CPA Financial Accounting and Reporting Far Quiz: Account For Equity And Debt Investments

What this quiz covers

This quiz focuses on Account For Equity And Debt Investments, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Equity security measured at fair value with changes in fair value recognized in net income (correct answer)
2. Held-to-maturity debt security measured at amortized cost
3. Equity method investment with investor recognizing its share of investee earnings
4. Available-for-sale equity security measured at fair value with changes in other comprehensive income

Explanation: This question tests the application of ASC 321, which requires equity securities to be measured at fair value with changes recognized in net income, unless the equity method or consolidation applies. The key financial data is the 3% ownership interest and lack of significant influence (no board representation or policy-making participation), which precludes equity method accounting under ASC 323. ASC 321 mandates that equity securities without readily determinable fair values may elect a practicability exception, but since these shares trade on an active exchange, fair value is readily determinable and must be used with changes flowing through net income. Option B is incorrect because ASC 320's held-to-maturity classification applies only to debt securities, not equity investments. Option C is incorrect because the 3% ownership and lack of influence indicators do not meet ASC 323's significant influence threshold (typically 20% or more). Option D is incorrect because ASC 321 eliminated the available-for-sale category for equity securities, though it still exists for debt securities under ASC 320. The decision framework is: for equity securities with readily determinable fair values and no significant influence, always apply fair value through net income under ASC 321.

Question 2

1. Level 1 using quoted prices in an active market for identical assets
2. Level 2 using quoted prices for similar assets in active markets without adjustment
3. Level 3 using an income approach with significant unobservable inputs (correct answer)
4. Measure at amortized cost because fair value cannot be reliably determined

Explanation: This question tests fair value hierarchy classification under ASC 820 for an equity security without quoted prices. The key financial data indicates Quartz uses a valuation model based primarily on unobservable inputs (projected cash flows and company-specific discount rates) with no recent observable transactions for identical or similar securities. ASC 820-10-35-52 defines Level 3 inputs as unobservable inputs that reflect the entity's own assumptions about market participant assumptions; when valuation techniques rely significantly on unobservable inputs like entity-specific projections and discount rates, the measurement is classified as Level 3. Option A is incorrect because Level 1 requires quoted prices in active markets for identical assets, which don't exist for this unquoted security. Option B is incorrect because Level 2 requires observable inputs for similar assets, which are not available per the fact pattern. Option D is incorrect because ASC 321 requires equity securities to be measured at fair value (with limited exceptions for those without readily determinable fair values), not amortized cost, and fair value can be estimated using valuation techniques. The decision rule is: classify fair value measurements based on the lowest level of significant inputs, with unobservable inputs resulting in Level 3 classification.

Question 3

1. Recognize a direct write-down of the bond investment to fair value with a $10,000 loss in net income
2. Recognize an allowance for credit losses of $15,000 with a corresponding credit loss expense in net income, while continuing to report the bond at amortized cost net of allowance (correct answer)
3. Recognize the entire $10,000 decline from amortized cost to fair value as other comprehensive income because the security is not trading
4. Recognize no impairment because held-to-maturity securities are not subject to credit loss recognition

Explanation: This question tests the application of ASC 326 (CECL) to held-to-maturity debt securities by a government business-type activity following FASB standards. The key financial data shows Metro Utility has identified $15,000 of expected credit losses on bonds with$980,000 amortized cost and $970,000 fair value. Under ASC 326-20-30-1, entities must recognize an allowance for credit losses equal to the expected credit losses over the contractual life; the allowance is recorded with a corresponding credit loss expense in net income, while the asset continues to be reported at amortized cost less the allowance on the balance sheet. Option A is incorrect because held-to-maturity securities are not written down directly to fair value; they maintain their amortized cost basis with a separate allowance. Option C is incorrect because credit losses on held-to-maturity securities are recognized in net income, not OCI, and the decline due to credit deterioration must be recognized. Option D is incorrect because ASC 326 specifically requires credit loss recognition for held-to-maturity securities when credit losses are expected. The decision framework is: for held-to-maturity securities with expected credit losses, establish an allowance account with the loss recognized in net income, maintaining the amortized cost accounting.

