Accounting 405 – Exam Questions with Correct Answers (Investments, Securities, Equity Method, Fair Value Accounting)

Description: This Accounting 405 exam set includes practice questions with 100% correct answers, focusing on investment accounting and financial reporting. Topics include trading securities, available-for-sale securities, held-to-maturity securities, equity method accounting, goodwill, dividends, and unrealized gains/losses. It also explains fair value reporting, comprehensive income, and the treatment of investment gains and losses. Verified solutions make this a reliable exam prep tool. On April 1, 2011, BigBen Company acquired 30% of th shares of Little Tick, Inc. BigBen aid $100,000 for the investment, which is $40,000 difference to inventory that will be sold in the remainder of 2011, and the rest to goodwill. Little Tick recognized a total of $10,000 of dividends to shareholders. BigBen's investment in Little Tick will affect Big Ben's 2011 net income by: - answera loss of $10,500 When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to difference between book values and Page1 fair values of investee assets on the date of acquisition: - answerReduces the investment account and reduces investment revenue Which of the following is not true about the fair value option - answerThe fair value option must be elected for all shares of an investment in a particular company Which of the following investment securities held by Zoogle, Inc. are not reported at fair value in its balance sheet? - answerDebt securities held to maturity Both fair values and subsequent growth of the investee are not as relevant for investments in which of the following categories? - answerHeld-to-maturity securities Securities that are purchased with the intent of selling them in the near future to take advantage of short-term price changes are classified as: - answerTrading securities Trading securities, by definition, are properly classified in the balance sheet as: - answerCurrent assets Dyckman Dealers has an investment in Thomas Corporation that Dyckman accounts for as a trading security. Thomas Corporation shares are publicly traded on the New York Stock Exchanges, and the prevailing price on that exchange indicates that Dyckman's investment is worth $20,000. However, Dyckman management believes that the stock market is generally overvalued and their analysis of the Thomas Investment suggests to them that it is worth $18,000 Dyckman should carry the Thomas investment on its balance sheet at: - answer$20,000 Goofy, Inc. bought $15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2010, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2010. Goofy reclassified Page2 this investment as trading securities in December of 2011 when the market value had risen to $125,000. What effect on 2011 income should be reported by Goofy for the Crazy Co. shares? - answer25,000 net loss Investments in securities available for sale are reported at: - answerFair value on the reporting date When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as: - answerDividend income In the statement of cash flows, inflows and outflows of cash from buying and selling available for sale securities are considered: - answerinvesting activities Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2008 for $50 per share and classified the investment as securities available for sale. Diamond's market value was $60 per share on December 31, 2009 and $65 on December 31, 2010. During 2011, Hawk sold all of its Diamond stock at $70 per share. In its 2011 income statement, Hawk would report: - answerA gain of $200,000 If an available-for-sale investment is sold for which there are unrealized losses in accumulated other comprehensive income (AOCI), the total effect on total comprehensive income is - answerno effect On January 1, 2011, Green Corporation purchased 20% of the outstanding voting common stock of Gold Company for $300,000. The book value of the acquired shares was $275,000. The excess of cost over book value is attributable to an intangible asset on Gold's books that was undervalued and had a remaining useful life of five years. For the year ended December 31, 2011, Gold reported net income of $125,000 and paid cash Page3 dividends of $25,000. What is the carrying value of Green's investment in Gold at December 31, 2011? - answer315,000 The equity method of accounting for investments in voting common stock is appropriate when: - answerThe investor can significantly influence the investee If Pop Company exercises significant influence over Son Company and owns 40% of its common stock, then Pop Company: - answerWould record 40% of the net income of Son Company as investment income each year Which of the following increases the investment account under the equity method of accounting? - answerNone of these is correct Jack Corporation purchased a 20% interset in Jill Corporation for $1,500,000 on January 1, 2011. Jack can significantly influence Jill. On December 10, 2011, Jill declared and paid $1 million in dividends. Jill reported a net loss of $6 million for the year. What amount of loss should Jack report in its income statement for 2011 relative to its investment in Jill? - answer1,200,000 The investment category for which the investor's "positive intent and ability to hold" is important is: - answerSecurities classified as held to maturity Which category completely excludes equity securities? - answerHeld-to-maturity securities The income statement reports changes in fair value for which type of securities? - answerTrading securities Trading securities are most commonly found on the books of: - answerBanks Holding gains and losses on trading securities are included in earnings because: - answerThey measure the success or failure of taking advantage of short-term price changes Nichols Enterprises has an investment Page4 in 25,000 shares of Elliott Electronics that Nichols accounts for as a security available for sale. Elliott shares are publicly traded on the New York Stock Exchange, and the Wall Street Journal quotes a price for those shares of $10/share. Nichols should carry the Elliott investment on its balance sheet at: - answer$250,000 The fair value of debt securities not regularly traded can be most reasonably approximated by: - answerCalculating the discounted present value of the principal and interest payments All investment securities are initially recorded at: - answerCost When an equity security is appropriately carried and reported as securities available for sale, a gain should be reported in the income statement: - answerOnly when the security is sold Zwick Company bought 28,000 shares of the voting common stock of Handy Corporation in January 2011. In December, Hart announced $200,000 net income for 2011 and declared and paid a cash dividend of $2 per share on the 200,000 shares of outstanding common stock. Zwick Company's dividend revenue from Handy Corporation in December 2011 would be: - answer$56,000 Dim Corporation purchased 1,000 shares of Witt Corporation stock in 208 for $800 per share and classified the investment as securities available for sale. Witt's market value was $400 per share on December 31, 2009, and $300 on December 31, 2010. During 2011, Dim sold all of its Witt stock at $350 per share. In its 2011 income statement, Dim would report: - answerA loss on the sale of investments of $450,000 Seybert Systems accounts for its investment in Wang Engineering as available for sale. Seybert's balance in accumulated other Page5 comprehensive income with respect to the Wang investment is a credit balance of $20,000, and Seybert lists the investment at $100,000 on its balance sheet. Seybert purchased the Wang investment for (ignore taxes): - answer$80,000 Consolidated financial statements are prepared when one company has: - answerControl over another company When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded: - answerAs a reduction in the investment account When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded - answerAs a reduction in the investment account At the fair value of equity securities is not determinable and the equity method is not appropriate, the securities should be reported at: - answerCost Smith buys and sells securities which it typically classifies as available for sale. On December 15, 2011, Smith purchased $500,000 of Jones shares,