26. Which of the following is not considered cash
for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal
checks
c. Coin, currency, and available funds
d. Postdated checks and I. O. U.'s
27. Which of the following is considered cash?
a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Postdated checks
28. Travel advances should be reported as
a. supplies.
b. cash because they represent the equivalent of
money.
c. investments.
d. none of these answers are correct.
29. Which of the following items should not be
included in the Cash caption on the balance
sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the
cash register
c. Amounts on deposit in checking account at the
bank
d. Postage stamps on hand
30. All of the following may be included under
the heading of "cash" except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance.
31. In which account are post-dated checks
received classified?
a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.
32. In which account are postage stamps
classified?
a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.
33. What is a compensating balance?
a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral
for outstanding loans.
d. Minimum deposits required to be
maintained in connection with a borrowing
arrangement.
34. Under which section of the balance sheet is
"cash restricted for plant expansion" reported?
a. Current assets.
b. Non-current assets.
c. Current liabilities.
d. Stockholders' equity.
35. A cash equivalent is a short-term, highly
liquid investment that is readily convertible into
known amounts of cash and
a. is acceptable as a means to pay current
liabilities.
b. has a current market value that is greater than
its original cost
c. bears an interest rate that is at least equal to
the prime rate of interest at the date of
liquidation.
d. is so near its maturity that it presents
insignificant risk of changes in interest rates.
36. Bank overdrafts, if material, should be
a. reported as a deduction from the current asset
section.
b. reported as a deduction from cash.
c. netted against cash and a net cash amount
reported.
d. reported as a current liability.
37. Deposits held as compensating balances
a. usually do not earn interest.
b. if legally restricted and held against short-
term credit may be included as cash.
c. if legally restricted and held against long-term
credit may be included among current assets.
d. none of these answers are correct.
38. When a company has cash available in
another account in the same bank at which an
overdraft has occurred, the company will:
a. offset the overdraft against cash account.
b. report the same in the notes to financial
statement.
c. report the bank overdraft amount as
account payable.
d. classify the bank overdraft as compensating
balance.
39. Which of the following statements is correct
regarding receivables?
a. Receivables are written promises of the
purchaser to pay for goods or services.
b. Receivables are claims held against
customers and others for money, goods, or
services.
c. Receivables are non-financial assets.
d. Receivables that are expected to be collected
within a year are classified as noncurrent.
40. The category "trade receivables" includes
a. advances to officers and employees.
b. income tax refunds receivable.
c. claims against insurance companies for
casualties sustained.
d. none of these answer choices are correct.
41. Which of the following should be recorded in
Accounts Receivable?
a. Receivables from officers
b. Receivables from subsidiaries
c. Dividends receivable
d. None of these answer choices are correct.
42. What is the preferable presentation of
accounts receivable from officers, employees, or
affiliated companies on a balance sheet?
a. As offsets to capital.
b. By means of footnotes only.
c. As assets but separately from other
receivables.
d. As trade notes and accounts receivable if they
otherwise qualify as current assets.
43. When a customer purchases merchandise
inventory from a business organization, she may
be given a discount which is designed to induce
prompt payment. Such a discount is called a(n)
a. trade discount.
b. nominal discount.
c. enhancement discount.
d. cash discount.
44. Trade discounts are
a. not recorded in the accounts; rather they are a
means of computing a price.
b. used to avoid frequent changes in catalogues.
c. used to quote different prices for different
quantities purchased.
d. all of the above.
45. If a company employs the gross method of
recording accounts receivable from customers,
then sales discounts taken should be reported as
a. a deduction from sales in the income
statement.
b. an item of "other expense" in the income
statement.
c. a deduction from accounts receivable in
determining the net realizable value of accounts
receivable.
d. sales discounts forfeited in the cost of goods
sold section of the income statement.
46. Why do companies provide trade discounts?
a. To avoid frequent changes in catalogs.
b. To induce prompt payment.
c. To easily alter prices for different customers.
d. To avoid frequent changes in catalogs and
to easily alter prices for different customers.
47. The accounting for cash discounts and trade
discounts are
a. the same.
b. always recorded net.
c. not the same.
d. tied to the timing of cash collections on the
account.
48. Of the approaches to record cash discounts
related to accounts receivable, which is more
theoretically correct?
a. Net approach.
b. Gross approach.
c. Allowance approach.
d. All three approaches are theoretically correct.
49. All of the following are problems associated
with the valuation of accounts receivable except
a. uncollectible accounts.
b. returns.
c. cash discounts under the net method.
d. allowances granted.
50. Why is the allowance method preferred over
the direct write-off method of accounting for bad
debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct
write-off method is difficult to do.
d. Improved matching of bad debt expense
with revenue.
