tango_gs

Which of the following statements about variable interest entities (VIE) are correct or incorrect?

Statement #1	One potential benefit of a VIE is a lower cost of capital since the assets and liabilities of the VIE are isolated in the event the sponsor experiences financial difficulties.
Statement #2	The organizational form of a VIE must be either a partnership or a joint venture and it is necessary for the VIE to have separate management and employees.

A) Both are correct.

B) Both are incorrect.

C) Only one is correct.

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Statement #1 is a correct statement. A lower cost of capital is a potential benefit of forming a VIE. Statement #2 is an incorrect statement. The organizational form can be a corporation, partnership, joint venture or trust. It is not necessary for the VIE to have separate management and employees.

tango_gs

Which of the following statements regarding qualifying special purpose entities (QSPE) is most accurate?

A) Under IFRS, the sponsor can avoid consolidating asset securitizations by creating a QSPE.

B) The QSPE has total control of the assets transferred from the sponsor.

C) A QSPE can hold only certain financial and non-financial assets.

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A QSPE can only hold financial assets (and the assets are usually receivables). As a legally separate, independent entity, the QSPE has total control of the assets transferred from the sponsor. Previously, under U.S. GAAP, the sponsor could avoid consolidating asset securitizations by creating a QSPE. QSPEs are no longer permitted under U.S. GAAP or IFRS.

tango_gs

Accounting standards for passive intercorporate investments establish 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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Accounting standards for passive intercorporate investments include, 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.

tango_gs

Which of the following statements regarding securities classified as held to maturity is most accurate?

A) 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.

B) 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.

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

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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 will most likely be characterized as an available-for-sale security?

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

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

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

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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.

tango_gs

Company X owns 15% of company S and exerts significant influence over the operations of the company. The book value of the investment on December 31, 2001, is $48,000. In 2002, company S earned $100,000 and paid dividends of $20,000. The value of the investment account on December 31, 2002, is:

A) $63,000.

B) $60,000.

C) $48,000.

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Because company X exerts significant influence over company S, the investment will be treated using the equity method, even though the ownership is less than the 20% guideline. The value of the investment account is equal to the beginning balance plus the proportionate income of company S minus the dividends received from company S, which equals 48,000 + (0.15 x 100,000) − (0.15 x 20,000) = 60,000.

tango_gs

Birtch Corporation acquires 25% of the common stock of TRQ Inc. on January 1, 2002. TRQ subsequently reports net income for the full year of $700,000, and pays a cash dividend equal to 30 percent of the reported income. Assuming the equity method of accounting is used, what will be the reported investment income for Birtch?

A) $60,000.

B) $115,000.

C) $175,000.

Under the equity method, dividends are not included as income to the acquirer. ($700,000 × 0.25) = $175,000 will be the reported investment income for Birtch.

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Assuming the equity method of accounting is used, What will be the cash flow received by Birtch, due to their investment in TRQ during 2002?

A) $227,500.

B) $52,500.

C) $65,400.

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The cash flow to Birtch will be ($700,000)(0.30)(0.25) = $52,500.

tango_gs

Global Life Insurance (GLI) reported the following portfolio information:

	2010 Q1	2010 Q2	2010 Q3	2010 Q4
Shares purchased (sold)	1,000	(200)	700	0
Total shares quarter-end	1,000	800	1,500	1,500
Purchase price	50.00		45.00
Sale price		45.00
Quarter-end market price	52.00	43.00	52.00	60.00
Total dividends	500	400	750	750

For the purpose of this question, assume that stocks can be classified as held to maturity.What is the income from the portfolio if the securities are classified as trading, available-for-sale, and held-to-maturity, respectively?

Trading

Available-for-sale

Held-to-maturity

A) $19,900 $19,900 -$6,600

B) $19,900 $1,400 $1,400

C) -$6,600 $1,400 $1,400

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Trading income is calculated as dividends plus all gains and losses (realized and unrealized). Total dividends are 2,400. GLI realized a loss on the sale of 200 shares at 45.00 per share for a total realized loss of 1,000. GLI has an unrealized gain of 8,000 (800×(60-50)) on the shares purchased in Q1 and 10,500 (700×(60-45)) the shares purchased in Q3, or total unrealized gains of 18,500. Therefore, total income under the trading classification is 19,900 (2,400 - 1,000 + 18,500). Under the available-for-sale and held-to-maturity classifications income is calculated as dividends plus realized gains and losses. Therefore, total income is 1,400 (2,400 + (-1,000)).
This item set requires a bit of imagination as equity securities cannot really be HTM.

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What is the balance sheet carrying value of the securities under each of the classifications at year-end?

Trading

Available-for-sale

Held-to-maturity

A) $71,500 $71,500 $71,500

B) $90,000 $71,500 $71,500

C) $90,000 $90,000 $71,500

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Under the trading and available-for-sale classifications the balance sheet carrying values are the market values of the shares or 90,000 = (1,500 × 60).

For held-to-maturity securities the carrying value is the amortized cost, or 71,500 = ((800 × 50) + (700 × 45)).

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What is the rate of return (income/year-end carrying value) under each of the three methods?

Trading

Available-for-sale

Held-to-maturity

A) 22.11% 1.56% 1.96%

B) 23.22% 23.22% 29.23%

C) 2.67% 2.67% 3.36%

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Trading = 22.11% (19,900/90,000)

Available-for-sale = 1.56% (1,400/90,000)

Held-to-maturity = 1.96% (1,400/71,500).

tango_gs

The Anderson Company acquired 100,000 shares of the Birschbach Company on January 1, 2000, at $25 per share. The market price of a share of Birschbach stock on December 31, 2000, was $35 per share. During 2000, Birschbach paid dividends of $1.50 per share and had earnings of $2.50 per share.If the Anderson Company accounts for the Birschbach shares as trading securities, the carrying amount of these shares on Anderson's balance sheet at the end of 2000 is:

A) $3.5 million.

B) $2.6 million.

C) $2.5 million.

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Trading securities are measured at fair market value.
(100,000)($35) = $3,500,000

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If Anderson Company accounts for the Birschbach Company shares as securities available-for-sale, the carrying amount of these shares on Anderson's balance sheet at the end of 2000 is:

A) $3.5 million.

B) $2.6 million.

C) $2.5 million.

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Available-for-sale securities are measured at fair market value.
(100,000)($35) = $3,500,000

tango_gs

Carter Schmitz, Inc. (Schmitz) purchased 200 shares of Intelismart at $21 a share in June 2006 and intends to actively trade 80 shares in the near future and hold the remaining 120 shares as available for sale securities. Intelismart's closing price was $26 on December 31, 2006, and Schmitz did not sell any of its shares.
What amount should Schmitz report on this investment under the income statement?

A) $400.

B) $1,000.

C) $600.

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The unrealized gain on the 120 shares available for sale is $600 (26 - 21 = 5 × 120 shares). There is also an unrealized gain of $400 (5 × 80) related to the 80 shares that are trading securities which would be reported on the income statement. For trading securities, realized and unrealized gains and losses are reported on the income statement. For available for sale securities, only realized gains and losses are reported on the income statement.