ECO 444 Investments Test Bank-No Answers

INVESTMENTS MULTIPLE CHOICE—Conceptual 1.

Whi Which of the the fol follo low wing ing is is not a debt security? a. Conv Conver erti tibl ble e bond bonds s b. Comm Commer erci cial al pape paper  r  c. Loan Loans s rece receiv ivab able le d. All of thes these e are are debt debt secu securit rities ies..

2.

A corre orrec ct valua aluati tion on is a. availa available ble-fo -for-s r-sale ale at amort amortize ized d cost. cost. b. held-to held-to-ma -matur turity ity at at amorti amortized zed cost cost.. c. held-to held-to-ma -matur turity ity at fair fair valu value. e. d. none none of the thes se.

3.

Securi Securitie ties s which which could could be be classi classifie fied d as heldheld-toto-mat maturi urity ty are are a. redeem redeemabl able e pref preferr erred ed stock stock.. b. warrants. c. muni munici cipa pall bond bonds. s. d. trea treasu sury ry stoc stock. k.

4.

A require requiremen mentt for a secur security ity to to be class classifi ified ed as heldheld-toto-mat maturi urity ty is a. abilit ability y to hold hold the secu securit rity y to matur maturity ity.. b. posi positi tive ve inte intent nt.. c. the securi security ty must must be a debt debt secu securit rity. y. d. All All of thes these e are are requ requir ired ed..

5.

Held Held-to -to-m -mat atur urit ity y secu securi riti ties es are are repor reporte ted d at a. acqu acquis isit itio ion n cost cost.. b. acquisitio acquisition n cost cost plus plus amortiz amortization ation of a discount. discount. c. acquisitio acquisition n cost cost plus plus amortiz amortization ation of a premium. premium. d. fair va value.

6.

Solo Solo Co. purchas purchased ed $300,0 $300,000 00 of bonds bonds for $315,0 $315,000. 00. If Solo Solo intend intends s to hold the secur securiti ities es to maturity, the entry to record the investment includes a. a debit debit to Held-to-Ma Held-to-Maturity turity Securities Securities at $300,00 $300,000. 0. b. a credit credit to Premi Premium um on Inves Investme tments nts of $15, $15,000 000.. c. a debit debit to to Held-to Held-to-Matu -Maturity rity Securities Securities at $315,0 $315,000. 00. d. none none of the thes se.

7.

Whi Which of the the fol follo low wing ing is is not correct in regard to trading securities? a. They are are held with with the intenti intention on of selling selling them them in a short short period period of time. time. b. Unrealized Unrealized holding holding gains gains and losses losses are reported reported as part part of net net income. income. c. Any disc discoun ountt or premi premium um is not not amort amortize ized. d. d. All All of thes these e are are corr correc ect. t.

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17 - 2

8.

9.

Test Bank for Intermediate Accounting, Eleventh Edition

Unreal Unrealize ized d holding holding gains gains or losses losses which which are recogn recognize ized d in income income are from secu securit rities ies classified as a. held held-to -to-m -mat atur urit ity. y. b. avai availa labl ble-f e-for or-s -sal ale. e. c. trading. d. none none of the thes se. An unre unreal aliz ized ed hold holdin ing g loss loss on a comp compan any' y's s avai availa labl blee-fo forr-sa sale le secu securi riti ties es shou should ld be reflected in the current financial statements as a. an extraordin extraordinary ary item item shown shown as a direct direct reduction reduction from from retained retained earnings earnings.. b. a current current loss resulting resulting from holding holding securit securities. ies. c. a note note or paren parenthe thetic tical al discl disclosu osure re only. only. d. other comprehe comprehensive nsive income income and deducte deducted d in the equity equity section section of the balance balance sheet. sheet.

10. 10.

An unre unreal aliz ized ed hold holdin ing g gain gain on a comp compan any' y's s avai availa labl blee-fo forr-sa sale le secu securi riti ties es shou should ld be reflected in the current financial statements as a. an extraordin extraordinary ary item item shown shown as a direct direct increase increase to to retained retained earnings. earnings. b. a current current gain resulting resulting from holding holding securiti securities. es. c. a note note or paren parenthe thetic tical al discl disclosu osure re only. only. d. other comprehe comprehensive nsive income income and includ included ed in the equity equity section section of the balance balance sheet. sheet.

