567
Chapter 12—Special Income and Investment Reporting Issues
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
Multiple
Choice
Learning
Goal
(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Difficult
Analytic
Measure
29
3
Difficult
Analytic
Measure
2
1
Difficult
Analytic
Reporting
30
3
Difficult
Analytic
Measure
3
1
Moderate
Analytic
Reporting
31
3
Difficult
Analytic
Reporting
4
1
Moderate
Analytic
Reporting
32
3
Difficult
Analytic
Measure
5
1
Easy
Analytic
Reporting
33
3
Moderate
Analytic
Reporting
6
1
Moderate
Analytic
Reporting
34
3
Difficult
Analytic
Reporting
7
1
Easy
Analytic
Reporting
35
3
Difficult
Analytic
Reporting
8
1
Easy
Analytic
Reporting
36
3
Difficult
Analytic
Reporting
9
1
Moderate
Analytic
Measure
37
3
Moderate
Analytic
Reporting
10
1
Moderate
Analytic
Reporting
38
3
Moderate
Analytic
Reporting
11
1
Moderate
Analytic
Reporting
39
3
Moderate
Analytic
Reporting
12
2
Moderate
Analytic
Measure
40
4
Moderate
Analytic
Reporting
13
2
Moderate
Analytic
Reporting
41
4
Moderate
Analytic
Reporting
14
2
Easy
Analytic
Reporting
42
4
Difficult
Analytic
Reporting
15
3
Easy
Analytic
Reporting
43
4
Difficult
Analytic
Reporting
16
3
Moderate
Reflective
Reporting
44
4
Moderate
Analytic
Reporting
17
3
Moderate
Analytic
Reporting
45
4
Moderate
Analytic
Reporting
18
3
Moderate
Analytic
Measure
46
4
Difficult
Analytic
Reporting
19
3
Moderate
Analytic
Measure
47
4
Difficult
Analytic
Reporting
20
3
Moderate
Analytic
Measure
48
4
Difficult
Analytic
Reporting
21
3
Moderate
Analytic
Reporting
49
4
Difficult
Analytic
Reporting
22
3
Difficult
Analytic
Reporting
50
5
Moderate
Analytic
Measure
23
3
Difficult
Analytic
Measure
51
5
Moderate
Analytic
Measure
24
3
Difficult
Analytic
Measure
52
5
Moderate
Analytic
Measure
25
3
Easy
Analytic
Reporting
53
5
Moderate
Analytic
Measure
26
3
Easy
Analytic
Reporting
54
5
Moderate
Analytic
Measure
27
3
Moderate
Analytic
Measure
55
5
Moderate
Analytic
Measure
28
3
Difficult
Analytic
Measure
568 ♦ Chapter 12
True/
False
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Analytic
Reporting
2
1
Moderate
Analytic
Reporting
3
1
Moderate
Analytic
Reporting
4
1
Moderate
Analytic
Reporting
5
1
Moderate
Analytic
Measure
6
1
Moderate
Analytic
Reporting
7
2
Moderate
Analytic
Reporting
8
2
Moderate
Analytic
Measure
9
2
Moderate
Analytic
Measure
10
2
Moderate
Analytic
Measure
11
2
Moderate
Analytic
Reporting
12
3
Moderate
Analytic
Reporting
13
3
Moderate
Analytic
Reporting
14
3
Difficult
Analytic
Reporting
15
3
Difficult
Analytic
Reporting
16
3
Moderate
Analytic
Reporting
17
3
Moderate
Analytic
Reporting
18
3
Moderate
Analytic
Reporting
19
3
Moderate
Analytic
Reporting
20
4
Moderate
Analytic
Measure
21
4
Moderate
Analytic
Reporting
22
4
Moderate
Analytic
Reporting
23
4
Moderate
Analytic
Reporting
24
4
Moderate
Analytic
Measure
25
5
Moderate
Analytic
Measure
26
5
Moderate
Analytic
Measure
27
5
Moderate
Analytic
Measure
28
5
Moderate
Analytic
Measure
29
5
Moderate
Analytic
Measure
30
5
Moderate
Analytic
Measure
31
5
Moderate
Analytic
Reporting
Problem
(s)
Learning
Goal
(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Analytic
Reporting
2
2
Moderate
Analytic
Measure
3
2
Moderate
Analytic
Reporting
4
3
Difficult
Analytic
Reporting
5
3
Difficult
Analytic
Reporting
6
3
Difficult
Analytic
Reporting
7
3
Difficult
Analytic
Reporting
