21.Carter Schmitz purchased 200 shares of Intelismart at $
What amount should Schmitz report on this investment under unrealized gain: income on its 2006 annual report?
A) $1,000.
B) $400.
C) $0.
D) $600.
22.On December 15, 2004, the Zeisler Company faces a financial crisis. Zeisler’s industry has gone into recession and net income has declined to nearly zero. Jeremiah Welch, the company’s CFO, is extremely concerned that, when the final figures for 2004 come in, the poor operating results will throw the firm into violation of its debt covenants, which specify that it must meet a certain return on assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant would trigger a provision in the lending agreement allowing lenders to put Zeisler’s debt back to the firm and likely force Zeisler into bankruptcy.
With only two weeks before the close of the firm’s fiscal year on December 31, there is no way to avoid bankruptcy through improved operations. Welch calls an emergency meeting with Olivia Dupree, the firm’s controller, to come up with a plan of action to keep Zeisler out of bankruptcy. He explains to Dupree that they need to increase Zeigler’s reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2004.
Dupree suggests that Zeisler’s equity investments might be useful in staving off bankruptcy. Zeisler acquired 100,000 shares of the Market Square Corporation on January 1, 2004, at $25 per share. Market Square paid dividends during 2004 of $1.50 per share and was expected to have earnings for 2004 of $2.50 per share. Zeisler also holds 250,000 shares of General Nuclear, purchased for $72 per share. General Nuclear has no dividends and is expected to report a loss for 2004. Both securities are classified on the financial statements as available-for-sale.
Dupree added that Zeisler also holds several million dollars of
Dupree left the meeting with Welch for a moment to check the stock market. She found that
Dupree suggested to Welch, “We could reclassify our equity investment in
Welch suggested that, instead of reclassifying
What is the investment income that Zeisler Company will report for the year 2004 on its investment in Market Square Corporation shares if it continues to account for the shares as an available-for-sale investment?
A) $200,000.
B) $150,000.
C) $100,000.
D) $250,000.
23.If Zeisler were to account for the Market Square Corporation shares as trading securities, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2004 balance sheet would be:
A) $3.50 million.
B) $2.75 million.
C) $2.60 million.
D) $2.50 million.
24.If Zeisler reclassified the common stock of General Nuclear as a trading security, what effect would it have on Zeisler’s 2004 income statement?
A) Net income would decline.
B) Net income would increase.
C) Reclassifying the security would have no effect on the income statement because gains and losses would be recognized in equity.
D) Reclassifying the security would have no effect on the income statement because gains and losses are not realized.
25.Regarding the statements made by Dupree and Welch about reclassifying Zeisler’s equity investment in
A) Welch’s statement is correct; Dupree’s statement is correct.
B) Welch’s statement is incorrect; Dupree’s statement is correct.
C) Welch’s statement is correct; Dupree’s statement is incorrect.
D) Welch’s statement is incorrect; Dupree’s statement is incorrect.
答案和详解如下：
21.Carter Schmitz purchased 200 shares of Intelismart at $
What amount should Schmitz report on this investment under unrealized gain: income on its 2006 annual report?
A) $1,000.
B) $400.
C) $0.
D) $600.
The correct answer was B)
The unrealized gain of $1,000 (26 - 21= 5 × 200 shares) is reported as a $400 operating gain (80 shares × 5).
22.On December 15, 2004, the Zeisler Company faces a financial crisis. Zeisler’s industry has gone into recession and net income has declined to nearly zero. Jeremiah Welch, the company’s CFO, is extremely concerned that, when the final figures for 2004 come in, the poor operating results will throw the firm into violation of its debt covenants, which specify that it must meet a certain return on assets (ROA) and not exceed a certain debt-to-asset ratio. A violation of either covenant would trigger a provision in the lending agreement allowing lenders to put Zeisler’s debt back to the firm and likely force Zeisler into bankruptcy.
With only two weeks before the close of the firm’s fiscal year on December 31, there is no way to avoid bankruptcy through improved operations. Welch calls an emergency meeting with Olivia Dupree, the firm’s controller, to come up with a plan of action to keep Zeisler out of bankruptcy. He explains to Dupree that they need to increase Zeigler’s reported ROA and reduce its reported debt-to-assets ratio relative to the numbers that would otherwise be reported for 2004.
Dupree suggests that Zeisler’s equity investments might be useful in staving off bankruptcy. Zeisler acquired 100,000 shares of the Market Square Corporation on January 1, 2004, at $25 per share. Market Square paid dividends during 2004 of $1.50 per share and was expected to have earnings for 2004 of $2.50 per share. Zeisler also holds 250,000 shares of General Nuclear, purchased for $72 per share. General Nuclear has no dividends and is expected to report a loss for 2004. Both securities are classified on the financial statements as available-for-sale.
Dupree added that Zeisler also holds several million dollars of
Dupree left the meeting with Welch for a moment to check the stock market. She found that
Dupree suggested to Welch, “We could reclassify our equity investment in
Welch suggested that, instead of reclassifying
What is the investment income that Zeisler Company will report for the year 2004 on its investment in Market Square Corporation shares if it continues to account for the shares as an available-for-sale investment?
A) $200,000.
B) $150,000.
C) $100,000.
D) $250,000.
The correct answer was B)
The investment income for available-for-sale securities includes dividends, interest, and realized gains. In this case, the investment income from Market Square Corporation would be the dividends it paid to the number of shares Zeisler owns:
100,000 shares × $1.50 per share = $150,000.
23.If Zeisler were to account for the Market Square Corporation shares as trading securities, assuming that the securities do not change in value between the December 15th meeting and the end of the year, the carrying amount of these shares on Zeisler's December 31, 2004 balance sheet would be:
A) $3.50 million.
B) $2.75 million.
C) $2.60 million.
D) $2.50 million.
The correct answer was A)
Trading securities are carried at fair market value:
100,000 shares × $35 per share = $3,500,000
24.If Zeisler reclassified the common stock of General Nuclear as a trading security, what effect would it have on Zeisler’s 2004 income statement?
A) Net income would decline.
B) Net income would increase.
C) Reclassifying the security would have no effect on the income statement because gains and losses would be recognized in equity.
D) Reclassifying the security would have no effect on the income statement because gains and losses are not realized.
The correct answer was A)
Reclassifying a security from available-for-sale to trading requires unrealized gains and losses to be recognized in income. Since Zeisler’s investment in General Nuclear has an unrealized loss, net income would be reduced.
25.Regarding the statements made by Dupree and Welch about reclassifying Zeisler’s equity investment in
A) Welch’s statement is correct; Dupree’s statement is correct.
B) Welch’s statement is incorrect; Dupree’s statement is correct.
C) Welch’s statement is correct; Dupree’s statement is incorrect.
D) Welch’s statement is incorrect; Dupree’s statement is incorrect.
The correct answer was B)
Welch’s statement is incorrect because dividends and interest are recognized as income both when the securities are classified as trading and when they are classified as available-for-sale.
Dupree’s statement is correct. Reclassifying the securities from available-for-sale to trading will significantly raise Zeisler’s near-zero net income by allowing Zeisler to recognize the unrealized gain in income when the security is reclassified. It will have no material effect on asset value because the shares will be carried at fair market value as trading securities and were already carried at fair market value (with the net unrealized gain in equity) as available-for-sale securities. Even though it may appear that equity would decline by the amount of the unrealized gain if the securities were reclassified, the unrealized gain will flow through income in 2004 and thus return to equity. Consequently, reclassifying the equity securities of
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