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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