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. T/F
TRUE
All investments in debt securities whose fair values are not readily determinable are carried at historical cost. T/F
FALSE
Both debt and equity securities can be categorized as trading securities. T/F
TRUE
Net unrealized holding gains (losses) are reported in the income statement for trading securities. T/F
TRUE
Purchases and sales of securities are always reported as investing activities in a statement of cash flows. T/F
FALSE
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. T/F
FALSE
Both trading securities and securities available for sale are reported at their fair values. T/F
TRUE
All securities considered available for sale should be reported as current assets in a classified balance sheet. T/F
FALSE
Unrealized gains and losses are included in other comprehensive income for securities that are classified as available for sale. T/F
TRUE
When available-for-sale securities are sold, the full amount of any gain or loss realized on the sale is included in before-tax net income. T/F
TRUE
Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee. T/F
FALSE
The equity method is in many ways a partial consolidation. T/F
TRUE
Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets. T/F
TRUE
When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost. T/F
FALSE
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. T/F
FALSE
Selecting the fair value option for an available-for-sale investment is equivalent to reclassifying that investment as a trading security. T/F
TRUE
The fair value option can not be elected for significant-influence investments, because those must be accounted for under the equity method. T/F
FALSE
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. T/F
TRUE
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. T/F
FALSE
Under IFRS No. 9, debt investments are classified as either "available for sale" or "fair value through profit and loss (FVTPL)." T/F
FALSE
Under IFRS No. 9, debt investments are classified as either "amortized cost" or "fair value through profit and loss (FVTPL)." T/F
TRUE
Under IFRS No. 9, equity investments are classified as either "fair value through other comprehensive income (FVTOCI)" or "fair value through profit and loss (FVTPL)." T/F
TRUE
Under IAS No. 39, transfers of debt investments equity investments out of the FVTPL category into AFS or HTM are permitted under "rare circumstances." T/F
TRUE
Under IFRS No. 9, cost can be used as an estimate of fair value in some circumstances. T/F
TRUE
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.
C. Securities classified as held to maturity.
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 the above are correct.
A. Long-term debenture bonds.
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 the above are reported at fair value.
B. Debt securities held to maturity.
Both fair values and subsequent growth of the investee are not as relevant for investments in which of the following categories?
A. Securities reported under the equity method.
B. Trading securities.
C. Held-to-maturity securities.
D. Securities available for sale.
C. Held-to-maturity securities.
Which category completely excludes equity securities?
A. Securities available for sale.
B. Consolidating securities.
C. Held-to-maturity securities.
D. Trading securities.
C. Held-to-maturity securities.
In 2009, Osgood Corporation purchased $4 million in ten-year municipal bonds at face value. On December 31, 2011, 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, 2011, balance sheet and the 2011 income statement would show the following:
A. Investment in Muni. Bonds: 3,600,000; Inc. Statement loss on Investments: 0
B. Investment in Muni. Bonds: 3,600,000; Inc. Statement loss on Investments: 400,000
C. Investment in Muni. Bonds: 4,000,000; Inc. Statement loss on Investments: 400,000
D. Investment in Muni. Bonds: 4,000,000; Inc. Statement loss on Investments: 0
B. Investment in Muni. Bonds: 3,600,000; Inc. Statement loss on Investments: 400,000
[The unrealized loss ($400,000) on transfer to new category of trading securities is included in income.]
Beresford Inc. purchased several investment securities during 2008, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.
Held to Maturity Securities:
ABC Co. Bonds: Fair Val(12/31/10): $375k; Fair Val.(12/31/11): $400k; Amort. Cost(12/31/10): $367.5k; Amort. Cost(12/31/11): $360k
Trading Securities:
DEF Co Stock: Fair Val(12/31/10): $48k; Fair Val.(12/31/11): $59.5k; Cost(12/31/10): $66k
GEH Inc. Stock: Fair Val(12/31/10): $47k; Fair Val.(12/31/11): $77k; Cost(12/31/10): $39k
IJK Inc. Stock: Fair Val(12/31/10): $44k; Fair Val.(12/31/11): $38.5k; Cost(12/31/10): $32.9k
Avail. for Sale Securities:
LMN Co. Stock: Fair Val(12/31/10): $130.5kk; Fair Val.(12/31/11): $150.4k; Cost(12/31/10): $140k
What balance sheet amount would Beresford report for its total investment securities at 12/31/10?
A. $637,000
B. $644,500
C. $645,400
D. None of the above is correct
A. $637,000
[The held-to-maturity securities are reported at amortized cost, and the others are reported at fair value.]
Beresford Inc. purchased several investment securities during 2008, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.