11.

When When an invest investmen mentt in a held-to-m held-to-matu aturit rity y security security is transf transferre erred d to an availa available ble-fo -for-s r-sale ale security, the carrying value assigned to the available-for-sale security should be a. its its orig origin inal al cos cost. t. b. its fair fair value value at the the date date of the the trans transfer fer.. c. the lower lower of its original original cost cost or its fair fair value value at the date of the transfer transfer.. d. the higher higher of its its original original cost cost or its fair fair value value at the date of the transfer transfer..

12.

When an investm investment ent in in an available-f available-for-sal or-sale e security security is transfe transferred rred to to trading trading becaus because e the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be a. its its orig origin inal al cos cost. t. b. its fair fair value value at the the date date of the the trans transfer fer.. c. the higher higher of its its original original cost cost or its fair fair value value at the date of the transfer transfer.. d. the lower lower of its original original cost cost or its fair fair value value at the date of the transfer transfer..

13.

In accounti accounting ng for investment investments s in debt debt securiti securities es that that are classi classified fied as as trading trading securiti securities, es, a. a disco discount unt is is report reported ed sepa separat rately ely.. b. a premi premium um is is repor reported ted separa separatel tely. y. c. any disc discoun ountt or premi premium um is is not amor amortiz tized. ed. d. none none of the thes se.

14.

Invest Investmen ments ts in in debt debt secur securiti ities es are are gener generall ally y recor recorded ded at at a. cost cost inclu includin ding g accru accrued ed inte interes rest. t. b. matu maturi rity ty valu value. e. c. cost cost includ including ing brok brokera erage ge and and other other fees. fees.

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Investments

17 - 3

c. 20 periods periods and 5% from the presen presentt value value of 1 table. table. d. 20 periods periods and 4% from the presen presentt value value of 1 table. table. 16.

Investment Investments s in in debt debt securit securities ies should be recorde recorded d on the date date of acquis acquisition ition at a. lowe lowerr of of cost cost or mar marke ket. t. b. mark arket val value. ue. c. market market value value plus brokerag brokerage e fees and and other costs costs incident incident to the the purchase. purchase. d. face value value plus plus brokerage brokerage fees fees and other other costs costs incident incident to to the purchase purchase..

17. 17.

An availa available ble-f -for or-s -sal ale e debt debt securi security ty is purc purcha hase sed d at a disc discou ount nt.. The The entr entry y to record record the amortization of the discount includes a a. debit debit to Availa Available ble-for -for-Sa -Sale le Securi Securitie ties. s. b. debit debit to the the discou discount nt acco account unt.. c. debi debitt to Int Intere erest st Rev Reven enue ue.. d. none none of the thes se.

18.

 APB Opinion Opinion No. 21 21 specifies that, regarding the amortization of a premium or discount on

a debt security, the a. effective effective interes interestt method method of of allocati allocation on must must be used. b. straight-l straight-line ine method method of alloca allocation tion must be used. used. c. effe effect ctiv ive e inte intere rest st metho method d of allo alloca cati tion on shou should ld be used used but but othe otherr meth method ods s can can be applied if there is no material difference in the results obtained. d. par value value method method must must be used and and therefore therefore no alloca allocation tion is necess necessary. ary. 19.

Which of the the following following is correct correct about the effecti effective ve interes interestt method method of amortizatio amortization? n? a. The effective effective interest interest method method applied to investme investments nts in debt securitie securities s is different different from that applied to bonds payable. b. Amortizati Amortization on of a discount discount decrease decreases s from period to period. period. c. Amortizati Amortization on of a premium premium decreases decreases from from period period to period. period. d. The effectiv effective e interest interest method produce produces s a constant constant rate of of return return on the book value of  the investment from period to period.

20. 20.

