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Homework answers / question archive / University of California, Los Angeles ESL 32 1)The investment category for which the investors positive intent and ability to hold" is important is: a
University of California, Los Angeles
ESL 32
1)The investment category for which the investors 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.
2. 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 these answer choices are correct.
3. Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet?
a. Debt securities held as available for sale securities. b. Debt securities held to maturity.
c. Bonds held as trading securities.
d. All of these answer choices are reported at fair value.
4. In which investment category are fair values and subsequent growth of an investee not relevant for reporting?
a. Securities reported under the equity method.
b. Trading securities.
c. Held-to-maturity securities.
d. Securities available for sale.
5. Which category of securities is presented on the balance sheet at amortized cost?
a. Securities available for sale.
b. Equity investments of less than 20 percent ownership. c. Held-to-maturity securities.
d. Trading securities.
6. In 2016, Osgood Corporation purchased $4 million of 10-year municipal bonds at face value. On December 31, 2018, the bonds had a fair value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2018, balance sheet and the 2018 income statement would show the following:
Income statement
Investment in municipal bonds
loss on investments
a. 3,600,000 0
b. 3,600,000 400,000
c. 4,000,000 400,000
d. 4,000,000 0
7. What balance sheet amount would Beresford report for the total of its investments in debt securities at 12/31/2017? a. $637,000.
b. $644,500.
c. $645,400.
d. None of these answer choices are correct.
8. What would be the balance in Beresford’s accumulated other comprehensive income with respect to these investments in its 12/31/2019 balance sheet (ignore taxes)?
a. $55,100.
b. $26,500. c. $10,400.
d. None of these answer choices are correct.
9. What total unrealized holding gain would Beresford report in its 2019 income statement relative to its investments in debt securities?
a. $55,900. b. $36,000. c. $80,900.
d. $48,200.
10. On January 1, 2018, 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, 2018 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.
11. 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 holding 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.
12. 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 holding 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 holding gain or loss on the reclassification date.
d. Need to restate earnings, as the original classification was in error.
13. 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 holding 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.
14. Bonds 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.
15. The income statement reports changes in fair value for which type of investment securities?
a. Securities reported under the equity method. b. Trading securities.
c. Held-to-maturity securities.
d. Available-for-sale securities.
16. Trading securities are most commonly found on the books of:
a. Oil companies.
b. Manufacturing companies. c. Banks.
d. Foreign subsidiaries.
17. 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.
18. Trading securities, by definition, are properly classified in the balance sheet as:
a. Shareholders’ equity.
b. Intangibles.
c. Current assets.
d. Other assets.
19. Unrealized 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.
20. 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.
21. Dyckman Dealers has an investment in Thomas Corporation bonds which Dyckman accounts for as a trading security.
Thomas Corporation’s bonds are publicly traded and the prevailing market price indicates that Dyckman’s investment is worth $20,000. However, Dyckman management believes that the bond 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.
22. Nichols Enterprises has an investment in 250 bonds of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott bonds are publicly traded, and The Wall Street Journal quotes a price for those bonds of
$1,000 per bond, but Nichols believes the market has not appreciated the full value of the Elliott bonds and that a more accurate price is $1,200 per bond. 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.
23. Anthers Inc. bought the following portfolio of trading securities near the end of 2018.
Security Cost Fair value 12/31/2018
A $80,000 $84,000
B 60,000 54,000
C 22,000 22,000
What amount will be reported in the balance sheet for this portfolio at December 31, 2018, and how will it be classified?
Amount Classification
a. $162,000 Noncurrent Asset
b. $162,000 Current Asset
c. $160,000 Noncurrent Asset
d. $160,000 Current Asset
24. On January 1, 2018, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. The ownership in Papa Company is 10%. Nana Company does not have significant influence over Papa Company. Papa reported net income of $52,000 for the year ended December 31, 2018. 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, 2018?
a. $284,400.
b. $300,000.
c. $315,600. d. $360,000.
25. Goofy Inc. bought a sizeable amount of Crazy Co.'s bonds for $150,000 on May 5, 2017, and classified the investment as available for sale. The market value of the bonds declined to $118,000 by December 31, 2017. Goofy reclassified this investment as trading securities in December of 2018 when the market value had risen to $125,000. What effect on 2018 income should be reported by Goofy for the Crazy Co. bonds?
a. $0.
b. $25,000 net unrealized holding loss.
c. $7,000 net unrealized holding gain.
d. $32,000 net unrealized holding loss.