Held to Maturity Securities:
ABC Co. Bonds: Fair Val(12/31/10): $375k; Fair Val.(12/31/11): $400k; Amort. Cost(12/31/10): $367.5k; Amort. Cost(12/31/11): $360k
Trading Securities:
DEF Co Stock: Fair Val(12/31/10): $48k; Fair Val.(12/31/11): $59.5k; Cost(12/31/10): $66k
GEH Inc. Stock: Fair Val(12/31/10): $47k; Fair Val.(12/31/11): $77k; Cost(12/31/10): $39k
IJK Inc. Stock: Fair Val(12/31/10): $44k; Fair Val.(12/31/11): $38.5k; Cost(12/31/10): $32.9k
Avail. for Sale Securities:
LMN Co. Stock: Fair Val(12/31/10): $130.5kk; Fair Val.(12/31/11): $150.4k; Cost(12/31/10): $140k
What would be the balance in Beresford's accumulated other comprehensive income with respect to these investments in its 12/31/11 balance sheet (ignore taxes)?
A. $55,100
B. $26,500
C. $10,400
D. None of the above is correct.
C. $10,400
[This is the cumulative increase in fair value above cost for its available-for-sale securities.]
Beresford Inc. purchased several investment securities during 2008, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.
Held to Maturity Securities:
ABC Co. Bonds: Fair Val(12/31/10): $375k; Fair Val.(12/31/11): $400k; Amort. Cost(12/31/10): $367.5k; Amort. Cost(12/31/11): $360k
Trading Securities:
DEF Co Stock: Fair Val(12/31/10): $48k; Fair Val.(12/31/11): $59.5k; Cost(12/31/10): $66k
GEH Inc. Stock: Fair Val(12/31/10): $47k; Fair Val.(12/31/11): $77k; Cost(12/31/10): $39k
IJK Inc. Stock: Fair Val(12/31/10): $44k; Fair Val.(12/31/11): $38.5k; Cost(12/31/10): $32.9k
Avail. for Sale Securities:
LMN Co. Stock: Fair Val(12/31/10): $130.5kk; Fair Val.(12/31/11): $150.4k; Cost(12/31/10): $140k
What total unrealized holding gain would Beresford report in its 2011 income statement relative to its investment securities?
A. $55,900
B. $36,000
C. $80,900
D. $48,200
B. $36,000
[This is the difference between the fair value of trading securities at 12/31/11 and at 12/31/10.]
On January 1, 2011, 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 semi-annually 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, 2011 journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:
A. $3336.
B. $3325.
C. $3000.
D. $3500.
A. $3336
[1/1/09:
Investment - Dr:100,000
Discount - Cr: 5,000
Cash - Cr: 95,000
6/30/09:
Cash(.06/2)x(100k) - Dr: 3,000
Discount(plug) - Dr: 325
Interest Revenue(.07/2)x(100k-5k) - Cr: 3,325
12/31/09:
Cash(06/2)x(100k) - Dr: 3,000
Discount(plug) - Dr: 336
Interest Revenue(.07/2)x(100k-5k+325) - Cr: 3,336]
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 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.
D. reclassify the investment as held to maturity, but there would be no income effect
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. reclassify 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.
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.
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
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.
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.
D. Trading securities.
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.
B. Trading securities.
Trading securities are most commonly found on the books of:
A. Oil companies.
B. Manufacturing companies.
C. Banks.
D. Foreign subsidiaries.
C. Banks.
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.
B. On each reporting date.
Trading securities, by definition, are properly classified in the balance sheet as:
A. Shareholders' equity.
B. Intangibles.
C. Current assets.
D. Other assets.
C. Current assets.
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
A. They measure the success or failure of taking advantage of short-term price changes.
In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:
A. Investing activities.
B. Operating activities.
C. Financing activities.
D. Noncash financing activities
B. Operating activities.
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
A. $20,000.
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/share, but Nichols believes the market has not appreciated the full value of the Elliott shares and that a more accurate price is $12/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's range of reasonably likely valuations of Elliott.
B. $250,000.
Anthers Inc. bought the following portfolio of trading securities near the end of 2011. (FV = Fair Value)
SecA: Cost:80k FV(12/31/11): 84k
SecB: Cost:60k FV(12/31/11): 54k
SecC: Cost:22k FV(12/31/11): 22k
What amount will be reported in the balance sheet for this portfolio at December 31, 2011, and how will it be classified?
A. 162k - Noncurrent Asset
B. 162k - Current Asset
C. 160k - Noncurrent Asset
D. 160k - Current Asset
D. 160k - Current Asset
[$84,000 + $54,000 + $22,000 = $160,000]
On January 1, 2011, 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, 2011. 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, 2011?
