ACCT 302 Read & Interact Spiceland, Nelson, & Thomas Chapter 12 solutions complete answers

ACCT 302 Read & Interact Spiceland, Nelson, & Thomas Chapter 12 solutions complete answers 

 

Holding bonds during periods in which the fair value of the bonds changes results in

 

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?" (Select all that apply.)

 

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of (Select all that apply.)

 

An investor who purchased corporate bonds that are not publicly traded may estimate the bonds' fair value by determining the

 

Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.

 

If the market rate of interest rises after a bond is purchased, the bond incurs

 

Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as ________ securities.

 

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)

 

Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period, (Select all that apply.)

 

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000; and discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of (Select all that apply.)

 

Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale? (Select all that apply.)

 

If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using               techniques.

 

Gains and losses relating to debt securities classified as trading are presented in the               in the periods in which fair value changes, regardless of whether they are realized or unrealized. (Enter one word per blank.)

 

Which of the following are correct regarding the financial statement presentation of HTM securities? (Select all that apply.)

 

Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be

 

Characteristics that support classification of investments as trading securities include (Select all that apply.)

 

How are available-for-sale debt securities reported? (Select all that apply.)

 

Bella Company purchased debt securities with a face amount of $500,000 for $480,000 and classifies them as trading securities. During the first year, the company amortized $2,000 of the associated discount. At the end of the period, the fair value is $504,000. Bella should recognize a fair value adjustment of

 

Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. Assume the investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed. The journal entry to record the sale of the bonds should include these credits: (Select all that apply.)

 

Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes (Select all that apply.)

 

Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as        activities in the statement of cash flows. (Enter only one word.)

 

Correctly match the account balances related to AFS debt securities with the correct financial statement presentation.

 

Unrealized holding gains and losses associated with debt investments properly classified as "available for sale" are

 

Accounting for held-to-maturity, trading, and available-for-sale debt securities differs with respect to

 

Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?

 

The appropriateness of the classification of debt investments must be reassessed

 

Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. On the date of sale, Markus should recognize a realized gain of _____ in net income. (Assume the debt investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed.)

 

Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in               in the period they occur. (Enter one word per blank.)

 

Global Company holds a portfolio of equity securities. The company intends to sell the securities during the next accounting period. The company should classify the investment as

 

Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.

 

Match the correct accounting treatment with the correct transaction.

 

Under U.S. GAAP, which of the following statements regarding the classification of debt investments is correct?

 

From an accounting perspective, critical events that investors experience over the life of an investment include (Select all that apply.)

 

The fair value option can be applied to: (Select all that apply.)

 

Beginning in 2018, equity adjustments that lack significant influence are accounted for the same way as debt investments classified as

 

The choice to classify debt securities as current or noncurrent depends on

 

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. How should Smith Co. record the purchase of this investment? (Select all that apply.)

 

January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018? (Select all that apply.)

 

Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to (Select all that apply.)

 

Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system. (Select all that apply.)

 

How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?

 

Regarding the valuation of equity investments that lack significant influence beginning in 2018, which of the following statements is correct?

 

When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the

 

All equity investments are initially recorded at

 

Dividends earned on an equity investment, when there is a lack of significant influence, are credited to

 

When fair value of equity investments is not readily determinable (select all that apply)

 

Cash flows related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the _____ section of the Statement of Cash Flows.

 

How are equity investments that lack significant influence adjusted? (Select all that apply.)

 

Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct? (Select all that apply.)

 

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale? (Select all that apply.)

 

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with (Select all that apply.)

 

When fair value of equity investments is not readily determinable,

 

Consistent with the equity method, investment income is

 

Equity investments for which the investor does not have significant influence are classified as _____ in the balance sheet. (Select all that apply).

 

Under the equity method, dividends received from the investment

 

Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the        method. (Enter only one word.)

 

Identify the statement that is correct regarding the purpose of additional adjustments under the equity method.

 

Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at

 

Lerner Inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. During the year after the acquisition, the undervalued equipment will _____ Lerner's investment revenue by _____.

 

Ziegler Company owns 40% of Norm Company's outstanding voting stock. During the current year, Norm reported income of $2 million and declared dividends of $1 million. Ziegler should report income from its investment of

 

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 million and the fair value of the company's net assets is $1.2 million. The difference between the book value and fair value of the net assets is attributed to undervalued land. Adrianna should

 

Dividends cause the investor's investment in the investee's net assets to

 

Gunter Company acquires a 25% interest in Hunter Company. The fair value of Hunter's inventory exceeds its book value by $40,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

 

Additional adjustments under the equity method directly affect which of the following accounts? (Select all that apply.)

 

The carrying value of an equity method investment consists of its initial cost plus

 

Abbott Inc. owns 30% of the outstanding voting shares of Berta Inc. On the date of acquisition, the fair value of Berta's equipment with a remaining useful life of five years and no residual value exceeded its carrying value by $20,000. During the year after the acquisition, the undervalued equipment will _____ Abbott's investment revenue by _____.

 

If an investment accounted for under the equity method is acquired during the year, income and other adjustments are

 

Goodwill arising from an investment accounted for under the equity method is

 

Under the equity method, if the investee company reports a net loss, the investment balance will

 

Silvia Company acquires a 30% interest in Small Company. The fair value of Small's inventory exceeds its carrying value by $100,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue would:

 

The investment account associated with Adam Corp.'s equity method investment shows a balance of $500,000. The investment is sold for $550,000. Adam should

 

Gruen Corporation aquires a 25% interest in Blau Company for $1 million. The excess of investment cost over Gruen's share of the book value of Blau's net assets is solely attributable to goodwill. During the year, Blau reports income of $500,000 and declares dividends of $100,000. The carrying value of Gruen's investment at the end of the accounting period will be:

 

Unrealized gains and losses for equity method investments that are carried at fair value are:

 

Noncurrent special purpose funds set aside for a future specific use, are typically classified as

 

On July 1, Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle reports income of $200,000 and declares dividends of 50,000. Adrianna should recognize income earned by debiting

 

The premium payments of life insurance policies with cash surrender value include (Select all that apply.)

 

True or false: If the investee reports a net loss, the equity investment account is not adjusted for additional expenses.

 

Impairments of available-for-sale debt instruments are recognized in other comprehensive income

 

When an equity method investment is sold,

 

Credit losses are due to

 

Kendrick Company elected the fair value option for its equity method investments. During the current period, the fair value of the investments increased. Kendrick Company should

 

Consistent with IFRS No. 9, impairments of debt investments will be accounted for using a

 

Which of the following is a common special purpose fund?

 

Emil Company purchases $400,000 face amount, 8% semi-annual 15-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is

 

The premium payments of life insurance policies with cash surrender value include an insurance expense portion and a(n)

 

Losses arising from credit losses on available-for-sale debt securities are recognized in _____; noncredit losses are recognized in _____.

 

Credit losses are calculated as the difference between the amortized cost of the debt and

 

Under IFRS, the entire impairment of debt investments are recognized in ______; under U.S. GAAP, if a portion of an impairment is due to noncredit losses, it is recorded in _______.

