4. For a marketable debt securities portfolio classified as held-to-maturity, which of the following amounts should be included in the period's net income, assuming the company elects the fair value option of reporting all of its financial instruments in the portfolio?

I. Unrealized temporary losses during the period.

II. Realized gains during the period.

III. Changes in the valuation allowance during the period.

IV. Unrealized gains during the period.

a. I only

b. I and II

c. I and III

d. I, II, and IV

Problems 5 and 6 are based on the following:

The following data pertains to Tyne Co.'s investments in marketable equity securities:

		Fair value
	Cost	12/31/Y2	12/31/Y1
Trading	$150,000	$155,000	$100,000
Available-for-sale	150,000	130,000	120,000

5. What amount should Tyne report as unrealized holding gain in its year 2 income statement, assuming Tyne does not elect to use the fair value option to report its investments?

a. $50,000

b. $55,000

c. $60,000

d. $65,000

6. Assume Tyne does not elect the fair value option to report investments. What amount should Tyne report as net unrealized loss on marketable equity securities at December 31, year 2, in accumulated other comprehensive income in stockholders' equity?

a. $0

b. $10,000

c. $15,000

d. $20,000

13. On January 2, year 1, Saxe Company purchased 20% of Lex Corporation's common stock for $150,000. Saxe Corporation intends to hold the stock indefinitely. This investment did not give Saxe the ability to exercise significant influence over Lex. During year 1 Lex reported net income of $175,000 and paid cash dividends of $100,000 on its common stock. There was no change in the fair value of the common stock during the year. The balance in Saxe's investment in Lex Corporation account at December 31, year 1 should be

a. $130,000

b. $150,000

c. $165,000

d. $185,000

1. On January 3, year 1, Falk Co. purchased 500 shares of Milo Corp. common stock for $36,000. On December 2, year 3, Falk received 500 stock rights from Milo. Each right entitles the holder to acquire one share of stock for $85. The market price of Milo's stock was $100 a share immediately before the rights were issued, and $90 a share immediately after the rights were issued. Falk sold its rights on December 3, year 3, for $10 a right. Falk's gain from the sale of the rights is

a. $0

b. $1,000

c. $1,400

d. $5,000

2. An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by

a. Decreasing annual insurance expense.

b. Increasing investment income.

c. Recording a memorandum entry only.

d. Decreasing a deferred charge.

3. A company's independent auditor is currently insisting that certain sales made on credit be reported on the financial statements using the installment sales method rather than traditional accrual accounting rules. Which of the following is the most logical explanation for that decision?

a. The company cannot estimate the amount of bad debt expense associated with these sales.

b. The company estimates that bad debts will be 30 percent of all sales.

c. Collection of the accounts receivable will take longer than one year.

d. The earning process on these sales was not substantially completed in the current year.

4. A company sells inventory costing $180,000 to its customers for $300,000 in Year One. In the following year, inventory costing $275,000 is bought and sold for $500,000. The company reports its sales using the installment sales method. In this second year, the company collected $140,000 from its Year One sales and $200,000 from its Year Two sales. What gross profit should the company report for Year Two?

a. $136,000

b. $144,500

c. $146,000

d. $153,000

5. On January 1, Year One, a company sells inventory costing $36,000 to a customer for $60,000 on credit. Because of flaws in the design of the inventory, there is significant doubt about the ultimate collectability of this balance. Thus, the cost recovery method is being applied by the seller. The entire balance is collected evenly over three years from the beginning of Year One to the end of Year Three. What amount of profit should be recognized in Year Two?

a. Zero

b. $4,000

c. $8,000

d. $20,000

6. Your company is getting ready to construct a bridge across the Mississippi River. The job is 10 percent complete after the first year. You are trying to decide between using the percentage of completion method and the completed contract method. Which of the following would be most likely to cause you to use the completed contract method?

a. Your company is constructing the bridge for the state of Mississippi.

b. You have constructed buildings previously but not bridges.

c. The 10 percent is a reasonable estimation but not a perfect estimation.

d. The job should take three more years to complete but might take four.

7. A construction company is hired by the state government on January 1, Year One to build a section of a new highway. The sales price is $100 million and the company estimates that the work will cost $96 million. During Year One, $18 million is spent on the work and the company's engineers believe that work costing $72 million is left to be completed. During Year Two, another $45 million is spent but $42 million of work is now estimated to remain. If the company is applying the percentage of completion method, what loss should be recognized in Year Two?

a. $2 million

b. $4 million

c. $5 million

d. $7 million

8. A company sends 10,000 units of its products to one of its customers on December 28, Year One. The customer has a right to return any of this merchandise within 6 months for a full refund. The company wants to record this transaction as a sale in Year One. Which of the following is most likely to necessitate that the recording of the transaction as a sale be delayed until Year Two?

a. The company can make a reasonable estimation that 25 percent of the units will be returned.

b. Return of the goods is not contingent on resale.

c. If the goods are stolen from the customer, the obligation is not affected.

d. The company cannot make a reasonable estimation of the number of units that will be returned.

9. On December 27, Year One, Company A buys merchandise for $40,000 and transfers it to Company B on consignment. Company B will attempt to sell these items for $60,000 over the subsequent eight months. If sales are made, Company B retains 10 percent and conveys the remainder to Company A. Company B makes the first sales in February of Year Two. The accountant for Company A recorded this transfer as a sale to Company B when shipped. A perpetual inventory system is in use. Which of the following statements is not true for the balance sheet of Company A at the end of Year One?

a. Total assets are overstated by $20,000.

b. Total stockholders equity is overstated by $20,000.

c. Total inventory is overstated by $20,000.

d. Ending retained earnings is overstated by $20,000.

10. Heyward Construction Company signs an agreement with the state of Maine to build a short stretch of highway for $42 million. During Year One, $8 million is spent and company officials anticipate that another $24 million will be needed to complete the work. During Year Two, another $13 million is spent and current information indicates that another $14 million will be required to finish the project. The estimations are all viewed as reasonable and officials feel that the company is capable of finishing the work. What amount of profit should the company recognize in Year Two?

a. Zero

b. $1,700,000

c. $2,166,667

d. $2,600,000

11. In Year One, the Atonlini Corporation begins to sell specific inventory items with a four-month right of return. Any merchandise can be returned at that time if the buyer has been unable to resale it to a third party. On December 1, Year One, goods costing $40,000 are sold to customers for a total of $50,000. Company officials expect 20 percent of this merchandise to be returned (unharmed) at the end of March in Year Two. In connection with this transaction, what amount of profit should Atonlini recognize in Year One?

a. Zero

b. $2,500

c. $8,000

d. $10,000