tango_gs

Mustang Corporation formed a special purpose entity (SPE) for purposes of providing research and development. An unrelated firm absorbs the expected losses of the SPE and the independent shareholders of the SPE receive the expected residual returns. Is the SPE considered a variable interest entity (VIE) according to FASB Interpretation No. 46(R) and is consolidation required by Mustang, respectively?

A) Yes; No.

B) Yes; Yes.

C) No; No.

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Since the shareholders do not absorb the expected losses, the SPE is considered a VIE. The unrelated firm (not Mustang) that absorbs the losses is the primary beneficiary and must consolidate the VIE.

tango_gs

Which of the following statements is INCORRECT regarding the classification of debt and equity security investments?

A) If equity and debt securities are trading securities, any realized and unrealized gains and losses are reported in the income statement.

B) If equity and debt securities are available-for-sale securities, any realized and unrealized gains and losses are reported in the income statement.

C) Debt held-to-maturity is reported in the balance sheet at amortized cost.

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In the case of available-for-sale securities, unrealized gains and losses are excluded from the income statement and are reported as a component of shareholders' equity.

tango_gs

Accounting standards for intercorporate investments establish different categories of securities with distinct ways of treating them on the financial statements of the company. One category requires the securities to be carried at fair value on the balance sheet with unrealized gains and losses excluded from the income statement. This category of security classification is called debt:

A) securities held-to-maturity.

B) and equity trading securities.

C) and equity securities available-for-sale.

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If securities are designated as debt and equity securities available-for-sale they can be sold to meet the liquidity and other needs of the company. As such, the securities are to be carried at fair value on the balance sheet with unrealized gains and losses excluded from the income statement

tango_gs

Which of the following statements about the various classifications of securities held by a firm is least accurate?

A) Trading securities are, by definition, current assets because the firm intends to trade these securities in the near term.

B) A firm which invests in the debt securities of another firm cannot classify these securities as "held to maturity" if they have the positive intent and ability to hold the securities until final maturity.

C) Equity securities of other companies cannot be classified as "held to maturity" under SFAS 115.

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Under SFAS 115, only debt securities, which the firm has the positive intent and ability to hold until final maturity, may be classified as held to maturity.

tango_gs

Which of the following securities would most likely be characterized as a held-to-maturity security?

A) Debt or equity securities.

B) Equity securities.

C) Debt securities.

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Only debt securities, that a company has a positive intent and ability to hold to maturity, can be characterized as a held-to-maturity security.

tango_gs

Firm A recently leased equipment used in its manufacturing plant. If the leased asset is worth less than $100,000 at the end of the lease, Firm A will pay the lessor the difference.

Firm B provided debt financing to an unrelated entity. The debt has a provision whereby Firm B cannot be repaid until all other senior debt is satisfied.

Do Firm A and Firm B have a variable interest?

A) Both have a variable interest.

B) Only one has a variable interest.

C) Neither have a variable interest.





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A lease residual guarantee and subordinated debt are both examples of variable interests. Firm A will experience a loss if the leased asset is worth less than $100,000 at the end of the lease. Firm B will experience a loss if the senior debt is not paid in full.

tango_gs

Trading securities are defined as:

A) debt and equity securities acquired with the intent of selling them in the near future.

B) debt and equity securities that are very liquid and easy to sell.

C) equity securities representing 20% to 50% ownership in a public firm.

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Debt and equity securities acquired with the intent of selling them in the near future are likely to be considered trading securities.

tango_gs

Cosmo Inc. (Cosmo) invests in two portfolios – Portfolio 1 and Portfolio 2. Portfolio 1 contains securities with an overall intent to profit within a month or two. Portfolio 2 contains equity securities with a moderate amount of acquisition and disposition activity. Which of the following treatments of Cosmo’s reporting of the investments in Portfolios 1 and 2, respectively, is most accurate?

Portfolio 1

Portfolio 2

A) Unrealized amounts reported on balance sheet. Assets reported at fair value.

B) Unrealized amounts reported on income statement. Assets reported at fair value.

C) Unrealized amounts reported on income statement. Assets reported at cost.

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Portfolio 1 contains held-for-trading securities because it is clear that the securities are acquired with the intent to profit over the near term. Therefore, the unrealized gains and losses would be reported immediately in the income statement.

Portfolio 2 contains available-for-sale securities. There are no debt securities and therefore, it cannot contain held-to-maturity securities. As well, there is no indication that the securities are acquired with the intent to profit over the near term. By default, the correct classification would be available-for-sale. Therefore, the securities (assets) would be reported at fair value.

