CH12 TB 8e final - practice questions PDF

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Chapter 12 Investments True/False Questions 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. Answer: True Level of Learning: 1 Easy Learning Objective: 12-01 Topic Area: Held to maturity securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

2. All investments in debt securities whose fair values are not readily determinable are carried at historical cost. Answer: False Level of Learning: 1 Easy Learning Objective: 12-01 Topic Area: Held to maturity securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement 3. Both debt and equity securities can be categorized as trading securities. Answer: True Level of Learning: 1 Easy Learning Objective: 12-02 Topic Area: Trading securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

4. Net unrealized holding gains (losses) are reported in the income statement for trading securities. Answer: True Level of Learning: 1 Easy Learning Objective: 12-02 Topic Area: Trading securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

5. Purchases and sales of securities are always reported as investing activities in a statement of cash flows.

Intermediate Accounting, Seventh Edition, © The McGraw-Hill Companies, Inc., 2016

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Chapter 12 Investments Answer: False Level of Learning: 2 Medium Learning Objective: 12-02 Topic Area: Trading securities Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

6. Routine transfers of debt and equity investments among the trading, available for sale, and held to maturity portfolios need not be disclosed in the financial statements. Answer: False Level of Learning: 2 Medium Learning Objective: 12-01 Learning Objective: 12-02 Learning Objective: 12-03 Topic Area: Transfers between investment categories Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

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Both trading securities and securities available for sale are reported at their fair values. Answer: True Level of Learning: 1 Easy Learning Objective: 12-02 Learning Objective: 12-03 Topic Area: Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

8. All securities considered available for sale should be reported as current assets in a classified balance sheet. Answer: False Level of Learning: 1 Easy Learning Objective: 12-03 Topic Area: Available for sale securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement 9. Unrealized gains and losses are included in other comprehensive income for securities that are classified as available for sale. Answer: True Level of Learning: 1 Easy Learning Objective: 12-03 12-2

Intermediate Accounting, Eighth Edition, © The McGraw-Hill Companies, Inc., 2016

Chapter 12 Investments Topic Area: Available for sale securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

10. When available-for-sale securities are sold, the amount of gain or loss realized from the date of purchase is included in before-tax net income. Answer: True Level of Learning: 2 Medium Learning Objective: 12-03 Topic Area: Available for sale securities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

11. Companies must always use the equity method when they hold between 25% and 50% of the common stock of an investee. Answer: False Level of Learning: 2 Medium Learning Objective: 12-04 Topic Area: Significant influence Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

12. The equity method is in many ways a partial consolidation. Answer: True Level of Learning: 1 Easy Learning Objective: 12-05 Topic Area: Equity method ‒ Accounting Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

13. Under the equity method of accounting for a stock investment, cash dividends received are considered a reduction of the investee's net assets. Answer: True Level of Learning: 1 Easy Learning Objective: 12-05 Topic Area: Equity method ‒ Accounting Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

Intermediate Accounting, Seventh Edition, © The McGraw-Hill Companies, Inc., 2016

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Chapter 12 Investments 14. When an equity method investment is sold, a gain or loss is recognized for the difference between its selling price and its cost. Answer: False Level of Learning: 1 Easy Learning Objective: 12-05 Topic Area: Equity method ‒ Accounting Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

15. If an investment is accounted for under the equity method, the investor reduces investment income and the investment account for amortization of goodwill acquired in the investment. Answer: False Level of Learning: 2 Medium Learning Objective: 12-05 Learning Objective: 12-06 Topic Area: Equity method ‒ Accounting Topic Area: Equity method ‒ Amortize fair value differentials Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

16. Selecting the fair value option for an available-for-sale investment is equivalent to reclassifying that investment as a trading security. Answer: True Level of Learning: 2 Medium Learning Objective: 12-07 Topic Area: Fair value option for investments Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

17. The fair value option cannot be elected for significant-influence investments because those must be accounted for under the equity method. Answer: False Level of Learning: 2 Medium Learning Objective: 12-07 Topic Area: Fair value option for investments Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

18. Under IAS No. 39, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP. 12-4

Intermediate Accounting, Eighth Edition, © The McGraw-Hill Companies, Inc., 2016

Chapter 12 Investments Answer: True Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Investor lacks significant influence Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global

