Deck 13: Marketable Securities and Derivatives

Question 1

Which of the following is/are true?

A)Management can sell securities with unrealized holding gains (or losses) and transfer through net income to Retained Earnings the entire unrealized holding gain (or loss)-that is, management can affect the timing of gain or loss recognition in net income for securities available-for-sale, but not for trading securities.
B)The timing ability is asymmetric in that impairment rules preclude indefinite deferrals of the recognition in income of unrealized losses, but not unrealized gains.
C)Users of the financial statements should be alert to the accounting effect on net income in evaluating the profitability of firms with both trading securities and securities available-for-sale.
D)all of the above
E)none of the above

Answer 1

D

Question 2

Both U.S.GAAP and IFRS require that firms record derivatives at their fair values on the balance sheet date.

Answer 2

True

Question 3

Measurement of trading securities at fair value reflects income when it occurs in the form of a change in fair value, not when the investor realizes a gain or loss at the time of sale.

Answer 3

True

Question 4

If a held-to-maturity security is deemed to be impaired, the investor recognizes (debits) the balance sheet carrying value of the investment and reduces (credits) an impairment loss (included in net income).

Question 5

A firm initially records the purchase of marketable securities at acquisition cost, which includes the purchase price plus any commissions, taxes, and other appropriate costs incurred.

Question 6

The future value of held-to-maturity debt securities reflects the economic opportunity cost of continuing to hold the securities.

Question 7

Firms initially record trading securities at fair value, excluding transactions costs (which firms expense as they incur them).

Question 8

Acquisition and disposition of trading securities are usually financing activities.

Question 9

Securities available-for-sale that a firm intends to sell within one year appear in marketable securities in the current assets section of the balance sheet.

Question 10

A derivative may have zero initial cost, but potentially large positive or negative fair values later.

Question 11

The transfer of a held-to-maturity investment in debt securities to either trading securities or securities available-for-sale would call into question the original designation of that investment.

Question 12

The term marketable securities refers to the financial instruments that firms classify as held-to-maturity, trading, or available-for-sale securities, recognizing that the term does not have a precise definition in U.S.GAAP or IFRS.

Question 13

U.S.GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to maturity nor trading securities as securities available-for-sale.

Question 14

Management can sell securities with unrealized holding gains (or losses) and transfer through net income to Retained Earnings the entire unrealized holding gain (or loss)-that is, management can affect the timing of gain or loss recognition in net income for both securities available-for-sale and trading securities.

Question 15

When accounting for a fair value hedge of a recognized asset or liability, at the end of each period, the firm remeasures the hedged asset or liability to fair value and includes the resulting gain or loss in net income, and the derivative instrument (hedging instrument) to fair value and includes the resulting loss or gain in net income.

Question 16

In both U.S.GAAP and IFRS, hedge accounting is elective; firms need not designate any derivatives as accounting hedges, regardless of the degree to which the derivatives mitigate the volatility of outcomes of other arrangements.

Question 17

Gains and losses on derivatives not designated as hedges of a specific risk, gains and losses on fair value hedges, and the ineffective portion of cash flow hedges affect net income simultaneously with changes in fair value.

Question 18

Firms might use a particular derivative to hedge fair value and to hedge cash flows.

Question 19

Gains and losses on effective cash flow hedges initially affect other comprehensive income, not net income.

Question 20

A derivative is a financial instrument whose value changes in response to changes in an underlying observable variable, such as a stock price, an interest rate, a currency exchange rate, or a commodity price.

Question 21

The provisions of U.S.GAAP require firms to classify marketable securities into which categories?

A)Debt securities held to maturity for which a firm has both the intent and the ability to hold to maturity-shown on the balance sheet at an amount based on acquisition cost, but subject to impairment.
B)Debt and equity securities held as trading securities shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income.
C)Debt and equity securities held as securities available-for-sale shown on the balance sheet at fair value, with unrealized changes in fair value of securities held at the end of the accounting period included in other comprehensive income, and realized changes in fair value included in net income when a firm sells the securities.
D)all of the above
E)choices a and b, only.

Question 22

Alex Corporation acquires securities classified as marketable securities for $10,000.The entry is as follows:

A)Cash...................................................................10,000 Marketable Securities.................................................10,000
B)Marketable Securities........................................10,000 Bonds Payable........................................................10,000
C)Marketable Securities........................................10,000 Common Stock.......................................................10,000
D)Marketable Securities........................................10,000 Cash........................................................................10,000
E)Bonds Payable...................................................10,000 Marketable Securities................................................10,000

Question 23

Which of the following is/are not true?

