Trading securities are reported at fair value, and all unrealized holding gains and losses
are recognized in earnings.
Available‐for‐sale securities are reported at fair value. However, unrealized holding gains
and losses for these securities are not included in periodic net income; rather, they are
reported as a component of other comprehensive income.
Held‐to‐maturity securities are reported at amortized cost, whereby discounts and
premiums are amortized over the remaining
Take Test: THIRD PARTIAL EXAM
CHAPTERS 8-9-10
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Test Information
Instructions
Descri This exam consists of four (4) essay and 25 multiple choice questions from the
ption following chapters:
Chapter 8: Working Capital
Chapter 9: Long-Term Assets I: Property, Plant, and Equipment
Chapter 10: Long-Term Assets II: Investments and Intangibles
Answer each question completely and in you own words (either in English or in
Spanish). You have one opportunity of four hours to answer it. When the tim
e is over, the exam will be submitted automatically.
Total value: 115 points
Instru
ctions
Time This test has a time limit of 4 hours.This test will save and submit automatically when the
d Test time expires.
Warnings appear when half the time, 5 minutes, 1 minute, and 30 seconds remain.
Multi Not allowed. This test can only be taken once.
ple
Attem
pts
Force This test can be saved and resumed at any point until time has expired. The timer will
Comp continue to run if you leave the test.
letion
Remaining Time:
3 hours, 51 minutes, 52 seconds.
Question 1
1. FASB ASC 320 requires companies to assign their portfolio of investments securities into
(1) trading securities, (2) securities available for sale, and (3) held-to-maturity securities.
Required:
1. Define each of these categories of securities and discuss the accounting treatment
for each category.
2. Discuss how companies are required to assign each category of securities into its
current and noncurrent portions.
3. Some individuals maintain that the only proper accounting treatment for all
marketable securities is current value. Others maintain that this treatment might
allow companies to "manage earnings." Discuss the arguments for each position.
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10 points
Question 2
1. The City of Martinsville donated land to Essex Company. The fair value of the land was
$100,000. The land had cost the city $45,000.
Required:
1. Describe the current accounting treatment fo the land. Include in your answer the
amount at which the land would be valued by Essex Company and any other
income statement or balance sheet effect.
2. Under the recommendations outlined in SFAS No. 116 (see FASB ASC 720), the
FASB required that donated assets be recorded at fair value and that revenue be
recognized equivalent to the amount recorded for a donation.
a. Defend the FASB's position. In your anser, refer to the conceptual
framework.
b. Criticize theh FASB's position. In your answer, refer to the conceptual
framework.
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10 points
Question 3
1. Property, plant, and equipment (plant assets) generally represent a material portion of the
total assets of most companies. Accounting for the acquisition and usage of such assets is
therefore an important part of the financial reporting process.
Required:
1. Distinguish between revenue and capital expenditures, and explain why this
distinction is important.
Capital Expenditures the cost incurred is “ordinary and necessary” if the
expenditure “prolongs future life” is then capitalized. This is important for the correct
allocation of the expense against the revenues
Briefly define depreciation as used in accounting.
It is the allocation of the investment costs through time
2. Identify the factors that are relevant in determining the annual depreciation, and
explain whether these factors are determined objectively or whether they are
based on judgement.
a) Depreciation base to be used for the asset. Objectively determined by the
purchase transaction
b) Asset’s useful life. Professional judgment based on estimations
c) Method of cost apportionment will be used. Professional judgment
based on estimations
3. Explain why depreciation is shown as an adjustment to cash in the operations
section of the statement of cash flows.
4.
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10 points
Question 4
1. Victoria Company has both current and noncurrent equity securities portfolios. All of the
equity securities have readily determinable fair values. Those equity securities in the
current portfolio are considered trading securities. At the beginning of the year, the
market value of each security exceeded cost.
During the year, some of the securities increased in value. These securities (some in the
current portfolio and some in the long-term portfolio) were sold. At the end of the year,
the market value of each of the remaining securities was less than original cost.
