A weakness of ___(insert from choices below)____ is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized gains or unrealized losses:
Detailed Answer
Correct answer: (A)
the available-for-sale approach
[Under the available-for-sale approach, unrealized gains and losses are accumulated in AOCI and only recognized in income when the investment is sold.]
2
If an available-for-sale investment is sold for which there are unrealized gains in accumulated other comprehensive income (AOCI), a reclassification adjustment affects other comprehensive income (OCI) in the period of sale by
Detailed Answer
Correct answer: (A)
reducing OCI for the amount of unrealized gains in AOCI.
3
If an available-for-sale investment is sold for which there are unrealized losses in accumulated other comprehensive income (AOCI), the total effect on total comprehensive income is
Detailed Answer
Correct answer: (C)
no effect.
[Other comprehensive income will be decreased but net income will be increased, so the total effect on comprehensive income is no change.]
4
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 lists the investment at $100,000 on its balance sheet. Seybert purchased the Wang investment for (ignore taxes):
Detailed Answer
Correct answer: (C)
$80,000.
[Fair value = $100,000 less unrealized gain of $20,000 = cost of $80,000.]
5
Sloan Company has owned an investment during 2011 that has increased in fair value. After all closing entries for 2011 are completed, the effect of the increase in fair value on total shareholders’ equity would be:
Detailed Answer
Correct answer: (C)
the same amount under the available-for-sale and trading-securities approaches.
[Unrealized gains end up in retained earnings for trading securities and AOCI for available-for-sale securities, but total shareholders’ equity is the same.]
6
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. B. C. D.
Detailed Answer
Correct answer: (B)
other comprehensive income typically would be reduced by the tax expense associated with unrealized holding gains.
[This question tests understanding of an Additional Consideration on accounting for income taxes associated with unrealized gains and losses on AFS investments.]
7
The Guitar World (TGW) holds an investment that increased in fair value over 2011, and accounts for that investment as available for sale. When considering taxes, TGW would:
Detailed Answer
Correct answer: (D)
reduce accumulated other comprehensive income (AOCI) for tax expense, and probably increase its deferred tax liability.
[This question tests understanding of an Additional Consideration on accounting for income taxes associated with unrealized gains and losses on AFS investments.]
8
The equity method of accounting for investments in voting common stock is appropriate when:
Detailed Answer
Correct answer: (A)
The investor can significantly influence the investee.
9
Consolidated financial statements are prepared when one company has:
Detailed Answer
Correct answer: (C)
Control over another company.
10
If Pop Company owns 15% of the common stock of Son Company, then Pop Company typically:
Detailed Answer
Correct answer: (B)
Would record dividends received from Son Company as investment revenue.