A. $284,400.
B. $300,000.
C. $315,600.
D. $360,000.
D. $360,000.
[8,000 x $45 = $360,000Trading securities are reported at fair value.]
Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2010, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2010. Goofy reclassified this investment as trading securities in December of 2011 when the market value had risen to $125,000. What effect on 2011 income should be reported by Goofy for the Crazy Co. shares?
A. $0.
B. $25,000 net loss.
C. $7,000 net gain.
D. $32,000 net loss
B. $25,000 net loss.
[Unrealized loss of $32,000 recorded in an allowance during 2010, but not included in the income statement. When the shares are reclassified in 2011, the $32,000 goes into the income statement. In addition, $7,000 unrealized gain for 2011 goes directly to income.]
Hobson Company bought the securities listed below during 2010. These securities were classified as trading securities. In its December 31, 2010, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of December, 2011 are as follows: (FV = Fair Value)
SecX: Cost:380k FV(12/31/11): 352k
SecY: Cost:180k FV(12/31/11): 160k
SecZ: Cost:420k FV(12/31/11): 414k
What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2011?
A. $41,000.
B. $54,000.
C. $13,000.
D. $0.
A. $41,000.
[Total Cost = 380k + 180k + 420k = 980k
Total FV = 352k + 160k + 414k = 926k
So:
Total Unrealized loss to date (980k-926k): 54k
Less Unrealized loss recognized 2010: 13k
Unrealized loss to report 2011 (54k-13k): 41k]
What is the effect on a company's cash flows and reported profit from accounting for an investment as a trading security versus as an available-for-sale security?
A. Effect on Total Cash Flows: Little, if any; Effect on Net income: Little, if any.
B. Effect on Total Cash Flows: Significant; Effect on Net income: Significant.
C. Effect on Total Cash Flows: Little, if any; Effect on Net income: Significant.
D. Effect on Total Cash Flows: Significant; Effect on Net income: Little, if any.
C. Effect on Total Cash Flows: Little, if any; Effect on Net income: Significant.
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
A. Calculating the discounted present value of the principal and interest payments.
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.
B. Securities available for sale.
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.
D. Fair value on the reporting date.
All investment securities are initially recorded at:
A. Cost.
B. Present value.
C. Equity value.
D. None of the above is correct.
A. Cost.
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.
A. Securities available for sale.
GAAP regarding accounting for certain debt and equity securities generally will 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%.
A. Less than 20%.
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.
D. Dividend income.
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.
D. Only when the security is sold.
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.
D. Fair value.
Unrealized holding gains and losses on securities available for sale would have the following effects on accumulated other comprehensive income:
A. Gains: Increase; Losses: Increase
B. Gains: Decrease; Losses: Decrease
C. Gains: Decrease; Losses: Increase
D. Gains: Increase; Losses: Decrease
D. Gains: Increase; Losses: Decrease
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. Non-cash financing activities.
C. Investing activities.
Unrealized holding gains and losses on securities available for sale would have the following effects on retained earnings:
A. Gains: Increase; Losses: No change
B. Gains: No change; Losses: Decrease.
C. Gains: No change; Losses: No change.
D. Gains: Increase; Losses: Decrease.
C. Gains: No change; Losses: No change.
Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2011. In December, Hart announced $200,000 net income for 2011 and declared and paid a cash dividend of $2 per share on the 200,000 shares of outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2011 would be:
A. $0.
B. $28,000.
C. $56,000.
D. None of the above is correct.
C. $56,000.
[Ownership share = 28,000/200,000 = 14%, so neither the equity method nor consolidation is appropriate.
28,000 shares x $2.00 per share = $56,000]
On January 2, 2010, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000 and classified the investment as available for sale. Ranger's net income for the years ended December 31, 2010 and 2011, were $10,000 and $50,000, respectively. During 2011, Ranger declared and paid a dividend of $60,000. There were no dividends in 2010. On December 31, 2010, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2011 income statement as income from this investment?
A. $26,000.
B. $7,200.
C. $20,000.
D. $27,200.
B. $7,200.
[Investment revenue from dividends:
$60,000 x 12% = $7,200]
Jeremiah Corporation purchased securities during 2011 and classified them as securities available for sale:
(FV = Fair Value)
SecA: Cost:40k FV(12/31/11): 49k
SecB: Cost:70k FV(12/31/11): 66k
SecC: Cost:28k FV(12/31/11): 39k
All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2011, income statement relative to the portfolio?
A. $0.
B. $16,000.
C. $20,000.
D. None of the above is correct.
A. $0.
[Unrealized gains and losses are not included in earnings for securities available for sale.]
Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2008 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2009 and $65 on December 31, 2010. During 2011, Hawk sold all of its Diamond stock at $70 per share. In its 2011 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.
C. A gain of $200,000.
[In 2008-2010, Hawk accumulated an unrealized gain and fair value adjustment of ($65 - 50) x 10,000
shares = $150,000. An additional increase of $50,000 occurred in 2011, so the total gain realized in the income statement would be $200,000.]
Dim Corporation purchased 1,000 shares of Witt Corporation stock in 2008 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2009, and $300 on December 31, 2010. During 2011, Dim sold all of its Witt stock at $350 per share. In its 2011 income statement, Dim would report:
A. A realized gain of $50,000.
B. A recognition of unrealized 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 loss of $500,000.
C. A loss on the sale of investments of $450,000.
[(As part of year-end fair-value adjustment, Dim would remove any previously recorded fair-value adjustment and accumulated other comprehensive income associated with the Witt investment.)
Cash - Dr: 350k
Loss on sale of investments - Dr: 450k
Investment in Witt - Cr: 800k]
On January 1, 2011, Everglade Company purchased the following securities and properly accounted for them as securities available for sale:
(FV = Fair Value)
SecA: Cost:40k FV(12/31/11): 55k
SecB: Cost:72k FV(12/31/11): 65k
SecC: Cost:16k FV(12/31/11): 20k
All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2009 income statement?
A. $0.
B. $19,000 unrealized gain.
C. $12,000 net unrealized gain.
D. $7,000 unrealized loss
A. $0.
[Unrealized gains and losses on securities available for sale do not affect income.]
Boulter, Inc. began business on January 1, 2011. At the end of December 2011, Boulter had the following investments in equity securities: (FV = Fair Value)
Cost: Trading: 60k; Avail 4 sale: 110k
FV: Trading: 54k; Avail 4 sale: 107.5k
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, 2011? (AOCISE = Accumulated Other Comprehensive Income in Shareholders' Equity)
A. Income: 8.5k; AOCISE: 0
B. Income: 0; AOCISE: 8.5k
C. Income: 6k; AOCISE: 2.5k
D. Income: 2.5k; AOCISE: 6k
C. Income: 6k; AOCISE: 2.5k
[Unrealized loss on trading securities is included in income: $60,000 - $54,000 = $6,000Unrealized loss on securities available for sale is reported as a separate component of shareholders'
equity: $110,000 - $107,500 = $2,500]
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:
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
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.]
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
A. reducing OCI for the amount of unrealized gains in AOCI.
B. increasing OCI for the amount of unrealized gains in AOCI.
C. no effect on OCI, as OCI only includes the effects of unrealized gains and losses.
D. no effect on OCI, as the realized gain is included in AOCI.
A. reducing OCI for the amount of unrealized gains in AOCI.
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
A. an increase.
B. a decrease.
C. no effect.
D. can't determine given this information.
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.]
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):
A. $100,000.
B. $120,000.
C. $80,000.
D. cannot be determined from this information.
C. $80,000.
[Fair value = $100,000 less unrealized gain of $20,000 = cost of $80,000.]
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:
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.
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.]
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 the above.
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.]
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:
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.
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.]
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.
A. The investor can significantly influence the investee.
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 the above is correct.
C. Control over another company.
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 the above are correct.
B. Would record dividends received from Son Company as investment revenue.
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
A. As a reduction in the investment account.
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 a 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
B. The investee reports a net income for the year.
Which of the following increases the investment account under the equity method of accounting?
A. Decreasing 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 the above is correct.
D. None of the above is correct.
[None of the transactions increases the owners' equity of the investee.]
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.
B. Cost.
When the investor's level of influence changes, it may be necessary to change from the equity method to another method. When the level of ownership falls from a range of 20% to 50% to less than 20%, the equity method typically would be discontinued and the investment account balance would be carried over at:
A. Amortized cost on the date of ownership change.
B. Fair market value on the date of ownership change.
C. Discounted present value on the date of ownership change.
D. The current balance, and this balance would serve as the new "cost".
D. The current balance, and this balance would serve as the new "cost".
When the investor's level of influence changes, it may be necessary to change to the equity method from another method. When the level of ownership rises from less than 20% to a range of 20% to 50%, the equity method typically would become appropriate and the investment account balance should be:
A. Retrospectively adjusted to the balance that would have existed if the equity method had been in effect for prior years.
B. Carried over as is with no adjustment necessary.
C. Carried over at fair market value on date of transfer.
D. Adjusted to reflect amortized cost.
A. Retrospectively adjusted to the balance that would have existed if the equity method had been in effect for prior years.
