ACC308 Chap 12 & 15

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? A. $0. B. $16,000. C. $20,000. D. None of the above is correct.

A. $0

In B's December 31, 2013, balance sheet, the deferred revenue from the sale of this machine should be: A. $0. B. $8,200. C. $60,000. D. $68,200.

A. $0

What would be the outstanding balance after payment 10? A. $0. B. $2,028. C. $8,929. D. $10,000.

A. $0

Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on January 1, 2013. On November 1, 2013, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2013 relative to its investment in Hack? A. $1,100,000. B. $2,400,000. C. $1,500,000. D. $1,600,000.

A. $1,100,000

What is the outstanding balance after payment 5? A. $1,818. B. $2,000. C. $2,182. D. $3,818.

A. $1,818

XYZ Company leased equipment to West Corporation under a lease agreement that qualifies as a capital lease to West but not as a result of a bargain purchase option or a title transfer. The present value of the asset is $600,000. The expected economic life of the asset is 10 years. The lease term is five years. Using the straight-line method, what would West record as annual depreciation? A. $120,000. B. $61,000. C. $60,000. D. $0.

A. $120,000

What is the net carrying value of the lease liability in Lone Star's June 30, 2013, balance sheet? Round your answer to the nearest dollar. A. $15,943,154. B. $17,533,246. C. $21,000,000. D. None of the above is correct.

A. $15,943,154

N Corp. entered into a nine-year capital lease on a warehouse on December 31, 2013. Lease payments of $26,000, which includes real estate taxes of $1,000, are due annually, beginning on December 31, 2014, and every December 31 thereafter. N does not know the interest rate implicit in the lease; N's incremental borrowing rate is 9%. The rounded present value of an ordinary annuity for nine years at 9% is 6.0. What amount should N report as capitalized lease liability at December 31, 2013? A. $150,000. B. $156,000. C. $225,000. D. $234,000.

A. $150,000

At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends. The amount of purchased goodwill is: A. $18 million. B. $30 million. C. $60 million. D. None of the above is correct.

A. $18,000

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: A. $20,000. B. $18,000. C. Either $18,000 or $20,000, as either are defensible valuations. D. $19,000, the midpoint of Dyckman's range of reasonably likely valuations of Thomas.

A. $20,000

On December 31, 2013, Perry Corporation leased equipment to Admiral Company for a five-year period. The annual lease payment, excluding executory costs, is $40,000. The interest rate for this lease is 10%. The payments are due on December 31 of each year. The first payment was made on December 31, 2013. The normal cash price for this type of equipment is $125,000 while the cost to Perry was $105,000. For the year ended December 31, 2013, by what amount will Perry's pretax earnings increase from this lease? A. $20,000. B. $24,000. C. $28,500. D. $40,000.

A. $20,000

What is the carrying value of the lease liability on Reagan's December 31, 2014, balance sheet (after the third lease payment is made)? A. $280,531. B. $190,530. C. $266,280. D. $356,280.

A. $280,531

The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is: A. $4.5 million. B. $15 million. C. $27 million. D. None of the above is correct.

A. $4.5 million

What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2013? A. $41,000. B. $54,000. C. $13,000. D. $0.

A. $41,000

At what amount would Reagan record the leased asset at inception of the agreement? A. $519,115. B. $429,115. C. $540,000. D. $576,000.

A. $519,115

What balance sheet amount would Beresford report for its total investment securities at 12/31/2012? A. $637,000. B. $644,500. C. $645,400. D. None of the above is correct.

A. $637,000

What is the outstanding balance after payment 9? A. $8,929. B. $13,463. C. $5,000. D. $5,537.

A. $8,929

What is the effective annual interest rate charged to Reagan on this lease? A. 4%. B. 6%. C. 8%. D. 17%.

A. 4%

One of the four criteria for a capital lease specifies that the lease term be equal to or greater than: A. 75% of the expected economic life of the leased property. B. 90% of the expected economic life of the leased property. C. 80% of the expected economic life of the leased property. D. 50% of the expected economic life of the leased property.

A. 75% of the expected economic life of the leased property.

Lone Star Company would account for this as: A. A capital lease. B. A direct financing lease. C. A sales type lease. D. An operating lease.

A. A capital lease.

On April 1, 2013, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick's identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2013, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2013, and paid total dividends for the year $10,000; these dividends were issued quarterly. BigBen's investment in LittleTick will affect BigBen's 2013 net income by: A. A loss of $10,500. B. Earnings of $4,500. C. Earnings of $1,125. D. Earnings of $3,450.

A. A loss of $10,500

Damon is the lessee in connection with a lease. Under the new ASU, Damon would not record: A. Accretion revenue. B. Amortization expense. C. Interest expense. D. A right-of-use asset.

A. Accretion revenue.

Which of the following is not true about the "fair value through other comprehensive income" approach for accounting for investments under IFRS No. 9? A. Allowed for debt investments. B. Includes unrealized gains in other comprehensive income. C. Does not require reclassification of realized gains from other comprehensive income. D. Allowed for equity investments.

A. Allowed for debt investments.

L Corp. recorded a capital lease in February using an annuity due present value table. The company's December 31 statement of cash flows using the indirect method will report: A. An addition to net income for depreciation. B. A cash inflow from financing activities. C. A cash outflow from investing activities. D. A cash inflow from operating activities.

A. An addition to net income for depreciation.

A direct financing lease is classified in the lessor's balance sheet as: A. An asset. B. A liability. C. Interest revenue. D. A contra account to lease liability.

A. An asset.

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are recorded as assets and amortized over the term of the lease in: A. An operating lease. B. A capital lease. C. A direct financing lease. D. A sales-type lease.

A. An operating lease.

If the leaseback portion of a sale-leaseback transaction is classified as an operating lease: A. Any gain is deferred and recognized as a reduction of rent expense. B. Any gain is deferred and recognized as a reduction of depreciation. C. Any gain is recognized at the lease's inception. D. There can be no gain.

A. Any gain is deferred and recognized as a reduction of rent expense.

For the lessor to account for a lease as a capital lease, the lease must meet: A. Any one of first four classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases. B. Any one of the six criteria specified by GAAP regarding accounting for leases. C. All four of the criteria specified by GAAP regarding accounting for leases. D. Any one of the four criteria specified by GAAP regarding accounting for leases.

A. Any one of first four classification criteria and both of the last two additional conditions specified by GAAP regarding accounting for leases.

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded: A. As a reduction in the investment account. B. As an increase in the investment account. C. As dividend income. D. As a contra item to stockholders' equity.

A. As a reduction in the investment account.

For a capital lease, an amount equal to the present value of the minimum lease payments should be recorded by the lessee as a(n): A. Asset and a liability. B. Asset and a different amount should be recorded as a liability. C. Liability and a different amount should be recorded as an asset. D. Expense.

