A
20) For equity securities are carried and reported as available for sale, when should a gain be reported on the income statement? A) when the security is sold B) when the fair value of the security increases C) when the security is reclassified as a trading security D) when the security is reclassified as a held to maturity security
Answer: A
21) Unrealized gains and losses on investments in equity securities are reported for an investment in another company when the percentage of ownership in another company is ________. A) less than 20% B) 20% to 50% C) 51% to 74% D) 75% or greater
Answer: A
23) As of 12/31/17, XYZ Inc. had Available-for-Sale debt investments with a fair value of $522,000, an amortized cost of $535,000, and a credit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported? A) Unrealized Loss of $6,500 reported as part of Other Comprehensive Income. B) Unrealized Loss of $20,500, reported as part of Net Income. C) Unrealized Loss of $20,500, reported as part of Other Comprehensive Income. D) Unrealized Loss of $6,500, reported as part of Net Income.
Answer: A
24) Laurent invested $19,000 in shares of DEF during Year 1, classifying the investment as available-for-sale. The fair value of this investment was $17,500 and $22,000 at the end of Year 1 and Year 2, respectively. What is the unrealized gain or loss for this investment at the end of Year 1 and how is it reported? A) Unrealized Loss of $1,500, reported as part of Other Comprehensive Income. B) Unrealized Loss of $1,500, reported as part of Net Income. C) Unrealized Gain of $3,000, reported as part of Other Comprehensive Income. D) Unrealized Gain of $3,000, reported as part of Net Income.
Answer: A
6) When should a company use the equity method to account for an investment in another company's common stock? A) The investor intends to hold the common stock for an indefinite period. B) The investor has voting control over the investee. C) The investor exerts significant influence over the investee. D) The investor exerts managerial control over the investee.
Answer: A
7) Griffin buys and sells securities and typically classifies them as available for sale. On December 15, Griffin purchased $800,000 of Baker Corporation shares and elected the fair value option to account for the investment. As of December 31, the shares in Baker Corporation had a fair value of $875,000. In its December 31 financial statements, Griffin will report pretax ________. A) Investment income of $75,000 in its income statement B) Other comprehensive income of $75,000 C) An investment in Baker Corporation of $800,000 D) Accumulated other comprehensive income of $875,000
Answer: A
7) Pepper Company owns 40% of the common stock and exercises significant influence over Salt Company. Pepper Company ________. A) would increase its investment account when Salt Company declares dividends B) would record 40% of the net income of Salt Company as investment income each year C) would record dividends received from Salt Company as investment revenue D) would file a consolidated financial statement with Salt Company
Answer: A
8) Glover buys and sells securities and typically classifies them as available for sale. On December 15, Glover purchased $700,000 of Mooney Corporation shares and elected the fair value option to account for the investment. As of December 31, the shares in Mooney Corporation had a fair value of $675,000. In its December 31 financial statements, Glover will report pretax ________. A) Investment loss of $5,000 in its income statement. B) Other comprehensive income/loss of $25,000. C) An investment in Mooney Corporation of $700,000 D) Accumulated other comprehensive income of $675,000
Answer: A
8) Packer Publications purchased 40,000 of the outstanding 100,000 shares of Bear Homes. How should Packer account for this investment? A) Packer should account for this investment using the equity method, as Packer has significant influence over the investee. B) Packer has control over Bear, so it must consolidate all financial statements. C) Packer should classify this investment as an Available-for-Sale Equity Investment. D) Packer should classify this investment as a Trading Equity Investment.
