Question 1

Which of the following is/aretrue?

Accepted Answer

A) U.S.GAAP and IFRS allow firms to choose whether to designate a particular derivative as a hedge, and therefore eligible for hedge accounting. 
B) Firms remeasure derivatives not designated as a hedge to fair value at every balance sheet date and include changes in fair value in net income. 
C) For a derivative designated as a hedge, firms must further designate it as hedging the risk of a change in fair value (fair value hedges) or a change in cash flows (cash flow hedges). 
D) all of the above 
E) none of the above 
A) U.S.GAAP and IFRS allow firms to choose whether to designate a particular derivative as a hedge, and therefore eligible for hedge accounting. 
B) Firms remeasure derivatives not designated as a hedge to fair value at every balance sheet date and include changes in fair value in net income. 
C) For a derivative designated as a hedge, firms must further designate it as hedging the risk of a change in fair value (fair value hedges) or a change in cash flows (cash flow hedges). 
D) all of the above 
E) none of the above

Question 2

Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000.
(Refer to the Marco Insurance) The journal entries to measure trading securities at fair value and recognize unrealized holding gain in net income on December 31, 2013.

Accepted Answer

A) Cash..................2,000 
Marketable Securities...............2,000 
B) Other Comprehensive Income.................2,000 
Marketable Securities................2,000 
C) Marketable Securities............2,000 
Other Comprehensive Income...........2,000 
D) Marketable Securities...........2,000 
Unrealized Holding Gain on Trading Securities.............2,000 
E) Marketable Securities................2,000 
Realized Holding Gain on Trading Securities..............2,000 
A) Cash..................2,000 
Marketable Securities...............2,000 
B) Other Comprehensive Income.................2,000 
Marketable Securities................2,000 
C) Marketable Securities............2,000 
Other Comprehensive Income...........2,000 
D) Marketable Securities...........2,000 
Unrealized Holding Gain on Trading Securities.............2,000 
E) Marketable Securities................2,000 
Realized Holding Gain on Trading Securities..............2,000

Question 3

Acquisition and disposition of trading securities are usually financing activities.

Accepted Answer

A) True 
 B)False

Question 4

The matching convention provides both the basis for hedge accounting, as well as the logic for the treating gains and losses from changes in fair value of fair value hedges differently from cash flow hedges.Which of the following is/are not true?

Accepted Answer

A) In a fair value hedge of a recognized asset or liability, both the hedged asset (or liability) and its related derivative (hedging instrument) appear on the balance sheet. 
B) Remeasuring both the hedged asset (or liability) and its related derivative to fair value each period and including the gain or loss on the hedged asset (or liability) and the loss or gain on the derivative in net income results in a net gain or loss that indicates the effectiveness of the hedge in neutralizing the risk. 
C) If the hedge is completely effective, there is a zero net effect on income (the gain or loss on the hedged item exactly offsets the loss or gain on the hedging instrument). 
D) In a cash flow hedge of a forecasted transaction, the hedged cash flow commitment does not appear on the balance sheet but the derivative instrument does appear. 
E) Application of the matching convention results in classifying the gain or loss on the derivative instrument in net income each period. 
A) In a fair value hedge of a recognized asset or liability, both the hedged asset (or liability) and its related derivative (hedging instrument) appear on the balance sheet. 
B) Remeasuring both the hedged asset (or liability) and its related derivative to fair value each period and including the gain or loss on the hedged asset (or liability) and the loss or gain on the derivative in net income results in a net gain or loss that indicates the effectiveness of the hedge in neutralizing the risk. 
C) If the hedge is completely effective, there is a zero net effect on income (the gain or loss on the hedged item exactly offsets the loss or gain on the hedging instrument). 
D) In a cash flow hedge of a forecasted transaction, the hedged cash flow commitment does not appear on the balance sheet but the derivative instrument does appear. 
E) Application of the matching convention results in classifying the gain or loss on the derivative instrument in net income each period.

Question 5

ValleyView Company ValleyView Company acquires common stock of Kansas Enterprises for $400,000 on November 1, 2013, and designates this investment as available-for-sale.The fair value of these shares is $435,000 on December 31, 2013.ValleyView sells these shares on August 15, 2014, for $480,000.
(Refer to ValleyView.) The journal entry to measure securities available-for-sale on December 31, 2013 is:

Accepted Answer

A) Unrealized Holding Gain on Securities Available-for-Sale................35,000
Marketable Securities...................35,000 
B) Unrealized Holding Gain on Securities Available-for-Sale................35,000
Common Stock......................35,000 
C) Common Stock..................35,000 
Unrealized Holding Gain on Securities Available-for-Sale............35,000 
D) Marketable Securities............................35,000 
Cash....................35,000 
E) Marketable Securities.............. 35,000 
Unrealized Holding Gain on Securities Available-for-Sale......35,000 
A) Unrealized Holding Gain on Securities Available-for-Sale................35,000
Marketable Securities...................35,000 
B) Unrealized Holding Gain on Securities Available-for-Sale................35,000
Common Stock......................35,000 
C) Common Stock..................35,000 
Unrealized Holding Gain on Securities Available-for-Sale............35,000 
D) Marketable Securities............................35,000 
Cash....................35,000 
E) Marketable Securities.............. 35,000 
Unrealized Holding Gain on Securities Available-for-Sale......35,000

