Acct Ch 17

True or False: Holdings between 20% and 50% of another company's voting stock are accounted for using the equity method.

True

True or False: To qualify for special accounting for hedges treatment, the hedging transaction must be at least moderately effective.

False

True or False: Under the equity method, dividends received by the investor are reported as dividend revenue on the income statement

False

Transfers of investments between any of the categories should be accounted for at: A. original cost. B. book value. C. equity value. D. fair valu

D

True or False: A fair value hedge may be used to offset the exposure to changes in the fair value of an unrecognized commitment.

True

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are: A. held-to-maturity debt securities. B. trading debt securities. C. available-for-sale debt securities. D. never-sell debt securities.

c

Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of: declines in the fair value of the investment. dividends paid by the investee. the losses of the investee. all of these answer choices are correct.

declines in the fair value of the investment.

Derivatives such as fair value hedges are recorded at fair value. historical cost. amortized cost. carrying value.

fair value.

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

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

Unrealized holding gains and losses on cash flow hedges are included in net income. reported as a component of other comprehensive income reported directly in retained earnings. not recorded or reported.

reported as a component of other comprehensive income

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

Fair Value

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

Fair Value Test

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

Fair value

True or False: In a variable-interest entity, stockholders may not absorb losses or receive the returns of a normal stockholder.

True

True or False: In instances of "significant influence" (generally an investment of 20% or more), the investor is required to account for the investment using the equity method.

True

True or False: One required disclosure for financial instrument is that a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges must be presented.

True

True or False: Recovery of impairment is prohibited by US GAAP for held-to-maturity securities.

True

True or False: The equity method gives recognition to the fact that investee earnings increase investee net assets that underlie the investment and investee losses and dividends decrease the net assets.

True

True or False: The holding period for trading securities is generally less than three months.

True

True or False: Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income.

True

True or False: Trading securities are reported on the balance sheet at fair value.

True

True or False: Under the equity method, if the investee's net income incl udes extraordinary items, the investor treats a proportionate share of the extraordinary items as an extraordinary item, rather than as ordinary investment revenue before extraordinary items

True

True or False: When an investor has holdings of less than 20% in an investee and the securities are classified as trading securities, unrealized holding gains or losses are reported as part of net income.

True

True or False: Whenever an investment in equity securities does not qualify for equity method treatment or for the use of consolidated financ ial statements, the investor is required to use the fair value method in accounting for the investment.

True

True or False: With a cash flow hedge, gains or lo sses are to be recorded in equity as a part of other comprehensive income.

True

True or false: Companies may also use the fair value option for their own debt instruments

True

True or false: For debt securities, the impairment test is to determine whether "it is probable that the investor will be unable to collect all amounts due according to the contractual terms."

True

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

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 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 original cost.

its fair value at the date of the transfer.

During 2014, Grambling Company purchased 10,000 shares of Southern Corp. common stock for $215,000 as an available-for-sale investment. The fair value of these shares was $289,000 at December 31, 2014. During 2015, Grambling sold all of the Southern stock for $226,000. Grambling Company should report a realized gain on the sale of stock in 2015 of $37,000. $25,000. $26,000. $11,000

$11,000

Foucault Company. owns 40,000 of the 100,000 outstanding shares of Mango Inc. common stock. During 2015, Mango earns $640,000 and pays cash dividends of $480,000. If the beginning balance in Foucault's investment account was $430,000, the balance at December 31, 2015 should be $686,000. $366,000. $430,000. $494,000.

$494,000. Begin Bal. + ((Earings-Cash Dividends)*Percent of ownership

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

3 months

Debt securities from which there is no recognized unrealized holding gains or losses in net income nor included as other comprehensive income are: A. held-to-maturity debt securities. B. trading debt securities. C. available-for-sale debt securities. D. never-sell debt securities.

A

Debt securities that are accounted for at amortized cost, not fair value are: A. held-to-maturity debt securities. B. trading debt securities. C. available-for-sale debt securities. D. never-sell debt securities.

A

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are: A. available-for-sale securities wher e a company has holdings of less than 20%. B. trading securities where a company has holdings of less than 20%. C. securities where a company has holdings of between 20% and 50%. D. securities where a company has holdings of more than 50%

A

McCoy Corporation purchased 7,400 shares of Chudzick Company's common stock. The purchase price was $362,600, which is equal to 50% of Chudzick Company's retained earnings balance. Chudzick Company's 46,000 shares of common stock are actively traded, and each share has a par value of $10. McCoy Corporation should account for this long-term investment using the: A. fair value method. B. equity method. C. consolidation method. D. amortized cost method.

A

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

All of these answer choices are correct

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

All of these answer choices are examples of significant influence.

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

All these

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

Amortized cost

Debt securities bought and held prim arily for sale in the near term to generate income on short-term price differences are: A. held-to-maturity debt securities. B. trading debt securities. C. available-for-sale debt secu

B

Use of the effective interest method in amortizing bond premiums and discounts results in: A. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. B. a varying amount being recorded as interest income from period to period. C. a variable rate of return on the book value of the investment. D. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method

B

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment: A. by using the equity method. B. by using the fair value method. C. by using the effective interest method. D. by consolidation.

B

If a company has acquired a 20% to 50% interest in another corporation, this generally results in: A. an insignificant level of influence. B. a passive level of influence. C. a significant level of influence. D. a controlling level of influence.