Answer: A
9) What type of account is Discount on Notes Receivable? A) Contra-Asset account B) Contra-Revenue account C) Liability account D) Expense account
Answer: A
Bosworth Corporation Bosworth Corporation accepted a 5 year note receivable from Steelman Company on January 1, Year 1. The note is for $750,000, which will be due at the maturity of the note. The note has a stated interest rate of 10%; however the prevailing market interest rate is 12%. The note requires interest payments on June 30 and December 31. 11) Refer to Bosworth Corporation. What will be the proceeds of the note receivable? A) $694,799 B) $695,928 C) $750,000 D) $807,913
Answer: A Explanation: A) $(750,000 × .55839) + (37,500 × 7.36009) = $694,799
16) HdG, Inc. accepts a $100,000, 5% note from Aberdeen Unlimited on 4/1/16., and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning 3/31/17. The market rate at the date of issuance of this note was 5%. How much Interest Revenue will HdG record on 3/31/17, the first annual installment payment date? A) $1,250 B) $5,000 C) $3,750 D) $2,500
Answer: A Explanation: A) $100,000 × .05 × 3/12
34) Refer to Sheppard Corporation. If Sheppard sold all of its shares of Meredith for $75,000 at the end of 2017, what would be the effect on net income of this transaction? A) $13,000 gain B) $10,000 gain C) $23,500 gain D) $0 gain
Answer: A Explanation: A) $75,000 - $62,000 = $13,000
11) Cider Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Cider has significant influence over Angel, so Cider will account for this investment using the equity method. Angel declared dividends of $275,000 during the year. Which of the following is the correct journal entry for this transaction? A) Cash 82,500 Investment in Angel & Associates 82,500 B) Investment in Angel & Associates 82,500 Dividend Revenue 82,500 C) Cash 275,000 Investment in Angel & Associates 275,000 D) Investment in Angel & Associates 275,000 Dividend Revenue 275,000
Answer: A Explanation: A) (3,000,000 / 10,000,000) × $275,000
15) Brightney purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. Brightney intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming an existing $1,500 debit balance in Fair Value Adjustment - Trading Equity Securities, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $500, reported as part of Net Income. B) Unrealized Gain of $3,500, reported as part of Net Income. C) Unrealized Gain of $500, reported as part of Other Comprehensive Income. D) Unrealized Gain of $3,500, reported as part of Other Comprehensive Income.
Answer: A Explanation: A) Fair Value of A & B less the cost of A & B = desired balance in Fair Value Adjustment account: ($15,000 + $9,000) - ($10,000 + $12,000) = $2,000 desired debit balance - previous debit balance, $1,500 = Unrealized Gain of $500.
21) On 1/1/16, Lantana Loan Co., a calendar-year company, accepts a 5%, $500,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 10%. In exchange for the note, Diamond agrees to make semi-annual interest payment and repay the full $500,000 at maturity. What is the amount of discount amortized and the amount of Interest Revenue recorded on 6/30/16, the date of the first interest payment? A) Discount Amortized, $9,328; Interest Revenue, $21,828 B) Discount Amortized, $18,783; Interest Revenue, $43,783 C) Discount Amortized, $25,000; Interest Revenue, $25,000 D) Discount Amortized, $12,500; Interest Revenue, $12,500
Answer: A Explanation: A) First, calculate the PV of the note using Excel PV function with the following inputs: N = 6, I/Y = 5%, PMT = $12,500 (500,000 × .05 × 6/12), FV = $500,000 Excel Formula: = PV(.05,6,12500,500000) = $436,554 Based on this PV, the first amortization entry would be: Cash (500,000 × .05 × 6/12) 12,500 Discount on Notes Receivable (difference) 9,328 Interest Revenue ($436,554 × .10 × 6/12) 21,828
Sheppard Corporation On January 3, 2016, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. The investment was classified as available for sale. Meredith's net income for the years ended December 31 2016 and 2017 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2016; however, during 2017, the company declared a $70,000 dividend. On December 31, 2016, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $70,000; in 2017, it increased again to $75,000. 32) Refer to Sheppard Corporation. What will be the income statement effect shown on the 2016 income statement? A) $0 B) $2,700 C) $8,000 D) $10,700
Answer: A Explanation: A) Since the percentage of investment is less than 20%, no income will be reported. The increase in the investment's value will be shown in comprehensive income.
10) Cassa & Associates purchased the bonds of JayBird. These bonds pay 5% interest semi-annually. The effective rate of interest at the date of investment was 4%. Did Jules purchase these bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.
Answer: B
13) Which of the following statements regarding available for sale debt securities is true? A) Fair value adjustments are treated as adjustments to net income. B) Fair value adjustments are treated as adjustments to other comprehensive income. C) Available for sale securities are valued on the balance sheet at historical cost. D) Interest revenue and fair value adjustments are netted to determine the effect on net income.
Answer: B
16) On July 1, Year 1, Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 10 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1? A) $1,747,695 B) $1,740,854 C) $1,750,117 D) $2,000,000
Answer: B
17) Dowell Corporation decided that an investment originally classified as available for sale should be reclassified as held to maturity. Dowell would ________. A) not reclassify the investment B) reclassify the investment as held to maturity and recognize all unrealized gains and losses in net income C) reclassify the investment as held to maturity and record the fair value of the investment as of the date reclassification as its amortized cost basis D) reclassify the investment as held to maturity, but recognize no income or loss
Answer: B
18) Norman Corporation owns an investment that it had originally classified as available for sale. This investment is now more appropriately treated as held to maturity. Norman would ________. A) reclassify the investment as held to maturity and make a prior period adjustment to retained earnings B) reclassify the investment as held to maturity and record the fair value at the reclassification date as the investment's cost basis for future amortization C) reclassify the investment as held to maturity and recognize in net income any unrealized gains or losses on the reclassification D) not reclassify the investment
Answer: B
18) Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid? A) trading security B) held-to-maturity security C) available-for-sale security D) Not enough information to classify this security.
