Deck 5: Short-Term Investments Receivables

Question 1

An unrealized gain on a trading security:

A)is recorded when a trading security is sold for more than its cost.
B)is recorded when a trading security is sold for less than its cost.
C)is recorded when the fair value of the trading security is more than its cost.
D)is recorded when the fair value of the trading security is less than its cost.

Answer 1

C

Question 2

At the end of each period, unrealized gains and losses on trading securities are closed and eventually become part of retained earnings on the income statement.

Answer 2

False

Question 3

A company's trading security has a fair value which exceeds its cost. When recording the year-end adjustment, the:

A)Investment in Trading Securities account will be credited.
B)Unrealized Gain on Trading Securities account will be credited.
C)Unrealized Loss on Trading Securities account will be debited.
D)Realized Gain on Sale of Treasury Securities account will be credited.

Answer 3

B

Question 4

Investments in trading securities:

A)are reported after accounts receivable on the balance sheet.
B)are more liquid than cash.
C)are reported at historical cost on the balance sheet.
D)are reported at current fair values on the balance sheet.

Question 5

Matthew Company purchases a trading security for $12,000 cash. The journal entry to record this transaction will include a:

A)debit to the Investment in Trading Securities account and a credit to Cash.
B)debit to Cash and a credit to the Investment in Trading Securities account.
C)debit to the Long-term Investment account and a credit Cash.
D)debit to the Unrealized Loss on Trading Securities account and a credit to Cash.

Question 6

A company will have an unrealized loss if the fair value of a trading security is greater than its cost.

Question 7

Stock investments that are expected to be sold within the near term, with the intent of generating profits on the sale, are called:

A)held-to-maturity investments.
B)trading securities.
C)available-for-sale securities.
D)equity-method investments.

Question 8

All investments in securities NOT classified as trading securities or held-to-maturity securities are classified as:

A)debt securities.
B)equity securities.
C)marketable securities.
D)available-for-sale securities.

Question 9

When a company receives a cash dividend from a trading security, the journal entry includes:

A)a debit to Investment in Trading Securities and credit to Cash.
B)a debit to Dividend Revenue and credit to Cash.
C)a debit to Cash and credit to Investment in Trading Securities.
D)a debit to Cash and credit to Dividend Revenue.

Question 10

Trading securities may generate dividend revenue.

Question 11

Investments in debt and equity securities create both unrealized and realized gains and losses.

Question 12

An unrealized gain occurs when a company sells a trading security.

Question 13

Which of the following statements is CORRECT?

A)Trading securities can be current or long-term assets.
B)Available-for-sale securities are always current assets.
C)Held-to-maturity securities are always current assets.
D)Trading securities are always current assets.

Question 14

Short-term investments, which are classified as current assets, may be divided into held-to-maturity securities, trading securities and available-for-sale securities.

Question 15

The purpose of purchasing a trading security is to sell it within the near term, at its cost.

Question 16

Unrealized gains and losses on trading securities are reported on the income statement.

Question 17

To be classified as a current asset, an investment must either be liquid or the investor must intend to use it to pay a current liability.

Question 18

Trading securities are originally recorded at their cost.

Question 19

Fair value is the amount for which investments in debt or equity securities can be sold.

Question 20

Investments in Trading Securities are reported on the:

A)income statement at current fair values.
B)balance sheet at cost.
C)balance sheet at current fair values.
D)income statement at cost.

Question 21

Smith Corporation purchases $620,000 of TMI Corporation stock on October 18, 2018. Smith Corporation classifies this investment as a trading security. On December 1, Smith Corporation received a cash dividend of $12,000 on the TMI Corporation stock. On December 31, 2018, Smith Corporation's investment in TMI Corporation has a fair value of $600,000.
Required:
Prepare the necessary journal entries. Explanations are not required.

Question 22

When a company receives a cash dividend from a short-term available-for-sale security, the journal entry is:

A)debit to Investment in Available-for-Sale Securities and credit Cash.
B)debit to Cash and credit to Dividend Revenue.
C)debit to Dividend Revenue and credit to Cash.
D)debit to Cash and credit to Investment in Available-for-Sale Securities.