When When inve invest stme ment nts s in debt debt secu securi riti ties es are are purc purcha hase sed d betw betwee een n inte interes restt paym paymen entt date dates, s, preferably the a. securities securities account account should should include include accrued accrued interest. interest. b. accrued accrued interes interestt is debited debited to Interest Interest Expense. Expense. c. accrue accrued d interes interestt is debited debited to Inter Interest est Reven Revenue. ue. d. accrued accrued interest interest is debited debited to Intere Interest st Receiv Receivable. able.

21. 21.

Whi Which of the the fol folllowin owing g is is not  generally correct about recording a sale of a debt security before maturity date? a. Accr Accrue ued d inte interes restt will will be rece receiv ived ed by the sell seller er even even though though it is not an intere interest st payment date. b. An entry entry must be be made to to amortize amortize a discoun discountt to the date date of sale. sale. c. The entry entry to amortiz amortize e a premium premium to the date of sale includes includes a credit credit to the Premium Premium on Investments in Debt Securities.

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17 - 4

23.

Test Bank for Intermediate Accounting, Eleventh Edition

c. The invest investor or must use the fair value value method method unless unless it can clearl clearly y demonstr demonstrate ate the ability to exercise "significant influence" over the investee. d. The investor investor should should always always use the the fair value value method method to account account for its invest investment. ment. A recl reclass assifi ificat cation ion adjust adjustmen mentt is is repo reporte rted d in in the the a. income income stateme statement nt as as an Other Revenue Revenue or Expense. Expense. b. stockholder stockholders’ s’ equity equity section section of the balance balance sheet. sheet. c. statement statement of of comprehen comprehensive sive income income as other other comprehen comprehensive sive income. income. d. statem statement ent of of stock stockhol holder ders’ s’ equit equity. y.

24.

If the the parent parent company company owns 90% of of the subsidiary subsidiary company's company's outstandi outstanding ng common common stock, stock, the company should generally account for the income of the subsidiary under the a. cost ost metho ethod. d. b. fair fair val value ue met metho hod. d. c. dive divest stur ure e met metho hod. d. d. equi equity ty met metho hod. d.

25.

Byner Byner Corpora Corporatio tion n account accounts s for its its invest investmen mentt in the common common stock stock of Yount Yount Comp Company any under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as a. a reduction reduction of the the carrying carrying value of the the investme investment. nt. b. additi additiona onall paid-i paid-in n capita capital. l. c. an additio addition n to the carrying carrying value value of the the invest investment. ment. d. divi divide dend nd inco income me..

26.

Under Under the equity equity method method of accoun accountin ting g for investme investments nts,, an investor investor recogn recognize izes s its share share of the earnings in the period in which the a. invest investor or sell sells s the the inve investm stment ent.. b. invest investee ee decl declare ares s a divide dividend. nd. c. inve invest stee ee pay pays s a div divid iden end. d. d. earnings earnings are reported reported by the investee investee in in its financi financial al statement statements. s.

27.

Dane, Inc., Inc., owns owns 35% 35% of Marin Corporation Corporation.. During During the the calenda calendarr year 2004, Marin Marin had net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What What effect effect would this this have have on the invest investmen mentt accoun account, t, net income income,, and retain retained ed earnings, respectively? a. Unders Understat tate, e, overs overstat tate, e, overs overstat tate e b. Overs Overstat tate, e, under understa state, te, unde underst rstate ate c. Overs Overstat tate, e, over oversta state, te, overst overstate ate d. Unders Understat tate, e, unders understat tate, e, unders understat tate e

*28.

All a. b. c.

of of the the follow following ing statem statements ents regarding regarding accounting accounting for derivative derivatives s are correct correct except  that they should should be recogniz recognized ed in the financial financial statem statements ents as assets assets and and liabilities liabilities.. they they should should be be report reported ed at at fair fair value. value. gains and losses losses resulti resulting ng from speculatio speculation n should should be deferred. deferred.

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Investments

17 - 5

c. requir requires es or or permit permits s net net settl settleme ement. nt. d. All of thes these e are are charac character terist istics ics.. *30. *30.

