Rushia Company has an available-for-sale investment in the 10%, 10-year bonds of Pear Co. The investment's carrying value is $3,200,000 at December 31, 2010. On January 9, 2011, Rushia learns that Pear Co. has lost its primary manufacturing facility in an uninsured fire. As a result, Rushia determines that the investment is impaired and now has a fair value of $2,300,000. In June, 2012, Pear Co. has succeeded in rebuilding its manufacturing facility, and its prospects have improved as a result.

If Rushia Company determines that the fair value of the investment is now $3,900,000 and is using U.S. GAAP for its external financial reporting, which of the following is true?

a. Rushia is prohibited from recording the recovery in value of the impaired investment.
b. Rushia may record a recovery of $900,000.
c. Rushia may record a recovery of $700,000.
d. Rushia may record a recovery of $1,600,000.


Answer: A

If Rushia Company determines that the fair value of the investment is now $2,900,000 and is using iGAAP for its external financial reporting, which of the following is true?

a. Rushia is prohibited from recording the recovery in value of the impaired investment.
b. Rushia may record a recovery of $600,000.
c. Rushia may record a recovery of $900,000.
d. Rushia may record a recovery, but is limited to 80% of the value of the recovery.


Answer: B

Match the approach and location where gains and losses from available-for-sale securities are reported: Location where gains/ Approach losses reported_ __

Match the approach and location where gains and losses from available-for-sale securities are reported:
Location where gains/
Approach losses reported_ __

a. GAAP Equity
b. iGAAP Equity
c. GAAP Income
d. iGAAP Comprehensive income

Answer: B

On December 31, 2010, Patel Co. purchased equity securities as trading securities. Pertinent data are as follows:

On December 31, 2010, Patel Co. purchased equity securities as trading securities. Pertinent data are as follows:

Fair Value
Security Cost At 12/31/11
A $132,000 $117,000
B 168,000 186,000
C 288,000 258,000

On December 31, 2011, Patel transferred its investment in security C from trading to available-for-sale because Patel intends to retain security C as a long-term investment. What total amount of gain or loss on its securities should be included in Patel's income statement for the year ended December 31, 2011?

a. $3,000 gain.
b. $27,000 loss.
c. $30,000 loss.
d. $45,000 loss.

Answer: B

On January 1, 2010, Reston Co. purchased 25% of Ace Corp.'s common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston's investment account was $720,000 at December 31, 2010. Ace reported net income of $450,000 for the year ended December 31, 2010, and paid common stock dividends totaling $180,000 during 2010. How much did Reston pay for its 25% interest in Ace?

On January 1, 2010, Reston Co. purchased 25% of Ace Corp.'s common stock; no goodwill resulted from the purchase. Reston appropriately carries this investment at equity and the balance in Reston's investment account was $720,000 at December 31, 2010. Ace reported net income of $450,000 for the year ended December 31, 2010, and paid common stock dividends totaling $180,000 during 2010. How much did Reston pay for its 25% interest in Ace?

a. $652,500.
b. $765,000.
c. $787,500.
d. $877,500.

Answer: A

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2010 for $400,000. During 2010, Doane earned $160,000 and paid dividends of $100,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2011, Doane earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2011, Rich sold half of its stock in Doane for $264,000 cash.

Rich, Inc. acquired 30% of Doane Corp.'s voting stock on January 1, 2010 for $400,000. During 2010, Doane earned $160,000 and paid dividends of $100,000. Rich's 30% interest in Doane gives Rich the ability to exercise significant influence over Doane's operating and financial policies. During 2011, Doane earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2011, Rich sold half of its stock in Doane for $264,000 cash.

Before income taxes, what amount should Rich include in its 2010 income statement as a result of the investment?

a. $160,000.
b. $100,000.
c. $48,000.
d. $30,000.


Answer: C because $160,000 × 30% = $48,000.

The carrying amount of this investment in Rich's December 31, 2010 balance sheet should be

a. $400,000.
b. $418,000.
c. $448,000.
d. $460,000.


Answer: B because $400,000 + $48,000 - ($100,000 × 30%) = $418,000.

What should be the gain on sale of this investment in Rich's 2011 income statement?

a. $64,000.
b. $55,000.
c. $49,000.
d. $40,000.

Answer: C because $49,000

On December 29, 2011, James Co. sold an equity security that had been purchased on January 4, 2010. James owned no other equity securities. An unrealized holding loss was reported in the 2010 income statement. A realized gain was reported in the 2011 income statement. Was the equity security classified as available-for-sale and did its 2010 market price decline exceed its 2011 market price recovery?

On December 29, 2011, James Co. sold an equity security that had been purchased on January 4, 2010. James owned no other equity securities. An unrealized holding loss was reported in the 2010 income statement. A realized gain was reported in the 2011 income statement. Was the equity security classified as available-for-sale and did its 2010 market price decline exceed its 2011 market price recovery?