8
3
Difficult
Analytic
Reporting
9
4
Difficult
Analytic
Reporting
10
4
Difficult
Analytic
Reporting
11
5
Moderate
Analytic
Reporting
Essay
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Analytic
Reporting
2
1
Moderate
Analytic
Reporting
3
1
Moderate
Analytic
Reporting
4
2
Moderate
Analytic
Reporting
5
3
Moderate
Analytic
Reporting
6
3
Moderate
Analytic
Reporting
7
3
Moderate
Analytic
Reporting
8
3
Moderate
Analytic
Reporting
9
3
Moderate
Analytic
Reporting
10
5
Moderate
Analytic
Reporting
Difficulty Ratings
Guide:
Easy
Taken nearly verbatim
from the text
Moderate
Using different expression
or application of concept
Difficult
Several reasoning steps
Case
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Difficult
Analytic
Reporting
2
1
Difficult
Analytic
Reporting
3
2
Difficult
Analytic
Reporting
4
3
Difficult
Analytic
Reporting
Special Income and Investment Reporting Issues ♦ 569
MULTIPLE CHOICE
1. Which of the following is NOT an event that might cause an asset impairment ?
a.
Decreases in the market prices of a fixed asset
b.
Expected maintenance and repair of a fixed asset
c.
Expected cash flow losses from the use of fixed assets
d.
Adverse conditions affecting the use of fixed assets
2. The loss on fixed asset impairment is reported _____________.
a.
as a separate expense item deducted from gross profit after operating expenses
b.
as a separate expense item deducted from revenue after the cost of goods sold
c.
as a separate expense item deducted from income from continuing operations
d.
only in the footnotes to the financial statements
3. What is the journal entry for writing down an impaired asset?
a.
Loss on fixed asset impairment XXX
Fixed Assets XXX
b.
Loss on fixed asset impairment XXX
Accumulated depreciation XXX
c.
Loss on fixed asset impairment XXX
Accumulated impairment XXX
d.
Fixed Assets XXX
Loss on fixed asset impairment XXX
4. Which of the following is an appropriate journal entry when an asset is impaired?
a.
Fixed Assets XXX
Cost of Goods sold XXX
b.
Loss on fixed asset impairment XXX
Fixed assets XXX
c.
Fixed assets XXX
Loss on fixed asset impairment XXX
d.
Extraordinary loss XXX
Fixed assets XXX
5. The “employee termination obligation” is what type of account?
a.
Sinking fund
b.
Contra account
c.
Liability
d.
Retained earnings
570 ♦ Chapter 12
6. Which of the following would NOT be shown below income from continuing operations on the
income statement?
a.
Income tax expense
b.
Discontinued operations
c.
Extraordinary items
d.
Cumulative effect of change in accounting principle
7. What are the criteria for an extraordinary item?
a.
Unusual
b.
Infrequent
c.
Both a and b
d.
None of the above
8. If a corporation changes from LIFO to FIFO, what must the corporation disclose regarding this
change?
a.
The cumulative effect of the change on the net income of all prior periods
b.
The effect on the current year’s net income
c.
The nature of the change
d.
Each of these is correct
9. If a company has an extraordinary loss reported on an income statement of $75,000 net of
applicable tax of $35,000, how much was the total loss?
a.
$75,000
b.
$40,000
c.
$110,000
d.
$35,000
10. Which of the following would NOT be considered a business segment?
a.
A new clothing line to update last year’s line
b.
A sales territory for a company
c.