A)Securities available-for-sale that a firm intends to sell within one year appear in marketable securities in the current assets section of the balance sheet.
B)Securities not available-for-sale appear in investments in securities in noncurrent assets.
C)Acquisition and disposition of securities available-for-sale are usually investing activities on the statement of cash flows.
D)U.S.GAAP and IFRS require firms to report these securities at fair value on the balance sheet.
E)none of the above

Question 24

To be classified as a current asset, marketable securities must be readily convertible into cash and

A)traded on the New York Stock Exchange.
B)must be sold prior to the longer of 6 months or the number of months until fiscal year-end.
C)have a short-term maturity.
D)management must intend to convert the securities to cash when necessary.
E)be issued by the U.S.Treasury.

Question 25

Barry Corporation holds equity securities earning $250 through dividend declarations and debt securities earning $300 from interest earned and that it has not yet received these amounts in cash.The entry is as follows:

A)Dividend Revenue............................................250 Interest Revenue...............................................300
Dividends and Interest Receivable..............................550
B)Dividend Revenue............................................250 Interest Revenue...............................................300
Dividends and Interest Payable...................................550
C)Dividends and Interest Receivable..................550 Dividend Revenue........................................................250
Interest Revenue...........................................................300
D)Dividends and Interest Payable........................550 Dividend Revenue........................................................250
Interest Revenue...........................................................300
E)Dividends and Interest Payable........................550 Dividends and Interest Receivable...............................550

Question 26

Kerry Corporation acquires the publicly traded debt of Jett Corporation on December 31, Year 1 as a temporary investment of excess cash.The securities mature in 4 years.How will the securities be recorded on Kerry's December 31, Year 1 financial statement?

A)as long-term investment in marketable equity securities
B)as current assets-marketable securities
C)as bonds payable
D)as short-term investment in marketable equity securities
E)in a reserve account for future operating cash needs

Question 27

Which of the following is not true regarding investments in securities available-for-sale?

A)The unrealized holding gain or holding loss increases or decreases Other Comprehensive Income (a shareholders' equity account).
B)The Other Comprehensive Income (a shareholders' equity account) is closed to Accumulated Other Comprehensive Income (another shareholders' equity account) at the end of the period.
C)The amortization of any difference between the purchase price and the maturity value of the debt makes interest revenue on these debt securities differ from the cash receipts for debt service payments.
D)Accumulated Other Comprehensive Income includes the sum of all increases and decreases in fair value of securities available-for-sale that have not yet appeared in net income.
E)Holding gains and losses on securities available-for-sale affect net income every accounting period.

Question 28

DPC, an electric utility, has $100 million of bonds payable outstanding that mature in five years.The utility acquires U.S.government securities whose periodic interest payments and maturity value exactly equal those on the utility's outstanding bonds.The firm intends to use the cash received from the government bonds to make required interest and principal payments on its own bonds.The electric utility could also have used its cash to purchase its bonds in the marketplace.Based on the above, DPC should treat these securities as

A)debt securities held as securities available-for-sale.
B)debt securities held as trading securities.
C)debt securities held to maturity.
D)equity securities held as trading securities.
E)equity securities held as securities available-for-sale.

Question 29

The investor recognizes interest on debt securities when

A)interest amounts are received in cash, only.
B)firm's board of directors declares interest, only.
C)interest accrues over time.
D)firm's board of directors declares interest and the interest amounts are received in cash, only.
E)none of the above

Question 30

The term _____ implies active and frequent buying and selling with the objective of generating profits from short-term changes in market prices.

A)gambling
B)mad money
C)conjecture
D)trading
E)ka-ching

Question 31

U.S.GAAP requires which of the following disclosures about marketable securities each period?

A)The aggregate fair value, gross unrealized holding gains, gross unrealized holding losses, and amortized cost for debt securities held to maturity and for debt and equity securities available-for-sale.
B)The proceeds from sales of securities available-for-sale, and the gross realized gains and gross realized losses on those sales.The statement of cash flows shows the cash expenditures to purchase available-for-sale securities and the cash receipts from maturities and sales of available-for-sale securities.
C)The change during the period in the net unrealized holding gain or loss on securities available-for-sale included in a separate shareholders' equity account.
D)The change during the period in the net unrealized holding gain or loss on trading securities included in earnings.
E)all of the above

Question 32

The provisions of IFRS require firms to classify marketable securities into which of the following categories?

