Deck 12: Investments

Question 1

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.

Answer 1

False

Question 2

Net unrealized holding gains (losses) are reported in the income statement for trading securities.

Answer 2

True

Question 3

Purchases and sales of securities are always reported as investing activities in a statement of cash flows.

Answer 3

False

Question 4

When a creditor's receivable becomes impaired due to a troubled debt restructuring, the receivable is remeasured based on the discounted present value of currently expected cash flows at the loan's original effective rate.

Question 5

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.

Question 6

The equity method is in many ways a partial consolidation.

Question 7

Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee.

Question 8

Selecting the fair value option for an available-for-sale investment is equivalent to reclassifying that investment as a trading security.

Question 9

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 these are correct.

Question 10

Unrealized gains and losses are included in other comprehensive income for securities that are classified as available for sale.

Question 11

Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets.

Question 12

The fair value option can not be elected for a significant-influence investment, because those must be accounted for under the equity method.

Question 13

All securities considered available for sale should be reported as current assets in a classified balance sheet.

Question 14

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.

Question 15

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.

Question 16

When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost.

Question 17

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 these are reported at fair value.

Question 18

Both debt and equity securities can be categorized as trading securities.

Question 19

Both trading securities and securities available for sale are reported at their fair values.

Question 20

All investments in debt securities whose fair values are not readily determinable are carried at historical cost.

Question 21

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.

Question 22

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.

Question 23

On January 1, 2009, 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, 2009 journal entry to record their second period of interest, they would record a credit to interest revenue of:

A)$3336.
B)$3325.
C)$3000.
D)$3500.

Question 24

What total unrealized holding gain would Beresford report in its 2009 income statement relative to its investment securities?

A)$55,900
B)$36,000
C)$80,900
D)$48,200 This is the difference between the fair value of trading securities at 12/31/09 and at 12/31/08.

Question 25

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. Yet, 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 their 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.

Question 26

Trading securities are most commonly found on the books of:

A)Oil companies.
B)Manufacturing companies.
C)Banks.
D)Foreign subsidiaries.

Question 27

What would be the balance in Beresford's accumulated other comprehensive income with respect to their investments in its 12/31/09 balance sheet (ignore taxes)?

A)$55,100
B)$26,500
C)$10,400
D)None of these is correct.This is the cumulative increase in fair value above cost for its available-for-sale securities.

Question 28

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.

Question 29

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.

Question 30

If the fair value of a held-to-maturity investment 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 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 treated the same way it would be treated if the decline in fair value was viewed as temporary.

Question 31

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.

Question 32

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.

Question 33

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.

Question 34

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.

Question 35

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.

Question 36

Trading securities, by definition, are properly classified in the balance sheet as:

A)Shareholders' equity.
B)Intangibles.
C)Current assets.
D)Other assets.

Question 37

Which category completely excludes equity securities?

A)Securities available for sale.
B)Consolidating securities.
C)Held-to-maturity securities.
D)Trading securities.

Question 38

What balance sheet amount would Beresford report for its total investment securities at 12/31/08?

A)$637,000
B)$644,500
C)$645,400
D)None of these is correct.The held-to-maturity securities are reported at amortized cost, and the others are reported at fair value.

Question 39

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.

Question 40

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 their 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.

Question 41

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)Noncash financing activities.

Question 42

All investment securities are initially recorded at:

A)Cost.
B)Present value.
C)Equity value.
D)None of these is correct.

Question 43

On January 2, 2008, 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, 2008 and 2009, were $10,000 and $50,000, respectively. During 2009, Ranger declared and paid a dividend of $60,000. There were no dividends in 2008. On December 31, 2008, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2009 income statement as income from this investment?

A)$26,000.
B)$ 7,200.
C)$20,000.
D)$27,200.Investment revenue from dividends: $60,000 12% = $7,200
Any change in fair value during 2009 would be reflected in shareholders' equity but would not affect net income.

Question 44

Hawk Corporation purchased ten thousand shares of Diamond Corporation stock in 2006 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2007 and $65 on December 31, 2008. During 2009, Hawk sold all of its Diamond stock at $70 per share. In its 2009 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.In 2006-2008, Hawk accumulated an unrealized gain and fair value adjustment of ($65 50) 10,000 shares = $150,000.An additional increase of $50,000 occurred in 2009, so the total gain realized in the income statement would be $200,000.