26. Hobson Company bought the securities listed below during 2017. These securities were classified as trading securities. In its December 31, 2017, income statement Hobson reported a net unrealized holding loss of $13,000 on these securities. Pertinent data at the end of June, 2018 is as follows:
Security Cost Fair Value
X $380,000 $352,000
Y 180,000 160,000
Z 420,000 414,000
What amount of unrealized holding loss on these securities should Hobson include in its income statement for the six months ended June 30, 2018?
a. $41,000. b. $54,000.
c. $13,000.
d. $ 0.
27. 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?
Effect on Total Cash Flows
Effect on Net Income
a. Little, if any, effect Little, if any, effect
b. Significant effect Significant effect
c. Little, if any, effect Significant effect
d. Significant effect Little, if any, effect
28. 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.
29. All investments in debt 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.
30. Investments in debt 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.
31. All investment securities are initially recorded at: a. Cost.
b. Present value.
c. Equity value.
d. None of these answer choices are correct.
32. 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.
33. GAAP regarding fair value accounting for investments in equity securities will generally 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%.
34. When an investor accounts for an investment in common stock at fair value through net income, 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.
35. When a debt 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.
36. 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.
37. 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
38. 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.
39. 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
40. Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2018. In December, Handy announced $200,000 net income for 2018 and declared and paid a cash dividend of $2 per share on all 200,000 shares of its outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2018 would be:
a. $ 0.
b. $28,000. c. $56,000.
d. None of these answer choices are correct.
41. On January 2, 2017, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000. Ranger's net income for the years ended December 31, 2017 and 2018, were $10,000 and $50,000, respectively. During 2018, Ranger declared and paid a dividend of $60,000. There were no dividends in 2017. On December 31, 2017, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2018 income statement as income from this investment?
a. $26,000.
b. $ 7,200.
c. $20,000. d. $27,200.
42. Jeremiah Corporation purchased debt securities during 2018 and classified them as securities available for sale:
Security Cost Fair Value,
12/31/2018
A $40,000 $49,000
B 70,000 66,000
C 28,000 39,000
All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2018, income statement relative to the portfolio?
a. $0.
b. $16,000.
c. $20,000.
d. None of these answer choices are correct.
43. In its 2018 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.
44. If Hawk records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Hawk would record upon sale?
a. A debit of $50,000.
b. A debit of $150,000. c. A debit of $200,000.
d. A credit of $150,000.
45. In its 2018 income statement, Dim would report:
a. A realized gain of $50,000.
b. A recognition of unrealized holding 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 holding loss of $500,000.
46. If Dim records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Dim would record upon sale?
a. A debit of $500,000.
b. A credit of $500,000.
c. A debit of $450,000. d. A credit of $450,000.
47. On January 1, 2018, Everglade Company purchased the following debt securities and properly accounted for them as securities available for sale:
Security Cost Fair value on 12/31/2018
ABC $40,000 $55,000
DEF 72,000 65,000
XYZ 16,000 20,000
All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2018 statement of other comprehensive income?
a. $0.
b. $19,000 unrealized holding gain.
c. $12,000 net unrealized holding gain.
d. $7,000 unrealized holding loss.
48. Boulter, Inc. began business on January 1, 2018. At the end of December 2018, Boulter had the following investments in debt securities:
Trading Available for Sale
Cost $60,000 $110,000
Fair value 54,000 107,500
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, 2018?
Income
Statement Accumulated Other Comprehensive Income in Shareholders' Equity
a. $8,500 $ 0
b. $ 0 $8,500
c. $6,000 $2,500
d. $2,500 $6,000
49. A weakness of is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized holding gains or unrealized holding 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
50. If an available-for-sale investment is sold for which there are unrealized holding 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 holding gains in AOCI.
b. Increasing OCI for the amount of unrealized holding gains in AOCI.
c. No effect on OCI, as OCI only includes the effects of unrealized holding gains and losses.
d. No effect on OCI, as the realized gain is included in AOCI.
