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Front 1

Election of the fair value option (FVO)

 

A.Requires deferral of related upfront costs.

B.Permits only for-profit entities to measure eligible items at fair value.

C.Results in recognition of unrealized gains and losses in other comprehensive income of a business entity.

D.Results in recognition of unrealized gains and losses in earnings of a business entity.

Back 1

Answer (D) is correct.
A business measures at fair value the eligible items for which the FVO election was made at a specified election date. The unrealized gains and losses on those items are reported in earnings at each subsequent reporting date.

Front 2

The decision to elect the fair value option (FVO)

A.May be applied to a portion of a financial instrument.

B.Must be applied to all instruments issued in a single transaction.

C.Must be applied only to classes of financial instruments.

D.Is irrevocable until the next election date, if any.

Back 2

Answer (D) is correct.
The decision to elect the FVO is final and cannot be revoked unless a new election date occurs. For example, an election date occurs when an entity recognizes an investment in equity securities with readily determinable fair values issued by another entity. A second election date occurs when the accounting changes because the investment later becomes subject to equity-method accounting. An original decision to classify the equity securities as available-for-sale may then be revoked at the second election date by choosing the FVO instead of the equity method.

Front 3

Examples of events requiring either remeasurement at fair value or initial recognition of eligible items and that result in an election date are

Back 3

(1) a business combination, (2) a consolidation or deconsolidation, or (3) a significant modification of debt

Front 4

Available-for-sale securities should be measured at

Back 4

Fair value in the balance sheet. Hence, the bond should be reported at its fair value to reflect the unrealized holding gain (change in fair value).

Front 5

A reclassification of available-for-sale securities to the held-to-maturity category will result in

 

 

Back 5

The amortization of an unrealized gain or loss existing at the transfer date.

Front 6

The amount by which the fair value of an equity security exceeds its cost should be accounted for in the financial statements when the security is classified as Trading or Available for Sale?

Back 6

Both.

Unrealized holding gains and losses on trading securities must be recognized in earnings. Unrealized holding gains and losses on available-for-sale securities not designated as being hedged in a fair value hedge are recognized in other comprehensive income.

Front 7

 If the unrealized holding loss is separately recorded in the balance sheet then the security 

Back 7

(1) must have been classified as available-for-sale, (2) was not designated as being hedged in a fair value hedge, and (3) was not accounted for as if it were a trading security (after an FVO election)

Front 8

Park Co. uses the equity method to account for its January 1 purchase of Tun, Inc.’s common stock. On January 1, the fair values of Tun’s FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park’s reported equity in Tun’s earnings for the year?

Back 8

Thus, the difference at the date of acquisition of the investee’s stock between the fair value and carrying amount of inventory is such an adjustment when the inventory is sold. A similar adjustment for land is required when the land is sold. Assuming that the FIFO inventory was sold during the year and the land was not, Park’s proportionate share of Tun’s reported net income is decreased by the inventory differential allocated at the date of acquisition.

Front 9

Green Corp. owns 30% of the outstanding common stock and 100% of the outstanding noncumulative nonvoting preferred stock of Axel Corp. In Year 1, Axel declared dividends of $100,000 on its common stock and $60,000 on its preferred stock. Green exercises significant influence over Axel’s operations and uses the equity method to account for the investment in the common stock. What amount of dividend revenue should Green report in its income statement for the year ended December 31, Year 1?

Back 9

It is a return of, not a return on, the investment. However, the equity method is not applicable to preferred stock. Thus, Green should report $60,000 of revenue when the preferred dividends are declared.

Front 10

The equity method is not required if the investment is classified as 

Back 10

held for sale

Front 11

Under IFRS 5, a noncurrent asset is held for sale if 

Back 11

The sale is highly probable. 

Front 12

The carrying amount of the bond equals

Back 12

Face amount minus the discount

Front 13

The cash paid for a bond equals

Back 13

The initial carrying amount plus accrued interest

(Face Amount +premium or -discount) Plus Accrued Interest

Front 14

Interest income for a bond issued at a discount is equal to the sum 

Back 14

Of the periodic cash flows and the amount of bond discount amortized during the interest period

Front 15

On July 1, Year 2, York Co. purchased as a long-term investment $1 million of Park, Inc.’s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, Year 2, balance sheet, what amount should York report as investment in bonds?

Back 15

The bond investment’s original balance was $906,000 ($946,000 price – $40,000 accrued interest) because the carrying amount does not include accrued interest paid. Under the effective interest method, interest income equals the yield or effective interest rate times the carrying amount of the bonds at the beginning of the interest period. The amortization of premium or discount is the difference between this interest income and the periodic cash payments. For Year 2, interest income is $45,300 [$906,000 × 10% × (6 ÷ 12)], and the actual interest is $40,000 [$1,000,000 × 8% × (6 ÷ 12)]. Hence, the carrying amount at year-end is $911,300 [$906,000 + ($45,300 – $40,000)].

Front 16

Upon the death of an officer, Jung Co. received the proceeds of a life insurance policy held by Jung on the officer. The proceeds were not taxable. The policy’s cash surrender value had been recorded on Jung’s books at the time of payment. What amount of revenue should Jung report in its statements?

Back 16

A) Proceeds received minus cash surrender value.

When life insurance proceeds are received, cash is debited for the amount received. Cash surrender value is credited for the amount of the asset on the books, and the balancing credit is to insurance income (a revenue account).

Front 17

Life insurance expense is equal to

Back 17

The excess of the premiums paid over the increase in cash surrender value and dividends received.

Front 18

Trading Securities 

Back 18

Debt or Equit Securities intended to be sold in near future.

Front 19

Available for sale

Back 19

Debt or Equit Securities not classified as htm or trading securities

Front 20

The face amount of the bond equals

Back 20

Carrying amount Plus discount

Front 21

An increase in the cash surrender value of a life insurance policy owned by a company is recorded by

Back 21

Decreasing annual insurance expense.

The cash surrender value of the policy is an asset of the company. Thus, part of the premium paid is not expense. As the cash surrender value increases, the annual insurance expense decreases, assuming a constant premium payment.

Front 22

Life insurance expense is equal to

Back 22

The excess of the premiums paid over the increase in the sum of cash surrender value and dividends received. However, the dividends were applied to increase the cash surrender value and were therefore not received.

Front 23

What is the JE for when proceeds of an insurance policy is recieved?

Back 23

Cash                                 XXXX

   Cash Surrender Value           XXXX

   Insurance income                 XXXX