Columbia College

ACCT 383

True/False Questions

1)Securities classified as held to maturity could be reported as either current or long-term on a classified balance sheet, depending upon their maturity dates.

2. Both debt and equity securities can be categorized as trading securities.

3. Both trading securities and securities available for sale are reported at their fair values.

4. When a creditor's receivable becomes impaired due to a troubled debt restructuring, the receivable is remeasured based on the discounted present value of currently expected cash flows at the loan's original effective rate.

5. All securities considered available for sale should be reported as current assets in a classified balance sheet.

6. Purchases and sales of securities are always reported as investing activities on a statement of cash flows.

7. All investments in debt securities whose fair values are not readily determinable are carried at historical cost.

8. Net unrealized holding gains (losses) are reported on the income statement for trading securities.

9. Routine transfers of debt and equity investments among the trading, available for sale, and held to maturity portfolios need not be disclosed in the financial statements.

10. The equity method is in many ways a partial consolidation.

11. Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.

12. When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost.

Matching Pair Questions

Use the following to answer questions 13-22:

13.22. Indicate (by letter) the level of stock ownership that most frequently relates to each concept listed below.

Level of Stock Ownership:

A. Less than 20%

B. 20% - 50%

C. More than 50%

Accounting/Reporting Concept:

13.            The investor can significantly influence the investee's operating and financial policies.
14.            The reporting of the investment depends on the intent of management to hold or trade it.
15.            The investment is reported at cost, adjusted for subsequent growth in the investee.
16.            The investment is reported at fair value.
17.            Financial statements are combined as if a single company.
18.            The investor controls the investee.
19.            Unrealized gains and losses are recorded at each reporting date.
20.            The investee is a subsidiary of the investor.
21.            Assets and liabilities of the investee are combined with those of investor for reporting purposes.
22.            The investor does not include an investment account for the investee in the balance sheet.

Use the following to answer questions 23-32:

23-32. Indicate (by letter) the way each of the investments listed below usually should be accounted for based on the information provided.

Reporting Category:

1. Trading Securities
2. Securities Held to Maturity
3. Securities Available for Sale
4. Equity Method
5. Consolidation
6. None of the above

Investments:

24.            Accounts Receivable.
25.            Treasury bonds held for short-term profit.
26.            Common stock held for immediate resale.
27.            40% of the voting common stock of XYZ Company.
28.            85% of the voting common stock of ABC Corporation.
29.            25% of the voting common stock of DEF Corporation.
30.            50% of the voting common stock of JMG Corporation.
31.            18% of Griggs corporation; investor's CEO on the board of directors of Griggs Corp; no other investor owns more than 1%.
32.            Corporate bonds to be held for full term of 10 years.

Use the following to answer questions 33-37:

33-37. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Change from the equity method
2. Change to the equity method
3. Dividends received
4. Financial instrument
5. Gross realized and unrealized holding gains and losses
6. Securities available for sale
7. Trading securities and securities available for sale
8. Trading securities
1. Unrealized gains
10. Unrealized losses

Phrases:

33.            Temporary decline in the fair value of an available for sale security.
34.            Reported at fair value.
35.            Changes in market value affect comprehensive income, but not net income.
36.            Changes in market value affect net income.
37.            Considered a reduction of investment account's balance under the equity method.

Use the following to answer questions 38-42:

38-42. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Change from the equity method
2. Change to the equity method
3. Dividends received
4. Financial instrument
5. Gross realized and unrealized holding gains and losses
6. Securities available for sale
7. Trading securities and securities available for sale securities
8. Trading securities
1. Unrealized gains
10. Unrealized losses

Phrases:

38.            Included in disclosure notes for each year presented.
39.            Accounted for prospectively.
40.            Accounted for retroactively.
41.            Encompasses cash, equity securities, and debt securities
42.            When related to trading securities, they increase net income.

Use the following to answer questions 43-47:

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Additional depreciation
2. Amortization of purchased patent
3. Consolidation
4. Derivatives
5. Equity method
6. Extraordinary item
7. Holding gains and losses
8. Impairment of securities available for sale
1. Losses of investee
10. Securities held to maturity

Phrases:

43.            Recognized only to the extent of carrying value under the equity method.
44.            Reported on the income statement for trading securities.
45.            Reduces investment account under the equity method due to change in intangible asset.
46.            Requires positive intent and ability.
47.            Requires recognition on the income statement if judged to be other than temporary.

Use the following to answer questions 48-52:

48-52. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase.

