Question 1

On its December 31, 20X1, statement of ﬁnancial position, Lumilite Co. reported its temporary investment in equity securities, under the fair value through net income method at $330,000. At December 31, 20X2, the fair value of the securities was $350,000. What should Lumilite report on its 20X2 statement of earnings because of the increase in fair value of the investments in 20X2?
A) $0
B) Unrealized gain of $20,000
C) Loss on investments of $10,000
D) Investment income of $20,000

Accepted Answer

Under the fair value through net income (FVTNI) method, changes in fair value of equity securities are recognized in the statement of earnings. Therefore, the increase in fair value from $330,000 to $350,000, which is $20,000, should be reported as investment income on the statement of earnings for 20X2.

Question 2

At December 31, 20X1, Prescott Corp. has the following equity securities (no significant influence) that were purchased earlier this year, its first year of operation: 
$$\begin{array} { | l | r | r | } 
\hline & \text { Cost } & \text { Market } \
\hline \text { Security A } & \$ 80,000 & \$ 83,000 \
\hline \text { Security B } & \$ 112,000 & \$ 124,000 \
\hline
\end{array}$$ If the investments are accounted for under the fair value through net income method the aggregate book value of the investment accounts should:
A) be increased by $15,000
B) be decreased by $15,000
C) Be decreased by $32,000
D) Remain unchanged

Accepted Answer

Under the fair value through net income method, investments are adjusted to their fair market value at the end of each reporting period, with gains or losses recognized in net income. The aggregate increase in market value is $15,000 ($3,000 for Security A and $12,000 for Security B), so the book value of the investments should be increased by this amount.

Question 3

Which of the following statements is correct?
A) Any unrealized holding gain or loss on investments in trading securities is reported on the income statement.
B) Any unrealized holding gain or loss on investments in available-for-sale securities is reported on the income statement.
C) All unrealized gains and losses are reported on the income statement regardless of the method used to account for the investment.
D) Any unrealized holding gain or loss on investments in trading securities or in available-for- sale securities is reported on the income statement.

Accepted Answer

Unrealized holding gains or losses on trading securities are reported on the income statement because these securities are held primarily for sale in the near term, and their fair value changes are considered part of the operating results of the period. In contrast, unrealized gains or losses on available-for-sale securities are reported in other comprehensive income, not on the income statement.

Question 4

Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false?
A) Since the bonds were issued at a premium, the cash interest will be greater than interest revenue.
B) Since the bonds were issued at a premium, the book value of the bond investment will decrease.
C) The bond investment must be accounted for using the held-to-maturity classiﬁcation.
D) The company would recognize unrealized gains or losses on the bonds under the fair value approach within the income statement.

Accepted Answer

Since Miller intends to hold the bonds to maturity, they are classified as held-to-maturity and are not subject to fair value adjustments in the income statement. Unrealized gains or losses are not recognized for held-to-maturity securities.

Question 5

Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of the following is true?
A) The investment would be accounted for using the equity method.
B) The investment would be accounted for by consolidation.
C) The investment would be accounted for under the market value method.
D) The investment would be accounted for under the amortized cost method.

Accepted Answer

Since Piano Company owns more than 50% of the voting common stock shares of Keys Corporation, it has control over Keys Corporation. This level of ownership typically requires the investment to be accounted for by consolidation, where the financial statements of both companies are combined.

Question 6

Under the fair value through other comprehensive income model, investments are reported as long term assets
A) depending on the value and risk of the investment.
B) depending on the balance in the accumulated comprehensive income account.
C) only if the intent is to sell before maturity.
D) depending on management intent.

Accepted Answer

Under the fair value through other comprehensive income model, investments are classified as long-term assets based on management's intent to hold them for a period of time, rather than the immediate realization of gains or losses. This classification does not depend on the value and risk of the investment, the balance in the accumulated comprehensive income account, or the intent to sell before maturity.

Question 7

Comprehensive income is included as part of
A) retained earnings.
B) shareholders' equity.
C) unearned revenue.
D) net income.

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. It is part of shareholders' equity but is not included in retained earnings, unearned revenue, or net income directly. Comprehensive income is reported in a separate component of shareholders' equity.

Question 8

On January 1, 20X4, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment and classified the shares as available-for-sale securities. During 20X4, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 20X4 from the Rocker investment?
A) $225,000
B) $37,500
C) $187,500
D) $250,000

Accepted Answer

Calculation: 20X4 investment (dividend) income ($37,500) = Proportionate share of Rocker's dividends ($250,000 × .15).