2010 Market Price
Decline Exceeded 2011
Available-for-Sale Market Price Recovery


a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer: D

At December 31, 2010, Jeter Corp. had the following equity securities that were purchased during 2010, its first year of operation:

At December 31, 2010, Jeter Corp. had the following equity securities that were purchased during 2010, its first year of operation:

Fair Unrealized
Cost Value Gain (Loss)
Trading Securities:
Security A $ 90,000 $ 60,000 $(30,000)
B 15,000 20,000 5,000
Totals $105,000 $ 80,000 $(25,000)

Available-for-Sale Securities:
Security Y $ 70,000 $ 80,000 $ 10,000
Z 85,000 55,000 (30,000)
Totals $155,000 $135,000 $(20,000)
All market declines are considered temporary. Fair value adjustments at December 31, 2010 should be established with a corresponding charge against
Income Stockholders' Equity



a. $45,000 $ 0
b. $30,000 $30,000
c. $25,000 $20,000
d. $25,000 $ 0

Answer: C

Valet Corp. began operations in 2010. An analysis of Valet's equity securities portfolio acquired in 2010 shows the following totals at December 31, 2010 for trading and available-for-sale securities: Trading Available-for-Sale Securities Securities Aggregate cost $90,000 $110,000 Aggregate fair value 65,000 95,000 What amount should Valet report in its 2010 income statement for unrealized holding loss?

Valet Corp. began operations in 2010. An analysis of Valet's equity securities portfolio acquired in 2010 shows the following totals at December 31, 2010 for trading and available-for-sale securities:
Trading Available-for-Sale
Securities Securities
Aggregate cost $90,000 $110,000
Aggregate fair value 65,000 95,000
What amount should Valet report in its 2010 income statement for unrealized holding loss?

a. $40,000.
b. $10,000.
c. $15,000.
d. $25,000.

Answer: D

On October 1, 2010, Wenn Co. purchased 600 of the $1,000 face value, 8% bonds of Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on January 1, 2017, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Wenn's December 31, 2011 balance sheet, the carrying value of the bonds is

On October 1, 2010, Wenn Co. purchased 600 of the $1,000 face value, 8% bonds of Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on January 1, 2017, pay interest semiannually on January 1 and July 1. Wenn used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Wenn's December 31, 2011 balance sheet, the carrying value of the bonds is

a. $690,000.
b. $684,000.
c. $681,600.
d. $672,000.

Answer: D

The following information relates to Windom Company for 2010: Realized gain on sale of available-for-sale securities $15,000 Unrealized holding gains arising during the period on available-for-sale securities 35,000 Reclassification adjustment for gains included in net income 10,000 Windom's 2010 other comprehensive income is

The following information relates to Windom Company for 2010:
Realized gain on sale of available-for-sale securities $15,000
Unrealized holding gains arising during the period on
available-for-sale securities 35,000
Reclassification adjustment for gains included in net income 10,000
Windom's 2010 other comprehensive income is

a. $25,000.
b. $40,000.
c. $50,000.
d. $60,000.

Answer: B

Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During 2010, Penn earns $120,000 and pays cash dividends of $40,000. Tracy should report investment revenue for 2010 of

Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During 2010, Penn earns $120,000 and pays cash dividends of $40,000.
Tracy should report investment revenue for 2010 of

a. $16,000.
b. $32,000.
c. $40,000.
d. $48,000.

Answer: D

Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During 2010, Penn earns $120,000 and pays cash dividends of $40,000. If the beginning balance in the investment account was $240,000, the balance at December 31, 2010 should be

Tracy Co. owns 4,000 of the 10,000 outstanding shares of Penn Corp. common stock. During 2010, Penn earns $120,000 and pays cash dividends of $40,000.
If the beginning balance in the investment account was $240,000, the balance at December 31, 2010 should be

a. $240,000.
b. $272,000.
c. $288,000.
d. $320,000.

Answer: B

Myers Co. acquired a 60% interest in Gannon Corp. on December 31, 2010 for $945,000. During 2011, Gannon had net income of $600,000 and paid cash dividends of $150,000. At December 31, 2011, the balance in the investment account should be

Myers Co. acquired a 60% interest in Gannon Corp. on December 31, 2010 for $945,000. During 2011, Gannon had net income of $600,000 and paid cash dividends of $150,000. At December 31, 2011, the balance in the investment account should be

a. $945,000.
b. $1,305,000.
c. $1,215,000.
d. $1,395,000.

Answer: C

Brown Corporation earns $240,000 and pays cash dividends of $80,000 during 2010. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown. How much investment income should Dexter report in 2010?

Brown Corporation earns $240,000 and pays cash dividends of $80,000 during 2010. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown.
How much investment income should Dexter report in 2010?

a. $80,000.
b. $72,000.
c. $48,000.
d. $240,000.

Answer: B

Brown Corporation earns $240,000 and pays cash dividends of $80,000 during 2010. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown.What amount should Dexter show in the investment account at December 31, 2010 if the beginning of the year balance in the account was $320,000?

