Q33. 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)   $2.50 million.

Q34. 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.

Q35. Regarding the statements made by Dupree and Welch about reclassifying Zeisler’s equity investment in

     trading:

A)   Welch’s statement is incorrect; Dupree’s statement is correct.

B)   Welch’s statement is correct; Dupree’s statement is incorrect.

C)   Welch’s statement is incorrect; Dupree’s statement is incorrect.

Q36. If Zeisler were to account for the Market Square Corporation shares using the equity method, 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)   $2.75 million.

B)   $3.50 million.

C)   $2.60 million.

答案和详解如下：

Q33. 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)   $2.50 million.

Correct answer is A)

Trading securities are carried at fair market value:

100,000 shares × $35 per share = $3,500,000

Q34. 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.

Correct answer is 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.

Q35. Regarding the statements made by Dupree and Welch about reclassifying Zeisler’s equity investment in

     trading:

A)   Welch’s statement is incorrect; Dupree’s statement is correct.

B)   Welch’s statement is correct; Dupree’s statement is incorrect.

C)   Welch’s statement is incorrect; Dupree’s statement is incorrect.

Correct answer is A)

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

Q36. If Zeisler were to account for the Market Square Corporation shares using the equity method, 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)   $2.75 million.

B)   $3.50 million.

C)   $2.60 million.

Correct answer is C)

Under the equity method the market value of the stock is ignored but the proportionate share of the earnings are added to the original investment and the proportionate share of the dividends are subtracted from the earnings. Hence, we have the original investment + (earnings − dividends) = total value of the investment.

[(100,000 shares)($25)] + [(100,000 shares)($2.50 earnings − 1.50 dividend)] = $2,600,000.