Categories for accounting with investments

Part 1
1. General Product, Inc., shipped 100 million coupons in products it sold in 2011. The coupons are redeemable for thirty cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2012. There were 45 million coupons redeemed in 2011, and 30 million redeemed in 2012.
What was General’s coupon promotion expense in 2011?
A. $7.5 million
B. $21.0 million
C. $13.5 million
D. $30.0 million

2. Which of the following is not true about the fair value option?
A. Electing the fair value option for held-to-maturity investments simply reclassifies those investments as trading securities.
B. All of these statements are true.
C. The fair value option is irrevocable.
D. The fair value option must be elected for all shares of an investment in a particular company.

3. Beresford, Inc., purchased several investment securities during 2008, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values aren’t considered permanent.
Held to maturity securities: Fair Value Fair Value Amortized Amortized
ABC Co. Bonds 12/31/10 12/31/11 Cost 12/31/10 Cost 12/31/11
$375,000 $400,000 $367,500 $360,000
Fair Value Fair Value
Trading securities: 12/31/10 12/31/11 Cost
DEF Co. Stock $48,000 $59,500 $66,000
GEH Inc. Stock $47,000 $77,000 $39,000
IJK Inc. Stock $44,000 $38,500 $32,900
Fair Value Fair Value
Available for Sale Securities 12/31/10 12/31/11 Cost
LMN Co. Stock $130,500 $150,400 $140,000
What would be the balance in Beresford’s accumulated other comprehensive income with respect to these investments in its 12/31/11 balance sheet (ignore taxes)?
A. $26,500
B. $55,100
C. $50,200
D. $10,400

4. Smith buys and sells securities which it typically classifies as available for sale. On December 15, 2011,
Smith purchased $500,000 of Jones shares, and elected the fair value option to account for the Jones investment. As of December 31, 2011, the Jones shares had a fair value of $525,000. In the 2011 financial statements, Smith will show (ignore taxes)
A. investment income of $25,000 in its income statement.
B. other comprehensive income of $25,000.
C. an investment in Jones of $500,000.
D. accumulated other comprehensive income of $525,000.

5. Goofy, Inc., bought 15,000 shares of Crazy Co.’s stock for $150,000 on May 5, 2010, and classified the stock as available for sale. The market value of the stock declined to $118,000 by December 31, 2010.
Goofy reclassified this investment as trading securities in December of 2011 when the market value had risen to $125,000. What effect on 2011 income should be reported by Goofy for the Crazy Co. shares?
A. $0
B. $32,000 net loss
C. $25,000 net loss
D. $7,000 net gain

6. On December 31, 2011, L, Inc., had a $1,500,000 note payable outstanding, due July 31, 2012. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23,
2012. In February 2012, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2012. On March 13, 2012, L issued its 2011 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2011, balance sheet?
A. $500,000
B. $0
C. $1,000,000
D. $1,500,000

7. Hawk Corporation purchased 10,000 shares of Diamond Corporation stock in 2008 for $50 per share and classified the investment as securities available for sale. Diamond’s market value was $60 per share on December 31, 2009 and $65 on December 31, 2010. During 2011, Hawk sold all of its Diamond stock at $70 per share. In its 2011 income statement, Hawk would report a gain of
A. $150,000.
B. $200,000.
C. $50,000.
D. $300,000.

8. Hope Company bought 30% of Faith Corporation in 2011. Hope’s purchase price equaled 30% of the book value of Faith’s net identifiable assets, which also equaled 30% of the fair value of Faith. During 2011, Faith reported net income in the amount of $4,000,000 and declared and paid dividends in the amount of $500,000. Hope mistakenly accounted for the investment as available for sale instead of using the equity method. What effect would this error have on the investment account and net income, respectively, for 2011?
A. Understated by $1,200,000; overstated by $1,050,000
B. Overstated by $1,200,000; overstated by $1,200,000
C. Understated by $1,050,000; understated by $1,050,000
D. Overstated by $1,050,000; understated by $1,050,000

9. 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 as of the reclassification date.
C. reclassify the investment as held to maturity, but there would be no income effect.
D. 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.

10. On January 1, 2011, Nana Company paid $100,000 for 8,000 shares of Papa Company common stock. These securities were classified as trading securities. The ownership in Papa Company is 10%. Papa reported net income of $52,000 for the year ended December 31, 2011. The fair value of the Papa stock on that date was $45 per share. What amount will be reported in the balance sheet of Nana Company for the investment in Papa at December 31, 2011?
A. $315,600
B. $300,000
C. $360,000
D. $284,400

11. B Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2011, B’s unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2011. B’s employees earn an average of $200 per day. In its December 31, 2011, balance sheet, what amount of liability for compensated absences is B required to report?
A. $90,000
B. $144,000
C. $60,000
D. $84,000

12. On January 1, 2011, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2011, G’s employees each earned an average of $800 per week. 500 vacation weeks earned in 2011 were not taken during 2011. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2012. What is the amount of G’s 2012 wages expense related to 2011 vacation time?
A. $420,000
B. $400,000
C. $20,000
D. $0