Brown Corporation earns $240,000 and pays cash dividends of $80,000 during 2010. Dexter Corporation owns 3,000 of the 10,000 outstanding shares of Brown.What amount should Dexter show in the investment account at December 31, 2010 if the beginning of the year balance in the account was $320,000?

a. $392,000.
b. $320,000.
c. $368,000.
d. $480,000.

Answer: C

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $300,000 on January 2, 2010. During 2010, Darby Company declared dividends of $50,000 and reported earnings for the year of $200,000.

Blanco Company purchased 200 of the 1,000 outstanding shares of Darby Company's common stock for $300,000 on January 2, 2010. During 2010, Darby Company declared dividends of $50,000 and reported earnings for the year of $200,000.

If Blanco Company used the fair value method of accounting for its investment in Darby Company, its Investment in Darby Company account on December 31, 2010 should be

a. $290,000.
b. $330,000.
c. $300,000.
d. $340,000.


Answer: C

If Blanco Company uses the equity method of accounting for its investment in Darby Company, its Investment in Darby Company account at December 31, 2010 should be

a. $290,000.
b. $300,000.
c. $330,000.
d. $340,000.


Answer: C

Harrison should report investment revenue for 2011 of

Harrison should report investment revenue for 2011 of

a. $320,000.
b. $256,000.
c. $64,000.
d. $0.

Answer: A

If the beginning balance in the investment account was $500,000, the balance at December 31, 2011 should be

If the beginning balance in the investment account was $500,000, the balance at December 31, 2011 should be

a. $820,000.
b. $660,000.
c. $564,000.
d. $500,000.

Answer: C

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2008. Sherman Corporation had 100,000 shares of common stock outstanding during 2011, paid cash dividends of $60,000 during 2011, and reported net income of $200,000 for 2011. Ziegler Corporation should report revenue from investment for 2011 in the amount of

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for $40 per share on January 2, 2008. Sherman Corporation had 100,000 shares of common stock outstanding during 2011, paid cash dividends of $60,000 during 2011, and reported net income of $200,000 for 2011. Ziegler Corporation should report revenue from investment for 2011 in the amount of

a. $15,000.
b. $35,000.
c. $50,000.
d. $55,000.

Answer: C

On January 2, 2010 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2010 Jobs, Inc. reported net income of $420,000 and distributed dividends of $180,000. The ending balance in the Investment in Pod Company account at December 31, 2010 was $320,000 after applying the equity method during 2010. What was the purchase price Pod Company paid for its investment in Jobs, Inc?

On January 2, 2010 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc. and subsequently used the equity method to account for the investment. During 2010 Jobs, Inc. reported net income of $420,000 and distributed dividends of $180,000. The ending balance in the Investment in Pod Company account at December 31, 2010 was $320,000 after applying the equity method during 2010. What was the purchase price Pod Company paid for its investment in Jobs, Inc?

a. $170,000
b. $260,000
c. $380,000
d. $470,000

Answer: B

On its December 31, 2010 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. There was no change during 2011 in the composition of Calhoun's portfolio of marketable equity securities held as available-for-sale securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/11 X $125,000 $160,000 Y 100,000 95,000 Z 175,000 125,000 $400,000 $380,000

On its December 31, 2010 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Securities Fair Value Adjustment (Available-for-Sale) account. There was no change during 2011 in the composition of Calhoun's portfolio of marketable equity securities held as available-for-sale securities. The following information pertains to that portfolio:
Security Cost Fair value at 12/31/11
X $125,000 $160,000
Y 100,000 95,000
Z 175,000 125,000
$400,000 $380,000

What amount of unrealized loss on these securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2011?

a. $30,000.
b. $20,000.
c. $10,000.
d. $0.

Answer: B

The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2011 is

a. $30,000.

b. $20,000.

c. $10,000.

d. $0.

Answer: A

During 2010, Woods Company purchased 20,000 shares of Holmes Corp. common stock for $315,000 as an available-for-sale investment. The fair value of these shares was $300,000 at December 31, 2010. Woods sold all of the Holmes stock for $17 per share on December 3, 2011, incurring $14,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2011 of

During 2010, Woods Company purchased 20,000 shares of Holmes Corp. common stock for $315,000 as an available-for-sale investment. The fair value of these shares was $300,000 at December 31, 2010. Woods sold all of the Holmes stock for $17 per share on December 3, 2011, incurring $14,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2011 of

a. $11,000.
b. $25,000.
c. $26,000.
d. $40,000.

Answer: A

On its December 31, 2010, balance sheet, Trump Co. reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2011, the fair value of the securities was $585,000. What should Trump report on its 2011 income statement as a result of the increase in fair value of the investments in 2011?

On its December 31, 2010, balance sheet, Trump Co. reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2011, the fair value of the securities was $585,000. What should Trump report on its 2011 income statement as a result of the increase in fair value of the investments in 2011?

a. $0.
b. Unrealized loss of $15,000.
c. Realized gain of $35,000.
d. Unrealized gain of $35,000.

Answer: A

Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows: December 31, 2010 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. $250,000 $200,000 $(50,000) Lyman, Inc. 245,000 265,000 20,000 $495,000 $465,000 $(30,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2010 income statement if 2010 is Kramer's first year of operation?