 

Otto Company purchases $200,000 face amount, 8% semi-annual 10-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is

 

 

5.
Adjustments made to OCI and AOCI to account for the tax effects of unrealized holding gains and losses on available-for-sale debt securities also give rise to _________. (Select all that apply.)Adjustments made to OCI and AOCI to account for the tax effects of unrealized holding gains and losses on available-for-sale debt securities also give rise to _________. (Select all that apply.)
 
 
6.
The adjustments that investors make when applying the equity method are designed to
 
 
8.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. At the time of acquisition, book value of the company's net assets is $1 million and the fair value of the company's net assets is $1.2 million. The difference between the book value and fair value of the net assets is attributed to an undervalued building with a remaining useful life of 10 years. Adrianna Company should recognize the additional depreciation by (Select all that apply.)
 
 
10.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares and pays dividends of $100,000. Adrianna should recognize the dividends from Saddle by crediting
 
 
11.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by crediting
 
 
12.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by debiting
 
 
16.
Archie Inc. has available-for-sale debt securities that have a fair value that exceeds their amortized cost, and Archie has been recording changes in fair value over the life of the securities. If Archie now sells those securities, it should reverse previous unrealized holding _____ included in ______.
 
 
17.
At the end of the current fiscal period, the fair value of Orbit Company's investment in AFS debt securities exceeds its carrying value by $20,000. Orbit should
 
 
 
 
 
 
 
 
 
 
 
 

20.
Bonds typically provide two sources of cash flows to investors. These are associated with the payment of
 
 
25.
Changes in the fair value are more relevant for trading debt securities than for held-to-maturity debt securities because they provide an indication of
 
 
26.
Choose the correct debit and credit for the investor's recognition of income reported by the investee when using the equity method.
 
 
27.
Companies need to recognize impairments related to held-to-maturity and available-for-sale debt investments because changes in the _____ _____ of those investments are not always recognized in net income.
 
 
28.
Consistent with IFRS, an investment that meets the "SPPI" criteria is accounted for using amortized cost if the business purpose of the investment is to
 
 
30.
Consistent with IFRS, transfers between investment categories are
 
 
34.
Debt investments in available-for-sale securities are reported at
 
 
35.
Debt investments that do not meet the criteria for held-to-maturity or trading securities are classified as _____-_____-_____.
 
 
36.
Debt investments that will not be held for their entire life or sold in the very near future are referred to as
 
 
37.
Debt securities that are classified as available-for-sale or trading are valued at
 
 
38.
Diamond Company has a $2 million insurance policy on its CEO, naming itself as beneficiary. Annual premiums are $10,000, payable on January 1st of each year. In 20X1, the cash surrender value of the policy increased according to the contract from $6,000 to $7,500. The entry to record the payment of the premium would include:
 
 
39.
Discontinuing the application of the equity method when the investor's share of the investee losses exceeds the carrying amount of the investment avoids the problem of reducing the investment account
 
 
40.
The "discount on bond investments" account is a
 
 
41.
The discount on bond investment (Select all that apply.)
 
 
 
 
 
 
 
 
 

44.
During the current period, Muenster Company amortized $5,000 of discount relating to its investment in debt securities. The company's amortization next period should be ______ the current period.
 
 
45.
Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is
 
 
46.
Equity and debt securities are commonly referred to as ____ instruments. (Enter only one word.)
 
 
48.
The equity method discourages income manipulation by requiring that dividends _____ the book value of the investment, rather than affect _____ _____.
 
 
49.
The equity method is also referred to as a one-line consolidation because (Select all that apply.)
 
 
50.
Extensive disclosures relating to investments primarily benefit financial statement
 
 
51.
Extensive financial statement disclosures are required for investments because they help financial statement users (Select all that apply.)
 
 
52.
Fair value adjustments for trading securities are typically recognized
 
 
53.
Folger Company recognizes an unrealized holding gain for debt investments that are classified as AFS. If the company had classified the investments as trading securities, its total shareholders' equity would be
 
 
54.
For discounted bonds, interest revenue is ____ cash interest each interest period.
 
 
55.
For each year presented, investors should disclose the following in the disclosure notes related to investments: (Select all that apply.)
 
 
56.
For held-to-maturity debt instruments, the difference between fair value and amortized cost must be _____ in a _____ to the financial statements.
 
 
58.
Fuller Company is the beneficiary on insurance policies with cash surrender value. The insurance premium should be
 
 
59.
Gains and losses that have not been realized through sales of the related investment are also referred to as:
 
 
60.
Gee Company accounts for its investment in Fuller Company using the equity method. During the year, Fuller reports a net loss. The net loss will
 
 
61.
Gerhard Company purchases debt investments for $200,000 and classifies them as available-for-sale securities. At the end of the accounting period, the fair value has increased to $207,000. Gerhard should report its investment at
 
 
63.
Goober Company is able to control the operating and financial policies of Stein Company. Goober should
 
 
 
 
 
 
 
 
 

65.
Greene Corporation does not recognize unrealized holding gains and losses for its bond investments. If the company is properly applying U.S. GAAP, its investment must be classified as
 
 
66.
Greenly Company acquired $40,000 face amount bonds of Neumann Company. Greenly can expect to receive the following cash flows from its investment. (Select all that apply.)
 
 
70.
Holding gains and losses are unrealized because the related investment has not
 
 
71.
Holding gains and losses associated with investments properly classified as held-to-maturity are
 
 
72.
Holding gains and losses associated with investments properly classified as "trading securities" are
 
 
77.
If a bond sells for more than its maturity value, the bond sells at a ____.
 
 
78.
If a company chooses to apply the fair value option to investments that otherwise would be accounted for under the equity method, the election (Select all that apply.)
 
 
80.
If an investee reports a net loss, an investor who properly applies the equity method will (Select all that apply.)
 
 
83.
If the interest rate paid on a bond exceeds the market interest rate, the bond will sell for an amount that is
 
 
84.
If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is
 
 
85.
If the investor's share of an investee's net loss exceeds the investment account balance, the equity method is not applied until
 
 
86.
If the market rate of interest decreases after a bond is purchased, the bond incurs
 
 
 
 
 
 
 
 
 

89.
Impairments related to debt investments may be accounted for using a
 
 
90.
An important factor that determines accounting for equity investments is
 
 
91.
In an equity investment with significant influence, any differences the fair value and book value of inventory is amortized into net income in the year the inventory is
 
 
92.
The interest rate for debt of similar risk and maturity is referred to as the _____ interest rate.
 
 
93.
Interest revenue is calculated based on the ____ interest rate. (Enter only one word.)
 
 
94.
In the statement of cash flows, dividends received from investments are classified as cash inflows from
 
 
96.
An investment in trading debt securities is initially recorded at
 
 
97.
Investments in debt securities classified as trading are reported on the balance sheet at _____ _____. (Enter one word per blank.)
 
 
98.
Investments that are properly classified as held-to-maturity should be carried at
 
 
99.
An investor is assumed to have control over the investee company if the investor owns _____ of the investee's outstanding voting shares.
 
 
100.
Investors must disclose this information related to their investments. (Select all that apply.)
 
 
101.
Investors use this interest rate to value investments in bonds:
 
 
102.
An investor that owns between ___ and ___ percent of the voting stock of an investee is assumed to have significant influence over the investee.
 