A. Asset and a liability.

The lessee's option to purchase a leased asset at a price that is sufficiently lower than the asset's expected fair value so that the exercise of the option appears reasonably assured is called a: A. Bargain purchase option. B. Lessee buy-out option. C. Lessor sell-out option. D. Guaranteed purchase option.

A. Bargain purchase option.

Barr Corp. is the lessee in a lease that contains a purchase option. Under the new ASU, Barr will consider the exercise price to be an additional cash payment if: A. Barr has a "significant economic incentive" to exercise the option. B. The exercise of the option is "reasonably assured." C. The exercise price is reasonably determinable. D. The exercise price never is considered to be an additional cash payment.

A. Barr has a "significant economic incentive" to exercise the option.

The fair value of debt securities not regularly traded can be most reasonably approximated by: A. Calculating the discounted present value of the principal and interest payments. B. Determining the value using similar securities in the NASDAQ market. C. Using the relative fair value method. D. Calling a licensed and registered stockbroker.

A. Calculating the discounted present value of the principal and interest payments.

All investment securities are initially recorded at: A. Cost. B. Present value. C. Equity value. D. None of the above is correct.

A. Cost.

Smith buys and sells securities, which it typically classifies as available for sale. On December 15, 2013, Smith purchased $500,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2013, the Jones shares had a fair value of $525,000. In the 2013 financial statements, Smith will show (ignore taxes): A. Investment income of $25,000 in its income statement. B. Other comprehensive income of $25,000. C. Accumulated other comprehensive income of $525,000. D. An investment in Jones of $500,000.

A. Investment income of $25,000 in its income statement.

Which of the following is not a characteristic of "simple" debt? A. Investor's purpose is collecting cash flows. B. An amount of principal (adjusted for premium or discount) is transferred to the borrower at issuance that will be returned to the debt holder when the debt matures. C. The debt instrument is not a derivative. D. The debt cannot be prepaid or settled in a way that the investor does not recover substantially all of its original investment unless that is what the investor chooses.

A. Investor's purpose is collecting cash flows.

When a capital lease is first recorded at the inception of the lease, the lessee typically debits: A. Leased asset. B. Rent expense. C. Lease expense. D. Lease receivable.

A. Leased asset.

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: A. Less than 20%. B. 20% to 50%. C. Over 50%. D. Exactly 100%.

A. 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? A. Long-term debenture bonds. B. Common stock. C. Callable preferred stock. D. All of the above are correct.

A. Long-term debenture bonds.

Crystal Corporation recorded a lease payment as follows: Rent Expense 2000 Cash 2000 Crystal must have a(n): A. Operating lease. B. Leveraged lease. C. Capital lease. D. Direct financing lease.

A. Operating lease.

Dicker Furriers purchased 1,000 shares of Loose Corporation stock on January 10, 2012, for $800 per share and classified the investment as securities available for sale. Loose's market value was $400 per share on December 31, 2012, and the decline in value was viewed as temporary. As of December 31, 2013, Dicker still owned the Loose stock whose market value had declined to $100 per share. The decline is due to a reason that's judged to be other than temporary. Dicker's December 31, 2013, balance sheet and the 2013 income statement would show the following: A. Option a B. Option b C. Option c D. Option d

A. Option a

Leasehold improvements usually are classified in a balance sheet as: A. Property, plant, and equipment. B. Other long-term assets. C. Investments. D. Expenses.

A. Property, plant, and equipment.

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: A. Reducing OCI for the amount of unrealized gains in AOCI. B. Increasing OCI for the amount of unrealized gains in AOCI. C. No effect on OCI, as OCI only includes the effects of unrealized gains and losses. D. No effect on OCI, as the realized gain is included in AOCI.

A. Reducing OCI for the amount of unrealized gains in AOCI.

When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be: A. Retrospectively adjusted to the balance that would have existed if the equity method had been in effect for prior years. B. Carried over as is with no adjustment necessary. C. Carried over at fair value on date of transfer. D. Adjusted to reflect amortized cost.

A. Retrospectively adjusted to the balance that would have existed if the equity method had been in effect for prior years.

A noncancelable lease contains a bargain purchase option. The fair value of the asset exceeds the lessor's cost of the asset. Collectibility of the lease payments is assured and there are no material cost uncertainties surrounding the lease. Therefore, the lease will be accounted for by the lessor as a(n): A. Sales-type lease. B. Direct financing lease. C. Operating lease. D. Guaranteed lease.

A. Sales-type lease.

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? A. Securities available for sale. B. Trading securities. C. Consolidated securities. D. Held-to-maturity securities.

A. Securities available for sale.

54. If the lessor retains title to leased property under the terms of the lease: A. The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount. B. The amount to be recovered through periodic lease payments is increased by the present value of the residual amount. C. The amount to be recovered will be the same as if there were no residual value. D. The lessor will record a greater amount of depreciation due to the residual value.

A. The amount to be recovered through periodic lease payments is reduced by the present value of the residual amount.

The equity method of accounting for investments in voting common stock is appropriate when: A. The investor can significantly influence the investee. B. The investor has voting control over the investee. C. The investor intends to hold the common stock indefinitely. D. The investor is assured of a continued supply of a valuable raw material.

A. The investor can significantly influence the investee.

Which of the following statements characterizes a leveraged lease? A. The lessor borrows part of the acquisition price of the leased asset from a third party lender. B. The lessor treats the lease as an operating lease. C. The lessee makes lease payments to the lessor's lender. D. The lessor's interest rate is always higher because the lease is leveraged.

A. The lessor borrows part of the acquisition price of the leased asset from a third party lender.

A sales-type lease differs from a direct financing lease in one respect: A. The lessor receives a manufacturer's or dealer's profit. B. The lessor receives more interest than on a direct financing lease. C. The lessor receives less interest than on a direct financing lease. D. The lessor uses a longer amortization period than on a direct financing lease.

A. The lessor receives a manufacturer's or dealer's profit.

When a lease qualifies as a capital lease, what is the cost basis of the asset acquired? A. The present value of the minimum lease payments, exclusive of executory costs. B. The present value of the minimum lease payments plus executory costs. C. The sum of the gross minimum lease payments. D. The present value of the minimum lease payments plus the present value of executory costs.

A. The present value of the minimum lease payments, exclusive of executory costs.

Like other assets, the cost of a leasehold improvement is allocated as depreciation expense over its useful life to the lessee, which will be: A. The shorter of the physical life of the asset or the lease term. B. The physical life of the asset. C. The lease term. D. A time period determined by management.

A. The shorter of the physical life of the asset or the lease term.

Holding gains and losses on trading securities are included in earnings because: A. They measure the success or failure of taking advantage of short-term price changes. B. The IRS mandates the inclusion. C. The SEC mandates the inclusion. D. They measure the book value of the securities in the balance sheet date.

A. They measure the success or failure of taking advantage of short-term price changes.

If the lessee and lessor use different interest rates to account for a capital lease, then: A. Total expenses for the lessee will be different from the lessor's total revenues. B. Total expenses for the lessee will equal the lessor's total revenues. C. GAAP has been violated by at least one party. D. The lessee will report more net income for the year.