Answer: B
21) Leotis Asset Management invested in the bonds of DEF Co. on 1/1/16. Leotis intends to hold the bonds until maturity. These 5-year bonds had a face vale of $300,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $287,205. Which of the following is the correct journal entry to record the receipt of the interest payment on 6/30/16? A) Interest Receivable 7,500 Held-to-Maturity Debt Investment - DEF Bonds 1,116 Interest Revenue 8,616 B) Cash 7,500 Held-to-Maturity Debt Investment - DEF Bonds 1,116 Interest Revenue 8,616 C) Interest Receivable 15,000 Held-to-Maturity Debt Investment - DEF Bonds 2,232 Interest Revenue 17,232 D) Cash 15,000 Held-to-Maturity Debt Investment - DEF Bonds 2,232 Interest Revenue 17,232
Answer: B
23) Accumulated Other Comprehensive Income reflects changes in the fair value of which type of securities? A) trading securities B) securities available for sale C) held-to-maturity securities D) consolidated securities
Answer: B
5) Sheehan & Co. purchased 35% of the outstanding shares of Jules & Associates. Jules then declared dividends at year end. How will these dividends effect the investment account for Sheehan? A) Dividends received will increase the investment account. B) Dividends received will reduce the investment account. C) Dividends received will have no impact on the investment account; it will increase Cash and Dividend Revenue. D) Dividends received will have no impact on the investment account; it will increase Realized Gain - Net Income.
Answer: B
Black Corporation Black Corporation bought the following securities during the current year: Security Cost Fair Value Alpha Co. $90,000 $95,000 Beta Co. $70,000 $65,000 Delta Co. $30,000 $34,000 28) Refer to Black Corporation: Assume that these securities are trading securities. How will these securities be classified on the balance sheet at December 31 of the current year? A) Amount Classification $190,000 Current Asset B) Amount Classification $194,000 Current Asset C) Amount Classification $190,000 Noncurrent Asset D) Amount Classification $194,000 Noncurrent Asset
Answer: B
20) Refer to Sheppard Corporation. Assume that Sheppard purchased 25% of Meredith's common stock for $62,000. All other facts remain the same. What would be the balance in the investment account as of December 31, 2017? A) $62,000 B) $63,000 C) $75,000 D) $80,500
Answer: B Explanation: B) $62,000 + ($18,000 × 25) + ($56,000 × 25%) - ($70,000 × 25%) = $63,000
14) Zeng Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Zeng has significant influence over Angel, so Zeng will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $8,000,000. The difference in fair value is a result of the higher fair value of equipment than it's book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, how will Zeng record the difference in net assets for this investment on 12/31? A) The higher fair value will allow Zeng to increase the investment account and income from the investment by $28,000 each year. B) The additional depreciation expense will decrease the income from the investment as well as the Investment account by $8,400. C) The higher fair value will allow JayBird to increase the investment account and income from the investment by $8,400 each year. D) The additional depreciation expense will decrease the income from the investment as well as the Investment account by $28,000.
Answer: B Explanation: B) $8,000,000 - 7,300,000 = $700,000 / 25 = $28,000 depr. exp. $28,000 × (3,000,000 / 10,000,000) = $8,400
14) HdG, Inc. accepts a $100,000, 5% note from Aberdeen Unlimited on 4/1/16, and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning 3/31/17. The market rate at the date of issuance of this note was 5%. What is the annual payment that HdG will receive for this note? A) $20,000 B) $23,097 C) $15,000 D) $24,743
Answer: B Explanation: B) Calculated using Excel PMT function with the following inputs: N=5, I/Y = 5%, PV = $100,000 Excel Formula: =PMT(.05,5,100000)
14) L & J purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. L & J intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming an existing $1,500 credit balance in Fair Value Adjustment - Trading Equity Securities, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Gain of $500, reported as part of Net Income. B) Unrealized Gain of $3,500, reported as part of Net Income. C) Unrealized Gain of $500, reported as part of Other Comprehensive Income. D) Unrealized Gain of $3,500, reported as part of Other Comprehensive Income.
