Accounting 405 Exam 2026: 286 Practice Questions and
Correct Answers
Question 1.
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 fair
values of investee assets on the date of acquisition:
Correct Answer: Reduces the investment account and reduces investment
revenue
Question 2.
Which of the following is not true about the fair value option
Correct Answer: The fair value option must be elected for all shares of an
investment in a particular company
Question 3.
Which of the following investment securities held by Zoogle, Inc. are not reported at fair
value in its balance sheet?
Correct Answer: Debt securities held to maturity
Question 4.
Both fair values and subsequent growth of the investee are not as relevant for investments
in which of the following categories?
Correct Answer: Held-to-maturity securities
Question 5.
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:
Correct Answer: Trading securities
Question 6.
Trading securities, by definition, are properly classified in the balance sheet as:
Correct Answer: Current assets
Question 7.
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:
Correct Answer: $20,000
Question 8.
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 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?
Correct Answer: 25,000 net loss
Question 9.
Investments in securities available for sale are reported at:
Correct Answer: Fair value on the reporting date
Question 10.
When an investor classifies an investment in common stock as securities available for sale,
cash dividends are classified by the investor as:
Correct Answer: Dividend income
Question 11.
In the statement of cash flows, inflows and outflows of cash from buying and selling
available for sale securities are considered:
Correct Answer: investing activities
Question 12.
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:
Correct Answer: A gain of $200,000
Question 13.
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
Correct Answer: no effect
Question 14.
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 dividends of
$25,000. What is the carrying value of Green's investment in Gold at December 31, 2011?
Correct Answer: 315,000
Question 15.
The equity method of accounting for investments in voting common stock is appropriate
when:
Correct Answer: The investor can significantly influence the investee
,Question 16.
If Pop Company exercises significant influence over Son Company and owns 40% of its
common stock, then Pop Company:
Correct Answer: Would record 40% of the net income of Son Company as
investment income each year
Question 17.
Which of the following increases the investment account under the equity method of
accounting?
Correct Answer: None of these is correct
Question 18.
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?
Correct Answer: 1,200,000
Question 19.
The investment category for which the investor's "positive intent and ability to hold" is
important is:
Correct Answer: Securities classified as held to maturity
Question 20.
Which category completely excludes equity securities?
Correct Answer: Held-to-maturity securities
Question 21.
The income statement reports changes in fair value for which type of securities?
Correct Answer: Trading securities
Question 22.
Trading securities are most commonly found on the books of:
Correct Answer: Banks
Question 23.
Holding gains and losses on trading securities are included in earnings because:
Correct Answer: They measure the success or failure of taking advantage of
short-term price changes
Question 24.
Nichols Enterprises has an investment 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:
Correct Answer: $250,000
Question 25.
The fair value of debt securities not regularly traded can be most reasonably approximated
by:
Correct Answer: Calculating the discounted present value of the principal and
interest payments
Question 26.
All investment securities are initially recorded at:
Correct Answer: Cost
Question 27.
When an equity security is appropriately carried and reported as securities available for
sale, a gain should be reported in the income statement:
Correct Answer: Only when the security is sold
Question 28.
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:
Correct Answer: $56,000
Question 29.
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:
Correct Answer: A loss on the sale of investments of $450,000
Question 30.
Seybert Systems accounts for its investment in Wang Engineering as available for sale.
Seybert's balance in accumulated other 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):
Correct Answer: $80,000
Question 31.
Consolidated financial statements are prepared when one company has:
Correct Answer: Control over another company
Correct Answers
Question 1.
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 fair
values of investee assets on the date of acquisition:
Correct Answer: Reduces the investment account and reduces investment
revenue
Question 2.
Which of the following is not true about the fair value option
Correct Answer: The fair value option must be elected for all shares of an
investment in a particular company
Question 3.
Which of the following investment securities held by Zoogle, Inc. are not reported at fair
value in its balance sheet?
Correct Answer: Debt securities held to maturity
Question 4.
Both fair values and subsequent growth of the investee are not as relevant for investments
in which of the following categories?
Correct Answer: Held-to-maturity securities
Question 5.
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:
Correct Answer: Trading securities
Question 6.
Trading securities, by definition, are properly classified in the balance sheet as:
Correct Answer: Current assets
Question 7.
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:
Correct Answer: $20,000
Question 8.
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 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?
Correct Answer: 25,000 net loss
Question 9.
Investments in securities available for sale are reported at:
Correct Answer: Fair value on the reporting date
Question 10.
When an investor classifies an investment in common stock as securities available for sale,
cash dividends are classified by the investor as:
Correct Answer: Dividend income
Question 11.
In the statement of cash flows, inflows and outflows of cash from buying and selling
available for sale securities are considered:
Correct Answer: investing activities
Question 12.
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:
Correct Answer: A gain of $200,000
Question 13.
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
Correct Answer: no effect
Question 14.
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 dividends of
$25,000. What is the carrying value of Green's investment in Gold at December 31, 2011?
Correct Answer: 315,000
Question 15.
The equity method of accounting for investments in voting common stock is appropriate
when:
Correct Answer: The investor can significantly influence the investee
,Question 16.
If Pop Company exercises significant influence over Son Company and owns 40% of its
common stock, then Pop Company:
Correct Answer: Would record 40% of the net income of Son Company as
investment income each year
Question 17.
Which of the following increases the investment account under the equity method of
accounting?
Correct Answer: None of these is correct
Question 18.
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?
Correct Answer: 1,200,000
Question 19.
The investment category for which the investor's "positive intent and ability to hold" is
important is:
Correct Answer: Securities classified as held to maturity
Question 20.
Which category completely excludes equity securities?
Correct Answer: Held-to-maturity securities
Question 21.
The income statement reports changes in fair value for which type of securities?
Correct Answer: Trading securities
Question 22.
Trading securities are most commonly found on the books of:
Correct Answer: Banks
Question 23.
Holding gains and losses on trading securities are included in earnings because:
Correct Answer: They measure the success or failure of taking advantage of
short-term price changes
Question 24.
Nichols Enterprises has an investment 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:
Correct Answer: $250,000
Question 25.
The fair value of debt securities not regularly traded can be most reasonably approximated
by:
Correct Answer: Calculating the discounted present value of the principal and
interest payments
Question 26.
All investment securities are initially recorded at:
Correct Answer: Cost
Question 27.
When an equity security is appropriately carried and reported as securities available for
sale, a gain should be reported in the income statement:
Correct Answer: Only when the security is sold
Question 28.
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:
Correct Answer: $56,000
Question 29.
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:
Correct Answer: A loss on the sale of investments of $450,000
Question 30.
Seybert Systems accounts for its investment in Wang Engineering as available for sale.
Seybert's balance in accumulated other 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):
Correct Answer: $80,000
Question 31.
Consolidated financial statements are prepared when one company has:
Correct Answer: Control over another company
