Deck 12: Investments

Question 1

In accounting for stock investments of less than 20%, the equity method is used.

Answer 1

False

Question 2

For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

Answer 2

True

Question 3

Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.

Answer 3

False

Question 4

The accounting for short-term debt investments and for long-term debt investments is similar.

Question 5

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

Question 6

In accordance with the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

Question 7

Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.

Question 8

A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

Question 9

Corporations purchase investments in debt or stock securities generally for one of two reasons.

Question 10

In accordance with the historical cost principle, brokerage fees should be added to the cost of an investment.

Question 11

The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Question 12

The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.

Question 13

If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.

Question 14

Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

Question 15

Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.

Question 16

Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

Question 17

When debt investments are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds.

Question 18

An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

Question 19

Debt investments are investments in government and corporation bonds.

Question 20

A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

Question 21

Corporations invest in other companies for all of the following reasons except to

A)house excess cash until needed.
B)generate earnings.
C)meet strategic goals.
D)increase trading of the other companies' stock.

Question 22

Pension funds and mutual funds regularly invest in debt and stock securities to

A)generate earnings.
B)house excess cash until needed.
C)meet strategic goals.
D)control the company in which they invest.

Question 23

An investment is readily marketable if it is management's intent to sell the investment.

Question 24

If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

Question 25

When recording bond interest, Interest Receivable is reported as a fixed asset in the balance sheet.

Question 26

At the time of acquisition of a debt investment,

A)no journal entry is required.
B)the historical cost principle applies.
C)the Stock Investments account is debited when bonds are purchased.
D)the Investment account is credited for its cost plus brokerage fees.

Question 27

Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.

Question 28

A company may purchase a noncontrolling interest in another firm in a related industry

A)to house excess cash until needed.
B)to generate earnings.
C)for strategic reasons.
D)for speculative reasons.

Question 29

Stocks traded on the New York Stock Exchange are considered readily marketable.

Question 30

When a parent company acquires a wholly owned subsidiary for an amount in excess of the book value of the net assets acquired, the excess is always allocated to goodwill.

Question 31

A typical investment to house excess cash until needed is

A)stocks of companies in a related industry.
B)debt securities.
C)low-risk, highly liquid securities.
D)stock securities.

Question 32

"Intent to convert" does not include an investment used as a resource that will be used whenever the need for cash arises.

Question 33

One of the reasons a corporation may purchase investments is that it has excess cash.

Question 34

The process of excluding intercompany transactions in preparing consolidated statements is referred to as intercompany eliminations.

Question 35

A consolidated income statement will reflect only revenue and expense transactions between the consolidated entity and parties outside the affiliated group.

Question 36

The Fair Value Adjustment account can only have a credit balance or a zero balance.

Question 37

To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

Question 38

Corporations invest excess cash for short periods of time in each of the following except

A)equity securities.
B)highly liquid securities.
C)low-risk securities.
D)government securities.

Question 39

Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received.

Question 40

Available-for-sale securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Question 41

The cost of debt investments includes each of the following except

A)brokerage fees.
B)commissions.
C)accrued interest.
D)the price paid.

Question 42

Ban Co. purchased 50, 5% Waylan Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a

A)debit to Interest Receivable for $1,250.
B)credit to Interest Revenue for $1,250.
C)credit to Interest Revenue for $1,262.50.
D)credit to Debt Investments for $1,262.50.

Question 43

In accounting for debt investments, entries are made for each of the following except the

A)acquisition.
B)interest revenue.
C)sale.
D)entries are made for each answer choice.

Question 44

Which of the following is not a true statement regarding short-term debt investments?

A)The securities usually pay interest.
B)Investments are frequently government or corporate bonds.
C)This type of investment must be currently traded in the securities market.
D)Debt investments are recorded at the price paid less brokerage fees.

Question 45

If a short-term debt investment is sold, the Investment account is

A)credited for the book value of the bonds at the sale date.
B)credited for the cost of the bonds at the sale date.
C)credited for the fair value of the bonds at the sale date.
D)debited for the cost of the bonds at the sale date.

Question 46

Penny Company owns 20% interest in the stock of Lynn Corporation. During the year, Lynn pays $25,000 in dividends, and reports $200,000 in net income. Penny Company's investment in Lynn will increase by

A)$25,000.
B)$40,000.
C)$45,000.
D)$35,000.

Question 47

Which of the following is not a true statement about the accounting for debt investments?

A)At acquisition, the historical cost principle applies.
B)The cost includes any brokerage fees.
C)Debt investments include investments in government and corporation bonds.
D)The cost includes any accrued interest.