 
103.
An investor who owns more than 50% of the outstanding voting stock of an investee company is assumed to have
 
 
105.
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should
 
 
 
 
 
 
 
 
 

109.
January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. What should Smith Co. record on December 31, 2021? (Select all that apply.)
 
 
110.
Jones Financial Institution buys and sells debt securities frequently to maximize short-term gains in market value. Jones should classify its portfolio as
 
 
112.
A key factor determining the accounting for equity investments is
 
 
113.
Klugen Company owns 30% of the outstanding shares of Dans Inc. On October 15, Dans declares a dividend of $100,000. Klugen should:
 
 
115.
Lerner Inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. Related to the undervalued equipment, during the year after the acquisition, Lerner should (Select all that apply.)
 
 
116.
Loren Company properly reclassifies an investment that previously lacked significant influence to the equity method. Loren should (Select all that apply.)
 
 
118.
Lucky Company invested in debt securities and classified them as HTM. At the end of the accounting period, the value of the investment appreciated by $10,500. The company should
 
 
119.
Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. The journal entry to record the interest for the first 6-month period includes (Select all that apply.)
 
 
 
 
 
 
 
 
 

124.
Marlon Company recognizes interest revenue of $5,400 related to its bonds; its periodic bond interest payment receipts are $5,200. The bonds must have issued at:
 
 
125.
Muenster Company owns 32% of the outstanding voting stock of Sloan Company. Muenster should
 
 
126.
Neumann Company changes from the equity method to another method. Which of the following occur at the time of change? (Select all that apply.)
 
 
128.
Northern Company has an equity investment in another company of $600,000. Northern Company does not have significant influence over the company and the investment has a fair value of $575,000. At the end of the reporting period, the journal entry includes (Select all that apply.)
 
 
129.
Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as available for sale (AFS) securities. At the end of the reporting period, the journal entry includes (Select all that apply.)
 
 
134.
On December 31, 2018, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and a carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and December 31. The effective interest revenue recognized for the six months ended December 31, 2018 is:
 
 
135.
On December 31, 2021, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and a carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and December 31. The journal entry to record the interest payment on December 31, 2021 includes (Select all that apply.)
 
 
136.
On December 31, 2021, Sparrow Company has bonds with an amortized cost of $424,000 and a fair value of $452,000. These bonds are properly classified as AFS securities. On January 12, 2022, Sparrow sells the bonds for $450,000. Just prior to recording the sale on January 12, 2022, the journal entry to adjust the bonds to fair value will include
 
 
137.
On December 31, 2021, Sparrow Company has bonds with an amortized cost of $424,000 and a fair value of $452,000. These bonds are properly classified as trading debt securities. On January 12, 2022, Sparrow sells the bonds for $450,000. Just prior to recording the sale on January 12, 2022, the journal entry to update the fair value adjustment account will include
 
 
139.
On the date of acquisition, an investment in bonds should be recorded at:
 
 
140.
The overall objective of derivatives is to
 
 
141.
Over the life of the investment, amortization of a discount
 
 
142.
Palmer Company purchases bonds with a face amount of $500,000 for $480,000 and properly classifies them as "held-to-maturity." On the maturity date of the bonds, the book value of bonds will be:
 
 
143.
Parker Company owns 30% of Sandra Company's stock. Which of the following will decrease the investment account?
 
 
 
 
 
 
 
 
 
 
 
 
 

144.
Parker Company owns 30% of Sandra Company's stock. Which of the following will increase the investment account?
 
 
145.
Porter Company classified its investment in the bonds of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5,000. The result of this increase in value will
 
 
146.
The premium on bond investment (Select all that apply.)
 
 
149.
The price of a bond is equal to
 
 
150.
The price of a bond is equal to the
 
 
151.
The primary reasons why holding gains and losses relating to held-to-maturity securities are not recognized even though they are recognized for trading and AFS securities probably is that the information is
 
 
153.
Ricardo Company chose the fair value option (FVO) for accounting for a new investment in AFS debt securities. Which of the following statements is correct?
 
 
154.
Robert Company properly applies the equity method to its investment in Margit Corporation, At the end of the current year, the fair value of Robert Company's investment increased. Robert Company should
 
 
155.
Silvia Company acquires a 30% interest in Small Company. The fair value of Small's inventory exceeds its carrying value by $100,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue is reduced by $30,000. This adjustment yields the same net investment revenue as if _____ had carried the inventory on its books at _______.
 
 
157.
Sour Company's ownership interest in Sweet Inc. declined from 25% to 15% during Year 20X1. Sour Company previously used the equity method to account for its interest in Sweet. In 20X1, the equity method
 
 
158.
Trading securities typically are classified in the balance sheet as
 
 
159.
True or false: An investment in trading debt securities should initially be recorded at cost.
 
 
 
 
 
 
 
 
 

161.
True or false: The 20% ownership threshold dictates the accounting treatment of equity investments regardless of other influences.
 
 
162.
True or false: The development of a consistent framework for accounting for all financial instruments is one of FASB's long-standing and ongoing projects.
 
 
163.
True or false: The various approaches to accounting for equity investments generally have similar results on the financial statements.
 
 
164.
True or false: When the fair value option is chosen for equity investments with significant influence, the company must report the investments on their own line in the balance sheet.
 
 
165.
Under IFRS No. 9, investments in equity securities are classified as (Select all that apply.)
 
 
166.
Under IFRS, one of the conditions that must be met in order to carry investments at "amortized cost" is that contractual cash flows
 
 
168.
Under IFRS, transfers of debt securities between the amortized cost, FVOCI, and FVPL categories occur if and only if the company
 
 
171.
Under the equity method, the fair value of the investment shares at the end of the reporting period is
 
 
174.
Unless information to the contrary exists, an investor is assumed to have significant influence over the investee company if the investor holds an ownership interest
 
 
175.
Unlike US GAAP, under IFRS unrealized holding gains and losses on equity investments can go through either the income statement or through _____ _____ _____.
 
 
178.
Werner acquires 35% of the outstanding voting shares of Voler Inc. At the time of acquisition, Voler's building with a 20-year remaining useful life was undervalued. Subsequent to the acquisition of the shares, Werner will debit the ____ account and credit the ____ account due to the undervalued building.
 
 
179.
When accounting for the sale of AFS debt securities, how are unrealized gains reversed? (Select all that apply.)
 
 
 
 
 
 
 
 
 

182.
When equity securities that lack significant influence are sold, a company should first record into net income any unrealized holding _____ or _____ that have occurred during the current year prior to the date of sale.
 
 
183.
When equity securities that lack significant influence are sold, (Select all that apply.)
 
 
186.
Which accounting standards require the equity method for use with significant influence investees?
 
 
187.
Which balance sheet presentation is acceptable for reporting an investment involving significant influence for which the fair value option was chosen? (Select all that apply.)
 
 
188.
Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9? (Select all that apply.)
 
 
189.
Which of the following are common examples of derivatives?
 
 
190.
Which of the following are common financial instruments that are used to finance or expand a company's operations? (Select all that apply.)
 
 
192.
Which of the following are financial instruments?
 
 
193.
Which of the following are financial instruments?
 
 
195.
Which of the following describes FASB's project activities with respect to developing a consistent framework for reporting financial instruments?
 
