Chapter 17 Investments Self-Assessment Quiz

Question 1

Unrealized holding gains and losses on cash flow hedges are

• reported directly in retained earnings.
• included in net income.
• not recorded or reported.
• reported as a component of other comprehensive income

Answer 1

reported as a component of other comprehensive income

Question 2

Select the correct statement regarding the impact on stockholders’ equity of a transfer from available-for-sale to trading.

• The unrealized gain or loss at the date of transfer is recognized in income.
• The unrealized gain or loss at the date of transfer increases or decreases stockholders’ equity.
• The unrealized gain or loss at the date of transfer carried as a separate component of stockholders’ equity is amortized over the remaining life of the security.
• The separate component of stockholders’ equity is increased or decreased by the unrealized gain or loss at the date of transfer.

Answer 2

-The unrealized gain or loss at the date of transfer increases or decreases stockholders’ equity.

Question 3

A debt security is transferred from one category to another. Generally accepted 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?

Transfer from trading to available-for-sale

Transfer from available-for-sale to trading

Transfer from held-to-maturity to available-for-sale

Transfer from available-for-sale to held-to-maturity

Answer 3

Transfer from available-for-sale to held-to-maturity

Question 4

Unrealized gains and losses on held-to-maturity securities are reported on the income statement.

T/F

Answer 4

False

Question 5

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

• none of these answer choices are correct.
• trading.
• held-to-maturity.
• available-for-sale.

Answer 5

Trading

Question 6

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

none of these answer choices are correct.

trading.

held-to-maturity.

available-for-sale.

Answer 6

held-to-maturity.

Question 7

Trading securities are reported on the balance sheet at fair value.

True

False

Answer 7

True

Question 8

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

True

False

Answer 8

False

Question 9

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

never-sell debt securities.

held-to-maturity debt securities.

trading debt securities.

available-for-sale debt securities.

Answer 9

available-for-sale debt securities.

Question 10

On its December 31, 2014, balance sheet, Estes Co. reported its investment in trading securities, which had cost $500,000, at fair value of $475,000. At December 31, 2015, the fair value of the securities was $492,500. What should Estes report on its 2015 income statement as a result of the increase in fair value of the investments in 2015?

Unrealized loss of $7,500.

Unrealized gain of $17,500.

$0.

Realized gain of $17,500.

Answer 10

Unrealized gain of $17,500.

Question 11

The unrealized gains and losses on available-for-sale securities are:

reported on individual securities.

not reported at all.

reported on the portfolio of investments.

none of these answer choices are correct.

Answer 11

reported on the portfolio of investments.

The fair value method is applied to the portfolio of investments.

Question 12

Trading securities are generally held for less than:

Entry field with correct answer
	3 months.
	6 months.
	12 months.
	3 weeks.

Answer 12

3 months.

Question 13

An unrealized holding gain on a company’s available-for-sale securities should be reflected in the current financial statements as

an extraordinary item shown as a direct increase to retained earnings.

other comprehensive income and included in the equity section of the balance sheet.

a current gain resulting from holding securities.

a note or parenthetical disclosure only.

Answer 13

other comprehensive income and included in the equity section of the balance sheet.

Question 14

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

True

False

Answer 14

False

Question 15

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.

True

False

Answer 15

False

Question 16

Holdings between 20% and 50% of another company’s voting stock are accounted for using the equity method.

True

False

Answer 16

True

Question 17

An ownership interest of 15% in another company’s voting stock should be accounted for using the:

consolidation method.

equity method.

cost method.

fair value method.

Answer 17

fair value method.

Question 18

An ownership interest of 30% of the common stock of another corporation should be accounted for using the:

fair value method.

cost method.

equity method.

consolidated method.

Answer 18

equity method.

Question 19

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

fair value method.
equity method.
divesture method.
cost method.

Answer 19

equity method.

Question 20

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

True
False

Answer 20

True

Question 21

Investments are reported at market value on the balance sheet under the equity method.

True

False

Answer 21

False

Investments reported under the equity method are carried at cost, and periodically adjusted by the investor’s share of the investee’s earnings or losses, and decreased by all dividends received from the investee.

Question 22

Which of the following statements related to impairments of investments is not correct?

Subsequent increases/decreases in the fair value of impaired available-for-sale securities are included as other comprehensive income.

A bankruptcy being experienced by an investee is an example of a permanent loss in value.

If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis.

The amount of any write-down in value is accounted for as a realized loss.

Answer 22

If the decline in value is considered temporary, the cost of the individual security is written down to a new cost basis.

The cost of an individual security is written down only if the decline in value is judged to be permanent.

Question 23

Companies with investments accounted for using the equity method cannot elect the fair value option.

True

False

Answer 23

False

Question 24

Companies base impairment for debt and equity securities on a(n)

intrinsic value test.

fair value test.

equity test.

discounted cash flow test.

Answer 24

fair value test.

Question 25

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

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

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

effective-interest method of allocation must be used.

straight-line method of allocation must be used.

Answer 25

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

Question 26

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

Amortization of a premium decreases from period to period.

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

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

Amortization of a discount decreases from period to period.

Answer 26

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

Question 27

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

accrued interest is debited to Interest Receivable.

accrued interest is debited to Interest Revenue.

securities account should include accrued interest.

accrued interest is debited to Interest Expense.

Answer 27

accrued interest is debited to Interest Revenue.

Question 28

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

A gain or loss on the sale is not extraordinary.

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

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

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

Answer 28

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

Question 29

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

True
False

Answer 29

True

Question 30

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.

True

False

Answer 30

False

If the decline is judged to be other than temporary, a company writes down the cost basis of the individual security to a new cost basis.

Question 31

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.

True

False

Answer 31

True

Question 32

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

True

False

Answer 32

False

The separate component of stockholders’ equity is increased or decreased by the unrealized gain or loss at the date of transfer.

Impact of Transfer on Net Income: None