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Reading 21- LOS B ~ Q11-15

11.Fiduciary had an investment in Portfolio A that had a market value of $7 million accounted for as available for sale. It had originally charged $3 million when Portfolio A was marked-to-market in the equity account on Fiduciary's balance sheet. Now, it has been determined that $1 million of the $3 million charge has been permanently impaired. Fiduciary should:

A)  charge an additional $1 million against the income statement while recognizing an additional charge (debit) to the equity section of the balance sheet.

B)  reclassify $1 million by charging it against the income statement while recognizing a decrease (debit) to the equity section of the balance sheet.

C)  reclassify $1 million by charging it against the income statement while recognizing an increase (credit) to the equity section of the balance sheet.

D)  charge an additional $1 million against the equity section of the balance sheet.

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

  

2006 Q1

2006 Q2

2006 Q3

2006 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

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                           $1,400   $1,400

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

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

D)                                         $1,400                             $1,400   $19,900

 

13.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)                                         $90,000                           $71,500 $71,500

B)                                         $71,500                           $71,500 $71,500

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

D)                                         $71,500                           $90,000 $90,000

 

14.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)                                         2.67%                              2.67%    3.36%

B)                                         23.22%                            23.22%  29.23%

C)                                         22.11%                            1.56%    1.96%

D)                                         -7.33%                             -7.33%   -9.23%

 

15.Two equity securities were purchased by Company XYZ in 1999 for $1,000. The market value of these securities rose to $1,350 by the end of 2000. If these securities were accounted for under SFAS 115 as Trading Securities, which of the following correctly describes their treatment on the balance sheet prior to posting the results of the income statement to the balance sheet?

A)  The valuation of the "Marketable Securities" account on the assets side of the balance sheet will rise by $350.

B)  The equity of the firm will rise by $350.

C)  The valuation of the "Marketable Securities" account on the assets side of the balance sheet will remain unchanged.

D)  The "Securities Valuation Reserve" on the liabilities and equity side of the balance sheet will rise by $350.

答案和详解如下:

11.Fiduciary had an investment in Portfolio A that had a market value of $7 million accounted for as available for sale. It had originally charged $3 million when Portfolio A was marked-to-market in the equity account on Fiduciary's balance sheet. Now, it has been determined that $1 million of the $3 million charge has been permanently impaired. Fiduciary should:

A)  charge an additional $1 million against the income statement while recognizing an additional charge (debit) to the equity section of the balance sheet.

B)  reclassify $1 million by charging it against the income statement while recognizing a decrease (debit) to the equity section of the balance sheet.

C)  reclassify $1 million by charging it against the income statement while recognizing an increase (credit) to the equity section of the balance sheet.

D)  charge an additional $1 million against the equity section of the balance sheet.


The correct answer was
C)

When there is an impairment of a previously realized charge that only affected the equity section of the balance sheet, a reclassification charge must be made to transfer the permanent impairment charge to the income statement. This accounting entry is a charge against the income statement with a corresponding credit or increase to the equity section.

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

  

2006 Q1

2006 Q2

2006 Q3

2006 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

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                           $1,400   $1,400

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

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

D)                                         $1,400                             $1,400   $19,900


The correct answer was
A)

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)).

 

13.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)                                         $90,000                           $71,500 $71,500

B)                                         $71,500                           $71,500 $71,500

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

D)                                         $71,500                           $90,000 $90,000


The correct answer was
C)

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)).

 

14.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)                                         2.67%                              2.67%    3.36%

B)                                         23.22%                            23.22%  29.23%

C)                                         22.11%                            1.56%    1.96%

D)                                         -7.33%                             -7.33%   -9.23%


The correct answer was
C)

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).

 

15.Two equity securities were purchased by Company XYZ in 1999 for $1,000. The market value of these securities rose to $1,350 by the end of 2000. If these securities were accounted for under SFAS 115 as Trading Securities, which of the following correctly describes their treatment on the balance sheet prior to posting the results of the income statement to the balance sheet?

A)  The valuation of the "Marketable Securities" account on the assets side of the balance sheet will rise by $350.

B)  The equity of the firm will rise by $350.

C)  The valuation of the "Marketable Securities" account on the assets side of the balance sheet will remain unchanged.

D)  The "Securities Valuation Reserve" on the liabilities and equity side of the balance sheet will rise by $350.


The correct answer was
A)

If a portfolio of securities is classified as "Trading Securities" under SFAS 115, then the portfolio's value is marked to market on each balance sheet date. Since the question specifically states that the change in retained earnings has not been posted to the balance sheet, equity will be unaffected by the increase in the valuation of the portfolio.

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