ACC 305 WEEK 5 MIDTERM EXAM
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ACC 305 WEEK 5 MIDTERM EXAM
ACC 305 Week 5 Midterm Exam – STR NEW
TRUE-FALSE—Conceptual
1. Debt securities include corporate
bonds and convertible debt, but notU.S.government securities.
2. Trading securities are securities
bought and held primarily for sale in the near term to generate income on
short-term price differences.
3. Unrealized holding gains and losses
are recognized in net income for available-for-sale debt securities.
4. A company can classify a debt
security as held-to-maturity if it has the positive intent to hold the
securities to maturity.
5. Companies do not report changes in
the fair value of available-for-sale debt securities as income until the
security is sold.
6. The Securities Fair Value Adjustment
account has a normal credit balance.
7. Companies report trading securities
at fair value, with unrealized holding gains and losses reported in net income.
8. Equity security holdings between 20
and 50 percent indicates that the investor has a controlling interest over the
investee.
9. The Unrealized Holding
Gain/Loss—Equity account is reported as a part of other compre-hensive income.
10. Significant influence over an investee may
be indicated by material intercompany trans-actions and interchange of
managerial personnel.
11. The accounting profession has concluded
that an investment of more than 50 percent of the voting stock of an investee
should lead to a presumption of significant influence over an investee.
12. All dividends received by an investor from
the investee decrease the investment’s carrying value under the equity method.
13. Under the fair value method, the investor
reports as revenue its share of the net income reported by the investee.
14. A controlling interest occurs when one
corporation acquires a voting interest of more than 50 percent in another
corporation.
15. Companies may not use the fair value
option for investments that follow the equity method of accounting.
16. Changes in the fair value of a company’s
debt instruments are included as part of earnings in any given period.
17. If a decline in a security’s value is
judged to be temporary, a company needs to write down the cost basis of the
individual security to a new cost basis.
18. A reclassification adjustment is necessary
when a company reports realized gains/losses as part of net income but also
shows unrealized gains/losses as part of other comprehensive income.
19. If a company transfers held-to-maturity
securities to available-for-sale securities, the unrealized gain or loss is
recognized in income.
20. The transfer of securities from trading to
available-for-sale and from available-for-sale to trading has the same impact
on stockholders’ equity and net income.
MULTIPLE CHOICE—Conceptual
21. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
22. A correct valuation is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. none of these.
23. Securities which could be classified
as held-to-maturity are
a. redeemable preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.
24. Unrealized holding gains or losses
which are recognized in income are from securities classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. none of these.
P25. When an investor’s accounting period ends on a
date that does not coincide with an interest receipt date for bonds held as an
investment, the investor must
a. make an adjusting entry to debit Interest
Receivable and to credit Interest Revenue for the amount of interest accrued
since the last interest receipt date.
b. notify the issuer and request that a special
payment be made for the appropriate portion of the interest period.
c. make an adjusting entry to debit Interest
Receivable and to credit Interest Revenue for the total amount of interest to
be received at the next interest receipt date.
d. do nothing special and ignore the fact that the
accounting period does not coincide with the bond’s interest period.
S26. Debt securities that are accounted for at
amortized cost, not fair value, are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S27. Debt securities acquired by a corporation which
are accounted for by recognizing unrealized holding gains or losses and are
included as other comprehensive income and as a separate component of
stockholders’ equity are
a. held-to-maturity debt securities.
b. trading debt securities.
c. available-for-sale debt securities.
d. never-sell debt securities.
S28. Use of the effective-interest method in
amortizing bond premiums and discounts results in
a. a greater amount of interest income over the life
of the bond issue than would result from use of the straight-line method.
b. a varying amount being recorded as interest
income from period to period.
c. a variable rate of return on the book value of the
investment.
d. a smaller amount of interest income over the life of
the bond issue than would result from use of the straight-line method.
S29. Equity securities acquired by a corporation
which are accounted for by recognizing unrealized holding gains or losses as
other comprehensive income and as a separate component of stockholders’ equity
are
a. available-for-sale securities where a company has
holdings of less than 20%.
b. trading securities where a company has holdings
of less than 20%.
c securities where a company has holdings of
between 20% and 50%.
d. securities where a company has holdings of more
than 50%.
30. A requirement for a security to be
classified as held-to-maturity is
a. ability to hold the security to maturity.
b. positive intent.
c. the security must be a debt security.
d. All of these are required.
31. Held-to-maturity securities are
reported at
a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.
32. Watt Co. purchased $300,000 of bonds
for $315,000. If Watt intends to hold the securities to maturity, the entry to
record the investment includes
a. a debit to Held-to-Maturity Securities at
$300,000.
b. a credit to Premium on Investments of $15,000.
c. a debit to Held-to-Maturity Securities at
$315,000.
d. none of these.