51. If an available-for-sale investment is sold for which there are unrealized holding 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.
52. 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.
53. Sloan Company has owned a debt securities investment during 2018 that has increased in fair value. After all closing entries for 2018 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.
54. 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 these answer choices are correct.
55. The Guitar World (TGW) holds an investment that increased in fair value over 2018, 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.
56. 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.
57. 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 these answer choices are correct.
58. 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 these answer choices are correct.
59. 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 these answer choices are correct.
60. 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.
61. 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 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.
62. 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 these answer choices are correct.
63. 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.
64. 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."
65. 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 the fair value that exists on date of transfer.
d. Adjusted to reflect amortized cost.
66. On July 1, 2018, 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 book value of identifiable net assets on Delany’s balance sheet. Delany recognized net income of $1,000,000 for 2018, and paid $150,000 of dividends each quarter 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.
67. Which of the following is not true about accounting for investments using the equity method under IFRS?
a. IFRS requires the equity method when the investor exercises significant influence over the investee.
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.
68. 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, 2017 and 2018, respectively. During 2018 Clor recognized
$80,000 of net income and paid dividends of $30,000. Assuming that Bloomfield owned the same percentage of Clor throughout 2018, their percentage ownership must have been:
a. 15%.
b. 18.75%.
c. 30%.
d. 50%.
69. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2018. Jack can significantly influence Jill. On December 10, 2018, 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 2018 relative to its investment in Jill?
a. $1,000,000.
b. $1,200,000.
c. $1,400,000.
d. $1,500,000.
70. Hope Company bought 30% of Faith Corporation in the beginning of 2018. 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 2018, 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 using the fair value through net income method instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2018?
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.
71. Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on January 1, 2018. On November 1, 2018, 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 2018 relative to its investment in Hack?
a. $1,100,000.
b. $2,400,000.
c. $1,500,000.
d. $1,600,000.
72. Assume that, on January 1, 2018, 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, 2018. The following information pertains to Yankee during 2018:
Net Income $200,000
Dividends declared and paid $60,000
Market price of common stock on 12/31/2018 $22/share
What amount would Matsui report in its year-end 2018 balance sheet for its investment in Yankee? a. $1,320,000.
b. $1,260,000.
c. $1,242,000.
d. None of these answer choices are correct.
73. Gerken Company concluded at the beginning of 2018 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.
74. On April 1, 2018, 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 2018, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2018, and paid total dividends for the year $10,000; these dividends were issued quarterly. BigBen’s investment in LittleTick will affect BigBen’s 2018 net income by:
a. A loss of $10,500.
b. Earnings of $4,500.
c. Earnings of $1,125.
d. Earnings of $3,450.
75. Cucumber Company concluded at the beginning of 2018 that the company’s ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment under the fair value through net income method, 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 fair value through net income. At the time of implementing the change to the fair value through net income 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.
76. 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.
77. On January 1, 2018, 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, 2018, 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, 2018?
a. $295,000.
b. $300,000. c. $315,000. d. $320,000.
78. The amount of purchased goodwill is: a. $18 million.
b. $30 million.
c. $60 million.
d. None of the above are correct.
79. 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 these answer choices are correct.
80. Smith buys and sells securities. On December 15, 2018, Smith purchased $500,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2018, the Jones shares had a fair value of
$525,000. In the 2018 financial statements, Smith will report (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.
81. 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 these answer choices are true.
82. 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 holding 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 these answer choices are true.
83. 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.
84. 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.
85. 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 holding gains in earnings.
c. Requires reclassification of realized gains from other comprehensive income.
d. Not vulnerable to other-than-temporary impairments.
86. Under IFRS No. 9, an investment can be accounted for at amortized cost if:
a. The debt consists of interest and principal, and the investor is holding the debt to collect those cash flows.
b. The investor elects amortized cost.
c. The investor owns between 20% and 50% of outstanding shares.
d. The debt is not in technical default.
87. Which of the following is not true about accounting for an equity investment under IFRS No. 9?
a. The investor can elect to account for the investment as FVOCI.
b. Unrealized holding gains and losses on the investment will be recognized in income unless the investor elects to account for the investment as FVOCI.
income when the investment is sold.
d. Unrealized holding gains and losses are recognized in net income if the investor accounts for the investments as FVPL.