51. Which of the following concepts relates to
using the allowance method in accounting for
accounts receivable?
a. Bad debt expense is an estimate that is
based on historical and prospective
information.
b. Bad debt expense is based on the actual
amounts determined to be uncollectible.
c. Bad debt expense is an estimate that is based
only on an analysis of the receivables aging.
d. Bad debt expense is management's
determination of which accounts will be sent to
the attorney for collection.
52. How can accounting for bad debts be used for
earnings management?
a. Determining which accounts to write-off.
b. Changing the percentage of sales recorded
as bad debt expense.
c. Using an aging of the accounts receivable
balance to determine bad debt expense.
d. Reversing previous write-offs.
53. What is the normal journal entry for
recording bad debt expense under the allowance
method?
a. Debit Allowance for Doubtful Accounts, credit
Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit
Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance
for Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance
for Doubtful Accounts.
54. What is the normal journal entry when
writing-off an account as uncollectible under the
allowance method?
a. Debit Allowance for Doubtful Accounts,
credit Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit
Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for
Doubtful Accounts.
d. Debit Accounts Receivable, credit Allowance
for Doubtful Accounts.
55. Which of the following is included in the
normal journal entry to record the collection of
accounts receivable previously written off when
using the allowance method?
a. Debit Allowance for Doubtful Accounts, credit
Accounts Receivable.
b. Debit Allowance for Doubtful Accounts, credit
Bad Debt Expense.
c. Debit Bad Debt Expense, credit Allowance for
Doubtful Accounts.
d. Debit Accounts Receivable, credit
Allowance for Doubtful Accounts.
56. Assuming that the ideal measure of short-
term receivables in the balance sheet is the
discounted value of the cash to be received in the
future, failure to follow this practice usually does
not make the balance sheet misleading because
a. most short-term receivables are not interest-
bearing.
b. the allowance for uncollectible accounts
includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or
factor.
57. Which of the following methods of
determining bad debt expense does not properly
match expense and revenue?
a. Charging bad debts with a percentage of sales
under the allowance method.
b. Charging bad debts with an amount derived
from a percentage of accounts receivable under
the allowance method.
c. Charging bad debts with an amount derived
from aging accounts receivable under the
allowance method.
d. Charging bad debts as accounts are written
off as uncollectible.
58. Which of the following methods of
determining annual bad debt expense best
achieves the matching concept?
a. Percentage of sales
b. Percentage of ending accounts receivable
c. Percentage of average accounts receivable
d. Direct write-off
59. Which of the following is a generally
accepted method of determining the amount of
the adjustment to bad debt expense?
a. A percentage of sales adjusted for the balance
in the allowance
b. A percentage of sales not adjusted for the
balance in the allowance
c. A percentage of accounts receivable not
adjusted for the balance in the allowance
d. An amount derived from aging accounts
receivable and not adjusted for the balance in the
allowance
60. The advantage of relating a company's bad
debt expense to its outstanding accounts
receivable is that this approach
a. gives a reasonably correct statement of
receivables in the balance sheet.
b. best relates bad debt expense to the period of
sale.
c. is the only generally accepted method for
valuing accounts receivable.
d. makes estimates of uncollectible accounts
unnecessary.
61. At the beginning of 2013, Gannon Company
received a three-year zero-interest-bearing
$1,000 trade note. The market rate for
equivalent notes was 8% at that time. Gannon
reported this note as a $1,000 trade note
receivable on its 2013 year-end statement of
financial position and $1,000 as sales revenue for
2013. What effect did this accounting for the
note have on Gannon's net earnings for 2013,
2014, 2015, and its retained earnings at the end
of 2015, respectively?
a. Overstate, overstate, understate, zero
b. Overstate, understate, understate, understate
c. Overstate, overstate, overstate, overstate
d. None of these answer choices are correct.
62. What is imputed interest?
a. Interest based on the stated interest rate.
b. Interest based on the implicit interest rate.
c. Interest based on the average interest rate.
d. Interest based on the coupon rate.
63. Antique Company has notes receivable that
have a fair value of $920,000 and a carrying
amount of $710,000. Antique decides on
December 31, 2014, to use the fair value option
for these recently-acquired receivables. The
adjusting entry to record this change will include
a:
a. debit to Unrealized Holding Gain or
LossIncome for $210,000.
b. credit to Notes Receivable for $210,000.
c. credit to Unrealized Holding Gain or
LossIncome for $210,000.
d. debit to Notes Receivable for $920,000.
64. Which of the following statements is not true
of fair value option?
a. Receivables are recorded at fair value in the
financial statements.
b. Unrealized holding gains and losses from
fair value adjustments are reported as a
component of comprehensive income.
c. The International Accounting Standards Board
believes that fair value measurement for
financial instruments provides more relevant
and understandable information than historical
cost.
d. An unrealized holding gain or loss is the net
change in the fair value of the receivable from
one period to another, exclusive of interest
revenue.
65. Why would a company sell receivables to
another company?
a. To improve the quality of its credit granting
process.
b. To limit its legal liability.
c. To accelerate access to amounts collected.
d. To comply with customer agreements.