Answer: B Explanation: B) Fair Value of A & B less the cost of A & B = desired balance in Fair Value Adjustment account: ($15,000 + $9,000) - ($10,000 + $12,000) = $2,000 desired debit balance + previous credit balance, $1,500 = Unrealized Gain of $3,500.
31) Thomas Corporation bought 25,000 shares of Powers Company stock for $250,000 on April 17. The market value of the stock declined to $195,000 by December 31. Thomas reclassified the investment as trading securities in December of the following year when the market value had risen to $215,000. What amount should be reported on the Year 2 income statement for the Powers shares? A) $0 B) $35,000 net loss C) $20,000 net gain D) $55,000 net loss
Answer: B Explanation: B) Report the net loss as the difference between the market value and historical cost on the date of reclassification.
27) Cowgirl Capital reported that following items related to equity investments for the year: - Unrealized Loss - Trading Securities $(10,000) - Unrealized Gain - Available-for-Sale Securities 7,500 - Realized Gain - Trading Securities 2,500 - Realized Loss - Available-for-Sale Securities (1,500) Based on these investments, what amounts will be reported in Net Income? What amount will be reported in Other Comprehensive Income? A) Net Income - $1,000; OCI - $(2,500) B) Net Income - $(9,000); OCI - $7,500 C) Net Income - $8,500; OCI - $(10,000) D) Net Income - $10,000; OCI - $(11,000)
Answer: B Explanation: B) The Unrealized Loss - Trading Securities, as well as the realized gain and loss are all reported as part of Net Income. $(10,000) + 2,500 + (1,500) = $(9,000). The Unrealized Gain - Available for Sale Securities is the only item reported as part of Other Comprehensive Income.
18) Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/16. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/16 was 4%. How much Interest Revenue will Trader Trust record on this note in 2016? A) $0, this is a non-interest bearing note receivable. B) $13,511 C) $20,000 D) $13,652
Answer: B Explanation: B) First, calculate the PV of the note: Calculated using Excel PV function with the following inputs: N = 10, I/Y = 4%, PMT = $0, FV = $500,000 Excel Formula: = PV(.04,10,0,500000) = $337,782 Interest Revenue for Year 1 is $337,782 × .04 = $13,511
10) If a company has elected the fair value option, where are gains and losses resulting from adjusting these accounts to fair value reported? A) Unrealized Gains are reported as part of Other Comprehensive Income while Unrealized losses are reported as part of Net Income. B) Unrealized Gains are reported as part of Net Income, while Unrealized Losses are reported as part of Other Comprehensive Income. C) Unrealized Gains and Losses are both reported as part of Net Income. D) Unrealized Gains and Losses are both reported as part of Other Comprehensive Income.
Answer: C
10) Which of the following is the primary effect of amortizing a discount on notes receivable? A) It increases the interest revenue so that the corporation's effective rate of return is brought up to the higher market rate. B) It reduces the discount and increases the carrying value of the note receivable until the carrying value is equal to the face value of the note. C) Both A and B are the primary effects of amortizing a discount. D) None of the above are accurate.
Answer: C
11) All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except which one? A) How long does management intend to hold the investment? B) Is the fair value of the equity investment readily determinable? C) How is the return on equity impacted by this investment? D) How much control does the investor have over the investee company for this equity investment?
Answer: C
17) Where are changes in fair value for available for sale securities reported? A) as operating income or loss on the income statement B) as income or loss from peripheral activities on the income statement C) as a component of accumulated other comprehensive income on the balance sheet D) as a prior period adjustment to retained earnings on the balance sheet
Answer: C
18) On July 1, Year 1, Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,800,000 plus accrued interest to yield 8%. The bonds mature on January 1, Year 11, and pay interest annually on January 1. On December 31, Year 5, the bonds had a fair value of $1,850,000. On March 1, Year 6, Walters sold the bond for $1,820,000 At what amount should Walters report the bond in its December 31, Year 5 balance sheet if it is classified as an available for sale security? A) $1,800,000 B) $1,820,000 C) $1,850,000 D) $2,000,000
Answer: C
19) Carly Enterprises purchased 1,000 shares of the 1,000,000 common shares outstanding in Crush Inc. Carly intends to hold onto this investment for the forseeable future. How should this investment be classified on the books of Carly? A) held-to-maturity equity investment B) held-to-maturity debt investment C) available-for-sale equity investment D) trading equity investment
Answer: C
22) As of 12/31/17, XYZ Inc. had Available-for-Sale debt investments with a fair value of $522,000, an amortized cost of $535,000, and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500. What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported? A) Unrealized Loss of $6,500, reported as part of Other Comprehensive Income. B) Unrealized Loss of $20,500, reported as part of Net Income. C) Unrealized Loss of $20,500, reported as part of Other Comprehensive Income. D) Unrealized Loss of $6,500, reported as part of Net Income.