Question 6

During 2013, Maria Corporation sold marketable securities for $14,000 that had a carrying value of $13,000 at the time of sale.The financial statements of Maria Corporation reveal the following
information with respect to securities available-for-sale:
 
2013
Income Statement
Realized Gain on Sale of Securities Available-for-Sale ... $4,000
a.What was the acquisition cost of the marketable securities sold?
b.What was the unrealized holding gain on the securities sold at the time of sale?
c.What was the unrealized holding gain during 2013 on securities still held by the end of 2013?
d.What was the cost of marketable securities purchased during 2013?

Accepted Answer

a.Sale of marketable securities during 2

Question 7

Derivatives include

Accepted Answer

A) an option to purchase a share of stock. 
B) a commitment to purchase a certain amount of foreign currency in the future. 
C) interest rate, foreign exchange rate, and commodity price hedges. 
D) all of the above 
E) none of the above 
A) an option to purchase a share of stock. 
B) a commitment to purchase a certain amount of foreign currency in the future. 
C) interest rate, foreign exchange rate, and commodity price hedges. 
D) all of the above 
E) none of the above

Question 8

In both U.S.GAAP and IFRS, hedge accounting is elective; firms need not designate any derivatives as accounting hedges, regardless of the degree to which the derivatives mitigate the volatility of outcomes of other arrangements.

Accepted Answer

A) True 
 B)False

Question 9

The U.S.government will pay Edie Company $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Edie Company purchases the bonds, the market prices these bonds to yield Edie Company 6% annually (3% each six months).The bonds are classified as held to maturity and Edie Company would classify this investment as a(n) _____on its _____ because it intends to hold the securities for _____

Accepted Answer

A) current asset; balance sheet; less than one year 
B) current asset; income statement; less than one year 
C) noncurrent asset; balance sheet; more than one year 
D) noncurrent asset; income statement; more than one year 
E) current asset; statement of cash flows; less than one year 
A) current asset; balance sheet; less than one year 
B) current asset; income statement; less than one year 
C) noncurrent asset; balance sheet; more than one year 
D) noncurrent asset; income statement; more than one year 
E) current asset; statement of cash flows; less than one year

Question 10

A financial instrument that obtains its value from some other financial item is known as a(n)

Accepted Answer

A) clone. 
B) mutual fund. 
C) derivative. 
D) stock exchange. 
E) underlying. 
A) clone. 
B) mutual fund. 
C) derivative. 
D) stock exchange. 
E) underlying.

Question 11

ValleyView Company ValleyView Company acquires common stock of Kansas Enterprises for $400,000 on November 1, 2013, and designates this investment as available-for-sale.The fair value of these shares is $435,000 on December 31, 2013.ValleyView sells these shares on August 15, 2014, for $480,000.
(Refer to the ValleyView.) The journal entries to record the sale of securities available-for-sale on August 15, 2013.

Accepted Answer

A) Cash.......................480,000 
Unrealized Holding Gain on Securities Available-for-Sale.......... 35,000
Marketable Securities.............. 435,000
Realized Gain on Sale of Securities Available-for-Sale.......... 80,000 
B) Marketable Securities................435,000 
Realized Gain on Sale of Securities Available-for-sale.............. 80,000
Cash................... 480,000
Unrealized Holding Gain on Securities Available-for-Sale.............. 35,000 
C) Cash......................480,000 
Realized Holding Gain on Securities Available-for-Sale......... 35,000
Marketable Securities.................... 435,000
Unrealized Gain on Sale of Securities Available-for-sale................ 80,000 
D) Marketable Securities.........435,000 
Unrealized Gain on Sale of Securities Available-for-sale..............80,000
Cash.............. 480,000
Realized Holding Gain on Securities Available-for-Sale............. 35,000 
E) none of the above 
A) Cash.......................480,000 
Unrealized Holding Gain on Securities Available-for-Sale.......... 35,000
Marketable Securities.............. 435,000
Realized Gain on Sale of Securities Available-for-Sale.......... 80,000 
B) Marketable Securities................435,000 
Realized Gain on Sale of Securities Available-for-sale.............. 80,000
Cash................... 480,000
Unrealized Holding Gain on Securities Available-for-Sale.............. 35,000 
C) Cash......................480,000 
Realized Holding Gain on Securities Available-for-Sale......... 35,000
Marketable Securities.................... 435,000
Unrealized Gain on Sale of Securities Available-for-sale................ 80,000 
D) Marketable Securities.........435,000 
Unrealized Gain on Sale of Securities Available-for-sale..............80,000
Cash.............. 480,000
Realized Holding Gain on Securities Available-for-Sale............. 35,000 
E) none of the above