66. When should a transfer of receivables be
recorded as a sale?
a. The transferred assets are isolated from the
transferor.
b. The transferor does not maintain effective
control over the transferred assets through an
agreement to repurchase or redeem them prior
to their maturity.
c. The transferee has the right to pledge or
exchange the transferred assets.
d. All of these answers are correct.
67. What is "recourse" as it relates to selling
receivables?
a. The obligation of the seller of the
receivables to pay the purchaser in case the
debtor fails to pay.
b. The obligation of the purchaser of the
receivables to pay the seller in case the debtor
fails to pay
c. The obligation of the seller of the receivables
to pay the purchaser in case the debtor returns
the product related to the sale.
d. The obligation of the purchaser of the
receivables to pay the seller if all of the
receivables are collected.
68. Which of the following is true when accounts
receivable are factored without recourse?
a. The transaction may be accounted for either as
a secured borrowing or as a sale, depending
upon the substance of the transaction.
b. The receivables are used as collateral for a
promissory note issued to the factor by the
owner of the receivables.
c. The factor assumes the risk of collectibility
and absorbs any credit losses in collecting
the receivables.
d. The financing cost (interest expense) should
be recognized ratably over the collection period
of the receivables.
69. Which of the following statements is
incorrect regarding the classification of accounts
and notes receivable?
a. Segregation of the different types of
receivables is required if they are material.
b. Disclose any loss contingencies that exist on
the receivables.
c. Any discount or premium resulting from
the determination of present value in notes
receivable transactions is an asset or liability
respectively.
d. Valuation accounts should be appropriately
offset against the proper receivable accounts.
70. Of the following conditions, which is the only
one that is not required if the transfer of
receivables with recourse is to be accounted for
as a sale?
a. The transferor is obligated to make a
genuine effort to identify those receivables
that are uncollectible.
b. The transferor surrenders control of the future
economic benefits of the receivables.
c. The transferee cannot require the transferor to
repurchase the receivables.
d. The transferor's obligation under the recourse
provisions can be reasonably estimated.
71. The accounts receivable turnover ratio
measures the
a. number of times the average balance of
accounts receivable is collected during the
period.
b. percentage of accounts receivable turned over
to a collection agency during the period.
c. percentage of accounts receivable arising
during certain seasons.
d. number of times the average balance of
inventory is sold during the period.
72. The accounts receivable turnover ratio is
computed by dividing
a. gross sales by ending net receivables.
b. gross sales by average net receivables.
c. net sales by ending net receivables.
d. net sales by average net receivables.
73. Which of the following items should be
included in accounts receivable reported on the
balance sheet?
a. Notes receivable.
b. Interest receivable.
c. Allowance for doubtful accounts.
d. Advances to related parties and officers.
74. How is days to collect accounts receivable
determined?
a. 365 days divided by accounts receivable
turnover.
b. Net sales divided by 365.
c. Net sales divided by average net trade
receivables.
d. Accounts receivable turnover divided by 365
days.
75. What is a possible reason for accounts
receivable turnover to increase from one year to
the next year
a. Decreased credit sales during a recession.
b. Write-off uncollectible receivables.
c. Granting credit to customers with lower credit
quality.
d. Improved collection process. a. added to the bank statement balance.
b. deducted from the bank statement balance.
76. Which of the following is a general rule of c. added to the balance per books.
classifying receivables? d. deducted from the balance per books.
a. Disclose any loss contingencies that exists on
the receivables.
b. Indicate the receivables classified as current
and noncurrent.
c. Disclose any receivables designated or pledged
as collateral.
d. All of these answers are correct. Which of the following should not be
considered cash?
77. Which of the following is an appropriate a. Certified check
reconciling item to the balance per bank in a b. Change fund
bank reconciliation? c. Postdated check
a. Bank service charge. d. Personal check
b. Deposit in transit.
c. Bank interest. The internal control feature specific to petty
d. Chargeback for NSF check. cash is
a. Assignment of responsibility
78. Which of the following statements is false? b. Imprest system
a. The imprest petty cash system in effect c. Proper authorization
adheres to the rule of disbursement by check. d. Separation of duties
b. Entries are made to the Petty Cash account
only to increase or decrease the size of the fund Credit balances in accounts receivable are
or to adjust the balance if not replenished at classified as
year-end. a. Long-term liabilities
c. The Petty Cash account is debited when the b. Part of accounts payable
fund is replenished. c. Deduction from accounts receivable
d. All of these answers are false. d. Current liabilities

79. A Cash Over and Short account Accounting for the interest in a non-interest
a. is not generally accepted. bearing note receivable is an example of what
b. is debited when the petty cash fund proves out aspect of accounting theory?
