Deck 18: Investing Assets

Question 1

Which of the following is a debt or equity security that a company intends to hold only for the short term?

A)trading security
B)available-for-sale security
C)held-to-maturity security
D)Not enough information to classify this security.

Answer 1

A

Question 2

Realized gains and losses occur when a company holds the securities that experience a change in fair value.

Answer 2

False

Question 3

Bonds are priced such that their yield will be the same as the stated rate of interest.

Answer 3

False

Question 4

Ryan Corporation purchased 10,000 shares of Acme Stock.It plans to hold them for a short time and then sell them at a gain.It should classify these securities as ________.

A)available for sale securities
B)held-to-maturity securities
C)trading securities
D)minority securities

Question 5

Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid?

A)trading security
B)held-to-maturity security
C)available-for-sale security
D)Not enough information to classify this security.

Question 6

Only debt securities can be classified as held-to-maturity securities.

Question 7

All of the following are key questions that must be addressed when accounting for investments in debt and equity securities except which one?

A)How long does management intend to hold the investment?
B)Is the fair value of the equity investment readily determinable?
C)How is the return on equity impacted by this investment?
D)How much control does the investor have over the investee company for this equity investment?

Question 8

Carly Enterprises purchased 1,000 shares of the 1,000,000 common shares outstanding in Crush Inc.Carly intends to hold onto this investment for the forseeable future.How should this investment be classified on the books of Carly?

A)held-to-maturity equity investment
B)held-to-maturity debt investment
C)available-for-sale equity investment
D)trading equity investment

Question 9

Investments in debt and equity securities that cannot be readily classified in the other reporting categories are classified as ________.

A)securities available for sale
B)trading securities
C)held to maturity securities
D)minority securities

Question 10

Investments in securities of other companies are classified as either debt securities or equity securities.

Question 11

Where are changes in fair value for available for sale securities reported?

A)as operating income or loss on the income statement
B)as income or loss from peripheral activities on the income statement
C)as a component of accumulated other comprehensive income on the balance sheet
D)as a prior period adjustment to retained earnings on the balance sheet

Question 12

Debt securities represent an investment by one company into the common or preferred shares of another company.

Question 13

Jules & Associates purchased the bonds of Jay Bird Retailers during the year.Jules intends to hold onto these bonds to collect all principal and interest,but due to financial constraints,will most likely have to sell this investment on the open market within the next year.How should Jules classify this investment?

A)held-to-maturity debt investment
B)available-for-sale equity investment
C)trading debt investment
D)available-for-sale debt investment

Question 14

If a security is not classified as held-to-maturity or trading,then it is classified as an available-for-sale security.

Question 15

Equity securities are an investment in the common or preferred shares of another company.

Question 16

A company generally classifies securities as available-for-sale when it plans to actively buy and sell securities with the objective of generating a gain on the sale.

Question 17

The yield is the actual return investors receive on investments in bonds.

Question 18

Equity securities can be classified as either trading securities or held-to-maturity securities.

Question 19

Fair values and subsequent growth of an investment are not relevant for reporting for which category of investments?

A)held-to-maturity
B)securities accounted for under the equity method
C)trading
D)available for sale

Question 20

Where are changes in fair value for trading securities reported?

A)as operating income or loss on the income statement
B)as income or loss from peripheral activities on the income statement
C)as a component of accumulated other comprehensive income on the balance sheet
D)as a prior period adjustment to retained earnings on the balance sheet

Question 21

On July 1,Year 1,Fairfield Company purchased $2 million of Hampton Corporation's 6% bonds for $1,731,590.The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities.The bonds mature in 10 years and pay interest annually on July 1.Assuming that Fairfield uses the effective interest method of amortization,what amount should it report for its investment in bonds on December 31,Year 1?

A)$1,747,695
B)$1,740,854
C)$1,750,117
D)$2,000,000

Question 22

Cassa & Associates purchased the bonds of JayBird.These bonds pay 5% interest semi-annually.The effective rate of interest at the date of investment was 4%.Did Jules purchase these bonds at a discount or premium?

A)These bonds were purchased at a discount because the stated rate exceeds the market rate.
B)These bonds were purchased at a premium because the stated rate exceeds the market rate.
C)These bonds were purchased at a discount because the market rate exceeds the stated rate.
D)These bonds were purchased at a premium because the market rate exceeds the stated rate.