On July 1, 2011, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the fair value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for 2011, and paid $150,000 quarterly dividends to its shareholders. After all closing entries are made, Tremen's "Investment in Delany Company" account would have a balance of:
A. $3,200,000.
B. $3,160,000.
C. $3,000,000.
D. $3,080,000.
D. $3,080,000.
[$3,000,000 + (40%)(1/2 of the year)($1,000,000 - $600,000) = $3,080,000]
Which of the following is not true about accounting for investments under IFRS?
A. IFRS allows proportionate consolidation of investments where two or more investors have joint control.
B. IFRS is more restrictive than U.S. GAAP concerning when an investor can elect the fair value option.
C. IFRS requires that the accounting policies of an investee be adjusted to correspond to those of the
investor when applying the equity method.
D. IFRS does not allow use of the equity method where two or more investors have joint control.
D. IFRS does not allow use of the equity method where two or more investors have joint control.
Bloomfield Bakers accounts for its investment in Clor Confectionary under the equity method. Bloomfield carried the Clor investment at $150,000 and $165,000 at December 31 of 2010 and 2011, respectively. During 2011 Clor recognized $80,000 of net income and paid dividends of $30,000. Assuming that Bloomfield owned the same percentage of Clor throughout 2011, their percentage ownership must have been:
A. 15%.
B. 18.75%.
C. 30%.
D. 50%.
C. 30%.
[$150,000 + X%($80,000 - $30,000) = $165,000, X = 30%]
Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2011. Jack can significantly influence Jill. On December 10, 2011, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report in its income statement for 2011 relative to its investment in Jill?
A. $1 000,000.
B. $1,200,000.
C. $1,400,000.
D. $1,500,000.
B. $1,200,000.
[Carrying Value before net loss(1.5 mill - (20% x 1 mill)) = 1.3 mill
Jack's share of net loss would be recognized in full: 20% x 6 mill = 1.2 mill]
Hope Company bought 30% of Faith Corporation in 2011. Hope's purchase price equaled 30% of the book value of Faith's net identifiable assets, which also equaled 30% of the fair value of Faith. During 2011, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2011?
A.Overstated by $1,050,000; understated by $1,050,000.
B. Understated by $1,050,000; understated by $1,050,000.
C. Overstated by $1,200,000; overstated by $1,200,000.
D. Understated by $1,200,000; overstated by $1,050,000.
B. Understated by $1,050,000; understated by $1,050,000.
[Net Income: Avail 4 sale:
Cash - Dr: 150k
Investment revenue - Cr: 150k
Net Income: Equity Method:
Investment - Dr: 1.2 mill
Investment revenue - Cr: 1.2 mill
Cash - Dr: 150k
Investment - Cr: 150k
Net increase in investment of $1,200,000 - $150,000 = $1,050,000 was not reported when the investment was classified as securities available for sale.
Also, the reported investment revenue of $150,000 was $1,050,000 less than the $1,200,000 that should have also been reported.]
Sox Corporation purchased a 40% interest in Hack Corporation for $1,500,000 on Jan 1, 2011. On November 1, 2011, Hack declared and paid $1 million in dividends. On December 31, Hack reported a net loss of $6 million for the year. What amount of loss should Sox report on its income statement for 2011 relative to its investment in Hack?
A. $1,100,000.
B. $2,400,000.
C. $1,500,000.
D. $1,600,000.
A. $1,100,000.
[Carrying value before new loss:
1.5 mill - (40% x 1 mill)) = 1.1 mill
Sox's Share of net loss = 6 mill x 40% = 2.4 mill. Because the investment account cannot be reduced below zero. the loss reported in 2011 would b only 1.1 mill]
Assume that, on 1/1/11, Matsui Co. paid $1,200,000 for its investment in 60,000 shares of Yankee Inc. Further, assume that Yankee has 200,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both $4,000,000 at 1/1/11. The following information pertains to Yankee during 2011:
Net income: 200k
Dividends declared and paid: 60k
Market Price of common stock (12/31/11): 22/share
What amount would Matsui report in its year-end 2011 balance sheet for its investment in Yankee?
A. $1,320,000
B. $1,260,000
C. $1,242,000
D. None of the above is correct.
C. $1,242,000
[This is $1,200,000 + (30% x $200,000 net income) - (30% x $60,000 dividends).]
Gerken Company concluded at the beginning of 2011 that the company's ownership interest in DillCo had increased to the point that it became appropriate to begin using the equity method to account for the investment. The balance in the investment account is $50,000 at the time of the change, and accountants working with company records determined that the balance would have been $75,000 if the account had been adjusted for investee net income and dividends as prescribed by the equity method. After implementing the change to the equity method, if financial statements were prepared,
A. net income and retained earnings will be higher by $25,000.
B. net income will be unchanged, and retained earnings will be higher by $25,000.
C. net income and retained earnings will be higher by $75,000.
D. the accounts will be unchanged, because no adjustment is necessary.
B. net income will be unchanged, and retained earnings will be higher by $25,000.
[Retained earnings are adjusted directly.]
