ch 14 practice test

1. Which category includes only debt securities? a. Held-to-maturity securities b. Available-for-sale securities c. Marketable equity securities d. Trading securities

ANS: A

14. When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes a. a proportionate share of the net income of the investee. b. a cash dividend received from the investee. c. periodic amortization of an intangible arising from contractual rights acquired in the purchase. d. depreciation related to the excess of market value over book value of the investee's depreciable assets at the date of purchase by the investor.

ANS: A

15. When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as a. an increase in the investment account. b. a deduction from the investment account. c. dividend revenue. d. a deduction from the investor's share of the investee's profits.

ANS: B

4. Changes in fair value of securities are reported in the stockholders' equity section of the balance sheet for which type of securities? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities

ANS: B

8. When an investor uses the cost method to account for investments in common stock, cash dividends received by the investor from the investee should normally be recorded as a. a deduction from the investment account. b. dividend revenue. c. an addition to the investor's share of the investee's profit. d. a deduction from the investor's share of the investee's profit.

ANS: B

17. The only significant difference between the provisions of international accounting standards as promulgated by IAS 39 and U.S. accounting standards under FASB ASC Topic 860 (Transfers and Servicing is a. IAS 39 requires accounting for all investments in debt securities to be on a fair value basis while ASC 860 does not. b. IAS 39 allows all unrealized gains and losses on securities valued at fair value to be reported in net income for the period while ASC 860 does not. c. IAS 39 requires trading securities to be reported on a fair value basis but not securities available for sale. d. IAS 39 does not permit the reporting of unrealized gains and losses on securities other than trading securities to be recorded as part of equity.

ANS: B PTS: 1 DIF: Easy OBJ: LO 10

11. For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account? a. Equity method securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities

ANS: B PTS: 1 DIF: Easy OBJ: LO 5

12. The equity method of accounting for an investment in the common stock of another company should be used when the investment a. is composed of common stock and it is the investor's intent to vote the common stock. b. ensures a source of supply such as raw materials. c. enables the investor to exercise significant influence over the investee. d. gives the investor voting control over the investee.

ANS: C

18. Consolidated financial statements are typically prepared when one company has a. accounted for its investment in another company by the equity method. b. significant influence over the operating and financial policies of another company. c. the controlling financial interest in another company. d. a substantial equity interest in the net assets of another company.

ANS: C

2. Which securities are purchased with the intent of selling them in the near future? a. Marketable equity securities b. Available-for-sale securities c. Trading securities d. Held-to-maturity securities

ANS: C

23. If an investment in stock is reclassified from available-for-sale securities to trading securities, the stock should be recorded on the date it is reclassified at the a. market value at the date of acquisition. b. book value at the date of reclassification. c. market value at the date of reclassification. d. lower-of-cost-or-market value at the date of reclassification.

ANS: C

7. From the following, select the most appropriate basis for the valuation of a new investment when properties or services are exchanged for stock. a. The par or stated value of the stock received b. The book value of the property or services exchanged c. The fair market value of the stock received d. Either the book value of the property or services exchange or the fair market value of the stock received, whichever is more clearly determinable

ANS: C

20. Which of the following is true? a. Trading securities can be classified as current or noncurrent depending on management's intent. b. Held-to-maturity securities should not be classified as current under any circumstance. c. Available-for-sale securities can be classified as current or noncurrent depending on management's intent. d. Trading securities should not be classified as current under any circumstance.

ANS: C PTS: 1 DIF: Medium OBJ: LO 9

3. Changes in fair value of securities are reported in the income statement for which type of securities? a. Marketable equity securities b. Available-for-sale securities c. Held-to-maturity securities d. Trading securities

ANS: D

6. FASB Statement No. 115 generally applies when the level of ownership of another company is at what percentage? a. More than 50% b. 20%-30% c. 30%-50% d. Less than 20%

ANS: D PTS: 1 DIF: Easy OBJ: LO 2

13. If the combined market value of trading securities at the end of the year is less than the market value of the same portfolio of trading securities at the beginning of the year, the difference should be accounted for by a. a credit to Investment in Trading Securities. b. reporting an unrealized loss in security investments in the stockholders' equity section of the balance sheet. c. a footnote to the financial statements. d. reporting an unrealized loss in security investments in the income statement.

ANS: D PTS: 1 DIF: Medium OBJ: LO 5