Question 4

1. Disclose fair value hierarchy levels for the fair value measurements and disclose the nature and amount of unrealized gains/losses and where they are reported (net income vs. other comprehensive income) (correct answer)
2. Disclose only the total fair value of all investments; no hierarchy or unrealized gain/loss disclosures are required for not-for-profit entities
3. Disclose amortized cost for the equity securities and recognize all unrealized gains/losses in other comprehensive income
4. Disclose only credit quality indicators for the debt securities; fair value disclosures are not required when fair value is below amortized cost

Explanation: This question tests disclosure requirements for not-for-profit entities under ASC 958, ASC 820, and ASC 321. The key financial data shows Summit Museum holds both equity securities at fair value and available-for-sale debt securities with unrealized losses. ASC 958-320-50 and ASC 958-321-50 require not-for-profit entities to disclose fair value hierarchy levels under ASC 820 for investments measured at fair value, as well as the nature and amounts of unrealized gains/losses; notably, ASC 958-220-45-3 requires not-for-profits to report all investment returns (including unrealized gains/losses) in the statement of activities as increases or decreases in net assets without donor restrictions unless restricted by donors. Option B is incorrect because not-for-profit entities must provide detailed fair value hierarchy and unrealized gain/loss disclosures. Option C is incorrect because equity securities are measured at fair value (not amortized cost), and not-for-profits report all investment returns in the statement of activities, not OCI. Option D is incorrect because fair value disclosures are required regardless of the relationship between fair value and cost, and the question asks about both debt and equity securities. The disclosure framework for not-for-profits requires: fair value hierarchy levels, location of investment returns in the statement of activities, and information about liquidity and redemption restrictions.

Question 5

1. Disclose fair value hierarchy levels for investments measured at fair value on a recurring basis and the location of unrealized gains/losses in the financial statements (correct answer)
2. Disclose only realized gains and losses because unrealized amounts are not recognized under GAAP
3. Disclose amortized cost for equity securities and omit fair value hierarchy because ASC 820 applies only to debt securities
4. Disclose fair value hierarchy only for Level 3 measurements; no disclosure is required for Level 1 or Level 2

Explanation: This question tests disclosure requirements under ASC 320, ASC 321, and ASC 820 for investment securities. The key financial data shows Orchid holds both available-for-sale debt securities with unrealized losses in OCI and equity securities with unrealized gains in net income. ASC 820-10-50 requires disclosure of fair value hierarchy levels for all recurring fair value measurements, while ASC 320-10-50 and ASC 321-10-50 require disclosure of unrealized gains/losses and their location in the financial statements (net income for equity securities, OCI for available-for-sale debt). Option B is incorrect because both realized and unrealized gains/losses must be disclosed under current GAAP. Option C is incorrect because equity securities are measured at fair value (not amortized cost) under ASC 321, and ASC 820 fair value hierarchy disclosures apply to both debt and equity securities. Option D is incorrect because fair value hierarchy disclosures are required for all levels (1, 2, and 3) of recurring fair value measurements, not just Level 3. The disclosure framework requires: fair value hierarchy levels for all investments measured at fair value, location of unrealized gains/losses (net income vs. OCI), and reconciliation of Level 3 measurements if applicable.

Question 6

1. Recognize $100,000 of equity in earnings and reduce it by$30,000 for dividends received
2. Recognize $80,000 of equity in earnings ($400,000 × 25% − $20,000 amortization) (correct answer)
3. Recognize $130,000 of dividend income ($120,000 × 25% + $100,000 share of earnings)
4. Recognize $70,000 of equity in earnings ($400,000 × 25% − $30,000 dividends received)

Explanation: This question tests equity method accounting under ASC 323, specifically the calculation of equity in earnings. The key financial data shows Noble owns 25% of Sable, triggering equity method accounting, with Sable reporting $400,000 net income and$120,000 dividends, plus $20,000 of basis difference amortization. Under ASC 323-10-35-4, the investor recognizes its proportionate share of investee earnings ($400,000 × 25% = $100,000) reduced by any amortization of basis differences ($20,000), resulting in $80,000 equity in earnings; dividends received reduce the investment carrying amount but do not affect income recognition. Option A is incorrect because it fails to account for the basis difference amortization that reduces equity in earnings. Option C is incorrect because under the equity method, dividends are not recognized as income but rather reduce the investment account. Option D is incorrect because it improperly reduces equity in earnings by dividends received; dividends reduce the investment balance, not the income recognized. The decision rule for equity method income is: recognize proportionate share of investee net income, adjust for basis difference amortization, and treat dividends as a return of investment rather than income.

Question 7

1. Recognize an allowance for credit losses for the difference between amortized cost and fair value, with a corresponding loss in net income
2. Recognize an other-than-temporary impairment in net income for the entire decline in fair value
3. Do not recognize a credit loss; continue to report at amortized cost because the decline relates to interest rate changes, not credit (correct answer)
4. Write the bonds down to fair value with the loss recognized in other comprehensive income

Explanation: This question tests the application of ASC 326 (Current Expected Credit Losses - CECL) to held-to-maturity debt securities. The key financial data shows the bonds' fair value decline ($2,040,000 to$1,920,000) is due solely to interest rate changes, not credit deterioration, and the issuer remains current on payments. Under ASC 326-20-35-5, entities must evaluate whether a credit loss exists by comparing the amortized cost basis to the present value of expected cash flows; since the decline is due to interest rates rather than credit issues and Kite expects to collect all contractual cash flows, no allowance for credit losses is required. Option A is incorrect because an allowance is only recognized when credit losses are expected, not for interest rate-driven declines. Option B is incorrect because ASC 326 replaced the other-than-temporary impairment model with the expected credit loss model for held-to-maturity securities. Option D is incorrect because held-to-maturity securities are not written down to fair value for non-credit related declines, and such losses would not flow through OCI. The decision rule is: for held-to-maturity securities, recognize credit losses only when the present value of expected cash flows is less than amortized cost due to credit deterioration, not market rate changes.

