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Chapter 12 Investments
True/False Questions
1. Securities classified as held to maturity could be reported as either current or long-term in a
classified balance sheet, depending upon their maturity dates.
2. All investments in debt securities whose fair values are not readily determinable are carried at
historical cost.
3. Both debt and equity securities can be categorized as trading securities.
4. Net unrealized holding gains (losses) are reported in the income statement for trading
securities.
5. Purchases and sales of securities are always reported as investing activities in a statement of
cash flows.
Chapter 12 Investments
6. 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.
7. Both trading securities and securities available for sale are reported at their fair values.
8. All securities considered available for sale should be reported as current assets in a classified
balance sheet.
9. Unrealized gains and losses are included in other comprehensive income for securities that are
classified as available for sale.
10. When available-for-sale securities are sold, the amount of gain or loss realized from the date
of purchase is included in before-tax net income.
11. Companies must always use the equity method when they hold between 25% and 50% of the
common stock of an investee.
12. The equity method is in many ways a partial consolidation.
13. Under the equity method of accounting for a stock investment, cash dividends received are
considered a reduction of the investee's net assets.
14. When an equity method investment is sold, a gain or loss is recognized for the difference
between its selling price and its cost.
15. If an investment is accounted for under the equity method, the investor reduces investment
income and the investment account for amortization of goodwill acquired in the investment.
16. Selecting the fair value option for an available-for-sale investment is equivalent to
reclassifying that investment as a trading security.
17. The fair value option cannot be elected for significant-influence investments because those
must be accounted for under the equity method.
18. Under IAS No. 39, investments for which the investor lacks significant influence use basically
the same reporting classifications as those used under U.S. GAAP.
Chapter 12 Investments
19. Under IFRS No. 9, investments for which the investor lacks significant influence use basically
the same reporting classifications as those used under U.S. GAAP.
20. Under IFRS No. 9, debt investments are classified as either “available for sale” or “fair value
through profit and loss (FVPL).”
21. Under IFRS No. 9, debt investments are classified as either “amortized cost,” or “fair value
through profit and loss (FVPL),” or “fair value through other comprehensive income
(FVOCI).”
22. Under IFRS No. 9, equity investments are classified as either “fair value through other
comprehensive income (FVOCI)” or “fair value through profit and loss (FVPL).”
23. Under IAS No. 39, transfers of debt investments out of the FVPL category into AFS or HTM
are permitted under “rare circumstances.”
24. Under IFRS No. 9, cost can be used as an estimate of fair value in some circumstances.
Chapter 12 Investments
Multiple Choice Questions
25. The investment category for which the investor's "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.
26. 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.
27. Which of the following investment securities held by Zoogle Inc. are not reported at fair value
in its balance sheet?
a. Common stock held as available for sale securities.
b. Debt securities held to maturity.
c. Preferred stock held as trading securities.
d. All of these answer choices are reported at fair value.
Chapter 12 Investments
28. 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.
29. Which category completely excludes equity securities?
a. Securities available for sale.
b. Consolidating securities.
c. Held-to-maturity securities.
d. Trading securities.
30. In 2014, Osgood Corporation purchased $4 million of 10-year municipal bonds at face value.
On December 31, 2016, the bonds had a market value of $3,600,000 and Osgood reclassified
the bonds from held to maturity to trading securities. Osgood's December 31, 2016, balance
sheet and the 2016 income statement would show the following:
Investment in
municipal bonds
Income
statement 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
Chapter 12 Investments
Use the following to answer questions 31–33:
Beresford Inc. purchased several investment securities during 2015, its first year of operations. The
following information pertains to these securities. The fluctuations in their fair values are not
considered permanent.
Fair
Fair
Amortized
Amortized
Held to Maturity Securities:
Value
12/31/2015
Value
12/31/2016
Cost
12/31/2015
Cost
12/31/2016
ABC Co. Bonds
$375,000
$400,000
$367,500
$360,000
Fair Value
Fair Value
Trading Securities:
12/31/2015
12/31/2016
Cost
DEF Co. Stock
$48,000
$59,500
$66,000
GEH Inc. Stock
$47,000
$77,000
$39,000
IJK Inc. Stock
$44,000
$38,500
$32,900
Fair Value
Fair Value
Available for Sale Securities:
12/31/2015
12/31/2016
Cost
LMN Co. Stock
$130,500
$150,400
$140,000
31. What balance sheet amount would Beresford report for its total investment securities at
12/31/2015?
a. $637,000.
b. $644,500.
c. $645,400.
d. None of these answer choices is correct.
32. What would be the balance in Beresford’s accumulated other comprehensive income with
respect to these investments in its 12/31/2016 balance sheet (ignore taxes)?
a. $55,100.
b. $26,500.
c. $10,400.
d. None of these answer choices is correct.
Chapter 12 Investments
33. What total unrealized holding gain would Beresford report in its 2016 income statement
relative to its investment securities?
a. $55,900.
b. $36,000.
c. $80,900.
d. $48,200.
34. On January 1, 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.
35. 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 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.
36. 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. rReclassify the investment as available for sale and immediately recognize in net income
any unrealized 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 gain or loss on the reclassification date.
d. Need to restate earnings, as the original classification was in error.
37. 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 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.
Chapter 12 Investments
38. 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:
a. Securities available for sale.
b. Consolidating securities.
c. Held-to-maturity securities.
d. Trading securities.
39. The income statement reports changes in fair value for which type of securities?
a. Securities reported under the equity method.
b. Trading securities.
c. Held-to-maturity securities.
d. Securities available for sale.
40. Trading securities are most commonly found on the books of:
a. Oil companies.
b. Manufacturing companies.
c. Banks.
d. Foreign subsidiaries.
41. 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.
42. Trading securities, by definition, are properly classified in the balance sheet as:
a. Shareholders’ equity.
b. Intangibles.
c. Current assets.
d. Other assets.
43. 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.
44. In the statement of cash flows, inflows and outflows of cash from buying and selling trading
securities typically are considered:
a. Investing activities.
Chapter 12 Investments
b. Operating activities.
c. Financing activities.
d. Noncash financing activities.
45. 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.
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.
46. 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.
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.
47. 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
a.
$162,000
Noncurrent Asset
b.
$162,000
Current Asset
c.
$160,000
Noncurrent Asset
d.
$160,000
Current Asset
48. 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.
49. 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?
Chapter 12 Investments
a. $0.
b. $25,000 net loss.
c. $7,000 net gain.
d. $32,000 net loss.
50. 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.
51. 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
52. 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.
53. All investments in debt and equity 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.
Chapter 12 Investments
54. Investments in 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.
55. All investment securities are initially recorded at:
a. Cost.
b. Present value.
c. Equity value.
d. None of these answer choices is correct.
56. 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.
57. 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
Chapter 12 Investments
is:
a. Less than 20%.
b. 20% to 50%.
c. Over 50%.
d. Exactly 100%.
58. When an investor classifies an investment in common stock as securities available for sale,
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.
59. When an equity 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.
60. 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.
Chapter 12 Investments
d. Fair value.
61. 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
62. 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.