tango_gs

Omricon Capital Associates specializes in making investments in the small cap market sector. In some cases the firm operates as a supplier of private equity for restructurings. In this instance, the firm views itself as having a value investment focus. In others, it acts as a venture capital firm. Here, the investment focus is usually growth. Finally, in some cases it simply takes passive investment positions in publicly-traded firms. The positions in marketable securities are sometimes considered trading positions, and other times the view is to hold for a longer period until valuation parameters are met or exceeded.
Omricon’s chief compliance officer, Raymond “Buzz” Richards has recently become concerned that the firm may not be correctly following the relevant accounting standards for these investments. To ensure that the rules are being effectively adhered to, he is seeking advice from the accounting firm of Merz-Brokaw and Associates on the matter. Sally Lee is the Merz-Brokaw partner heading up the consulting team assigned to review the situation.
The size of the investments ranges from a few percent of the firm’s outstanding equity, to positions of greater than 50%. Richards says that it has always been his understanding that the percentage of the equity held is the major determinant with respect to which accounting method applies. Lee reminds him that the firm’s intent for its investments also plays a role in determining how they are accounted for.
Some of the firm’s investments have not worked out as planned. Richards has conferred with the firm’s portfolio managers regarding securities being held by the firm that are worth less than when they were acquired, and has presented a list of these investments to Lee. His concern is what this implies for the accounting for these investments. Lee tells him that the issue here is whether or not the security can be considered impaired, and that designating a security as impaired implies that the decline in value is permanent.
Top managers at Omricon have asked Lee to help them evaluate the impact of the choice of accounting method on the firm’s profitability. Some members of the management team are of the belief that the accounting method does not affect financial measures because these are driven by underlying economic factors. Others believe that these measures can be affected by the accounting method chosen.Which of the following statements concerning percentage ownership and accounting method is most accurate?

A) When the ownership is less than 20%, US GAAP requires the investment in financial assets method, IFRS the equity method.

B) When the ownership is less than 20%, both US GAAP and IFRS require the investment in financial assets method.

C) When the ownership is less than 20%, both US GAAP and IFRS require the equity method.

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When the percentage ownership is less than 20% (with no significant influence over the investee firm), both US GAAP and IFRS require the investment in financial assets method. (Study Session 6, LOS 22.a)

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For instances in which Omricon holds exactly 50% of the outstanding equity of the investee firm’s equity (i.e., the investee firm is a joint venture), which of the following statements is most accurate?

A) IFRS and US GAAP both permit a choice between the equity method and proportional consolidation.

B) US GAAP requires that the equity method be used; IFRS permits a choice between the equity method and proportional consolidation.

C) IFRS requires that the equity method be used; US GAAP permits a choice between the equity method and proportional consolidation.

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When the percentage ownership is exactly 50% (i.e., the investment is a joint venture), IFRS allows for the choice between the equity method and proportionate consolidation, while US GAAP requires the equity method. (Study Session 6, LOS 22.b)

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The three classifications for passive investments in securities that trade in secondary markets are:

A) trading securities, available-for-sale securities, held-to-maturity securities.

B) marketable securities, available-for-sale securities, held-to-maturity securities.

C) trading securities, marketable securities, held-to-maturity securities.

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The three classifications for passive investments in securities that trade in secondary markets (i.e., marketable securities) are trading securities, available-for-sale securities, and held-to-maturity securities. (Study Session 6, LOS 22.a)

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When a passive investment in marketable equity securities is classified as available-for-sale:

A) US GAAP requires that unrealized gains and losses are reported on the income statement, while under IFRS the firm can elect to report on either the income statement or in comprehensive income on the balance sheet.

B) IFRS requires that unrealized gains and losses are reported in comprehensive income on the balance sheet, while under US GAAP the firm can elect to report on either the income statement or in comprehensive income on the balance sheet.

C) US GAAP and IFRS require that unrealized gains and losses are reported as equity in other comprehensive income on the balance sheet.

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When a passive investment in marketable equity securities is classified as available-for-sale, US GAAP and IFRS require that unrealized gains and losses are reported as equity in other comprehensive income on the balance sheet. (Study Session 6, LOS 22.b)

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With respect to Lee’s statement concerning securities that are currently worth less than when they were acquired, a security should be considered impaired when the:

A) decline in value is permanent, its value should be written down to the new fair value, and a loss reported on the income statement.

B) decline in value is other than temporary, its value should be written down to the new fair value, and a loss reported on the income statement.

C) decline in value is other than temporary, its value should be written down to the new fair value, and a loss reported in comprehensive income in equity on the balance sheet.

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A security should be considered impaired when the decline in value is “other than temporary”. That is to say that it is obviously not due to a temporary decline in the market. No one knows for sure if any decline in value is permanent, but in most cases it is obvious that it is not simply a market phenomenon. When this is the case, the asset’s value should be written down to the new fair value, and a loss reported on the income statement. (Study Session 6, LOS 22.a)

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In most situations, when IFRS allows for a choice between the equity method and proportionate consolidation, the use of the equity method will result in:

A) ROA being higher and leverage being higher than under proportionate consolidation.

B) ROA being lower and leverage being higher than under proportionate consolidation.

C) ROA being higher and leverage being lower than under proportionate consolidation.

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In most cases, the choice of the equity method will result in leverage being lower, net profit margin being higher, and ROA being higher than would be the case under proportionate consolidation. (Study Session 6, LOS 22.c)

tango_gs

Harter Company recently acquired a 40% stake in Compton Corp. for $40 million in cash by borrowing at 10%. Harter will account for this acquisition using which of the following methods:

A) Equity method.

B) Acquisition Method.

C) Held to maturity debt securities method.

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The 40% ownership stake would indicate significant control has been gained over the affiliate company. The equity method would be used.