The investment category for which the investor's "positive intent and ability to hold" is important is:
a. Securities reported under the equity method.
b. Trading securities.
c. Securities classified as held to maturity.
d. Securities available for sale.
answer
c. held to maturity.
question
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 answer choices are correct.
answer
a. Long-term debenture bonds.
question
Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet?
a. Debt securities held as available for sale securities.
b. Debt securities held to maturity.
c. Bonds held as trading securities.
d. All of these answer choices are reported at fair value.
answer
b. Debt securities held to maturity.
question
In which investment category are fair values and subsequent growth of an investee not relevant for reporting?
a. Securities reported under the equity method.
b. Trading securities.
c. Held-to-maturity securities.
d. Securities available for sale.
answer
c. Held-to-maturity securities.
question
Which category of securities is presented on the balance sheet at amortized cost?
a. Securities available for sale.
b. Equity investments of less than 20 percent ownership.
c. Held-to-maturity securities.
d. Trading securities.
answer
c. Held-to-maturity securities.
question
In 2016, Osgood Corporation purchased $4 million of 10-year municipal bonds at face value. On December 31, 2018, the bonds had a fair value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2018, balance sheet and the 2018 income statement would show the following:
Investment in municipal bonds Income statement loss on investments
a. 3,600,000 0
b. 3,600,000 400,000
c. 4,000,000 400,000
d. 4,000,000 0
answer
b. 3,600,000 400,000
The unrealized holding loss ($400,000) on transfer to new category of trading securities is included in income.
question
On January 1, 2018, 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 semiannually 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, 2018 journal entry to record the second period of interest, Rupar would record a credit to interest revenue of:
a. $3,336.
b. $3,325.
c. $3,000.
d. $3,500.
answer
a. $3,336.
1/1/2018 Investment 100,000
Discount on bond investment 5,000
Cash 95,000
6/30/2018 Cash (.06/2) x ($100,000) 3,000
Discount on bond investment (difference) 325
Interest revenue (.07/2) x ($100,000 - $5,000) 3,325
12/31/2018 Cash (.06/2) x ($100,000) 3,000
Discount on bond investment (difference) 336
Interest revenue (.07/2) x ($100,000-$5,000+325) 3,336
question
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 holding gains and losses that have not already been recognized 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.
answer
b. Reclassify the investment as held to maturity and immediately recognize in net income all unrealized holding gains and losses that have not already been recognized as of the reclassification date.
question
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 holding 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.
answer
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.
question
Bonds 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.
answer
d. Trading securities.
question
The income statement reports changes in fair value for which type of investment securities?
a. Securities reported under the equity method.
b. Trading securities.
c. Held-to-maturity securities.
d. Available-for-sale securities.
answer
b. Trading securities.
question
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
answer
b. On each reporting date.
question
Trading securities, by definition, are properly classified in the balance sheet as:
answer
c. Current assets.
question
Unrealized holding gains and losses on trading securities are included in earnings because:
answer
a. They measure the success or failure of taking advantage of short-term price changes.
question
In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered:
answer
b. Operating activities.
question
Nichols Enterprises has an investment in 250 bonds of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott bonds are publicly traded, and The Wall Street Journal quotes a price for those bonds of $1,000 per bond, but Nichols believes the market has not appreciated the full value of the Elliott bonds and that a more accurate price is $1,200 per bond. Nichols should carry the Elliott investment on its balance sheet at:
answer
b. $250,000.
question
What is the effect on a company's cash flows and reported profit from accounting for an investment as a trading security as compared to accounting for it as an available-for-sale security?
Effect on Total
Cash Flows Effect on
Net Income
answer
c. Little, if any, effect Significant effect
question
The fair value of debt securities not regularly traded can be most reasonably approximated by:
answer
a. Calculating the discounted present value of the principal and interest payments.
question
All investments in debt securities that don't fit the definitions of the other reporting categories are classified as:
answer
b. Securities available for sale.
question
Investments in debt securities available for sale are reported at:
answer
d. Fair value on the reporting date.
question
All investment securities are initially recorded at:
.
answer
a. Cost.
question
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?
answer
a. Securities available for sale.
question
GAAP regarding fair value accounting for investments in equity securities will generally apply to an investment when the percentage of ownership of another company is:
answer
a. Less than 20%.