 
196.
Which of the following earnings management techniques may be observed when accounting for investments? (Select all that apply).
 
 
 
 
 
 
 
 
 

197.
Which of the following earnings management techniques may be observed when accounting for investments? (Select all that apply).
 
 
198.
Which of the following events may lead an investor to switch from the fair value method to the equity method?
 
 
199.
Which of the following investment-related transactions are classified as investing activities in the statement of cash flows? (Select all that apply.)
 
 
200.
Which of the following is a benefit of the required accounting treatment for investments using the equity method?
 
 
202.
Which of the following is the most important concept or principle that explains the differences in reporting holding gains and losses?
 
 
203.
Which of the following is true regarding significant influence as it relates to equity securities?
 
 
205.
Which of the following may give rise to potential earnings management?
 
 
206.
Which of the following represent an important difference between the fair value through net income and equity method? (Select all that apply.)
 
 
207.
Which of the following represent an important similarity between the fair value through net income and equity method?
 
 
208.
Which of the following represent differences under IFRS (as compared to U.S. GAAP) with respect to the equity method? (Select all that apply.)
 
 
209.
Which of the following scenarios may require additional adjustments under the equity method?
 
 
210.
Which of the following types of debt investments are reported at fair value? (Select all that apply.)
 
 
211.
Which reporting method should be used if the investor can exert significant influence over the investee?
 
 
 
 
 
 
 
 
 

 

5.
Adjustments made to OCI and AOCI to account for the tax effects of unrealized holding gains and losses on available-for-sale debt securities also give rise to _________. (Select all that apply.)

a.) lower net income
b.) deferred tax liabilities
c.) deferred tax assets
d.) current taxes payable
 
 
6.
Adjustments must be made to _____ to account for the tax effects of debt investments. (Select all that apply.)

a.) retained earnings
b.) OCI
c.) AOCI
d.) net income
 
 
7.
The adjustments that investors make when applying the equity method are designed to

a.) record separate financial statement items of the investee on an item-by-item basis.
b.) mimic what would happen if an investment were consolidated.
c.) consolidate the investor and investee.
 
 
11.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares and pays dividends of $100,000. Adrianna should recognize the dividends from Saddle by crediting

a.) investment in Saddle Company for $70,000.
b.) investment in Saddle Company for $35,000.
c.) dividends revenue for $35,000.
d.) dividends revenue for $70,000.
 
 
12.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by crediting

a.) dividend revenue for $35,000.
b.) investment in Saddle Company for $70,000.
c.) investment in Saddle Company for $35,000.
d.) investment revenue for $70,000.
 
 
13.
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by debiting

a.) dividend revenue for $35,000.
b.) investment in Saddle Company for $70,000.
c.) investment in Saddle Company for $35,000.
 
 
 
 
 
 
 
 
 
 

17.
Archie Inc. has available-for-sale debt securities that have a fair value that exceeds their amortized cost, and Archie has been recording changes in fair value over the life of the securities. If Archie now sells those securities, it should reverse previous unrealized holding _____ included in ______.

a.) losses / net income
b.) losses / OCI
c.) gains / OCI
d.) gains / net income
 
 
18.
At the end of the accounting period, trading debt securities must be adjusted to ___________ value. (Enter only one word.)
 
 
19.
At the end of the current fiscal period, the fair value of Orbit Company's investment in AFS debt securities exceeds its carrying value by $20,000. Orbit should

a.) disclose the increase in value, but not record it.
b.) recognize an unrealized holding gain in income.
c.) recognize an unrealized holding gain in OCI.
 
 
20.
At the time of acquisition, debt investments are recorded at

a.) Future cash flows
b.) face value
c.) cost
d.) market value
 
 
21.
Barber Company acquires 35% of the outstanding shares of Carter Company. Which of the following is correct?

a.) Barber must consolidate Carter Company.
b.) Barber must utilize the equity method.
c.) Barber may choose to apply the fair value option
 
 
24.
Blum Company invested in debt securities and classified them as "held-to-maturity." At the accounting period, the value of the investment appreciated by $10,500. The company should

a.) not recognize the unrealized gain.
b.) recognize an unrealized gain on investment in net income.
c.) recognize an unrealized gain on investment in other comprehensive income.
 
 
25.
Bonds typically provide two sources of cash flows to investors. These are associated with the payment of

dividends
interest
principal
taxes
 
 
26.
Carried at amortized cost and unrealized holding gains and losses are not recognized
 
 
27.
Carried at fair value and unrealized holding gains and losses are recognized in net income
 
 
28.
Carried at fair value and unrealized holding gains and losses are recognized in other comprehensive income
 
 
 
 
 
 
 
 
 

34.
Changes in the fair value are more relevant for trading debt securities than for held-to-maturity debt securities because they provide an indication of

a.) management's success at investing
b.) economic conditions.
tc.) he riskiness of the investments
 
 
36.
ChoiceApproach used to account for equity investments for which the investor lacks significant influence.
Approach used to account for equity investments for which the investor lacks significant influence.
 
 
38.
Choose the correct debit and credit for the investor's recognition of income reported by the investee when using the equity method.

a.) debit investment revenue
b.) debit dividends receivable
c.) credit investment revenue
d.) debit investment account
e.) credit investment account
 
 
39.
Companies need to recognize impairments related to held-to-maturity and available-for-sale debt investments because changes in the ___________ ____________ of those investments are not always recognized in net income.
 
 
40.
Company that is controlled by another entity.
 
 
41.
Consistent with IFRS, an investment that meets the "SPPI" criteria is accounted for using amortized cost if the business purpose of the investment is to

a.) to hold the investment from inception to maturity.
b.) sell the investment at a gain when the market value rises.
c.) hold the investment to collect the contractual cash flows
 
 
43.
Consistent with IFRS, the fair value method may be chosen to avoid

a.) overstating income
b.) overstating assets
c.) a loss of relevance
d.) accounting mismatch
 
 
44.
Consistent with IFRS, the fair value option is:

a.) permitted for all types of investments
b.) permitted only in specific circumstances
c.) not permitted
 
 
45.
Consistent with IFRS, transfers between investment categories are

a.) permitted only in rare circumstances.
b.) strictly prohibited.
c.) permitted if disclosed in the notes.
 
 
49.
Current period holding gains or losses
 
 
50.
Debt investments classified as "available-for-sale" securities are reported at

a.) fair value.
b.) amortized cost.
c.) original cost.
 
 
51.
Debt investments that do not meet the criteria for held-to-maturity or trading securities are classified as ________ ________ __________
 
 
 
 
 
 
 
 
 

52.
Debt investments that will not be held for their entire life or sold in the very near future are referred to as

a.) held to maturity securities
b.) trading securities
c.) available-for-sale securities
 
 
53.
Diamond Company has a $2 million insurance policy on its CEO, naming itself as beneficiary. Annual premiums are $10,000, payable on January 1st of each year. In 20X1, the cash surrender value of the policy increased according to the contract from $6,000 to $7,500. The entry to record the payment of the premium would include:

a.) Debit to cash surrender value $7,500
b.) Debit to insurance expense $8,500
c.) Credit to cash $8,500
 
 
54.
Discontinuing the application of the equity method when the investor's share of the investee losses exceeds the carrying amount of the investment avoids the problem of reducing the investment account ________ ________
 
 
55.
The "discount on bond investments" account is a
 
 
57.
Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is

a.) 6%.
b.) 8%.
c.) 4%.
d.) 3%.
 