Question 45

Jeremiah Corporation purchased securities during 2009 and classified them as securities available for sale: All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2009, income statement relative to the portfolio?

A)$0.
B)$16,000.
C)$20,000.
D)None of these is correct.

Question 46

Hobson Company bought the securities listed below during 2008. These securities were classified as trading securities. In its December 31, 2008, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of December 2009 are as follows: What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2009?

A)$41,000.
B)$54,000.
C)$13,000.
D)$ 0.

Question 47

Dim Corporation purchased one thousand shares of Witt Corporation stock in 2006 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2007, and $300 on December 31, 2008. During 2009, Dim sold all of its Witt stock at $350 per share. On their 2009 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.(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.)

Question 48

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.

Question 49

On January 1, 2009, Everglade Company purchased the following securities and properly accounted for them as securities available for sale: 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.

Question 50

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 market 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.

Question 51

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.

Question 52

The rules of FASB Statement No. 115, "Accounting for Certain Debt and Equity Securities," generally apply when the percentage of ownership of another company is:

A)Less than 20%.
B)20% to 50%.
C)Over 50%.
D)Exactly 100%.

Question 53

On January 1, 2009, 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, 2009. 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, 2009?

A)$284,400.
B)$300,000.
C)$315,600.
D)$360,000.8,000 $45 = $360,000 Trading securities are reported at fair value.

Question 54

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.

Question 55

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.

Question 56

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.

Question 57

Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2008, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2008. Goofy reclassified this investment as trading securities in December of 2009 when the market value had risen to $125,000. What effect on 2009 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.Unrealized loss of $32,000 recorded in an allowance during 2008, but not included in the income statement.When the shares are reclassified in 2009, the $32,000 goes into the income statement.In addition, $7,000 unrealized gain for 2009 goes directly to income.

Question 58

If the fair value of an available-for-sale investment 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 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 treated the same way it would be treated if the decline in fair value was viewed as temporary.

Question 59

When an impairment of securities available for sale occurs for a reason that is judged to be "other than temporary," the investment is written down to its fair market 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.

Question 60

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.

Question 61

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".

Question 62

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.

Question 63

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.

Question 64

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 they list the investment at $100,000 on their 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.fair value = $100,000 less unrealized gain of $20,000 = cost of $80,000.

Question 65

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 these is correct.

Question 66

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 2008 and 2009, respectively. During 2009 Clor recognized $80,000 of net income and paid dividends of $30,000. Assuming that Bloomfield owned the same percentage of Clor throughout 2009, their percentage ownership must have been:

A)15%.
B)18.75%.
C)30%.
D)50%.$150,000 + X%($80,000 $30,000) = $165,000, X = 30%.

Question 67

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 these is correct.None of the transactions increases the owners' equity of the investee.

Question 68

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 these.

Question 69

The Guitar World (TGW) holds an investment that increased in fair value over 2009, 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 their 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 their deferred tax liability.

Question 70

Sloan Company has owned an investment during 2009 that has increased in fair value. After all closing entries for 2009 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.unrealized gains end up in retained earnings for trading securities and AOCI for available-for-sale securities, but total shareholders' equity is the same.

Question 71

A weakness of ___(insert from 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.under the available-for-sale approach, unrealized gains and losses are accumulated in AOCI and only recognized in income when the investment is sold.

Question 72

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.

Question 73

Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2009. In December, Hart announced $200,000 net income for 2009 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 2009 would be:

A)$ 0.
B)$32,000.
C)$56,000.
D)None of these is correct.Ownership share = 28,000/200,000 = 14%, so neither the equity method nor consolidation is appropriate.28,000 shares $2.00 per share = $56,000

Question 74

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.Other comprehensive income will be decreased but net income will be increased, so the total effect on comprehensive income is no change.

Question 75

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.

Question 76

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.

Question 77

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 these are correct.

Question 78

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.

Question 79

If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company:

A)Would record dividends received from Son Company as investment revenue.
B)Would increase its investment account when Son Company declares dividends.
C)Would record 40% of the net income of Son Company as investment income each year.
D)All of these are correct.

Question 80

Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2009. Jack can significantly influence Jill. On December 10, 2009, 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 2009 relative to its investment in Jill?

A)$1 000,000.
B)$1,200,000.
C)$1,400,000.
D)$1,500,000.Carrying value before net loss: ($1,500,000 (20% $1,000,000)) = $1,300,000
Jack's share of net loss would be recognized in full: 20% $6,000,000 = $1,200,000.