Answer: C
26) Which of the following statements is incorrect? A) Unrealized gains from transferring Available-for-sale securities to Trading securities should be recognized in net income. B) Unrealized losses from transferring Held-to-maturity securities to Available-for-sale securities should be recognized in other comprehensive income. C) Unrealized gains for Trading securities that were transferred to Held-to-maturity securities should be recognized in other comprehensive income. D) Unrealized losses for Trading securities transferred to Available-for-sale securities are already recognized as part of net income, so no adjustment is needed.
Answer: C
33) Refer to Sheppard Corporation. What will be the effect shown on 2017 income? A) $0 B) $5,000 C) $10,500 D) $15,500
Answer: C
7) Grey Co. holds a debt investment at amortized cost of $50,000. At 12/31/15, the fair value of the investment is $55,000 and the present value of the future cash flows is $49,000. Has an impairment loss occurred? If so, how much is the impairment loss to be recorded? A) Yes, the future cash flows are less than the amortized cost, so an impairment loss for the difference must be recorded, $1,000. B) Yes, the future cash flows are less than the amortized cost, however, the loss cannot be calculated without knowing if this difference is temporary or other-than-temporary. C) No, the fair value of the investment is greater than its amortized cost, so an impairment has not occurred. D) There is not enough information to determine if an impairment loss has occurred.
Answer: C
7) When a note receivable is non-interest bearing, ________. A) the face value of the note equals the proceeds B) the carrying value of the note decreases over the life of the note receivable C) the effective rate of interest exceeds the prevailing rate D) the amount of discount amortized decreases each year over the life of the note
Answer: C
8) If a note's interest rate is equal to the prevailing market rate of interest, which of the following will occur? A) The note's face value is less than the note's present value. B) The note's face value is more than the notes present value. C) The note's face value and present value are equal. D) There is not enough information provided to make this determination.
Answer: C
9) Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 3%. The effective rate of interest for similar bonds on the date of investment was 4%. Did Goo Goo purchase the bonds at a discount or premium? A) These bonds were purchased at a discount because the stated rate exceeds the market rate. B) These bonds were purchased at a premium because the stated rate exceeds the market rate. C) These bonds were purchased at a discount because the market rate exceeds the stated rate. D) These bonds were purchased at a premium because the market rate exceeds the stated rate.
Answer: C
9) Which of the following statements is incorrect in regards to the equity method of accounting for investments? A) The investment account is increased by the percentage of the investee's net income. B) The investment account is decreased by the percentage of the investee's dividends declared. C) The investment account is adjusted to fair value at the end of the reporting period. D) The investment account is decreased by the percentage of the investee's net loss.
Answer: C
13) Jardon Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Jardon has significant influence over Angel, so Jardon will account for this investment using the equity method. Angel declared Net Income of $1,250,000 for the year. How will Angel's Net Income be recorded by Jardon? A) Cash 375,000 Income from Investment 375,000 B) Cash 1,250,000 Investment in Angel & Associates 1,250,000 C) Investment in Angel & Associates 375,000 Income from Investment 375,000 D) Investment in Angel & Associates 1,250,000 Income from Investment 1,250,000
Answer: C Explanation: C) (3,000,000 / 10,000,000) × 1,250,000
19) Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/16. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/16 was 4%. What is the carrying value of this note on the balance sheet on 12/31/16? A) $500,000 B) $337,782 C) $351,293 D) $324,271
Answer: C Explanation: C) First, calculate the PV of the note: Calculated using Excel PV function with the following inputs: N = 10, I/Y = 4%, PMT = $0, FV = $500,000 Excel Formula: = PV(.04,10,0,500000) = $337,782 Next, calculate the Discount Amortized / Interest Revenue for Year 1: $337,782 × .04 = $13,511. The remaining discount balance is (500,000 - 337,782) - 13,511 = $148,707. The carrying value is the face value of the note ($500,000), less the discount balance ($148,707) = $351,293.