Question 23

On January 1,Year 1,Gibson Corporation purchased bonds issued by Williamson Company.These bonds were classified as held-to-maturity securities.The face value of these bonds is $200,000,pay 8% interest and were purchased to yield 6%.The bonds mature in 10 years and pay interest on an annual basis.If Gibson Corporation paid $229,439 for these bonds,how much interest revenue should it report on the bonds at December 31,Year 1? Assume that Gibson used the effective interest method.

A)$20,000
B)$12,000
C)$16,000
D)$22,943

Question 24

Changes in the fair value of trading debt securities are reported in other comprehensive income.

Question 25

Joss Enterprises invested in shares of Angel Athletics.Joss intends to sell these shares for a profit in the very near future.How should Joss classify this investment?

A)available-for-sale equity investment
B)trading debt investment
C)available-for-sale debt investment
D)trading equity investment

Question 26

Companies classify debt securities in one of two ways: available-for-sale or held-to-maturity.

Question 27

A company reports unrealized gains or losses from trading debt securities in other comprehensive income.

Question 28

Bateman Enterprises invested in the bonds of Greater Glouster on January 1,2015.These 10-year,$100,000 bonds pay interest of 3% every June 30 and December 31.The effective rate of interest for similar bonds on January 1 was 4%.What is the semi-annual interest payment received by Bateman for these bonds?

A)$1,500
B)$3,000
C)$2,000
D)$4,000

Question 29

Companies determine the cost of held-to-maturity securities as the present value of the future cash flows,discounted at the stated rate of interest.

Question 30

Price Enterprises invested in the bonds of Greater Glouster on January 1,2015.These 10-year,$100,000 bonds pay interest of 3% every June 30 and December 31.The effective rate of interest for similar bonds on January 1 was 4%.What is the purchase price of these bonds?

A)$100,000
B)$91,889
C)$108,584
D)$91,824

Question 31

Goo Goo Enterprises invested in the bonds of Greater Glouster.These bonds pay interest of 3%.The effective rate of interest for similar bonds on the date of investment was 4%.Did Goo Goo purchase the bonds at a discount or premium?

A)These bonds were purchased at a discount because the stated rate exceeds the market rate.
B)These bonds were purchased at a premium because the stated rate exceeds the market rate.
C)These bonds were purchased at a discount because the market rate exceeds the stated rate.
D)These bonds were purchased at a premium because the market rate exceeds the stated rate.

Question 32

Which of the following statements regarding trading debt securities is false?

A)If a trading debt security is purchased at a premium,the premium must be amortized on a periodic basis.
B)Fair value adjustments are treated as adjustments to net income.
C)If the fair value of trading debt securities is less than the historical cost the fait value adjustment account will have a credit balance.
D)Fair value adjustments are treated as as adjustments to other comprehensive income.

Question 33

What types of gains and losses resulting from the change in the value of investments must companies report?

Question 34

Companies determine the cost of held-to-maturity securities as the present value of the future cash flows,discounted at the market rate of interest.

Question 35

What key questions must be addressed when accounting for investments in debt and equity securities?

Question 36

A separate fair value adjustment account is typically used to reflect the difference between the fair value and the cost of the investment so as to avoid excessive changes in the investment account itself.

Question 37

Which of the following statements regarding available for sale debt securities is true?

A)Fair value adjustments are treated as adjustments to net income.
B)Fair value adjustments are treated as adjustments to other comprehensive income.
C)Available for sale securities are valued on the balance sheet at historical cost.
D)Interest revenue and fair value adjustments are netted to determine the effect on net income.

Question 38

Both trading securities and held-to-maturity securities are always valued at fair value.

Question 39

Available-for-sale debt securities are reported at fair value,with unrealized gains or losses reported in other comprehensive income.

Question 40

List and discuss the three categories of investing securities.

Question 41

During 2015,Arnold Corporation purchased $6 million of 10 year municipal bonds at face value.On December 31,2017,the bonds had a market value of $6,600,000.Arnold reclassified the bonds from held-to-maturity to trading securities.Arnold's balance sheet and income statement for December 31,2017 will reflect which of the following?

A)
B)
C)
D)

Question 42

Eagles Auto invested in bonds of ABC.,which it intends to hold until maturity 1/1/22.These 5-year bonds were dated 1/1/17,had a face value of $75,000,and pay 4% interest annually on 12/31.Eagles purchased these bonds when the market rate of interest was 3%.Complete the entire amortization table for this investment and record all entries for the life of the investment.

