Bakersfield College

ACG 2021

1)On January1 2016 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, 2016 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.

 

 

 

 

 

 

 

 

 

 

 

2. 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:
   1. Not reclassify the investment, as original classifications are irrevocable.
   2. 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.
   3. 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.

 

 

 

3. 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:

1. 1. Not reclassify the investment, as original classifications are irrevocable.
   2. rReclassify the investment as available for sale and immediately recognize in net income any unrealized gain or loss on the reclassification date.
   3. Reclassify the investment as available for sale and immediately recognize in accumulated other comprehensive income any unrealized gain or loss on the reclassification date.
   4. Need to restate earnings, as the original classification was in error.

 

 

 

4. 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:
   1. Not reclassify the investment, as original classifications are irrevocable.
   2. Reclassify the investment as held to maturity and immediately recognize in net income any unrealized gain or loss on the reclassification date.
   3. 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.
   4. Need to restate earnings, as the original classification was in error.

 

 

 

5. 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.

 

 

 

6. 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.

 

 

 

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

 

 

 

8. 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.

 

 

 

9. Trading securities, by definition, are properly classified in the balance sheet as:
   1. Shareholders’ equity.

1. 2. Intangibles.
   3. Current assets.
   4. Other assets.

 

 

 

10. 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 in the balance sheet date.

 

 

 

11. 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.

 

 

 

12. Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchange, and the prevailing price on that exchange indicates that Dyckman’s investment is worth $20,000. However, Dyckman management believes that the stock market is generally overvalued, and their analysis of the Thomas investment suggests to them that it is worth

$18,000. Dyckman should carry the Thomas investment on its balance sheet at: a.         $20,000.

b.     $18,000.

3. Either $18,000 or $20,000, as either are defensible valuations.
4. $19,000, the midpoint of Dyckman’s range of reasonably likely valuations of Thomas.

 

 

 

13. Nichols Enterprises has an investment in 25,000 shares of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott shares are publicly traded on the New York Stock Exchange, and The Wall Street Journal quotes a price for those shares of $10 a share, but Nichols believes the market has not appreciated the full value of the Elliott shares and that a more accurate price is $12 a share. Nichols should carry the Elliott investment on its balance sheet at: a.   $300,000.

b.     $250,000.

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

 

 

 

14. Anthers Inc. bought the following portfolio of trading securities near the end of 2016.

 

Security	Cost	Fair value 12/31/2016
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, 2016, and how will it be classified?

 

Amount              Classification

1. 1. $162,000          Noncurrent Asset
   2. $162,000          Current Asset
   3. $160,000          Noncurrent Asset
   4. $160,000          Current Asset

 

 

 

15. On January 1, 2016, 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, 2016. 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, 2016?

a.     $284,400.

b.     $300,000.

c.     $315,600.

d.     $360,000.

 

 

 

16. Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2015, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2015. Goofy reclassified this investment as trading securities in December of 2016 when the market value had risen to $125,000. What effect on 2016 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.

 

 

17. Hobson Company bought the securities listed below during 2015. These securities were classified as trading securities. In its December 31, 2015, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of June, 2016 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 loss on these securities should Hobson include in its income statement for the six months ended June 30, 2016?

a.     $41,000.

b.     $54,000.

c.     $13,000.

d.     $ 0.

 

 

 

18. 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