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Each Transaction Below Involves an Equity Security Originally Acquired at a Cost

Question 113

Matching

Each transaction below involves an equity security originally acquired at a cost of $1,000. Identify the effect each transaction has on the current ratio and earnings per share You may use each choice more than once or not at all.

Premises:

Responses:

Passive investment with a current balance sheet value of $1,200 is sold for $1,100.

Increase in current ratio and earnings per share.

Passive investment with a current balance sheet value of $800 is sold for $800.

Does NOT change earnings per share or the current ratio.

Passive investment with a current balance sheet value of $1,200 is sold for $1,300.

Does NOT change earnings per share; may impact the current ratio under certain conditions.

Passive investment has a market value of $800 at yearend.

Decrease in current ratio and earnings per share.

Passive investment has a market value of $1,200 at yearend.

Increases earnings per share.

Can’t determine the direction of changes in at least one ratio from the event given.

Premises:

Passive investment with a current balance sheet value of $1,200 is sold for $1,100.

Passive investment with a current balance sheet value of $800 is sold for $800.

Passive investment with a current balance sheet value of $1,200 is sold for $1,300.

Passive investment has a market value of $800 at yearend.

Passive investment has a market value of $1,200 at yearend.

Responses:

Increase in current ratio and earnings per share.

Does NOT change earnings per share or the current ratio.

Does NOT change earnings per share; may impact the current ratio under certain conditions.

Decrease in current ratio and earnings per share.

Increases earnings per share.

Can’t determine the direction of changes in at least one ratio from the event given.

Correct Answer:

Premises:

Responses:

Increase in current ratio and earnings per share.

Does NOT change earnings per share or the current ratio.

Does NOT change earnings per share; may impact the current ratio under certain conditions.

Decrease in current ratio and earnings per share.

Increases earnings per share.

Can’t determine the direction of changes in at least one ratio from the event given.

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