Question 43

On July 1,Year 1,Walters Corporation purchased as a short-term investment a $2 million face amount Kempff 6% bond for $1,800,000 plus accrued interest to yield 8%.The bonds mature on January 1,Year 11,and pay interest annually on January 1.On December 31,Year 5,the bonds had a fair value of $1,850,000.On March 1,Year 6,Walters sold the bond for $1,820,000 At what amount should Walters report the bond in its December 31,Year 5 balance sheet if it is classified as an available for sale security?

A)$1,800,000
B)$1,820,000
C)$1,850,000
D)$2,000,000

Question 44

Which of the following statements is incorrect?

A)If the investor has significant influence over the investee,the investor must use the equity method of accounting for the investment.
B)If the investor has control over the investee,financial statements for the two companies must be consolidated.
C)If the investor has no significant influence over the investee,can readily determine the fair value of the investment,and plans to hold the investment for a very short period of time,the investor should classify the investment as a trading security.
D)If the investor reports the investment as available-for-sale,the investment is reported at cost with unrealized gains and losses reported as part of other comprehensive income.

Question 45

Both realized and unrealized gains and losses for trading equity securities are classified as other income on the income statement.

Question 46

Cross Clothiers invested $200,000 in a debt security that it properly classified as a trading security on 12/20/17.At 12/31/17,this trading security had a fair value of $201,500.Record the journal entries needed for this investment assuming this is the first and only trading debt security for Joss.

Question 47

On January 1,Seahawk Company purchased $770,000 on 12% bonds at face value.At December 31,the market value of the bonds was $810,000.
Required:
Prepare the valuation entry on December 31 of the current year assuming that the bonds are classified as:
1.Trading securities
2.Available for sale securities
3.Held to maturity securities

Question 48

For available-for-sale equity securities,realized gains/losses are reported in net income.

Question 49

Unrealized gains and losses from fair value adjustments for trading equity investments are reported as part of other comprehensive income,while gains and losses from the sale of trading equity investments is reported in net income.

Question 50

As of 12/31/17,XYZ Inc.had Available-for-Sale debt investments with a fair value of $522,000,an amortized cost of $535,000,and a credit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500.What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?

A)Unrealized Loss of $6,500 reported as part of Other Comprehensive Income.
B)Unrealized Loss of $20,500,reported as part of Net Income.
C)Unrealized Loss of $20,500,reported as part of Other Comprehensive Income.
D)Unrealized Loss of $6,500,reported as part of Net Income.

Question 51

If an investor company has significant influence over an investee company,the investment is valued at the fair value of the stock on the balance sheet date.

Question 52

Significant influence is typically gained by an investor company owning more than 50% of the voting shares of the investee company.

Question 53

Leotis Asset Management invested in the bonds of DEF Co.on 1/1/16.Leotis intends to hold the bonds until maturity.These 5-year bonds had a face vale of $300,000,pay 5% interest on 6/30 and 12/31 of each year,and were issued when the market rate of interest was 6%,resulting in a cost of $287,205.Which of the following is the correct journal entry to record the receipt of the interest payment on 6/30/16?

A)
B)
C)
D)

Question 54

On September 30,2016,Angel Outfitters invested in 10-year,$200,000,5% bonds of ABC Co.These bonds were dated January 1,2016,and pay interest annually on December 31.Angel paid face value plus accrued interest for these bonds,and intends to hold these bonds until maturity.Which of the following is the correct journal entry to record this investment?

A)
B)
C)
D)

Question 55

If an investor company has significant influence over an investee company,the investment is valued at the fair value of the stock on the balance sheet date.

Question 56

Kelemen Asset Management invested in the bonds of DEF Co.on 1/1/16.Kelemen intends to hold the bonds until maturity.These 5-year bonds had a face vale of $300,000,pay 5% interest on 6/30 and 12/31 of each year,and were issued when the market rate of interest was 6%,resulting in a cost of $287,205.How much interest revenue will Kelemen record on 6/30/16?

A)$9,000
B)$7,180
C)$7,500
D)$8,616

Question 57

The appropriate accounting method for equity investments depends on the investor's level of influence over the investee company.

Question 58

Companies report equity investments without a readily determinable fair value at their historical cost.

