TEST BANK
CHAPTER 1
Intercorporate Investments: An Overview
MULTIPLE CHOICE
1. Topic: Accounting for trading securities
LO 1
A company invests $500,000 in equity securities on April 30, 2016, and classifies them as trading
securities. At December 31, 2016, the company’s year-end, the securities have a fair value of
$495,000. On February 1, 2017, the company sells the securities for $520,000.
Which statement is true regarding how this information is reported in the company’s financial
statements?
a. The company’s 2016 balance sheet reports the securities at $500,000, and a loss of
$5,000 is reported on the 2016 income statement.
b. The company’s 2016 balance sheet reports the securities at $495,000, and a gain of
$20,000 is reported on the 2017 income statement.
c. The company’s 2016 balance sheet reports the securities at $495,000, and a gain of
$25,000 is reported on the 2017 income statement.
d. The company’s 2016 balance sheet reports the securities at $500,000, and no gain or
loss appears in the 2016 financial statements.
ANS: c
Use the following information on a company’s investments in equity securities to answer
Questions 2-5. The company’s accounting year ends December 31.
Investment
Date of
Acquisition Cost
Fair Value
12/31/16
Date
Sold
Selling
Price
Ajax Company stock 9/20/16 $38,000 $39,000 2/10/17 $42,000
Brill Company stock 10/2/16 14,000 13,900 1/17/17 13,000
2. Topic: Accounting for trading securities
LO 1
If the above investments are categorized as trading securities, what amount is reported for gain
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