Q: A company buys 10,000 shares at $$15 each, receives 0.50 $$per share in dividends, and the shares trade at $18 at year-end. If classified as trading securities, what is the total impact on income?

Total impact = $$(18-15) \times 10,000 + 0.50 \times 10,000 = 30,000 + 5,000 = 35,000$$

Question 1

Which of the following best describes a 'trading security' in financial accounting?

Accepted Answer

A debt or equity security held for resale in the short term and reported at fair value, with unrealized gains and losses recorded in the income statement.

Question 2

A company purchases bonds with the intention to hold them until maturity. How should these bonds be classified and measured?

Accepted Answer

Held-to-maturity; measured at amortized cost.

Question 3

Which statement about unrealized gains and losses for available-for-sale securities is correct?

Accepted Answer

They are included in the comprehensive income statement and reported in accumulated other comprehensive income.

Question 4

A company buys 10,000 shares at $$15 each, receives 0.50 $$per share in dividends, and the shares trade at $18 at year-end. If classified as trading securities, what is the total impact on income?

Accepted Answer

Total impact = $$(18-15) 	imes 10,000 + 0.50 	imes 10,000 = 30,000 + 5,000 = 35,000$$

Question 5

Which of the following is NOT a characteristic of strategic investments?

Accepted Answer

They are always held for short-term resale.

Question 6

Under the equity method, how is the investment account affected when the investee reports net income and pays dividends?

Accepted Answer

Increased by the investor's share of net income and decreased by dividends received.

Question 7

Which of the following best describes the accounting treatment for a subsidiary?

Accepted Answer

Consolidated financial statements aggregate and eliminate intercompany transactions between the parent and subsidiary.

Question 8

A company owns 25% of another company and uses the equity method. The investee earns $$80,000 and pays 16$$,000 in dividends. What is the change in the investment account?

Accepted Answer

Increase by $$20,000 (share of earnings), decrease by 4$$,000 (dividends): net increase $16,000.

Question 9

Which of the following is true regarding the reporting of dividends received from investments?

Accepted Answer

Dividends received are reported in the income statement regardless of classification.

Question 10

Which measurement basis is used for 'held-to-maturity' investments?

Accepted Answer

Amortized cost

Question 11

A company has no specific trading intention for a debt security. According to the classification chart, how should this security be classified?

Accepted Answer

Available for sale

Question 12

Which of the following is a real-world example of a joint venture?

Accepted Answer

Sony-Ericsson partnership

Question 13

What is the main difference between the income statement and the comprehensive income statement?

Accepted Answer

The comprehensive income statement includes items not recognized in profit or loss, such as unrealized gains on available-for-sale securities.

Question 14

If a company intends to trade a security over the short term, which accounting classification should it use?

Accepted Answer

Held for trading

Question 15

Which of the following is NOT reported at fair value?

Accepted Answer

Held-to-maturity investments

Question 16

A company purchases a 60% interest in another company. How should this investment be classified?

Accepted Answer

Subsidiary

Question 17

Which of the following is a characteristic of joint operations?

Accepted Answer

Joint control of assets and joint obligation for liabilities, but not a separate legal entity.

Question 18

Which of the following would be classified as an associate?

Accepted Answer

An entity in which the investor has significant influence, usually with 20-50% ownership.

Question 19

Which of the following is true about the elimination process in consolidated financial statements?

Accepted Answer

Intercompany transactions and accounts between the parent and subsidiaries are eliminated.

Question 20

A company records an investment at acquisition cost, increases it by its share of investee earnings, and decreases it by dividends received. Which accounting method is this?

Accepted Answer

Equity method

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