ACC 305 WEEK 2 QUIZ 1

ACC 305 WEEK 2 QUIZ 1

ACC 305 Week 2 Quiz 1 – STR NEW

ACC 305 Week 2 Quiz 1

TRUE-FALSE—Conceptual

1. Debt securities include corporate bonds and convertible debt, but notU.S.government securities.

2. Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

3. Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.

4. A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.

5. Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

6. The Securities Fair Value Adjustment account has a normal credit balance.

7. Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income.

8. Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.

9. The Unrealized Holding Gain/Loss—Equity account is reported as a part of other compre-hensive income.

10. Significant influence over an investee may be indicated by material intercompany trans-actions and interchange of managerial personnel.

11. The accounting profession has concluded that an investment of more than 50 percent of the voting stock of an investee should lead to a presumption of significant influence over an investee.

12. All dividends received by an investor from the investee decrease the investment’s carrying value under the equity method.

13. Under the fair value method, the investor reports as revenue its share of the net income reported by the investee.

14. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation.

15. Companies may not use the fair value option for investments that follow the equity method of accounting.

16. Changes in the fair value of a company’s debt instruments are included as part of earnings in any given period.

17. If a decline in a security’s value is judged to be temporary, a company needs to write down the cost basis of the individual security to a new cost basis.

18. A reclassification adjustment is necessary when a company reports realized gains/losses as part of net income but also shows unrealized gains/losses as part of other comprehensive income.

19. If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income.

20. The transfer of securities from trading to available-for-sale and from available-for-sale to trading has the same impact on stockholders’ equity and net income.

MULTIPLE CHOICE—Conceptual

21. Which of the following is not a debt security?

a. Convertible bonds

b. Commercial paper

c. Loans receivable

d. All of these are debt securities.

22. A correct valuation is

a. available-for-sale at amortized cost.

b. held-to-maturity at amortized cost.

c. held-to-maturity at fair value.

d. none of these.

23. Securities which could be classified as held-to-maturity are

a. redeemable preferred stock.

b. warrants.

c. municipal bonds.

d. treasury stock.

24. Unrealized holding gains or losses which are recognized in income are from securities classified as

a. held-to-maturity.

b. available-for-sale.

c. trading.

d. none of these.

P25. When an investor’s accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period.

c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.

d. do nothing special and ignore the fact that the accounting period does not coincide with the bond’s interest period.

S26. Debt securities that are accounted for at amortized cost, not fair value, are

a. held-to-maturity debt securities.

b. trading debt securities.

c. available-for-sale debt securities.

d. never-sell debt securities.

S27. Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders’ equity are

a. held-to-maturity debt securities.

b. trading debt securities.

c. available-for-sale debt securities.

d. never-sell debt securities.

S28. Use of the effective-interest method in amortizing bond premiums and discounts results in

a. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.

b. a varying amount being recorded as interest income from period to period.

c. a variable rate of return on the book value of the investment.

d. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

S29. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders’ equity are

a. available-for-sale securities where a company has holdings of less than 20%.

b. trading securities where a company has holdings of less than 20%.

c securities where a company has holdings of between 20% and 50%.

d. securities where a company has holdings of more than 50%.

30. A requirement for a security to be classified as held-to-maturity is

a. ability to hold the security to maturity.

b. positive intent.

c. the security must be a debt security.

d. All of these are required.

31. Held-to-maturity securities are reported at

a. acquisition cost.

b. acquisition cost plus amortization of a discount.

c. acquisition cost plus amortization of a premium.

d. fair value.

32. Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes

a. a debit to Held-to-Maturity Securities at $300,000.

b. a credit to Premium on Investments of $15,000.

c. a debit to Held-to-Maturity Securities at $315,000.

d. none of these.

33. Which of the following is not correct in regard to trading securities?

a. They are held with the intention of selling them in a short period of time.

b. Unrealized holding gains and losses are reported as part of net income.

c. Any discount or premium is not amortized.

d. All of these are correct.

34. In accounting for investments in debt securities that are classified as trading securities,

a. a discount is reported separately.

b. a premium is reported separately.

c. any discount or premium is not amortized.

d. none of these.

35. Investments in debt securities are generally recorded at

a. cost including accrued interest.

b. maturity value.

c. cost including brokerage and other fees.

d. maturity value with a separate discount or premium account.

36. Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for

a. 10 periods and 10% from the present value of 1 table.

b. 10 periods and 8% from the present value of 1 table.

c. 20 periods and 5% from the present value of 1 table.

d. 20 periods and 4% from the present value of 1 table.

37. Investments in debt securities should be recorded on the date of acquisition at

a. lower of cost or market.

b. market value.

c. market value plus brokerage fees and other costs incident to the purchase.

d. face value plus brokerage fees and other costs incident to the purchase.

38. An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

a. debit to Available-for-Sale Securities.

b. debit to the discount account.

c. debit to Interest Revenue.

d. none of these.

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

a. effective-interest method of allocation must be used.

b. straight-line method of allocation must be used.

c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.

d. par value method must be used and therefore no allocation is necessary.

40. Which of the following is correct about the effective-interest method of amortization?

a. The effective interest method applied to investments in debt securities is different from that applied to bonds payable.

b. Amortization of a discount decreases from period to period.

c. Amortization of a premium decreases from period to period.

d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.

41. When investments in debt securities are purchased between interest payment dates, preferably the

a. securities account should include accrued interest.

b. accrued interest is debited to Interest Expense.

c. accrued interest is debited to Interest Revenue.

d. accrued interest is debited to Interest Receivable.

42. Which of the following is not generally correct about recording a sale of a debt security before maturity date?

a. Accrued interest will be received by the seller even though it is not an interest payment date.

b. An entry must be made to amortize a discount to the date of sale.

c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.

d. A gain or loss on the sale is not extraordinary.

S43. When a company has acquired a “passive interest” in another corporation, the acquiring company should account for the investment

a. by using the equity method.

b. by using the fair value method.

c. by using the effective interest method.

d. by consolidation.

S44. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method Equity Method

a. No Effect Decrease

b. Increase Decrease

c. No Effect No Effect

d. Decrease No Effect

P45. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Fair Value Method Equity Method

a. Income Income

b. A reduction of the investment A reduction of the investment

c. Income A reduction of the investment

d. A reduction of the investment Income

46. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

a. The investor should always use the equity method to account for its investment.

b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise “significant influence” over the investee.

c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise “significant influence” over the investee.

d. The investor should always use the fair value method to account for its investment.

47. If the parent company owns 90% of the subsidiary company’s outstanding common stock, the company should generally account for the income of the subsidiary under the

a. cost method.

b. fair value method.

c. divesture method.

d. equity method.

48. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a. a reduction of the carrying value of the investment.

b. additional paid-in capital.

c. an addition to the carrying value of the investment.

d. dividend income.

49. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

a. investor sells the investment.

b. investee declares a dividend.

c. investee pays a dividend.

d. earnings are reported by the investee in its financial statements.

50. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2012, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?

a. Understate, overstate, overstate

b. Overstate, understate, understate

c. Overstate, overstate, overstate

d. Understate, understate, understate

All Questions Included