Question

The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study investments while preparing for the CPA examination. Determine the response that best completes the statements or questions.
1. During year 4, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500 as a short-term investment. The investment was appropriately classified as a trading security. The market value of this investment was $29,500 at December 31, year 4. Wall sold all of the Hemp common stock for $14 per share on January 15, year 5, incurring $1,400 in brokerage commissions and taxes. On the sale, Wall should report a realized loss of:
a. $1,500
b. $2,900
c. $3,500
d. $4,900
2. The following information pertains to Lark Corp.'s long-term marketable equity securities portfolio:


Differences between cost and market values are considered to be temporary. The decline in market value was properly accounted for at December 31, 2012. At December 31, 2013, what is the net unrealized holding gain or loss to be reported as:


3. The following information was extracted from Gil Co.'s December 31, 2013, balance sheet:

Noncurrent assets:
Long-term investments in marketable
equity securities (at fair value) .......... $96,450
Stockholders’ equity:
Accumulated other comprehensive
income** .................... (25,000)
** Includes a net unrealized holding loss on long-term investments in marketable equity securities of $19,800.
The historical cost of the long-term investments in marketable equity securities was:
a. $ 63,595
b. $ 76,650
c. $ 96,450
d. $116,250
4. On both December 31, 2012, and December 31, 2013, Kopp Co.'s only equity security investment had the same fair value, which was below its original cost. Kopp considered the decline in value to be temporary in 2012 but other-than-temporary in 2013. At the end of both years the security was classified as a noncurrent asset. Kopp could not exercise significant influence over the investee. What should be the effects of the determination that the decline was other-than-temporary on Kopp's 2013 net noncurrent assets and net income?
a. Decrease in both net noncurrent assets and net income.
b. No effect on both net noncurrent assets and net income.
c. Decrease in net noncurrent assets and no effect on net income.
d. No effect on net noncurrent assets and decrease in net income.
5. When the equity method is used to account for investments in common stock, which of the following affect(s) the investor's reported investment income?


6. A corporation uses the equity method to account for its 40% ownership of another company. The investee earned $20,000 and paid $5,000 in dividends. The investor made the following entries:


What effect will these entries have on the investor's statement of financial position?
a. Investment in affiliate overstated, retained earnings understated.
b. Financial position will be fairly stated.
c. Investment in affiliate overstated, retained earnings overstated.
d. Investment in affiliate understated, retained earnings understated.
7. Park Co. uses the equity method to account for its January 1, 2013, purchase of Tun Inc.'s common stock. On January 1, 2013, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's 2013 earnings?


8. On January 2, 2013, Well Co. purchased 10% of Rea Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. Rea reported net income of $500,000 for 2013, and paid dividends of $150,000. In its December 31, 2013, balance sheet, what amount should Well report as investment in Rea?
a. $435,000
b. $450,000
c. $400,000
d. $385,000 Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS to accounting for investments.
9. Under IFRS No. 9, which of the following is not a category into which a debt investment can be classified?
a. FVTPL ("fair value through profit and loss").
b. FVTOCI ("fair value through other comprehensive income").
c. Amortized cost.
d. Parts a-c are all classifications in which a debt investment might be classified under IFRS No. 9.
10. Under IFRS No. 9, which of the following is not a category in which an equity investment can be classified?
a. FVTPL ("Fair Value through Profit and Loss").
b. FVTOCI ("Fair Value through Other Comprehensive Income").
c. Amortized cost.
d. Parts a-c are all classifications in which an equity investment is classified under IFRS No. 9.
11. Which of the following is not true about transfers between investment categories under IFRS?
a. Under IAS No. 39, transfers of debt investments out of FVTPL into AFS or HTM is permitted under rare circumstances.
b. Under IFRS No. 9, transfers of debt investments out of FVTPL to amortized cost are possible if the business model changes with respect to the debt investment.
c. Under IFRS No. 9, transfers of equity investments out of FVTOCI to FVTPL are possible if the business model changes with respect to the equity investment.
d. Parts a-c are all true about transfers between investment categories under IFRS.
12. Which of the following is true about use of the equity method under IFRS?
a. IFRS allows use of the fair value option under essentially the same circumstances as does U.S. GAAP for investments that otherwise would be accounted for under the equity method.
b. IFRS No. 11 allows proportionate consolidation rather than the equity method for investments that qualify as joint ventures.
c. FVTPL is preferred to the equity method when the investor can exercise significant influence over the operations of the investee.
d. IAS No. 28 requires that the accounting policies of investees be adjusted to correspond to those of the investor.
13. Which of the following is true about accounting for other-than-temporary impairments under IFRS?
a. Recoveries of OTT impairments for debt investments can be recognized in earnings.
b. Recoveries of OTT impairments for equity investments can be recognized in earnings.
c. Under IFRS, the amount of OTT impairment calculated for a debt investment is the same regardless of whether the investment is classified as held-to-maturity or available-for-sale.
d. Two of the three answers included in a-c aretrue.


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