A. Total expenses for the lessee will be different from the lessor's total revenues.

Mann Co. is the lessor in a six-year lease beginning December 31, 2013. The agreement specifies that Woo Corp. make equal annual lease payments on December 31 of each year. Under the new ASU, in its 2014 income statement: A. Woo will report interest expense and amortization expense. B. Woo will report interest expense and accretion revenue. C. Mann will report accretion expense and amortization expense. D. Mann will report accretion expense and interest revenue.

A. Woo will report interest expense and amortization expense.

The Stevens Company purchased a debt investment that meets the characteristics of a simple debt instrument. Stevens is holding the debt for purposes of managing risk. Might Stevens have to recognize an impairment loss on the debt? A. Yes. B. No, because the debt is accounted for at FV-NI, so any fair value changes are already recognized as unrealized gains and losses. C. No, because the debt is accounted for at amortized cost, so fair value changes are not included in earnings. D. Insufficient information is available to answer this question.

A. Yes.

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. A. the available-for-sale approach B. the trading-securities approach C. both the available-for-sale and trading-securities approaches D. neither the available-for-sale and trading-securities approaches

A. the available-for-sale approach

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: A. $3,336. B. $3,325. C. $3,000. D. $3,500.

A.$3,336

Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2013. Jack can significantly influence Jill. On December 10, 2013, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report in its income statement for 2013 relative to its investment in Jill? A. $1,000,000. B. $1,200,000. C. $1,400,000. D. $1,500,000.

B. $1,200,000

What is the interest revenue that Technoid would report on this lease in its 2013 income statement? A. $0. B. $1,673,820. C. $876,662. D. None of the above is correct.

B. $1,673,820

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols calculates that the bonds have incurred credit losses. Before-tax net income for 2013 will be reduced by: A. $0. B. $10,000. C. $20,000. D. $30,000.

B. $10,000

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Under the new ASU, what amount did SmithCo record as the net residual asset? A. $6,400. B. $13,200. C. $14,000. D. $20,000.

B. $13,200

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? A. $0. B. $25,000 net loss. C. $7,000 net gain. D. $32,000 net loss.

B. $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: A. $300,000. B. $250,000. C. Either $250,000 or $300,000, as either are defensible valuations. D. $275,000, the midpoint of Nichols' range of reasonably likely valuations of Elliott.

B. $250,000

What total unrealized holding gain would Beresford report in its 2013 income statement relative to its investment securities? A. $55,900. B. $36,000. C. $80,900. D. $48,200.

B. $36,000

What is the total effective interest paid over the term of the lease? A. $100,000. B. $36,718. C. $53,282. D. $63,282.

B. $36,718

On February 1, 2013, Pearson Corporation became the lessee of equipment under a five-year, noncancelable lease. The estimated economic life of the equipment is eight years. The fair value of the equipment was $600,000. The lease does not meet the definition of a capital lease in terms of a bargain purchase option, transfer of title, or the lease term. However, Pearson must classify this as a capital lease if the present value of the minimum lease payments is at least A. $600,000. B. $540,000. C. $450,000. D. $405,000.

B. $540,000

What would the lessee record as annual depreciation on the asset using the straight-line method? A. $5,328. B. $6,328. C. $6,392. D. $10,000.

B. $6,328

Francisco leased equipment from Julio on December 31, 2013. The lease is a 10-year lease with annual payments of $150,000 due on December 31 of each year beginning December 31, 2013. The present value of the lease is $1,020,000. Francisco's incremental borrowing rate is 12% for this type of lease. The implicit rate of 10% is known by the lessee. What should be the balance in Francisco lease liability at December 31, 2014? A. $824,400. B. $807,000. C. $806,400. D. $792,000.

B. $807,000

What would be the amount of interest expense recorded with payment 5? A. $2,000. B. $893. C. $7,107. D. $1,107.

B. $893

Refer to the following lease amortization schedule. The five payments are made annually starting with the inception of the lease. A $2,000 bargain purchase option is exercisable at the end of the five-year lease. The asset has an expected economic life of eight years. What is the effective annual interest rate? A. 9%. B. 10%. C. 11%. D. 20%.

B. 10%

Warren Co. recorded a right-of-use asset of $800,000 in a 10-year lease under which no profit was recorded at commencement by the lessor. The interest rate charged the lessee was 10%. Under the new ASU, the balance in the right-of-use asset after two years will be: A. $648,000. B. $640,000. C. $880,000. D. $968,000.

B. 640,000

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Its estimated useful life was 16 years. Following the guidance of the new ASU, the total decrease in earnings (pretax) in Carla's December 31, 2013 income statement would be: A. $5,000. B. $7,400. C. $8,400. D. $9,000.

B. 7,400

M Corp. recorded a capital lease in February using an annuity due present value table. The company's December 31 statement of cash flows using the direct method will report: A. A cash inflow from investing activities. B. A cash outflow from financing activities. C. A cash outflow from investing activities. D. A cash inflow from operating activities.

B. A cash outflow from financing activities.

If the leaseback portion of a sale-leaseback transaction is classified as a capital lease: A. Any gain is deferred and recognized as a reduction of rent expense. B. Any gain is deferred and recognized as a reduction of depreciation. C. Any gain is recognized at the lease's inception. D. There can be no gain.

B. Any gain is deferred and recognized as a reduction of depreciation.

Which of the following is not an example of a derivative? A. Interest rate swap. B. Cash. C. Stock option. D. Forward contract.

B. Cash.

If the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at: A. Amortized cost. B. Cost. C. Consolidated value. D. Net present value.

B. Cost.

Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet? A. Common stock held as available for sale securities. B. Debt securities held to maturity. C. Preferred stock held as trading securities. D. All of the above are reported at fair value.

B. Debt securities held to maturity.

On January 1, 2013, Wellburn Corporation leased an asset from Tabitha Company. The asset originally cost Tabitha $300,000. The lease agreement is an operating lease that calls for four annual payments beginning on January 1, 2013, in the amount of $36,000. The other three remaining payments will be made on January 1 of each subsequent year. Which of the following journal entries should Tabitha record on January 1, 2013?

B. Dr. Cash Cr. Unearned rent revenue

Brown, Inc., purchased an equity investment for the purposes of maximizing its return on investment. How should Brown account for the investment? A. Amortized cost. B. FV-NI. C. FV-OCI. D. Cost method.

B. FV-NI.

Jackson & Sons purchased a debt investment that meets the characteristics of a simple debt instrument. Jackson is holding the debt for resale in the near future. How should Jackson account for the investment? A. Amortized cost. B. FV-NI. C. FV-OCI. D. Cost method.

B. FV-NI.

Under IAS No. 39, which is not a category for accounting for investments? A. Fair value through profit and loss. B. Fair value through other comprehensive income. C. Held-to-maturity. D. Available-for-sale.