An individual retail store for hardware supplies
d.
A product category for a company.
Special Income and Investment Reporting Issues ♦ 571
11. GAAP identifies three types of unusual items that require specialized reporting on the income
statement. All of the below fall into this category except __________.
a.
Results of discontinued operations
b.
Income tax expense
c.
Extraordinary items
d.
A change from one generally accepted accounting principle to another
12. Oelk, Inc. has net income of $50,000, paid preferred stock dividends of $5,000 and common stock
dividends of $10,000. Oelk had 10,000 shares of common stock outstanding. What is Oelk’s
earnings per common share?
a.
$5.00
b.
$4.50
c.
$3.50
d.
Zero/share
13. Earnings per share should be shown for which of the following items?
a.
Income from continuing operations
b.
Unusual items below continuing operations if they exist
c.
Net income
d.
Each of these is correct
14. Which securities does management intend to actively trade for profit?
a.
Available-for-sale securities
b.
Trading securities
c.
Equity securities
d.
Bond securities
15. Available for sale securities are classified as what type of account?
a.
Common stock
b.
Investing activities
c.
Asset
d.
Stockholders’ equity
16. On a balance sheet, available-for-sale securities are reported at what value?
a.
Historical cost
b.
Fair market value
c.
Lower of cost or market
d.
Their tax basis
572 ♦ Chapter 12
17. Marketable Securities are _____________.
a.
temporary investments recorded at cost plus brokerage commissions
b.
temporary investments recorded at purchase price
c.
permanent investments recorded at cost plus brokerage commissions
d.
permanent investments recorded at purchase price
CE Co.
CE Co.’s portfolio of temporary investments has the following values as of December 31, 2004:
Common Stock
Cost
Market
ABC Corp
$125,000
$100,000
HIF Corp
$250,000
$300,000
XYZ Corp
$300,000
$350,000
18. Refer to CE Co. What is the total unrealized gain (loss) For CE Corp.?
a.
$50,000
b.
$75,000
c.
$100,000
d.
($25,000)
19. Refer to CE Co. Assuming a tax rate of 40%, what is the total amount shown on CE’s balance
sheet for temporary investments at December 31, 2004?
a.
$720,000
b.
$750,000
c.
$675,000
d.
$700,000
20. Refer to CE Co. How much of the gain (loss) should be shown as comprehensive income?
a.
$75,000
b.
$100,000
c.
$60,000
d.
$45,000
21. Unrealized gains and losses on temporary investments are reported in comprehensive income until
the investments are sold. Then where are the gains/losses reported?
a.
Stockholders’ Equity Statement
b.
Balance Sheet
c.
Income statement
d.
None of the above
Special Income and Investment Reporting Issues ♦ 573
22. A company has the following information: Unrealized gain in temporary marketable securities of
$100,000 (net of applicable income tax of $25,000). What is the amount added (subtracted) in the
current asset section on the balance sheet?
a.
$100,000
b.
$25,000
c.
$75,000
d.
Not able to determine from the information given
23. If temporary investments were purchased at a cost of $220,000 and current market price is
$235,000 and the applicable tax on the gain is $5,000 ,then the balance sheet would record the net
value of temporary investments at ___________.
a.
$ 235,000
b.
$ 230,000
c.
$ 220,000
d.
$ 215,000
24. If net income is $420,000 and there are $20,000 unrealized gains on temporary investments,
comprehensive income would be ___________.
a.
$ 440,000
b.
$ 420,000
c.
$ 400,000
d.
$ 20,000
25. A method used for long-term investments in stocks where the investor has significant influence
over the operating activities of the investee is called __________.
a.
Available-for sale
b.
Equity method
c.
Stockholders’ equity method
d.
Common stock method
26. In order to be considered as having a significant influence over an investee, the investor must own
what percentage of investee stock?
a.
10%
b.
20%
c.
30%
d.
40%
574 ♦ Chapter 12
Amy, Inc.