Comp Compan anie ies s that that atte attemp mptt to expl exploi oitt inef ineffi fici cien enci cies es in vari variou ous s deri deriva vati tive ve mark market ets s by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called a. arbi arbittrage rageur urs s. b. gamblers. c. hedgers. d. specu pecullator ators. s.

*31. *31.

The acco account unting ing for for fair fair valu value e hedges hedges reco records rds the the deriv derivati ative ve at its its a. amor amorti tize zed d cost cost.. b. carr carryi ying ng valu value. e. c. fair value. d. hist histor oric ical al cos cost. t.

*32. *32.

Gain Gains s or or loss losses es on cas cash h flow flow hedg hedges es are are a. igno ignored red comp comple lete tely ly.. b. recorded recorded in equity equity,, as part part of other comprehens comprehensive ive income. income. c. report reported ed dire directl ctly y in in net net inco income. me. d. report reported ed direc directly tly in in retain retained ed earnin earnings. gs.

*33. *33.

An option option to conv convert ert a conve converti rtible ble bond bond into into shares shares of commo common n stock stock is a(n) a(n) a. embe embedd dded ed deri deriva vati tive ve.. b. host host secu securi rity ty.. c. hybr hybrid id secu securi rity ty.. d. fair fair valu value e hed hedge ge..

*34.

All of the follow following ing are requirement requirements s for for disclosu disclosures res related related to financi financial al instrume instruments nts except  a. disclosing disclosing the the fair value value and related related carrying carrying value value of the instrument instruments. s. b. distin distingui guishi shing ng betwee between n financ financial ial instrume instruments nts held or issued issued for purpos purposes es other than trading. c. combining combining or nettin netting g the fair fair value value of separate separate financia financiall instrument instruments. s. d. disp displa layi ying ng as a sepa separa rate te clas classi sifi fica cati tion on of othe otherr comp compreh rehen ensi sive ve inco income me the the net net gain/loss on derivative instruments designated in cash flow hedges.

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17 - 6

Test Bank for Intermediate Accounting, Eleventh Edition

MULTIPLE CHOICE—Computational 35.

Redman Redman Compan Company's y's tradi trading ng securit securities ies portfo portfolio lio which which is appropria appropriatel tely y included included in current current assets is as follows: December 31, 2004 Fair Unrealized Cost Value Val ue Gain Gai n (Loss) (Lo ss)  Arlington Corp. 260,000 200,000 $(60,000) Downs, Inc. 245,000 265,000 20,000 $505,000 $465,000 $(40,000) Ignoring income taxes, what amount should be reported as a charge against income in Redman's 2004 income statement if 2004 is Redman's first year of operation? a. $0. b. $20,000. c. $40,000. d. $60,000.

36.

On its December December 31, 31, 2003, 2003, balance balance sheet, Quinn Co. reporte reported d its investment investment in availab availablelefor-sale securities, which had cost $360,000, at fair value of $330,000. At December 31, 2004, the fair value of the securities was $355,000. What should Quinn report on its 2004 income statement as a result of the increase in fair value of the investments in 2004? a. $0. b. Unre Unreal aliz ized ed loss loss of of $5,0 $5,000 00.. c. Real Realiz ized ed gai gain n of $25, $25,00 000. 0. d. Unre Unreal aliz ized ed gain gain of $25 $25,0 ,000 00..

37.

On August August 1, 2004, 2004, Betti Bettis s Company Company acqui acquired red $120,0 $120,000 00 face face value value 10% bonds bonds of Hanson Hanson Corporation at 104 plus accrued interest. The bonds were dated May 1, 2004, and mature on April 30, 2009, with interest interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Bettis make to record the purchase of the bonds on  August 1, 2004? a. Held-t Held-to-M o-Matu aturit rity y Securi Securitie ties s ....... .......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... .... 124,80 124,800 0 Intere Interest st Revenu Revenue e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ........ ........ ........ .... 3,000 3,000 Cash ........................................................................ 127,800 b. Held-t Held-to-M o-Matu aturit rity y Securi Securitie ties s ....... .......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... .... Cash ........................................................................