B. Fair value through other comprehensive income.

Under both U.S. GAAP and IFRS, a lease is a capital lease (called a finance lease under IFRS) if substantially all risks and rewards of ownership are transferred. In making this determination, more judgment, and less specificity, is applied using: A. U.S. GAAP. B. IFRS. C. Both U.S. GAAP and IFRS. D. Neither U.S. GAAP nor IFRS.

B. IFRS.

A guaranteed residual value at the inception of a capital lease should be: A. Excluded from minimum lease payments. B. Included as part of minimum lease payments at present value. C. Included as part of minimum lease payments at future value. D. Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

B. Included as part of minimum lease payments at present value.

When an impairment of an equity investment that is classified as available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair value and the amount of the write-down is: A. Recorded as a deferred credit. B. Included in income. C. Recorded as deferred asset. D. Treated as unrealized.

B. Included in income.

Which of the following is a criterion for a debt instrument to be viewed as having a lending or customer financing business purpose? A. Debt instrument is held for the purpose of being sold. B. Investor's purpose is collecting cash flows. C. Investor cannot renegotiate, sell, or settle the debt to minimize losses due to deteriorating credit quality. D. Investment is actively managed internally on a fair value basis but doesn't qualify for FV-OCI.

B. Investor's purpose is collecting cash flows.

In this situation, Reagan: A. Is the lessee in a sales-type lease. B. Is the lessee in a capital lease. C. Is the lessor in a capital lease. D. Is the lessor in a sales-type lease.

B. Is the lessee in a capital lease.

Gerken Company concluded at the beginning of 2013 that the company's ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $50,000 at the time of the change, and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared: A. Net income and retained earnings will be higher by $25,000. B. Net income will be unchanged, and retained earnings will be higher by $25,000. C. Net income and retained earnings will be higher by $75,000. D. The accounts will be unchanged, because no adjustment is necessary.

B. Net income will be unchanged, and retained earnings will be higher by $25,000.

For trading securities, unrealized holding gains and losses are included in earnings: A. Only at the end of the fiscal year. B. On each reporting date. C. Only when they exceed 10% of the underlying investment. D. Based on a vote of the board of directors.

B. On each reporting date.

In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered: A. Investing activities. B. Operating activities. C. Financing activities. D. Noncash financing activities.

B. 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: A. Option a B. Option b C. Option c D. Option d

B. Option B

C Corp. has a rate of return on assets of 10%. Not including any indirect effects on earnings, the rate of return on assets is immediately increased when C records: Capital Lease Operating Lease a. yes yes b. no no c. yes no d. no yes A. Option a B. Option b C. Option c D. Option d

B. Option b

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: A. Accumulated other comprehensive income would be increased by the tax benefits typically associated with unrealized holding gains. B. Other comprehensive income typically would be reduced by the tax expense associated with unrealized holding gains. C. Accumulated other comprehensive income would not be affected by taxes. D. None of the above is correct.

B. Other comprehensive income typically would be reduced by the tax expense associated with unrealized holding gains.

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: A. Not reclassify the investment, as original classifications are irrevocable. B. 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. C. 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. D. Reclassify the investment as held to maturity, but there would be no income effect.

B. 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.

All investments in debt and equity securities that don't fit the definitions of the other reporting categories are classified as: A. Trading securities. B. Securities available for sale. C. Held-to-maturity securities. D. Consolidated securities.

B. Securities available for sale.

Of the four criteria for a capital lease, which two are not applied if the lease begins during the final quarter of the asset's useful life? A. The 75% test and the bargain purchase option. B. The 90% test and the 75% test. C. The 90% test is the only one to which this applies. D. The bargain purchase and the passage of title criteria.

B. The 90% test and the 75% test.

The four criteria provided in GAAP for distinguishing a capital lease from an operating lease do not include: A. The agreement specifies that ownership transfers at the end of the lease term. B. The collectibility of the lease payments must be reasonably predictable. C. The agreement contains a bargain purchase option. D. The noncancelable lease term is 75% or more of the useful life of the leased asset.

B. The collectibility of the lease payments must be reasonably predictable.

An OTT impairment for an equity investment is recognized in net income if fair value declines below the investment's cost and: A. The company has incurred noncredit losses. B. The company does not have the intent and ability to hold the investment until fair value recovers. C. The company lacks intent to hold the investment until fair value recovers. D. The company has incurred credit losses.

B. The company does not have the intent and ability to hold the investment until fair value recovers.

When the total expenses over the life of an operating lease are compared to the total expenses over the life of a capital lease, one will find that: A. The expenses of a capital lease are greater than the expenses of the operating lease. B. The expenses of the capital lease and operating lease are equal. C. The expenses of an operating lease are greater than the expenses of a capital lease. D. No meaningful comparison can be made.

B. The expenses of the capital lease and operating lease are equal.

Which of the following is not true about the fair value option? A. The fair value option is irrevocable. B. The fair value option must be elected for all shares of an investment in a particular company. C. Electing the fair value option for held-to-maturity investments simply reclassifies those investments as trading securities. D. All of the above are true.

B. The fair value option must be elected for all shares of an investment in a particular company.

When the equity method of accounting for investments is used by the investor, the investment account is increased when: A. A cash dividend is received from the investee. B. The investee reports a net income for the year. C. The investor records additional depreciation related to the investment. D. The investee reports a net loss for the year.

B. The investee reports a net income for the year.

If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company intends to sell the investment: A. The investment is not written down to fair value. B. The investment is written down to fair value, and the entire impairment loss is recognized in net income. C. The investment is written down to fair value, and the entire impairment loss is recognized in accumulated other comprehensive income. D. The investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.

B. The investment is written down to fair value, and the entire impairment loss is recognized in net income.

If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because it is viewed as "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year: A. The investment is not written down to fair value. B. The investment is written down to fair value, and the impairment loss is recognized in net income. C. The investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income. D. The investment is written down to fair value, and only the noncredit loss is included in net income.

B. The investment is written down to fair value, and the impairment loss is recognized in net income.

126. Which of the following is not true about recognizing unrealized gains and losses on equity investments? A. If the investor does not have significant influence over the investee, the equity investment is always accounted for as FV-NI. B. The investor can use the FV-OCI approach if the equity is held for purposes of maximizing return on investment or managing risk. C. The investor will recognize unrealized gains and losses in earnings in the period in which fair value of the investment changes. D. If the investor has significant influence but not control over the investee, the equity method is used.

B. The investor can use the FV-OCI approach if the equity is held for purposes of maximizing return on investment or managing risk.

If the lessee expects to obtain title to leased property due to a bargain purchase option or passage of title at the end of the lease term: A. The lessee ignores any residual value for the leased property. B. The lessor ignores any residual value for the leased property. C. The lessee adds the present value of the residual value to the amount recorded for the lease. D. The lessor will always charge a higher annual lease rate.