Amy, Inc. pays $500,000 cash for 30% of the common stock of Corrie Corp on December 31,
2004. Corrie Corp. has $300,000 of net income and pays $60,000 in dividends in 2005.
27. Refer to Amy, Inc. What is the total amount Amy, Inc. received in cash for dividends from Corrie
Corp in 2005?
a.
$500,000
b.
$30,000
c.
$60,000
d.
$18,000
28. Refer to Amy, Inc. What is the total by which amount Amy, Inc. increased her investment account
due to Corrie Corps net income?
a.
$300,000
b.
$60,000
c.
$90,000
d.
$18,000
29. Refer to Amy, Inc. What is the total increase/decrease in Amy, Inc.’s investment from 2005
transactions?
a.
$72,000
b.
$90,000
c.
$500,000
d.
$300,000
30. Refer to Amy, Inc. What is the balance in Amy, Inc.’s investment account at the end of 2005?
a.
$500,000
b.
$590,000
c.
$560,000
d.
$572,000
Special Income and Investment Reporting Issues ♦ 575
KWW Co.
Assume that on January 1st 2004, KWW Co. purchased 30% of the common stock of Investee Co.
for $500,000. That year Investee reports net income of $100,000 and dividends of $30,000.
31. Refer to KWW Co. Show the journal entry to record the purchase by KWW of Investee.
a.
Trading Securities 500,000
Cash 500,000
b.
Available-for-sale securities 500,000
Cash 500,000
c.
Investment in Investee stock 150,000
Cash 150,000
d.
Investment in Investee stock 500,000
Cash 500,000
32. Refer to KWW Co. What is the balance in KWW’s investment account at the end of the period?
a.
$500,000
b.
$150,000
c.
$570,000
d.
$521,000
33. Assume that the carrying value of Drei, Inc. stock has a carrying value of $25,000 when it is sold.
If the proceeds of the sale are $22,000, record the journal entry for this transaction.
a.
Loss on sale of investment 3,000
Cash 22,000
Investment in Drei stock 25,000
b.
Cash 25,000
Investment in Drei stock 25,000
c.
Cash 22,000
Investment in Drei stock 22,000
d.
Loss on sale of investment 3,000
Investment in Drei stock 3,000
576 ♦ Chapter 12
ABC Co.
ABC Co. had the following available-for-sale stock portfolio:
Common Stock
Cost
Market
M&M
$100,000
$150,000
NTW
250,000
225,000
HSS
300,000
375,000
34. Refer to ABC Co. At what amount should the stock be reported on ABC’s Balance Sheet?
a.
$650,000
b.
$750,000
c.
$100,000
d.
$600,000
35. Refer to ABC Co. What amount (if any) should be reported in other comprehensive income if the
tax rate is 30%?
a.
$70,000
b.
$25,000
c.
$100,000
d.
$130,000
36. Refer to ABC Co. After the balance sheet date, the market valuations for all three stocks were the
same. Assuming ABC sold NTW, what would ABC report on the Income Statement if anything if
the tax rate is 30%?
a.
Unrealized loss of $25,000
b.
Realized loss of $17,500
c.
Realized gain of $25,000
d.
Nothing, it was already reported in comprehensive income
Special Income and Investment Reporting Issues ♦ 577
37. Refer to ABC Co. After the balance sheet date, the market valuations for all three stocks were the
same. Assuming ABC sold NTW, show the journal entry to record the sale of stock.
a.
Cash 225,000
Loss on sale of NTW 25,000
Available-for-sale securities 250,000
b.
Cash 225,000
Unrealized loss 25,000
Available-for-sale securities 250,000
c.
Cash 225,000
Available-for-sale securities 225,000
d.
Nothing. It was already reported in comprehensive income.
38. A corporation owning a majority of the voting stock of another corporation is called the
__________.
a.
Affiliate
b.
Parent
c.
Equity
d.
Top corporation
39. At the end of the fiscal year, parent and subsidiary corporations are combined and reported as a
single company. These combined financial statements are called __________.
a.