Victoria also has invetsments in long-term bonds, which the company intends to hold to
maturity. All of the bonds were purchased at face value. During the year, some of these
bonds were called by the issuer before maturity. In each case, the call price was in excess
of par value. Three months before the end of th eyear, additional similar bonds were
purchased for face value plus 2 month's accrued interest.
Required:
1. How should Victoria aacount for the sale of the securities from each portfolio?
Why?
2. How should Victoria account for the marketable equity securities portfolios at
year-end? Why?
3. How should Victoria account for the disposition before their maturity of the long-
term bonds called by the isuer? Why?
4. How shoukd Victoria report the purchase of the additional similar bonds at the
date of acquisition? Why?
5.
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10 points
Question 5
1. Of the following items, the one that should be classified as a current asset is
Trade installment receivables normally collectible in 18 months
Cash designated for the redemption of callable preferred stock
Cash surrender value of a life insurance policy of which the company is
beneficiary
A deposit on machinery ordered, delivery of which will be made within six
months
3 points
Question 6
1. The advantage of relating a company’s bad debt experience to its accounts
receivable is that this approach
Gives a reasonable correct statement of receivables in the balance sheet
Relates bad debts expense to the period of sale
Is the only generally accepted method for valuing accounts receivable
Makes estimates of uncollectible accounts unnecessary
3 points
Question 7
1. 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
Most short-term receivables are not interest bearing
The allowance for uncollectible accounts includes a discount element
The amount of the discount is not material
Most receivables can be sold to a bank or factor
3 points
Question 8
1. An inventory pricing procedure in which the oldest costs incurred rarely have an
effect on the ending inventory valuation is
FIFO
LIFO
Conventional retail
Weighted average
3 points
Question 9
1. When inventory declines in value below original (historical) cost, and this decline
is considered other than temporary, what is the maximum amount that the
inventory can be valued at?
Sales price net of conversion costs
Net realizable value
Historical cost
Net realizable value reduced by a normal profit margin
3 points
Question 10
1. The original cost of an inventory item is above the replacement cost. The
replacement cost is below the net realizable value less the normal profit margin.
Under the lower of cost or market method the inventory item should be priced at
its
Original cost
Replacement cost
Net realizable value
Net realizable value less the normal profit margin
3 points
Question 11
1. Liquidity is the ability
To increase net assets through regular operations
To generate cash from sources other than regular operations
To convert existing assets into cash
Of financial statement users to predict a company’s cash flows
3 points
Question 12
1. Liquidity ratios measures the
Operating success of a company over a period of time
The ability of a company to survive over a long period of time
The short-term ability of a company to pay its maturing obligations and to meet
unexpected needs for cash
The number of times interest is earned
3 points
Question 13
1. Working capital is a measure of
Financial flexibility
Liquidity.
Profitability.
Solvency.
3 points
Question 14
1. A common measure of liquidity is
Return on assets.
Accounts receivable turnover.
Profit margin.
Debt to equity.
3 points
Question 15
1. When a closely held corporation issues preferred stock for land, the land should be
recorded at the
Total par value of the stock issued
Total book value of the stock issued
Appraised value of the land
Total liquidating value of the stock issued
3 points
Question 16
1. Property, plant, and equipment are conventionally presented in the balance sheet at
Replacement cost less accumulated depreciation
Historical cost less salvage value
Original cost adjusted for general price level changes
Acquisition cost less depreciated portion thereof
3 points
Question 17
1. As generally used in accounting, depreciation
Is a process of asset valuation for balance sheet purposes
Applies only to long-lived intangible assets
Is used to indicate a decline in market value of a long-lived asset
Is an accounting process that allocates long-lived asset cost to accounting periods
3 points
Question 18
1. For income statement purposes, depreciation is a variable expense if the depreciation
method used for book purposes is
Units of production
Straight line
Sum-of-the-year’s-digits
Declining balance
3 points
Question 19
1. When a company purchases land with a building on it and immediately tears down the
building so that the land can be used for the construction of a plant, the cost incurred to
tear down the building should be
Expensed as incurred
Added to the cost of the plant
Added to the cost of the land
Amortized over the estimated time period between the tearing down of the
building and the completion of the plant
3 points
Question 20
1. The theoretical justification for reporting depreciation expense is
Depreciation expense represents a decrease in the value of the asset that has
occurred during the accounting period.