B. The lessor ignores any residual value for the leased property.

Which of the following statements characterizes an operating lease? A. The lessee records depreciation and interest. B. The lessor records depreciation and lease revenue. C. The lessor transfers title at the end of the lease term. D. The lessee records a leased asset.

B. The lessor records depreciation and lease revenue.

For a leased asset under a lease that qualifies as a capital lease because of a bargain purchase option, the depreciation period used by the lessee must be: A. The same period that was used by the lessor. B. The useful life to the lessee. C. The term of the lease regardless of the lease provisions. D. The remaining life of the asset at the time the lease agreement took effect.

B. The useful life to the lessee.

The income statement reports changes in fair value for which type of securities? A. Securities reported under the equity method. B. Trading securities. C. Held-to-maturity securities. D. Securities available for sale.

B. Trading securities.

Bridges Inc. holds a debt investment from RiteCo and had viewed that investment as adversely affected by particular events in the market for RiteCo's products, but without specific information about deterioration of RiteCo's credit quality. However, Bridges just learned that RiteCo is entering bankruptcy. As a result of receiving this information, what is Bridges likely to do with the RiteCo investment? A. Transfer it from Bucket 1 to Bucket 2. B. Transfer it from Bucket 2 to Bucket 3. C. Transfer it from Bucket 3 to Bucket 2. D. Transfer it from Bucket 2 to Bucket 1.

B. Transfer it from Bucket 2 to Bucket 3.

Hope Company bought 30% of Faith Corporation in the beginning of 2013. Hope's purchase price equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2013, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2013? A. Overstated by $1,050,000; understated by $1,050,000. B. Understated by $1,050,000; understated by $1,050,000. C. Overstated by $1,200,000; overstated by $1,200,000. D. Understated by $1,200,000; overstated by $1,050,000.

B. Understated by $1,050,000; understated by $1,050,000.

If Pop Company owns 15% of the common stock of Son Company, then Pop Company typically: A. Would record 15% of the net income of Son Company as investment income each year. B. Would record dividends received from Son Company as investment revenue. C. Would increase its investment account by 15% of Son Company income each year. D. All of the above are correct.

B. Would record dividends received from Son Company as investment revenue.

Wang Corporation purchased $100,000 of Hales Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Wang classifies its investment as held to maturity. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $70,000 during 2013. Wang calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses. If Wang accounts for the Hales bonds under IFRS, before-tax net income for 2013 will be reduced by: A. $0. B. $10,000. C. $20,000. D. $30,000.

B.$10,000

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Under the new ASU, what amount of profit did SmithCo record at the commencement of the lease? A. $34,000. B. $27,200. C. $14,000. D. $11,800.

B.$27,200

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? A. $26,000. B. $7,200. C. $20,000. D. $27,200.

B.$7,200

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)? A. $55,100. B. $26,500. C. $10,400. D. None of the above is correct.

C. $10,400

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? A. $0. B. $19,000 unrealized gain. C. $12,000 net unrealized gain. D. $7,000 unrealized loss.

C. $12,000 net unrealized gain

On January 1, 2013, Gibson Corporation entered into a four-year operating lease. The payments were as follows: $20,000 for 2013, $18,000 for 2014, $16,000 for 2015, and $14,000 for 2016. What is the correct amount of lease expense for 2014? A. $20,500. B. $19,000. C. $17,000. D. $18,000.

C. $17,000

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Under the new ASU, what amount of interest revenue from the lease should SmithCo report in its December 31, 2013, income statement? A. $12,000. B. $4,000. C. $3,400. D. $5,000.

C. $3,400

Carla Salons leased equipment from SmithCo on July 1, 2013. The present value of the lease payments discounted at 10% was $80,000. Ten annual lease payments of $12,000 are due at the beginning of each fiscal year beginning July 1, 2013. SmithCo had constructed the equipment recently for $66,000, and its retail fair value was $100,000. Following the guidance of the new ASU, the total increase in earnings (pretax) in SmithCo's December 31, 2013 income statement would be: A. $27,200. B. $30,600. C. $31,600. D. $31,860.

C. $31,600

On January 1, 2013, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2013, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2013? A. $295,000. B. $300,000. C. $315,000. D. $320,000.

C. $315,000

What would the lessee record as annual depreciation on the asset using the straight-line method, assuming no residual value? A. $3,325. B. $6,920. C. $4,325. D. $5,320.

C. $4,325

What is the total interest paid over the term of the lease? A. $42,000. B. $8,200. C. $7,400. D. $3,460.

C. $7,400

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): A. $100,000. B. $120,000. C. $80,000. D. Cannot be determined from this information.

C. $80,000

Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method. Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31, 2012 and 2013, respectively. During 2013 Clor recognized $80,000 of net income and paid dividends of $30,000. Assuming that Bloomfield owned the same percentage of Clor throughout 2013, their percentage ownership must have been: A. 15%. B. 18.75%. C. 30%. D. 50%.

C. 30%

What is the amount of residual value guaranteed by Reagan to the lessor? A. $1,385. B. $34,615. C. $36,000. D. Cannot be determined from the given information.

C. 36,000

One of the four criteria for a capital lease specifies that the present value of the minimum lease payments be equal to or greater than: A. 90% of the cost of the asset. B. 75% of the fair value of the asset. C. 90% of the fair value of the asset. D. 75% of the cost of the asset.

C. 90% of the fair value of the asset.

P Corp. leased an asset to L Corp. using an operating lease in February. P Corp.'s December 31 statement of cash flows will report: A. A cash outflow from investing activities. B. A cash outflow from financing activities. C. A cash inflow from operating activities. D. No cash outflow.

C. A cash inflow from operating activities.

J Corp. entered into an operating lease in February. The company's December 31 statement of cash flows will report: A. A cash outflow from investing activities. B. A cash outflow from financing activities. C. A cash outflow from operating activities. D. No cash outflow.

C. A cash outflow from operating activities.

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are matched with the interest revenues they help generate in: A. An operating lease. B. A capital lease. C. A direct financing lease. D. A sales-type lease.

C. A direct financing lease.

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. A gain of $50,000. B. A gain of $150,000. C. A gain of $200,000 D. A gain of $300,000.

C. 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. A realized gain of $50,000. B. A recognition of unrealized losses of $400,000. C. A loss on the sale of investments of $450,000. D. A trading gain of $50,000 and an unrealized loss of $500,000.

C. A loss on the sale of investments of $450,000

Technoid would account for this as: A. A capital lease. B. A direct financing lease. C. A sales-type lease. D. An operating lease.

C. A sales-type lease.

The journal entries for the _____________, ___________, and __________ approaches under the proposed ASU correspond to those used for the held-to-maturity, trading security, and available-for-sale approaches, respectively, in current GAAP. A. FV-NI, FV-OCI, amortized cost B. FV-OCI, amortized cost, FV-NI C. Amortized cost, FV-NI, FV-OCI D. The journal entries do not correspond.