 
58.
Equity and debt securities are commonly referred to as __________ instruments.
 
 
60.
The equity method discourages income manipulation by requiring that dividends ______________ the book value of the investment, rather than affect ____________ ______________
 
 
61.
The equity method is also referred to as a one-line consolidation because (Select all that apply.)

a.) the equity method only considers the parent company.
b.) the equity method views the investor and investee as a single entity.
c.) the investor reports its equity interest in a single investment account.
 
 
62.
The eventual effect of the different methods of recognizing holding gains and losses for debt securities on total income is

a.) the same if the adjustment is a loss.
b.) the same if the adjustment is a gain.
c.) always different.
d.) always the same.
 
 
63.
Extensive disclosures relating to investments primarily benefit financial statement

a.) users.
b.) preparers.
c.) auditors.
 
 
64.
Extensive financial statement disclosures are required for investments because they help financial statement users (Select all that apply.)

a.) assess the quality of fair value measurements.
b.) understand the effect of fair value measurement.
c.) assess the overall profitability of the company.
 
 
65.
Fair value adjustments for trading securities are typically recognized

a.) directly in the investment account.
b.) in a separate valuation account.
c.) only in a disclosure note.
 
 
67.
Folger Company recognizes an unrealized holding gain for debt investments that are classified as AFS. If the company had classified the investments as trading securities, its total shareholders' equity would be

a.) lower
b.) the same
c.) higher
 
 
68.
For a specific investment in equity securities, use of the equity method tends to produce ____ financial statement results than would using the fair value method.

a.) different
b.) similar
c.) the same
 
 
69.
For discounted bonds, interest revenue is ____ cash interest each interest period.

a.) greater than
b.) smaller than
c.) equal to
 
 
 
 
 
 
 
 
 

70.
For each year presented, investors should disclose the following in the disclosure notes related to investments: (Select all that apply.)

a.) Aggregate fair value
b.) Description of the valuation techniques used in the fair value measurement process
c.) Expected future cash flows for all investment types
d.) Gross realized and unrealized holding gains and losses
 
 
71.
For each year presented, investors should disclose the following in the disclosure notes related to investments: (Select all that apply.)

a.) Gross realized and unrealized holding gains and losses
b.) Aggregate fair value
c.) Expected future cash flows for all investment types
d.) Description of the valuation techniques used in the fair value measurement process
 
 
72.
For held-to-maturity debt instruments, the difference between fair value and amortized cost must be ____________ in a ____________ to the financial statements.
 
 
74.
Fuller Company is the beneficiary on insurance policies with cash surrender value. The insurance premium should be

a.) allocated between expense and asset
b.) expensed as incurred
c.) deferred until the employees retire
 
 
76.
Gains and losses that have not been realized through sales of the related investment are also referred to as:

a.) extraordinary gains and losses
b.) temporary gains and losses
c.) unrealized holding gains and losses
d.) other than temporary gains and losses
 
 
77.
Gee Company accounts for its investment in Fuller Company using the equity method. During the year, Fuller reports a net loss. The net loss will

a.) decrease Gee's investment balance.
b.) increase Gee's investment balance.
c.) not affect Gee's investment balance.
 
 
78.
Gerhard Company purchases debt investments for $200,000 and classifies them as available-for-sale securities. At the end of the accounting period, the fair value has increased to $207,000. Gerhard should report its investment at

a.) $207,000.
b.) $200,000 plus interest
c.) $200,000.
 
 
80.
Goober Company is able to control the operating and financial policies of Stein Company. Goober should

a.) report its investment at fair value.
b.) apply only the equity method.
c.) issue consolidated financial statements
 
 
82.
Greene Company purchases an investment in bonds issued by Blue Company. Greene intends to hold the bonds until they mature and did not elect the fair value option. Greene should report the investment at

a.) fair market value.
b.) original cost.
c.) amortized cost.
 
 
83.
Greenly Company acquired $40,000 face amount bonds of Neumann Company. Greenly can expect to receive the following cash flows from its investment. (Select all that apply.)

Principal
Interest
Dividends
 
 
84.
The group of financial instruments that derive their values from some other security or index are referred to as

a.) stock options
b.) intangible instruments
c.) derivatives
 
 
 
 
 
 
 
 
 

88.
Holding gains and losses are unrealized because the related investment has not

a.) been sold.
b.) changed in value.
c.) matured.
 
 
89.
Holding gains and losses associated with investments properly classified as held-to-maturity are

a.) recognized in equity.
b.) recognized in income.
c.) not recognized.
 
 
90.
Holding gains and losses associated with investments properly classified as "trading securities" are

a.) recognized as other comprehensive income.
b.) not recognized.
c.) recognized as part of income.
 
 
95.
if a bond sells for more than its maturity value, the bond sells at a _________
 
 
96.
If a company chooses to apply the fair value option to investments that otherwise would be accounted for under the equity method, the election (Select all that apply.)

a.) is irrevocable
b.) can be made for some investments and not others
c.) must be made for all investments
d.) can be changed later
 
 
98.
If an investee reports a net loss, an investor who properly applies the equity method will (Select all that apply.)

a.) credit investment
b.) debit investment
c.) credit investment revenue
d.) not recognize the loss
e.) debit loss on investment
 
 
99.
If an investee reports a net loss, an investor who properly applies the equity method will (Select all that apply.)

a.) debit loss on investment
b.) debit investment
c.) not recognize the loss
d.) credit investment revenue
e.) credit investment
 
 
101.
If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is

a.) more than its maturity value.
b.) less than its maturity value.
c.) equal to its maturity value.
 
 
 
 
 
 
 
 
 
 

102.
If the investor's share of an investee's net loss exceeds the investment account balance, the equity method is not applied until

a.) subsequent income is equal to the unrecognized loss
b.) the investee reports one year of income
c.) the fair value of the investment increases
 
 
103.
If the market rate of interest decreases after a bond is purchased, the bond incurs

a.) an unrealized holding loss
b.) a realized gain
c.) a realized loss
d.) an unrealized holding gain
 
 
106.
Impairments related to debt investments may be accounted for using a

a.) two-step approach.
b.) credit loss model.
c.) debt-recovery model
 
 
107.
An important factor that determines accounting for equity investments is

a.) the amount of income derived from the investment.
b.) the volatility of the investment.
c.) influence or control over the investee entity.
d.) the availability of an open security market.
 
 
108.
In an equity investment with significant influence, any differences the fair value and book value of inventory is amortized into net income in the year the inventory is ___________
 
 
109.
The interest rate for debt of similar risk and maturity is referred to as the _____ interest rate.
 
 
110.
Interest received is calculated based on the _______ interest rate.
 
 
111.
interest revenue is calculated based on the ____________ interest rate.
 
 
112.
In the statement of cash flows, dividends received from investments are classified as cash inflows from

a.) operating activities
b.) financing activities
c.) investing activities
 
 
114.
An investment in trading debt securities is initially recorded at

a.) net realizable value.
b.) amortized cost.
c.) cost.
 
