INTERMEDIATE ACCOUNTING TEST Banks PDF

Preview

Summary

CHAPTER 17INVESTMENTSIFRS questions are available at the end of this chapter.TRUE-FALSE—ConceptualAnswer No. DescriptionF 1. Examples of debt securities. T 2. Definition of trading securities. F 3. Available-for-sale unrealized gains/losses. F 4. Classifying held-to-maturity securities. T 5. Fair va...

Description

CHAPTER 17 INVESTMENTS IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual Answer F T F F T F T F T T F T F T F T F T F T

No.

Description

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Examples of debt securities. Definition of trading securities. Available-for-sale unrealized gains/losses. Classifying held-to-maturity securities. Fair value changes in AFS securities. Securities Fair Value Adjustment account. Accounting for trading securities. Definition of significant influence. Reporting Unrealized Holding Gain/Loss—Equity account. Examples of significant influence. Definition of controlling interest. Effect of dividends on investment under equity. Reporting revenue under fair value method. Definition of controlling interest. Using fair value option. Accounting for changes in fair value. Temporary declines and write downs. Necessary of reclassification adjustment. Transfer of held-to-maturity securities. Transfers from trading to available-for-sale.

MULTIPLE CHOICE—Conceptual Answer c b c c a a c b a d b c d c c d c a c

No. 21. 22. 23. 24. P 25. S 26. S 27. S 28. S 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39.

Description Debt securities. Valuation of debt securities. Held-to-maturity securities. Unrealized gain/loss recognition for securities. Accounting for accrued interest. Identifying securities accounted for at amortized cost. Accounting for available-for-sale securities. Using effective-interest method of amortization. Identifying available-for-sale securities. Classification as held-to-maturity. Reporting held-to-maturity securities. Acquisition of held-to-maturity securities. Accounting for trading securities. Accounting for trading debt securities. Recording investments in debt securities. Calculating the issue price of bonds. Valuation of investments in debt securities. Recording amortization of bond discount. Amortization of premium/discount on investment in a debt security.

17 - 2

Test Bank for Intermediate Accounting, Thirteenth Edition

MULTIPLE CHOICE—Conceptual (cont.) Answer d c c b a c b d a d d d a d c b b d c b a c b d c b a c a d

No. 40. 41. 42. S 43. S 44. P 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. P 57. 58. 59. *60. *61. *62. *63. *64. *65. *66. *67. *68. *69.

Description Effective-interest rate method. Debt securities purchased between interest dates. Sale of debt security prior to maturity. Passive interest investment. Fair value vs. equity method. Fair value vs. equity method. Conditions for using the equity method. Ownership interest required for using the equity method. Recording of dividends received under the equity method. Recognition of earnings of investee using the equity method. Effect of using the fair value method in error. Determine value of investment. Fair value option. Accounting for impairments. Reclassification adjustment in comprehensive income. Reclassification of securities. Reclassification of securities. Transfer of a debt security. Definition of “gains trading” or “cherry picking”. Accounting for transfers between Categories. Accounting for derivatives. Characteristics of a derivative instrument. Identifying companies that are arbitrageurs. Identifying equity securities. Accounting for fair value hedges. Gains/losses on cash flow hedges. Identifying an embedded derivative. Requirements for financial instrument disclosures. Variable-interest entity. Risk-and-reward model and voting-interest approach.

P

These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. S

MULTIPLE CHOICE—Computational Answer c b d b a c a b c a b

No. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.

Description Recording the purchase of debt securities. Computing cost of bond investment. Calculation of discount amortization. Calculation of revenue from HTM securities. Computation of other comprehensive income. Computation of gain/loss on sale of bonds. Acquisition of held-to-maturity securities. Carrying value of held-to-maturity securities. Carrying value of available-for-sale debt securities. Calculation of income from available-for-sale debt securities. Calculation of income from HTM securities.