over. a. Substance over
c. is debited when the petty cash fund proves b. Prudence
out short. c. Matching
d. is a contra account to Cash. d. Verifiability

80. The journal entries for a bank reconciliation Financial assets include all of the following,
a. are taken from the "balance per bank" section except
only. a. Accounts receivable
b. may include a debit to Office Expense for b. Loans receivable
bank service charges. c. Cash
c. may include a credit to Accounts Receivable d. Prepaid expenses
for an NSF check.
d. may include a debit to Accounts Payable for an Which is not classified as a financial
NSF check. instrument?
a. Convertible bond
81. When preparing a bank reconciliation, bank b. Warranty provision
credits are c. Foreign currency contract
d. Loan receivable
Which should be classified as financial
instruments?
a. Accounts receivable
b. Inventory
c. Patent
d. Land
Which of the following is a financial liability?
a. Constructive obligation
b. Deferred revenue
c. Warranty obligation
d. An obligation to deliver own shares worth
a fixed amount of cash
All of the following financial assets shall be
measured at fair value through profit or loss,
except
a. Financial assets at amortized cost
b. Investments in quoted equity instruments
c. Financial assets held for trading
d. Financial assets designated as FVTPL
Which of the following financial assets are
assessed for impairment?
a. Equity investments at FVTPL
b. Equity investments at FVTOCI
c. Debt investments at FVTPL
d. Debt investments at FVTOCI
Which statement best describes significant
influence?
a. The contractually agreed sharing of control
over an economic entity
b. The mutual sharing in the risks and benefits of
a combined entity
c. The power to participate in the financial
and operating policy decisions of an entity
d. The holding of a significant proportion of the
share capital in another entity.
The actual interest earned by the bondholder
is
a. Nominal rate
b. No rate
c. Exchange rate
d. Effective rate
It is an agreement between two parties to
exchange a specified amount of a commodity
on a specified date in the future at a specified
rate
a. Forward contract
b. Option contract
c. Futures contract
d. Interest rate swap
Which of the following is not a derivative
instrument?
a. Futures contract
b. Variable annuity swap
c. Interest rate swap
d. Credit indexed contract
Which of the following should not be
reported as inventory?
a. Machinery for the production process held
by a manufacturing entity
b. Land held by a real estate firm
c. Shares and bonds held by a brokerage firm
d. Partially completed goods held by a
manufacturing entity
A bank draft is
a. A credit balance of the cash in bank account
b. A statement made by a bank to inform its
depositors of their cash in bank balance
c. A type of money market instrument
d. A check drawn by a bank on its own funds
in another bank
Non-trade receivables are classified as
current assets if these are reasonably to be
collected
a. Within the operating cycle
b. Within one year or within the operating cycle,
whichever is shorter
c. Within one year or within the operating cycle,
whichever is longer
d. Within one year, the length of the
operating cycle notwithstanding
When an investor purchased a bond between
interest dates at a premium, the cash paid to
the seller is
a. More than the face amount of the bond
b. The same as the face amount of the bond
c. Less than the face amount of the bond
d. Face amount of the bond plus accrued interest
All of the following are characteristics of
derivatives, except
a. It is settled at a future date
b. It requires no initial investment or an initial
small investment
c. It is acquired for the purpose of generating
a profit from short-term fluctuation in
market price
d. The value changes in response to an
underlying
The standard for Financial Instruments is
a. PFRS 8
b. PAS 8
c. PFRS 9
d. PAS 7
Which of the following investment securities
held by Zoogle Inc. may be classified as held-to-
maturity securities in its balance sheet?
A. Long-term debenture bonds.
B. Common stock.
C. Callable preferred stock.
D. All of the above are correct.
Which of the following investment securities
held by Zoogle Inc. are not reported at fair value
in its balance sheet?
A. Common stock held as available for sale
securities.
B. Debt securities held to maturity.
C. Preferred stock held as trading securities.
D. All of the above are reported at fair value.
Both fair values and subsequent growth of the
investee are not as relevant for investments in
which of the following categories?
A. Securities reported under the equity method.
B. Trading securities.
C. Held-to-maturity securities.
D. Securities available for sale.
Which category completely excludes equity
securities?
A. Securities available for sale.
B. Consolidating securities.
C. Held-to-maturity securities.
D. Trading securities.
If Dinsburry Company concluded that an
investment originally classified as a trading
security would now more appropriately be
classified as held to maturity, Dinsburry would:
A. Not reclassify the investment, as original
classifications are irrevocable.
B. Reclassify the investment as held to
maturity and immediately recognize in net
income all unrealized gains and losses that
have not already been recognized as of the
reclassification date.
C. Reclassify the investment as held to maturity
and treat the fair value as of the date of
reclassification as the investment's amortized
cost basis for future amortization.
D. Reclassify the investment as held to maturity,
but there would be no income effect.
If Ziggy Company concluded that an investment
originally classified as held to maturity would
now more appropriately be classified as
available for sale, Ziggy would:
A. Not reclassify the investment, as original
classifications are irrevocable.