 
116.
Investments in debt securities classified as trading are reported on the balance sheet at __________ _________ (Enter one word per blank.)
 
 
117.
investors must disclose this information related to their investments. (Select all that apply.)

a.) Changes in net unrealized holding gains and losses
b.) Amortized cost basis by major type
c.) Gross realized and unrealized holding gains and losses
d.) Expected future cash flows by investment type
e.) Aggregate fair value
 
 
118.
Investors use this interest rate to value investments in bonds:

a.) face interest rate
b.) stated interest rate
c.) market interest rate
 
 
119.
Investors utilize the __________ interest rate to value the stream of cash flows associated with bond investments. (Enter only one word.)
 
 
120.
Investor who controls another entity through majority stock ownership.
 
 
121.
An investor who owns more than 50% of the outstanding voting stock of an investee company is assumed to have

a.) partial influence
b.) significant influence
c.) control
d.) no significant influence
 
 
 
 
 
 
 
 
 

123.
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should

a.) debit investment in trading securities
b.) credit dividend revenue
c.) credit investment in trading securities
d.) debit dividend revenue
 
 
129.
A key factor determining the accounting for equity investments is

a.) the extent to which the investor can influence the investees activities.
b.) the amount of income received from the investment.
c.) the relative size of the investor and the investee.
d.) the observed fluctuation in market prices of similar securities.
 
 
130.
Klugen Company owns 30% of the outstanding shares of Dans Inc. On October 15, Dans declares a dividend of $100,000. Klugen should:

a.) debit dividend revenue
b.) credit investment in Dans stock
c.) debit investment in Dans stock
d.) credit dividend revenue
 
 
132.
Lerner Inc. owns 30% of the outstanding voting shares of Koerner Inc. On the date of acquisition, the fair value of Koerner's equipment with a remaining useful life of ten years and no residual value exceeded its carrying value by $50,000. Related to the undervalued equipment, during the year after the acquisition, Lerner should (Select all that apply.)

a.) credit investment revenue for $1,500
b.) debit investment revenue for $1,500
d.) debit investment in Koerner for $1,500
e.) credit investment in Koerner for $1,500
 
 
133.
Loren Company properly reclassifies an investment that previously lacked significant influence to the equity method. Loren should (Select all that apply.)

a.) include a disclosure note describing the change to the equity method.
b.) use balance in the investment account at the date of change as the starting balance for applying the equity method.
c.) recognize a gain or loss in net income income.
d.) retroactively apply the equity method and restate previous years financial statements.
 
 
 
 
 
 
 
 
 

135.
Lucky Company invested in debt securities and classified them as HTM. At the end of the accounting period, the value of the investment appreciated by $10,500. The company should

a.) disclose the fair market value in the notes.
b.) carry the investment at fair market value on the balance sheet.
c.) recognize the unrealized gain in net income.
 
 
136.
Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. Margot should recognize the following interest revenue for the first 6-month period:
 
 
137.
Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. The journal entry to record the interest for the first 6-month period includes (Select all that apply.)


a.) credit premium on bond investment $250
b.) credit interest revenue $3,000
c.) debit cash $3,000
d.) debit discount on bond investment $250
e.) debit cash $2,750
f.) credit interest revenue $2,750
 
 
142.
Marlon Company recognizes interest revenue of $5,400 related to its bonds; its periodic bond interest payment receipts are $5,200. The bonds must have issued at:
 
 
143.
Match the IFRS debt instrument category with the corresponding US GAAP category with similar accounting treatment.

Amortized Cost
 
 
144.
Match the IFRS debt instrument category with the corresponding US GAAP category with similar accounting treatment.

Fair value through other comprehensive income (FVOCI)
 
 
145.
Match the IFRS debt instrument category with the corresponding US GAAP category with similar accounting treatment.

Fair value through profit or loss (FVPL)
 
 
146.
Match the ownership percentage on the left with the usual reporting method

Apply equity method.
 
 
147.
Match the ownership percentage on the left with the usual reporting method

Apply fair value through net income method.
 
 
148.
Match the ownership percentage on the left with the usual reporting method

consolidation
 
 
149.
Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.
 
 
150.
Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.

AFS or HTM to Trading
 
 
151.
Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.

AFS to HTM
 
 
152.
Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.

HTM to AFS
 
 
153.
Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.

Trading to AFS or HTM
 
 
 
 
 
 
 
 
 

154.
Merkel Company invested in Sub Company and is able to exert significant influence over the operating and financial policies of Sub Company. Merkel should

a.) report the investment at fair value.
b.) apply the equity method.
c.) apply the cost method.
 
 
155.
Muenster Company owns 32% of the outstanding voting stock of Sloan Company. Muenster should

a.) apply the fair value through net income method.
b.) consolidate the financial statements.
c.) apply the equity method.
 
 
156.
Net fair value adjustments to date - net holding gains and losses to date
 
 
157.
Neumann Company changes from the equity method to another method. Which of the following occur at the time of change? (Select all that apply.)

a.) The carrying amount of the investment is adjusted to fair value.
b.) A gain or loss is recognized on the investment at the time of transition.
c.) The balance in the investment account when the equity method is discontinued serves as the new cost basis.
d.) No adjustment is made to the remaining carrying amount of the investment.
 
 
159.
Northern Company has an equity investment in another company of $600,000. Northern Company does not have significant influence over the company and the investment has a fair value of $575,000. At the end of the reporting period, the journal entry includes (Select all that apply.)

a.) debit to unrealized holding gain - net income $25,000
b.) credit to unrealized holding gain - other comprehensive income $25,000
c.) credit to fair value adjustment $25,000.
d.) debit to fair value adjustment $25,000
e.) debit to unrealized holding gain - other comprehensive income $25,000
f.) debit to unrealized holding loss - net income $25,000
 
 
160.
Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as available for sale (AFS) securities. At the end of the reporting period, the journal entry includes (Select all that apply.)

a.) debit to unrealized holding gain on AFS securities - net income $75,000
b.) credit to unrealized holding gain on AFS securities - OCI $75,000
c.) debit to unrealized holding gain on AFS securities - OCI $75,000
d.) credit to unrealized holding gain on AFS securities - net income $75,000
e.) debit to fair value adjustment $75,000.
f.) credit to fair value adjustment $75,000
 
 
161.
Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. Northern properly classifies these bonds as AFS securities. Prior to recording the sale, the journal entry to adjust the bonds to fair value includes (Select all that apply.)


a.) credit to unrealized holding gain on AFS securities - net income $5,000
b.) credit to unrealized holding gain on AFS securities - OCI $5,000
c.) debit to fair value adjustment $5,000.
d.) credit to unrealized holding gain on AFS securities - OCI $80,000
e.) debit to fair value adjustment $80,000.
f.) credit to unrealized holding gain on AFS securities - net income $80,000
 
 
162.
Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. Northern properly classifies these bonds as trading securities. Prior to recording the sale, the journal entry to adjust the bonds to fair value includes (Select all that apply.)

a.) debit to fair value adjustment $5,000.
b.) credit to unrealized holding gain on trading securities - net income $80,000
c.) credit to unrealized holding gain on trading securities - other comprehensive income $80,000
d.) credit to unrealized holding gain on trading securities - net income $5,000
e.) credit to unrealized holding gain on trading securities - other comprehensive income $5,000
f.) debit to fair value adjustment $80,000.
 