Question 9

Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?
A) Since the bonds were purchased at a premium, the cash interest will be less than interest revenue.
B) Since the bonds were purchased at a discount, the book value of the bond investment will increase.
C) The bond investment must be accounted for using the trading securities classiﬁcation.
D) The company would recognize unrealized gains or losses on the bonds.

Accepted Answer

Since the bonds were purchased at 96, meaning below their face value (a discount), over time as the bonds approach maturity, the book value of the bond investment will increase through the amortization of the discount. This process aligns the book value with the face value by the maturity date.

Question 10

On July 1, 20X4, Surf Company purchased long-term investments in available-for-sale securities as follows: Blue Corporation common stock (par $5) 2,000 shares at $16 per share. Black Company preferred stock (par $20) 1,500 shares at $30 per share . The quoted market prices per share on December 31, 20X4 were as follows: Blue Corporation stock, $15 per share Black Company stock, $30 per share Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying value of the long-term investments reported in the statement of ﬁnancial position at December 31, 20X4 would be which of the following?
A) $77,000
B) $73,500
C) $71,500
D) $75,000

Accepted Answer

The carrying value of available-for-sale securities is reported at fair value. Blue Corporation stock is valued at $15 per share for 2,000 shares, totaling $30,000. Black Company stock remains at $30 per share for 1,500 shares, totaling $45,000. Combined, the carrying value is $75,000.

Question 11

Under the amortized cost model, holding gains are
A) recognized in net income.
B) the recognition depends on management's intention.
C) recognized in other comprehensive income.
D) are not recognized.

Accepted Answer

The answer of Under the amortized cost model, holding gains...

Question 12

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classiﬁcations should be used by Idaho Company in accounting for the investment?
A) Trading securities.
B) Held-to-maturity.
C) Available-for-sale.
D) Consolidation.

Accepted Answer

Since Idaho Company purchased nonvoting preferred stock, it does not have significant influence over Potato Corporation. Therefore, the investment cannot be accounted for using the equity method or consolidation. Preferred stock cannot be classified as held-to-maturity because this category is reserved for debt securities that the company has the positive intent and ability to hold to maturity. Trading securities are meant for short-term profit through active buying and selling, which does not seem to be the intent described. Available-for-sale is the appropriate classification for such investments that do not fit the other categories and are not intended for active trading.

Question 13

Which of the following is the best description of investments in available-for-sale securities?
A) Investments in bonds that management intends to hold to maturity.
B) Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future.
C) Investments in more than ﬁfty percent of the voting stock of another company.
D) Investments in securities that are accounted for under the market value method other than trading securities and held-to-maturity investments.

Accepted Answer

Available-for-sale securities are investments in stocks or bonds that a company plans to hold for a period of time, but not necessarily to maturity or for immediate sale. They are accounted for using the market value method, distinguishing them from trading securities (which are intended for short-term profit) and held-to-maturity investments (which are bonds the company intends to hold until they mature). Unlike investments in more than fifty percent of the voting stock of another company, which would typically be accounted for using the equity method or consolidation, available-for-sale securities are marked to market with unrealized gains or losses reported in other comprehensive income.

Question 14

Libby Company purchased equity securities for $100,000 and classiﬁed them as available-for-sale securities on September 15, 20X4. At December 31, 20X4, the current market value of the securities was $105,000. How should the investment be reported in the 20X4 ﬁnancial statements?
A) The investment in available-for-sale securities would be reported on the statement of ﬁnancial position at its $100,000 cost.
B) The $5,000 unrealized gain is reported within the statement of earnings.
C) The $5,000 realized gain is reported within the income statement.
D) The investment in available for sale securities would be reported in the statement of ﬁnancial position at its $105,000 market value and an unrealized holding gain on available- for-sale securities would be reported in the stockholders' equity section of the statement of ﬁnancial position.

Accepted Answer

Available-for-sale securities are reported at fair market value on the balance sheet, and unrealized gains or losses are recorded in other comprehensive income, which is a component of stockholders' equity, not in the income statement.

Question 15

On July 1, 20X0, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 shares of the preferred stock (non-voting) of Nature Company for $30 per share (18,000 shares outstanding). The records of Nature Company reflect the following: $$\begin{array} { | l | r | } 
\hline 20X0 \text { net income } & \$ 60,000 \
\hline \text { Dividends declared and paid during December, 20X0 } & \$ 6,500 \
\hline \text { December 31, 20X0 market price per share } & \$ 27.00 \
\hline
\end{array}$$ The amount reported on the statement of financial position by Wildlife Company for its investment at December 31, 20X0 would be which of the following?
A) $160,000
B) $162,000
C) $182,000
D) $200,000

Accepted Answer

The investment in available-for-sale securities is reported at fair value. Wildlife Supply Company purchased 6,000 shares at $30 per share, totaling $180,000. By December 31, 20X0, the market price per share decreased to $27. Therefore, the investment's value is 6,000 shares * $27 = $162,000.