A)Held to maturity investments for which a firm has both the intent and the ability to hold to maturity-shown on the balance sheet at an amount based on acquisition cost, but subject to impairment.
B)Debt and equity securities held as financial assets at fair value through profit or loss, shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income.
C)Debt and equity securities held as available-for-sale financial assets, shown on the balance sheet at fair value, with unrealized changes in fair value of securities held at the end of the accounting period included in other comprehensive income, and realized changes in fair value included in net income when a firm sells the securities.
D)all of the above
E)choices a and b, only.

Question 33

The provisions of U.S.GAAP require firms to classify marketable securities into the following categories except

A)debt securities held to maturity for which a firm has both the intent and the ability to hold to maturity-shown on the balance sheet at an amount based on acquisition cost, but subject to impairment.
B)debt and equity securities held as trading securities shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income.
C)debt and equity securities held as securities available-for-sale shown on the balance sheet at fair value, with unrealized changes in fair value of securities held at the end of the accounting period included in other comprehensive income, and realized changes in fair value included in net income when a firm sells the securities.
D)debt and equity securities held as securities available-for-sale shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income.
E)none of the above

Question 34

The investor recognizes dividends on equity securities as revenue when the

A)dividend amounts are received in cash, only.
B)firm's board of directors declares dividends, only.
C)dividend accrues over time, only.
D)dividend accrues over time and the dividend amounts are received in cash, only.
E)none of the above

Question 35

U.S.GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to maturity nor trading securities as _____.

A)derivative securities
B)noncurrent securities
C)securities not available-for-sale
D)securities available-for-sale
E)marketing making securities

Question 36

For financial reporting purposes, acquisition and disposition of trading securities are usually _____ activities.

A)nonoperating
B)financing
C)investing
D)operating
E)exchange

Question 37

A firm records debt securities purchased at the acquisition cost.The acquisition cost will differ from the _______ of the debt if the __________on the bonds differs from the required ________ on the bonds at the time the firm acquired them.

A)market value; coupon rate; market yield
B)market value; discount rate; coupon yield
C)maturity value; coupon rate; market yield
D)maturity value; discount rate; market yield
E)maturity value; discount rate; coupon yield

Question 38

Which of the following is/are true regarding securities classified as available-for-sale?

A)they must be tested for impairment and if they are impaired, the firm treats the unrealized loss in Accumulated Other Comprehensive Income as if it were realized.
B)they must be tested for impairment and if they are impaired, the firm treats the unrealized loss in Net Income as if it were realized.
C)they are not tested for impairment and do not effect Accumulated Other Comprehensive Income.
D)they are not tested for impairment and do not effect Net Income.
E)they must be tested for impairment and if they are impaired, the firm treats the unrealized loss in Retained Earnings as if it were realized.

Question 39

The provisions of IFRS require firms to classify marketable securities into which of the following categories except

A)held to maturity investments for which a firm has both the intent and the ability to hold to maturity-shown on the balance sheet at an amount based on acquisition cost, but subject to impairment.
B)debt and equity securities held as financial assets at fair value through profit or loss, shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income.
C)debt and equity securities held as available-for-sale financial assets, shown on the balance sheet at fair value, with unrealized changes in fair value of securities held at the end of the accounting period included in other comprehensive income, and realized changes in fair value included in net income when a firm sells the securities.
D)debt and equity securities held as available-for-sale financial assets, shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income.
E)choices a and b, only.

Question 40

Which of the following is not true regarding investments in securities available-for-sale?

A)Firms initially record investments in securities available-for-sale at acquisition cost, including transaction costs.
B)If a firm classifies debt securities as available-for-sale, it must amortize any difference between the purchase price and the maturity value of the debt over the remaining term to maturity.
C)The amortization of any difference between the purchase price and the maturity value of the debt makes interest revenue on these debt securities differ from the cash receipts for debt service payments.
D)On the date of each balance sheet, firms measure securities classified as available-for-sale at fair value.
E)The difference between amortized cost for debt securities or the carrying value for equity securities and the fair value of these securities is a realized holding gain or loss.