19. Under IFRS No. 9, investments for which the investor lacks significant influence use basically the same reporting classifications as those used under U.S. GAAP. Answer: False Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Investor lacks significant influence Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global

20. Under IFRS No. 9, debt investments are classified as either “available for sale” or “fair value through profit and loss (FVPL).” Answer: False Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global

21. Under IFRS No. 9, debt investments are classified as either “amortized cost,” or “fair value through profit and loss (FVPL),” or “fair value through other comprehensive income (FVOCI).” Answer: True Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global

Intermediate Accounting, Seventh Edition, © The McGraw-Hill Companies, Inc., 2016

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Chapter 12 Investments 22. Under IFRS No. 9, equity investments are classified as either “fair value through other comprehensive income (FVOCI)” or “fair value through profit and loss (FVPL).” Answer: True Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global xx.

Under IFRS No. 9, a debt investment can be accounted for at amortized cost if the debt agreement includes only interest and principal and the investor intends to hold it to collect contractual cash flows. Answer: True Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global

23. Under IAS No. 39, transfers of debt investments out of the FVPL category into AFS or HTM are permitted under “rare circumstances.” Answer: True Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement AICPA: BB Global

24. Under IFRS No. 9, cost can be used as an estimate of fair value in some circumstances. Answer: True Level of Learning: 1 Easy Learning Objective: 12-08 Topic Area: IFRS ‒ Cost method Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: FN Measurement 12-6

Intermediate Accounting, Eighth Edition, © The McGraw-Hill Companies, Inc., 2016

Chapter 12 Investments AICPA: BB Global Multiple Choice Questions 25. The investment category for which the investor's "positive intent and ability to hold" is important is: a. Securities reported under the equity method. b. Trading securities. c. Securities classified as held to maturity. d. Securities available for sale. Answer: c Level of Learning: 1 Easy Learning Objective: 12-01 Topic Area: Held to maturity securities Topic Area: Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

26. Which of the following investment securities held by Zoogle Inc. may be classified as held-tomaturity securities in its balance sheet? a. Long-term debenture bonds. b. Common stock. c. Callable preferred stock. d. All of these answer choices are correct. Answer: a Level of Learning: 1 Easy Learning Objective: 12-01 Topic Area: Held to maturity securities Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

27. 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 answer choices are reported at fair value. Answer: b Level of Learning: 1 Easy Learning Objective: 12-01 Topic Area: Held to maturity securities Topic Area: Distinguish among investment categories Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

Intermediate Accounting, Seventh Edition, © The McGraw-Hill Companies, Inc., 2016

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Chapter 12 Investments 28. In which investment category are fair values and subsequent growth of an investee not relevant for reporting? a. Securities reported under the equity method. b. Trading securities. c. Held-to-maturity securities. d. Securities available for sale. Answer: c Level of Learning: 2 Medium Learning Objective: 12-01 Topic Area: Held to maturity securities Topic Area: Distinguish among investment categories Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

29. Which category completely excludes equity securities? a. Securities available for sale. b. Consolidating securities. c. Held-to-maturity securities. d. Trading securities. Answer: c Level of Learning: 2 Medium Learning Objective: 12-01 Topic Area: Held to maturity securities Topic Area: Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

30. In 2014, Osgood Corporation purchased $4 million of 10-year municipal bonds at face value. On December 31, 2016, the bonds had a market value of $3,600,000 and Osgood reclassified the bonds from held to maturity to trading securities. Osgood's December 31, 2016, balance sheet and the 2016 income statement would show the following: Income Investment in statement loss municipal bonds on investments a. 3,600,000 0 b. 3,600,000 400,000 c. 4,000,000 400,000 d. 4,000,000 0 Answer: b Level of Learning: 3 Hard Learning Objective: 12-01 Topic Area: Transfers between investment categories Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement 12-8

Intermediate Accounting, Eighth Edition, © The McGraw-Hill Companies, Inc., 2016

Chapter 12 Investments Feedback: The unrealized loss ($400,000) on transfer to new category of trading securities is included in income. Use the following to answer questions 31–33: Beresford Inc. purchased several investment securities during 2015, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.

