Self Study Chapter 17

Practice Question 01

Correct! A correct valuation is held-to-maturity securities at amortized cost.

A correct valuation is

trading securities at amortized cost.

none of these.

available-for-sale securities at amortized cost.

held-to-maturity securities at amortized cost.


Correct! Since options, a, b, and c, are all requirements for a security to be classified as held-to-maturity, d is the most correct.

A requirement for a security to be classified as held-to-maturity is

ability to hold the security to maturity.

the security must be a debt security.

positive intent.

All of these are required


Correct! The net unrealized loss on Yellowtail’s portfolio of trading securities results in a charge against income of $7,000.

Yellowtail Company's trading securities portfolio which is appropriately included in current assets is as follows:

December 31, 2012

Cost Fair ValueUnrealized Gain (Loss)

Arlington Corp. $453,000 $423,000 $(30,000)Downs, Inc. 242,000 265,000 23,000

$695,000 $688,000 $(7,000)

res_EAT_130132

res_EAT_130132

Ignoring income taxes, what amount should be reported as a charge against income in Yellowtail's 2012 income statement if 2012 is Yellowtail's first year of operation?

$23,000.

$30,000.

$7,000.

$0.


Correct! Holdings of more than 50% are accounted for under the equity method.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the

cost method.

fair value method.

divesture method.

equity method.


Correct! $45,000 plus $105,000 less $30,000 reclassification results in $120,000.

The following information relates to Baggett Company for 2012:

Realized gain on sale of available-for-sale securities $45,000Unrealized holding gains arising during the period on available-for-sale securities 105,000Reclassification adjustment for gains included in net income 30,000

Baggett’s 2012 other comprehensive income is

$180,000.

res_EAT_130132

res_EAT_130132

$150,000.

$75,000.

$120,000.


Correct! Impairment for debt and equity securities is based on a fair value test.

Companies base impairment for debt and equity securities on a(n)

fair value test.

equity test.

discounted cash flow test.

intrinsic value test


Correct! The carrying value assigned to the available-for-sale security should be its fair value at the date of the transfer.

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

the higher of its original cost or its fair value at the date of the transfer.

its original cost.

the lower of its original cost or its fair value at the date of the transfer.

its fair value at the date of the transfer.

res_EAT_130132

res_EAT_130132

res_EAT_130132


Correct! The unrealized gain or loss at the date of transfer increases or decreases stockholders’ equity.

Select the correct statement regarding the impact on stockholders’ equity of a transfer from trading to available-for-sale.

The unrealized gain or loss at the date of transfer is recognized in income.

The unrealized gain or loss at the date of transfer carried as a separate component of stockholders’ equity is amortized over the remaining life of the security.The separate component of stockholders’ equity is increased or decreased by the unrealized gain or loss at the date of transfer.The unrealized gain or loss at the date of transfer increases or decreases stockholders’ equity


Correct! Unrealized holding gains or losses which are recognized in income are from securities classified as trading.

Unrealized holding gains or losses which are recognized in income are from securities classified as

held-to-maturity.

available-for-sale.

trading.

none of these.


Correct! Investments in debt securities should be recorded on the date of acquisition at market value plus brokerage fees and other costs incidental to the purchase.

Investments in debt securities should be recorded on the date of acquisition at

market value plus brokerage fees and other costs incidental to the purchase.

face value plus brokerage fees and other costs incidental to the purchase.

res_EAT_130132

res_EAT_130133

res_EAT_130133

lower of cost or market.

market value.


Correct! Net proceeds of ($463,250 less $15,000) $448,250 less $382,500 results in a realized gain of $65,750.

During 2012, Martin Company purchased 17,000 shares of Mount Vernon Corp. common stock for $382,500 as an available-for-sale investment. The fair value of these shares was $373,150 at December 31, 2012. Martin sold all of the Mount Vernon stock for $27.25 per share on December 3, 2013, incurring $15,000 in brokerage commissions. Martin Company should report a realized gain on the sale of stock in 2013 of

$80,750.

