Intermediate accounting. Chapter 12
All investments in debt securities whose fair values are not readily determinable are carried at historical cost
FALSE
All securities considered available for sale should be reported as current assets in a classified balance sheet.
FALSE
Purchases and sales of securities are always reported as investing activities in a statement of cash flows.
FALSE
Routine transfers of debt and equity investments among the trading, available for sale, and held to maturity portfolios need not be disclosed in the financial statements.
FALSE
Investments in securities available for sale are reported at:
Fair value on the reporting date.
Investments in securities to be held for an unspecified period of time are reported at:
Fair value.
All investment securities are initially recorded at:
Cost.
trading securities, by definition, are properly classified in the balance sheet as:
Current Assets
Jeremiah Corporation purchased securities during 2013 and classified them as securities available for sale: All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2013, income statement relative to the portfolio?
$0
What would be the balance in Beresford's accumulated other comprehensive income with respect to these investments in its 12/31/2013 balance sheet (ignore taxes)?
$10,400
On January 1, 2013, Everglade Company purchased the following securities and properly accounted for them as securities available for sale: All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2013 statement of other comprehensive income?
$12,000 net unrealized gain.
Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchange, and the prevailing price on that exchange indicates that Dyckman's investment is worth $20,000. However, Dyckman management believes that the stock market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth $18,000. Dyckman should carry the Thomas investment on its balance sheet at:
$20,000.
Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2012, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2012. Goofy reclassified this investment as trading securities in December of 2013 when the market value had risen to $125,000. What effect on 2013 income should be reported by Goofy for the Crazy Co. shares?
$25,000 net loss
Nichols Enterprises has an investment in 25,000 shares of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott shares are publicly traded on the New York Stock Exchange, and The Wall Street Journal quotes a price for those shares of $10 a share, but Nichols believes the market has not appreciated the full value of the Elliott shares and that a more accurate price is $12 a share. Nichols should carry the Elliott investment on its balance sheet at
$250,000.
On January 1, 2013, Rupar Retailers purchased $100,000 of Anand Company bonds at a discount of $5,000. The Anand bonds pay 6% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on January 1 and July 1 of each year. Rupar accounts for the bonds as a held-to-maturity investment, and uses the effective interest method. In Rupar's December 31, 2013, journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:
$3,336
What total unrealized holding gain would Beresford report in its 2013 income statement relative to its investment securities?
$36,000
On January 1, 2013, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2013. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2013?
$360,000
What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2013?
$41,000.
Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2013. In December, Handy announced $200,000 net income for 2013 and declared and paid a cash dividend of $2 per share on the 200,000 shares of outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2013 would be
$56,000.
What balance sheet amount would Beresford report for its total investment securities at 12/31/2012?
$637,000.
On January 2, 2012, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2012 and 2013, were $10,000 and $50,000, respectively. During 2013, Ranger declared and paid a dividend of $60,000. There were no dividends in 2012. On December 31, 2012, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2013 income statement as income from this investment?
$7,200.
Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet?
Debt securities held to maturity.
Seybert Systems accounts for its investment in Wang Engineering as available for sale. Seybert's balance in accumulated other comprehensive income with respect to the Wang investment is a credit balance of $20,000, and Seybert reports the investment at $100,000 on its balance sheet. Seybert purchased the Wang investment for (ignore taxes):
$80,000
When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as:
Dividend income.
Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2010 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2011, and $65 on December 31, 2012. During 2013, Hawk sold all of its Diamond stock at $70 per share. In its 2013 income statement, Hawk would report:
A gain of $200,000
Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2010 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2011, and $300 on December 31, 2012. During 2013, Dim sold all of its Witt stock at $350 per share. In its 2013 income statement, Dim would report:
A loss on the sale of investments of $450,000
Trading securities are most commonly found on the books of:
Banks
The fair value of debt securities not regularly traded can be most reasonably approximated by:
Calculating the discounted present value of the principal and interest payments
Which category completely excludes equity securities?
Held-to-maturity securities
Both fair values and subsequent growth of the investee are not as relevant for investments in which of the following categories?
Held-to-maturity securities.