127,80 127,800 0

c. Held-t Held-to-M o-Matu aturit rity y Secur Securiti ities es ..... ........ ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ...... .. Interest Revenue ..................................................... Cash ........................................................................

127,80 127,800 0

d. Held-t Held-to-M o-Matu aturit rity y Securi Securitie ties s ....... .......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... .... Prem Premiu ium m on Bond Bonds s .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ...... ..... .. Cash ........................................................................

120,00 120,000 0 7,80 7,800 0

127,800 3,000 124,800

127,800

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Investments 38. 38.

17 - 7

On Augus Augustt 1, 2004, 2004, Witte Witten n Co. Co. acqu acquir ired ed 80, $1,00 $1,000, 0, 9% bond bonds s at 97 plus plus accru accrued ed interest. The bonds were dated May 1, 2004, and mature on April 30, 2010, with interest paid each October 31 and April 30. The bonds will be added to Witten’s available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2004 is a. Avai Availa lable ble-f -for or-S -Sal ale e Secu Securi riti ties es .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ..... .. 79,4 79,400 00 Cash ........................................................................ 79,400 b. Avai Availa lable ble-f -for or-S -Sal ale e Secu Securi riti ties es .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ..... .. Intere Interest st Receiv Receivabl able e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ....... ... Cash ........................................................................

77,6 77,600 00 1,800 1,800

c. Avai Availa lable ble-f -for or-S -Sal ale e Secu Securi riti ties es .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ..... .. Intere Interest st Revenu Revenue e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ........ ........ ........ .... Cash ........................................................................

77,6 77,600 00 1,800 1,800

d. Avai Availa lable ble-f -for or-S -Sal ale e Secu Securi riti ties es .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ..... .. Intere Interest st Revenu Revenue e ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ........ ........ ........ ........ ........ .... Discount on Debt Securities .................................... Cash ........................................................................

80,0 80,000 00 1,800 1,800

79,400

79,400

2,400 79,400

39.

On Octobe Octoberr 1, 2004, 2004, Porter Porter Co. purch purchase ased d to hold to matur maturity ity,, 1,200, 1,200, $1,000 $1,000,, 9% bonds bonds for $1,188,000 which includes $18,000 accrued interest. The bonds, which mature on February 1, 2013, pay interest semiannually on February 1 and August 1. Porter uses the straight-line method of amortization. The bonds should be reported in the December 31, 2004 balance sheet at a carrying value of  a. $1,1 $1,170 70,0 ,000 00.. b. $1,1 $1,170 70,9 ,900 00.. c. $1,188,000. d. $1,1 $1,188 88,3 ,360 60..

40. 40.

On Novem Novembe berr 1, 2004, 2004, Littl Little e Comp Compan any y purc purcha hase sed d 1,20 1,200 0 of the $1,00 $1,000 0 face face value value,, 9% bonds of Player, Incorporated, for $1,264,000, which includes accrued interest of $18,000. The bonds, which mature on January 1, 2009, pay interest semiannually on March 1 and September 1. Assuming that Little uses the straight-line method of amortization and that the bonds are appropriately appropriately classified classified as available-fo available-for-sal r-sale, e, the net carrying carrying value of the bonds should be shown on Little's December 31, 2004, balance sheet at a. $1,2 $1,200 00,0 ,000 00

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17 - 8

Test Bank for Intermediate Accounting, Eleventh Edition

42.

On Octobe Octoberr 1, 2004, 2004, Lyman Lyman Co. purcha purchased sed to hold hold to maturi maturity, ty, 300, 300, $1,000 $1,000,, 9% bonds bonds for  $312 $312,0 ,000 00.. An addi additi tion onal al $19, $19,00 000 0 was was paid paid for for accr accrue ued d inte intere rest st.. Inte Intere rest st is paid paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2008. Lyman uses straight-line amortization. Ignoring income taxes, the amount reported in Lyman's 2004 income statement from this investment should be a. $6,750. b. $6,030. c. $7,470. d. $8,190.

43. 43.

