Multiple Choice Questions
1. Investments in equity securities are deemed to be “passive” if:
a. 100 percent of the firm’s stock is owned.
b. Between 50 percent and 100 percent of the firm’s stock is owned.
c. Between 20 percent and 50 percent of the firm’s stock is owned.
d. Less than 20 percent of the firm’s stock is owned.
2. Equity and debt investments that management intends to sell in the future, but not necessarily in the near term, are called:
a. Trading securities
b. Available-for-sale securities
c. Debt securities
d. Stock securities
3. Which of the following is a reason businesses purchase securities?
a. To profit from changes in day-to-day security prices.
b. To diversify risk.
c. To save (and earn returns on) money from uneven cash flows.
d. All of the above are reasons to purchase securities.
4. Which of the following terms is not used for debt securities?
a. Trading Securities
b. Fair Value Securities
c. Available-for-Sale Securities
d. Held to Maturity Securities
5. How are held-to-maturity securities valued?
a. Historical Cost
b. Fair Market Value
c. Amortized Cost
d. Amortized Fair Value
6. The Boss Inc. reported an unrealized gain on its income statement due to appreciation in the stock price of AMW Corp. How much of AMW does The Boss own, and how have they classified this investment?
a. Owns 35%, trading security
b. Owns 18%, available-for-sale security
c. The Boss owns over half of AMW and has consolidated the companies’ income statement information.
d. Owns 9%, trading security
7. EMK Corp. is holding two bonds to maturity, both of which have a book value of $ 132,000. At the end of the fiscal year, the fair market value of bond A is $ 118,000, and the fair market value of bond B is $ 136,000. What is the unrealized gain or loss for EMK on these two bonds?
a. Unrealized loss of $ 14,000
b. Unrealized loss of $ 10,000
c. Unrealized gain of $ 4,000
d. No unrealized gain or loss
8. Refer to the information for Shackley above. Which of these are reported on Shackley’s income statement?
a. A & B
b. B only
c. A & C
d. B & C
Shackley Inc. owns three available-for-sale equity securities, which have yielded the following fiscal year-end results:
A. Dividend income: $ 350
B. Gain on sale: $ 2,000
C. Unrealized loss: $ 600