土豆妮

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.

土豆妮

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.

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 acquired with the intent of selling them in the near future.

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

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

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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

Cosmo Inc. (Cosmo) invests in two portfolios – Portfolio 1 and Portfolio 2. Portfolio 1 contains securities with an overall intent to profit within a month or two. Portfolio 2 contains equity securities with a moderate amount of acquisition and disposition activity. Which of the following treatments of Cosmo’s reporting of the investments in Portfolios 1 and 2, respectively, is most accurate?

Portfolio 1

Portfolio 2

A) Unrealized amounts reported on income statement. Assets reported at fair value.

B) Unrealized amounts reported on balance sheet. Assets reported at fair value.

C) Unrealized amounts reported on income statement. Assets reported at cost.

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Portfolio 1 contains held-for-trading securities because it is clear that the securities are acquired with the intent to profit over the near term. Therefore, the unrealized gains and losses would be reported immediately in the income statement.

Portfolio 2 contains available-for-sale securities. There are no debt securities and therefore, it cannot contain held-to-maturity securities. As well, there is no indication that the securities are acquired with the intent to profit over the near term. By default, the correct classification would be available-for-sale. Therefore, the securities (assets) would be reported at fair value.

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

Accounting standards for passive intercorporate investments include a category of securities that is carried on the company balance sheet at cost. This category of securities is called debt:

A) and equity trading securities.

B) securities held-to-maturity.

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 least accurate?

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

B) Equity securities of other companies cannot be classified as "held to maturity" under SFAS 115.

C) 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.

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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

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) and equity trading securities.

B) securities held-to-call.

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.

土豆妮

Firm A recently leased equipment used in its manufacturing plant. If the leased asset is worth less than $100,000 at the end of the lease, Firm A will pay the lessor the difference.

Firm B provided debt financing to an unrelated entity. The debt has a provision whereby Firm B cannot be repaid until all other senior debt is satisfied.

Do Firm A and Firm B have a variable interest?

A) Only one has a variable interest.

B) Neither have a variable interest.

C) Both have a variable interest.

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A lease residual guarantee and subordinated debt are both examples of variable interests. Firm A will experience a loss if the leased asset is worth less than $100,000 at the end of the lease. Firm B will experience a loss if the senior debt is not paid in full.