Question 16

Lyrical Company purchased equity securities for $500,000 and classiﬁed them as trading securities on September 15, 20X0. On December 31, 20X0, the current market value of the securities was $481,000. How should the investment be reported within the 20X0 ﬁnancial statements?
A) The investment in trading securities would be reported on the statement of ﬁnancial position at its $481,000 market value.
B) The investment in trading securities would be reported in the statement of ﬁnancial position at its $500,000 cost.
C) A realized holding loss on the trading securities would be reported on the statement of earnings.
D) The investment in trading securities would be reported in the balance sheet at its $481,000 market value and a realized holding loss on the trading securities would be reported on the statement of earnings.

Accepted Answer

DTrading securities are reported at fair market value on the balance sheet, and any unrealized gains or losses are recognized in earnings. Therefore, the investment should be reported at its current market value of $481,000, and the $19,000 decrease in value should be recognized as a loss in the statement of earnings.

Question 17

Which of the following is the best description of investments in trading securities?
A) Investments in bonds that management intends to hold to maturity.
B) Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future.
C) Investments in more than ﬁfty percent of the voting stock of another company.
D) Investments that provide the investor signiﬁcant inﬂuence over the investee, but not control over the investee.

Accepted Answer

Trading securities are investments in stocks or bonds that a company plans to sell in the short term to profit from price fluctuations.

Question 18

On January 1, 20X4, Short Company purchased as an available-for-sale investment, 20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at a cost of $50 per share. During November 20X4, Daniel declared and paid a cash dividend of $2 per share. At December 31, 20X4, end of the accounting period, Daniel's shares were selling at $48. The 20X4 financial statements for Short Company should report the following amounts: $$\begin{array} { | l | r | r | r | } 
\hline & \text { Long-Term Investment } & \begin{array} { r } 
\text { Unrealized Holding } \
\text { Gains/Losses }
\end{array} & \text { Investment Revenue } \
\hline \text { A } & 1,000,000 & 40,000 & 40,000 \
\hline \text { B } & 960,000 & \text { Zero } & \text { Zero } \
\hline \text { C } & 1,000,000 & 80,000 & \text { Zero } \
\hline \text { D } & 960,000 & 40,000 & 40,000 \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The initial investment is 20,000 shares at $50 per share, totaling $1,000,000. However, the value at the end of the year is 20,000 shares at $48 per share, totaling $960,000, indicating a $40,000 unrealized loss. Dividends of $2 per share on 20,000 shares total $40,000 in investment revenue.

Question 19

The premium or discount on bonds accounted for under the amortized cost method is
A) amortized over the expected holding period.
B) amortized over the life of the bond.
C) not amortized.
D) recognized in revenue.

Accepted Answer

The premium or discount on bonds accounted for under the amortized cost method is amortized over the life of the bond. This approach spreads the premium or discount amount evenly over the bond's term to maturity, affecting the interest expense or income recognized in each period.

Question 20

Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 20X0. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?
A) Since the bonds were issued at par value, the cash interest will be the same as interest revenue.
B) The bonds will earn $75,000 of interest by December 31, 20X0.
C) The bond investment must be accounted for using the fair value approach.
D) Since they were classiﬁed as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.

Accepted Answer

The false statement is C because when bonds are classified as held-to-maturity, the accounting treatment involves amortized cost, not the fair value approach. Unrealized gains or losses are not recognized in the financial statements for these types of investments.

Quiz 13: Measuring and Evaluating Financial Performance

Which of the following statements is correct?

Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false?

Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of the following is true?

Under the fair value through other comprehensive income model, investments are reported as long term assets

Comprehensive income is included as part of

Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?

Under the amortized cost model, holding gains are

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classiﬁcations should be used by Idaho Company in accounting for the investment?

Which of the following is the best description of investments in available-for-sale securities?

Libby Company purchased equity securities for $100,000 and classiﬁed them as available-for-sale securities on September 15, 20X4. At December 31, 20X4, the current market value of the securities was $105,000. How should the investment be reported in the 20X4 ﬁnancial statements?

Lyrical Company purchased equity securities for $500,000 and classiﬁed them as trading securities on September 15, 20X0. On December 31, 20X0, the current market value of the securities was $481,000. How should the investment be reported within the 20X0 ﬁnancial statements?

Which of the following is the best description of investments in trading securities?

The premium or discount on bonds accounted for under the amortized cost method is

Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 20X0. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?