University of Houston

ACCT 3367

Chapter 17 Investments Pre-Class Quiz

1)On January 1, 2021, 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 June 30 and December 31 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, 2021, journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:

A) $3,336. Amortization schedule

B) $3,325.

C) $3,000.

D) $3,500.

2. The income statement reports changes in fair value for which type of investment securities?

1. Securities reported under the equity method.
2. Trading securities.- unrealized holding gain loss goes to income statement
3. Held-to-maturity securities.
4. Available-for-sale securities.

3. 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:

1. Securities available-for-sale.
2. Consolidating securities.
3. Held-to-maturity securities.
4. Trading securities.

* Trading securities: bought and held primarily for sale in near term to generate income on short- term price differences

B.1) Which of the following investment securities held by Zoogle Inc. may be classified as held- to-maturity securities in its balance sheet?

1. Long-term debenture bonds.- these don’t have collaterals, they are the riskiest
2. Common stock.- can exchange at any time
3. Callable preferred stock.- can exchange at any time
4. All of these answer choices are correct.

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

1. Debt securities held as available-for-sale securities.
2. Debt securities held-to-maturity.
3. Bonds held as trading securities.
4. All of these answer choices are reported at fair value.

5. In which investment category are fair values and subsequent growth of an investee not

relevant for reporting?

1. Securities reported under the equity method.
2. Trading securities.
3. Held-to-maturity securities.
4. Securities available-for-sale.

6. What total unrealized holding gain would Beresford report in its 2021 income statement relative to its investments in bonds?

A) $55,900.

B) $36,000.

C) $80,900.

D) $48,200.

6. Trading securities are most commonly found on the books of:

1. Oil companies.
2. Manufacturing companies.
3. Banks.
4. Foreign subsidiaries.

8. In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:

1. Investing activities.
2. Operating activities.
3. Financing activities.
4. Noncash financing activities.

9. Beresford Inc. purchased several investments in debt securities during 2020, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.

Trading Securities:                       Fair Value

Fair Value 12/31/2021               Cost

IJK Inc. Bonds                                $       44,000          $       38,500          $       32,900

Available-for-Sale Securities:

Fair Value 12/31/2020

Fair Value 12/31/2021               Cost

LMN Co. Bonds                             $   130,500            $ 150,400           $ 140,000

What would be the balance in Beresford's accumulated other comprehensive income with respect to these investments in its 12/31/2021 balance sheet (ignore taxes)?

A) $55,100.

B) $26,500.

C) $10,400.

D) None of these answer choices are correct.

10. 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.

3. Either $250,000 or $300,000, as either are defensible valuations.
4. $275,000, the midpoint of Nichols's range of reasonably likely valuations of Elliott.

11. The fair value of debt securities not regularly traded can be most reasonably approximated by:

1. Calculating the discounted present value of the principal and interest payments.
2. Determining the value using similar securities in the NASDAQ market.- this is about another company, cannot use this
3. Using the relative fair value method.
4. Calling a licensed and registered stockbroker.

12. On January 1, 2021, 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, 2021. 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, 2021?

A) $284,400.

B) $300,000.

C) $315,600.

D) $360,000.

13. All investment securities are initially recorded at:

1. Cost.
2. Present value.
3. Equity value.
4. None of these answer choices are correct.

14. 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%.

3. Over 50%.
4. Exactly 100%.

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

1. The investor can significantly influence the investee.
2. The investor has voting control over the investee.- consolidation
3. The investor intends to hold the common stock indefinitely.
4. The investor is assured of a continued supply of a valuable raw material.

16. Consolidated financial statements are prepared when one company has:

1. Accounted for the investment using the equity method.
2. Accounted for the investment as securities available-for-sale.
3. Control over another company.
4. None of these answer choices are correct.

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

1. Would record dividends received from Son Company as investment revenue.
2. Would increase its investment account when Son Company declares dividends.
3. Would record 40% of the net income of Son Company as investment income each year.
4. All of these answer choices are correct.

18. 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:

1. Amortized cost on the date of ownership change.
2. Fair value on the date of ownership change.
3. Discounted present value on the date of ownership change.
4. The current balance, and this balance would serve as the new "cost."

