Question 1

Martin Company acquired $500,000 face value of the outstanding bonds of Tory Company on January 1, 2012.The bonds pay interest semiannually on June 30 and December 31 at an annual rate of 7% and mature on December 31, 2014.The bonds were priced on the market on January 1, 2012, to yield 6% compounded semiannually.Martin Company classifies these bonds as held to maturity.
a.Compute the amount that Martin Company paid for these bonds, excluding commissions and taxes.
b.Prepare an amortization table for these bonds.
c.Give the journal entries that Martin Company would make to account for these bonds during 2012.
d.Give the journal entries that Martin Company would make to account for these bonds on December 31, 2014.

Accepted Answer

The answer of Martin Company acquired $500,000 face value of...

Question 2

Gains and losses on derivatives not designated as hedges of a specific risk, gains and losses on fair value hedges, and the ineffective portion of cash flow hedges affect net income simultaneously with changes in fair value.

Accepted Answer

A) True 
 B)False

Question 3

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 total income from the purchase and sale of these securities is _____ reported _____

Accepted Answer

A) $80,000; in the year of sale. 
B) $80,000; as they occur. 
C) $35,000; in the year of sale. 
D) $35,000; as they occur. 
E) $45,000; in the year of sale

Question 4

A derivative may have zero initial cost, but potentially large positive or negative fair values later.

Accepted Answer

A) True 
 B)False

Question 5

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 acquisition of trading securities on December 28, 2013.

Accepted Answer

A) Cash................400,000 
Marketable Securities............400,000 
B) Other Comprehensive Income..............400,000 
Marketable Securities............400,000 
C) Marketable Securities...........400,000 
Other Comprehensive Income..........400,000 
D) Marketable Securities................400,000 
Cash.................................400,000 
E) Marketable Securities..................400,000 
Net Income..................................400,000

Question 6

Lightner Company decides that an available-for-sale security is impaired as of December 31, 2013 and has an unrealized loss of $5,000.The journal entry to record an impairment loss on securities available-for-sale would be:

Accepted Answer

A) Unrealized Holding Loss on Securities Available-for-Sale...........5,000
Impairment Loss..............5,000 
B) Impairment Loss................ 5,000 
Unrealized Holding Loss on Securities Available-for-Sale.................... 5,000 
C) Realized Holding Loss on Securities Available-for-Sale..........5,000
Impairment Loss............. 5,000 
D) Impairment Loss ............ 5,000 
Realized Holding Loss on Securities Available-for-Sale..............5,000 
E) Impairment Loss................... 5,000 
Retained Earnings................ 5,00

Question 7

U.S.GAAP requires firms to disclose which of the following information with respect to derivatives?

Accepted Answer

A) A description of the firm's risk management strategy and how particular derivatives help accomplish the firm's hedging objectives. 
B) For fair value and cash flow hedges, firms must disclose the net gain or loss recognized in earnings resulting from the hedge's ineffectiveness. 
C) For cash flow hedges, firms must describe the transactions or events that will result in reclassifying gains and losses from accumulated other comprehensive income to net income and the estimated amount of such reclassifications during the next 12 months. 
D) The net amount of gains and losses recognized in earnings because a hedged firm commitment no longer qualifies as a fair value hedge or a hedged forecasted transaction no longer qualifies as a cash flow hedge. 
E) all of the above

Question 8

Which of the following is not true?

Accepted Answer

A) A firm must recognize derivatives on its balance sheet as assets or liabilities, depending on the rights and obligations under the contract. 
B) Firms must remeasure derivatives to fair value each period. 
C) The change in fair value either increases or decreases the balance sheet carrying value of the derivative asset or liability. 
D) The change in fair value affects either (1) net income immediately (like a trading security), or (2) other comprehensive income immediately and net income later (like securities available-for-sale). 
E) The income effect of a change in the fair value of a derivative is independent of the purpose for which a firm acquires the derivative and whether the firm chooses to apply hedge accounting.

Question 9

How are securities measured at acquisition?

Accepted Answer

The answer of How are securities measured at acquisition?...

Question 10

According to U.S.GAAP,firms holding debt and equity securities for short-term profit potential

Accepted Answer

A) report the investments on the balance sheet at market value. 
B) initially record the investments at acquisition cost. 
C) report unrealized holding gains and losses on the investments in the income statement. 
D) all of the above. 
E) none of the above.

