ACCOUNTING 405 ACTUAL EXAM PAPER
2026 QUESTIONS WITH SOLUTIONS
VERIFIED ANSWERS
●● When the equity method of accounting for investments is used by the
investor, the amortization of additional depreciation due to difference
between book values and fair values of investee assets on the date of
acquisition:
Answer: Reduces the investment account and reduces investment
revenue
●● Which of the following is not true about the fair value option
Answer: The fair value option must be elected for all shares of an
investment in a particular company
●● Which of the following investment securities held by Zoogle, Inc.
are not reported at fair value in its balance sheet?
Answer: Debt securities held to maturity
●● Both fair values and subsequent growth of the investee are not as
relevant for investments in which of the following categories?
Answer: Held-to-maturity securities
,●● Securities that are purchased with the intent of selling them in the
near future to take advantage of short-term price changes are classified
as:
Answer: Trading securities
●● Trading securities, by definition, are properly classified in the
balance sheet as:
Answer: Current assets
●● Dyckman Dealers has an investment in Thomas Corporation that
Dyckman accounts for as a trading security. Thomas Corporation shares
are publicly traded on the New York Stock Exchanges, and the
prevailing price on that exchange indicates that Dyckman's investment is
worth $20,000. However, Dyckman management believes that the stock
market is generally overvalued and their analysis of the Thomas
Investment suggests to them that it is worth $18,000 Dyckman should
carry the Thomas investment on its balance sheet at:
Answer: $20,000
●● Goofy, Inc. bought $15,000 shares of Crazy Co.'s stock for $150,000
on May 5, 2010, and classified the stock as available for sale. The
market value of the stock declined to $118,000 by December 31, 2010.
Goofy reclassified this investment as trading securities in December of
2011 when the market value had risen to $125,000. What effect on 2011
income should be reported by Goofy for the Crazy Co. shares?
Answer: 25,000 net loss
, ●● Investments in securities available for sale are reported at:
Answer: Fair value on the reporting date
●● When an investor classifies an investment in common stock as
securities available for sale, cash dividends are classified by the investor
as:
Answer: Dividend income
●● In the statement of cash flows, inflows and outflows of cash from
buying and selling available for sale securities are considered:
Answer: investing activities
●● Hawk Corporation purchased 10,000 shares of Diamond Corporation
stock in 2008 for $50 per share and classified the investment as
securities available for sale. Diamond's market value was $60 per share
on December 31, 2009 and $65 on December 31, 2010. During 2011,
Hawk sold all of its Diamond stock at $70 per share. In its 2011 income
statement, Hawk would report:
Answer: A gain of $200,000
●● If an available-for-sale investment is sold for which there are
unrealized losses in accumulated other comprehensive income (AOCI),
the total effect on total comprehensive income is
Answer: no effect
2026 QUESTIONS WITH SOLUTIONS
VERIFIED ANSWERS
●● When the equity method of accounting for investments is used by the
investor, the amortization of additional depreciation due to difference
between book values and fair values of investee assets on the date of
acquisition:
Answer: Reduces the investment account and reduces investment
revenue
●● Which of the following is not true about the fair value option
Answer: The fair value option must be elected for all shares of an
investment in a particular company
●● Which of the following investment securities held by Zoogle, Inc.
are not reported at fair value in its balance sheet?
Answer: Debt securities held to maturity
●● Both fair values and subsequent growth of the investee are not as
relevant for investments in which of the following categories?
Answer: Held-to-maturity securities
,●● Securities that are purchased with the intent of selling them in the
near future to take advantage of short-term price changes are classified
as:
Answer: Trading securities
●● Trading securities, by definition, are properly classified in the
balance sheet as:
Answer: Current assets
●● Dyckman Dealers has an investment in Thomas Corporation that
Dyckman accounts for as a trading security. Thomas Corporation shares
are publicly traded on the New York Stock Exchanges, and the
prevailing price on that exchange indicates that Dyckman's investment is
worth $20,000. However, Dyckman management believes that the stock
market is generally overvalued and their analysis of the Thomas
Investment suggests to them that it is worth $18,000 Dyckman should
carry the Thomas investment on its balance sheet at:
Answer: $20,000
●● Goofy, Inc. bought $15,000 shares of Crazy Co.'s stock for $150,000
on May 5, 2010, and classified the stock as available for sale. The
market value of the stock declined to $118,000 by December 31, 2010.
Goofy reclassified this investment as trading securities in December of
2011 when the market value had risen to $125,000. What effect on 2011
income should be reported by Goofy for the Crazy Co. shares?
Answer: 25,000 net loss
, ●● Investments in securities available for sale are reported at:
Answer: Fair value on the reporting date
●● When an investor classifies an investment in common stock as
securities available for sale, cash dividends are classified by the investor
as:
Answer: Dividend income
●● In the statement of cash flows, inflows and outflows of cash from
buying and selling available for sale securities are considered:
Answer: investing activities
●● Hawk Corporation purchased 10,000 shares of Diamond Corporation
stock in 2008 for $50 per share and classified the investment as
securities available for sale. Diamond's market value was $60 per share
on December 31, 2009 and $65 on December 31, 2010. During 2011,
Hawk sold all of its Diamond stock at $70 per share. In its 2011 income
statement, Hawk would report:
Answer: A gain of $200,000
●● If an available-for-sale investment is sold for which there are
unrealized losses in accumulated other comprehensive income (AOCI),
the total effect on total comprehensive income is
Answer: no effect