Terms:

1. Additional depreciation
2. Amortization of purchased patent
3. Consolidation
4. Derivatives
5. Equity method
6. Extraordinary item
7. Holding gains and losses
8. Impairment of securities available for sale
1. Losses of investee
10. Securities held to maturity

Phrases:

48.            Results when fair value of investee's assets exceeds carrying value.
49.            Reported by investor, below income from continuing operations and in proportion to ownership interest in investee.
50.            Used when investor can significantly influence investee.
51.            Used when investor has effective control of investee.
52.            Have value based on some other security or index.

Multiple Choice Questions

53. The investment category for which the investor's "positive intent and ability to hold" is important is:
    1. Securities reported under the equity method.
    2. Trading securities.
    3. Securities classified as held to maturity.
    4. Securities available for sale.

54. The fair value of debt securities not regularly traded can be 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.
    3. Using the relative fair value method.
    4. Calling a licensed and registered stockbroker.

55. 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:
    1. Securities available for sale.
    2. Consolidating securities.
    3. Held-to-maturity securities.
    4. Trading securities.

56. Both fair values and subsequent growth of the investee are irrelevant for investments in which of the following categories?
    1. Securities reported under the equity method.
    2. Trading securities.
    3. Held-to-maturity securities.
    4. Securities available for sale.

57. All investments in debt and equity securities that don't fit the definitions of the other reporting categories are classified as:
    1. Trading securities.
    2. Securities available for sale.
    3. Held-to-maturity securities.
    4. Consolidated securities.

58. Investments in securities available for sale are reported at:
    1. Discounted present value.
    2. Lower of cost or market.
    3. Historical cost.
    4. Fair value on the reporting date.

59. The income statement reports changes in fair value for which type of securities?
    1. Securities reported under the equity method.
    2. Trading securities
    3. Held-to-maturity securities.
    4. Securities available for sale.

60. The shareholders' equity section of the balance sheet reflects changes in the fair value of securities for which type of securities?
    1. Securities available for sale.
    2. Trading securities.
    3. Consolidated securities.
    4. Held-to-maturity securities.

61. Which category completely excludes equity securities?
    1. Securities available for sale.
    2. Consolidating securities.
    3. Held-to-maturity securities.
    4. Trading securities.

62. The rules of FASB Statement No. 115, "Accounting for Certain Debt and Equity Securities," generally apply when the percentage of ownership of another company is:
    1. Less than 20%.

B) 20% to 50%.

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

63. If the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at:
    1. Amortized cost.
    2. Cost.
    3. Consolidated value.
    4. Net present value.

64. When an investor uses the cost method to account for an investment in common stock, cash dividends are classified by the investor as:
    1. A return of capital.
    2. A loss.
    3. A deduction from the investment account.
    4. Dividend income.

65. When an equity security is appropriately carried and reported using the cost method, a gain should be reported:
    1. When the fair market value of the security changes.
    2. When the present value of the security changes.
    3. Only when the Dow Jones Industrial Average increases at least 100 points.
    4. Only when the security is sold.

66. Investments in securities to be held for an unspecified period of time are reported at:
    1. Historical cost.
    2. Present value.
    3. Lower of cost or market.
    4. Fair value.

67. All investment securities are initially recorded at:
    1. Cost.
    2. Present value.
    3. Equity value.
    4. None of the above is correct.

68. Unrealized holding gains and losses on securities available for sale would have the following effects on shareholders' equity:

Gains                Losses

1. 1. Increase         Increase
   2. Decrease       Decrease
   3. Decrease       Increase
   4. Increase         Decrease

69. When an impairment of securities available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair market value and the amount of the write-down is:
    1. Recorded as a deferred credit.
    2. Included in income.
    3. Recorded as deferred asset.
    4. Treated as unrealized.

70. Trading securities are most commonly found on the books of:
    1. Oil companies.
    2. Manufacturing companies.
    3. Banks.
    4. Foreign subsidiaries.

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

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

73. Trading securities, by definition, are properly classified on the balance sheet as:
    1. Investments.
    2. Intangibles.
    3. Current assets.
    4. Other assets.

74. On 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.

75. On the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered:
    1. Operating activities.
    2. Financing activities.
    3. Investing activities.
    4. Noncash financing activities.

76. 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.
    3. The investor intends to vote the common stock.
    4. The investor is assured of a continued supply of a valuable raw material.

77. Consolidated financial statements are prepared when one company has:
    1. Accounted for the investment using the equity method.
    2. Accounted for the investment using the cost method.
    3. Significant influence over another company.
    4. None of the above is correct.

78. When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:
    1. As a reduction in the investment account.
    2. As an increase in the investment account.
    3. As dividend income.
    4. As a contra item to stockholders' equity.

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

80. 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:
    1. Reduces the investment account and increases investment revenue.
    2. Increases the investment account and increases investment revenue.
    3. Reduces the investment account and reduces investment revenue.
    4. Increases the investment account and reduces investment revenue.

