52) 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
A) Option a
B) Option b
C) Option c
D) Option d
53) 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.
54) 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.
55) 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.
56) All investment securities are initially recorded at:
A) Cost.
B) Present value.
C) Equity value.
D) None of these answer choices are correct.
57) 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.
58) 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%.
59) 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.
60) 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.
61) 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.
62) 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
A) Option a
B) Option b
C) Option c
D) Option d
63) 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.
64) 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
A) Option a
B) Option b
C) Option c
D) Option d
65) 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.
66) 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.
67) 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.
68) Hawk Corporation purchased 1,000 Diamond Corporation bonds in 2015 for $500 per bond
and classified the investment as securities available for sale. The value of the Diamond
investment was $600 per bond on December 31, 2016, and $650 on December 31, 2017. During
2018, Hawk sold all of its Diamond investment at $700 per bond.
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.
69) Hawk Corporation purchased 1,000 Diamond Corporation bonds in 2015 for $500 per bond
and classified the investment as securities available for sale. The value of the Diamond
investment was $600 per bond on December 31, 2016, and $650 on December 31, 2017. During
2018, Hawk sold all of its Diamond investment at $700 per bond.
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.
70) Dim Corporation purchased 1,000 bonds of Witt Corporation in 2015 for $800 per bond and
classified the investment as securities available for sale. The value of these holdings was $400
per bond on December 31, 2016, and $300 on December 31, 2017. During 2018, Dim sold all of
its Witt bonds at $350 per share.
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.
71) Dim Corporation purchased 1,000 bonds of Witt Corporation in 2015 for $800 per bond and
classified the investment as securities available for sale. The value of these holdings was $400
per bond on December 31, 2016, and $300 on December 31, 2017. During 2018, Dim sold all of
its Witt bonds at $350 per share.
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.
72) 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,
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.
73) 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
A) Option a
B) Option b
C) Option c
D) Option d
74) 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
75) 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.
76) 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.
77) 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.
78) 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.
79) 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.
80) 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.
81) 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.
82) 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.
83) 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.
84) 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.
85) 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.
86) 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.
87) 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.
88) 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.