question
When an investor accounts for an investment in common stock at fair value through net income, cash dividends are classified by the investor as:
answer
d. Dividend income.
question
When a debt security is appropriately carried and reported as securities available for sale, a gain should be reported in the income statement:
answer
d. Only when the security is sold.
question
Unrealized holding gains and losses on securities available for sale would have the following effects on accumulated other comprehensive income:
answer
d. Increase Decrease
question
Investments in securities to be held for an unspecified period of time are reported at:
answer
d. Fair value.
question
Unrealized holding gains and losses on securities available for sale would have the following effects on retained earnings:
Gains Losses
a. Increase No change
b. No change Decrease
c. No change No change
d. Increase Decrease
answer
c. No change No change
question
Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2018. In December, Handy announced $200,000 net income for 2018 and declared and paid a cash dividend of $2 per share on all 200,000 shares of its outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2018 would be:
answer
c. $56,000.
Ownership share = 28,000/200,000 = 14%, so the equity method is not appropriate.
28,000 shares x $2.00 per share = $56,000
question
On January 2, 2017, Howdy Doody Corporation purchased 12% of Ranger Corporation's common stock for $50,000. Ranger's net income for the years ended December 31, 2017 and 2018, were $10,000 and $50,000, respectively. During 2018, Ranger declared and paid a dividend of $60,000. There were no dividends in 2017. On December 31, 2017, the fair value of the Ranger stock owned by Howdy Doody had increased to $70,000. How much should Howdy Doody show in the 2018 income statement as income from this investment?
answer
d. $27,200.
Investment revenue from dividends:
$60,000 x 12% = $ 7,200
Increase in fair value:
$70,000 - 50,000 = 20,000
Total = $27,200
question
Jeremiah Corporation purchased debt securities during 2018 and classified them as securities available for sale:
Security Cost Fair Value,
12/31/2018
A $40,000 $49,000
B 70,000 66,000
C 28,000 39,000
All declines are considered to be temporary. How much gain will be reported by Jeremiah Corporation in the December 31, 2018, income statement relative to the portfolio?
answer
a. $0.
Unrealized holding gains and losses are not included in earnings for securities available for sale.
question
Dim Corporation purchased 1,000 bonds of Witt Corporation in 2015 for $800 per bond and classified the investment as securities available for sale. The value of these holdings was $400 per bond on December 31, 2016, and $300 on December 31, 2017. During 2018, Dim sold all of its Witt bonds at $350 per share.
70. In its 2018 income statement, Dim would report:
answer
c. A loss on the sale of investments of $450,000.
As part of year-end fair-value adjustment, Dim would remove any previously recorded fair-value adjustment and accumulated other comprehensive income associated with the Witt investment.
question
If Dim records unrealized holding gains and losses up to the moment of sale, what would be the amount of reclassification adjustment that Dim would record upon sale?
answer
d. A credit of $450,000.
Entry 1 - Updating the fair value adjustment
Need to move from a fair-value adjustment of ($400,000) to ($300,000)
FV Adjustment
Balance on 12/31/2017 ($300,000)
± Adjustment needed to update fair value ?
Balance needed on date of sale ($350,000)
Fair-Value Adjustment
12/31/2017 $300,000
Change needed $50,000
Balance on date of sale $350,000
Fair value adjustment 50,000
Unrealized holding gain - OCI 50,000
Entry 2 - Reverse previously recognized unrealized holding gains and losses
Fair value adjustment (account balance) 450,000
Reclassification adjustment - OCI 450,000
Entry 3 - Record the sale transaction
Cash 350,000
Loss on sale of investments 450,000
Investment in Witt 800,000
(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
On January 1, 2018, Everglade Company purchased the following debt securities and properly accounted for them as securities available for sale:
Security Cost Fair value on 12/31/2018
ABC $40,000 $55,000
DEF 72,000 65,000
XYZ 16,000 20,000
All declines in value are considered temporary. What amount should the Everglade Company report relative to these securities in its 2018 statement of other comprehensive income?
answer
c. $12,000 net unrealized holding gain
question
A weakness of ______ is that firms can increase or decrease net income by choosing to sell particular investments with net unrealized holding gains or unrealized holding losses.
answer
a. the available-for-sale approach
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