$65,750.

$75,100.

$90,100.


Correct! $430,000 plus ($640,000 X 40%) less ($480,000 X 40%) equals $494,000.

Mitchell Company. owns 40,000 of the 100,000 outstanding shares of Pitts Inc. common stock. During 2013, Pitts earns $640,000 and pays cash dividends of $480,000. If the beginning balance in Mitchell’s investment account was $430,000, the balance at December 31, 2013 should be

$494,000.

$686,000.

$430,000.

$366,000.


Correct! An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as other comprehensive income and included in the equity section of the balance sheet.

An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as

res_EAT_130133

res_EAT_130133

a note or parenthetical disclosure only.

an extraordinary item shown as a direct increase to retained earnings.

a current gain resulting from holding securities.

other comprehensive income and included in the equity section of the balance sheet


Correct! A temporary decline in the value of an investment is not an impairment; therefore a new cost basis is not necessary.

Which of the following statements related to impairments of investments is correct?

The amount of any write-down in value is accounted for as a recognized loss.

Subsequent increases/decreases in the fair value of impaired available-for-sale securities are not included as other comprehensive income.A bankruptcy being experienced by an investee is an example of a temporary loss in value.

If the decline in value is considered temporary, the cost of the individual security is not written down to a new cost basis


Correct! The type of transfer being described is a transfer from available-for-sale to held-to-maturity.

A debt security is transferred from one category to another. Generally accepted accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?

Transfer from available-for-sale to trading

Transfer from held-to-maturity to available-for-sale

res_EAT_130133

res_EAT_130133

Transfer from available-for-sale to held-to-maturity

Transfer from trading to available-for-sale


Correct! The unrealized gain or loss at the date of transfer increases or decreases stockholders’ equity.

Select the correct statement regarding the impact on stockholders’ equity of a transfer from available-for-sale to trading.

The unrealized gain or loss at the date of transfer increases or decreases stockholders’ equity.

The unrealized gain or loss at the date of transfer is recognized in income.

The unrealized gain or loss at the date of transfer carried as a separate component of stockholders’ equity is amortized over the remaining life of the security.The separate component of stockholders’ equity is increased or decreased by the unrealized gain or loss at the date of transfer


Your answer is correct.

Debt securities that are bought and held primarily for sale in the near term are reported at:

net realizable value.fair value.

cost.

res_EAT_130133

res_EAT_130133

res_EAT_130133

amortized cost



Unrealized holding gains or losses are recognized as other comprehensive income for:

long-term securities.

available-for-sale securities.

held-to-maturity securities.

trading securities.


Your answer is correct. 426000 – 415000 = 11000

During 2012, Moxey Company purchased 10,000 shares of Hanover Corp. common stock for $415,000 as an available-for-sale investment. The fair value of these shares was $389,000 at December 31, 2012. During 2013, Moxey sold all of the Hanover stock for $426,000. Moxey Company should report a realized gain on the sale of stock in 2013 of

$37,000.

$11,000.

$25,000.

$26,000.



On its December 31, 2012, balance sheet, Draper Co. reported its investment in trading securities, which had cost $300,000, at fair value of $275,000. At December 31, 2013, the fair value of the securities was $292,500. What should Draper report on its 2013 income statement as a result of the increase in fair value of the investments in 2013?

Unrealized gain of $17,500.

res_EAT_130133

res_EAT_130133

res_EAT_130133

Unrealized loss of $7,500.

Realized gain of $17,500.

$0.



The unrealized holding gain or loss on trading securities is reported as:

an addition to (deduction from) the trading securities account balance.

other comprehensive income.part of net income.

a separate component of stockholders' equity



An ownership interest of 30% of the common stock of another corporation should be accounted for using the:

cost method.

equity method.

fair value method.

consolidated method


Your answer is correct. 20-50% holding requires the use of the equity method. 25% holdings 35,000/140,000 shares outstanding. With equity method, only Net Income (profit or loss) is used to figure revenue from the investment.

res_EAT_130133

res_EAT_130133

Gise Corporation purchased 35,000 shares of common stock of the Wagner Corporation for $52 per share on January 2, 2010. During 2012, Wagner Corporation had 140,000 shares of common stock outstanding, paid cash dividends of $88,000, and reported net income of $320,000. Gise Corporation should report revenue from investment for 2012 in the amount of

$22,000.