Kramer Company's trading securities portfolio which is appropriately included in current assets is as follows:
December 31, 2010
Fair Unrealized
Cost Value Gain (Loss)
Catlett Corp. $250,000 $200,000 $(50,000)
Lyman, Inc. 245,000 265,000 20,000
$495,000 $465,000 $(30,000)
Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2010 income statement if 2010 is Kramer's first year of operation?

a. $0.
b. $20,000.
c. $30,000.
d. $50,000.

Answer: C

At December 31, 2011, Atlanta Co. has a stock portfolio valued at $40,000. Its cost was $33,000. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit balance of $2,000, which of the following journal entries is required at December 31, 2011?

At December 31, 2011, Atlanta Co. has a stock portfolio valued at $40,000. Its cost was $33,000. If the Securities Fair Value Adjustment (Available-for-Sale) has a debit balance of $2,000, which of the following journal entries is required at December 31, 2011?

a. Securities Fair Value Adjustment 7,000
(Available-for-Sale)
Unrealized Holding Gain or Loss-Equity 7,000
b. Securities Fair Value Adjustment 5,000
(Available-for-Sale)
Unrealized Holding Gain or Loss-Equity 5,000
c. Unrealized Holding Gain or Loss-Equity 7,000
Securities Fair Value Adjustment 7,000
(Available-for-Sale)
d. Unrealized Holding Gain or Loss-Equity 5,000
Securities Fair Value Adjustment 5,000
(Available-for-Sale)

Answer: B

Instrument Corp. has the following investments which were held throughout 2010-2011: Market Value Cost 12/31/10 12/31/11 Trading $300,000 $400,000 $380,000 Available-for-sale 300,000 320,000 360,000

Instrument Corp. has the following investments which were held throughout 2010-2011:
Market Value
Cost 12/31/10 12/31/11
Trading $300,000 $400,000 $380,000
Available-for-sale 300,000 320,000 360,000

What amount of gain or loss would Instrument Corp. report in its income statement for the year ended December 31, 2011 related to its investments?


a. $20,000 gain.
b. $20,000 loss.
c. $140,000 gain.
d. $80,000 gain.

Answer: B

What amount would be reported as accumulated other comprehensive income related to investments in Instrument Corp.'s balance sheet at December 31, 2010?

a. $40,000 gain.

b. $60,000 gain.

c. $20,000 gain.

d. $120,000 gain.

Answer: C

During 2010 Logic Company purchased 4,000 shares of Midi, Inc. for $30 per share. The investment was classified as a trading security. During the year Logic Company sold 1,000 shares of Midi, Inc. for $35 per share. At December 31, 2010 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2010 related to its investment in Midi, Inc. stock?

During 2010 Logic Company purchased 4,000 shares of Midi, Inc. for $30 per share. The investment was classified as a trading security. During the year Logic Company sold 1,000 shares of Midi, Inc. for $35 per share. At December 31, 2010 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2010 related to its investment in Midi, Inc. stock?

a. ($8,000)
b. $5,000
c. ($3,000)
d. ($1,000)

Answer: D

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2010, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2010 and December 31, 2010 by the amortized premiums of $1,062 and $1,098, respectively.

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2010, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2010 and December 31, 2010 by the amortized premiums of $1,062 and $1,098, respectively.

At February 1, 2011, Richman Co. sold the Carlin bonds for $309,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2011 was $310,125. Assuming Richman Co. has a portfolio of Available-for-Sale Debt Securities, what should Richman Co. report as a gain (or loss) on the bonds?



a. $0.
b. ($1,125).
c. ($6,561).
d. ($8,811).

Answer: B

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2010, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2010 and December 31, 2010 by the amortized premiums of $1,062 and $1,098, respectively. At December 31, 2010, the fair value of the Carlin, Inc. bonds was $318,000. What should Richman Co. report as other comprehensive income and as a separate component of stockholders' equity?

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2010, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an effective interest rate of 7%. Using the effective interest method, Richman Co. decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2010 and December 31, 2010 by the amortized premiums of $1,062 and $1,098, respectively.
At December 31, 2010, the fair value of the Carlin, Inc. bonds was $318,000. What should Richman Co. report as other comprehensive income and as a separate component of stockholders' equity?

Answer: 7,686

On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Co. uses the straight-line method, what is the amount of premium amortization that would be recognized in 2012 related to these bonds?

On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity.
Assuming that Moss Co. uses the straight-line method, what is the amount of premium amortization that would be recognized in 2012 related to these bonds?

a. $642
b. $422
c. $460
d. $502

Answer: A

On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Co. uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2011 related to these bonds?