33. Which of the following is not correct in regard
to trading securities?
a. They are held with the intention of selling them
in a short period of time.
b. Unrealized holding gains and losses are reported
as part of net income.
c. Any discount or premium is not amortized.
d. All of these are correct.
34. In accounting for investments in
debt securities that are classified as trading securities,
a. a discount is reported separately.
b. a premium is reported separately.
c. any discount or premium is not amortized.
d. none of these.
35. Investments in debt securities are
generally recorded at
a. cost including accrued interest.
b. maturity value.
c. cost including brokerage and other fees.
d. maturity value with a separate discount or
premium account.
36. Jordan Co. purchased ten-year, 10%
bonds that pay interest semiannually. The bonds are sold to yield 8%. One step
in calculating the issue price of the bonds is to multiply the principal by the
table value for
a. 10 periods and 10% from the present value of 1
table.
b. 10 periods and 8% from the present value of 1
table.
c. 20 periods and 5% from the present value of 1
table.
d. 20 periods and 4% from the present value of 1
table.
37. Investments in debt securities
should be recorded on the date of acquisition at
a. lower of cost or market.
b. market value.
c. market value plus brokerage fees and other costs
incident to the purchase.
d. face value plus brokerage fees and other costs
incident to the purchase.
38. An available-for-sale debt security
is purchased at a discount. The entry to record the amortization of the
discount includes a
a. debit to Available-for-Sale Securities.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.
39. APB Opinion No. 21 specifies that,
regarding the amortization of a premium or discount on a debt security, the
a. effective-interest method of allocation must be
used.
b. straight-line method of allocation must be used.
c. effective-interest method of allocation should be
used but other methods can be applied if there is no material difference in the
results obtained.
d. par value method must be used and therefore no
allocation is necessary.
40. Which of the following is correct
about the effective-interest method of amortization?
a. The effective interest method applied to
investments in debt securities is different from that applied to bonds payable.
b. Amortization of a discount decreases from period
to period.
c. Amortization of a premium decreases from period
to period.
d. The effective-interest method produces a constant
rate of return on the book value of the investment from period to period.
41. When investments in debt securities
are purchased between interest payment dates, preferably the
a. securities account should include accrued
interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.
42. Which of the following is not generally
correct about recording a sale of a debt security before maturity date?
a. Accrued interest will be received by the seller
even though it is not an interest payment date.
b. An entry must be made to amortize a discount to
the date of sale.
c. The entry to amortize a premium to the date of
sale includes a credit to the Premium on Investments in Debt Securities.
d. A gain or loss on the sale is not extraordinary.
S43. When a company has acquired a “passive interest”
in another corporation, the acquiring company should account for the investment
a. by using the equity method.
b. by using the fair value method.
c. by using the effective interest method.
d. by consolidation.
S44. Santo Corporation declares and distributes a
cash dividend that is a result of current earnings. How will the receipt of
those dividends affect the investment account of the investor under each of the
following accounting methods?
Fair Value
Method Equity
Method
a.
No
Effect
Decrease
b.
Increase
Decrease
c.
No
Effect
No Effect
d.
Decrease
No Effect
P45. An investor has a long-term investment in
stocks. Regular cash dividends received by the investor are recorded as
Fair Value
Method
Equity Method
a.
Income
Income
b. A reduction of the
investment A reduction of
the investment
c.
Income
A reduction of the investment
d. A reduction of the
investment
Income
46. When a company holds between 20% and
50% of the outstanding stock of an investee, which of the following statements
applies?
a. The investor should always use the equity method
to account for its investment.
b. The investor should use the equity method to
account for its investment unless circum-stances indicate that it is unable to
exercise “significant influence” over the investee.
c. The investor must use the fair value method
unless it can clearly demonstrate the ability to exercise “significant
influence” over the investee.
d. The investor should always use the fair value
method to account for its investment.
47. If the parent company owns 90% of
the subsidiary company’s outstanding common stock, the company should generally
account for the income of the subsidiary under the
a. cost method.
b. fair value method.
c. divesture method.
d. equity method.
48. Koehn Corporation accounts for its
investment in the common stock of Sells Company under the equity method. Koehn
Corporation should ordinarily record a cash dividend received from Sells as
a. a reduction of the carrying value of the
investment.
b. additional paid-in capital.
c. an addition to the carrying value of the
investment.
d. dividend income.
49. Under the equity method of accounting
for investments, an investor recognizes its share of the earnings in the period
in which the
a. investor sells the investment.
b. investee declares a dividend.
c. investee pays a dividend.
d. earnings are reported by the investee in its financial
statements.
50. Judd, Inc., owns 35% of Cosby
Corporation. During the calendar year 2012, Cosby had net earnings of $300,000
and paid dividends of $30,000. Judd mistakenly recorded these transactions
using the fair value method rather than the equity method of accounting. What
effect would this have on the investment account, net income, and retained
earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
All Questions Included.
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