 
164.
On December 31, 2021, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and a carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and December 31. The journal entry to record the interest payment on December 31, 2021 includes (Select all that apply.)

a.) credit interest revenue $2,500
b.) credit interest revenue $2,850
c.) debit cash $2,850
d.) credit premium on bond investment $350
e.) debit discount on bond investment $350
f.) debit cash $2,500
 
 
 
 
 
 
 
 
 

165.
On December 31, 2021, Sparrow Company has bonds with an amortized cost of $424,000 and a fair value of $452,000. These bonds are properly classified as AFS securities. On January 12, 2022, Sparrow sells the bonds for $450,000. Just prior to recording the sale on January 12, 2022, the journal entry to adjust the bonds to fair value will include


a.) A credit to fair value adjustment $28,000
b.) A debit to unrealized holding loss - OCI $2,000
c.) A debit to fair value adjustment $2,000
d.) A credit to unrealized holding gain - net income $28,000
 
 
166.
On December 31, 2021, Sparrow Company has bonds with an amortized cost of $424,000 and a fair value of $452,000. These bonds are properly classified as trading debt securities. On January 12, 2022, Sparrow sells the bonds for $450,000. Just prior to recording the sale on January 12, 2022, the journal entry to update the fair value adjustment account will include

a.) a credit to unrealized holding gain - net income 2,000
b.) a debit to unrealized holding loss-other comprehensive income $28,000
c.) a credit to fair value adjustment $2,000
d.) a debit to fair
 
 
168.
Over the life of the investment, amortization of a discount

a.) decreases each period.
b.) increases each period.
c.) is constant.
 
 
169.
Palmer Company purchases bonds with a face amount of $500,000 for $480,000 and properly classifies them as "held-to-maturity." On the maturity date of the bonds, the book value of bonds will be:

a.) $500,000
b.) $520,000
c.) $480,000
 
 
170.
Parker Company owns 30% of Sandra Company's stock. Which of the following will decrease the investment account?

a.) Sandra Company declares a dividend.
b.) Parker receives dividends from Sandra Company.
c.) Sandra Company reports income.
 
 
171.
Parker Company owns 30% of Sandra Company's stock. Which of the following will increase the investment account?

a.) Sandra Company declares a dividend.
b.) Parker receives previously declared dividends from Sandra Company.
c.) Sandra Company reports income.
 
 
172.
Porter Company classified its investment in the bonds of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5,000. The result of this increase in value will

a.) not be recognized.
b.) be an increase in other comprehensive income.
c.) be an increase in net income.
 
 
173.
The premium on bond investment (Select all that apply.)

a.) increases the carrying value of the bond to its cost at date of purchase
b.) reduces the carrying value of the bond to its cost at date of purchase
 
 
176.
The price of a bond is equal to

a.) the face amount of the bond when the stated interest rate is different than the market interest rate.
b.) present value of future interest payments plus present value of principal
c.) present value of principal minus present value of future interest payments
 
 
177.
The price of a bond is equal to the

A.) present value of interest payments.
B.) nominal amount of future cash receipt
C.) Present value of future cash receipts
 
 
178.
The primary reasons why holding gains and losses relating to held-to-maturity securities are not recognized even though they are recognized for trading and AFS securities probably is that the information is

a.) more volatile.
b.) less relevant.
c.) not easily determined.
 
 
179.
Realized gains and losses from the sale of AFS securities
 
 
 
 
 
 
 
 
 

181.
Ricardo Company chose the fair value option (FVO) for accounting for a new investment in AFS debt securities. Which of the following statements is correct?

a.) Ricardo may reclassify the investment when there is a change in fair value.
b.) Ricardo may reclassify the investment at year-end.
c.) Ricardo's choice is irrevocable.
 
 
182.
Robert Company properly applies the equity method to its investment in Margit Corporation, At the end of the current year, the fair value of Robert Company's investment increased. Robert Company should

a.) recognize an unrealized gain
b.) recognize a realized gain
c.) not recognize a
 
 
183.
Rosa Company purchases debt securities and classifies them as "available-for-sale" securities. How should Rosa recognize changes in the value of the investment?

a.) As unrealized holding gain or loss in other comprehensive income.
b.) Rosa should not recognize changes in value.
c.) As unrealized holding gain or loss in income.
 
 
184.
Silvia Company acquires a 30% interest in Small Company. The fair value of Small's inventory exceeds its carrying value by $100,000. During the subsequent year, the inventory is sold. As a result of the sale of inventory, investment revenue is reduced by $30,000. This adjustment yields the same net investment revenue as if _____ had carried the inventory on its books at _______.

a.) Silvia; fair value
b.) Small; fair value
c.) Small; cost
d.) Silvia; cost
 
 
186.
Sour Company's ownership interest in Sweet Inc. declined from 25% to 15% during Year 20X1. Sour Company previously used the equity method to account for its interest in Sweet. In 20X1, the equity method

a.) is continued until the entire equity investment is disposed.
b.) is discontinued and the carrying value of the investment serves as the new cost basis.
c.) is continued but the carrying value of the investment is modified
 
 
187.
True or false: An investment in trading debt securities should initially be recorded at cost.
 
 
188.
True or false: Any unrealized holding gain or loss that exist when a transfer of investment category occurs should be immediately recognized into income.
 
 
190.
True or false: Rather than debiting or crediting the investment account, fair value adjustments for trading securities are typically recognized in a separate account.
 
 
191.
True or false: The 20% ownership threshold dictates the accounting treatment of equity investments regardless of other influences.
 
 
192.
True or false: The development of a consistent framework for accounting for all financial instruments is one of FASB's long-standing and ongoing projects.
 
 
193.
True or false: The various approaches to accounting for equity investments generally have similar results on the financial statements.
 
 
194.
True or false: When the fair value option is chosen for equity investments with significant influence, the company must report the investments on their own line in the balance sheet.
 
 
195.
Under IFRS No. 9, investments in equity securities are classified as (Select all that apply.)

a.) fair value through other comprehensive income
b.) held to maturity
c.) available for sale
d.) fair value through profit and loss
e.) fair value through net income
 
 
196.
Under IFRS, one of the conditions that must be met in order to carry investments at "amortized cost" is that contractual cash flows

a.) consist only of principal and interest payments.
b.) consist only of principal and interest and short-term changes in fair value
c.) are received within the first 5 years of the investment.
d.) are comparable to prevailing market interest rates.
 
 
 
 
 
 
 
 
 

198.
Under IFRS, transfers of debt securities between the amortized cost, FVOCI, and FVPL categories occur if and only if the company

a.) acquires additional debt securities of the same type.
b.) determines the fair value of the debt instruments are fluctuating significantly.
c.) changes its business model with respect to the debt investment.
 
 
201.
Under the equity method, the fair value of the investment shares at the end of the reporting period is

a.) only reported if fair value is less than book value.
b.) not reported.
c.) always reported.
 
