Module 2 Quiz

Question 1

Which debt securities recognize the unrealized holding gains or losses as other comprehensive income?

Answer 1

Available-for-sale securities

Debt securities, also known as available-for-sale securities, recognize unrealized holding gains and losses as other comprehensive income and as a separate component of stockholders’ equity.

Question 2

Savannah Corporation purchased 35,000 shares of common stock of the Boulet Corporation for $50 per share on January 2, 2020. During 2020, Boulet Corporation had 140,000 shares of common stock outstanding, paid cash dividends of $120,000, and reported net income of $320,000.

Which amout should Savannah Corporation report as revenue from investment for 2020?

Answer 2

$80,000

The revenue from investment is the following: (35,000 /140,000) x $320,000 (Net Income) = $80,000.

Question 3

What is accurate about the effective-interest method of amortization?

Answer 3

It must be used to amortize a discount or premium unless some other method yields a similar result.

Question 4

When the parent treats the investment as a subsidiary, how does the parent generally prepare their financial statements?

Answer 4

Using consolidated financial statements

When the parent treats the investment as a subsidiary, the parent generally prepares consolidated financial statements. Consolidated financial statements treat the parent and subsidiary corporations as a single economic entity.

Question 5

During 2020, Jackson Company purchased 17,000 shares of Monticello Corp. common stock for $382,500 as a passive interest investment. The fair value of these shares was $373,150 at December 31, 2020. Jackson sold all of the Monticello stock for $27.25 per share on July 3, 2021, incurring $15,000 in brokerage commissions.

Which realized gain on the sale of stock in 2021 should Jackson Company report?

Answer 5

$65,750.00

The realized gain on sale of stock is computed as: ($27.25 x 17,000) Selling Price - $382,500 (Cost) - $15,000 (Brokerage Fees) = $65,750.