Question 23

Strategies to increase the current ratio may include:

A)increasing sales.
B)paying off some current liabilities before the end of the year.
C)reclassifying long-term investments as short-term investments based on a plan to sell the investments within the next year.
D)all of the above.

Question 24

Which statement is FALSE?

A)Available-for-sale securities are held with the intent of selling them some time in the future.
B)Held-to-maturity securities are stock investments that the investor has the intent and ability to hold until they mature.
C)Trading securities are debt and stock investments purchased and expected to be sold within the near term through active trading.
D)A debt security, not classified as either trading or held-to-maturity, is an available-for-sale security.

Question 25

On March 1, 2016, Emma's Toy Store purchased Toy Maker's stock for $33,400, as a short-term available-for-sale security. On April 10, dividends of $1,075 were received from the Toy Maker's stock. On December 31, 2016, the end of Emma's Toy Store's accounting year, the Toy Maker's stock had a fair value of $34,300. On January 1, 2017, Emma's Toy Store sold all of the Toy Maker's stock for $35,000.
Required:
Prepare the journal entries needed to record the transactions for 2016 and 2017. Explanations are not required.

Question 26

The Investment in Available-for-Sale Securities account is reported on the:

A)income statement at cost.
B)income statement at current fair value.
C)balance sheet at cost.
D)balance sheet at current fair value.

Question 27

To be classified as a current asset, an investment must meet which of the following criteria:

A)the investment must be liquid.
B)the investor must intend to either convert the investment to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liability.
C)the investment must be easily convertible to cash.
D)all of the above

Question 28

Unrealized gains on trading securities are reported on the:

A)statement of cash flows as investing activities.
B)balance sheet as an element of other comprehensive income.
C)income statement as an element of other comprehensive income.
D)income statement as Other Revenues and Gains.

Question 29

An investment, which was purchased for $400,000 and classified as an available-for-sale security, has a fair value of $420,000 at the end of the year. The year-end journal entry will have a credit to:

A)Retained Earnings.
B)Unrealized Gain on Investment in Available-for-Sale Securities.
C)Investment in Available-for-Sale Securities.
D)Gain on Sale of Investment in Available-for-Sale Securities.

Question 30

When a company sells a short-term available-for-sale security, the Gain on the Sale of the Investment in Available-for-Sale Securities account is reported on the:

A)revenues section of the income statement.
B)current assets section of the balance sheet.
C)other revenues and gains section of the income statement.
D)stockholders' equity section of the balance sheet.

Question 31

Trading securities purchased in 2016 for $90,300, had a fair value of $92,100 on December 31, 2016. At December 31, 2017 the securities had a fair value of $95,700. The journal entry on December 31, 2017 would include a:

A)debit to the Investment in Trading Securities account for $5400.
B)debit to the Investment in Trading Securities account for $3600.
C)credit to the Unrealized Gain on Trading Securities account for $5400.
D)debit to the Unrealized Loss on Trading Securities account for $3600.

Question 32

A realized gain on the sale of a trading security occurs when the:

A)sale price is greater than the trading investment carrying amount.
B)sale price is less than the trading investment carrying amount.
C)sale price is greater than the trading investment original cost.
D)sale price is less than the trading investment original cost.

Question 33

Martin Company has current assets of $10,000 and current liabilities of $8,000. Its management is concerned about the current ratio and is considering paying Accounts Payable totaling $3,000. Martin Company has a loan with National Bank which requires Martin to maintain a minimum current ratio of 1.4.
Required:
1. What is the formula for the current ratio?
2. Compute the current ratio before the possible payment of the liabilities of $3,000.
3. Compute the current ratio assuming that Martin Company pays the $3,000 in current liabilities.
4. Compute the current ratio assuming that Martin Company buys inventory of $3,000 on account. Ignore Requirement 3.
5. Compute the current ratio assuming that Martin Company sells short-term investments with a carrying value of $3,000 for $3,000. Ignore Requirements 3 and 4.

Question 34

Which statement is TRUE?