Question 48

Tempest Co. purchased 60, 6% Urich Company bonds for $60,000 cash. Interest is payable semiannually on July 1 and January 1. If 30 of the securities are sold on July 1 for $32,000, the entry would include a credit to Gain on Sale of Debt Investments for

A)$1,600.
B)$1,750.
C)$1,800.
D)$2,000.

Question 49

Ban Co. purchased 50, 5% Waylan Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a

A)debit to Interest Receivable for $1,250.
B)debit to Interest Revenue for $1,250.
C)credit to Interest Revenue for $1,262.50.
D)debit to Debt Investments for $1,262.50.

Question 50

Mize Company owns 30% interest in the stock of Lyte Corporation. During the year, Lyte pays $20,000 in dividends to Mize, and reports $300,000 in net income. Mize Company's investment in Lyte will increase Mize's net income by

A)$6,000.
B)$90,000.
C)$96,000.
D)$10,000.

Question 51

Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000. If Bay sells all of its Community bonds for $64,500, what gain or loss is recognized?

A)Loss of $9,300
B)Loss of $4,500
C)Gain of $9,300
D)Gain of $4,500

Question 52

On January 1, 2014, Grgante Corporation purchased 25% of the common stock outstanding of Long Corporation for $270,000. During 2014, Long Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments-Long account on the books of Grgante Corporation at December 31, 2014 is

A)$270,000.
B)$310,000.
C)$350,000.
D)$280,000.

Question 53

For accounting purposes, the method used to account for long-term investments in common stock is determined by

A)the amount paid for the stock by the investor.
B)the extent of an investor's influence on the operating and financial affairs of the investee.
C)whether the stock has paid dividends in past years.
D)whether the acquisition of the stock by the investor was "friendly" or "hostile."

Question 54

Blaine Company had these transactions pertaining to stock investments: Feb. 1 Purchased 2,000 shares of Norton Company (10%) for $51,000.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct) 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the sale of the stock would include a

A)debit to Cash for $30,600.
B)credit to Gain on Sale of Stock Investments for $1,200.
C)debit to Stock Investments for $30,600.
D)credit to Gain on Sale of Stock Investments for $1,800.

Question 55

Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000. The journal entry to record this investment includes a debit to

A)Debt Investments for $64,800.
B)Debt Investments for $60,000.
C)Cash for $60,000.
D)Stock Investments for $60,000.

Question 56

Blaine Company had these transactions pertaining to stock investments: Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.
June 1 Received cash dividends of $3 per share on Horton stock.
Oct) 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the receipt of the dividends on June 1 would include a

A)debit to Stock Investments for $6,000.
B)credit to Dividend Revenue for $6,000.
C)debit to Dividend Revenue for $6,000.
D)credit to Stock Investments for $6,000.

Question 57

When a company holds stock of several different corporations, the group of securities is identified as a(n)

A)affiliated investment.
B)consolidated portfolio.
C)investment portfolio.
D)controlling interest.

Question 58

Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000. Assume Community pays interest on January 1 and July 1, and the July 1 entry was done correctly. The journal entry at December 31, 2014 would include a credit to

A)Interest Receivable for $2,400.
B)Interest Revenue for $4,800.
C)Accrued Expense for $4,800.
D)Interest Revenue for $2,400.

Question 59

In accounting for stock investments between 20% and 50%, the _______ method is used.

A)consolidated statements
B)controlling interest
C)cost
D)equity

Question 60

Blaine Company had these transactions pertaining to stock investments: Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct) 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the purchase of the Horton stock would include a

A)debit to Stock Investments for $45,900.
B)credit to Cash for $45,900.
C)debit to Stock Investments for $51,000.
D)debit to Investment Expense for $5,100.

Question 61

If the equity method is being used, cash dividends received

A)are credited to Dividend Revenue.
B)require no entry because investee net income has already been recorded at the proper proportion on the investor's books.
C)are credited to the Stock Investments account.
D)are credited to the Revenue from Stock Investments account.

Question 62

When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor

A)has insignificant influence on the investee and that the cost method should be used to account for the investment.
B)should apply the cost method in accounting for the investment.
C)will prepare consolidated financial statements.
D)has significant influence on the investee and that the equity method should be used to account for the investment.

Question 63

Which of the following would not be considered a motive for making a stock investment in another corporation?

