Reference no: EM132979611

Problem 1: Which one of the following statements best describes the impact of classifying trading securities as held-to-maturity securities? Assume that the losses are NOT deemed as other than temporary.

a. Allows a company to avoid booking unrealized gains and losses on the income statement but does not allow the company to manipulate its total equity
b. Allows a company to avoid booking unrealized gains and losses on the income statement and also allows the company to manipulate its total equity
c. Does not allow a company to avoid booking unrealized gains and losses on the income statement but allows the company to manipulate its total equity
d. Does not allow a company to avoid booking unrealized gains and losses on the income statement and does not allow the company to manipulate its total equity

Problem 2: ACo owns 10% of the outstanding shares of BCo. ACo has no influence on BCo. BCo's shares do not have readily available market values. Therefore, ACo should account for its investment using the cost method. BCo is profitable and has NOT declared all of its profits as dividends. If ACo had used the equity method instead of the cost method, what effect would it have on ACo's financial statements? [Assume dividends received are treated as operating cash inflows.]

a. The book value of ACo's investment in BCo would have been lower and ACo would have shown lower retained earnings. ACo's operating cash flow would have been lower.
b. The book value of ACo's investment in BCo would have been higher and ACo would have shown higher retained earnings. ACo's operating cash flow would have been higher.
c. The book value of ACo's investment in BCo would have been higher and ACo would have shown higher retained earnings. However, ACo's operating cash flow would NOT have been affected.
d. None of the above.