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Reading 33: Understanding the Balance Sheet - LOS g ~ Q1-3

Q1. At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Beta’s stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security?

          Available-for-sale           Trading security

 

A) $2,000                                       $20,000

B) $0                                               $22,000

C) $2,000                                       $22,000

Q2. What amounts should Ponca report in its year-end income statement and balance sheet as a result of its investment in securities X and Y?

          Income Statement          Balance Sheet

 

A) $30,000 unrealized gain       $950,000

B) $30,000 unrealized gain       $980,000

C) No gain or loss                        $980,000

Q3. When the market value of an investment in a debt security is less than its carrying value, how should the investor report the investment on the balance sheet if the security is classified as held-to-maturity and what amount should be reported if the security is classified as available-for-sale?

          Held-to-maturity                          Available-for-sale

 

A)                                                      Amortized cost       Fair value

B)                                                     Amortized cost       Amortized cost

C)                                                     Fair value      Fair value

答案和详解如下:

Q1. At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Beta’s stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security?

          Available-for-sale           Trading security

 

A) $2,000                                       $20,000

B) $0                                               $22,000

C) $2,000                                       $22,000

Correct answer is C)

Unrealized gains and losses from trading securities are recognized in the income statement while unrealized gains and losses from available-for-sale securities bypass the income statement and are reported as other comprehensive income, a component of stockholders’ equity. Cash dividends are recognized in the income statement for both trading and available-for-sale securities. Thus, Alpha will recognize only the $2,000 dividend if the shares are considered available-for-sale and will recognize $22,000 ($2,000 dividend + $20,000 unrealized gain) if the shares are considered trading securities.

Q2. What amounts should Ponca report in its year-end income statement and balance sheet as a result of its investment in securities X and Y?

          Income Statement          Balance Sheet

 

A) $30,000 unrealized gain       $950,000

B) $30,000 unrealized gain       $980,000

C) No gain or loss                        $980,000

Correct answer is B)

Trading securities are reported in the balance sheet at fair value. At the end of the year, the fair value of the securities was $980,000 ($435,000 + $545,000). The unrealized gains and losses from trading securities are recognized in the income statement. Thus, Ponca would recognize an unrealized gain of $30,000 ($980,000 fair value – $950,000 cost).

Q3. When the market value of an investment in a debt security is less than its carrying value, how should the investor report the investment on the balance sheet if the security is classified as held-to-maturity and what amount should be reported if the security is classified as available-for-sale?

          Held-to-maturity                          Available-for-sale

 

A)                                                      Amortized cost       Fair value

B)                                                     Amortized cost       Amortized cost

C)                                                     Fair value      Fair value

Correct answer is A)

Held-to-maturity securities are reported on the balance sheet at amortized cost while available-for-sale securities are reported at fair value. Amortized cost includes the amortization of a premium or discount that was created when the security was purchased.

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