 
202.
Under the fair value option, unrealized gains and losses on debt securities are

a.) recognized in net income.
b.) recognized in comprehensive income.
c.) are not recognized
 
 
205.
Unless information to the contrary exists, an investor is assumed to have significant influence over the investee company if the investor holds an ownership interest

a.) between 20% and 50%
b.) between 15% and 50%
c.) of more than 50%
d.) of more than 20%
 
 
206.
Unlike US GAAP, under IFRS unrealized holding gains and losses on equity investments can go through either the income statement or through _________ __________ ________
 
 
208.
Unrealized gains and losses on AFS debt securities must be recognized in

a.) other comprehensive income.
b.) net income.
c.) retained earnings account.
 
 
211.
What type of financial statement items are combined in the process of preparing consolidated financial statements?

a.) No financial statement items are combined
b.) Item-by-item numbers from the individual parent and subsidiary financial statements
c.) Aggregate numbers from the individual parent and subsidiary financial statements
 
 
212.
When accounting for the sale of AFS debt securities, how are unrealized gains reversed? (Select all that apply.)

a.) credit the unrealized gain account
b.) debit a reclassification adjustment
c.) credit the fair value adjustment account
d.) debit the fair value adjustment account
 
 
 
 
 
 
 
 
 

215.
When equity securities that lack significant influence are sold, a company should first record into net income _____________ ____________ or _____________ that have occurred during the current year prior to the date of sale.
 
 
216.
When equity securities that lack significant influence are sold, (Select all that apply.)

a.) a gain or loss on the sale of equity securities is recorded.
b.) unrealized holding gains and losses that occurred during the current year prior to sale are not recorded in net income.
c.) on the date of sale, the amounts associated with the investment are removed from the balance sheet accounts.
d.) first unrealized holding gains and losses that occurred during the current year prior to sale are recorded in net income.
 
 
219.
Which accounting standards require the equity method for use with significant influence investees?

a.) U.S. GAAP and IFRS
b.) IFRS only
c.) U.S. GAA
 
 
220.
Which balance sheet presentation is acceptable for reporting an investment involving significant influence for which the fair value option was chosen? (Select all that apply.)

a.) report the investment as an investment in trading securities
b.) combine the investment with equity method investments
c.) report the investment as a separate line item
 
 
221.
Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9? (Select all that apply.)

a.) available-for-sale
b.) fair value through profit or loss
c.) amortized cost
d.) trading
e.) fair value through oci
 
 
222.
Which of the following are common examples of derivatives?

a.) Investment revenue
b.) Options
c.) Interest rate swaps
d.) Accounts receivable
e.) Forward contracts
 
 
223.
Which of the following are common financial instruments that are used to finance or expand a company's operations? (Select all that apply.)

accounts receivable 
PPE
Preferred Stock
Common Stock
Corporate Bonds
 
 
225.
Which of the following are financial instruments?

a.) common stock of another company
b.) cash
c.) stock options
d.) a company's own common stock
 
 
226.
Which of the following are financial instruments?

a.) evidence of ownership interest in companies
b.) accounts receivable
c.) cash
d.) a currently used purchase patent
 
 
 
 
 
 
 
 
 

228.
Which of the following describes FASB's project activities with respect to developing a consistent framework for reporting financial instruments?

a.) A long-term project that was completed in 2014.
b.) A long-term still active project.
c.) a short-term project that will be resolved in the near future
 
 
229.
Which of the following earnings management techniques may be observed when accounting for investments? (Select all that apply).

a.) Income smoothing by timing the sale of equity method investments.
b.) Using discretion in estimating the fair value of investments.
c.) Increasing income when receiving dividend income for equity method investments.
 
 
230.
Which of the following events is of little importance if an investment in debt securities is held to maturity.

a.) Amortized bond discount or premium
b.) Interest payment received during the holding period
c.) Changes in fair value during the holding period
 
 
231.
Which of the following events may lead an investor to switch from the fair value method to the equity method?

a.) A decrease in the ownership interest in the investee's common shares
b.) An increase in the ownership interest in the investee's common shares
c.) A conversion of bonds to non-voting preferred shares
 
 
232.
Which of the following fundamental concepts or principles supports the use of the fair value method?

a.) conservatism
b.) consistency
c.) relevance
d.) reliability
 
 
233.
Which of the following investment-related transactions are classified as investing activities in the statement of cash flows? (Select all that apply.)

a.) the purchase of investments
b.) the sale of investments
c.) fair value changes relating to investments
d.) dividends received on investments
 
 
234.
Which of the following is a benefit of the required accounting treatment for investments using the equity method?

a.) Dividend income is reported as a part of net income.
b.) Managers can time the sale of investments to recognize gains or losses in particular periods.
c.) Dividend income is not included in income, but reduces the book value of the investment.
 
 
236.
Which of the following is correct regarding the fair value option? (Select all that apply.)

a.) The election can be applied to selected securities.
b.) The election is irrevocable.
c.) The election must be applied to the entire portfolio.
 
 
237.
Which of the following is the most important concept or principle that explains the differences in reporting holding gains and losses?

a.) Consistency
b.) Relevance
c.) Reliability
d.) Matching
 
 
238.
Which of the following is true regarding significant influence as it relates to equity securities?

a.) Owning less than 20% of the voting shares of a company indicates that the investor is unable to exercise significant influence.
b.) Owning 20% of the voting shares of a company indicates the investor's ability to exercise significant influence.
c.) An investor owning less than 20% of voting shares might exert significant influence of a company by having an officer on the board of directors.
 
 
240.
Which of the following may give rise to potential earnings management?

a.) Inaccurate fair value estimates
b.) Selling HTM securities prior to maturity
c.) Distortion of cash flows received from investment
 
 
241.
Which of the following minimum ownership percentages is typically necessary to control another entity's operating and financial policies?

a.) more than 80%
b.) 20% or more
c.) more than 50%
d.) less than 20%
 
 
242.
Which of the following represent an important difference between the fair value through net income and equity method? (Select all that apply.)

a.) the recognition of the initial investment
b.) the recognition of income and dividends
c.) the treatment of holding gains and losses
 
 
 
 
 
 
 
 
 

243.
Which of the following represent an important similarity between the fair value through net income and equity method?

a.) the treatment of holding gains and losses
b.) the recognition of the initial investment
c.) the recognition of income and dividends
 
 
244.
Which of the following represent differences under IFRS (as compared to U.S. GAAP) with respect to the equity method? (Select all that apply.)

a.) The fair value option may be chosen for equity method investments
b.) The investee must adjust its accounting policies to correspond with the investor's policies
c.) The fair value option is not available for most equity method investments
 
 
245.
Which of the following represents a key difference between the three debt investment classifications (HTM, AFS, trading) with respect to financial reporting?

a.) classification of realized gains and losses
b.) classification of income earned on investments
c.) classification of unrealized gains and losses
 
 
246.
Which of the following scenarios may require additional adjustments under the equity method?

a.) The investor's acquisition cost exceeds market value of the underlying net assets.
b.) The investor's acquisition cost exceeds the book value of the underlying net assets.
c.) The acquisition takes place during the middle of the fiscal period
 
 
247.
Which of the following types of debt investments are reported at fair value? select all that apply

a.) held to maturity
b.) trading
c.) available for sale
 
 
248.
Which reporting method should be used if the investor can exert significant influence over the investee?

a.) Cost method
b.) Equity method
c.) Fair value method
d.) Consolidation method