Investments

MULTIPLE CHOICE—Computational (cont.) Answer b d a d b d b c b c a a b a b c c a c b b b c c c b c b d b

No. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110.

Description Determine gain on sale of debt securities. Computation of revenue from HTM securities. Calculation of premium amortization. Calculation of other comprehensive income. Calculation of loss on sale of bonds. Calculation of loss on sale of trading security. Determination of unrealized loss on trading security. Determination of accumulated other comprehensive income. Entry to record unrealized gain on AFS securities. Fair value for trading securities. Unrealized gain on available-for-sale securities. Calculation of gain on sale of equity security. Determination of unrealized loss on AFS securities. Calculation of unrealized loss included in comprehensive income. Computation of purchase price of equity method investment. Computation of revenue from investment. Computation of investment account balance. Calculation of investment revenue. Accounting for stock investments/fair value method. Accounting for stock investments/equity method. Accounting for stock investments/fair value method. Equity method of accounting. Fair value method of accounting for stock investment. Equity method of accounting for stock investment. Balance of investment account using the equity method. Investment income recognized under the equity method. Balance of investment account using the equity method. Balance of investment account using the equity method. Investment income recognized under the equity method. Other comprehensive income.

MULTIPLE CHOICE—CPA Adapted Answer d d c d c b c a b

No. 111. 112. 113. 114. 115. 116. 117. 118. 119.

Description Carrying value of AFS debt securities. Unrealized loss on trading and AFS securities. Unrealized loss on trading and AFS securities. Classification of an equity security. Investment income recognized under the equity method. Balance of investment account using the equity method. Sale of stock investment. Calculate the acquisition price of a stock investment. Transfer of securities from trading to AFS.

17 - 3

17 - 4

Test Bank for Intermediate Accounting, Thirteenth Edition

EXERCISES Item E17-120 E17-121 E17-122 E17-123 E17-124 E17-125 E17-126 *E17-127 *E17-128

Description Investment in debt securities at a premium. Investment in debt securities at a discount. Investments in equity securities (essay). Investment in equity securities. Fair value and equity methods (essay). Fair value and equity methods. Comprehensive income calculation. Fair value hedge. Cash flow hedge.

PROBLEMS Item P17-129 P17-130 P17-131 *P17-132 *P17-133

Description Trading equity securities. Trading securities. Available-for-sale securities. Derivative financial instrument. Free-standing derivative.

CHAPTER LEARNING OBJECTIVES 1.

Identify the three categories of debt securities and describe the accounting and reporting treatment for each category.

2.

Understand the procedures for discount and premium amortization on bond investments.

3.

Identify the categories of equity securities and describe the accounting and reporting treatment for each category.

4.

Explain the equity method of accounting and compare it to the fair value method for equity securities.

5.

Describe the accounting for the fair value option.

6.

Discuss the accounting for impairments of debt and equity investments.

7.

Explain why companies report reclassification adjustments.

8.

Describe the accounting for transfer of investment securities between categories.

*9.

Explain who uses derivatives and why.

*10.

Understand the basic guidelines for accounting for derivatives.

*11.

Describe the accounting for derivative financial instruments.

*12.

Explain how to account for a fair value hedge.

*13.

Explain how to account for a cash flow hedge.

Investments

17 - 5

*14.

Identify special reporting issues related to derivative financial instruments that cause unique accounting problems.

*15.

Describe the accounting for variable-interest entities.

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item

Type

Item

Type

Item

1. 2.

TF TF

3. 21.

TF MC

22. 23.

4. 5. 6. 7. S 28. S 29.

TF TF TF TF MC MC

30. 31. 32. 33. 34. 35.

MC MC MC MC MC MC

36. 37. 38. 39. 40. 41.

8. 9. 10.

TF TF TF

11. 43. 86.

TF MC MC

87. 88. 89.

12. 13. 14. S 44. P 45.

TF TF TF MC MC

46. 47. 48. 49. 50.

