mid02wk06s

mid02wk06s - ECON 136B MIDTERM#2 SPRING 2006 MULTIPLE...

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Unformatted text preview: ECON 136B MIDTERM#2 SPRING 2006 MULTIPLE CHOICE (40MINS) 1.Held—to—maturity securities are reported at a.acquisition cost. b.acquisition cost plus amortization of a discount. c.acquisition cost plus amortization of a premium. d. fair value. 2.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 thetransfer. 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. 3. Dane, lnc., 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.0verstate, understate, understate c.0verstate, overstate, overstate d.Understate, understate, understate 4. On its December 31, 2003, balance sheet, Quinn Co. reported its investment in trading securities, which had cost $360,000, at fair value of $330,000. At December 31, 2004, the fair value of the securities was $355,000. What should Quinn report on its 2004 income statement as a result of the increase in fair value of the investments in 2004? a.$0. b.Unrea|ized loss of $5,000. c. Realized gain of $25,000. d.Unrealized gain of $25,000 5. On its December 31, 2003, balance sheet, Quinn Co. reported its investment in available-for—sale securities, which had cost $360,000, at fair value of $330,000. At December 31, 2004, the securities were sold for $355,000. What should Quinn report on its 2004 income statement as a result of the increase in fair value of the investments in 2004? ' a.$0. b.Unrea|ized loss of $5,000. c.Realized gain of $25,000. d.Unrealized gain of $25,000 6. On its December 31, 2003, patanpe sheet, Quinn Co. reported its investment in ayailable-for—sale securities, which had cpst $360,000, at fair value of $330,000. At December 31, 2004,'the fair value of the schrities was $355,000. What should Quinn report on its 2004 balance sheet as a result of the increase in fair value of the investments in 2004? ' .$0. .Unrealized loss of $5,000. b.Realized gain of $25,000. d.Unrealized gain of $25,000 Karter 09mpany purchased 200 of the 1,000 outstanding shares of Flynn Company's common stock for $180,000 on January 2, 20014. During 2004, Flynn Company declared. dividends of $30,000 and reported earnings for the year of $120,000. Hf Karter Company used the fair value method of accountlng for its investment in Flynn Company, its Investment in Flynn Company account on December 31, 2004 should be ' " ' 08198000. 6.5180000. 0.0204000. 0." Karter Company uses the equity method of accounting for its investment in . Flynn Company, its Investment in Flynn Company account'at December 31, 2004 should be a,§174,000. b... 80,000. 9. 198,000. 00204000. 9. On December 29, 2005, Greer Co. sold an equity seout'ity that had been purchased on January 4, 2004. Greer owned no other equity securities. An unrealized holding loss was reported in the 2004 income statement. A realized gain was reported in the 2005 income statement. Was the equity security classified as available—for—sale and did its 2004 market price decline exceed its 2005 market price recovery? 2004 Market Price Decline Exceeded 2005 Available—for—Sale Market Price Recovery a. Yes Yes b. Yes No c. No Yes d. No No 10. On December 31, 2003, Nance Co. purchased equity securities as trading securities. Pertinent data are as follows: FairValue t AH '1/04 .$ $0., on,” _ $ 78,000 E 112., 09 124,000 C 192.00 ‘ 172,000 On December 31, 2004, Nance transferred its investment in security C from trading to evailable-for—sale because Nance intends to retain security {2 as a long-term investment. What total amount of gain pr loss on its securities should be included in N nce's income statement for the year ended December 31, 2004? 00 gain. '.,- . , , 1b,;300 loss. 5 0,000 loss. 1% a. p. c. ’ d. 0,000 loss. MW the following information for questions 11 through 13. Kimm, inc. acquired 30% of Game Corp.'s voting stock on January 1, 2004 for $360,000.‘During 2004, Game earned $150,000 and paid dividends of $90,000. Kimm's 30% inte est. in Game gives Kimm the abilitth exercise significant influence over Camels operating and financial policies. During 2005, Game earned $180,000 and paid dividen‘ds‘ of $60,000 on April 1 and $60,00cgonggtober 1. On July _1, 2005, Kimm sold half of its stock in Game for $237,000 cash. ' 11.Before income taxes, what amount should Kimm include in its 2004 income statement as a result of the investment? a.