C. Amortized cost, FV-NI, FV-OCI

Trading securities are most commonly found on the books of: A. Oil companies. B. Manufacturing companies. C. Banks. D. Foreign subsidiaries.

C. Banks.

From the perspective of the lessee, leases may be classified as either: A. Direct financing or sales-type. B. Capital or direct financing. C. Capital or operating. D. Direct financing or operating.

C. Capital or operating.

Consolidated financial statements are prepared when one company has: A. Accounted for the investment using the equity method. B. Accounted for the investment as securities available for sale. C. Control over another company. D. None of the above is correct.

C. Control over another company.

Trading securities, by definition, are properly classified in the balance sheet as: A. Shareholders' equity. B. Intangibles. C. Current assets. D. Other assets.

C. Current assets.

On January 1, 2013, Calloway Company leased a machine to Zone Corporation. The lease qualifies as a direct financing lease. Calloway paid $240,000 for the machine and is leasing it to Zone for $34,000 per year, an amount that will return 10% to Calloway. The present value of the minimum lease payments is $240,000. The lease payments are due each January 1, beginning in 2013. What is the appropriate interest entry on December 31, 2013?

C. Dr. Interest Receivable 20,600 Cr. Interest Revenue 20,600

Cortez Associates purchased a debt investment that meets the characteristics of a simple debt instrument. Cortez intends to hold the debt for purposes of maximizing its return on investment. How should Cortez account for the investment? A. Amortized cost. B. FV-NI. C. FV-OCI. D. Cost method.

C. FV-OCI.

Both fair values and subsequent growth of the investee are not as relevant for investments in which of the following categories? A. Securities reported under the equity method. B. Trading securities. C. Held-to-maturity securities. D. Securities available for sale.

C. Held-to-maturity securities.

Which category completely excludes equity securities? A. Securities available for sale. B. Consolidating securities. C. Held-to-maturity securities. D. Trading securities.

C. Held-to-maturity securities.

Under IFRS No. 9, which is not a category for accounting for investments? A. Fair value through profit and loss. B. Fair value through other comprehensive income. C. Held-to-maturity. D. Amortized cost.

C. Held-to-maturity.

In the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered: A. Operating activities. B. Financing activities. C. Investing activities. D. Noncash financing activities.

C. Investing activities.

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: A. An increase. B. A decrease. C. No effect. D. Cannot be determined given this information.

C. No effect.

Which of the following is not true when the fair value option is elected for an investment that would normally be accounted for under the equity method? A. No journal entry need be made to recognize the investor's portion of the investee's net income. B. Unrealized gains and losses on that investment are recognized in net income. C. No journal entry need be made to recognize the investor's portion of dividends paid by the investee. D. All of the above are true.

C. No journal entry need be made to recognize the investor's portion of dividends paid by the investee.

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? A. Option a B. Option b C. Option c D. Option d

C. Option C

B Corp. has a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the debt/equity ratio is increased when B records: Capital Lease Operating Lease a. yes yes b. no no c. yes no d. no yes A. Option a B. Option b C. Option c D. Option d

C. Option c

Unrealized holding gains and losses on securities available for sale would have the following effects on retained earnings: Gains Losses a. increase no change b. no change decrease c. no change no change d. increase decrease A. Option a B. Option b C. Option c D. Option d

C. 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? Cash Flows Net Income a. little, if any, effect little, if any, effect b. sig effect sig effect c. little, if any, effect sig effect d. sig effect little, if any, effect A. Option a B. Option b C. Option c D. Option d

C. Option c

Since the lease payments under a lease agreement are normally paid at the beginning of each period, the appropriate compound interest table to be used to determine the amount at which the leased asset should be recorded is the: A. Ordinary annuity table. B. Present value of $1 table. C. Present value of an annuity due table. D. Future value of an annuity due table.

C. Present value of an annuity due table.

The lessee normally measures the lease liability to be recorded as the: A. Future value of the minimum lease payments. B. Sum of the cash payments over the term of the lease. C. Present value of the minimum lease payments. D. Fair market value of the leased asset.

C. Present value of the minimum lease payments.

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: A. Not reclassify the investment, as original classifications are irrevocable. B. Reclassify the investment as available for sale and immediately recognize in net income any unrealized gain or loss on the reclassification date. C. Reclassify the investment as available for sale and immediately recognize in accumulated other comprehensive income any unrealized gain or loss on the reclassification date. D. Need to restate earnings, as the original classification was in error.

C. 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 Dizbert Company concluded that an investment originally classified as available for sale would now more appropriately be classified as held to maturity, Dizbert would: A. Not reclassify the investment, as original classifications are irrevocable. B. Reclassify the investment as held to maturity and immediately recognize in net income any unrealized gain or loss on the reclassification date. C. 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. D. Need to restate earnings, as the original classification was in error.

C. 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.

When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition: A. Reduces the investment account and increases investment revenue. B. Increases the investment account and increases investment revenue. C. Reduces the investment account and reduces investment revenue. D. Increases the investment account and reduces investment revenue.

C. Reduces the investment account and reduces investment revenue.

Which of the following is not true about the "fair value through profit and loss" approach for accounting for investments under IFRS? A. Allowed under both IAS No. 39 and IFRS No. 9. B. Includes unrealized gains in earnings. C. Requires reclassification of realized gains from other comprehensive income. D. Not vulnerable to other-than-temporary impairments.

C. Requires reclassification of realized gains from other comprehensive income.

The investment category for which the investor's "positive intent and ability to hold" is important is: A. Securities reported under the equity method. B. Trading securities. C. Securities classified as held to maturity. D. Securities available for sale.

C. Securities classified as held to maturity.

Distinguishing between operating and capital leases is due in large part to the accounting concept of: A. Conservatism. B. Materiality. C. Substance over form. D. Historical cost.

C. Substance over form.

Of the four criteria for a capital lease, the one that most often is the decisive criteria is: A. The 75% of economic life test. B. The transfer of title. C. The 90% of fair value test. D. The bargain purchase option.

C. The 90% of fair value test.

Cucumber Company concluded at the beginning of 2013 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment as available for sale, rather than using the equity method as it had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as an available-for-sale investment. At the time of implementing the change to the available-for-sale method, if financial statements were prepared: A. Net income and retained earnings will be lower by $25,000. B. Net income will be unchanged, and retained earnings will be lower by $25,000. C. The accounts will be unchanged, because no adjustment is necessary. D. Other comprehensive income and accumulated other comprehensive income will be lower by $25,000.

C. The accounts will be unchanged, because no adjustment is necessary.

Which of the following statements regarding guaranteed residual values is true for the lessee? A. The asset and liability at the inception of the lease should be increased by the amount of the residual value. B. The asset and liability at the inception of the lease should be decreased by the amount of the residual value. C. The asset and liability at the inception of the lease should be increased by the present value of the residual value. D. The asset and liability at the inception of the lease should be decreased by the present value of the residual value.

