Chapter 12: multiple choice

Jeremiah Corporation purchased securities during 2013 and classified them as securities available for sale: Security/cost/FV A/$40000/$49000 B/$70000/$66000 C/$28000/$39000 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

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?

$1,100,000

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?

$1,200,000

Assume that, on January 1, 2013, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at January 1, 2013. The following information pertains to Yankee during 2013: Net Income: $200000 Dividends: $60000 MKT price: $22/share What amount would Matsui report in its year-end 2013 balance sheet for its investment in Yankee?

$1,242,000

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2013. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols claculates that the bonds have incurred credit losses. Before-tax net income for 2013 will be reduced by:

$10000

On January 1, 2013, Everglade Company purchased the following securities and properly accounted for them as securities available for sale: Security/cost/FV ABC/$40000/$55000 DEF/$72000/$65000 XYZ/$16000/$20000 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?

$12000 net unrealized gain

Anthers Inc bought the following portfolio of trading securities near the end of 2013. Security/cost/fv A/$80000/$84000 B/$60000/$54000 C/$22000/22000 What amount will be reported in the balance sheet for this portfolio at December 31, 2013 and how will it be classified?

$160,000 Current asset 84+54+22

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 purchase goodwill is:

$18 million

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

$20000

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 loss:32000 gain:70000

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

Assume that, on January 1, 2013, Sosa Enterprises paid $3,000,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an eight-year remaining useful life and straight-line depreciation with no residual value for its depreciable assets. At January 1, 2013, the book value of Orioles' identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction. The following information pertains to Orioles during 2013: Net income: $600000 Dividends: $360000 MKT price: $80/share What amount would Sosa Enterprises report in its year-end 2013 balance sheet for its investment in Orioles Co.?

$3,027,000

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2013. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired becasue Nichols in planning to sell the bonds in the near future. Before-tac net income for 2013 will be reduced by:

$30,000

Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent and ability to hold the bonds until they matured in 2017, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2013. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols concluded 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:

$30000

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:

$3080000 3000000+(40%)(.5)(1000000-600000)

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?

$315,000.

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:

$3336

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 8000X$45

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 total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:

$4.5 million

Hobson Company bought the securities listed below during 2012. These securities were classified as trading securities. In its December 31, 2012, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of December 2013 is as follows: security/cost/FV X/$380000/$352000 Y/$180000/$160000 Z/$420000/$414000 What amount of loss these securities should Hobson include in its income statement for the year ended December 31,2013?

$41,000 total unrealized loss to date: 54000 less unrealized loss recognized in 2012: 13000 unrealized loss to report for 2013: 41000

Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2013. In December, Hart 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 28000X$2

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 60000X12%

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

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:

30% 150000+X%(80000-30000)=165000

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 In 2010-2012, Hawk accumulated an unrealized gain and fair value adjustment of ($65 - 50) x 10,000 shares = $150,000. An additional increase of $50,000 occurred in 2013, so the total gain realized in the income statement would be $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

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.

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

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded

As a reduction in the investment account

Trading securities are most commonly found on the books of:

Banks

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

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

The fair value of debt securites not regularly traded can be most reasonably approximated by:

Calculating the discounted present value of the principal and interest payment

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?

Cashflows: Little effect Net income: significant effect

Consolidated financial statements are prepared when one company has

Control over another company

All investment securites are initially recorded at

Cost

If the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at:

Cost

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.

Which of the following investment securites held by Zoogle Inc. are not reported at fair value in its balance sheet?

Debt securities held to maturity

When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as

Dividend income

Brown, Inc., purchased an equity investment for the purposes of maximizing its return on investment. How should Brown account for the investment?

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?

FV-NI.

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?

FV-OCI.

Investments in securities to be held for an unspecified period of time are reported at

Fair value

Investments in securities available for sale are reported at:

Fair value on the reporting date

Both fair value and subsequent growth of the investee are not as relevant for investments in which of the following categories?

Held-to-maturity securities

Which category completely excludes equity securities?

Held-to-maturity securities

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:

Included in income

Boulter, Inc. began business on January 1, 2013. At the end of December 2013, Boulter had the following investments in equity securities: cost/FV Trading:60000/54000 AFS: 110000/107500 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?

Income statement: $6000 AOCI: $2500 60000-54000=6000 110000-107500=2500

Unrealized holding gains and losses on securities available for sale would have the following effects on accumulated other comprehensive income

Increase gains decrease losses

In the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered

Investing activities

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:

Investment in Loose stock: 100000 Income statement loss on investments: 700000

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):

Investment income of $25,000 in its income statement

Which of the following is a criterion for a debt instrument to be viewed as having a lending or customer financing business purpose?

Investor's purpose is collecting cash flows

Which of the following is not a characteristic of "simple" debt?

Investor's purpose is collecting cash flows

Which of the following investment securities held by Zoggle Inc may be classified as held-to-maturity securites in its balance sheet?

Long-term debenture bonds

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:

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

Unrealized holding gains and losses on securities available for sale would have the following effects on retained earnings

No change Gains No change Losses

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

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

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

Reduces the investment account and reduces investment revenue.

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.

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:

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

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

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:

The accounts will be unchanged, because no adjustment is necessary

An OTT impairment for an equity investment is recognized in net income if fair value declines below the investment's cost and

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

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

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

If a debt instrument is viewed as complex, which of the following is most likely not true?

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

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.

The fair value option must be elected for all share 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

The investee reports a net income for the year

If the fair value of a trading security declines for a reason that is viewed as "other than temporary

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

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

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 intends to sell the investment:

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

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

The equity method of accounting for investments in voting common stock is appropriate when:

The investor can significantly influence the investee

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"?

The investor intends to hold the investment to maturity.

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

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

The income statement reports changes in fair value for which type of securities

Trading securities

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?

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

If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company

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

If Pop Company owns 15% of the common stock of Son Company, then Pop Company typically

Would record dividends received from Son Company as investment revenue

Which of the following is not an example of a derivative? a. interest rate swap b. cash c. stock option d. forward contract

cash

Trading securities, by definition, are properly classified in the balance sheet as

current assets

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 $3.6 million 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:

investment in municipal bonds: $3.6million income statement loss on investments: $400,000

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%

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:

loss of $10,500

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?

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

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, infows and outflows of cash from buying and selling trading securities typically are considered

operating activities

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

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

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

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 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?

yes