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Chapter12: Investments

CPA and CMA Review Questions

CPA Exam Questions

The following questions are 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.

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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:

 LO2

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:

 

 LO3

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Differences between cost and market values are considered to be temporary. The decline in market value was properly accounted for at December 31, 2010. At December 31, 2011, what is the net unrealized holding gain or loss to be reported as:

p. 677

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3.

 

The following information was extracted from Gil Co.'s December 31, 2011, balance sheet:

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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

 

 LO3

4.

 

On both December 31, 2010, and December 31, 2011, 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 2010 but other-than-temporary in 2011. 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 2011 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.

 

 LO3

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?

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 LO5

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:

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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.

 

 LO5

7.

 

Park Co. uses the equity method to account for its January 1, 2011, purchase of Tun Inc.'s common stock. On January 1, 2011, 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 2011 earnings?

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 LO6

p. 678

8.

 

On January 2, 2011, 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 2011, and paid dividends of $150,000. In its December 31, 2011, balance sheet, what amount should Well report as investment in Rea?

 

 LO4

a.

 

$435,000

b.

 

$450,000

c.

 

$400,000

d.

 

$385,000

CMA Exam Questions

The following questions dealing with investments are adapted from questions that previously appeared on Certified Management Accountant (CMA) examinations. The CMA designation sponsored by the Institute of Management Accountants (www.imanet.org) provides members with an objective measure of knowledge and competence in the field of management accounting. Determine the response that best completes the statements or questions.

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1.

 

An investment in available-for-sale securities is valued on the balance sheet at

a.

 

The cost to acquire the asset.

b.

 

Accumulated income minus accumulated dividends since acquisition.

c.

 

Fair value.

d.

 

The par or stated value of the securities.

 LO3

Questions 2 and 3 are based on the following information concerning Monahan Company's portfolio of debt securities at May 31, year 2 and May 31, year 3. All of the debt securities were purchased by Monahan during June, year 1. Prior to June, year 1, Monahan had no investments in debt or equity securities.

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2.

 

Assuming that the above securities are properly classified as available-for-sale securities under U.S. GAAP, the unrealized holding gain or loss as of May 31, year 3 would be

 LO3

a.

 

recognized as an $8,005 unrealized holding gain on the income statement.

b.

 

recognized in accumulated other comprehensive income by a year-end credit of $8,005.

c.

 

recognized in accumulated other comprehensive income by a year-end debit of $8,005.

d.

 

not recognized.

3.

 

Assuming that the above securities are properly classified as held-to-maturity securities under U.S. GAAP, the unrealized holding gain or loss as of May 31, year 3 would be

a.

 

recognized as an $8,005 unrealized holding gain on the income statement.

b.

 

recognized in accumulated other comprehensive income by a year-end credit of $8,005.

c.

 

recognized in accumulated other comprehensive income by a year-end debit of $8,005.

d.

 

not recognized.

 

 LO1

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