B. Reclassify the investment as available for sale
and immediately recognize in net income any
unrealized gain or loss on the reclassification
date.
C. Reclassify the investment as available for
sale and immediately recognize in
accumulated other comprehensive income
any unrealized gain or loss on the
reclassification date.
D. Need to restate earnings, as the original
classification was in error.
If Dizbert Company concluded that an
investment originally classified as available for
sale would now more appropriately be classified
as held to maturity, Dizbert would:
A. Not reclassify the investment, as original
classifications are irrevocable.
B. Reclassify the investment as held to maturity
and immediately recognize in net income any
unrealized gain or loss on the reclassification
date.
C. Reclassify the investment as held to
maturity and treat the fair value as of the
date of reclassification as the investment's
amortized cost basis for future amortization.
D. Need to restate earnings, as the original
classification was in error.
Securities that are purchased with the intent of
selling them in the near future to take advantage
of short-term price changes are classified as:
A. Securities available for sale.
B. Consolidating securities.
C. Held-to-maturity securities.
D. Trading securities.
The income statement reports changes in fair
value for which type of securities?
A. Securities reported under the equity method.
B. Trading securities.
C. Held-to-maturity securities.
D. Securities available for sale.
Trading securities are most commonly found on
the books of:
A. Oil companies.
B. Manufacturing companies.
C. Banks.
D. Foreign subsidiaries.
For trading securities, unrealized holding gains
and losses are included in earnings:
A. Only at the end of the fiscal year.
B. On each reporting date.
C. Only when they exceed 10% of the underlying
investment.
D. Based on a vote of the board of directors.
Trading securities, by definition, are properly
classified in the balance sheet as:
A. Shareholders' equity.
B. Intangibles.
C. Current assets.
D. Other assets.
Holding gains and losses on trading securities
are included in earnings because:
A. They measure the success or failure of
taking advantage of short-term price
changes.
B. The IRS mandates the inclusion.
C. The SEC mandates the inclusion.
D. They measure the book value of the securities
in the balance sheet date.
In the statement of cash flows, inflows and
outflows of cash from buying and selling trading
securities typically are considered:
A. Investing activities
B. Operating activities.
C. Financing activities.
D. Noncash financing activities.
The fair value of debt securities not regularly
traded can be most reasonably approximated by:
A. Calculating the discounted present value of
the principal and interest payments.
B. Determining the value using similar securities
in the NASDAQ market.
C. Using the relative fair value method.
D. Calling a licensed and registered stockbroker.
All investments in debt and equity securities that
don't fit the definitions of the other reporting
categories are classified as:
A. Trading securities.
B. Securities available for sale.
C. Held-to-maturity securities.
D. Consolidated securities.
Investments in securities available for sale are
reported at:
A. Discounted present value.
B. Lower of cost or market.
C. Historical cost.
D. Fair value on the reporting date.
All investment securities are initially recorded
at:
A. Cost.
B. Present value.
C. Equity value.
D. None of the above is correct.
Accumulated Other Comprehensive Income in
the shareholders' equity section of the balance
sheet reflects changes in the fair value of
securities for which type of securities?
A. Securities available for sale.
B. Trading securities.
C. Consolidated securities.
D. Held-to-maturity securities.
GAAP regarding accounting for unrealized gains
and losses on investments in equity securities
will apply to an investment when the percentage
of ownership of another company is:
A. Less than 20%.
B. 20% to 50%.
C. Over 50%.
D. Exactly 100%.
When an investor classifies an investment in
common stock as securities available for sale,
cash dividends are classified by the investor as:
A. A return of capital.
B. A loss.
C. A deduction from the investment account.
D. Dividend income.
When an equity security is appropriately carried
and reported as securities available for sale, a
gain should be reported in the income statement:
A. When the fair value of the security increases.
B. When the present value of the security
increases.
C. Only when the Dow Jones Industrial Average
increases at least 100 points.
D. Only when the security is sold.
Investments in securities to be held for an
unspecified period of time are reported at:
A. Historical cost.
B. Present value.
C. Lower of cost or market.
D. Fair value.
Unrealized holding gains and losses on securities
available for sale would have the following
effects on accumulated other comprehensive
income:
Gains Losses
a. increase increase
b. decrease decrease
c. decrease increase
d. increase decrease
In the statement of cash flows, inflows and
outflows of cash from buying and selling
available for sale securities are considered:
A. Operating activities.
B. Financing activities.
C. Investing activities.
D. Noncash financing activities.
Unrealized holding gains and losses on securities
available for sale would have the following
effects on retained earnings:
Gains Losses
a. increase no change
b. no change decrease
c. no change no change
d. increase decrease
A weakness of __________ is that firms can increase
or decrease net income by choosing to sell
particular investments with net unrealized gains
or unrealized losses.