88. 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. Is allowed for equity method investments.
b. Includes unrealized holding gains in other comprehensive income.
c. Does not require reclassification of realized gains from other comprehensive income.
d. Is allowed for equity investments.
89. 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 2022, 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 2018. Wang views this decline as an other-than-temporary (OTT) impairment. 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 IAS No. 39, before-tax net income for 2018 will be reduced by:
a. $0.
b. $10,000. c. $20,000.
d. $30,000.
90. Espana Corporation purchased $100,000 of Hales Inc. 6% bonds at par and classifies its investment as available for sale. 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 2018. Espana views this decline as an other-than-temporary impairment. Espana 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 Espana accounts for the Hales bonds under IAS No. 39, before-tax net income for 2018 will be reduced by:
a. $0.
b. $10,000.
c. $20,000. d. $30,000.
91. 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.
92. 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.
93. 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.
94. When an impairment of an 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 net income.
c. Recorded as deferred asset.
d. Treated as unrealized.
95. An OTT impairment for a debt 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.
96. 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.
97. 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.
98. 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.
Use the following to answer questions :
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 2022, 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 2018. Nichols calculates that, of the
$30,000 decrease in fair value, $10,000 of it relates to credit losses and $20,000 relates to noncredit losses.
99. 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 2018 will be reduced by:
a. $0.
b. $10,000.
c. $20,000. d. $30,000.
100. 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 2018 will be reduced by:
a. $0.
b. $10,000.
c. $20,000. d. $30,000.
101. 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 2018 will be reduced by:
a. $0.
b. $10,000. c. $20,000.
d. $30,000.
102. Dicker Furriers purchased 1,000 bonds of Loose Corporation on January 10, 2017, for $800 per bond and classified the investment as securities available for sale. Loose's market value was $400 per bond on December 31, 2017, and the decline in value was viewed as temporary. As of December 31, 2018, Dicker still owned the Loose bonds 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, 2018, balance sheet and the 2018 income statement would show the following:
Income statement
Investment in Loose stock
loss on investments
a. 100,000 700,000
b. 100,000 300,000
c. 400,000 0
d. 100,000 300,000
103. Which of the following is not an example of a derivative?
a. Interest rate swap.
b. Cash.
c. Stock option.
d. Forward contract.
104. 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. Use the following to answer questions 131-133:
On January 12th, 2018 Jefferson Corporation purchased bonds of Rose Corporation for $73 million and classified the securities as available-for-sale. On December 31st, 2018 these bonds were valued at $67 million. Eight months later, on October 3rd, 2019 Jefferson Corporation sold these bonds for $87 million.
105. As part of the multi-step approach to record the 2019 transaction, Jefferson Corporation should first update the fair value adjustment on the date of sale by recording:
a. An unrealized holding gain of $20 million in 2019.
b. A gain of $20 million in 2019.
c. An unrealized holding gain of $26 million in 2019.
d. A gain of $14 million in 2019.
106. As part of the multi-step approach to record the 2019 transaction, Jefferson Corporation should next take the second step of:
a. Reversing total accumulated unrealized holding gains of $20 million.
b. Reversing total accumulated unrealized holding gains of $6 million c. Reversing total accumulated unrealized holding gains of $14 million
d. Reversing total accumulated unrealized holding gains of $26 million
107. As part of the multi-step approach to record 2019 transaction, Jefferson Corporation should finally take the third step of recording a sales transaction with a gain of:
a. $20 million
b. $26 million
c. $6 million d. $14 million
108. As part of the multi-step approach to record the 2019 transaction, Phillips Corporation should first update the fair value adjustment by recording
a. An unrealized holding gain of $28 million in 2019. b. A unrealized holding loss of $10 million in 2019.
c. An unrealized holding gain of $8 million in 2019.
d. A gain of $8 million in 2019.
109. As part of the multi-step approach to record the 2019 transaction, Jefferson Corporation should next take the second step of recording a sales transaction where it:
a. Credits a fair value adjustment of $18 million.
b. Debits a fair value adjustment of $18 million.
c. Debits a fair value adjustment of $8 million. d. Credits a fair value adjustment of $8 million.
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