A)Appreciation in the market value of the stock investment
B)Use of the investment for expanding its own operations
C)Use of the investment to diversify its own operations
D)An increase in the amount of interest revenue from the stock investment

Question 64

If the equity method is being used, the Revenue from Stock Investments account is

A)just another name for a Dividend Revenue account.
B)credited when dividends are declared by the investee.
C)credited when net income is reported by the investee.
D)debited when dividends are declared by the investee.

Question 65

If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is

A)the cost method.
B)the equity method.
C)the preparation of consolidated financial statements.
D)determined by agreement with whomever owns the remaining 90% of the stock.

Question 66

Under the equity method, the Stock Investments account is credited when the

A)investee reports net income.
B)investee reports a net loss.
C)investment is originally acquired.
D)investee reports net income and when the investment is originally acquired.

Question 67

On January 1, 2014, Gene Corp. paid $800,000 for 100,000 shares of Onofine Company's common stock, which represents 30% of Onofine's outstanding common stock. Onofine reported net income of $200,000 and paid cash dividends of $60,000 during 2014. Gene should report the investment in Onofine Company on its December 31, 2014, balance sheet at:

A)$800,000
B)$758,000
C)$818,000
D)$842,000

Question 68

The account, Stock Investments, is

A)a subsidiary ledger account.
B)a long-term liability account.
C)a long-term investment account.
D)another name for Debt Investments.

Question 69

If the cost method is used to account for a long-term investment in common stock,

A)it is presumed that the investor has significant influence on the investee.
B)the earning of net income by the investee is considered a proper basis for recognition of income by the investor.
C)net income of the investee is not considered earned by the investor until dividends are declared by the investee.
D)the Investment account may be, at times, greater than the acquisition cost.

Question 70

Cruz Inc. earns $450,000 and pays cash dividends of $150,000 during 2014. Cruz Corporation owns 73,500 of the 210,000 outstanding shares of Viejo. How much revenue from investment should Viejo report in 2014?

A)$52,500
B)$105,000
C)$157,500
D)$210,000

Question 71

If the cost method is used to account for a long-term investment in common stock, dividends received should be

A)credited to the Stock Investments account.
B)credited to the Dividend Revenue account.
C)debited to the Stock Investments account.
D)recorded only when 20% or more of the stock is owned.

Question 72

If a company acquires a 40% common stock interest in another company,

A)the equity method is usually applicable.
B)all influence is classified as controlling.
C)the cost method is usually applicable.
D)the ability to exert significant influence over the activities of the investee does not exist.

Question 73

If a common stock investment is sold at a gain, the gain

A)is reported as operating revenue.
B)is reported under a special section, "Discontinued investments," on the income statement.
C)is reported in the Other revenues and gains section of the income statement.
D)contributes to gross profit on the income statement.

Question 74

On January 1, 2014, Lark Corporation purchased 35% of the common stock outstanding of Dinc Corporation for $700,000. During 2014, Dinc Corporation reported net income of $200,000 and paid cash dividends of $100,000. The balance of the Stock Investments-Dinc account on the books of Lark Corporation at December 31, 2014 is

A)$700,000.
B)$735,000.
C)$770,000.
D)$665,000.

Question 75

Viejo Inc. earns $600,000 and pays cash dividends of $150,000 during 2014. Cruz Corporation owns 73,500 of the 210,000 outstanding shares of Viejo. What amount should Cruz show in the investment account at December 31, 2014 if the beginning of the year balance in the account was $40,000?

A)$197,500
B)$210,000
C)$157,500
D)$250,000

Question 76

The cost method of accounting for long-term investments in stock should be employed when the

A)investor owns more than 50% of the investee's stock.
B)investor has significant influence on the investee and the stock held by the investor are marketable equity securities.
C)market value of the shares held is greater than their historical cost.
D)investor's influence on the investee is insignificant.

Question 77

Under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company,

A)the Dividend Revenue account is credited.
B)the Stock Investments account is increased.
C)the Stock Investments account is decreased.
D)no entry is necessary.

Question 78

If an investor owns less than 20% of the common stock of another corporation as a long-term investment,

A)the equity method of accounting for the investment should be employed.
B)no dividends can be expected.
C)it is presumed that the investor has relatively little influence on the investee.
D)it is presumed that the investor has significant influence on the investee.

Question 79

Revenue is recognized when cash dividends are received under

A)the controlling interest method.
B)the cost method.
C)the equity method.
D)both the cost and equity methods.

Question 80

Under the equity method, the Stock Investments account is increased when the

A)investee company reports net income.
B)investee company pays a dividend.
C)investee company reports a loss.
D)stock investment is sold at a gain.