A)Available-for-sale securities are debt securities only.
B)Trading securities are debt securities only.
C)Held-to-maturity securities are debt securities only.
D)Held-to-maturity securities are reported as long-term assets only.

Question 35

Jones Company purchases 1,000 shares of Micro Corporation stock at $34 per share on July 31. The company expects to hold the stock for 6 months and then sell it. At December 31, the market price of the stock is $32 per share.
Required:
1. What type of investment is this for Jones Company? Explain your answer.
2. Prepare the necessary journal entries. Explanations are not required.
3. Discuss how Jones Company would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31.

Question 36

Michael Company purchased a trading investment that had a carrying amount of $35,900 when its management decided to sell it. The investment was purchased for $32,000. If Michael Company sold this investment for $45,100, Michael will have a(n):

A)Gain on Sale of Trading Security for $13,100.
B)Gain on Sale of Trading Security for $9200.
C)Unrealized Loss on Trading Security of $9200.
D)Unrealized Gain on Trading Security of $13,100.

Question 37

On April 3, Jenny's Store purchased stock in New Company for $36,000, and classified it as a short-term available-for-sale security. On April 28, Jenny's Store received dividends from New Company of $1,250. On June 30, the New Company stock had a fair value of $32,000.
Required:
1. Prepare the journal entries needed to record the transactions. Explanations are not required.
2. What will Jenny's Store report on its income statement for the year ended December 31?

Question 38

The Unrealized Gains on Investment in Available-for-Sale Securities account is reported on the:

A)income statement.
B)statement of retained earnings.
C)current asset section of the balance sheet.
D)stockholders' equity section of the balance sheet.

Question 39

When a company sells a trading security, the Gain on the Sale of Trading Securities is reported in the:

A)stockholders' equity section of the balance sheet.
B)short-term investments section of the balance sheet.
C)other revenue, gains, and losses section of the balance sheet.
D)other revenues and gains of the income statement.

Question 40

Trading securities purchased for $400,000, had a fair value of $410,000 at the end of the year. The adjusting entry to record this difference includes a credit to:

A)Retained Earnings.
B)Unrealized Gain on Trading Securities.
C)Investment in Trading Securities.
D)Accumulated Other Comprehensive Income.

Question 41

On December 2, a customer returned merchandise, with a selling price of $1200 purchased on account, to a department store. Ignoring cost of goods sold, which journal entry should the department store prepare? Assume no sales discount was offered for early payment.

A)Debit Sales Revenue for $1200 and credit Accounts Receivable for $1200.
B)Debit Sales Revenue for $1200 and credit Cash for $1200.
C)Debit Sales Revenue for $1200 and credit Refund Liability for $1200.
D)Debit Refund Liability for $1200 and credit Accounts Receivable for $1200.

Question 42

Which of the following statements regarding contracts is INCORRECT?

A)The process of revenue recognition is based on contracts that the entity has with outsiders.
B)A contract is an agreement between two parties that creates enforceable rights or performance obligations.
C)Only written contracts are valid.
D)Identifying the contract with the customer is the first step of the revenue recognition model.

Question 43

The revenue recognition principle requires that revenue be recorded only for the net amount that the company expects to eventually realize.

Question 44

To satisfy a performance obligation means that:

A)the provider has substantially completed the service for the customer.
B)the goods have been transferred to the customer who has assumed ownership and control over goods.
C)the selling entity has done everything required to earn the revenue.
D)All of the above statements are correct.

Question 45

On December 1, Macy Company sold merchandise with a selling price of $1000 on account to Mrs. Jorgensen, with terms 3/10, n/30. Ignoring cost of goods sold, what journal entry did Macy Company prepare on December 1? Macy expects no sales returns.

A)Debit Cash for 1000 and credit Accounts Receivable for 1000.
B)Debit Accounts Receivable for 970 and credit Cash for 970.
C)Debit Accounts Receivable for 970 and credit Sales Revenue for 970.
D)Debit Sales Revenue for 1000 and credit Accounts Receivable for 1000.