Securities that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as:
trading securities
In the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered:
Investing activities.
GAAP regarding accounting for unrealized gains and losses on investments in equity securities will apply to an investment when the percentage of ownership of another company is:
Less than 20%.
Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet?
Long-term debenture bonds.
If an available-for-sale investment is sold for which there are unrealized losses in accumulated other comprehensive income (AOCI), the total effect on total comprehensive income is:
No effect
For trading securities, unrealized holding gains and losses are included in earnings:
On each reporting date.
When an equity security is appropriately carried and reported as securities available for sale, a gain should be reported in the income statement:
Only when the security is sold.
In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:
Operating activities
In 2011, Osgood Corporation purchased $4 million in 10-year municipal bonds at face value. On December 31, 2013, the bonds had a market value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2013, balance sheet and the 2013 income statement would show the following:
Option b
Boulter, Inc. began business on January 1, 2013. At the end of December 2013, Boulter had the following investments in equity securities: All declines in value are deemed to be temporary in nature. How should the corresponding losses be reflected in the financial statements at December 31, 2013?
Option c
Unrealized holding gains and losses on securities available for sale would have the following effects on retained earnings:
Option c
What is the effect on a company's cash flows and reported profit from accounting for an investment as a trading security as compared to accounting for it as an available-for-sale security?
Option c
Unrealized holding gains and losses on securities available for sale would have the following effects on accumulated other comprehensive income:
Option d
What amount will be reported in the balance sheet for this portfolio at December 31, 2013, and how will it be classified?
Option d
When investments are treated as available-for-sale, other comprehensive income (OCI) also includes the tax effects associated with unrealized holding gains and losses. As a result
Other comprehensive income typically would be reduced by the tax expense associated with unrealized holding gains
If Ziggy Company concluded that an investment originally classified as held to maturity would now more appropriately be classified as available for sale, Ziggy would:
Reclassify the investment as available for sale and immediately recognize in accumulated other comprehensive income any unrealized gain or loss on the reclassification date.
If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity, Dinsburry would:
Reclassify the investment as held to maturity and immediately recognize in net income all unrealized gains and losses that have not already been recognized as of the reclassification date
If Dizbert Company concluded that an investment originally classified as available for sale would now more appropriately be classified as held to maturity, Dizbert would:
Reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the investment's amortized cost basis for future amortization
The Guitar World (TGW) holds an investment that increased in fair value over 2013, and accounts for that investment as available for sale. When considering taxes, TGW would:
Reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase its deferred tax liability.
If an available-for-sale investment is sold for which there are unrealized gains in accumulated other comprehensive income (AOCI), a reclassification adjustment affects other comprehensive income (OCI) in the period of sale by:
Reducing OCI for the amount of unrealized gains in AOCI
Accumulated Other Comprehensive Income in the shareholders' equity section of the balance sheet reflects changes in the fair value of securities for which type of securities?
Securities available for sale.
All investments in debt and equity securities that don't fit the definitions of the other reporting categories are classified as:
Securities available for sale.
The investment category for which the investor's "positive intent and ability to hold" is important is:
Securities classified as held to maturity.
Both debt and equity securities can be categorized as trading securities.
TRUE
Both trading securities and securities available for sale are reported at their fair values.
TRUE
Net unrealized holding gains (losses) are reported in the income statement for trading securities.
TRUE
Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet, depending upon their maturity dates.
TRUE
Unrealized gains and losses are included in other comprehensive income for securities that are classified as available for sale.
TRUE
When available-for-sale securities are sold, the amount of gain or loss realized from the date of purchase is included in before-tax net income.
TRUE
Sloan Company has owned an investment during 2013 that has increased in fair value. After all closing entries for 2013 are completed, the effect of the increase in fair value on total shareholders' equity would be:
The same amount under the available-for-sale and trading-securities approaches
Holding gains and losses on trading securities are included in earnings because:
They measure the success or failure of taking advantage of short-term price changes
The income statement reports changes in fair value for which type of securities?
Trading securities.
A weakness of __________ is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized gains or unrealized losses.
the available-for-sale approach