30) On January 1 of the current year, Beta Company paid $200,000 for 10,000 shares of Gamma Company common stock. These securities were classified as trading securities. Beta owns 10% of Gamma Company. Gamma reported net income of $65,000 for December 31 of the current year. The fair value of the Gamma stock on that date was $27. What amount will be reported in Beta's balance sheet for the investment in Gamma at December 31? A) $206,500 B) $265,000 C) $270,000 D) $276,500
Answer: C Explanation: C) For a trading security, the fair value is the reported value.
21) Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16. On the date of the investment, Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000. This difference is the result of equipment (remaining 10 year life) with a higher fair value than book value. Crush has significant influence over Carly and will account for this investment using the equity method. During the year, Carly declared dividends of $125,000 and reported Net Income of $1,300,000. What is the balance in the Investment in Carly account at year end? A) $5,087,500 B) $5,037,500 C) $5,062,500 D) $3,887,500
Answer: C Explanation: C) Proportion of Ownership = 500,000 / 1,000,000 = 50% Share of Dividends = $125,000 × 50% = $62,500 Share of Net Income = $1,300,000 × 50% = $650,000 Share of Additional Depreciation Expense = ($10,000,000 - 9,500,000) / 10 = $50,000 × 50% = $25,000 Investment Balance = $4,500,000 - 62,500 + 650,000 - 25,000 = $5,062,500
25) ABC invested $19,000 in shares of DEF during Year 1, classifying the investment as available-for-sale. The fair value of this investment was $17,500 and $22,000 at the end of Year 1 and Year 2, respectively. Which of the following is the correct journal entry to adjust the trading securities to fair value at the end of Year 2? A) Fair Value Adjustment - Available-for-Sale Securities 4,500 Unrealized Holding Gain - Net Income 4,500 B) Fair Value Adjustment - Available-for-Sale Securities 3,000 Unrealized Holding Gain - Other Comprehensive Income 3,000 C) Fair Value Adjustment - Available-for-Sale Securities 4,500 Unrealized Holding Gain - Other Comprehensive Income 4,500 D) Fair Value Adjustment - Available-for-Sale Securities 3,000 Unrealized Holding Gain - Net Income 3,000
Answer: C Explanation: C) First, calculate the balance of Fair Value Adjustment to begin Year 2, $19,000 - $17,500 = $1,500 Loss, which created a $1,500 credit balance in Fair Value Adjustment. The desired balance in Fair Value Adjustment in Year 2 is $22,000 - $19,000 = $3,000 debit balance. The adjusting entry needed is then a debit to the account for $4,500 ($1,500 credit balance + $3,000 desired debit balance).
13) Rhoads purchased common shares of Company A and B for $10,000 and $12,000, respectively on 12/15. Rhoads intends to sell these securities within 30 days. At 12/31, Investments in Company A & B had a fair value of $9,000 and $15,000, respectively. Assuming this is the first trading investment for Rhoads, what is the unrealized gain or loss for these securities and how is it reported? A) Unrealized Loss of $1,000, Unrealized Gain of $3,000, both reported as part of Net Income. B) Unrealized Gain of $2,000, reported as part of Other Comprehensive Income. C) Unrealized Loss of $1,000, Unrealized Gain of $3,000, both reported as part of Other Comprehensive Income. D) Unrealized Gain of $2,000, reported as part of Net Income.
Answer: D
14) Ewok Enterprises recently elected the fair value option to account for its investment in Yoda Inc. Ewok purchased the shares for $210,000 and the shares are currently trading for $195,000 at year-end. What is the carrying value of this investment on the balance sheet of Ewok? A) $210,000 B) $15,000 C) $202,500 D) $195,000
Answer: D
14) Which of the following is not a consideration for a company in determining whether to disclose more detail by security type? A) geographic concentration B) economic characteristic C) business sector D) total return on investment to date
Answer: D
14) Which of the following statements regarding trading debt securities is false? A) If a trading debt security is purchased at a premium, the premium must be amortized on a periodic basis. B) Fair value adjustments are treated as adjustments to net income. C) If the fair value of trading debt securities is less than the historical cost the fait value adjustment account will have a credit balance. D) Fair value adjustments are treated as as adjustments to other comprehensive income.