Question 41

The U.S.government will pay Edie Company $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Edie Company purchases the bonds, the market prices these bonds to yield Edie Company 6% annually (3% each six months).The bonds are classified as held to maturity and Edie Company would classify this investment as a(n) _____on its _____ because it intends to hold the securities for _____

A)current asset; balance sheet; less than one year
B)current asset; income statement; less than one year
C)noncurrent asset; balance sheet; more than one year
D)noncurrent asset; income statement; more than one year
E)current asset; statement of cash flows; less than one year

Question 42

The U.S.government will pay AirSys $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time AirSys purchases the bonds, the market prices these bonds to yield AirSys 6% annually (3% each six months).The bonds are classified as held to maturity. AirSys will pay an amount equal to _____ for the bonds.

A)present value of an annuity of $2.5 million for 10 periods plus the present value of $100 million paid at the end of 10 periods, both cash flows discounted at 3% per period
B)present value of an annuity of $5.0 million for 5 periods plus the present value of $100 million paid at the end of 5 periods, both cash flows discounted at 6% per period.
C)present value of an annuity of $2.5 million for 10 periods plus the present value of $100 million paid at the end of 10 periods, both cash flows discounted at 2.5% per period.
D)present value of an annuity of $5.0 million for 5 periods plus the present value of $100 million paid at the end of 5 periods, both cash flows discounted at 5% per period.
E)the future value of cash flows totaling $125 million

Question 43

Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000.
(Refer to the Marco Insurance) The journal entries to record the sale of trading securities at a gain on January 3, 2014.

A)Cash.................................................................405,000 Marketable Securities.................................................402,000
Realized Gain on Sale of Trading Securities.................3,000
B)Marketable Securities.................................... 402,000 Realized Gain on Sale of Trading Securities......3,000
Cash.......................................................................... 405,000
C)Cash.............................................................. 405,000 Marketable Securities................................................402,000
Unrealized Gain on Sale of Trading Securities.............3,000
D)Marketable Securities.......................................402,000 Unrealized Gain on Sale of Trading Securities....3,000
Cash......................................................................... 405,000
E)Cash................................................................ 405,000 Marketable Securities.................................................402,000
Realized Gain on Sale of
Securities Held to Maturity........................................ 3,000

Question 44

Using the amortization procedure for bonds, if an investor receives cash each period, it debits Cash and credits the Marketable Securities account.The result of this process is a new _____ (called the _____ for use in the computations during the next period. The bonds are classified as held to maturity.

A)market value; market price
B)carrying value; amortized cost
C)present value; present value of future cash flows
D)market value; present value of future cash flows
E)carrying value; present value of future cash flows

Question 45

U.S.GAAP and IFRS require firms to account for debt securities held-to-maturity that are deemed to be impaired.The investor recognizes (debits) _____ and reduces (credits) _____.

A)an impairment loss (included in other comprehensive income); the balance sheet carrying value of the investment
B)the balance sheet carrying value of the investment; an impairment loss (included in other comprehensive income)
C)the balance sheet carrying value of the investment; an impairment loss (included in net income)
D)an impairment loss (included in net income); the balance sheet carrying value of the investment
E)reserve for impairment loss (included in other comprehensive income); the balance sheet reserve for net realizable value of investments

Question 46

Firms sometimes acquire debt securities with the intention of holding these securities until maturity.U.S.GAAP and IFRS require firms to measure marketable securities for which firms have an intent and ability to hold to maturity by _____.A firm initially records these debt securities at acquisition cost.This acquisition cost will differ from the maturity value of the debt if the coupon rate on the bonds differs from the _____.

A)the imputed interest method; required market yield on the bonds at the time the firm acquired them
B)the straight-line method; required market yield on the bonds at the time the firm acquired them
C)the effective interest method; required market yield on the bonds at the time the firm acquired them
D)the effective interest method; required market yield on the bonds at the time the bonds were originally issued.
E)the straight-line method; required market yield on the bonds at the time the bonds were originally issued.

Question 47

A firm records debt securities purchases at the acquisition cost.The firm must use the _____ method to amortize any difference between acquisition cost and maturity value over the life of the debt as an adjustment to _____

A)market value, interest revenue
B)market value, interest expense
C)effective interest; interest revenue
D)effective interest; interest expense
E)maturity value; interest expense

Question 48

The U.S.government will pay SB Amos $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.Assume that at the time SB Amos purchases the bonds, the market prices these bonds to yield SB Amos 6% annually (3% each six months).The bonds are classified as held to maturity.SB Amos will pay an amount equal to _____ for the bonds.

A)$95,734,898
B)100,000,000
C)105,567,432
D)110,987,012
E)116,802,503

Question 49

Firms include trading securities in _____ in the _____ section of the _____.