C

On January 1, 2014, Alton Co. purchased $100,000 of 10%, Olson, Inc. bonds with interest payable on July 1 and January 1 for $107,000. On February 1, 2014, Alton purchased $100,000 of 12%, Ehrlich Co. bonds w ith interest payable on August 1 and February 1 for $95,000. Alton classifies th e Olson and Ehrlich bonds as trading debt securities. On December 31, 2014, the fair value of the Olson and Ehrlich bonds are $110,000 and $94,000, respectively. At December, 2014, what adjusting entry should be made by Alton? A. No entry should be made. B. Fair Value Adjustment (trading) 3,000 Unrealized Holding Gain or Loss—Income 3,000 C. Fair Value Adjustment (trading) 2,000 Unrealized Holding Gain or Loss—Income 2,000 D. Unrealized Holding Gain or Loss— Income 1,000 Fair Value Adjustment (trading) 1,000

C

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: par value. fair value. book value. cost.

Cost

True or False: A company should evaluate investments for impairment if it has reason to believe the value of the investment may be impaired.

False

True or False: A call option increases in valu e when the underlying asset decreases in value.

False

True or False: Amortization of discount or pr emium on trading debt securities is debited or credited to the Fair Value Adjustment (trading) account

False

True or False: Available-for-sale securities are securities that are bought and held primarily for sale in the near term to generate income on short-term price differences

False

True or False: Both debt securities and equity securities can be classified as held-to-maturit

False

True or False: Companies can choose the fair va lue option at any time they are holding a financial instrument.

False

True or False: Embedded deriva tives should be recorded in the same manner as the host security

False

True or False: Gains and losses resulting from changes in the fair value of trading securities are reported in the equity section of the balance sheet.

False

True or False: Gains and losses resulting from the speculation of derivatives should not be recognized immediately in income.

False

True or False: Held-to-maturity securities are accounted for at fair value.

False

True or False: Held-to-maturity securities are reported at fair value.

False

True or False: If one corporation acquires an inter est of less than 20% in another corporation, that investor is generally deemed to have little influence over the investee and will account for the investment under the equity metho

False

True or False: Investments are reported at market value on the balance sheet under the equity method.

False

True or False: Once the equity method is adopted by an investor, the method must continue in use until the investment to which it has been applied is sold or liquidated by some other means

False

True or False: The fair value method requires that companies classify equity securities at acquisition as held-to-maturity securities or available-for-sale securities.

False

True or False: Unrealized gains and losses on held-to-maturity securities are reported on the income statement.

False

True or false: Derivatives shoul d be reported in the balance sheet at historical cost.

False

true or false: Unrealized gains and losses related to changes in the fair value of available-for-sale debt securities are recorded in an unrealized holding gain or loss account which is reported as a part of net income

False

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. Subsequent increases/decreases in the fair value of impaired available-for-sale securities are not included as other comprehensive income. If the decline in value is considered temporary, the cost of the individual security is not written down to a new cost basis. 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.

Which of the following is not a disclosure required under the equity method? The accounting policies of the investor related to investments. The difference between the amount in the investment account and the amount of underlying equity in the investee's net assets. The aggregate value of each identified investment based on quoted market price. 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 carried as a separate component of stockholders' equity is amortized over the remaining life of the security. The unrealized gain or loss at the date of transfer is recognized in income. 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.

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

Trading

True or False: Amortization of discount or premium on available-for-sale debt securities is debited or credited to the Debt Investments account

True

True or False: Derivatives should be recognized in the financial statements as assets and liabilities.

True

True or False: Gains and losses on cash flow hedges are recorded in equity as part of other comprehensive income

True

True or False: Held-to-maturity securities are secu rities that the enterpri se has the positive intent and ability to hold to maturity

True

True or False: If the decline in value of securities is judged to be other than temporary, the cost basis of the individual security is written down to a new cost basis.

True

On its December 31, 2014, balance sheet, Estes Co. reported its investment in trading securities, which had cost $500,000, at fair value of $475,000. At December 31, 2015, the fair value of the securities was $492,500. What should Estes report on its 2015 income statement as a result of the increase in fair value of the investments in 2015? Realized gain of $17,500. Unrealized gain of $17,500. $0. Unrealized loss of $7,500.

Unrealized gain of $17,500.

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

a significant influence over the investee company

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

available-for-sale to trading.

On August 1, 2014, the Mc Cellen Company acquired $100,000, 8% bonds of Lankford Co. for $104,000. The bonds were da ted August 1, 2014, and mature on July 31, 2019, with interest payable each January 31 and July 31. McCellen plans on holding the bonds till their maturity. What entry should McCellen make to reco rd the purchase of the bonds on August 1, 2014? A. Debt Investments 104,000 Interest Receivable 2,000 Cash 106,000 B. Debt Investments 104,000 Cash 104,000 C. Debt Investments 106,000 Accrued Interest Receivable 2,000 Cash 104,000 D. Debt Investments 100,000 Premium on Debt Securities 6,000 Cash 106,

b

On January 3, 2014, Slezak Company purchased 22% of Urban Corporation's common stock for $250,000. Shortly after the purchase, Slezak Company executives tried to obtain representation on Urban Corpor ation's board of directors and failed. During 2014 Urban reported net income of $150,000 and paid cash dividends of $80,000 on the common stock. The balance in Slezak Company's Investment in Urban Corporation account at December 31, 2014, should be: A. $265,400. B. $234,600. C. $250,000. D. $300,60

c

An option to convert a convertible bond into shares of common stock is a(n) fair value hedge. embedded derivative. host security. cash flow hedge.

embedded derivative.

Which of the following statements regarding accounting for derivatives is false? they should be recognized in the financial statements as assets and liabilities. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge. they should be reported at fair value. gains and losses resulting from speculation should be deferred.

gains and losses resulting from speculation should be deferred.

A variable-interest entity has All of the above are characteristics of a variable-interest entity. insufficient equity investment at risk. stockholders who have decision-making rights. stockholders who absorb the losses or receive the benefits of a normal stockholder

insufficient equity investment at risk.

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

reported on the balance sheet.

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

reported on the portfolio of investments.