ACCT 201 Pre-Quiz #6 (Chapter 12) - Professor Farina

Student: ___________________________________________________________________________ True / False Questions: Circle True or False. 1. Securities classified as held to maturity could be reported as either current or long-term in a classified balance sheet, depending upon their maturity dates. True False 2. Both debt and equity securities can be categorized as trading securities. True False 3. Net unrealized holding gains (losses) are reported in the income statement for trading securities. True False 4. Both trading securities and securities available for sale are reported at their fair values. True False 5. All securities considered available for sale should be reported as current assets in a classified balance sheet. True False 6. Unrealized gains and losses are included in other comprehensive income for securities that are classified as available for sale. True False 7. When available-for-sale securities are sold, the full amount of any gain or loss realized on the sale is included in before-tax net income. True False 8. Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets. True False 9. When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost. True False 10. The fair value option cannot be elected for a significant-influence investment, because those must be accounted for under the equity method. True False

11. When a creditor's receivable becomes impaired due to a troubled debt restructuring, the receivable is remeasured based on the discounted present value of currently expected cash flows at the loan's original effective rate. True False Multiple Choice Questions: Circle the letter of the best answer. 12. Which of the following investment securities held by Zoogle Inc. are not reported at fair value in its balance sheet? A. Common stock held as available for sale securities B. Debt securities held to maturity C. Preferred stock held as trading securities D. All of these are reported at fair value. 13. If the fair value of a held-to-maturity investment declines for a reason that is viewed as "other than temporary", A. the investment is not written down to fair value. B. the investment is written down to fair value, and the impairment loss is recognized in net income. C. the investment is written down to fair value, and the impairment loss is recognized in accumulated other comprehensive income. D. the investment is treated the same way it would be treated if the decline in fair value was viewed as temporary. 14. If Dinsburry Company concluded that an investment originally classified as a trading security would now more appropriately be classified as held to maturity, Dinsburry would: A. not reclassify the investment, as original classifications are irrevocable. B. reclassify the investment as held to maturity and immediately recognize in net income all unrealized gains and losses as of the reclassification date. C. reclassify the investment as held to maturity and treat the fair value as of the date of reclassification as the investment's amortized cost basis for future amortization. D. reclassify the investment as held to maturity, but there would be no income effect.

15. If Ziggy Company concluded that an investment originally classified as held to maturity would now more appropriately be classified as available for sale, Ziggy would: A. not reclassify the investment, as original classifications are irrevocable. B. reclassify the investment as available for sale and immediately recognize in net income any unrealized gain or loss on the reclassification date. C. reclassify the investment as available for sale and immediately recognize in accumulated other comprehensive income any unrealized gain or loss on the reclassification date. D. need to restate earnings, as the original classification was in error. 16. 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: A. Securities available for sale. B. Consolidating securities. C. Held-to-maturity securities. D. Trading securities. 17. The income statement reports changes in fair value for which type of securities? A. Securities reported under the equity method. B. Trading securities C. Held-to-maturity securities. D. Securities available for sale. 18. In the statement of cash flows, inflows and outflows of cash from buying and selling trading securities typically are considered: A. Investing activities. B. Operating activities. C. Financing activities. D. Noncash financing activities. 19. Anthers Inc. bought the following portfolio of trading securities near the end of 2009.

What amount will be reported in the balance sheet for this portfolio at December 31, 2009, and how will it be classified?

