Question

1) The amount of change in the fair value of an investment classified as trading securities is:

a. reported as Investment Income or Investment Expense.

b. is taken into account only at the time of sale.

c. ignored unless permanent drop in value occurs.

d. included within stockholders' equity section.

e. included in the net income.

2) Gain or loss on sale of trading securities is calculated as a difference between the sales price and the:

a. fair value or the original cost of the investment, whichever is greater.

b. cost plus portion of investee income.

c. cost less any dividends received.

d. carrying amount of the investment on the date of sale.

e. original cost of the investment.

3) Dividends received on trading securities are recorded with a:

a. debit to Investment in Trading Securities and credit to Unrealized Gain—Trading Securities.

b. debit to Cash and credit to Dividend Revenue.

c. debit to Cash and credit to Investment in Trading Securities.

d. debit to Cash and credit to Investment Income.

e. debit to Investment in Trading Securities and credit to Investment Income.

4) Which of the following is true concerning trading securities?

a. They are expected to be held for a long period of time.

b. They are recorded at historical cost on the acquisition date.

c. Dividends are not paid on them.

d. They are purchased to make the company look financially strong.

e. Unrealized gains and losses are reported in the stockholders' equity section of the balance sheet.

25) Which of the following is a reason for reporting trading securities at their fair value?

a. Reporting securities at fair value improves its marketability

b. To make the company look financially strong

c. The value of the security may radically fluctuate

d. The owner may plan to hold the security for a long period of time

e. The fair value of the security can be objectively determined

Answer 1

Trading securities are investments in debt or equity that management plans to actively trade for profit in the current period.

1. Option E. Included in the net income. The Gain or Loss on trading securities are treated as unrealized till the time it sold where actual loss or gain is recognized in the Income statement.

2. Option D. carrying amount of the investment on the date of sale

3. Option B. debit to Cash and credit to Dividend Revenue

4. Option B. They are recorded at historical cost on the acquisition date

5. Option C. The value of the security may radically fluctuate