Chapter 17: Investments (Practice Quiz)

Unrealized gains and losses on held-to-maturity securities are reported on the income statement. (T/F) - ANS False, Unrealized gains and losses are not recorded on held-to-maturity securities. Debt securities that are bought and held primarily for sale in the near term are reported at: - ANS fair value During 2017, Grambling Company purchased 10,000 shares of Southern Corp. common stock for $215,000 as a passive interest investment. The fair value of these shares was $289,000 at December 31, 2017. During 2018, Grambling sold all of the Southern stock for $226,000. Grambling Company should report a realized gain on the sale of stock in 2018 of - ANS $11,000. The unrealized gains and losses on available-for-sale securities are: - ANS reported on the portfolio of investments. Investments are reported at market value on the balance sheet under the equity method. (T/F) - ANS False, Investments reported under the equity method are carried at cost, and periodically adjusted by the investor's share of the investee's earnings or losses, and decreased by all dividends received from the investee. Foucault Company owns 40,000 of the 100,000 outstanding shares of Mango Inc. common stock. During 2018, Mango earns $640,000 and pays cash dividends of $480,000. If the beginning balance in Foucault's investment account was $430,000, the balance at December 31, 2018 should be - ANS $494,000. Recovery of impairment is prohibited by US GAAP for held-to-maturity securities. (T/F) - ANS True Derivatives should be recognized in the financial statements as assets and liabilities. (T/F) - ANS True Gains and losses on cash flow hedges are recorded in equity as part of other comprehensive income. (T/F) - ANS True Two reasons why concerns exist for fair value measurement are: 1) lack of reliability related to the fair value measurement; and 2) the ability to manipulate fair value measurements to achieve financial results inconsistent with the underlying economics of the situation. (T/F) - ANS True Recovery of impairment - ANS is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities. A correct valuation is - ANS held-to-maturity securities at amortized cost. A requirement for a security to be classified as held-to-maturity is - ANS the ability to hold the security to maturity, positive intent, and that the security be a debt security. The unrealized holding gain or loss on trading securities is reported as: - ANS part of net income. An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as - ANS other comprehensive income and included in the equity section of the balance sheet. Under the equity method, if an investee company generates net income, the investor company: - ANS records its proportionate share as an increase in its investment account. Savannah Corporation purchased 35,000 shares of common stock of the Boulet Corporation for $50 per share on January 2, 2017. During 2017, Boulet Corporation had 140,000 shares of common stock outstanding, paid cash dividends of $120,000, and reported net income of $320,000. Savannah Corporation should report revenue from investment for 2017 in the amount of - ANS $80,000. For that assets the following Impairment model is used: Impairment measured as the difference between the lower of amortized cost or fair value? - ANS Debt securities measured at fair value with gains and losses recorded in net income. The following information relates to Boulder Company for 2017: Realized gain on sale of available-for-sale securities $45,000 Unrealized holding gains arising during the period on available-for-sale securities 105,000 Reclassification adjustment for gains included in net income 30,000 Boulder's 2017 comprehensive income is - ANS $120,000. A fair value hedge is recorded at amortized cost. (T/F) - ANS False, Fair value hedges are recorded at fair value. An option to convert a convertible bond into shares of common stock is a(n)embedded derivative. (T/F) - ANS True Both the cost and the fair value of all financial instruments must be reported in the notes to financial statements. (T/F) - ANS True Under both GAAP and IFRS the option to use the fair value method must be made at initial recognition and the selection is irrevocable. (T/F) - ANS True