Question 46

On December 1, Macy Company sold merchandise with a selling price of $1000 on account to Mrs. Jorgensen, with terms 3/10, n/30. Mrs. Jorgensen paid the amount due on December 9. Which journal entry should Macy Company prepare on December 9?

A)Debit Cash for $1000 and credit Sales Revenue for $1000.
B)Debit Sales Revenue for $1000 and credit Cash for $1000.
C)Debit Sales Revenue for $1000, credit Sales Discount for $30, and credit Cash for $970.
D)Debit Cash for $970 and credit Accounts Receivable for $970.

Question 47

If the credit terms are 2/10, n/30, the buyer can get a 2% discount if the invoice is paid within 20 days of the invoice date.

Question 48

A business offers credit terms of 2/15, n/30. These terms indicate that:

A)the total amount of the invoice must be paid within 15 days of the invoice date.
B)a discount of 2% can be taken if the invoice is paid within 15 days of the invoice date.
C)the buyer can take a 2% discount if the bill is paid within 30 days of the invoice date.
D)no discount is offered for early payment.

Question 49

On July 8, ABC Plumbing provided services of $7,500 on account to First Bank, with terms 3/10, n/30. On July 28, ABC received the full amount due from First Bank.
Prepare the journal entries for ABC Plumbing. Omit explanations.

Question 50

Nichols Company has shipped goods to one of its customers FOB shipping point. Nichols Company will recognize sales revenue when:

A)their customer has received the goods.
B)the goods leave Nichols' shipping dock.
C)the two parties agree that revenue should be recognized.
D)the customer pays the invoice.

Question 51

Which of the following is a TRUE statement regarding sales?

A)Sales revenue recognized in a particular period must be reduced by an amount for estimated sales returns.
B)For the sale of products, the performance obligation is generally satisfied when the customer orders the goods.
C)Sales returns and allowances increase a company's profit.
D)If customers return merchandise within the refund period, the Sales Returns account is credited.

Question 52

When goods are shipped FOB destination, revenue is recognized by the seller when the goods leave the seller's shipping dock.

Question 53

A company has gross revenue of $502,000; sales discounts of $2900; and sales returns and allowances of $3300. Net revenue is:

A)$495,800.
B)$498,700.
C)$499,100.
D)$502,000.

Question 54

When goods are shipped FOB destination:

A)revenue is recognized when the goods leave the shipping dock.
B)revenue is recognized when the invoice is mailed to the customer.
C)revenue is recognized only after cash payment is received.
D)revenue is recognized when the goods are received by the customer.

Question 55

On December 1, Macy Company sold merchandise with a selling price of $6000 on account to Mrs. Jorgensen, with terms 5/10, n/30. On December 3, Mrs. Jorgensen returned merchandise with a selling price of $500. Mrs. Jorgensen paid the amount due on December 9. What journal entry did Macy Company prepare on December 9?

A)Debit Cash for $5225 and credit Sales Revenue for $5225.
B)Debit Sales Revenue for $500 and credit Cash for $500.
C)Debit Sales Revenue for $5500, credit Sales Discount for $275 and credit Cash for $5225.
D)Debit Cash for $5225 and credit Accounts Receivable for $5225.

Question 56

The shipping terms in the sales contract determine when ownership of goods changes hands between the buyer and the seller.

Question 57

Leno Company sells goods to the Fallon Company for $10,000. It offers credit terms of 2/10, n/30. If Fallon Company pays the invoice within the discount period, Leno Company will record a debit to Cash in the amount of:

A)$10,200.
B)$200.
C)$9800.
D)$10,000.

Question 58

On December 1, Macy Company sold merchandise with a selling price of $3000 on account to Mrs. Jorgensen, with terms 4/10, n/30. On December 3, Mrs. Jorgensen returned merchandise with a selling price of $900. Mrs. Jorgensen paid the amount due on December 19. What journal entry did Macy Company prepare on December 19? (Assume all sales are recorded at the net amount.)