Question 11

The provisions of U.S.GAAP require firms to classify marketable securities into the following categories except

Accepted Answer

A) debt securities held to maturity for which a firm has both the intent and the ability to hold to maturity-shown on the balance sheet at an amount based on acquisition cost, but subject to impairment. 
B) debt and equity securities held as trading securities shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income. 
C) debt and equity securities held as securities available-for-sale shown on the balance sheet at fair value, with unrealized changes in fair value of securities held at the end of the accounting period included in other comprehensive income, and realized changes in fair value included in net income when a firm sells the securities. 
D) debt and equity securities held as securities available-for-sale shown on the balance sheet at fair value, with changes in fair value of securities held at the end of the accounting period reported each period in net income. 
E) none of the above

Question 12

In Year 1, the firm purchased a portfolio of marketable securities for $1,000, which it holds as current assets.At the end of Year 1, the portfolio had a market value of $800.During Year 2, the firm sold some of the securities for $120 which had originally cost $100, but which had a market value of $90 at the end of Year 1.At the end of Year 2, the remaining securities had a market value of $1,150.
Required:
 a.	Assume the firm treats its holdings as available-for-sale.
 	1. Record the entry made at the end of Year 1.
 	2. Record the entries made during Year 2 and at the end of Year 2.

b.	Assume the firm treats its holdings as trading securities.
 	1. Record the entry made at the end of Year 1.
 	2. Record the entries made during Year 2 and at the end of Year 2.

Accepted Answer

The answer of In Year 1, the firm purchased a...

Question 13

Using the amortization procedure, the holder of the debt securities (the investor) records interest revenue each period at an amount equal to the _____ at the start of the period multiplied by the _____ applicable to that debt on the day the firm acquired the debt.The bonds are classified as held to maturity.

Accepted Answer

A) carrying value of the debt; market rate of interest 
B) market value of the debt; market rate of interest 
C) carrying value of the debt; applicable federal rate of interest 
D) present value of the debt; market rate of interest 
E) present value of the debt; applicable federal rate of interest

Question 14

U.S.GAAP requires firms holding minority, passive investments in debt and equity securities as securities available-for-sale that the firm intends to sell within one year to report them as

Accepted Answer

A) Investments in Securities in the Current asset section of the balance sheet. 
B) Investments in Securities in the Long-term asset section of the balance sheet. 
C) Marketable Securities in the Current asset section of the balance sheet. 
D) Marketable Securities in the Long-term asset section of the balance sheet. 
E) none of the above

Question 15

Describe the fair value option applied to marketable securities and derivatives.

Accepted Answer

The answer of Describe the fair value option applied to...

Question 16

Kerry Corporation acquires the publicly traded debt of Jett Corporation on December 31, Year 1 as a temporary investment of excess cash.The securities mature in 4 years.How will the securities be recorded on Kerry's December 31, Year 1 financial statement?

Accepted Answer

A) as long-term investment in marketable equity securities 
B) as current assets-marketable securities 
C) as bonds payable 
D) as short-term investment in marketable equity securities 
E) in a reserve account for future operating cash needs

Question 17

U.S.GAAP and IFRS require firms to disclose the fair value of financial instruments in a note to the financial statements.What should such a note include?

Accepted Answer

The answer of U.S.GAAP and IFRS require firms to disclose...

Question 18

Measurement of trading securities at _____ reflects income when it occurs in the form of a change in _____, not when the investor realizes a gain or loss _____.

Accepted Answer

A) fair value; fair value; at the time of sale 
B) net realizable value; fair value; at the time of sale 
C) net realizable value; future value; in Other Comprehensive Income 
D) realizable value; future value; in Other Comprehensive Income 
E) future value; future value; in Other Comprehensive Income

Question 19

Complete the following chart for items a through d, describing the accounting treatment 
using the number by one of the following four approaches listed as follows. 
(Assume that the firm does not elect the fair value option):

APPROACHES
(1) Measured at fair value with changes recognized in net income.
(2) Measured at amortized cost.
(3) Measured at fair value with changes recognized initially in other comprehensive income.
(4) Measurement depends on whether firm uses hedge accounting.

In the third column of the chart, present your explanation regarding this approach.

Accepted Answer

The answer of Complete the following chart for items a...

Question 20

Which of the following is/aretrue?

Accepted Answer

A) Both U.S.GAAP and IFRS provide for the option of reporting selected financial assets and financial liabilities at fair value and recognizing gains and losses in net income as fair values change. 
B) Once elected, the fair value option is irrevocable for the instrument to which the firm applies it. 
C) Both U.S.GAAP and IFRS require measurement at fair value with changes included in income for three items: (1) trading securities, (2) fair value hedges, (3) derivatives not designated as hedges. 
D) Firms can elect the fair value option for the following items: (1) bonds held to maturity, (2) available-for-sale securities, and (3) cash flow hedges. 
E) all of the above

Exam 13: Marketable Securities and Derivatives