On April 1, 2011, BigBen Company acquired 30% of the shares of LittleTick, Inc. BigBen paid $100,000 for the investment, which is $40,000 more than 30% of the book value of LittleTick's identifiable net assets. BigBen attributed $15,000 of the $40,000 difference to inventory that will be sold in the remainder of 2011, and the rest to goodwill. LittleTick recognized a total of $20,000 of net income for 2011, and paid a total of $10,000 of dividends to shareholders. BigBen's investment in LittleTick will affect BigBen's 2011 net income by:
A. a loss of $10,500.
B. earnings of $4,500.
C. earnings of $1,125.
D. earnings of $3,450.
A. a loss of $10,500.
[(30%)(¾ of the year)($20,000) - $15,000 = ($10,500).]
Cucumber Company concluded at the beginning of 2011 that the company's ownership interest in PickelCo had decreased to the point that it became appropriate to begin accounting for its investment as available for sale, rather than using the equity method as it had been doing. The balance in the investment account is $75,000 at the time of the change, and accountants working with company records determined that the balance would have been $50,000 if the investment had been accounted for as an available-for-sale investment. At the time of implementing the change to the available-for-sale method, if financial statements were prepared,
A. net income and retained earnings will be lower by $25,000.
B. net income will be unchanged, and retained earnings will be lower by $25,000.
C. the accounts will be unchanged, because no adjustment is necessary. D. other comprehensive income and accumulated other comprehensive income will be lower by $25,000
C. the accounts will be unchanged, because no adjustment is necessary.
[The equity method balance becomes the new cost basis, but after the change, under AFS reporting, the investment must be marked to fair value with unrealized gains and losses shown in other comprehensive income and accumulated other comprehensive income.]
When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition:
A. Reduces the investment account and increases investment revenue.
B. Increases the investment account and increases investment revenue.
C. Reduces the investment account and reduces investment revenue.
D. Increases the investment account and reduces investment revenue.
C. Reduces the investment account and reduces investment revenue.
On January 1, 2011, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2011, Gold reported net income of $125,000 and paid cash dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2011?
A. $295,000.
B. $300,000.
C. $315,000.
D. $320,000
C. $315,000.
[Cost: 300k
Share of NI(20% x 125k): 25k
Share of dividends(20%x 25k): (5k)
Amort. of intangible((300k-275k)/5): (5k)
Carrying value 12/31/09(300k+25k-5k-5k): 315k]
At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million in dividends.
The amount of purchased goodwill is:
A. $18 million.
B. $30 million.
C. $60 million.
D. None of the above is correct.
A. $18 million.
[Cost: 45 mill
FV(30% x (75+15)): (27 mill)
Goodwill(45-27): 18 mill]
The total amount of additional depreciation to be recognized by SBC over the remaining life of the assets is:
A. $4.5 million.
B. $15 million.
C. $27 million.
D. None of the above is correct.
A. $4.5 million.
[FV in excess of book value: 15 mill
Share of ownership: 30%
Additional depreciation(15*.3): 4.5 mill]
Assume that, on 1/1/11, Sosa Enterprises paid $5,100,000 for its investment in 36,000 shares of Orioles Co. Further, assume that Orioles has 120,000 total shares of stock issued and estimates an 8 year remaining useful life and straight-line depreciation with no residual value for its depreciable assets.At 1/1/11, the book value of Orioles' identifiable net assets was $7,000,000, and the fair value of Orioles was $10,000,000. The difference between Orioles' fair value and the book value of its identifiable net assets is attributable to $1,800,000 of land and the remainder to depreciable assets. Goodwill was not part of this transaction.The following information pertains to Orioles during 2011:
Net Income: 600k
Dividends declared and paid: 360k
Market price of common stock 12/31/11: 80/share
What amount would Sosa Enterprises report in its year-end 2011 balance sheet for its investment in Orioles Co.? A. $3,200,000
B. $3,180,000
C. $3,135,000
D. $3,027,000
D. $3,027,000
[This is $3,000,000 + (30% x $600,000 net income) - (30% x $360,000 dividends) - (30% x $1,200,000/8 yrs. of additional depreciation).]