A)Debit Cash for $2016 and credit Sales Revenue for $2016.
B)Debit Cash for $2100 and credit Accounts Receivable for $2016 and credit Sales Discounts Forfeited 84.
C)Debit Cash for $2016 and credit Accounts Receivable for $2016.
D)Debit Cash for $2016, debit Sales Discounts Forfeited for 84 and credit Accounts Receivable for $2100.

Question 59

Retailers, wholesalers, and manufacturers typically disclose sales revenue at the net amount, which means after sales discounts and sales returns and allowances have been added to gross sales revenue.

Question 60

On October 11, Younger Company sold merchandise with a selling price of $6,000 on account to Main Street Office Supplies, with terms 2/10, n/30. No sales returns are expected. On October 20, Younger received the full amount due from Main Street.
Ignoring cost of goods sold, prepare the journal entries for Younger Company. Omit explanations.

Question 61

Under the direct write-off method, the journal entry to record Uncollectible-Account Expense includes a credit to Accounts Receivable.

Question 62

When evaluating the collectability of accounts receivable:

A)the Uncollectible-Account Expense is a contra account.
B)the Allowance for Uncollectible Accounts is an operating expense in the selling, general and administrative category.
C)the allowance method uses estimates developed from the company's collection experience.
D)the direct write-off method uses the Allowance for Uncollectible Accounts to record bad debts.

Question 63

Under the allowance method, Uncollectible-Account Expense is recorded in the same accounting period as the sale.

Question 64

By selling on credit, companies run the risk of not collecting some receivables.

Question 65

Accounts (trade)receivable are amounts to be collected from customers from the sale of goods or services.

Question 66

The most important internal control over cash is to:

A)have all customers pay by check.
B)separate cash-handling duties from cash-accounting duties.
C)separate cash-handling from the mailroom.
D)have an imprest petty cash fund.

Question 67

The two major types of receivables are accounts receivable and trade receivables.

Question 68

Accounts receivable represents a form of extending credit which requires customers to sign a promise to pay the business a definite sum at the maturity date, plus interest.

Question 69

The category "Other Receivables" on the balance sheet includes:

A)Accounts Receivable, Interest Receivable.
B)Notes Receivable, Accounts Receivable, Interest Receivable.
C)Interest Receivable, Dividend Receivable, Advances to Employees.
D)none of the above.

Question 70

With regard to Accounts Receivable, a separate account for each customer is kept in a(n):

A)control account.
B)subsidiary ledger.
C)general ledger.
D)control ledger.

Question 71

Smith and Son's Department Store has a policy that allows customers to return merchandise for up to 45 days for a full refund. Based on prior experience, approximately 8% of merchandise sold will be returned.
In November, the store's total sales were $2,500,000, all for cash. The cost of the merchandise sold was $1,600,000. No sales discount is offered for early payment.
In December, within the allowable return period, customers returned merchandise that retailed for $100,000 and that cost $66,000 for a refund.
Prepare the journal entries for these transactions. Omit explanations

Question 72

Accounts receivable are reported on the balance sheet at their net realizable value.

Question 73

Uncollectible-account expense is included in Cost of Goods Sold on the income statement.

Question 74

What is the benefit and cost of extending credit to customers?

A)
B)
C)
D)

Question 75

The net realizable value of accounts receivable is the difference between gross accounts receivable and:

A)Sales Discounts.
B)Sales Returns and Allowances.
C)Uncollectible-Account Expense.
D)Allowance for Uncollectible Accounts.

Question 76

The Allowance for Uncollectible Accounts has a normal debit balance because it is an asset account.

Question 77

Generally Accepted Accounting Principles (GAAP)allow companies to use either the direct write-off method or the allowance method to determine uncollectible-account expense.

Question 78

With regard to notes receivable, which of the following statements is CORRECT?

A)Notes receivable are less formal contracts than accounts receivable.
B)Notes receivable are also called promissory notes because a written promise to pay is not required.
C)All notes receivable require the borrower to pledge collateral.
D)The borrower signs a written promise to pay the lender a definite sum at the maturity date, with interest.

Question 79

Under the allowance method, companies are not allowed to use different methods to estimate Uncollectible-Account Expense.

Question 80

The general ledger has a separate account receivable for each customer.