$150,000. b.$90,000. c.$45,000. d.$27,000. 12.The carrying amount of this investment in Kimm's December 31, 2004 balance sheet should be a.$360,000. b.$378,000. c.$405,000. d.$333,000. 13.What should be the gain on sale of this investment in Kimm's 2005 income statement? a.$57,000. b.$52,500. c.$43,500. d.$34,500. 14. The interegérete written in the terms of the bond indenture is known as the a. my, my fie. . ‘ b. no, inalrate. c. stated ratp. d. ' coupon rate. nominal rate; or Hated rate. 15.Stone, lnc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a,premium, this indicates that ' a.the effective yield or market rate of interest exceeded the stated (nominal) rate. ' b.the nominal cite of interest exceeded the market rate. c.the market an nominal rates coincided. T‘ ‘ d.no necessary/relationship exists between the two rates 16 . Under the effective interest method 'of bond discount or premium amortization, the periodic interest expense is equal'to ' ' ‘ a.the stated (nominal) rate of interest multiplied by the face value of the bonds. b.the market rate of interest multiplied by the face value of the bonds. c.the stated fate multiplied by the beginriing-of—period carrying amount of the bonds. d.the market rate multiplied by the beginning-of-period carrying amount of the bonds. ' " ‘ Cox Co. issued $100,000 of ten—year, 10% bonds that pay interest bonds are'sold to yield_8°/o. ‘ semia-nnually. The 17.0ne step in calculating the issue price of the bonds is to multiply the principal by the table value for a. 10 periods and 10% from the present value of 1 table. b. 20 periods and 5% from the present value of 1 table. c. 10 periods and 8% from the present value of 1 table. d. 20 periods and 4% from the preSent value of 1 table 18.The printing costs and legal fees associated with the issuance of bonds should a.be expensed when incurred. b.be reported as a deduction from the face amount of bonds payable. c.be accumulated in a deferred charge account and amortized over the life of the bonds. d.not be reported as an expense until the period the bonds mature or are retired. 19. When a note payable is issued for prdperty, goods, or services, the present value of the note is measured by a.the fair value of the property, goods, or services. b.the market value of the note. . ' c.using an imputed interest rate to discount all future payments on the note. d.any of these. - 20. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless a.no interest rate is stated. b.the stated interest rate is unreasonable. , c. the stated face amount of the note is materially different from the current cash sales price for‘similar items or from current market value of the note. d.any of these. 21. Note disclosures for long-term debt generally include all of the following except a.assets pledged as security. b.call provisions and conversion privileges. c.restrictions imposed by the creditor. d.names of specific creditors 22. ln a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should a.compute a new effective interest rate. b.not recognize a loss. c.calculate its loss using the historical effective rate of the loan. d.calculate its loss using the current effective rate of the loan. 23.0n January 1, 2004, Ann Stine loaned $37,565 to Joe Grant. A zero-interest- bearing note (face amount, $50,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2006. The prevailing rate of interest for a loan of this type is 10%. What amount of interest expense should Mr. Grant recognize in 2005? a.$3,757. b.$5,000. c.$4132. d.$4145. 24.0n January 1, 2004, Foster Company sold property to Agler Company which originally cost Foster $570,000. There was no established exchange price for this property. Agler gave Foster a $900,000 zero—interest—bearing note payable in three equal annual installments of $300,000 with the first payment due December 31, 2004. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. What is the amount of interest expense that should be recognized by Agler in 2004, using the effective interest method? a.