Question 59

As of 12/31/17,XYZ Inc.had Available-for-Sale debt investments with a fair value of $522,000,an amortized cost of $535,000,and a debit balance in the Fair Value Adjustment - Available for Sale Debt Investments account of $7,500.What is the amount of gain or loss reported by XYZ related to these available-for-sale debt investments and how should it be reported?

A)Unrealized Loss of $6,500,reported as part of Other Comprehensive Income.
B)Unrealized Loss of $20,500,reported as part of Net Income.
C)Unrealized Loss of $20,500,reported as part of Other Comprehensive Income.
D)Unrealized Loss of $6,500,reported as part of Net Income.

Question 60

On January 1,Year 1 Alcorn Corporation purchased $95,000 of 9% bonds at face value.The bonds are classified as a held-to-maturity investment.The bonds pay interest semiannually on January 1 and July 1.On December 31,Year 1,the fair value of the bonds is $98,000
Required:
1.Prepare the journal entries to record the acquisition of the bonds and the first two interest payments.Include any year-end adjusting entries.
2.If the bonds were classified as an available for sale security,what additional adjusting entry would be made on December 31?

Question 61

Brightney purchased common shares of Company A and B for $10,000 and $12,000,respectively on 12/15.Brightney intends to sell these securities within 30 days.At 12/31,Investments in Company A & B had a fair value of $9,000 and $15,000,respectively.Assuming an existing $1,500 debit balance in Fair Value Adjustment - Trading Equity Securities,what is the unrealized gain or loss for these securities and how is it reported?

A)Unrealized Gain of $500,reported as part of Net Income.
B)Unrealized Gain of $3,500,reported as part of Net Income.
C)Unrealized Gain of $500,reported as part of Other Comprehensive Income.
D)Unrealized Gain of $3,500,reported as part of Other Comprehensive Income.

Question 62

What affect do unrealized holding gains and losses on available for sale securities have on retained earnings?

A)
B)
C)
D)

Question 63

ABC invested $19,000 in shares of DEF during Year 1,classifying the investment as available-for-sale.The fair value of this investment was $17,500 and $22,000 at the end of Year 1 and Year 2,respectively.Which of the following is the correct journal entry to adjust the trading securities to fair value at the end of Year 2?

A)
B)
C)
D)

Question 64

Under the equity method,cash dividends received by the investor from the investee should be treated as ________.

A)an adjustment to other comprehensive income
B)a reduction in the investment account
C)an increase in the investment account
D)dividend income

Question 65

Accumulated Other Comprehensive Income reflects changes in the fair value of which type of securities?

A)trading securities
B)securities available for sale
C)held-to-maturity securities
D)consolidated securities

Question 66

Which of the following is the main difference between U.S.GAAP and IFRS in accounting for equity investments?

A)IFRS requires all equity securities to reported at cost,allowing companies to report gains and losses only when those securities are sold.
B)For equity securities without quoted prices in the active market,IFRS allows companies to determine a fair value for these securities based on market comparables or a discounted cash flow methodology.
C)For trading equity securities,unrealized gains and losses are reported as part of other comprehensive income instead of net income.
D)IFRS requires companies to report all equity securities into one investment classification,instead of the three investment classifications allowed under U.S.GAAP.

Question 67

What is the initial reporting basis for all investment securities?

A)Cost
B)Discounted Present Value
C)Fair Value
D)Equity Value

Question 68

Laurent invested $19,000 in shares of DEF during Year 1,classifying the investment as available-for-sale.The fair value of this investment was $17,500 and $22,000 at the end of Year 1 and Year 2,respectively.What is the unrealized gain or loss for this investment at the end of Year 1 and how is it reported?

A)Unrealized Loss of $1,500,reported as part of Other Comprehensive Income.
B)Unrealized Loss of $1,500,reported as part of Net Income.
C)Unrealized Gain of $3,000,reported as part of Other Comprehensive Income.
D)Unrealized Gain of $3,000,reported as part of Net Income.

Question 69

Norman Corporation owns an investment that it had originally classified as available for sale.This investment is now more appropriately treated as held to maturity.Norman would ________.

A)reclassify the investment as held to maturity and make a prior period adjustment to retained earnings
B)reclassify the investment as held to maturity and record the fair value at the reclassification date as the investment's cost basis for future amortization
C)reclassify the investment as held to maturity and recognize in net income any unrealized gains or losses on the reclassification
D)not reclassify the investment

Question 70

L & J purchased common shares of Company A and B for $10,000 and $12,000,respectively on 12/15.L & J intends to sell these securities within 30 days.At 12/31,Investments in Company A & B had a fair value of $9,000 and $15,000,respectively.Assuming an existing $1,500 credit balance in Fair Value Adjustment - Trading Equity Securities,what is the unrealized gain or loss for these securities and how is it reported?