$0.

$58,000.

$80,000.



When an available-for-sale equity security is sold, the gain (loss) on sale is the difference between the net proceeds from the sale and the security's:

book value.

par value.

cost.

fair value.


Your answer is correct. Page 988

Examples of the ability to exercise significant influence over an investee include all of the following except:

interchange of managerial personnel.technological dependency.All of the options are examples of significant influence.

material intercompany transactions


res_EAT_130133

res_EAT_130133

res_EAT_130133


Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of:

dividends paid by the investee.declines in the fair value of the investment.

the losses of the investee.

All of the options would decrease the investment account



Which of the following is not a disclosure required under the equity method?

The aggregate value of each identified investment based on quoted market price.The accounting policies of the investor related to investments.

The name of the investor and the percentage of ownership.

The difference between the amount in the investment account and the amount of underlying equity in the investee's net assets



All of the following are part of comprehensive income except:

a reclassification adjustment for gains included in net income.

All of the options are part of comprehensive income.

res_EAT_130133

res_EAT_130133

res_EAT_130133

realized gains on sale of available-for-sale-securities.

unrealized holding gains on available-for-sale-securities



Which of the following statements related to impairments of investments is not correct?

The amount of any write-down in value is accounted for as a realized loss.

Subsequent increases/decreases in the fair value of impaired available-for-sale securities are included as other comprehensive income.If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis.

A bankruptcy being experienced by an investee is an example of a permanent loss in value



The unrealized gain (loss) at the date of transfer is recognized in income for transfers from:

held-to-maturity to available-for-sale.

available-for-sale to held-to-maturity.

available-for-sale to trading and from available-for-sale to held-to-maturity.

available-for-sale to trading.


Trading securities are reported on the balance sheet at fair value with the unrealized gain or loss reported in income.

Trading securities are reported on the balance sheet at fair value.

res_EAT_130133

res_EAT_130133

False

True


Unrealized gains and losses are not recorded on held-to-maturity securities.

Unrealized gains and losses on held-to-maturity securities are reported on the income statement.

True

False


Trading securities are temporary investments held for less than three months.

The holding period for trading securities is generally less than three months.

False

True


Investments of this size are considered to result in a significant influence over the investee company, so the equity method is used.

Holdings between 20% and 50% of another company’s voting stock are accounted for using the equity method.

False

True


res_EAT_130133

res_EAT_130133

res_EAT_130133

res_EAT_130133

Investments should be evaluated for impairment at each reporting date.

A company should evaluate investments for impairment if it has reason to believe the value of the investment may be impaired.

False

True


Gains and losses from changes in the fair value of trading securities are reported on the income statement.

Gains and losses resulting from changes in the fair value of trading securities are reported in the equity section of the balance sheet.

True

False


Dividends received by the investor decrease the investment’s carrying amount on the balance sheet.

Under the equity method, dividends received by the investor are reported as dividend revenue on the income statement.

True

False


Investments reported under the equity method are carried at cost, and periodically adjusted by the investor’s share of the investee’s earnings or losses, and decreased by all dividends received from the investee.

Investments are reported at market value on the balance sheet under the equity method.

res_EAT_130133

res_EAT_130133

res_EAT_130133

False

True


Fair value is the treatment for reporting financial assets and liabilities.

Both the FASB and the IASB believe that reporting fair values for financial assets and liabilities provides more useful and relevant information relative to historical cost.

True

False


Companies may elect the fair value option for investments accounted for using the equity method.

Companies with investments accounted for using the equity method cannot elect the fair value option.