Smith buys and sells securities which it typically classifies as available for sale. On December 15, 2011, Smith purchased $500,000 of Jones shares, and elected the fair value option to account for the Jones investment. As of December 31, 2011, the Jones shares had a fair value of $525,000. In the 2011 financial statements, Smith will show (ignore taxes):
A. investment income of $25,000 in its income statement.
B. other comprehensive income of $25,000.
C. accumulated other comprehensive income of $525,000.
D. an investment in Jones of $500,000.
A. investment income of $25,000 in its income statement.
Which of the following is not true about the fair value option?
A. The fair value option is irrevocable.
B. The fair value option must be elected for all shares of an investment in a particular company.
C. Electing the fair value option for held-to-maturity investments simply reclassifies those investments as trading securities.
D. All of the above are true
B. The fair value option must be elected for all shares of an investment in a particular company.
Which of the following is not true when the fair value option is elected for an investment that would normally be accounted for under the equity method?
A. No journal entry need be made to recognize the investor's portion of the investee's net income.
B. Unrealized gains and losses on that investment are recognized in net income.
C. No journal entry need be made to recognize the investor's portion of dividends paid by the investee.
D. All of the above are true.
C. No journal entry need be made to recognize the investor's portion of dividends paid by the investee.
Under IAS No. 39: which is not a category for accounting for investments?
A. Fair value through profit and loss.
B. Fair value through other comprehensive income.
C. Held-to-maturity.
D. Available-for-sale.
B. Fair value through other comprehensive income.
Under IFRS No. 9: which is not a category for accounting for investments?
A. Fair value through profit and loss.
B. Fair value through other comprehensive income.
C. Held-to-maturity.
D. Amortized cost.
C. Held-to-maturity.
Which of the following is NOT true about the "fair value through profit and loss" approach for accounting for investments under IFRS?
A. Allowed under both IAS No. 39 and IFRS No. 9.
B. Includes unrealized gains in earnings.
C. Requires reclassification of realized gains from other comprehensive income.
D. Not vulnerable to other-than-temporary impairments.
C. Requires reclassification of realized gains from other comprehensive income.
Wang Corporation purchased $100,000 of Hales Inc 6% bonds at par with the intent and ability to hold the bonds until they matured in 2015, so Wang classifies its investment as held to maturity. Unfortunately, a combination of problems at Hales and in the debt market caused the fair value of the Hales investment to decline to $70,000 during 2011. Wang calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses. If Wang accounts for the Hales bonds under IFRS, before-tax net income for 2011 will be reduced by: A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
B. $10,000.
If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company intends to sell the investment,
A. the investment is not written down to fair value.
B. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
C. the investment is written down to fair value, and the entire impairment loss is recognized in accumulated other comprehensive income.
D. the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.
B. the investment is written down to fair value, and the entire impairment loss is recognized in net income.
If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment,
A. the investment is written down to fair value, and only the non-credit-loss component of the impairment loss is recognized in net income.
B. the investment is written down to fair value, and the entire impairment loss is recognized in net
income.
C. the investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.
D. the investment is written down to fair value, but none of the impairment loss is recognized in net income.
C. the investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.
If the fair value of a trading security declines for a reason that is viewed as "other than temporary",
A. the investment is not written down to fair value.
B. the investment is written down to fair value, and a special "impairment loss" is recognized in net income.
C. the investment is written down to fair value, and the impairment loss is recognized in accumulated
other comprehensive income.
D. the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.
D. the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary.
When an impairment of an equity investment that is classified as available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair value and the amount of the write-down is:
A. Recorded as a deferred credit.
B. Included in income.
C. Recorded as deferred asset.
D. Treated as unrealized
B. Included in income.
An OTT impairment for an equity investment is recognized if fair value declines below amortized cost and
A. The company has incurred non-credit losses.
B. The company does not have the intent and ability to hold the investment until fair value recovers.
C. The company lacks intent to hold the investment until fair value recovers.
D. The company has incurred credit losses.
B. The company does not have the intent and ability to hold the investment until fair value recovers.
If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because it is viewed as "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the current year,
A. the investment is not written down to fair value.
B. the investment is written down to fair value, and the impairment loss is recognized in net income.
C. the investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income.
D. the investment is written down to fair value, and only the credit loss is included in net income.
B. the investment is written down to fair value, and the impairment loss is recognized in net income.
If the fair value of a debt investment that is classified as an available-for-sale investment declines for a reason that is viewed as "other than temporary" because the company has incurred a credit loss on the investment,
A. the investment is written down to fair value, and only the non-credit-loss component of the impairment loss is recognized in net income.
B. the investment is written down to fair value, and the entire impairment loss is recognized in net
income.
C. the investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.
D. the investment is written down to fair value, but none of the impairment loss is recognized in net income.
C. the investment is written down to fair value, and only the credit-loss component of the impairment loss is recognized in net income.