C. The asset and liability at the inception of the lease should be increased by the present value of the residual value.

If a debt instrument is viewed as complex, which of the following is most likely not true? A. The debt is always classified as FV-NI. B. The investor will recognize large unrealized losses in the period in which fair value of the debt changes. C. The debt may be accounted for at FV-OCI, depending on the investor's business purpose for holding the debt. D. The debt may be a derivative.

C. The debt may be accounted for at FV-OCI, depending on the investor's business purpose for holding the debt.

If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment: A. The investment is written down to fair value, and only the noncredit-loss component of the impairment loss is recognized in net income. B. The investment is written down to fair value, and the entire impairment loss is recognized in net income. C. The investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income. D. The investment is written down to fair value, but none of the impairment loss is recognized in net income.

C. The investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.

If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment: A. The investment is written down to fair value, and only the noncredit-loss component of the impairment loss is recognized in net income. B. The investment is written down to fair value, and the entire impairment loss is recognized in net income. C. The investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income. D. The investment is written down to fair value, but none of the impairment loss is recognized in net income.

C. The investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.

Which of the following is not among the criteria for classifying a lease as a capital lease? A. The agreement specifies that ownership of the asset transfers to the lessee. B. The agreement contains a bargain purchase option. C. The noncancelable lease term is equal to 90% or more of the expected economic life of the asset. D. The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset.

C. The noncancelable lease term is equal to 90% or more of the expected economic life of the asset.

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: A. Higher under the available-for-sale approach than under the trading-securities approach. B. Lower under the available-for-sale approach than under the trading-securities approach. C. The same amount under the available-for-sale and trading-securities approaches. D. Not possible to identify whether the available-for-sale or trading-securities approaches yield higher shareholders' equity given this information.

C. The same amount under the available-for-sale and trading-securities approaches.

If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company: A. Would record dividends received from Son Company as investment revenue. B. Would increase its investment account when Son Company declares dividends. C. Would record 40% of the net income of Son Company as investment income each year. D. All of the above are correct.

C. Would record 40% of the net income of Son Company as investment income each year.

What amount would Matsui report in its year-end 2013 balance sheet for its investment in Yankee? A. $1,320,000. B. $1,260,000. C. $1,242,000. D. None of the above is correct.

C.$1,242,000

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: A. $0. B. $28,000. C. $56,000. D. None of the above is correct.

C.$56,000

On January 1, 2013, Packard Corporation leased equipment to Hewlitt Company. The lease term is eight years. The first payment of $450,000 was made on January 1, 2013. Remaining payments are made on December 31 each year, beginning with December 31, 2013. The equipment cost Packard Corporation $2,400,000. The present value of the minimum lease payments is $2,640,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, what will be the balance reported as a liability by Hewlitt in the December 31, 2014, balance sheet? A. $1,950,000. B. $1,509,000. C. $1,959,000. D. $1,704,900.

D. $1,704,900

ABC Company leased equipment to Best Corporation under a lease agreement that qualifies as a direct financing lease. The cost of the asset is $120,000. The lease contains a bargain purchase option that is effective at the end of the fifth year. The expected economic life of the asset is 10 years. The lease term is five years. The asset is expected to have a residual value of $2,000 at the end of 10 years. Using the straight-line method, what would Best record as annual depreciation? A. $23,600. B. $12,200. C. $12,000. D. $11,800.

D. $11,800

Red Co. recorded a residual asset of $100,000 in a 10-year lease under which no profit was recorded at commencement by the lessor. The interest rate charged the lessee was 10%. Under the new ASU, the balance in the residual asset after two years will be: A. $80,000. B. $90,000. C. $110,000. D. $121,000.

D. $121,000

What amount would Sosa Enterprises report in its year-end 2013 balance sheet for its investment in Orioles Co.? A. $3,200,000. B. $3,180,000. C. $3,135,000. D. $3,027,000.

D. $3,027,000

On July 1, 2013, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the fair value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for 2013, and paid $150,000 quarterly dividends to its shareholders. After all closing entries are made, Tremen's "Investment in Delany Company" account would have a balance of: A. $3,200,000. B. $3,160,000. C. $3,000,000. D. $3,080,000.

D. $3,080,000

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols believes it is more likely than not that it will have to sell the Holly bonds before the bonds have a chance to recover their fair value. Before-tax net income for 2013 will be reduced by: A. $0. B. $10,000. C. $20,000. D. $30,000.

D. $30,000

Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols is planning to sell the bonds in the near future. Before-tax net income for 2013 will be reduced by: A. $0. B. $10,000. C. $20,000. D. $30,000.

D. $30,000

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? A. $284,400. B. $300,000. C. $315,600. D. $360,000.

D. $360,000

On September 1, 2013, Custom Shirts Inc. entered into a lease agreement appropriately classified as an operating lease. The lease term is three years. The annual payments are (a) $20,000 for year 1, (b) $24,000 for year 2, and (c) $28,000 for year 3. How much rent expense will Custom Shirts recognize for 2013? A. $6,667. B. $24,000. C. $20,000. D. $8,000.

D. $8,000

What is the effective annual interest rate? A. 9%. B. 10%. C. 11%. D. 12%.

D. 12%

On January 1, 2013, Princess Corporation leased equipment to King Company. The lease term is eight years. The first payment of $675,000 was made on January 1, 2013. The equipment cost Princess Corporation $3,600,000. The present value of the minimum lease payments is $3,960,000. The lease is appropriately classified as a sales-type lease. Assuming the interest rate for this lease is 10%, how much interest revenue will Princess record in 2014 on this lease? A. $261,000. B. $328,500. C. $325,350. D. $293,850.

D. 293,850

Prepayments made on an operating lease are considered to be: A. A lease expense. B. A depreciable asset. C. Executory costs. D. A prepayment of rent.

D. A prepayment of rent.

Matt Co. is the lessor in connection with a lease. Under the new ASU, Matt Co. would not record: A. Accretion revenue. B. A residual asset. C. Interest revenue. D. A right-of-use asset.

D. A right-of-use asset.

Recording a sales-type lease is similar to recording: A. A purchase on account. B. An exchange of assets. C. A sale of a fixed asset. D. A sale of merchandise on account.

D. A sale of merchandise on account.

Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire that lease are called initial direct costs. Initial direct costs are expensed at the inception of the lease in: A. An operating lease. B. A capital lease. C. A direct financing lease. D. A sales-type lease.

D. A sales-type lease.

Which of the following is not true about derivatives? A. Large losses on derivative investments have been reported in the press. B. Derivatives are so named because their value is derived from some underlying measure. C. Derivatives are useful instruments for managing risk. D. Accounting for derivatives is fully resolved and no additional rules or interpretations are likely.