Question 8

1. Level 3 valuation using an income approach (discounted cash flows) because the security is thinly traded
2. Level 2 valuation using quoted prices for similar securities adjusted for differences
3. Level 1 valuation using quoted prices for identical assets in a market Harbor can access at the measurement date (correct answer)
4. Measure at historical cost because donated securities are recorded at donor’s carrying value

Explanation: This question tests fair value hierarchy classification under ASC 820 for donated equity securities received by a not-for-profit entity. The key financial data indicates that while the stock is thinly traded, there are recent orderly market transactions for identical shares at $42 per share that Harbor can access at the measurement date. ASC 820-10-35-40 defines Level 1 inputs as quoted prices in active markets for identical assets that the reporting entity can access at the measurement date; the existence of recent orderly transactions for identical shares that Harbor can access qualifies as Level 1, despite the thin trading. Option A is incorrect because Level 3 valuation using unobservable inputs is only appropriate when observable market data for identical or similar assets is unavailable. Option B is incorrect because Level 2 inputs involve quoted prices for similar (not identical) assets or identical assets in markets that are not active. Option D is incorrect because ASC 958-605-30-2 requires not-for-profit entities to measure donated securities at fair value on the contribution date, not at the donor's historical cost. The decision framework is: classify fair value measurements as Level 1 when quoted prices for identical assets in accessible markets exist, regardless of trading volume, as long as transactions are orderly.

Question 9

1. Equity security measured at fair value with changes in net income because ownership is below 20%
2. Equity method investment because Pine can exercise significant influence over Alder (correct answer)
3. Consolidated subsidiary because board representation indicates control
4. Available-for-sale equity security with changes in other comprehensive income

Explanation: This question tests the determination of significant influence under ASC 323 despite ownership below the typical 20% threshold. The key financial data shows Pine owns only 12% of Alder but has board representation and participates in significant operating and financing decisions through contractual arrangements. ASC 323-10-15-6 states that significant influence may be evidenced by board representation, participation in policy-making, and other factors, even with ownership below 20%; these qualitative factors override the percentage ownership presumption. Option A is incorrect because the presence of significant influence indicators requires equity method accounting regardless of the ownership percentage being below 20%. Option C is incorrect because board representation alone, without majority ownership or other control indicators, does not constitute control requiring consolidation under ASC 810. Option D is incorrect because ASC 321 eliminated the available-for-sale classification for equity securities, and significant influence requires equity method accounting anyway. The decision framework is: assess both quantitative (ownership %) and qualitative factors (board seats, policy participation) to determine significant influence, with qualitative factors potentially overriding low ownership percentages.

Question 10

1. Recognize equity method loss of $270,000 ($900,000 × 30%) and report a negative investment balance of $(70,000)$
2. Recognize equity method loss limited to $200,000 and reduce the investment balance to zero, with no additional loss recognized (correct answer)
3. Recognize no equity method loss because dividends were not paid
4. Recognize equity method loss of $270,000 and record the excess$70,000 as a liability for expected future funding

Explanation: This question tests the limitation on equity method losses under ASC 323 when the investment balance reaches zero. The key financial data shows River's 30% share of Delta's $900,000 loss equals$270,000, but River's investment balance is only $200,000, with no legal or constructive obligations to fund Delta. ASC 323-10-35-19 states that an investor shall discontinue applying the equity method when the investment balance reaches zero and shall not recognize additional losses unless the investor has guaranteed obligations or is otherwise committed to provide financial support; since River has no such obligations, losses are limited to reducing the investment to zero. Option A is incorrect because it would create a negative investment balance, which is not permitted without legal or constructive obligations. Option C is incorrect because equity method losses are recognized regardless of dividend payments. Option D is incorrect because recording a liability requires a legal or constructive obligation to fund future losses, which River explicitly lacks. The decision framework is: limit equity method losses to the investment's carrying amount unless the investor has legal/constructive obligations or has guaranteed the investee's obligations, in which case additional losses create a liability.