Answer: D
15) On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $200,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $229,439 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method. A) $20,000 B) $12,000 C) $16,000 D) $22,943
Answer: D
17) During 2015, Arnold Corporation purchased $6 million of 10 year municipal bonds at face value. On December 31, 2017, the bonds had a market value of $6,600,000. Arnold reclassified the bonds from held-to-maturity to trading securities. Arnold's balance sheet and income statement for December 31, 2017 will reflect which of the following? A) Investment in municipal bonds Income statement gain on investments $6,000,000 $0 B) Investment in municipal bonds Income statement gain on investments $6,000,000 $600,000 C) Investment in municipal bonds Income statement gain on investments $6,600,000 $0 D) Investment in municipal bonds Income statement gain on investments $6,600,000 $600,000
Answer: D
20) Jules & Associates purchased the bonds of Jay Bird Retailers during the year. Jules intends to hold onto these bonds to collect all principal and interest, but due to financial constraints, will most likely have to sell this investment on the open market within the next year. How should Jules classify this investment? A) held-to-maturity debt investment B) available-for-sale equity investment C) trading debt investment D) available-for-sale debt investment
Answer: D
20) Kelemen Asset Management invested in the bonds of DEF Co. on 1/1/16. Kelemen intends to hold the bonds until maturity. These 5-year bonds had a face vale of $300,000, pay 5% interest on 6/30 and 12/31 of each year, and were issued when the market rate of interest was 6%, resulting in a cost of $287,205. How much interest revenue will Kelemen record on 6/30/16? A) $9,000 B) $7,180 C) $7,500 D) $8,616
Answer: D
22) Joss Enterprises invested in shares of Angel Athletics. Joss intends to sell these shares for a profit in the very near future. How should Joss classify this investment? A) available-for-sale equity investment B) trading debt investment C) available-for-sale debt investment D) trading equity investment
Answer: D
29) Refer to Black Corporation: Assume that these securities are available-for-sale. How will these securities be classified on the balance sheet at December 31 of the current year? A) Amount Classification $190,000 Current Asset B) Amount Classification $194,000 Current Asset C) Amount Classification $190,000 Noncurrent Asset D) Amount Classification $194,000 Noncurrent Asset
Answer: D
15) HdG, Inc. accepts a $100,000, 5% note from Aberdeen Unlimited on 4/1/16., and lends money to Aberdeen. Aberdeen agrees to pay 5 equal annual payments on this note beginning 3/31/17. The market rate at the date of issuance of this note was 5%. How much Interest Revenue will HdG record on 12/31/16, the end of its fiscal year? A) HdG will not record Interest Revenue until it receives the first installment payment on this note on 3/31/17. B) $2,500 C) $5,000 D) $3,750
Answer: D Explanation: D) $100,000 × .05 × 9/12
12) Refer to Bosworth Corporation. What will be the interest revenue recorded on June 30, Year 1? A) $37,500 B) $45,000 C) $41,756 D) $41,688
Answer: D Explanation: D) $694,799 × .06 = $41,688
15) Meyer Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. Meyer has significant influence over Angel, so Meyer will account for this investment using the equity method. On the purchase date, Angel had net assets with a book value of $7,300,000 and a fair value of $8,000,000. The difference in fair value is a result of the higher fair value of equipment than it's book value. The remaining useful life of this equipment is 25 years. Assuming this investment was purchased on 1/1, which of the following is the correct journal entry to record the difference in net assets for this investment on 12/31? A) Investment in Angel & Associates 8,400 Income from Investment 8,400 B) Depreciation Expense 28,000 Accumulated Depreciation - Investment Assets 28,000 C) Depreciation Expense 28,000 Investment in Angel & Associates 28,000 D) Income from Investment 8,400 Investment in Angel & Associates 8,400
Answer: D Explanation: D) $8,000,000 - 7,300,000 = $700,000 / 25 = $28,000 depr. exp. $28,000 × (3,000,000 / 10,000,000) = $8,400
16) PM Distributors began Year 2 with Trading Equity Investments of $8,500 (which consisted of a single investment) as well as a debit balance of $1,000 in the Fair Value Adjustment - Trading Equity Investments account. This trading security was sold for $9,500 during Year 2. How much was the gain or loss for the sale of this investments and how is it recorded? A) No gain or loss reported, as the investment was sold for the adjusted fair value. B) Unrealized Gain of $1,000, reported as part of Other Comprehensive Income. C) Realized Loss of $1,000, reported as part of Net Income. D) Realized Gain of $1,000, reported as part of Net Income.
Answer: D Explanation: D) $9,500 selling price - $8,500 initial cost.
10) JayBird Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates. JayBird has significant influence over Angel, so JayBird will account for this investment using the equity method. Angel declared dividends of $275,000 during the year. How will JayBird record this transaction? A) JayBird will increase the investment account by $82,500. B) JayBird will increase Dividend Revenue by $82,500. C) JayBird will increase Dividend Revenue by $275,000. D) JayBird will decrease the investment account by $82,500.