A. the available-for-sale approach
B. the trading-securities approach
C. both the available-for-sale and trading-
securities approaches
D. neither the available-for-sale and trading-
securities approaches
If an available-for-sale investment is sold for
which there are unrealized gains in accumulated
other comprehensive income (AOCI), a
reclassification adjustment affects other
comprehensive income (OCI) in the period of
sale by:
A. Reducing OCI for the amount of unrealized
gains in AOCI.
B. Increasing OCI for the amount of unrealized
gains in AOCI.
C. No effect on OCI, as OCI only includes the
effects of unrealized gains and losses.
D. No effect on OCI, as the realized gain is
included in AOCI.
If an available-for-sale investment is sold for
which there are unrealized losses in accumulated
other comprehensive income (AOCI), the total
effect on total comprehensive income is:
A. An increase.
B. A decrease.
C. No effect.
D. Cannot be determined given this information.
Sloan Company has owned an investment during
2013 that has increased in fair value. After all
closing entries for 2013 are completed, the effect
of the increase in fair value on total
shareholders' equity would be:
A. Higher under the available-for-sale approach
than under the trading-securities approach.
B. Lower under the available-for-sale approach
than under the trading-securities approach.
C. The same amount under the available-for-
sale and trading-securities approaches.
D. Not possible to identify whether the available-
for-sale or trading-securities approaches yield
higher shareholders' equity given this
information.
When investments are treated as available-for-
sale, other comprehensive income (OCI) also
includes the tax effects associated with
unrealized holding gains and losses. As a result:
A. Accumulated other comprehensive income
would be increased by the tax benefits typically
associated with unrealized holding gains.
B. Other comprehensive income typically
would be reduced by the tax expense
associated with unrealized holding gains.
C. Accumulated other comprehensive income
would not be affected by taxes.
D. None of the above is correct.
The Guitar World (TGW) holds an investment
that increased in fair value over 2013, and
accounts for that investment as available for sale.
When considering taxes, TGW would:
A. Recognize tax expense on the income
statement, and probably increase taxes payable.
B. Recognize tax expense on the income
statement, and probably increase its deferred tax
liability.
C. Reduce accumulated other comprehensive
income (AOCI) for tax expense, and probably
increase taxes payable.
D. Reduce accumulated other comprehensive
income (AOCI) for tax expense, and probably
increase its deferred tax liability.
The equity method of accounting for investments
in voting common stock is appropriate when:
A. The investor can significantly influence the
investee.
B. The investor has voting control over the
investee.
C. The investor intends to hold the common
stock indefinitely.
D. The investor is assured of a continued supply
of a valuable raw material.
Consolidated financial statements are prepared
when one company has:
A. Accounted for the investment using the equity
method.
B. Accounted for the investment as securities
available for sale.
C. Control over another company.
D. None of the above is correct.
When using the equity method to account for an
investment, cash dividends received by the
investor from the investee should be recorded:
A. As a reduction in the investment account.
B. As an increase in the investment account.
C. As dividend income.
D. As a contra item to stockholders' equity.
When the equity method of accounting for
investments is used by the investor, the
investment account is increased when:
A. A cash dividend is received from the investee.
B. The investee reports a net income for the
year.
C. The investor records additional depreciation
related to the investment.
D. The investee reports a net loss for the year..
Which of the following increases the investment
account under the equity method of accounting?
A. Decreases in the market price of the investee's
stock.
B. Dividends paid by the investee that were
declared in the previous year.
C. Net loss of the investee company.
D. None of the above is correct.
If the fair value of equity securities is not
determinable and the equity method is not
appropriate, the securities should be reported at:
A. Amortized cost.
B. Cost.
C. Consolidated value.
D. Net present value.
When the investor's level of influence changes, it
may be necessary to change from the equity
method to another method. When the level of
ownership falls from a range of 20% to 50% to
less than 20%, the equity method typically
would be discontinued and the investment
account balance would be carried over at:
A. Amortized cost on the date of ownership
change.
B. Fair value on the date of ownership change.
C. Discounted present value on the date of
ownership change.
D. The current balance, and this balance
would serve as the new "cost."
When the investor's level of influence changes, it
may be necessary to change to the equity method
from another method. When the level of
ownership rises from less than 20% to a range of
20% to 50%, the equity method typically would
become appropriate and the investment account
balance should be:
A. Retrospectively adjusted to the balance
that would have existed if the equity method
had been in effect for prior years.
B. Carried over as is with no adjustment
necessary.
C. Carried over at fair value on date of transfer.
D. Adjusted to reflect amortized cost..
Which of the following is not true about
accounting for investments under IAS No. 31
under IFRS?
A. IFRS allows proportionate consolidation of
investments where two or more investors have
joint control.
B. IFRS is more restrictive than U.S. GAAP
concerning when an investor can elect the fair
value option.
