Deck 13: Investments and Fair Value Accounting

Question 1

The investor carrying an investment by the equity method records cash dividends received as an increase in the carrying amount of the investment.

Answer 1

False

Question 2

The corporation owning all or a majority of the voting stock of another corporation is known as the parent company.

Answer 2

True

Question 3

The financial statements resulting from combining parent and subsidiary statements are called consolidated statements.

Answer 3

True

Question 4

When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price.

Question 5

The equity method causes the investment account to mirror the proportional changes in book value of the investee.

Question 6

It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company.

Question 7

Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method.

Question 8

When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded.

Question 9

An equity investment in less than 20% of another company's stock is accounted for using the cost method.

Question 10

To record a bond investment made between interest payment dates, Investment in Bonds would be debited and Cash and Interest Revenue would be credited.

Question 11

Any gains or losses on the sale of bonds normally would be reported in the Other Income Loss) section of the income statement.

Question 12

Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment.

Question 13

If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment.

Question 14

When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income.

Question 15

As with other assets, the cost of a bond investment includes all costs related to the purchase.

Question 16

Although marketable securities may be retained for several years, they continue to be classified as temporary, provided they are readily marketable and can be sold for cash at any time.

Question 17

Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments.

Question 18

If the proceeds from the sale of bond investments exceed the carrying amount of the bonds, a gain is realized.

Question 19

Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market value each accounting period.

Question 20

The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.

Question 21

Comprehensive income is all changes in stockholders' equity during the period except those resulting from dividends and stockholders' investments.

Question 22

Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit.

Question 23

Unrealized gains and losses on trading securities are not included in the calculation of income from operations.

Question 24

Investment in Bonds is listed on the balance sheet after Bonds Payable.

Question 25

Investments in stocks that are expected to be held for the long term are listed in the stockholder's equity section of the balance sheet.

Question 26

Investments in bonds that management intends to hold to maturity are called trading securities.

Question 27

Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.

Question 28

When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds.

Question 29

Trading securities are reported on the balance sheet at cost.

Question 30

The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee.

Question 31

Investment in Bonds is reported on the balance sheet at lower of cost or market.

Question 32

Trading securities should be reported on the financial statements at fair market value.

Question 33

In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.

Question 34

Held-to-maturity securities are reported on the balance sheet at fair market value.

Question 35

A disadvantage of fair value use is that the comparability between companies may be impacted by different fair value measurements.

Question 36

Any difference between the fair market values of the securities and their cost is a realized gain or loss.

Question 37

Growth firms generally pay regular dividends to stockholders.

Question 38

Generally accepted accounting principles GAAP) require the use of fair value accounting for all assets and liabilities.

Question 39

Comprehensive income must be reported on the income statement.

Question 40

Temporary investments are recorded at their cost, which would include broker's commissions.

Question 41

On June 1, $40,000 of treasury bonds were purchased between interest dates. The broker commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1?

A) $400
B) $406
C) $2,000
D) $2,400

Question 42

Which of the following is not a reason to invest excess cash in temporary investments?

A) earn interest revenue
B) influence the operations of another company
C) receive dividends
D) realize gains from the increase in market value of the securities

Question 43

Temporary investments such as in trading securities are

A) recorded at cost but reported at fair market value
B) recorded at cost and reported at cost
C) recorded at cost but reported at lower of cost or fair market value
D) recorded at fair market value and reported at fair market value

Question 44

A company uses cash to pay all of the following except

A) all of the options are uses of cash
B) interest to creditors
C) current expenses
D) dividends to stockholders

Question 45

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include a

A) debit to Interest Receivable for $2,000
B) debit to Investment in Bonds for $202,000
C) debit to Cash for $200,000
D) credit to Interest Revenue for $2,000

Question 46

The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet.

Question 47

On June 1, $50,000 of treasury bonds were purchased between interest dates. The broker commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to the Investment-Treasury Bonds account?

A) $50,000
B) $50,500
C) $49,500
D) $53,000

Question 48

Comprehensive income does not affect net income or retained earnings.

Question 49

Investment in certificates of deposit and other securities that do not change in value are reported on the balance sheet as

A) equity investments
B) available-for-sale securities
C) cash and cash equivalents
D) held-to-maturity securities

Question 50

On April 1, Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a

A) credit to Interest Payable for $2,000
B) debit to Investments-Tetter Company Bonds for $52,000
C) debit for Cash of $50,000
D) debit to Investments-Tetter Company Bonds for $50,000

Question 51

Cash is used for all of the following activities except

A) supporting current operating activities
B) replacing worn-out machinery
C) expanding current operations
D) bribing government officials

Question 52

Long-term investments are held for all of the listed reasons below except

A) to earn the interest or dividend income
B) for their long-term gain potential
C) to have influence over another business entity
D) to meet current cash needs

Question 53

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be

A) debit Cash, $4,000; credit Interest Revenue, $4,000
B) debit Cash, $4,000; credit Interest Receivable, $4,000
C) debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500
D) debit Cash, $2,500; credit Interest Revenue, $2,500

Question 54

Foreign currency translation adjustment is an example of an item that would be included in other comprehensive income.

