土豆妮

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

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

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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.

土豆妮

According to SFAS No. 115, a category of securities is carried on the company balance sheet at cost. This category of securities is called debt:

A) securities held-to-maturity.

B) and equity trading securities.

C) and equity securities available-for-sale.

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When debt securities are purchased with both the intent and ability to hold them until they mature, they are recorded on the balance sheet at cost.

土豆妮

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

A) 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.

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

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.

土豆妮

SFAS No. 115 establishes different categories of securities with distinct ways of treating them on the financial statements of the company. Which of the following categories requires realized and unrealized gains and losses to be reported as income? Debt:

A) securities held-to-call.

B) and equity trading securities.

C) and equity securities available-for-sale.

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The SFAS No. 115 category, debt and equity trading securities, is for securities that, when acquired, are intended to be resold within a near term time horizon. They are classified as current assets on the balance sheet, with any realized or unrealized gains and losses reported as income.

土豆妮

Which of the following statements is TRUE about securities classified as held to maturity?

A) Only debt securities can be classified as "held to maturity" securities.

B) Equity securities can be classified as "held to maturity" if the security pays a large and consistent dividend and management has decided to hold the security for more than five years.

C) Equity securities can be classified as "held to maturity" if the firm's management has decided to hold the security for more than five years.

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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.

土豆妮

In one of your evening MBA courses, you are about to take an accounting exam and are concerned about your knowledge of accounting for marketable equity securities. You have the following data from a previous take-home assignment:

Security	Cost	2005 Value	2006 Value
1	$80	$75	$85
2	$20	$30	$35
3	$40	$20	$45

You are assumed to own 100 shares of each firm. Under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," the securities will be classified as either held-to-maturity, available-for-sale, or trading securities.

Which of the following statements regarding the income statement and balance sheet treatment of securities classified as held-to-maturity is most accurate? They are carried at:

A) cost on the balance sheet and coupon receipts are considered income.

B) fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.

C) cost on the balance sheet with unrealized gains and losses reported in income.

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SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a company to classify its securities into categories based upon the company's intent relative to the eventual disposition of the securities.

One of these categories, held-to-maturity securities, is composed of debt securities which a company has the positive intent and ability to hold to maturity. These securities are carried at the cost on the balance sheet and coupon receipts are considered income.

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Which of the following statements regarding the income statement and balance sheet treatment of securities classified as available-for-sale is most accurate? They are carried at:

A) cost on the balance sheet and coupon receipts are considered income.

B) fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.

C) fair market value on the balance sheet with unrealized gains and losses reported in income.

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SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a company to classify its securities into categories based upon the company's intent relative to the eventual disposition of the securities.

One of these categories, available-for-sale securities, may be sold to address the liquidity and other needs of a company. Debt and equity securities classified as available-for-sale are carried at fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as a separate component of shareholders' equity.

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Which of the following statements regarding the income statement and balance sheet treatment of securities classified as trading securities is most accurate? They are carried at:

A) cost on the balance sheet with unrealized gains and losses reported in income.

B) fair market value on the balance sheet with unrealized gains and losses excluded from income and reported as separate component of shareholders' equity.

C) fair market value on the balance sheet with unrealized gains and losses reported in income.

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SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires a company to classify its securities into categories based upon the company's intent relative to the eventual disposition of the securities.

One of these categories, trading securities, is for debt and equity securities acquired for the purpose of selling them in the near term. These securities are measured at fair market value and are listed as current assets on the balance sheet. Unrealized and realized gains and losses are reported in income.

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Using the provisions of SFAS 115, if the securities are classified as trading securities the balance sheet value for the portfolio at year-end 2005 is:

A) $12,500, and record no gains or losses.

B) $14,000, and record no gains or losses.

C) $12,500, and record an unrealized loss of $1,500.

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The original portfolio cost was: $8,000 + $2,000 + $4,000 = $14,000

In 2005: $7,500 + $3,000 + $2,000 = $12,500

Thus we write the portfolio down by $1,500 and take an unrealized loss.

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Using the provisions of SFAS 115, if the securities are classified as trading securities the balance sheet value for the portfolio at year-end 2006 is:

A) $16,500, and record an unrealized gain of $2,500.

B) $14,000, and record an unrealized gain of $2,500.

C) $16,500, and record an unrealized gain of $4,000.

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The original portfolio cost was: $8,000 + $2,000 + $4,000 = $14,000

In 2005 the value of the portfolio was: $7,500 + $3,000 + $2,000 = $12,500

In 2006 the value of the portfolio was: $8,500 + $3,500 + $4,500 = $16,500

We write the balance sheet value up to current value and recognize an unrealized gain of $4,000.

土豆妮

Which of the following securities will most likely be characterized as an available-for-sale security?

A) Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes.

B) Debt securities that a company has a positive intent and ability to hold to maturity.

C) Equity securities representing 30% ownership in another firm.

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Debt or equity securities that are carried on the balance sheet at fair market value and may be sold for liquidity purposes are likely to be considered as available-for-sale.

土豆妮

Trading securities are defined as:

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

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

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

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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.

土豆妮

Maverick Incorporated formed a special purpose entity (SPE) to purchase and lease a 50,000 acre ranch. The SPE financed 95% of the purchase price with debt. The remaining 5% was financed with equity capital received from two separate independent investors. The lender would not make the loan without Maverick’s guarantee. How should Maverick treat the SPE in its financial statements if Maverick is the lessee?

A) No firm must consolidate the SPE.

B) Each equity investor must proportionately consolidate the SPE.

C) Maverick must consolidate the SPE.

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The 5% at-risk equity investment is not sufficient to support the activities of the SPE without Maverick’s guarantee. Thus, the SPE is considered a variable interest entity (VIE). Since Maverick is responsible for the guarantee, Maverick is the primary beneficiary and must consolidate the SPE.

土豆妮

According to FASB Interpretation No. 46(R), would an entity qualify as a variable interest entity (VIE) if the shareholders have insufficient equity capital at-risk and would an entity qualify as a VIE if the shareholders absorb the expected losses?

A) Qualify as both.

B) Qualify as neither.

C) Qualify as one only.

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An entity is a VIE if there is insufficient equity capital at-risk. If shareholders absorb the expected losses, the entity would not be a VIE unless any of the other conditions apply.