Held to Maturity Securities: ABC Co. Bonds

Fair Value 12/31/2015 $375,000

Fair Value 12/31/2016 $400,000

Amortized Cost 12/31/2015 $367,500

Trading Securities: DEF Co. Stock GEH Inc. Stock IJK Inc. Stock

Fair Value 12/31/2015 $48,000 $47,000 $44,000

Fair Value 12/31/2016 $59,500 $77,000 $38,500

Cost $66,000 $39,000 $32,900

Available for Sale Securities: LMN Co. Stock

Fair Value 12/31/2015 $130,500

Fair Value 12/31/2016 $150,400

Cost $140,000

Amortized Cost 12/31/2016 $360,000

31. What balance sheet amount would Beresford report for its total investment securities at 12/31/2015? a. $637,000. b. $644,500. c. $645,400. d. None of these answer choices is correct. Answer: a Level of Learning: 3 Hard Learning Objective: 12-01 Learning Objective: 12-02 Learning Objective: 12-03 Topic Area: Distinguish among investment categories Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: The held-to-maturity securities are reported at amortized cost, and the others are reported at fair value.

32. What would be the balance in Beresford’s accumulated other comprehensive income with respect to these investments in its 12/31/2016 balance sheet (ignore taxes)? a. $55,100. b. $26,500. c. $10,400. d. None of these answer choices is correct. Answer: c Level of Learning: 3 Hard Intermediate Accounting, Seventh Edition, © The McGraw-Hill Companies, Inc., 2016

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Chapter 12 Investments Learning Objective: 12-03 Topic Area: Available for sale securities Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: This is the cumulative increase in fair value above cost for its available-for-sale securities.

33. What total unrealized holding gain would Beresford report in its 2016 income statement relative to its investment securities? a. $55,900. b. $36,000. c. $80,900. d. $48,200. Answer: b Level of Learning: 3 Hard Learning Objective: 12-03 Topic Area: Trading securities Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: This is the difference between the fair value of trading securities at 12/31/2016 and at 12/31/2015. 34. On January 1, 2016, Rupar Retailers purchased $100,000 of Anand Company bonds at a discount of $5,000. The Anand bonds pay 6% interest but were purchased when the market interest rate was 7% for bonds of similar risk and maturity. The bonds pay interest semiannually on January 1 and July 1 of each year. Rupar accounts for the bonds as a held-tomaturity investment, and uses the effective interest method. In Rupar’s December 31, 2016 journal entry to record the second period of interest, Rupar would record a credit to interest revenue of: a. $3,336. b. $3,325. c. $3,000. d. $3,500. Answer: a Level of Learning: 3 Hard Learning Objective: 12-01 Topic Area: Held to maturity securities Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement

Feedback: 1/1/2016

6/30/2016

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Investment Discount Cash Cash (.06/2) x ($100,000) Discount (plug) Interest revenue (.07/2) x ($100,000 – $5,000)

100,000 5,000 95,000 3,000 325 3,325

Intermediate Accounting, Eighth Edition, © The McGraw-Hill Companies, Inc., 2016

Chapter 12 Investments 12/31/2016

Cash (.06/2) x ($100,000) Discount (plug) Interest revenue (.07/2) x ($100,000–$5,000+325)

3,000 336 3,336

35. 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 that have not already been recognized 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. Answer: b Level of Learning: 3 Hard Learning Objective: 12-01 Learning Objective: 12-02 Topic Area: Transfers between investment categories Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

36. 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. rReclassify 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. Answer: c Level of Learning: 3 Hard Learning Objective: 12-01 Learning Objective: 12-03 Topic Area: Transfers between investment categories Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

37. If Dizbert Company concluded that an investment originally classified as available for sale would now more appropriately be classified as held to maturity, Dizbert 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 any unrealized gain or loss on 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. Need to restate earnings, as the original classification was in error.

Intermediate Accounting, Seventh Edition, © The McGraw-Hill Companies, Inc., 2016

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Chapter 12 Investments Answer: c Level of Learning: 3 Hard Learning Objective: 12-01 Learning Objective: 12-03 Topic Area: Transfers between investment categories Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

38. 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. Answer: d Level of Learning: 1 Easy Learning Objective: 12-02 Topic Area: Trading securities Topic Area: Distinguish among investment categories Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement 39. 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. Answer: b Level of Learning: 1 Easy Learning Objective: 12-02 Topic Area: Trading securities Topic Area: Distinguish among investment...