Question 55

The primary objectives of investing in temporary investments is to

A) all of these
B) realize gains from increases in market price of the securities
C) receive dividends
D) earn interest revenue

Question 56

The cumulative effects of other comprehensive income items may be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income.

Question 57

The journal entry Pierce will record on June 30 will include a

A) credit to Interest Revenue for $2,400
B) debit to Cash for $3,600
C) credit to Cash for $2,400
D) credit to Interest Receivable for $1,200

Question 58

Temporary investments

A) are reported as current assets
B) include cash equivalents
C) do not include equity securities
D) all are correct

Question 59

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be

A) debit Investment-Evans Company Bonds, $101,500; credit Cash, $101,500
B) debit Investment-Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500
C) debit Investment-Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash $101,500
D) debit Investment-Evans Company Bonds, $100,000; credit Cash $100,000

Question 60

Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be

A) debit Cash, $105,000; credit Investment-Evans Company Bonds, $104,500, and Interest Revenue, $500
B) debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000
C) debit Cash, $104,500, and Interest Receivable, $500; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500
D) debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500

Question 61

When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as an)

A) prior period adjustment
B) operating income and losses
C) paid-in capital addition
D) gain or loss

Question 62

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to

A) Investment in Vallerio
B) Retained Earnings
C) Dividend Revenue
D) Dividend Receivables

Question 63

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

A) investment only
B) investment plus Wendell's share of Porter's net income earned since the investment was purchased
C) investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased
D) investment plus Wendell's share of Porter's net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased

Question 64

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

A) credit to cash for $9,000
B) debit to the investment account for $9,000
C) credit to the investment account for $9,000
D) credit to a loss account for $9,000

Question 65

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the

A) equity method
B) market method
C) cost or market method
D) cost method

Question 66

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

A) $12,750 gain
B) $600 gain
C) $600 loss
D) $9,250 loss

Question 67

The journal entry Pierce will record on February 1 will include a

A) credit to Interest Revenue for $1,500
B) credit to Gain on Sale of Investments for $1,500
C) credit to Cash for $52,500
D) credit to Interest Receivable for $600

Question 68

Which of the following stock investments should be accounted for using the cost method?

A) investments of less than 20%
B) investments between 20% and 50%
C) investments of less than 20% and investments between 20% and 50%
D) all stock investments should be accounted for using the cost method

Question 69

Which of the following statements is not a reason a company may purchase another company's stock?

A) earning a return on excess cash
B) sustain the other company's stock price
C) gaining control of another company's operations
D) developing or maintaining business relationships

Question 70

The equity method of accounting for investments

A) requires a year-end adjustment to revalue the stock to lower of cost or market
B) requires the investment to be reported at its original cost
C) requires the investment be increased by the reported net income of the investee
D) requires the investment be increased by the dividends paid by the investee

Question 71

Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

A) debit Investment in Worton Corporation Stock; credit Cash
B) debit Cash; credit Dividend Revenue
C) debit Investment in Worton Corporation Stock; credit Income of Worton Corporation
D) debit Cash; credit Investment in Worton Corporation Stock

Question 72

Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives?

A) debit Investment in Worton Corporation; credit Cash
B) debit Cash; credit Dividend Revenue
C) debit Investment in Worton Corporation; credit Income of Worton Corporation
D) debit Cash; credit Investment in Worton Corporation

Question 73

The cost method of accounting for stock

A) recognizes dividends as income
B) is only appropriate as part of a consolidation
C) requires the investment be increased by the reported net income of the investee
D) requires the investment be decreased by the reported net income of the investee

Question 74

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is

A) Cash 4,500 Investments-Saxton Company Stock 4,500
B) Investments-Saxton Company Stock 4,780 Cash 4,780
C) Investments-Saxton Company Stock 4,500
Brokerage Fee Expense
280
Cash
4,780
D) Investments-Saxton Company Stock 4,500 Cash 4,500

Question 75

Interest revenue on bonds is reported

A) as an addition to the Investment in Bonds account
B) as part of comprehensive income but not as part of net income
C) as part of other income
D) as part of operating income

Question 76

Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the

A) parent
B) minority interest
C) affiliate
D) subsidiary

Question 77

Which of the following items would not affect the investor's income for the period?

A) interest received on a temporary investment in bonds
B) dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock
C) dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock
D) interest received on a long-term investment in bonds

Question 78

What are the total proceeds from the February 1 sale?

A) $52,400
B) $51,500
C) $50,000
D) $52,000

Question 79

The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the

A) cost method
B) market method
C) income method
D) equity method

Question 80

Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of bonds at 97. The journal entry for the purchase would include a

A) credit to Interest Receivable for $4,500
B) credit to Interest Revenue for $4,500
C) debit to Interest Receivable for $4,500
D) debit to Interest Revenue for $4,500