A)held-to-maturity securities; current assets; balance sheet
B)marketable securities; noncurrent assets; statement of cash flows
C)marketable securities; current assets; balance sheet
D)held-to-maturity securities; noncurrent assets; balance sheet
E)held-to-maturity securities; current assets; statement of cash flows

Question 50

Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000.
(Refer to the Marco Insurance) The journal entries to measure trading securities at fair value and recognize unrealized holding gain in net income on December 31, 2013.

A)Cash.....................................................2,000 Marketable Securities.....................................2,000
B)Other Comprehensive Income.................2,000 Marketable Securities.....................................2,000
C)Marketable Securities..............................2,000 Other Comprehensive Income........................2,000
D)Marketable Securities..............................2,000 Unrealized Holding Gain on
Trading Securities........................................2,000
E)Marketable Securities..............................2,000 Realized Holding Gain on
Trading Securities.........................................2,000

Question 51

Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000.
(Refer to Marco Insurance.) The total income from the purchase and sale of these securities is

A)$5,000
B)$4,000
C)$3,000
D)$2,000
E)$1,000

Question 52

Using the amortization procedure, a holder of the debt securities (the investor) records interest revenue each period by debiting the _____ and crediting _____ which after closing entries increases _____ The bonds are classified as held to maturity.

A)Marketable Securities account; Interest Revenue; Retained Earnings
B)Interest Revenue; Retained Earnings; Marketable Securities account
C)Retained Earnings; Marketable Securities account; Interest Revenue
D)Marketable Securities account; Interest Expense; Retained Earnings
E)Common Stock account; Interest Expense; Retained Earnings

Question 53

ValleyView Company ValleyView Company acquires common stock of Kansas Enterprises for $400,000 on November 1, 2013, and designates this investment as available-for-sale.The fair value of these shares is $435,000 on December 31, 2013.ValleyView sells these shares on August 15, 2014, for $480,000.
(Refer to ValleyView.) The journal entry to measure securities available-for-sale on December 31, 2013 is:

A)Unrealized Holding Gain on Securities Available-for-Sale................35,000
Marketable Securities.....................................35,000
B)Unrealized Holding Gain on Securities Available-for-Sale................35,000
Common Stock...............................................35,000
C)Common Stock.......................................35,000 Unrealized Holding Gain on
Securities Available-for-Sale.......................35,000
D)Marketable Securities............................35,000 Cash..............................................................35,000
E)Marketable Securities........................... 35,000 Unrealized Holding Gain on
Securities Available-for-Sale......................35,000

Question 54

The U.S.government will pay Bringle $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Bringle purchases the bonds, the market prices these bonds to yield Bringle 6% annually (3% each six months).The bonds are classified as held to maturity.Bringle will record the following entry.

A)Marketable Securities..............................95,734,898 Cash..........................................................................95,734,898
B)Marketable Securities............................100,000,000 Cash........................................................................100,000,000
C)Cash........................................................95,734,898 Marketable Securities...............................................95,734,898
D)Cash.................................................... 100,000,000 Marketable Securities...............................................95,734,898
E)Cash.......................................................105,907,059 Marketable Securities ............................................105,907,059

Question 55

The U.S.government will pay Allen $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Allen purchases the bonds, the market prices these bonds to yield Allen 6% annually (3% each six months).The bonds are classified as held to maturity.Because the market requires a _____ than the _____ on the bonds, the bonds will sell on the market for a _____.

A)lower yield; stated interest rate; premium
B)lower yield; market interest rate; premium
C)higher yield; stated interest rate; discount
D)lower yield; stated interest rate; discount
E)market yield; stated interest rate; premium

Question 56

Using the amortization procedure, the holder of the debt securities (the investor) records interest revenue each period at an amount equal to the _____ at the start of the period multiplied by the _____ applicable to that debt on the day the firm acquired the debt.The bonds are classified as held to maturity.