On January 3, 2010, Moss Co. acquires $100,000 of Adam Company's 10-year, 10% bonds at a price of $106,418 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity.
Assuming that Moss Co. uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2011 related to these bonds?

a. $10,000
b. $10,642
c. $9,578
d. $9,540

Answer: D

During 2008, Hauke Co. purchased 2,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2010 was $1,960,000. The bonds mature on March 1, 2015, and pay interest on March 1 and September 1. Hauke sells 1,000 bonds on September 1, 2012, for $988,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is

During 2008, Hauke Co. purchased 2,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2010 was $1,960,000. The bonds mature on March 1, 2015, and pay interest on March 1 and September 1. Hauke sells 1,000 bonds on September 1, 2012, for $988,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is

a. $0.
b. $4,800.
c. $8,000.
d. $11,200.

Answer: B

On October 1, 2010, Menke Co. purchased to hold to maturity, 200, $1,000, 9% bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2014. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2010 income statement from this investment should be

On October 1, 2010, Menke Co. purchased to hold to maturity, 200, $1,000, 9% bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2014. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2010 income statement from this investment should be

a. $4,500.
b. $4,020.
c. $4,980.
d. $5,460.

Answer: B

On November 1, 2010, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2017. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2010 income statement as a result of Horton's available-for-sale investment in Lopez wa

On November 1, 2010, Horton Co. purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2017. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2010 income statement as a result of Horton's available-for-sale investment in Lopez wa

Answer:  4,375

On November 1, 2010, Howell Company purchased 600 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2015, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2010, balance sheet at

On November 1, 2010, Howell Company purchased 600 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2015, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2010, balance sheet at

a. $600,000.
b. $623,000.
c. $622,080.
d. $632,000.

Answer: C

On October 1, 2010, Renfro Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2019, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2010 balance sheet at a carrying value of

On October 1, 2010, Renfro Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2019, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2010 balance sheet at a carrying value of

a. $975,000.
b. $975,750.
c. $990,000.
d. $990,250

Answer: B

On August 1, 2010, Fowler Company acquired $200,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2010, and mature on April 30, 2015, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2010?

On August 1, 2010, Fowler Company acquired $200,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2010, and mature on April 30, 2015, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2010?

a. Held-to-Maturity Securities 208,000
Interest Revenue 5,000
Cash 213,000
b. Held-to-Maturity Securities 213,000
Cash 213,000
c. Held-to-Maturity Securities 213,000
Interest Revenue 5,000
Cash 208,000
d. Held-to-Maturity Securities 200,000
Premium on Bonds 13,000
Cash 213,000

Answer: A

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively. At April 1, 2012, Landis Co. sold the Ritter bonds for $515,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2012 was $516,875. Assuming Landis Co. has a portfolio of Available-for-Sale Debt Securities, what should Landis Co. report as a gain or loss on the bonds?

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively.
At April 1, 2012, Landis Co. sold the Ritter bonds for $515,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2012 was $516,875. Assuming Landis Co. has a portfolio of Available-for-Sale Debt Securities, what should Landis Co. report as a gain or loss on the bonds?

a. ($14,685).
b. ($10,935).
c. ($1,875).
d. $ 0.

Answer: C

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively. At December 31, 2011, the fair value of the Ritter, Inc. bonds was $530,000. What should Landis Co. report as other comprehensive income and as a separate component of stockholders' equity?

Landis Co. purchased $500,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2011, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Landis Co. decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2011 and December 31, 2011 by the amortized premiums of $1,770 and $1,830, respectively.

At December 31, 2011, the fair value of the Ritter, Inc. bonds was $530,000. What should Landis Co. report as other comprehensive income and as a separate component of stockholders' equity?

a. $12,810.
b. $9,210.
c. $3,600.
d. No entry should be made.

Answer: A

Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2011, paying $376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.

Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2011, paying $376,100. The bonds mature January 1, 2021; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity.

On July 1, 2011, Patton Company should increase its Held-to-Maturity Debt Securities account for the Scott Co. bonds by

a. $2,392.
b. $1,371.
c. $1,196.
d. $686.

Answer: D

($376,100 × .055) - ($400,000 × .05) = $686.

For the year ended December 31, 2011, Patton Company should report interest revenue from the Scott Co. bonds of:

a. $42,392.
b. $41,409.
c. $41,368.
d. $40,000.


Answer: B


$376,100 × .055 = $20,686
($376,100 + $686) × .055 - $20,723; $20,686 + $20,723 = $41,409.

Kern Company purchased bonds with a face amount of $400,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $6,000, and paid accrued interest for three months of $10,000. The amount to record as the cost of this long-term investment in bonds is

Kern Company purchased bonds with a face amount of $400,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $6,000, and paid accrued interest for three months of $10,000. The amount to record as the cost of this long-term investment in bonds is

a. $424,000.
b. $414,000.
c. $408,000.
d. $400,000.



Answer: B

($400,000 × 1.02) + $6,000 = $414,000.