A. B. C. D.
3

20. On January 1, 2009, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2009. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2009? A. $284,400. B. $300,000. C. $315,600. D. $360,000. 21. Goofy Inc. bought 15,000 shares of Crazy Co.'s stock for $150,000 on May 5, 2008, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2008. Goofy reclassified this investment as trading securities in December of 2009 when the market value had risen to $125,000. What effect on 2009 income should be reported by Goofy for the Crazy Co. shares? A. $0. B. $25,000 net loss. C. $7,000 net gain.. D. $32,000 net loss. 22. Hobson Company bought the securities listed below during 2008. These securities were classified as trading securities. In its December 31, 2008, income statement Hobson reported a net unrealized loss of $13,000 on these securities. Pertinent data at the end of December 2009 are as follows:

What amount of loss on these securities should Hobson include in its income statement for the year ended December 31, 2009? A. $41,000. B. $54,000. C. $13,000. D. $ 0. 23. All investments in debt and equity securities that don't fit the definitions of the other reporting categories are classified as: A. Trading securities. B. Securities available for sale. C. Held-to-maturity securities. D. Consolidated securities.

24. Accumulated Other Comprehensive Income in the shareholders' equity section of the balance sheet reflects changes in the fair value of securities for which type of securities? A. Securities available for sale. B. Trading securities. C. Consolidated securities. D. Held-to-maturity securities. 25. When an investor classifies an investment in common stock as securities available for sale, cash dividends are classified by the investor as: A. A return of capital. B. A loss. C. A deduction from the investment account. D. Dividend income. 26. Boulter, Inc. began business on January 1, 2009. At the end of December 2009, Boulter had the following investments in equity securities:

All declines in value are deemed to be temporary in nature. How should the corresponding losses be reflected in the financial statements at December 31, 2009?

A. B. C. D. 27. Jack Corporation purchased a 20% interest in Jill Corporation for $1,500,000 on January 1, 2009. Jack can significantly influence Jill. On December 10, 2009, 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 2009 relative to its investment in Jill? A. $1 000,000. B. $1,200,000. C. $1,400,000. D. $1,500,000. 28. When the equity method of accounting for investments is used by the investor, the investment account is increased when: A. A cash dividend is received from the investee. B. The investee reports a net income for the year. C. The investor records additional depreciation related to the investment. D. The investee reports a net loss for the year.
5

29. On July 1, 2009, Tremen Corporation acquired 40% of the shares of Delany Company. Tremen paid $3,000,000 for the investment, and that amount is exactly equal to 40% of the book value of identifiable net assets on Delany's balance sheet. Delany recognized net income of $1,000,000 for 2009, and paid dividends to their shareholders of $600,000. After all closing entries are made, Tremen's "investment in Delany Company" account would have a balance of: A. $3,200,000. B. $3,160,000. C. $3,000,000. D. $3,080,000. 30. When the equity method of accounting for investments is used by the investor, the amortization of additional depreciation due to differences between book values and fair values of investee assets on the date of acquisition: A. Reduces the investment account and increases investment revenue. B. Increases the investment account and increases investment revenue. C. Reduces the investment account and reduces investment revenue. D. Increases the investment account and reduces investment revenue. 31. On January 1, 2009, 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, 2009, 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, 2009? A. $295,000. B. $300,000. C. $315,000. D. $320,000.

32. Short Problem: Solve the following problem on a separate piece of paper and attach your solution to this pre-quiz. On January 4, 2009, Runyan Bakery paid $374 million for 10 million shares of Lavery Labeling Company common stock. The investment represents a 30% interest in the net assets of Lavery and gave Runyan the ability to exercise significant influence over Lavery's operations. Runyan received dividends of $2 per share on December 15, 2009, and Lavery reported net income of $130 million for the year ended December 31, 2009. The market value of Lavery's common stock at December 31, 2009, was $31 per share. On the purchase date, the book value of Lavery's net assets was $800 million and: 1. The fair market value of Lavery's depreciable assets, with an average remaining useful life of six years, exceeded their book value by $80 million. 2. The remainder of the excess of the cost of the investment over the book value of net assets purchased was attributable to goodwill. Required: 1. Prepare all appropriate journal entries related to the investment during 2009, assuming Runyan accounts for this investment by the equity method.
2. Prepare the journal entries required by Runyan, assuming that the 10 million shares

represents a 10% interest in the net assets of Lavery rather than a 30% interest and that the investment is classified as available-for-sale securities.