Question 12

Marco Insurance Marco Insurance acquired shares of Penny Systems' common stock on December 28, 2013, for $400,000 and classified them as trading securities.The fair value of these securities on December 31, 2013, was $402,000.Marco Insurance sold these shares on January 3, 2014, for $405,000.
(Refer to the Marco Insurance) The journal entries to record the sale of trading securities at a gain on January 3, 2014.

Accepted Answer

A) Cash.........................405,000 
Marketable Securities........................402,000
Realized Gain on Sale of Trading Securities.................3,000 
B) Marketable Securities................... 402,000 
Realized Gain on Sale of Trading Securities......3,000
Cash.............................. 405,000 
C) Cash.................................. 405,000 
Marketable Securities............................402,000
Unrealized Gain on Sale of Trading Securities.............3,000 
D) Marketable Securities.......................................402,000 
Unrealized Gain on Sale of Trading Securities....3,000
Cash............................ 405,000 
E) Cash.............. 405,000 
Marketable Securities......................402,000
Realized Gain on Sale of
Securities Held to Maturity........... 3,000 
A) Cash.........................405,000 
Marketable Securities........................402,000
Realized Gain on Sale of Trading Securities.................3,000 
B) Marketable Securities................... 402,000 
Realized Gain on Sale of Trading Securities......3,000
Cash.............................. 405,000 
C) Cash.................................. 405,000 
Marketable Securities............................402,000
Unrealized Gain on Sale of Trading Securities.............3,000 
D) Marketable Securities.......................................402,000 
Unrealized Gain on Sale of Trading Securities....3,000
Cash............................ 405,000 
E) Cash.............. 405,000 
Marketable Securities......................402,000
Realized Gain on Sale of
Securities Held to Maturity........... 3,000

Question 13

The U.S.government will pay SB Amos $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.Assume that at the time SB Amos purchases the bonds, the market prices these bonds to yield SB Amos 6% annually (3% each six months).The bonds are classified as held to maturity.SB Amos will pay an amount equal to _____ for the bonds.

Accepted Answer

A) $95,734,898 
B) 100,000,000 
C) 105,567,432 
D) 110,987,012 
E) 116,802,503 
A) $95,734,898 
B) 100,000,000 
C) 105,567,432 
D) 110,987,012 
E) 116,802,503

Question 14

Which of the following items appears in the balance sheet at amortized acquisition cost?

Accepted Answer

A) debt securities held to maturity 
B) trading securities 
C) available-for-sale securities 
D) derivatives 
E) securities available for liquidation 
A) debt securities held to maturity 
B) trading securities 
C) available-for-sale securities 
D) derivatives 
E) securities available for liquidation

Question 15

If a held-to-maturity security is deemed to be impaired, the investor recognizes (debits) the balance sheet carrying value of the investment and reduces (credits) an impairment loss (included in net income).

Accepted Answer

A) True 
 B)False

Question 16

Firms might use a particular derivative to hedge fair value and to hedge cash flows.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is not true regarding investments in securities available-for-sale?

Accepted Answer

A) Firms initially record investments in securities available-for-sale at acquisition cost, including transaction costs. 
B) If a firm classifies debt securities as available-for-sale, it must amortize any difference between the purchase price and the maturity value of the debt over the remaining term to maturity. 
C) The amortization of any difference between the purchase price and the maturity value of the debt makes interest revenue on these debt securities differ from the cash receipts for debt service payments. 
D) On the date of each balance sheet, firms measure securities classified as available-for-sale at fair value. 
E) The difference between amortized cost for debt securities or the carrying value for equity securities and the fair value of these securities is a realized holding gain or loss. 
A) Firms initially record investments in securities available-for-sale at acquisition cost, including transaction costs. 
B) If a firm classifies debt securities as available-for-sale, it must amortize any difference between the purchase price and the maturity value of the debt over the remaining term to maturity. 
C) The amortization of any difference between the purchase price and the maturity value of the debt makes interest revenue on these debt securities differ from the cash receipts for debt service payments. 
D) On the date of each balance sheet, firms measure securities classified as available-for-sale at fair value. 
E) The difference between amortized cost for debt securities or the carrying value for equity securities and the fair value of these securities is a realized holding gain or loss.

Question 18

U.S.GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to maturity nor trading securities as securities available-for-sale.

Accepted Answer

A) True 
 B)False

Question 19

A derivative is a financial instrument whose value changes in response to changes in an underlying observable variable, such as a stock price, an interest rate, a currency exchange rate, or a commodity price.