81. 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 would be discontinued and the investment account balance would be carried over at:
    1. Amortized cost on the date of ownership change.
    2. Fair market 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".

82. 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 would become appropriate and the investment account balance should be:
    1. Retroactively 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 fair market value on date of transfer.
    4. Adjusted to reflect amortized cost.

83. What is the effect on a company's cash flows and reported profit from using a particular method to account for an investment in another company?

Effect on Cash Flows

Effect on Profit

1. 1. Little, if any, effect      Little, if any, effect
   2. Significant effect          Significant effect
   3. Little, if any, effect      Significant effect
   4. Significant effect          Little, if any, effect

84. If Pop Company owns 15% of the common stock of Son Company, then Pop Company:
    1. Would record 15% of the net income of Son Company as investment income each year.
    2. Records dividends received from Son Company as investment revenue.
    3. Would increase its investment account by 15% of Son Company income each year.
    4. All of the above are correct.

85. If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company:
    1. Records 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 the above are correct.

86. Which of the following increases the investment account under the equity method of accounting?
    1. Decreasing the market price of the investee's stock
    2. Dividends paid by the investee that were declared in the previous year
    3. Net loss of the investee company
    4. None of the above is correct.

87. 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
    2. Common stock
    3. Callable preferred stock
       1. All of the above are correct.

88. Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet?
    1. Common stock held as available for sale securities
    2. Debt securities held to maturity
    3. Preferred stock held as trading securities
    4. All of the above are reported at fair value.

89. Assume that, on 1/1/06, 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 1/1/06. The following information pertains to Yankee during 2006:

Net Income                                                                             $200,000

Dividends declared and paid                                              $60,000 Market price of common stock on 12/31/06             $22/share

What amount would Matsui report in its year-end 2006 balance sheet for its investment in Yankee?

A) $1,320,000

B) $1,260,000

C) $1,242,000

1. 1. None of the above is correct.

90. Assume that, on 1/1/05, Sosa Enterprises paid $3,000,000 for its investment in 40,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued, and estimates an 8 year remaining useful life and straight-line depreciation with no residual value for its depreciable assets.

The book value and fair value of Orioles' identifiable net assets were $7,000,000 and

$10,000,000, respectively, at 1/1/05. The difference between the fair value and book value of Orioles is attributable to $1,800,000 of goodwill and the remainder to depreciable equipment.

The following information pertains to Orioles during 2005:

Net Income                                                                             $600,000

Dividends declared and paid                                            $360,000 Market price of common stock on 12/31/06             $80/share

What amount would Sosa Enterprises report in its year-end 2005 balance sheet for its investment in Orioles Co.?

A) $3,200,000

B) $3,180,000

C) $3,135,000

D) $3,027,000

Use the following to answer questions 91-93:

Beresford Inc. purchased several investment securities during 2005, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.

91. What balance sheet amount would Beresford report for its total investment securities at 12/31/05?

A) $637,000

B)   $644,500

C)   $645,400

D) None of the above is correct.

92. What total holding gain would Beresford report in its 2006 income statement relative to its investment securities?

A) $55,900

B)   $36,000

C)   $80,900

D) $48,200

93. What holding gain would Beresford report in a special section of shareholders' equity in its 12/31/06 balance sheet?

A) $55,100

B)   $26,500

C)   $10,400

D) None of the above is correct.

94. On January 1, 2006, 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, 2006. The fair value of the Papa stock on that date was $45 per share. What amount will be reported on the balance sheet of Nana Company for the investment in Papa at December 31, 2006?

A) $284,400.

B)   $300,000.

C)   $315,600.

D) $360,000.

95. On January 1, 2006, Everglade Company purchased the following securities and properly accounted for them as securities available for sale:

All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2006 income statement?

A) $0.

2. $19,000 unrealized gain.
3. $12,000 net unrealized gain.
4. $7,000 unrealized loss.

96. Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2005, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2005. Goofy reclassified this investment as trading securities in December of 2006 when the market value had risen to $125,000. What effect on 2006 income should be reported by Goofy for the Crazy Co. shares?

A) $0.

2. $25,000 net loss.
3. $7,000 net gain..
4. $32,000 net loss.

97. Boulter, Inc. began business on January 1, 2006. At the end of December 2006, Boulter had the following investments in equity securities:

All declines in value are deemed to be temporary in nature. How should the corresponding losses be reflected in the financial statements at December 31, 2006?

98. Hobson Company bought the securities listed below during 2005. These securities were classified as trading securities. On its December 31, 2005, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of December 2006 are as follows:

Security           Cost          Fair Value

What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2006?

A) $41,000.

B)   $54,000.

C)   $13,000.

D) $ 0.