MC MC MC MC MC

95. 96. 97. 98. 99.

15.

TF

16.

TF

51.

17.

TF

53.

MC

122.

18.

TF

54.

MC

S

19. 20.

TF TF

55. 56.

60.

MC

61.

MC

62.

MC

63.

64.

MC

127.

MC MC

P

57. 58.

Type Item Type Item Type Learning Objective 1 S MC 24. MC 26. MC P S MC 25. MC 27. MC Learning Objective 2 MC 42. MC 77. MC MC 72. MC 78. MC MC 73. MC 79. MC MC 74. MC 80. MC MC 75. MC 81. MC MC 76. MC 82. MC Learning Objective 3 MC 90. MC 93. MC MC 91. MC 94. MC MC 92. MC 112. MC Learning Objective 4 MC 100. MC 105. MC MC 101. MC 106. MC MC 102. MC 107. MC MC 103. MC 108. MC MC 104. MC 109. MC Learning Objective 5 MC 52. MC 110. MC Learning Objective 6 E 130. P Learning Objective 7 Learning Objective 8 MC 59. MC 122. MC 119. MC 129. Learning Objective 9* Learning Objective 10*

MC E

132.

Learning Objective 11* P 133. P Learning Objective 12*

E P

Item

Type

Item

Type

70. 71.

MC MC

83. 84. 85. 111. 120. 121.

MC MC MC MC E E

113. 114. 122.

MC MC E

129. 130. 131.

P P P

115. 116. 117. 118. 123.

MC MC MC MC E

124. 125. 126.

E E E

130.

P

17 - 6

Test Bank for Intermediate Accounting, Thirteenth Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS (cont.) Learning Objective 13* 65.

MC

128.

E Learning Objective 14*

66. 67. Note:

MC MC

68.

MC

69.

TF = True-False MC = Multiple Choice

Learning Objective 15* MC E = Exercise P = Problem

TRUE-FALSE—Conceptual 1.

Debt securities include corporate bonds and convertible debt, but not U.S. government securities.

2.

Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

3.

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

4.

A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.

5.

Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

6.

The Securities Fair Value Adjustment account has a normal credit balance.

7.

Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income.

8.

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

9.

The Unrealized Holding Gain/Loss—Equity account is reported as a part of other comprehensive income.

10. Significant influence over an investee may be indicated by material intercompany transactions and interchange of managerial personnel. 11.

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.

Investments

17 - 7

12. All dividends received by an investor from the investee decrease the investment’s carrying value under the equity method. 13. Under the fair value method, the investor reports as revenue its share of the net income reported by the investee. 14. A controlling interest occurs when one corporation acquires a voting interest of more than 50 percent in another corporation. 15. Companies may not use the fair value option for investments that follow the equity method of accounting. 16. Changes in the fair value of a company's debt instruments are included as part of earnings in any given period. 17. 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. 18. 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. 19. If a company transfers held-to-maturity securities to available-for-sale securities, the unrealized gain or loss is recognized in income. 20. The transfer of securities from trading to available-for-sale and from available-for-sale to trading has the same impact on stockholders’ equity and net income.

True-False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. F T F F T

Item 6. 7. 8. 9. 10.

Ans. F T F T T

Item 11. 12. 13. 14. 15.

Ans. F T F T F

Item 16. 17. 18. 19. 20.

Ans. T F T F T

MULTIPLE CHOICE—Conceptual 21.

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.

22.

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.

17 - 8

Test Bank for Intermediate Accounting, Thirteenth Edition

23.

Securities which could be classified as held-to-maturity are a. redeemable preferred stock. b. warrants. c. municipal bonds. d. treasury stock.

24.

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.

P

25. 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.

S

26. 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.

S

27. 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.

S

28. 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.

S

29. 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%.

Investments

17 - 9

30.

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.

31.

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.

32.

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.

33.

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.

34.

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.

35.

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.

36.

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 ...