A)carrying value of the debt; market rate of interest
B)market value of the debt; market rate of interest
C)carrying value of the debt; applicable federal rate of interest
D)present value of the debt; market rate of interest
E)present value of the debt; applicable federal rate of interest

Question 57

The U.S.government will pay Turner Company $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Turner Company purchases the bonds, the market prices these bonds to yield Turner Company 6% annually (3% each six months).The bonds are classified as held to maturity. Because the market requires a _____ than the _____ on the bonds, the bonds will sell on the market for a _____

A)lower yield; stated interest rate; premium
B)lower yield; market interest rate; premium
C)higher yield; stated interest rate; discount
D)lower yield; stated interest rate; discount
E)market yield; stated interest rate; premium

Question 58

The U.S.government will pay Simpson Company $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Simpson Company purchases the bonds, the market prices these bonds to yield Simpson Company 6% annually (3% each six months).The bonds are classified as held to maturity and Simpson Company would classify this investment as a(n) _____on its _____ because it intends to hold the securities for _____.

A)current asset; balance sheet; less than one year
B)current asset; income statement; less than one year
C)noncurrent asset; balance sheet; more than one year
D)noncurrent asset; income statement; more than one year
E)current asset; statement of cash flows; less than one year

Question 59

ValleyView Company ValleyView Company acquires common stock of Kansas Enterprises for $400,000 on November 1, 2013, and designates this investment as available-for-sale.The fair value of these shares is $435,000 on December 31, 2013.ValleyView sells these shares on August 15, 2014, for $480,000.
(Refer to ValleyView.) The journal entry to record acquisition of securities available-for-sale on November 1, 2013 is:

A)Cash ......................400,000 Marketable Securities ..............400,000
B)Cash ......................400,000 Common Stock ............. . . ..400,000
C)Common Stock .............400,000 Cash ..................... .. 400,000
D)Marketable Securities ........400,000 Cash ....................... 400,000
E)Marketable Securities ........400,000 Common Stock ............. . . ..400,000

Question 60

Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000.
(Refer to the Marco Insurance) The journal entries to record acquisition of trading securities on December 28, 2013.

A)Cash.....................................................400,000 Marketable Securities.....................................400,000
B)Other Comprehensive Income..............400,000 Marketable Securities.....................................400,000
C)Marketable Securities..........................400,000 Other Comprehensive Income.......................400,000
D)Marketable Securities..........................400,000 Cash................................................................400,000
E)Marketable Securities..........................400,000 Net Income.....................................................400,000

Question 61

ValleyView Company ValleyView Company acquires common stock of Kansas Enterprises for $400,000 on November 1, 2013, and designates this investment as available-for-sale.The fair value of these shares is $435,000 on December 31, 2013.ValleyView sells these shares on August 15, 2014, for $480,000.
(Refer to ValleyView.) The total income from the purchase and sale of these securities is _____ reported _____

A)$80,000; in the year of sale.
B)$80,000; as they occur.
C)$35,000; in the year of sale.
D)$35,000; as they occur.
E)$45,000; in the year of sale

Question 62

Information concerning Manley Company's portfolio of debt securities at May 31, Year 6, and May 31, Year 7, is presented below.All of the debt securities were purchased by Manley during June, Year 5.Prior to June, Year 5, Manley had no investments in debt or equity securities.
$\begin{array}{llc}\text { As of May } 31, \text { Year } 6 & \text { Amortized Cost } &\text { Fair Value }\\\hline\text { CZ Company bonds } & \$ 164,526 & \$ 168,300 \\\text { Jerry Industry bonds } & 204,964 & 205,200 \\\text { Barley Inc. bonds } & 305,785 & 285,200 \\\hline&\$675,275&\$658,700\\\\\text { As of May } 31, \text { Year } 7 & \text { Amortized Cost } &\text { Fair Value }\\\hline\text { CZ Company bonds } & \$ 152,565 & \$ 147,600 \\\text { Jerry Industry bonds } & 193,800 & 204,500 \\\text { Barlev Inc. bonds } & 289,130 & 291,400\\&\$635,495&\$643,500\end{array}$ (CMA adapted, Jun 97 #11) Refer to the Manley Company example.Assuming that the above securities are properly classified as available-for-sale securities under U.S.GAAP, the unrealized holding gain or loss as of May 31, Year 7, would be

A)recognized as a $8,005 unrealized holding gain on the income statement.
B)recognized as other comprehensive income with a year-end credit balance of $8,005 in the Unrealized Holding Gain/Loss account.
C)recognized as a $24,580 unrealized holding loss on the income statement.
D)recognized as a $24,580 unrealized holding loss in retained earnings.
E)recognized as other comprehensive income with a year-end credit balance of $8,005 in retained earnings.