19. 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:

1. Retrospectively adjusted to the balance that would have existed if the equity method had been in effect for prior years.
2. Carried over as is with no adjustment necessary.
3. Carried over at the fair value that exists on date of transfer.
4. Adjusted to reflect amortized cost.

20. On July 1, 2021, 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 2021, and paid $150,000 of dividends each quarter to its shareholders. After all closing entries are made for the year ended December 31, 2021, 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.

21. Smith buys and sells equity securities. On December 15, 2021, Smith purchased $500,000 of Jones shares and elected the fair value option to account for the Jones investment. As of December 31, 2021, the Jones shares had a fair value of $525,000. In the 2021 financial statements, Smith will report (ignore taxes):

1. Investment income of $25,000 in its income statement.
2. Other comprehensive income of $25,000.
3. Accumulated other comprehensive income of $525,000.
4. An investment in Jones of $500,000.

22. Which of the following is not true about the fair value option?

1. The fair value option is irrevocable.

2. The fair value option must be elected for all shares of an investment in a particular company.
3. Electing the fair value option for held-to-maturity investments simply reclassifies those investments as trading securities.
4. All of these answer choices are true.

23. 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?

1. No journal entry need be made to recognize the investor's portion of the investee's net income.
2. Unrealized holding gains and losses on that investment are recognized in net income.
3. No journal entry need be made to recognize the investor's portion of dividends paid by the investee.
4. All of these answer choices are true.

24. Dicker Furriers purchased 1,000 bonds of Loose Corporation on January 10, 2020, for $800 per bond and classified the investment as securities available-for-sale. Loose's market value was

$400 per bond on December 31, 2020, and the decline was due to a noncredit loss. As of December 31, 2021, Dicker still owned the Loose bonds whose market value had declined to

$100 per bond. The additional decline is due to a credit loss of $300 per bond. Dicker does not believe (and never has believed) it is more likely than not that it would have to sell the Loose investment before fair value recovers. Dicker's December 31, 2021, balance sheet and the 2021 income statement would show the following:

1. Option a.
2. Option b.
3. Option c.
4. Option d.

25. Dicker Furriers purchased 1,000 bonds of Loose Corporation on January 10, 2020, for $800 per bond and classified the investment as securities available-for-sale. Loose's market value was

$400 per bond on December 31, 2020, and the decline was due to a noncredit loss. As of December 31, 2021, Dicker still owned the Loose bonds whose market value had declined to

$100 per bond. The additional decline is due to a credit loss of $300 per bond. During 2021 Dicker determined for the first time that it was more likely than not that it would have to sell the Loose investment before fair value recovers. Dicker's December 31, 2021, balance sheet and the 2021 income statement would show the following:

1. Option a.
2. Option b
3. Option c.
4. Option d.

26. Dicker Furriers purchased 1,000 bonds of Loose Corporation on January 10, 2020, for $800 per bond at par and classified the investment as a held-to-maturity investment. Loose's market value was $400 per bond on December 31, 2020, and the decline was due to a noncredit loss. As of December 31, 2021, Dicker still owned the Loose bonds whose market value had declined to

$100 per bond. The additional decline is due to a credit loss of $300 per bond. Dicker does not

believe (and never has believed) it is more likely than not that it would have to sell the Loose

investment before fair value recovers. Dicker's December 31, 2021, balance sheet and the 2021 income statement would show the following:

1. Option a.
2. Option b.
3. Option c.
4. Option d.

27. Which of the following is not an example of a use of special purpose funds?

1. Petty cash.
2. Payroll.
3. Bond repayment.
4. Accounts receivable.

28. Several years ago, Cayuga Capital acquired a $1 million insurance policy on the life of its chief executive officer, naming Cayuga Capital as beneficiary. Annual premiums are $20,000, payable at the beginning of each year. In 2021, the cash surrender value of the policy increased from $12,000 to $15,000 according to the contract. Cayuga's journal entry to record payment of the insurance premium in 2021 would include a:

1. debit to cash of $20,000.
2. debit to cash surrender value of life insurance of $15,000.
3. debit to insurance expense of $17,000.
4. credit to surrender value revenue of $3,000.

29. LaBelle Corporation owns a $6 million whole life insurance policy on the life of its CEO, naming LaBelle as beneficiary. The annual premiums are $95,000 and are payable at the beginning of each year. The cash surrender value of the policy was $56,000 at the beginning of 2021.