Answer: D Explanation: D) (3,000,000 / 10,000,000) × $275,000
Sheppard Corporation On January 3, 2016, Sheppard Corporation purchased 15% of Meredith Corporation's common stock for $62,000. The investment was classified as available for sale. Meredith's net income for the years ended December 31 2016 and 2017 were $18,000 and $56,000 respectively. Meredith declared no dividends during 2016; however, during 2017, the company declared a $70,000 dividend. On December 31, 2016, the fair value of Meredith's stock that Sheppard Corporation owned had increased to $70,000; in 2017, it increased again to $75,000. 17) Refer to Sheppard Company. What will be the balance in the investment account at the end of December 31, 2016? A) $62,000 B) $64,700 C) $80,000 D) $70,000
Answer: D Explanation: D) 15% investment does not use the equity method
16) Eagle Exporters purchased 40,000 of the 100,000 outstanding shares of Giant Distributors for $2,000,000. Eagle has significant influence over Giant and will account for this investment using the equity method. During the year, Giant declared dividends of $140,000 and reported Net Income of $800,000. What is the balance in the Investment in Giant account at year end? A) $1,736,000 B) $2,660,000 C) $1,340,000 D) $2,264,000
Answer: D Explanation: D) 40,000 / 100,000 = 40% ownership portion 2,000,000 - (140,000 × .4) + (800,000 × .4) = $2,264,000
9) Which of the following statements is incorrect? A) If the investor has significant influence over the investee, the investor must use the equity method of accounting for the investment. B) If the investor has control over the investee, financial statements for the two companies must be consolidated. C) If the investor has no significant influence over the investee, can readily determine the fair value of the investment, and plans to hold the investment for a very short period of time, the investor should classify the investment as a trading security. D) If the investor reports the investment as available-for-sale, the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income.
Answer: D Explanation: D) Available-for-sale investment are reported at fair value, not cost.
17) Trader Trust accepts a $500,000 non-interest bearing 10-year note from Coffee Co. in exchange for Cash on 1/1/16. Coffee Co. promises to repay $500,000 at maturity. The market rate on 1/1/16 was 4%. How much cash will Trader loan Coffee in exchange for this note? A) $500,000 B) $300,000 C) $341,292 D) $337,782
Answer: D Explanation: D) Calculated using Excel PV function with the following inputs: N = 10, I/Y = 4%, PMT = $0, FV = $500,000 Excel Formula: = PV(.04,10,0,500000)
20) On 1/1/16, Lantana Loan Co., a calendar-year company, accepts a 5%, $500,000 three-year loan that pays interest semi-annually on 6/30 and 12/31 from Diamond Distributors, when the market rate of interest was 10%. In exchange for the note, Diamond agrees to make semi-annual interest payment and repay the full $500,000 at maturity. How much cash will Diamond receive in exchange for this note? A) $500,000 B) $568,852 C) $437,829 D) $436,554
Answer: D Explanation: D) Calculated using Excel PV function with the following inputs: N = 6, I/Y = 5%, PMT = $12,500 (500,000 × .05 × 6/12), FV = $500,000 Excel Formula: = PV(.05,6,12500,500000) = $436,554
16) Skywalker Limited purchased shares of Jedi Jewelers during 2015 for $124,000. Skywalker elected the fair value option for accounting for this investment. At year end 2015, 2016, and 2017, this investment had a fair value of $120,000, $130,000, and $135,000, respectively. How will this investment be reported on the Balance Sheet at year-end, 2017? A) Investment in Jedi - $135,000 B) Investment in Jedi - $130,000, plus Fair Value Adjustment - Fair Value Option - $5,000 C) Investment In Jedi - $124,000 D) Investment in Jedi - $124,000, plus Fair Value Adjustment - Fair Value Option - $11,000
Answer: D Explanation: D) Investment account maintained at cost ($124,000); FV Adjustment Account balance is 2017 FV less cost ($135,000 - $124,000 = $11,000)
12) Price Enterprises invested in the bonds of Greater Glouster on January 1, 2015. These 10-year, $100,000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds? A) $100,000 B) $91,889 C) $108,584 D) $91,824
Answer: D
18) Refer to Sheppard Company. What will be the balance in the investment account at the end of December 31, 2017? A) $62,000 B) $62,600 C) $73,100 D) $75,000
Answer: D Explanation: D) 15% investment does not use equity method