Question 63

ValleyView Company ValleyView Company acquires common stock of Kansas Enterprises for $400,000 on November 1, 2013, and designates this investment as available-for-sale.The fair value of these shares is $435,000 on December 31, 2013.ValleyView sells these shares on August 15, 2014, for $480,000.
(Refer to the ValleyView.) The journal entries to record the sale of securities available-for-sale on August 15, 2013.

A)Cash.....................................................480,000 Unrealized Holding Gain on
Securities Available-for-Sale.......... 35,000
Marketable Securities.................................... 435,000
Realized Gain on Sale of Securities
Available-for-Sale...................................... 80,000
B)Marketable Securities..........................435,000 Realized Gain on Sale of Securities
Available-for-sale................................ 80,000
Cash............................................................ 480,000
Unrealized Holding Gain on
Securities Available-for-Sale....................... 35,000
C)Cash....................................................480,000 Realized Holding Gain on
Securities Available-for-Sale............. 35,000
Marketable Securities.................................... 435,000
Unrealized Gain on Sale of Securities
Available-for-sale.......................................... 80,000
D)Marketable Securities.........................435,000 Unrealized Gain on Sale of Securities
Available-for-sale................................80,000
Cash............................................................. 480,000
Realized Holding Gain on
Securities Available-for-Sale....................... 35,000
E)none of the above

Question 64

Short-term marketable equity securities were acquired on July 1, Year 1 for $23,000, and classified as available-for-sale.On December 31, Year 1, the securities had a market value of $24,000, determined as follows: What adjustment is required to reflect December 31, Year 1 fair value?

A)unrealized holding gain on available-for-sale securities of $1,000, reported in other comprehensive income
B)unrealized holding gain on available-for-sale securities of $1,000, reported in the income statement
C)realized holding gain on available-for-sale securities of $1,000, reported in the income statement
D)realized holding gain on available-for-sale securities of $1,000, reported in other comprehensive income
E)realized holding gain on available-for-sale securities of $1,000, reported in retained earnings

Question 65

Which of the following would most likely not be classified as Investment in Securities appearing between the Current Assets and the Property, Plant and Equipment sections of the balance sheet?

A)United States Treasury Notes that the firm expects to hold for less than one year
B)investments in securities for the purpose of exerting significant influence over the investee's dividend payout policy
C)investments in securities for the purpose of exerting significant influence over the investee's day-to-day operations
D)all of the above
E)none of the above

Question 66

U.S.GAAP classifies securities that are neither debt securities held to maturity or trading securities as

A)securities available-for-sale.
B)securities held for short term profit potential.
C)securities held for speculation.
D)securities held for speculation.
E)derivative securities.

Question 67

Lightner Company decides that an available-for-sale security is impaired as of December 31, 2013 and has an unrealized loss of $5,000.The journal entry to record an impairment loss on securities available-for-sale would be:

A)Unrealized Holding Loss on Securities Available-for-Sale................5,000
Impairment Loss..........................................5,000
B)Impairment Loss................................... 5,000 Unrealized Holding Loss on
Securities Available-for-Sale.................... 5,000
C)Realized Holding Loss on Securities Available-for-Sale................5,000
Impairment Loss....................................... 5,000
D)Impairment Loss .................................. 5,000 Realized Holding Loss on
Securities Available-for-Sale.....................5,000
E)Impairment Loss.................................. 5,000 Retained Earnings...................................... 5,000

Question 68

U.S.GAAP requires firms holding minority, passive investments in debt and equity securities as securities available-for-sale that the firm intends to sell within one year to report them as

A)Investments in Securities in the Current asset section of the balance sheet.
B)Investments in Securities in the Long-term asset section of the balance sheet.
C)Marketable Securities in the Current asset section of the balance sheet.
D)Marketable Securities in the Long-term asset section of the balance sheet.
E)none of the above

Question 69

Which of the following is/are elements of a derivative?

A)A derivative has one or more underlyings.An underlying is an observable variable such as a specified interest rate, or commodity price, or foreign exchange rate.
B)A derivative has one or more notional amounts.A notional amount is a number of currency units, bushels, shares, or other units specified in the contract.
C)A derivative sometimes requires no initial investment.
D)Derivatives typically require, or permit, net settlement, which means that when the counterparties settle the derivative contract, one of the contracting parties pays the other the fair value of the contract.
E)all of the above

Question 70

U.S.GAAP requires firms holdingtrading securities to report unrealized holding gains and losses on the investments

A)in the income statement.
B)as an adjustment to the Capital stock section of the balance sheet.
C)in the footnotes to the financial statements.
D)as an adjustment to the Treasury stock section of the balance sheet.
E)none of the above