False

True



Debt securities may be classified as:

held-to-maturity.

available-for-sale.

res_EAT_130133

res_EAT_130133

res_EAT_130133

all of these.

trading



Held-to-maturity securities are reported at their:

net realizable value.fair value.

historical cost.

amortized cost



Unrealized gains and losses on held-to-maturity securities are:

reported on the balance sheet.

reported on the income statement.

not reported because these securities are reported at their amortized cost.

None of these.


res_EAT_130133

res_EAT_130133

res_EAT_130133


Unrealized gains and losses on available-for-sale securities are:

reported on the balance sheet.

not reported because these securities are reported at their amortized cost.

None of these.

reported on the income statement



The unrealized gains and losses on available-for-sale securities are:

reported on the portfolio of investments.

not reported at all.

None of these.

reported on individual securities



Trading securities are generally held for less than:

6 months.

12 months.

1 month.

3 months.

res_EAT_130133

res_EAT_130133

res_EAT_130133



An ownership interest of 15% in another company’s voting stock should be accounted for using the:

fair value method.

cost method.

consolidation method.equity method



When an investor company owns 25% of an investee company’s common stock, the investor is said to have:

a minor influence over the investee company.

little or no influence over the investee company.

a controlling interest over the investee company.

a significant influence over the investee company



Under the equity method, if an investee company generates net income, the investor company:

records its proportionate share as an increase in its investment account.

res_EAT_130133

res_EAT_130134

res_EAT_130134

records its proportionate share as an unrealized gain.

records its proportionate share of the net income as dividend income.

does not recognize any share of the net income



Transfers between categories of investments are accounted for at:

fair value.

amortized cost.

cost.

book value.


Correct! Derivatives can protect against changes in oil prices, foreign currencies, and hydrocarbon prices.

Derivatives may be used to manage all of the following types of risk except changes in:

Derivatives can be used be used to manage risk for changes in all of the above investments.

foreign currencies.oil prices.

hydrocarbon prices


Correct! Derivatives are reported on the balance sheet at fair value.

Derivatives should be reported on the balance sheet at:

res_EAT_130134

res_EAT_130573

Derivatives should not be reported on the balance sheet.

cost.

fair value.

amortized cost


Correct! The Option Premium Formula is Option Premium = Intrinsic Value + Time Value.

The Option Premium Formula is:

Market Price at Issuance – Option Price

Intrinsic Value + Time Value

Option Price + Time Value

Time Value - Extrinsic Value


Correct! When a put option contract is purchased, the exercise price equals the current market price so no entry is necessary at the purchase date.

When a put option contract is purchased,

the contract is recorded as an asset at the exercise price.

the contract is recorded as a liability if the exercise price is less than the current market price.

the contract is recorded as an asset at the current market price.

no journal entry is required.


res_EAT_130573

res_EAT_130573

res_EAT_130574

Correct! Unrealized holding gains and losses on cash flow hedges are reported as a component of other comprehensive income.

Which of the following is not true with regard to accounting for cash flow hedges?

Unrealized holding gains and losses on cash flow hedges are reported in net income.

All of the above are true with regard to accounting for cash flow hedges.

Cash flow hedges are reported at fair value on the balance sheet.

No entry is required at the inception of futures contract


Page 1012

Correct! A convertible bond consists of two parts: a host security and an embedded derivative.

A convertible bond consists of two parts:

a host security and an embedded derivative.

an embedded derivative and a bifurcated security.a bifurcated security and a risk management security.

a hybrid security and a host security


Page 1021

Correct! Voting interest is not a characteristic which would qualify an economic interest as a variable-interest entity.

Which of the following is not a characteristic which would qualify an economic interest as a variable-interest entity?

Stockholders do not have decision-making rights.

Stockholders have insufficient equity capital at risk.

The holding is less than 50% of the outstanding stock of the economic interest.

res_EAT_130574

res_EAT_130574

res_EAT_130574

Stockholders are shielded from losses or their returns are capped or must be shared with other parties

Self Study Chapter 17

Documents

convertible

cash flow

option premium

current financial

companys voting

current market

unrealized

put option