Duri During ng 2002, 2002, Plano Plano Co. purch purchas ased ed 500, 500, $1,000 $1,000,, 9% bond bonds. s. The carry carryin ing g valu value e of the bonds at December 31, 2004 was $490,000. The bonds mature on March 1, 2009, and pay interest on March 1 and September 1. Plano sells 250 bonds on September 1, 2005, for $247,000, after the interest has been received. Plano uses straight-line amortization. The gain on the sale is a. $0. b. $1,200. c. $2,000. d. $2,800.

Use the following information for questions 44 through 47. The summarized balance sheets of Elston Company and Alley Company as of December 31, 2004 are as follows: Elston Company Balance Sheet December 31, 2004  Assets $800,000 Liabilities Capital stock Retained earnings Total equities

$100,000 400,000 300,000 $800,000  Alley Company Balance Sheet

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Investments

17 - 9

45.

If Elsto Elston n Company Company acqui acquired red a 30% inte interes restt in Alley Alley Compan Company y on Decemb December er 31, 2004 2004 for  for  $150,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Alley Company Stock would have been a. $190,000. b. $150,000. c. $120,000. d. $135,000.

46.

If Elsto Elston n Company Company acqui acquired red a 20% inte interes restt in Alley Alley Compan Company y on Decemb December er 31, 2003 2003 for  for  $90,000 and during 2005 Barnes Company had net income of $50,000 and paid a cash dividend of $20,000, applying the fair value method would give a debit balance in the Investment in Alley Company Stock account at the end of 2005 of  a. $74,000. b. $90,000. c. $100,000. d. $96,000.

47.

If Elsto Elston n Company Company acqui acquired red a 30% inte interes restt in Alley Alley Compan Company y on Decemb December er 31, 2004 2004 for  for  $135,000 and during 2005 Alley Company had net income of $50,000 and paid a cash divide dividend nd of $20,00 $20,000, 0, applyi applying ng the equity equity method method would give a debit debit balanc balance e in the Investment in Alley Company Stock account at the end of 2005 of  a. $135,000. b. $144,000. c. $150,000. d. $145,000.

Use the following information for questions 48 and 49. Karter Company purchased 200 of the 1,000 outstanding shares of Flynn Company's common stock for $180,000 on January 2, 2004. During 2004, Flynn Company declared dividends of  $30,000 and reported earnings for the year of $120,000. 48.

If Karter Karter Compa Company ny used the the fair value value metho method d of accounti accounting ng for its its investm investment ent in Flynn Flynn Company, its Investment in Flynn Company account on December 31, 2004 should be a. $174,000.

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17 - 10

Test Bank for Intermediate Accounting, Eleventh Edition

50.

What What amount amount shoul should d Glenon Glenon show in in the invest investmen mentt accoun accountt at Decemb December er 31, 2004 2004 if the beginning of the year balance in the account was $240,000? a. $294,000. b. $240,000. c. $276,000. d. $360,000.

51.

How much much inves investme tment nt inco income me shou should ld Glen Glenon on repo report rt in in 2004? 2004? a. $60,000. b. $54,000. c. $36,000. d. $180,000.

52.

Young Young Co. acqui acquired red a 60% inte interes restt in Tomlin Tomlin Corp. Corp. on Dece Decembe mberr 31, 2003 2003 for $630, $630,000 000.. During 2004, Tomlin had net income of $400,000 and paid cash dividends of $100,000. At December 31, 2004, the balance in the investment account should be a. $630,000. b. $870,000. c. $810,000. d. $930,000.

Use the following information for questions 53 and 54. Stone Co. owns 3,000 of the 10,000 outstanding shares of Maye Corp. common stock. During 2004, Maye earns $180,000 and pays cash dividends of $50,000. 53. 53.

If the the begi beginn nnin ing g bala balanc nce e in the the inve invest stme ment nt acco accoun untt was was $270 $270,0 ,000 00,, the the bala balanc nce e at December 31, 2004 should be a. $270,000. b. $306,000. c. $324,000. d. $360,000.

54.

Stone Stone should should report report invest investmen mentt reve revenue nue for 2004 2004 of  a. $18,000.