Question 71

U.S.GAAP requires firms holding debt and equity securities as securities available-for-sale to treat unrealized holding gains or losses each period as

A)an increase or decrease in Accumulated Other Comprehensive Income (a separate shareholder equity account).
B)as an increase or decrease in reported Net Income for the period.
C)as an increase or decrease in reported Retained Earnings for the period.
D)a separate footnote disclosure to the financial statements.
E)none of the above

Question 72

A financial instrument that obtains its value from some other financial item is known as a(n)

A)clone.
B)mutual fund.
C)derivative.
D)stock exchange.
E)underlying.

Question 73

(CMA adapted, Jun 97 #12) Refer to the Manley Company example.Assuming that the above securities are properly classified as held-to-maturity securities under U.S.GAAP, the unrealized holding gain or loss as of May 31, Year 7, would

A)be recognized as a $8,005 unrealized holding gain on the income statement.
B)be recognized as other comprehensive income with a year-end credit balance of $8,005 in the Unrealized Holding Gain/Loss account.
C)be recognized as a $24,580 unrealized holding loss on the income statement.
D)be recognized as a $24,580 unrealized holding loss in retained earnings.
E)not be recognized.

Question 74

Which of the following would most likely be classified as Marketable Securities in the Current Assets section of the balance sheet?

A)United States Treasury Notes that the firm expects to hold for less than one year
B)investments in securities for the purpose of exerting significant influence over the investee's dividend payout police
C)investments in securities for the purpose of exerting significant influence over the investee's licensing of a patent
D)investments in securities for the purpose of exerting control over the investee's day-to-day operations
E)none of the above

Question 75

U.S.GAAP requires firms holding securities available-for-sale to value the securities on the balance sheet after acquisition at

A)an amount based on acquisition cost.
B)market value, with changes in market value of securities held at the end of the accounting period reported each period in income.
C)market value, with changes in market value of securities held at the end of the accounting period not affecting reported income until the firm sells, or otherwise disposes of, the securities.
D)market value, with changes in market value of securities held at the end of the accounting period reported each period in retained earnings.
E)present value of future cash flows, with changes in market value of securities held at the end of the accounting period reported each period in retained earnings.

Question 76

According to U.S.GAAP, firms holding debt securities with a positive intent and ability to hold to maturity display such securities in the Investments section of the balance sheet at

A)amortized acquisition cost .
B)market value.
C)maturity value.
D)future value of future cash flows.
E)present value of future cash flows.

Question 77

Which of the following items appears in the balance sheet at amortized acquisition cost?

A)debt securities held to maturity
B)trading securities
C)available-for-sale securities
D)derivatives
E)securities available for liquidation

Question 78

According to U.S.GAAP,firms holding debt and equity securities for short-term profit potential

A)report the investments on the balance sheet at market value.
B)initially record the investments at acquisition cost.
C)report unrealized holding gains and losses on the investments in the income statement.
D)all of the above.
E)none of the above.

Question 79

U.S.GAAP requires firms holding debt and equity securities, as well as derivatives, as trading securities to value the securities on the balance sheet after acquisition at

A)an amount based on acquisition cost.
B)market value, with changes in market value of securities held at the end of the accounting period reported each period in income.
C)market value, with changes in market value of securities held at the end of the accounting period not affecting reported income until the firm sells, or otherwise disposes of, the securities.
D)present value of future cash flows, with changes in present value of future cash flows of securities held at the end of the accounting period reported each period in income.
E)present value of future cash flows, with changes in present value of future cash flows of securities held at the end of the accounting period not affecting reported income until the firm sells, or otherwise disposes of, the securities.

Question 80

Which of the following is/are not true?

A)A derivative is a financial instrument whose value changes in response to changes in an underlying observable variable, such as a stock price, an interest rate, a currency exchange rate, or a commodity price.
B)Unlike equity securities, which have no definite settlement date, firms settle a derivative at a date that the terms of the instrument specify.
C)A derivative requires an investment that is small, relative to the investment in a contract that is similarly exposed to changes in market factors, or requires no investment at all.
D)Firms use derivative instruments to hedge the risks that arise from changes in interest rates, foreign exchange rates, and commodity prices.
E)The general idea behind hedging is that changes in the fair value of the derivative instrument map the changes in the fair value of an asset or liability or changes in future cash flows, thereby multiplying the effects of those changes.