Consolidated financial statements
b.
Goodwill statements
c.
Parent/subsidiary statements
d.
Separate accounting statements
40. When a premium is amortized on an investment in bonds, the journal entry would include a
____________.
a.
Debit to premium on bond investment
b.
Credit to premium on bond investment
c.
Debit to investment in bonds
d.
Credit to investment in bonds
41. When a discount is amortized on an investment in bonds, the journal entry would include a
____________.
a.
Debit to premium on bond investment
b.
Credit to premium on bond investment
c.
Debit to investment in bonds
d.
Credit to investment in bonds
578 ♦ Chapter 12
42. If an investor fails to amortize a discount on an investment in bonds ____________.
a.
Interest revenue will be overstated and assets will be understated
b.
Interest revenue will be understated and assets will be overstated
c.
Interest revenue and assets will be understated
d.
Interest revenue and assets will be overstated
43. If an investor fails to amortize a premium on an investment in bonds ____________.
a.
Net income, assets and stockholders’equity (retained earnings) will be overstated
b.
Net income will be understated, assets and stockholders’equity (retained earnings) will be
overstated
c.
Net income and assets will be understated and stockholders’equity (retained earnings) will
be overstated
d.
Net income, assets and stockholders’equity (retained earnings) will be understated
44. When bonds are purchased between interest dates, the accrued interest the buyer pays the seller is
_____________.
a.
Debited to interest expense
b.
Credited to interest revenue
c.
Debited to a discount on bonds payable
d.
Debited to interest revenue
45. A company purchased $200,000, 8% bonds at 95 plus accrued interest of $3,500. The entry will
include a debit to ____________.
a.
Investment in bonds for $203,500
b.
Investment in bonds for $200,000
c.
Interest revenue for $3,500
d.
Discount on Investment in bonds for $10,000
46. An investor sold $400,000 of bonds at 102 plus accrued interest of $3,500. If the bond investment
was carried at $405,000 at the time of the sale, the entry will include a credit to ____________.
a.
Investment in bonds for $400,000
b.
Investment in bonds for $408,500
c.
Interest revenue for $5,000
d.
Gain on sale of investment for $3,000
Special Income and Investment Reporting Issues ♦ 579
47. An investor sold $100,000 of bonds at 99 plus accrued interest of $2,000. If the bond investment
was carried at $96,500 at the time of sale, the entry will include a credit to ____________.
a.
Investment in bonds for $100,000
b.
Investment in bonds for $99,000
c.
Gain on sale of investment for $2,500
d.
Gain on sale of investment for $2,000
48. When a bond investment is sold and the carrying amount of the bond investment is less than the
cash received _______________.
a.
A gain is recognized
b.
A loss is recognized
c.
No gain or loss can be recognized on the investors books
d.
A gain or loss may occur depending on the interest rates
49. When a bond investment is sold for less cash than the carrying amount _____________.
a.
A gain is recognized
b.
A loss is recognized
c.
No gain or loss can be recognized on the investors’ books
d.
A gain or loss may occur depending on the interest rates
50. The P/E ratio is computed by __________.
a.
Market price per share/EPS (diluted)
b.
Market price per share/EPS (basic)
c.
EPS/Market price per share (basic)
d.
EPS/Market price per share (diluted)
51. Investors in low price-earnings-ratio companies are often referred to as __________ investors.
a.
Minority
b.
Growth
c.
Value
d.
Retired
580 ♦ Chapter 12
52. If Declo Company had a market price per share of common stock or $50, and EPS (basic) of
$1.50, and paid dividends on common stock of 0.50 per share, what was Declo’s price-earnings
ratio?
a.
33.33
b.
50
c.
100
d.
0.03
53. Which ratio shows the market value of a share of commons stock to the book value of common
stock?
a.
Price-earnings
b.
Book value
c.
Fair Market Value
d.
Price-book
54. If NickCo. had total stockholders’ equity of $10,000,000, common shares outstanding of
1,000,000, paid $100,000 in common stock dividends, and had $10,000 in net income, what was
NickCo’s book value per share?
a.