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Investments

17 - 11

MULTIPLE CHOICE—CPA Adapted 56.

Unruh Unruh Corp. Corp. began opera operatio tions ns in 2004. 2004. An analysis analysis of Unruh Unruh’s ’s equity equity securi securitie ties s portfol portfolio io acquir acquired ed in 2004 2004 shows shows the followin following g totals totals at Decemb December er 31, 2004 2004 for trading trading and available-for-sale securities: Trading Available-for-Sale Securities Securities  Aggregate cost $98,000 $130,000  Aggregate fair value 78,000 114,000 What amount should Unruh report in its 2004 income statement for unrealized holding loss? a. $36,000. b. $30,000. c. $16,000. d. $20,000.

57. 57.

At Dece Decemb mber er 31, 31, 2004 2004,, Mall Malle e Corp Corp.. had had the the foll follow owin ing g equi equity ty secu securi riti ties es that that were were purchased during 2004, its first year of operation: Fair Unrealized Cost Value Valu e Gain Gai n (Loss) (Lo ss) Trading Securities: Security A $100,000 $ 60,000 $(40,000) B 15,000 20,000 5,000 Totals $115,000 $ 80,000 $(35,000)  Available-for-Sale Securities: Security Y Z Totals

$ 70,000 85,000 $155,000

$ 80,000 55,000 $135,000

$ 10,000 (30,000) $(20,000)

 All market declines are considered temporary. Fair value adjustments at December 31,

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17 - 12

Test Bank for Intermediate Accounting, Eleventh Edition

58.

On Decemb December er 29, 2005 2005,, Greer Greer Co. sold sold an equit equity y securi security ty that that had been been purcha purchased sed on January 4, 2004. Greer owned no other equity securities. An unrealized holding loss was reported in the 2004 income statement. A realized gain was reported in the 2005 income statement. Was the equity security classified as available-for-sale and did its 2004 market price decline exceed its 2005 market price recovery? 2004 Market Price Decline Exceeded 2005  Available-for-Sale Market Price Recovery a. Yes Yes b. Yes No c. No Yes d. No No

59. 59.

On Dece Decemb mber er 31, 31, 2003 2003,, Nanc Nance e Co. Co. purc purcha hase sed d equi equity ty securi securiti ties es as trad tradin ing g secu securi riti ties es.. Pertinent data are as follows: Fair Value Security Cost At 12/31/04  A $ 88,000 $ 78,000 B 112,000 124,000 C 192,000 172,000 On December 31, 2004, Nance transferred its investment in security C from trading to available-for-sale because Nance intends to retain security C as a long-term investment. What total amount of gain or loss on its securities should be included in Nance's income statement for the year ended December 31, 2004?

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Investments

17 - 13

61.

Before Before incom income e taxes, taxes, what what amount amount should should Kimm Kimm includ include e in its 2004 incom income e stateme statement nt as a result of the investment? a. $150,000. b. $90,000. c. $45,000. d. $27,000.

62. 62.

The The carr carryi ying ng amoun amountt of this this inve invest stme ment nt in Kimm Kimm's 's Decem Decembe berr 31, 31, 2004 2004 balan balance ce sheet sheet should be a. $360,000. b. $378,000. c. $405,000. d. $333,000.

63.

What should should be the the gain gain on sale of this this invest investment ment in Kimm's Kimm's 2005 income income statement? statement? a. $57,000. b. $52,500. c. $43,500. d. $34,500.

64. 64.

On Janua January ry 1, 2004 2004,, Sloa Sloane ne Co. purch purchas ased ed 25% of Orr Orr Corp Corp.' .'s s comm common on stock stock;; no goodwill resulted from the purchase. Sloane appropriately carries this investment at equity and the balance in Sloane’s investment account was $480,000 at December 31, 2004. Orr  reported net income of $300,000 for the year ended December 31, 2004, and paid common stock dividends totaling $120,000 during 2004. How much did Sloane pay for its

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17 - 14

Test Bank for Intermediate Accounting, Eleventh Edition

PROBLEMS Pr. 17-74—Trading equity securities.

