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Classification of securities, Percentage of Completion

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1- A correct valuation is
available-for-sale at amortized cost
held-to-maturity at amortized cost
held-to-maturity at fair value
None of the above

2- Securities which could be classified as held-to-maturity are
redeemable preferred stock
warrants
municipal bonds
treasury stock

3-Unrealized holding gains or losses which are recognized in income are from securities classified as
held-to-maturity.
available-for-sale.
trading.
none of these

4- When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
notify the issuer and request that a special payment be made for the appropriate portion of the interest period.
make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.
do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period

5-. Use of the effective-interest method in amortizing bond premiums and discounts results in
a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.
a varying amount being recorded as interest income from period to period.
a variable rate of return on the book value of the investment.
a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

6-When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are
earned
realized
recognized
All of the above

7-Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as
service revenue.
deferred service revenue.
a reduction in installment accounts receivable.
a direct addition to retained earnings.

8- The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?
The amount of future returns can be reasonably estimated.
The seller's price is substantially fixed or determinable at time of sale.
The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.
The buyer is obligated to pay the seller upon resale of the product.

9-How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
As construction in process in the current asset section of the balance sheet.
As construction in process in the noncurrent asset section of the balance sheet.
As a receivable in the noncurrent asset section of the balance sheet.
In a note to the financial statements until the customer is formally billed for the portion of work completed.

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Solution Preview

1. held-to-maturity at amortized cost: Because the security is expected to be held until it matures, the holder should amortize any premium or discount paid on it until maturity.

2. Municipal bonds: The redeemable security may be called by the issuer, the warrants expire after a short period of time, and treasury stock is a redemption by the issuer of its own stock so it is not an investment.

3. Trading: Because the security was purchased strictly to earn short-term income, any unrealized gains should be reported as income.

4. Make an adjusting entry to debit Interest ...

Solution Summary

1- A correct valuation is
available-for-sale at amortized cost
held-to-maturity at amortized cost
held-to-maturity at fair value
None of the above

2- Securities which could be classified as held-to-maturity are
redeemable preferred stock
warrants
municipal bonds
treasury stock

3-Unrealized holding gains or losses which are recognized in income are from securities classified as
held-to-maturity.
available-for-sale.
trading.
none of these

4- When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
notify the issuer and request that a special payment be made for the appropriate portion of the interest period.
make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.
do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period

5-. Use of the effective-interest method in amortizing bond premiums and discounts results in
a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.
a varying amount being recorded as interest income from period to period.
a variable rate of return on the book value of the investment.
a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

6-When the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, revenues are
earned
realized
recognized
All of the above

7-Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on each appliance sold. Although Dot Point sells the appliances on an installment basis, all service contracts are cash sales at the time of purchase by the buyer. Collections received for service contracts should be recorded as
service revenue.
deferred service revenue.
a reduction in installment accounts receivable.
a direct addition to retained earnings.

8- The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions?
The amount of future returns can be reasonably estimated.
The seller's price is substantially fixed or determinable at time of sale.
The buyer's obligation to the seller would not be changed in the event of theft or damage of the product.
The buyer is obligated to pay the seller upon resale of the product.

9-How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
As construction in process in the current asset section of the balance sheet.
As construction in process in the noncurrent asset section of the balance sheet.
As a receivable in the noncurrent asset section of the balance sheet.
In a note to the financial statements until the customer is formally billed for the portion of work completed.

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Similar Posting

Some Accounting for Investments

1. Presented below are four unrelated situations involving equity securities that have readily determinable fair values.

Situation 1
A noncurrent portfolio with an aggregate market value in excess of cost includes one particular security whose market value has declined to less than half of the original cost. The decline in value is considered to be other than temporary.

Situation 2
The balance sheet of a company does not classify assets and liabilities as current and noncurrent. The portfolio of marketable equity securities includes securities normally considered to be trading securities that have a net cost in excess of market value of $2,000. The remainder of the portfolio is considered noncurrent and has a net market value in excess of $5,000.

Situation 3
A marketable equity security, whose market value is currently less than cost, is classified as a noncurrent security that is available for sale but is to be reclassified as a trading security.

Situation 4
A company's noncurrent portfolio of marketable equity securities consists of the common stock of one company. At the end of the prior year the market value of the security was 50 percent of original cost, and the effect was properly reflected in the balance sheet. However, at the end of the current year the market value of the security had appreciated to twice the original cost. The security is still considered noncurrent at year-end.

Required:
Determine the effect on classification, carrying value, and earnings for each of the preceding situations. Complete your response to each situation before proceeding to the next situation.

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