Accepted Answer

A) True 
 B)False

Question 20

The U.S.government will pay Simpson Company $2,500,000 each six months, equal to 2.5% of the $100 million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the $100 million at the end of five years.At the time Simpson Company purchases the bonds, the market prices these bonds to yield Simpson Company 6% annually (3% each six months).The bonds are classified as held to maturity and Simpson Company would classify this investment as a(n) _____on its _____ because it intends to hold the securities for _____.

Accepted Answer

A) current asset; balance sheet; less than one year 
B) current asset; income statement; less than one year 
C) noncurrent asset; balance sheet; more than one year 
D) noncurrent asset; income statement; more than one year 
E) current asset; statement of cash flows; less than one year 
A) current asset; balance sheet; less than one year 
B) current asset; income statement; less than one year 
C) noncurrent asset; balance sheet; more than one year 
D) noncurrent asset; income statement; more than one year 
E) current asset; statement of cash flows; less than one year

Which of the following is/aretrue?

Acquisition and disposition of trading securities are usually financing activities.

The matching convention provides both the basis for hedge accounting, as well as the logic for the treating gains and losses from changes in fair value of fair value hedges differently from cash flow hedges.Which of the following is/are not true?

Derivatives include

In both U.S.GAAP and IFRS, hedge accounting is elective; firms need not designate any derivatives as accounting hedges, regardless of the degree to which the derivatives mitigate the volatility of outcomes of other arrangements.

A financial instrument that obtains its value from some other financial item is known as a(n)

Which of the following items appears in the balance sheet at amortized acquisition cost?

If a held-to-maturity security is deemed to be impaired, the investor recognizes (debits) the balance sheet carrying value of the investment and reduces (credits) an impairment loss (included in net income).

Firms might use a particular derivative to hedge fair value and to hedge cash flows.

Which of the following is not true regarding investments in securities available-for-sale?

U.S.GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to maturity nor trading securities as securities available-for-sale.

A derivative is a financial instrument whose value changes in response to changes in an underlying observable variable, such as a stock price, an interest rate, a currency exchange rate, or a commodity price.

Introduction to Business Activities and Overview of Financial Statements and the Reporting Process

The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet

The Basics of Record Keeping and Financial Statement Preparation: Income Statement

Balance Sheet: Presenting and Analyzing Resources and Financing

Income Statement: Reporting Results of Operating Activities

Statement of Cash Flows

Introduction to Financial Statement Analysis

Revenue Recognition, Receivables, and Advances From Customers

Working Capital

Long-Lived Tangible and Intangible Assets

Notes, Bonds, and Leases

Liabilities: Off-Balance Sheet Financing, Retirement Benefits, and Income Taxes

Intercorporate Investments in Common Stock

Shareholders Equity: Capital Contributions and Distributions

Statement of Cash Flows: Another Look

Synthesis and Extensions

Filters

Exam 13: Marketable Securities and Derivatives

Which of the following is/aretrue?

Acquisition and disposition of trading securities are usually financing activities.

The matching convention provides both the basis for hedge accounting, as well as the logic for the treating gains and losses from changes in fair value of fair value hedges differently from cash flow hedges.Which of the following is/are not true?

Derivatives include

In both U.S.GAAP and IFRS, hedge accounting is elective; firms need not designate any derivatives as accounting hedges, regardless of the degree to which the derivatives mitigate the volatility of outcomes of other arrangements.

A financial instrument that obtains its value from some other financial item is known as a(n)

Which of the following items appears in the balance sheet at amortized acquisition cost?

If a held-to-maturity security is deemed to be impaired, the investor recognizes (debits) the balance sheet carrying value of the investment and reduces (credits) an impairment loss (included in net income).

Firms might use a particular derivative to hedge fair value and to hedge cash flows.

Which of the following is not true regarding investments in securities available-for-sale?

U.S.GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to maturity nor trading securities as securities available-for-sale.

A derivative is a financial instrument whose value changes in response to changes in an underlying observable variable, such as a stock price, an interest rate, a currency exchange rate, or a commodity price.

Introduction to Business Activities and Overview of Financial Statements and the Reporting Process

The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet

The Basics of Record Keeping and Financial Statement Preparation: Income Statement

Balance Sheet: Presenting and Analyzing Resources and Financing

Income Statement: Reporting Results of Operating Activities

Statement of Cash Flows

Introduction to Financial Statement Analysis

Revenue Recognition, Receivables, and Advances From Customers

Working Capital

Long-Lived Tangible and Intangible Assets

Notes, Bonds, and Leases

Liabilities: Off-Balance Sheet Financing, Retirement Benefits, and Income Taxes

Intercorporate Investments in Common Stock

Shareholders Equity: Capital Contributions and Distributions

Statement of Cash Flows: Another Look

Synthesis and Extensions

Filters