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21.     Which of the following is not generally correct about recording a sale of a debt security before maturity date?
a.     Accrued interest will be received by the seller even though it is not an interest payment date.
b.     An entry must be made to amortize a discount to the date of sale.
c.     The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.
          d.     A gain or loss on the sale is not extraordinary.

     22.     When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
          a.     The investor should always use the equity method to account for its investment.
b.     The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
c.     The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
          d.     The investor should always use the fair value method to account for its investment.
     23.     A reclassification adjustment is reported in the
          a.     income statement as an Other Revenue or Expense.
b.     stockholders’ equity section of the balance sheet.
c.     statement of comprehensive income as other comprehensive income.
d.     statement of stockholders’ equity.

     24.     If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the
          a.     cost method.
          b.     fair value method.
          c.     divesture method.
          d.     equity method.

     25.     Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as
          a.     a reduction of the carrying value of the investment.
          b.     additional paid-in capital.
          c.     an addition to the carrying value of the investment.
          d.     dividend income.

     26.     Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
          a.     investor sells the investment.
          b.     investee declares a dividend.
          c.     investee pays a dividend.
          d.     earnings are reported by the investee in its financial statements.

     27.     Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2004, Marin had net earnings of $300,000 and paid dividends of $30,000. Dane mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?
          a.     Understate, overstate, overstate
          b.     Overstate, understate, understate
          c.     Overstate, overstate, overstate
          d.     Understate, understate, understate

     *28.     All of the following statements regarding accounting for derivatives are correct except that
          a.     they should be recognized in the financial statements as assets and liabilities.
          b.     they should be reported at fair value.
          c.     gains and losses resulting from speculation should be deferred.
          d.     gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.

     *29.     All of the following are characteristics of a derivative financial instrument except the instrument
          a.     has one or more underlyings and an identified payment provision.
          b.     requires a large investment at the inception of the contract.
          c.     requires or permits net settlement.
          d.     All of these are characteristics.

     *30.     Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called
          a.     arbitrageurs.
          b.     gamblers.
          c.     hedgers.
          d.     speculators.

     *31.     The accounting for fair value hedges records the derivative at its
          a.     amortized cost.
          b.     carrying value.
c.     fair value.
d.     historical cost.

     *32.     Gains or losses on cash flow hedges are
          a.     ignored completely.
          b.     recorded in equity, as part of other comprehensive income.
          c.     reported directly in net income.
          d.     reported directly in retained earnings.

     *33.     An option to convert a convertible bond into shares of common stock is a(n)
          a.     embedded derivative.
          b.     host security.
          c.     hybrid security.
          d.     fair value hedge.

     *34.     All of the following are requirements for disclosures related to financial instruments except
          a.     disclosing the fair value and related carrying value of the instruments.
          b.     distinguishing between financial instruments held or issued for purposes other than trading.
          c.     combining or netting the fair value of separate financial instruments.
          d.     displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.

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