$0. b.$30,000. c.$74,610. d.$90,000. 25.0n January 1, 2004, Glenn Company sold property to Jefrey Company. There was no established exchange price for the property, and Jefrey gave Glenn a ' $1,000,000 zero-interest-bearing note payable in 5 equal annual installments of $200,000, with the first payment due December 31, 2004. The prevailing rate of interest for a note of this type is 9%. What. should be the balance of the Discount on Notes Payable account on the books of Jefrey at December 31, 2004 after adjusting entries are made, assuming that the effective interest method is used? a.$0 b.$214,110 c.$223,200 d.$279,000 26.0n July 1, 2002, Moon, lnc. issued 9% bonds in the face amount of $2,000,000, which mature on July 1, 2012. The bonds were issued for $1,878,000 to yield 10%, resulting in a bond discount of $122,000. Moon uses the effective interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2004, Moon's unamortized bond discount should be a.$105,620. b.$102,000. " c.$97,600. d.$86,000. fl. k» (5 a v- H C. A C- C a h (7, (5 M 75+ ‘ H .A. \3 m u H F A W LEM g D. {L (1 "MW ” WEMQ____,., « 9 DR-“ M E“ Q ELL? WWWWWWWWWWWW _,Mfiw«»-mm ‘M 3% mm n C 6 m a v M A MEN» 6 u c, ““Mtw‘MWWMW—WMN ~«MWMWwML&WW&:¢W ____ wwwwwwwwww ,ng “aw—W KW PROBLEM I (15 MINS.) A) Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds 0 n 00.: T 5.3mm March 1 / Issued $600,000 face ag/alue Sloan Co. second rt a e, 8% bonds for $65 ,120, Ey‘iricluding accrued inter st. Interest is payablw on December 1 and June 1 - bonds maturing 10 years from this past Decem er 1. The bonds are callable at ‘ - ' - ‘ - ' at the purchase date as well as on the call I)». V :iAssume the bond Paid Semiannual interest on Sloan Co. bonds. (Use straight-line amortization of any premium or discount.) December 1 Paid semiannual interest on Sloan Co. bonds and purchased $600,000 face value bonds at the call price in accordance with the provisions of the bond indenture. B) Show the balance sheet and income statement results at November 30 for both Sloan and the buyer of the bond who intends on holding the bond to maturity if the 102 call price is also the fair value of the bond on the open market. 6) Show any‘changes you would make toB) ifthe buyer intends an selling sometime in the following year. AWSM‘V GU! WN§ ‘5'“? /’5 @.. u . ( Alec/L WV} . , “ 3 ()AJ‘H (C) ‘C/Zd '7! [600000 YE?" > m IQUQ / /luoD fV/Za édadoo {600000)(097K 6/1,) l K100 1 9640 F K EH1" IMF/07'): 7M3? _ Wm M' ' {"75 k/ L”_.7_:fl"r’0. “Wu-1U“ Y A a"? K 322.. W” ‘ v~ ,- A /ZOUU 2 7?; ‘4' A” ‘76"), kc“ “Aw M“ ZVduu Z/kduo ‘ i). \ /J’7/ 09"“ \ - é $6311.; x (.567 >< {L z: 22 <97 _ WOW - N9, Q5" ((300000 Cyb‘ R) 5( 7F) Pk wig ‘ V / CA ,J W LAM / {HM 3é7v7 (ms/f (éaaoodfi /€)L (a {um i; 3) WI Vt 1,5 I/ /"‘“ f \m Pmrybué 2mg BOND 000 {V6 C0 / 00(1) [Wiyp6uw4‘22yfi) 33(17g \ (mm, m. 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Explain how the intended W of a common stock investment can \ affect the method of accounting emp oyed by a company .Be sure to clarify how the § § financial statements will be affected by these choices (hint there are 3 choices) and how . - 6’ management might use this accounting rule to manipulate there financial statements. You %L may assume the company invested in has gone up in value an but has had losses since ‘ (1)3 acquisition . K Howmé Pmmo ow Wsz WWW a: my Mm» cr Mam 7‘» as; 4W TWO: #4qu Ma. aw. 2 {F How/c6 fer/tan 6 QJLZ flcgmm AM Tiff 6» WW felled W}: SECa/Lfl/CQ/{ticqcflkky 7mm Tm; (Mama/T MA? fit Pow/Hm :4: © A “WWII—’6 ENCOwa THEAJ fire: 6A mu, SAW 7m: QMon , } . FAc/L Qmué Ania mm am; a; M qty/lawns» (Mm) 0mm /’\ICJML 1 mm Fo/L 7H1; (Wow. (it 04m: Ci) DVV‘FTWM V f gamma flown (s LoflGEA 4”” (£er 77%;} NHL mfiflfafl alch ,3; 3604mm» IVY/hi @fiw - (3A. 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This note was uploaded on 01/31/2010 for the course ECON 136B taught by Professor Anderson during the Spring '08 term at UCSB.

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mid02wk06s - ECON 136B MIDTERM#2 SPRING 2006 MULTIPLE...

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