C. IFRS requires that the accounting policies of
an investee be adjusted to correspond to those of
the investor when applying the equity method.
D. IFRS does not allow use of the equity
method where two or more investors have
joint control.
Which of the following is not true about the fair
value option?
A. The fair value option is irrevocable.
B. The fair value option must be elected for
all shares of an investment in a particular
company.
C. Electing the fair value option for held-to-
maturity investments simply reclassifies those
investments as trading securities.
D. All of the above are true.
Which of the following is not true when the fair
value option is elected for an investment that
would normally be accounted for under the
equity method?  to sell the investment:
A. No journal entry need be made to recognize
the investor's portion of the investee's net
income.
B. Unrealized gains and losses on that
investment are recognized in net income.
C. No journal entry need be made to
recognize the investor's portion of dividends
paid by the investee.
D. All of the above are true.
Under IAS No. 39, which is not a category for
accounting for investments?
A. Fair value through profit and loss.
B. Fair value through other comprehensive
income.
C. Held-to-maturity.
D. Available-for-sale.
Under IFRS No. 9, which is not a category for
accounting for investments?
A. Fair value through profit and loss.
B. Fair value through other comprehensive
income.
C. Held-to-maturity.
D. Amortized cost.
Which of the following is not true about the "fair
value through profit and loss" approach for
accounting for investments under IFRS?
A. Allowed under both IAS No. 39 and IFRS No. 9.
B. Includes unrealized gains in earnings.
C. Requires reclassification of realized gains
from other comprehensive income.
D. Not vulnerable to other-than-temporary
impairments.
Which of the following is not true about the "fair
value through other comprehensive income"
approach for accounting for investments under
IFRS No. 9?
A. Allowed for debt investments.
B. Includes unrealized gains in other
comprehensive income.
C. Does not require reclassification of realized
gains from other comprehensive income.
D. Allowed for equity investments.
If the fair value of a held-to-maturity investment
declines for a reason that is viewed as "other
than temporary" because the company intends
A. The investment is not written down to fair
value.
B. The investment is written down to fair
value, and the entire impairment loss is
recognized in net income.
C. The investment is written down to fair value,
and the entire impairment loss is recognized in
accumulated other comprehensive income.
D. The investment is treated the same way it
would be treated if the decline in fair value was
viewed as temporary.
If the fair value of a held-to-maturity investment
declines for a reason that is viewed as "other
than temporary" because the company has
incurred a credit loss on the investment:
A. The investment is written down to fair value,
and only the noncredit-loss component of the
impairment loss is recognized in net income.
B. The investment is written down to fair value,
and the entire impairment loss is recognized in
net income.
C. The investment is written down to fair
value, and only the credit-loss component of
the impairment loss is recognized in net
income.
D. The investment is written down to fair value,
but none of the impairment loss is recognized in
net income.
If the fair value of a trading security declines for
a reason that is viewed as "other than
temporary":
A. The investment is not written down to fair
value.
B. The investment is written down to fair value,
and an "impairment loss" is recognized in net
income.
C. The investment is written down to fair value,
and the impairment loss is recognized in
accumulated other comprehensive income.
D. The investment is treated the same way it
would be treated if the decline in fair value
was viewed as temporary.
When an impairment of an equity investment
that is classified as available for sale occurs for a
reason that is judged to be "other than
temporary," the investment is written down to
its fair value and the amount of the write-down
is:
A. Recorded as a deferred credit.
B. Included in income.
C. Recorded as deferred asset.
D. Treated as unrealized.
An OTT impairment for an equity investment is
recognized in net income if fair value declines
below the investment's cost and:
A. The company has incurred noncredit losses.
B. The company does not have the intent and
ability to hold the investment until fair value
recovers.
C. The company lacks intent to hold the
investment until fair value recovers.
D. The company has incurred credit losses.
If the fair value of a debt investment that is
classified as an available-for-sale investment
declines for a reason that is viewed as "other
than temporary" because it is viewed as "more
likely than not" that the investor will be required
to sell the investment prior to recovering the
amortized cost of the investment less any credit
losses arising in the current year:
A. The investment is not written down to fair
value.
B. The investment is written down to fair
value, and the impairment loss is recognized
in net income.
C. The investment is written down to fair value,
and the impairment loss is recognized in
accumulated other comprehensive income.
D. The investment is written down to fair value,
and only the noncredit loss is included in net
income.
If the fair value of a debt investment that is
classified as an available-for-sale investment
declines for a reason that is viewed as "other
than temporary" because the company has
incurred a credit loss on the investment:
A. The investment is written down to fair value,
and only the noncredit-loss component of the
imparment loss is recognized in net income.
B. The investment is written down to fair value,
and the entir impairment loss is recognized in
net income.
C. The investment is written down to fair
value, and only the credit-loss component of
the impairment loss is recognized in net
income.
D. The investment is written down to fair value,
but none of the impairment loss is recognized in
net income.