A)Unrealized Gain of $500,reported as part of Net Income.
B)Unrealized Gain of $3,500,reported as part of Net Income.
C)Unrealized Gain of $500,reported as part of Other Comprehensive Income.
D)Unrealized Gain of $3,500,reported as part of Other Comprehensive Income.

Question 71

Refer to Black Corporation: Assume that these securities are available-for-sale.How will these securities be classified on the balance sheet at December 31 of the current year?

A)
B)
C)
D)

Question 72

How are transfers between portfolios (i.e.from trading to available-for-sale)accounted for?

A)Transfers between portfolios are accounted for at fair value on the date of the transfer.
B)Transfers between portfolios are not allowed under U.S.GAAP.
C)Transfers between portfolios are accounted for based on the initial cost of the investment.
D)Transfers between portfolios are accounted for based on the most recently reported fair value of the investments.

Question 73

Cowgirl Capital reported that following items related to equity investments for the year: Based on these investments,what amounts will be reported in Net Income? What amount will be reported in Other Comprehensive Income?

A)Net Income - $1,000; OCI - $(2,500)
B)Net Income - $(9,000); OCI - $7,500
C)Net Income - $8,500; OCI - $(10,000)
D)Net Income - $10,000; OCI - $(11,000)

Question 74

For equity securities are carried and reported as available for sale,when should a gain be reported on the income statement?

A)when the security is sold
B)when the fair value of the security increases
C)when the security is reclassified as a trading security
D)when the security is reclassified as a held to maturity security

Question 75

Which of the following statements is incorrect?

A)Unrealized gains from transferring Available-for-sale securities to Trading securities should be recognized in net income.
B)Unrealized losses from transferring Held-to-maturity securities to Available-for-sale securities should be recognized in other comprehensive income.
C)Unrealized gains for Trading securities that were transferred to Held-to-maturity securities should be recognized in other comprehensive income.
D)Unrealized losses for Trading securities transferred to Available-for-sale securities are already recognized as part of net income,so no adjustment is needed.

Question 76

Refer to Black Corporation: Assume that these securities are trading securities.How will these securities be classified on the balance sheet at December 31 of the current year?

A)
B)
C)
D)

Question 77

Dowell Corporation decided that an investment originally classified as available for sale should be reclassified as held to maturity.Dowell would ________.

A)not reclassify the investment
B)reclassify the investment as held to maturity and recognize all unrealized gains and losses in net income
C)reclassify the investment as held to maturity and record the fair value of the investment as of the date reclassification as its amortized cost basis
D)reclassify the investment as held to maturity,but recognize no income or loss

Question 78

Rhoads purchased common shares of Company A and B for $10,000 and $12,000,respectively on 12/15.Rhoads intends to sell these securities within 30 days.At 12/31,Investments in Company A & B had a fair value of $9,000 and $15,000,respectively.Assuming this is the first trading investment for Rhoads,what is the unrealized gain or loss for these securities and how is it reported?

A)Unrealized Loss of $1,000,Unrealized Gain of $3,000,both reported as part of Net Income.
B)Unrealized Gain of $2,000,reported as part of Other Comprehensive Income.
C)Unrealized Loss of $1,000,Unrealized Gain of $3,000,both reported as part of Other Comprehensive Income.
D)Unrealized Gain of $2,000,reported as part of Net Income.

Question 79

Unrealized gains and losses on investments in equity securities are reported for an investment in another company when the percentage of ownership in another company is ________.

A)less than 20%
B)20% to 50%
C)51% to 74%
D)75% or greater

Question 80

PM Distributors began Year 2 with Trading Equity Investments of $8,500 (which consisted of a single investment)as well as a debit balance of $1,000 in the Fair Value Adjustment - Trading Equity Investments account.This trading security was sold for $9,500 during Year 2.How much was the gain or loss for the sale of this investments and how is it recorded?

A)No gain or loss reported,as the investment was sold for the adjusted fair value.
B)Unrealized Gain of $1,000,reported as part of Other Comprehensive Income.
C)Realized Loss of $1,000,reported as part of Net Income.
D)Realized Gain of $1,000,reported as part of Net Income.