Which of the following is NOT a reason to consider a decline in the fair value of a debt investment to be "other than temporary"?
A. The investor determines that a credit loss exists on the investment.
B. The investor intends to sell the investment.
C. The investor believes it is "more likely than not" that the investor will be required to sell the investment prior to recovering the amortized cost of the investment less any credit losses arising in the
current year.
D. The investor intends to hold the investment to maturity.
D. The investor intends to hold the investment to maturity.
Nichols Corporation purchased $100,000 of Holly Inc 6% bonds at par with the intent and ability to hold the bonds until they matured in 2015, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2011. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses.
Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols is planning to sell the bonds in the near future. Before-tax net income for 2011 will be reduced by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
D. $30,000.
Nichols Corporation purchased $100,000 of Holly Inc 6% bonds at par with the intent and ability to hold the bonds until they matured in 2015, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2011. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses.
Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols believes it is more likely than not that it will have to sell the Taylor bonds before the bonds have a chance to recover their fair value. Before-tax net income for 2011 will be reduced by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
D. $30,000.
Nichols Corporation purchased $100,000 of Holly Inc 6% bonds at par with the intent and ability to hold the bonds until they matured in 2015, so Nichols classifies its investment as held to maturity. Unfortunately, a combination of problems at Holly and in the debt market caused the fair value of the Holly investment to decline to $70,000 during 2011. Nichols calculates that, of the $30,000 drop in fair value, $10,000 of it relates to credit losses and $20,000 relates to non-credit losses.
Assume that Nichols concludes that the Holly bonds are other-than-temporarily impaired because Nichols calculates that the bonds have incurred credit losses. Before-tax net income for 2011 will be reduced by:
A. $0.
B. $10,000.
C. $20,000.
D. $30,000.
B. $10,000.
Dicker Furriers purchased one thousand shares of Loose Corporation stock on January 10, 2010, for $800 per share and classified the investment as securities available for sale. Loose's market value was $400 per share on December 31, 2010, and the decline in value was viewed as temporary. As of December 31, 2011, Dicker still owned the Loose stock whose market value has declined to
$100 per share. The decline is due to a reason that's judged to be other than temporary. Dicker's December 31, 2011, balance sheet and the 2011 income statement would show the following:
A. Investment in Loose stock: 100k; Inc. statement loss on investments: 700k
B. Investment in Loose stock: 100k; Inc. statement loss on investments: 300k
C. Investment in Loose stock: 400k; Inc. statement loss on investments: 0
D. Investment in Loose stock: 400k; Inc. statement loss on investments: 300k
A. Investment in Loose stock: 100k; Inc. statement loss on investments: 700k
[12/31/10:
Unrealized loss (OCI) - Dr: 400k
FV adjustment (Loose) - Cr: 400k
12/31/11:
FV adjustment (Loose) - Dr: 400k
Unrealized loss (OCI) - Cr: 400k
OTT Impairment Loss - Dr: 700k
Investment in Loose - Cr: 700k]
Which of the following is not an example of a derivative?
A. Interest rate swap.
B. Cash.
C. Stock option.
D. Forward contract.
B. Cash.
Which of the following is not true about derivatives?
A. Large losses on derivative investments have been reported in the press.
B. Derivatives are so named because their value is derived from some underlying measure.
C. Derivatives are useful instruments for managing risk.
D. Accounting for derivatives is fully resolved and no additional rules or interpretations are likely.
D. Accounting for derivatives is fully resolved and no additional rules or interpretations are likely.
Audit
An examination of a company's financial statements and the accounting system.
Bank Collection
Collection of money by the bank on behalf of a depositor.
Bank Reconciliation
Document explaining the reasons for the difference between a depositor's cash records and the depositor's cash balance in its bank account.
Bank Statement
Document the bank uses to report what it did with the depositor's cash. Shows the bank account's beginning and ending balances and lists the month's cash transactions conducted through the bank.
Check
Document that instructs a bank to pay the designated person or business a specified amount of money.
Controller
The chief accounting officer of a company.
Deposit in Transit
A deposit recorded by the company but not yet by its bank.
Imprest System
A way to account for petty cash by maintaining a constant balance in the petty cash account, supported by the fund (cash plus payment tickets)totaling the same amount.
Internal Control
Organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records.
Nonsufficient Funds Check
A "hot" check, one for which the maker's bank account has insufficient money to pay the check.
Outstanding Check
A check issued by the company and recorded on its books but not yet paid by its bank.
Petty Cash
Fund containing a small amount of cash that is used to pay for minor expenditures.
Voucher
Instrument authorizing a cash payment.