Which of the following is not a reason to
consider a decline in the fair value of a debt
investment to be "other than temporary"?
A. The investor determines that a credit loss
exists on the investment.
B. The investor intends to sell the investment.
C. The investor believes it is "more likely than
not" that the investor will be required to sell the
investment prior to recovering the amortized
cost of the investment less any credit losses
arising in the current year.
D. The investor intends to hold the
investment to maturity.
Which of the following is not an example of a
derivative?
A. Interest rate swap.
B. Cash.
C. Stock option.
D. Forward contract.
Which of the following is not true about
derivatives?
A. Large losses on derivative investments have
been reported in the press.
B. Derivatives are so named because their value
is derived from some underlying measure.
C. Derivatives are useful instruments for
managing risk.
D. Accounting for derivatives is fully resolved
and no additional rules or interpretations are
likely.
The journal entries for the _____________, ___________,
and __________ approaches under the proposed
ASU correspond to those used for the held-to-
maturity, trading security, and available-for-sale
approaches, respectively, in current GAAP.
A. FV-NI, FV-OCI, amortized cost
B. FV-OCI, amortized cost, FV-NI
C. Amortized cost, FV-NI, FV-OCI
D. The journal entries do not correspond.
Which of the following is not true about
recognizing unrealized gains and losses on
equity investments?
A. If the investor does not have significant
influence over the investee, the equity
investment is always accounted for as FV-NI.
B. The investor can use the FV-OCI approach
if the equity is held for purposes of
maximizing return on investment or
managing risk.
C. The investor will recognize unrealized gains
and losses in earnings in the period in which fair
value of the investment changes.
D. If the investor has significant influence but not
control over the investee, the equity method is
used.
Which of the following is a criterion for a debt
instrument to be viewed as having a lending or
customer financing business purpose?
A. Debt instrument is held for the purpose of
being sold.
B. Investor's purpose is collecting cash flows.
C. Investor cannot renegotiate, sell, or settle the
debt to minimize losses due to deteriorating
credit quality.
D. Investment is actively managed internally on a
fair value basis but doesn't qualify for FV-OCI.
Which of the following is not a characteristic of
"simple" debt?
A. Investor's purpose is collecting cash flows.
B. An amount of principal (adjusted for premium
or discount) is transferred to the borrower at
issuance that will be returned to the debt holder
when the debt matures.
C. The debt instrument is not a derivative.
D. The debt cannot be prepaid or settled in a way
that the investor does not recover substantially
all of its original investment unless that is what
the investor chooses..
If a debt instrument is viewed as complex, which
of the following is most likely not true?
A. The debt is always classified as FV-NI.
B. The investor will recognize large unrealized
losses in the period in which fair value of the
debt changes.
C. The debt may be accounted for at FV-OCI,
depending on the investor's business
purpose for holding the debt.
D. The debt may be a derivative.
Brown, Inc., purchased an equity investment for
the purposes of maximizing its return on Stevens have to recognize an impairment loss on
investment. How should Brown account for the the debt?
investment? A. Yes.
A. Amortized cost. B. No, because the debt is accounted for at FV-NI,
B. FV-NI. so any fair value changes are already recognized
C. FV-OCI. as unrealized gains and losses.
D. Cost method. C. No, because the debt is accounted for at
amortized cost, so fair value changes are not
Cortez Associates purchased a debt investment included in earnings.
that meets the characteristics of a simple debt D. Insufficient information is available to answer
instrument. Cortez intends to hold the debt for this question.
purposes of maximizing its return on
investment. How should Cortez account for the Which of the following is not true about how the
investment? proposed ASU treats impairments?
A. Amortized cost. A. The objective is to calculate expected losses of
B. FV-NI. contractual cash flows.
C. FV-OCI. B. Losses are discounted for the time value of
D. Cost method. money.
C. Different buckets capture differences in the
Jackson & Sons purchased a debt investment that deterioration of credit quality.
meets the characteristics of a simple debt D. Losses always are estimated for the
instrument. Jackson is holding the debt for resale remaining life of the investment.
in the near future. How should Jackson account
for the investment?
A. Amortized cost.
B. FV-NI.
C. FV-OCI.
D. Cost method.

Cain Corporation owns $10,000 of IBM bonds.

Some bonds are held for immediate sale, but
others are held in terms of long-term
appreciation. Which of the following is true
about how Cain should account for this
investment?
A. Cain should account for all the bonds as FV-NI.
B. Cain should account for all the bonds as FV-
OCI.
C. Cain should determine the primary business
purpose of the bonds, and account for the bonds
according to that purpose, as all of a particular
type of debt should be accounted for the same
way.
D. Cain should determine the business
purpose of each bond, and account for it
according to that business purpose.

The Stevens Company purchased a debt

investment that meets the characteristics of a
simple debt instrument. Stevens is holding the
debt for purposes of managing risk. Might