Question 11

1. $475,000
2. $495,000
3. $520,250
4. $494,250 (correct answer)

Explanation: When you see an investment where one company owns a significant percentage of another's shares (here, 15,000 ÷ 40,000 = 37.5%), this signals equity method accounting. Under the equity method, you adjust the investment account for your share of the investee's earnings, reduce it for dividends received, and eliminate intercompany profits. Start with the initial investment of $450,000. Apex's 37.5$200,000 net income, adding $75,000 to the investment account. When Delta pays$80,000 in dividends, Apex receives 37.5% or $30,000, which reduces the investment account since dividends represent a return of investment under the equity method. The critical piece is the intercompany transaction. When Delta sold land to Apex for $120,000 (book value$90,000), Delta recorded a $30,000 gain. Since Apex has significant influence, you must eliminate 37.5$30,000 × 37.5% = $11,250. Final calculation: $450,000 +$75,000 - $30,000 -$11,250 = $494,250. Answer D ($494,250) correctly applies all equity method adjustments. Answer A ($475,000) ignores the intercompany elimination. Answer B ($495,000) includes the income and dividend adjustments but misses the profit elimination. Answer C ($520,250) appears to add rather than subtract the intercompany profit elimination. Remember: equity method investments require three key adjustments—share of earnings (add), dividends received (subtract), and elimination of intercompany profits (subtract your ownership percentage).

Question 12

1. Investment carrying amount of $360,000 and investment income of$36,000
2. Investment carrying amount of $385,000 and dividend income of$9,000 (correct answer)
3. Investment carrying amount of $385,000 and investment income of$41,400
4. Investment carrying amount of $387,000 and other comprehensive income of$5,400

Explanation: When you encounter an equity investment question, the first step is determining the appropriate accounting method based on ownership percentage and influence. With 18% ownership and no significant influence, this investment falls under the fair value through net income method (formerly available-for-sale securities). Under this method, you report the investment at fair value on the balance sheet and recognize only dividends received as income. Catalyst's investment carrying amount should be $385,000 (the year-end fair value), and dividend income should be$9,000 (18% × $50,000 dividends paid by Innovate). The$25,000 unrealized gain ($385,000 -$360,000) flows through net income, but the question specifically asks for amounts "related to this investment," making dividend income the most precise answer. Choice A incorrectly uses the original cost of $360,000 as the carrying amount and calculates$36,000 income (18% × $200,000 net income), which would apply under the equity method - but that requires significant influence, typically 20-50% ownership. Choice C uses the correct fair value carrying amount of $385,000 but incorrectly calculates income as$41,400. This appears to combine dividend income with a portion of comprehensive income, which isn't how fair value accounting works. Choice D shows $387,000 carrying amount ($360,000 + $36,000 share of income -$9,000 dividends + $5,400 OCI), mixing equity method mechanics with fair value presentation. Study tip: Remember the 20% threshold - below it without significant influence means fair value accounting with dividend income recognition, not equity method income recognition.

Question 13

1. $627,000
2. $645,000
3. $621,000 (correct answer)
4. $639,000

Explanation: Equity method calculation: Initial cost $600,000, plus share of income (30$150,000 = $45,000), less share of dividends (30$60,000 = $18,000), less amortization of excess cost. Excess cost =$600,000 - (30% × $1,800,000) =$600,000 - $540,000 =$60,000. Annual amortization = $60,000 ÷ 10 years =$6,000. Carrying amount = $600,000 +$45,000 - $18,000 -$6,000 = $621,000. Choice A omits the amortization. Choice B omits dividends. Choice D omits both dividends and amortization.

Question 14

1. $72,000 interest income (correct answer)
2. $108,000 net loss ($180,000 unrealized loss less $72,000 interest income)
3. $108,000 net income ($180,000 unrealized gain less $72,000 interest expense)
4. $180,000 unrealized loss with$72,000 interest income reported separately

Explanation: Under the business model test and SPPI (solely payments of principal and interest) criteria, these debt securities qualify for measurement at amortized cost. Only the $72,000 interest income affects net income; the$180,000 decline in fair value is not recognized since the securities are not measured at fair value. Choice B incorrectly includes the fair value decline in net income. Choice C has the wrong sign and characterizes interest as expense. Choice D incorrectly reports unrealized losses for amortized cost securities.

Question 15

1. Record $26,000 interest income using the effective interest method and recognize fair value changes in other comprehensive income
2. Record $30,000 interest income using the stated rate and recognize fair value changes through net income
3. Record $27,040 interest income using the effective interest method and recognize fair value changes through net income (correct answer)
4. Record $30,000 interest income using the stated rate and amortize the$20,000 premium over 5 years

Explanation: Since the security is held for trading, it must be measured at fair value through net income (FVTNI). However, interest income should still be calculated using the effective interest method: $520,000 × 5.2$27,040. All fair value changes flow through net income, not OCI. Choice A incorrectly uses OCI for a trading security. Choice B uses the wrong interest calculation method. Choice D incorrectly treats this as an amortized cost security despite the trading classification.