$9.90
b.
$9.89
c.
$10.00
d.
$0.10
55. Which of the following would be an example of an unrecorded intangible asset?
a.
Inventory
b.
Investments
c.
Brand name recognition
d.
Machinery
TRUE/FALSE
1. A fixed asset impairment occurs when the book value of an asset is below its fair value, and is
NOT expected to recover.
2. A loss from fixed asset impairment reduces the book value of the fixed asset immediately, which
will reduce the depreciation expense for future periods.
Special Income and Investment Reporting Issues ♦ 581
3. “Restructuring charges” are the accrued employee termination benefits associated with a
management approved employee termination plan.
4. A gain or loss from disposing of a business segment of an entity is reported on the income
statement as a gain or loss from discontinued operations.
5. Gains and losses on the disposal of fixed assets are extraordinary items.
6. When there are changes in generally accepted accounting principles, disclosure should include a
justification for the change.
7. Basic earnings per share is the net income per share of common stock.
8. Earnings per share is one measure of the liquidity of a corporation.
9. Common stock dividends must be subtracted from net income to calculate earnings per share.
10. Earnings per share must be calculated for unusual items reported below income from continuing
operations.
11. When there are convertible securities, warrants, and stock options in the capital structure, earnings
per share need not be calculated.
582 ♦ Chapter 12
12. Any difference between the fair market value of an available for sale security and its cost is an
unrealized holding gain or loss.
13. Any dividends received on an investment are recorded as a debit to dividend revenue.
14. The purchase of marketable securities for increases assets and decreases cash flow.
15. Unrealized holding gains and losses on temporary investments are reported as an other
comprehensive income item.
16. Under the equity method of accounting for investments, receipts of dividends from the investee
result in a decrease in the investor’s investment account.
17. The equity method causes the investor’s investment account to mirror the proportional changes in
the fair value of the investee.
18. Accounting for the sale of stock is the same for both short-term and long-term investments.
19. To stockholders of a parent company, consolidated financial statements are more meaningful than
separate statements for each corporation.
20. Held-to-maturity securities are disclosed on the balance sheet at fair market value.
Special Income and Investment Reporting Issues ♦ 583
21. If bonds are purchased as an investment between interest dates, any accrued interest is normally
debited to interest revenue on the investors’ books.
22. On the investor’s books, any premium or discount on the bond investment is recorded in the
Investment in Bonds account.
23. Unlike bonds payable, the amortization of discounts and premiums on bond investments is
recorded when the interest is received.
24. The carrying amount of the bonds is the cost plus amortized discount.
25. A high price-earnings ratio indicates the market expects low growth and low earnings.
26. Growth investors seek stocks that have high price-earnings ratios..
27. Growth companies are considered risky because high growth expectations are already reflected in
the book value.
28. Value investors seek stocks that have high price-earnings ratios because these companies are the
most valuable..
29. The book value per share is determined by dividing total stockholders’ equity by the number of
common shares authorized.
584 ♦ Chapter 12
30. Large price-book ratios can occur when a company has significant intangible assets that are not
recorded.
31. Purchases and sales of security investments are recorded in the financing activities section of the
statement of cash flows.
ESSAY
1. Show the following items in an income statement format:
Discontinued operations
Extraordinary items
Changes in accounting principles
2. Discuss each of the following:
Discontinued operations
Extraordinary items
Changes in accounting principles
Special Income and Investment Reporting Issues ♦ 585
3. Discuss fixed asset impairment and restructuring charges.
4. Discuss basic earnings per share for common stock and what income statement items it must be
shown for.
5. Discuss accounting for investments in stocks including:
(a)
Trading securities
(b)
Available-for-sale securities
(a)
586 ♦ Chapter 12
6. Discuss how to account for available-for-sale securities.
7. Describe the equity method of accounting for investments, when it is used, and how to account for
the investment account.
8. Discuss the sale of investment in stocks; both short-term and long-term stock.