Gordon Gordon Compan Company y has the follow following ing securi securitie ties s in its portfo portfolio lio of tradin trading g equity equity securi securitie ties s on December 31, 2003: Cost Fair Value 5,000 shares of Milner Corp., Common $160,000 $139,000 10,000 shares of Eddy, Common 182,000 190,000 $342,000 $329,000  All of the securities had been purchased in 2003. In 2004, Gordon completed the following securities transactions: March March 1  April 1

Sold Sold 5,000 5,000 shares shares of of Milner Milner Corp Corp., ., Commo Common n @ $31 less less fees fees of $1,50 $1,500. 0. Bought 600 shares of Yount Stores, Common Common @ $50 plus fees of $550.

The Gordon Company portfolio of trading equity securities appeared as follows on December 31, 2004: Cost Fair Value 10,000 shares of Eddy, Common $182,000 $195,500

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Investments  AGH Common (10,000 shares) DEL Preferred (2,000 shares) Pratt Convertible bonds (200 bonds)

17 - 15

Cost $300,000 210,000 230,000

During 2005, the following events occurred: 1. Sold Sold 5,000 5,000 shares shares of AGH AGH for for $170,0 $170,000. 00. 2. Acquired Acquired 1,000 shares shares of Norton Norton Common Common for $45 per share. share. Brokerage Brokerage commissi commissions ons totaled totaled $1,000.  At 12/31/05, the fair values for for Garcia's trading securities were: were:  AGH Common, $28 per share DEL Preferred, $110 per share Pratt Bonds, $1,020 per bond Norton Common, $42 per share

Instructions

(a) (a) (b) (c)

Prep Prepare are a sche schedu dule le whic which h show shows s the the bala balanc nce e in the the Secu Securi riti ties es Fair Fair Valu Value e Adju Adjust stme ment nt (Trading) at December 31, 2004 (after the adjusting entry for 2004 is made). Prepar Prepare e a schedu schedule le which which shows the aggreg aggregate ate cost cost and fair value values s for Garcia' Garcia's s trading trading securities portfolio at 12/31/05. Prepare Prepare the necessary necessary adjusting adjusting entry based upon your your analysi analysis s in (b) (b) above. above.

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17 - 16

Test Bank for Intermediate Accounting, Eleventh Edition

Pr. 17-76—Available-for-sale equity securities.

During the course of your examination of the financial statements of Simpson Corporation for the year ended December December 31, 2004, you found a new account, "Investme "Investments." nts." Your examination examination revealed that during 2004, Simpson began a program of investments, and all investment-related transactions were entered in this account. Your analysis of this account account for 2004 follows: Simpson Corporation  Analysis of Investments Investments For the Year Ended December 31, 2004 Date—2004

Debit

Credit

(a) Pinson Company Common Stock Feb. 14 Purchased 1,000 shares @ $55 per share. July July 26 Rece Receiv ived ed 100 100 sha shares res of Pins Pinson on Comp Compan any y com commo mon n sto stock ck as a stock dividend. (Memorandum entry in general ledger.) Sept. Sept. 28 Sold Sold the the 100 100 share shares s of of Pinso Pinson n Comp Company any common common stock stock received July 26 @ $70 per share.

$55,000

$7,000

(b) Debit  Apr. Oct.

Watts Inc., Common Stock 30 Purchased 5,000 shares @ $40 per share. 28 Received dividend of $1.20 per share.

Credit

$200,000 $6,000

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Investments

17 - 17

*Pr. 17-77 —Derivative financial instrument.

Kelley Co. purchased a put option on Flynn common shares on July 7, 2004, for $170. The put option is for 200 shares, and the strike price is $50. The option expires on January 31, 2005. The following data are available with respect to the put option: Date Date September 30, 2004 December 31, 2004 January 31, 2005

Mark Market et Pric Price e of Flyn Flynn n Shar Shares es $54 per share $52 per share $55 per share

Instructions

Prepare the journal entries for Kelley Co. for the following dates:

Time Time Valu Value e of Put Put Opti Option on $88 35 0