On August 1, 2010, Dambro Co. acquired 200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2010, and mature on April 30, 2016, with interest paid each October 31 and April 30. The bonds will be added to D'ambros available-for-sale portfolio. The preferred entry to record the purchase of the bonds on

On August 1, 2010, Dambro Co. acquired 200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2010, and mature on April 30, 2016, with interest paid each October 31 and April 30. The bonds will be added to D'ambros available-for-sale portfolio. The preferred entry to record the purchase of the bonds on 

August 1, 2010 is
a. Available-for-Sale Securities 198,500
Cash 198,500
b. Available-for-Sale Securities 194,000
Interest Receivable 4,500
Cash 198,500
c. Available-for-Sale Securities 194,000
Interest Revenue 4,500
Cash 198,500
d. Available-for-Sale Securities 200,000
Interest Revenue 4,500
Discount on Debt Securities 6,000
Cash 198,500
C. Available-for-Sale Securities 194,000
Interest Revenue 4,500







Answer: A


Dr. Available-for-Sale Securities: 200 × $1,000 × .97 = $194,000
Dr. Interest Revenue: $200,000 × .045 × 3/6 = $4,500
Cr. Cash: $194,000 + $4,500 = $198,500.

Under U.S. GAAP, which of the following models may be used to determine if an investment is consolidated? Risk-and-reward model Voting-interest approach

Under U.S. GAAP, which of the following models may be used to determine if an investment is consolidated?
Risk-and-reward model Voting-interest approach

a. Yes No
b. No Yes
c. No No
d. Yes Yes

Answer: D

A variable-interest entity has

A variable-interest entity has

a. insufficient equity investment at risk.
b. stockholders who have decision-making rights.
c. stockholders who absorb the losses or receive the benefits of a normal stockholder.
d. All of the above are characteristics of a variable-interest entity.

Answer: A

All of the following are requirements for disclosures related to financial instruments except

All of the following are requirements for disclosures related to financial instruments except

a. disclosing the fair value and related carrying value of the instruments.
b. distinguishing between financial instruments held or issued for purposes other than trading.
c. combining or netting the fair value of separate financial instruments.
d. displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.

Answer: C

An option to convert a convertible bond into shares of common stock is a(n)

An option to convert a convertible bond into shares of common stock is a(n)

a. embedded derivative.
b. host security.
c. hybrid security.
d. fair value hedge.

Answer: A

Gains or losses on cash flow hedges are

Gains or losses on cash flow hedges are

a. ignored completely.
b. recorded in equity, as part of other comprehensive income.
c. reported directly in net income.
d. reported directly in retained earnings.

Answer: B

The accounting for fair value hedges records the derivative at its

The accounting for fair value hedges records the derivative at its

a. amortized cost.
b. carrying value.
c. fair value.
d. historical cost.

Answer: C

Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III. Call or put options.

Which of the following are considered equity securities?
I. Convertible debt.
II. Redeemable preferred stock.
III. Call or put options.

a. I and II only.
b. I and III only.
c. II only.
d. III only.

Answer: D

All of the following are characteristics of a derivative financial instrument except the instrument

All of the following are characteristics of a derivative financial instrument except the instrument

a. has one or more underlyings and an identified payment provision.
b. requires a large investment at the inception of the contract.
c. requires or permits net settlement.
d. All of these are characteristics.

Answer: B

All of the following statements regarding accounting for derivatives are correct except that

All of the following statements regarding accounting for derivatives are correct except that

a. they should be recognized in the financial statements as assets and liabilities.
b. they should be reported at fair value.
c. gains and losses resulting from speculation should be deferred.
d. gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.

Answer: C

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called

a. arbitrageurs.
b. gamblers.
c. hedgers.
d. speculators.

Answer: A

Transfers between categories

Transfers between categories

a. result in companies omitting recognition of fair value in the year of the transfer.
b. are accounted for at fair value for all transfers.
c. are considered unrealized and unrecognized if transferred out of held-to-maturity into trading.
d. will always result in an impact on net income.

Answer: B

"Gains trading" or "cherry picking" involves

"Gains trading" or "cherry picking" involves

a. moving securities whose value has decreased since acquisition from available-for-sale to held-to-maturity in order to avoid reporting losses.
b. reporting investment securities at fair value but liabilities at amortized cost.
c. selling securities whose value has increased since acquisition while holding those whose value has decreased since acquisition.
d. All of the above are considered methods of "gains trading" or "cherry picking."

Answer: C

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?

A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?

a. Transfer from trading to available-for-sale
b. Transfer from available-for-sale to trading
c. Transfer from held-to-maturity to available-for-sale
d. Transfer from available-for-sale to held-to-maturity

Answer: D

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

a. its original cost.
b. its fair value at the date of the transfer.
c. the higher of its original cost or its fair value at the date of the transfer.
d. the lower of its original cost or its fair value at the date of the transfer.

Answer: B

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be

a. its original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.

Answer: B

A reclassification adjustment is reported in the

A reclassification adjustment is reported in the

a. income statement as an Other Revenue or Expense.
b. stockholders' equity section of the balance sheet.
c. statement of comprehensive income as other comprehensive income.
d. statement of stockholders' equity.

Answer: C

Impairments are

Impairments are

a. based on discounted cash flows for securities.
b. recognized as a realized loss if the impairment is judged to be temporary.
c. based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments.
d. evaluated at each reporting date for every investment.

