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41.     When investments in debt securities are purchased between interest payment dates, preferably the
a.     securities account should include accrued interest.
b.     accrued interest is debited to Interest Expense.
c.     accrued interest is debited to Interest Revenue.
d.     accrued interest is debited to Interest Receivable.

     42.     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.

     S43.     When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment
a.     by using the equity method.
b.     by using the fair value method.
c.     by using the effective interest method.
d.     by consolidation.

     S44.     Bista Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
          Fair Value Method     Equity Method
a.          No Effect     Decrease
b.          Increase     Decrease
c.          No Effect     No Effect
d.          Decrease     No Effect

     P45.     An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as
          Fair Value Method     Equity Method
a.          Income     Income
b.          A reduction of the investment     A reduction of the investment
c.          Income     A reduction of the investment
d.     A reduction of the investment     Income


     46.     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.

     47.     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.

     48.     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.

     49.     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.

     50.     Dane, Inc., owns 35% of Marin Corporation. During the calendar year 2007, 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

     51.     An unrealized holding loss on a company's available-for-sale securities should be reflected in the current financial statements as
a.     an extraordinary item shown as a direct reduction from retained earnings.
b.     a current loss resulting from holding securities.
c.     a note or parenthetical disclosure only.
d.     other comprehensive income and deducted in the equity section of the balance sheet.


     52.     An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as
a.     an extraordinary item shown as a direct increase to retained earnings.
b.     a current gain resulting from holding securities.
c.     a note or parenthetical disclosure only.
d.     other comprehensive income and included in the equity section of the balance sheet.

     53.     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.

     54.     When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be
a.     its original cost.
b.     its fair value at the date of the transfer.
c.     the lower of its original cost or its fair value at the date of the transfer.
d.     the higher of its original cost or its fair value at the date of the transfer.

     55.     When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be
a.     its original cost.
b.     its fair value at the date of the transfer.
c.     the higher of its original cost or its fair value at the date of the transfer.
d.     the lower of its original cost or its fair value at the date of the transfer.

     P56.     A debt security is transferred from one category to another. Generally acceptable accounting principles require that for this particular reclassification (1) the security be transferred at fair value at the date of transfer, and (2) the unrealized gain or loss at the date of transfer currently carried as a separate component of stockholders' equity be amortized over the remaining life of the security. What type of transfer is being described?
a.     Transfer from trading to available-for-sale
b.     Transfer from available-for-sale to trading
c.     Transfer from held-to-maturity to available-for-sale
d.     Transfer from available-for-sale to held-to-maturity

     *57.     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.

     *58.     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.
     *59.     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.

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

     *61.     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.

     *62.     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.

     *63.     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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