Depreciation expense represents the impairment of the asset that has occurred
during the accounting period.
Depreciation expense represents the unrealized loss that has been incurred by
using the asset during the accounting period.
Depreciation expense represents the allocation of the historical cost of the asset
that has been applied to the accounting period.
3 points
Question 21
1. Under the equity method of accounting for investments, an investor recognizes its share
of the earnings in the period in which the
Investor sells the investment
Investee declares a dividend
Investee pays a dividend
Earnings are reported by the investee in its financial statements
3 points
Question 22
1. On January 15, 2005, a corporation was granted a patent on a product. On January 2,
2013, to protect its patent, the corporation purchased a patent on a competing product
the originally was issued on January 10, 2011. Because of its unique plant, the
corporation does not feel the competing patent can be used in producing a product. The
cost of the competing patent should be
Amortized over a maximum period of 17 years
Amortized over a maximum period of 13 years
Amortized over a maximum period of 9 years
Expensed in 2013
3 points
Question 23
1. Pacer Company purchased 300 of the 1, 000 outstanding shares of Queen Company’s
common stock for $80,000 on January 2, 2012. During 2013, Queen Company declared
dividends of $8,000 and reported earnings for the year of $20,000.If Pacer Company
uses the equity method of accounting for its investment in Queen Company, its
Investment in Queen Company account at December 31, 2013 should be
$100, 000
$88,000
$83,600
$80,000
3 points
Question 24
1. A net unrealized loss on a company’s long-term portfolio of available for sale securities
should be reflected in the current financial statements as
An extraordinary item shown as a direct reduction from retained earnings
A current loss resulting from holding marketable equity securities
A footnote or parenthetical disclosure only
A component of other comprehensive income
3 points
Question 25
1. Goodwill is an intangible asset
Goodwill is an intangible asset
That is recorded when the company has projected earnings in excess of earnings
expected for an investment in a similar company in the same industry.
That is reviewed for impairment when circumstances indicate that impairment may
have occurred.
That is reviewed annually to determine whether impairment has occurred.
3 points
Question 26
1. A trading security is measured at fair value on the balance sheet date and reported as
A current asset, and changes in fair value are reported in earnings as unrealized
gains and losses.
A current asset, and changes in fair value are reported in earnings as realized
gains and losses.
Either a current or noncurrent asset depending on whether they meet the definition
of a current asset.
A current asset, and changes in fair value are reported in accumulated other
comprehensive income as unrealized gains and losses.
3 points
Question 27
1. The economic concept of income would require that an investment in the common stock
of another entity be
Reported in the balance sheet at historical cost and that only realized gains and
losses be reported in earnings.
Reported in the balance sheet at historical cost and that unrealized gains and
losses be reported in earnings.
Reported in the balance sheet at fair value and that unrealized gains and losses
be reported in earnings.
Reported in the balance sheet at fair value and that unrealized gains and losses
be reported in other comprehensive income.
3 points
Question 28
1. Under the fair value option, an investment in the common stock of another entity will be
Reported as a current asset
Reported as a noncurrent asset
Reported as either a current or noncurrent asset depending on managerial intent.
Reported as a current asset only if it was not previously reported as an equity
method investment.
3 points
Question 29
1. When a company reports goodwill in its balance sheet, we know that
It was internally generated because the company has earnings in excess of those
of other companies in the industry.
The company purchased it.
The company will be reporting amortization expense for the goodwill.
The company will not be reporting an impairment loss for the goodwill.
3 points
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