Answer: D

The fair value option allows a company to

The fair value option allows a company to

a. value its own liabilities at fair value.
b. record income when the fair value of its bonds increases.
c. report most financial instruments at fair value by recording gains and losses as a separate component of stockholders' equity.
d. All of the above are true of the fair value option.

Answer: A

Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011?

Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011?

I. $3,000,000
II. $3,040,000
III. $3,120,000



a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.

Answer: D

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, 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?

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, 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

Answer: D

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

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.

Answer: D

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

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.

Answer: A

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

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. divestiture method.
d. equity method.

Answer: D

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

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 circumstances 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.

Answer: B

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

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

Answer: C

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

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

Answer: A

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment

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.

Answer: B

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

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.

Answer: C

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

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.

Answer: C

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

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.

Answer: D

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

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.

Answer: C

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

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.

Answer: A

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

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.

Answer: C

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

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.

Answer: D

Investments in debt securities are generally recorded at

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.

Answer: C

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

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.

Answer: C

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

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.

Answer: D

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

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.

Answer: C

Held-to-maturity securities are reported at

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.

Answer: B

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

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.

Answer: D

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

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%.

Answer: A

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

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.

Answer: B

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

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.

Answer: C

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

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.

Answer: A

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

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.

Answer: A

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

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.

Answer: C

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

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

a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.

Answer: C

A correct valuation is

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.

Answer: B

Which of the following is not a debt security?

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.

Answer: C

When a company sells property and then leases it back, any gain on the sale should usually be

When a company sells property and then leases it back, any gain on the sale should usually be

a. recognized in the current year.
b. recognized as a prior period adjustment.
c. recognized at the end of the lease.
d. deferred and recognized as income over the term of the lease.

Answer: D

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

In a sale-leaseback transaction where none of the four leasing criteria are satisfied, which of the following is false?

a. The seller-lessee removes the asset from its books.
b. The purchaser-lessor records a gain.
c. The seller-lessee records the lease as an operating lease.
d. All of the above are false statements.

Answer: B

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

To avoid leased asset capitalization, companies can devise lease agreements that fail to satisfy any of the four leasing criteria. Which of the following is not one of the ways to accomplish this goal?

a. Lessee uses a higher interest rate than that used by lessor.
b. Set the lease term at something less than 75% of the estimated useful life of the property.
c. Write in a bargain purchase option.
d. Use a third party to guarantee the asset's residual value.

Answer: C

The Lease Liability account should be disclosed as

The Lease Liability account should be disclosed as

a. all current liabilities.
b. all noncurrent liabilities.
c. current portions in current liabilities and the remainder in noncurrent liabilities.
d. deferred credits.

Answer: C

Which of the following statements is correct?

Which of the following statements is correct?

a. In a direct-financing lease, initial direct costs are added to the net investment in the lease.
b. In a sales-type lease, initial direct costs are expensed in the year of incurrence.
c. For operating leases, initial direct costs are deferred and allocated over the lease term.
d. All of these.

Answer: D

For a sales-type lease,

For a sales-type lease,

a. the sales price includes the present value of the unguaranteed residual value.
b. the present value of the guaranteed residual value is deducted to determine the cost of goods sold.
c. the gross profit will be the same whether the residual value is guaranteed or unguaranteed.
d. none of these

Answer: C

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

A lessor with a sales-type lease involving an unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

a. The minimum lease payments plus the unguaranteed residual value.
b. The present value of the minimum lease payments.
c. The cost of the asset to the lessor, less the present value of any unguaranteed residual value.
d. The present value of the minimum lease payments plus the present value of the unguaranteed residual value.

Answer: B

The primary difference between a direct-financing lease and a sales-type lease is the

The primary difference between a direct-financing lease and a sales-type lease is the

a. manner in which rental receipts are recorded as rental income.
b. amount of the depreciation recorded each year by the lessor.
c. recognition of the manufacturer's or dealer's profit at the inception of the lease.
d. allocation of initial direct costs by the lessor to periods benefited by the lease arrangements

Answer: C

The initial direct costs of leasing

The initial direct costs of leasing

a. are generally borne by the lessee.
b. include incremental costs related to internal activities of leasing, and internal costs related to costs paid to external third parties for originating a lease arrangement.
c. are expensed in the period of the sale under a sales-type lease.
d. All of the above are true with regard to the initial direct costs of leasing.

Answer: C

When lessor's account for residual values related to leased assets, they

When lessor's account for residual values related to leased assets, they

a. always include the residual value because they always assume the residual value will be realized.
b. include the unguaranteed residual value in sales revenue.
c. recognize more gross profit on a sales-type lease with a guaranteed residual value than on a sales-type lease with an unguaranteed residual value.
d. All of the above are true with regard to lessors and residual values.

Answer: A

If the residual value of a leased asset is guaranteed by a third party

If the residual value of a leased asset is guaranteed by a third party

a. it is treated by the lessee as no residual value.
b. the third party is also liable for any lease payments not paid by the lessee.
c. the net investment to be recovered by the lessor is reduced.
d. it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term.