D. Accounting for derivatives is fully resolved and no additional rules or interpretations are likely.

For the lessee to account for a lease as a capital lease, the lease must meet: A. All four of the criteria specified by GAAP regarding accounting for leases. B. Any one of the six criteria specified by GAAP regarding accounting for leases. C. Any two of the criteria specified by GAAP regarding accounting for leases. D. Any one of the four criteria specified by GAAP regarding accounting for leases.

D. Any one of the four criteria specified by GAAP regarding accounting for leases.

If the lessor records unearned rent at the beginning of a lease term, the lease must: A. Be a direct financing lease. B. Be a sales-type lease. C. Contain a bargain renewal option. D. Be an operating lease.

D. Be an operating lease.

Cain Corporation owns $10,000 of IBM bonds. Some bonds are held for immediate sale, but others are held in terms of long-term appreciation. Which of the following is true about how Cain should account for this investment? A. Cain should account for all the bonds as FV-NI. B. Cain should account for all the bonds as FV-OCI. C. Cain should determine the primary business purpose of the bonds, and account for the bonds according to that purpose, as all of a particular type of debt should be accounted for the same way. D. Cain should determine the business purpose of each bond, and account for it according to that business purpose.

D. Cain should determine the business purpose of each bond, and account for it according to that business purpose.

GAAP requires that some lease agreements be accounted for as purchases. The theoretical justification for this treatment is that a lease of this type: A. Complies with the concept of form over substance. B. Reflects the relationship of cause and effect. C. Satisfies the concept of historical cost. D. Conveys most of the risks and benefits of property ownership.

D. Conveys most of the risks and benefits of property ownership.

What are the three types of expenses that a lessee experiences with a capital lease? A. Lease expense, executory costs, interest expense. B. Depreciation expense, lease expense, interest expense. C. Executory costs, lease expense, depreciation expense. D. Depreciation expense, interest expense, executory costs.

D. Depreciation expense, interest expense, executory costs.

When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as: A. A return of capital. B. A loss. C. A deduction from the investment account. D. Dividend income.

D. Dividend income.

Investments in securities available for sale are reported at: A. Discounted present value. B. Lower of cost or market. C. Historical cost. D. Fair value on the reporting date.

D. Fair value on the reporting date.

Investments in securities to be held for an unspecified period of time are reported at: A. Historical cost. B. Present value. C. Lower of cost or market. D. Fair value.

D. Fair value.

Which of the following is not true about accounting for investments under IAS No. 31 under IFRS? A. IFRS allows proportionate consolidation of investments where two or more investors have joint control. B. IFRS is more restrictive than U.S. GAAP concerning when an investor can elect the fair value option. C. IFRS requires that the accounting policies of an investee be adjusted to correspond to those of the investor when applying the equity method. D. IFRS does not allow use of the equity method where two or more investors have joint control.

D. IFRS does not allow use of the equity method where two or more investors have joint control.

If the residual value of a leased asset turns out to be more than the amount guaranteed by the lessee, the: A. Lessor must compensate the lessee for the excess. B. Lessee must pay the lessor the amount of the excess. C. Lessee will reduce the last year's depreciation. D. Lessor is not obligated to compensate the lessee for the excess.

D. Lessor is not obligated to compensate the lessee for the excess.

Which of the following is not true about how the proposed ASU treats impairments? A. The objective is to calculate expected losses of contractual cash flows. B. Losses are discounted for the time value of money. C. Different buckets capture differences in the deterioration of credit quality. D. Losses always are estimated for the remaining life of the investment.

D. Losses always are estimated for the remaining life of the investment.

Which of the following increases the investment account under the equity method of accounting? A. Decreases in the market price of the investee's stock. B. Dividends paid by the investee that were declared in the previous year. C. Net loss of the investee company. D. None of the above is correct.

D. None of the above is correct.

When an equity security is appropriately carried and reported as securities available for sale, a gain should be reported in the income statement: A. When the fair value of the security increases. B. When the present value of the security increases. C. Only when the Dow Jones Industrial Average increases at least 100 points. D. Only when the security is sold.

D. Only when the security is sold.

From the perspective of the lessor, leases may be classified as either: A. Direct financing or sales-type. B. Operating, capital, or direct financing. C. Operating, sales-type, indirect financing. D. Operating, direct financing, or sales-type.

D. Operating, direct financing, or sales-type.

Anthers Inc. bought the following portfolio of trading securities near the end of 2013. What amount will be reported in the balance sheet for this portfolio at December 31, 2013, and how will it be classified? A. Option a B. Option b C. Option c D. Option d

D. Option D

S Corp. has a rate of return on assets of 10% and a debt/equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of recording a capital lease on these ratios is a(an): Return on Assets Debt/Equity a. increase increase b. decrease decrease c. increase decrease d. decrease increase A. Option a B. Option b C. Option c D. Option d

D. Option d

Unrealized holding gains and losses on securities available for sale would have the following effects on accumulated other comprehensive income: Gains Losses a. increase increase b. decrease decrease c. decrease increase d. increase decrease A. Option a B. Option b C. Option c D. Option d

D. Option d

Additional lessor conditions for classification as a capital lease are consistent with the criteria of the: A. Matching principle. B. Cause and effect principle. C. Materiality concept. D. Realization principle.

D. Realization principle.

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: A. Recognize tax expense on the income statement, and probably increase taxes payable. B. Recognize tax expense on the income statement, and probably increase its deferred tax liability. C. Reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase taxes payable. D. Reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase its deferred tax liability.

D. Reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase its deferred tax liability.

When the investor's level of influence changes, it may be necessary to change from the equity method to another method. When the level of ownership falls from a range of 20% to 50% to less than 20%, the equity method typically would be discontinued and the investment account balance would be carried over at: A. Amortized cost on the date of ownership change. B. Fair value on the date of ownership change. C. Discounted present value on the date of ownership change. D. The current balance, and this balance would serve as the new "cost."

D. The current balance, and this balance would serve as the new "cost."

113. If the fair value of a trading security declines for a reason that is viewed as "other than temporary": A. The investment is not written down to fair value. B. The investment is written down to fair value, and an "impairment loss" is recognized in net income. C. The investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income. D. The investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.

D. The investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.

118. Which of the following is not a reason to consider a decline in the fair value of a debt investment to be "other than temporary"? A. The investor determines that a credit loss exists on the investment. B. The investor intends to sell the investment. C. The investor believes it is "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year. D. The investor intends to hold the investment to maturity.

D. The investor intends to hold the investment to maturity.

In a sale-leaseback arrangement, the lessee is also: A. The new owner of the property. B. The buyer. C. A third-party guarantor. D. The seller.

D. The seller.

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: A. Securities available for sale. B. Consolidating securities. C. Held-to-maturity securities. D. Trading securities.

D. Trading securities.

The appropriate asset value reported in the balance sheet by the lessee for an operating lease is: A. Present value of the minimum lease payments. B. Sum of the minimum lease payments. C. Fair value of the asset at the inception of the lease. D. Zero, unless a prepayment or accrual is involved.

D. Zero, unless a prepayment or accrual is involved.