Answer: D

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

In order to properly record a direct-financing lease, the lessor needs to know how to calculate the lease receivable. The lease receivable in a direct-financing lease is best defined as

a. the amount of funds the lessor has tied up in the asset which is the subject of the direct-financing lease.
b. the difference between the lease payments receivable and the fair market value of the leased property.
c. the present value of minimum lease payments.
d. the total book value of the asset less any accumulated depreciation recorded by the lessor prior to the lease agreement.

Answer: C

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

a. should be amortized over the period of the lease using the effective interest method.
b. should be amortized over the period of the lease using the straight-line method.
c. does not arise.
d. should be recognized at the lease's expiration.

Answer: A

Which of the following would not be included in the Lease Receivable account?

Which of the following would not be included in the Lease Receivable account?

a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included

Answer: D

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

A lessee with a capital lease containing a bargain purchase option should depreciate the leased asset over the

a. asset's remaining economic life.
b. term of the lease.
c. life of the asset or the term of the lease, whichever is shorter.
d. life of the asset or the term of the lease, whichever is longer.

Answer: A

In the earlier years of a lease, from the lessee's perspective, the use of the

In the earlier years of a lease, from the lessee's perspective, the use of the

a. capital method will enable the lessee to report higher income, compared to the operating method.
b. capital method will cause debt to increase, compared to the operating method.
c. operating method will cause income to decrease, compared to the capital method.
d. operating method will cause debt to increase, compared to the capital method.

Answer: B

In computing depreciation of a leased asset, the lessee should subtract

In computing depreciation of a leased asset, the lessee should subtract

a. a guaranteed residual value and depreciate over the term of the lease.
b. an unguaranteed residual value and depreciate over the term of the lease.
c. a guaranteed residual value and depreciate over the life of the asset.
d. an unguaranteed residual value and depreciate over the life of the asset.

Answer: A

In computing the present value of the minimum lease payments, the lessee should

In computing the present value of the minimum lease payments, the lessee should

a. use its incremental borrowing rate in all cases.
b. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
c. use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
d. none of these.

Answer: C

Executory costs include

Executory costs include

a. maintenance.
b. property taxes.
c. insurance.
d. all of these.

Answer: D

Minimum lease payments may include a

Minimum lease payments may include a

a. penalty for failure to renew.
b. bargain purchase option.
c. guaranteed residual value.
d. any of these.

Answer: D

Which of the following is a correct statement of one of the capitalization criteria?

Which of the following is a correct statement of one of the capitalization criteria?

a. The lease transfers ownership of the property to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.

Answer: C

The methods of accounting for a lease by the lessee are

The methods of accounting for a lease by the lessee are

a. operating and capital lease methods.
b. operating, sales, and capital lease methods.
c. operating and leveraged lease methods.
d. none of these.

Answer: A

The amount to be recorded as the cost of an asset under capital lease is equal to the

The amount to be recorded as the cost of an asset under capital lease is equal to the

a. present value of the minimum lease payments.
b. present value of the minimum lease payments or the fair value of the asset, whichever is lower.
c. present value of the minimum lease payments plus the present value of any unguaranteed residual value.
d. carrying value of the asset on the lessor's books.

Answer: B

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee?

a. No impact as the option does not enter into the transaction until the end of the lease term.
b. The lessee must increase the present value of the minimum lease payments by the present value of the option price.
c. The lessee must decrease the present value of the minimum lease payments by the present value of the option price.
d. The minimum lease payments would be increased by the present value of the option price if, at the time of the lease agreement, it appeared certain that the lessee would exercise the option at the end of the lease and purchase the asset at the option price.

Answer: B

An essential element of a lease conveyance is that the

An essential element of a lease conveyance is that the

a. lessor conveys less than his or her total interest in the property.
b. lessee provides a sinking fund equal to one year's lease payments.
c. property that is the subject of the lease agreement must be held for sale by the lessor prior to the drafting of the lease agreement.
d. term of the lease is substantially equal to the economic life of the leased property.

Answer: A

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that

While only certain leases are currently accounted for as a sale or purchase, there is theoretic justification for considering all leases to be sales or purchases. The principal reason that supports this idea is that

a. all leases are generally for the economic life of the property and the residual value of the property at the end of the lease is minimal.
b. at the end of the lease the property usually can be purchased by the lessee.
c. a lease reflects the purchase or sale of a quantifiable right to the use of property.
d. during the life of the lease the lessee can effectively treat the property as if it were owned by the lessee.

Answer: C

Which of the following best describes current practice in accounting for leases?

Which of the following best describes current practice in accounting for leases?

a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.

Answer: B

Which of the following is an advantage of leasing?

Which of the following is an advantage of leasing?

a. Off-balance-sheet financing
b. Less costly financing
c. 100% financing at fixed rates
d. All of these

Answer: D

Major reasons why a company may become involved in leasing to other companies is (are)

Major reasons why a company may become involved in leasing to other companies is (are)

a. interest revenue.
b. high residual values.
c. tax incentives.
d. all of these.

Answer: D