Deck 16: Investments

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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 6

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

Question 7

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 8

Debt investments are investments in government and corporation bonds.

Question 9

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

Question 10

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 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

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 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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 31

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

Question 32

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 33

On January 1, 2010, Milton Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end.
The adjusting entry on December 31, 2010, is

Question 34

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 35

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

Question 36

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 37

On January 1, 2010, Milton Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end.
The entry for the receipt of interest on July 1, 2010, is

Question 38

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 39

At the time of acquisition of a debt investment,

A) no journal entry is required.
B) the 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 40

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 41

Elston Corporation sells 200 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $30 a share. Elston sold the shares for $40 a share. The entry to record the sale is

Question 42

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

A) acquisition.
B) interest revenue.
C) amortization of any discount or premium.
D) sale.

Question 43

Greene Corporation sells 300 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $50 a share. Greene sold the shares for $40 a share. The entry to record the sale is

A)
Stock Investments 15,000
B)
C)
D)

Question 44

Nance Company owns 30% interest in the stock of Finley Corporation. During the year, Finley pays $25,000 in dividends to Nance, and reports $100,000 in net income. Nance Company's investment in Finley will increase by

A) $25,000.
B) $30,000.
C) $24,000.
D) $22,500.

Question 45

The cost of debt investments includes each of the following except

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

Question 46

Nagen Company had these transactions pertaining to stock investments:
Feb) 1 Purchased 3,000 shares of Horton Company (10%) for $49,800 cash plus brokerage fees of $1,200.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct) 1 Sold 1,200 shares of Horton stock for $24,000 less brokerage fees of $600.
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 47

Barr Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2010 for $61,250. This includes a brokerage commission of $1,250.
The journal entry to record this investment includes a debit to

A) Debt Investments for $60,000.
B) Debt Investments for $61,250.
C) Cash for $61,250.
D) Stock Investments for $60,000.

Question 48

Winrow Co. purchased 50, 6% Johnston 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 $1,500.
B) debit to Interest Revenue for $1,500.
C) credit to Interest Revenue for $1,515.
D) debit to Debt Investments for $1,500.

Question 49

Winrow Co. purchased 50, 6% Johnston 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 $1,500.
B) credit to Interest Revenue for $1,500.
C) credit to Interest Revenue for $1,515.
D) credit to Debt Investments for $1,515.

Question 50

Barr Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2010 for $61,250. This includes a brokerage commission of $1,250.
Assume Community pays interest on January 1 and July 1, and the July 1 entry was done correctly. The journal entry at December 31, 2010 would include a credit to

A) Interest Receivable for $3,000.
B) Interest Revenue for $6,000.
C) Accrued Expense for $6,000.
D) Interest Revenue for $3,000.

Question 51

Nagen Company had these transactions pertaining to stock investments:
Feb) 1 Purchased 3,000 shares of Horton Company (10%) for $49,800 cash plus brokerage fees of $1,200.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct) 1 Sold 1,200 shares of Horton stock for $24,000 less brokerage fees of $600.
The entry to record the purchase of the Horton stock would include a

A) debit to Stock Investments for $49,800.
B) credit to Cash for $49,800.
C) debit to Stock Investments for $51,000.
D) debit to Investment Expense for $1,200.

Question 52

On January 1, Barone Company purchased as a short-term investment a $1,000, 8% bond for $1,050. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,100 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?

Question 53

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

A) At acquisition, the 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 54

Nagen Company had these transactions pertaining to stock investments:
Feb) 1 Purchased 3,000 shares of Horton Company (10%) for $49,800 cash plus brokerage fees of $1,200.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct) 1 Sold 1,200 shares of Horton stock for $24,000 less brokerage fees of $600.
The entry to record the sale of the stock would include a

A) debit to Cash for $24,000.
B) credit to Gain on Sale of Stock Investments for $1,200.
C) debit to Stock Investments for $20,400.
D) credit to Gain on Sale of Stock Investments for $3,000.

Question 55

On January 1, 2010, Milton Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end.
The entry for the receipt of interest on January 1, 2011 is

Question 56

Tolan Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage fees of $600. Interest is payable semiannually on July 1 and January 1. If 30 of the securities are sold on July 1 for $32,000 less $300 brokerage fees, the entry would include a credit to Gain on Sale of Debt Investments for

A) $2,000.
B) $1,700.
C) $2,300.
D) $1,400.

Question 57

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 58

Barr Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2010 for $61,250. This includes a brokerage commission of $1,250.
If Barr sells all of its Community bonds for $62,500 and pays $1,500 in brokerage commissions, what gain or loss is recognized?

A) Gain of $2,500
B) Loss of $250
C) Gain of $250
D) Gain of $1,250

Question 59

On January 1, Burkett Company purchased as an investment a $1,000, 7% bond for $1,020. The bond pays interest on January 1 and July 1. What is the entry to record the interest accrual on December 31?

Question 60

Mouns Company owns 30% interest in the stock of Darian Corporation. During the year, Darian pays $20,000 in dividends to Mouns, and reports $100,000 in net income. Mouns Company's investment in Darian will increase Mouns' net income by

A) $15,000.
B) $30,000.
C) $24,000.
D) $6,000.

Question 61

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

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

Question 62

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.

Question 63

The account, Stock Investments, is

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

Question 64

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 65

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

Question 66

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 67

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 68

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 69

Carlin Corporation sells 400 shares of common stock being held as a short-term investment. The shares were acquired six months ago at a cost of $50 a share. Carlin sold the shares for $40 a share. The entry to record the sale is

Question 70

Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

Question 71

On January 1, 2010, Garner Corporation purchased 25% of the common stock outstanding of Landon Corporation for $250,000. During 2010, Landon Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments-Landon account on the books of Garner Corporation at December 31, 2010 is

A) $250,000.
B) $290,000.
C) $330,000.
D) $260,000.

Question 72

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 73

Decker Corporation purchased 1,000 shares of Kent common stock at $75 per share plus $3,000 brokerage fees as a short-term investment. The shares were subsequently sold at $80 per share less $3,400 brokerage fees. The cost of the securities purchased and gain or loss on the sale were

Question 74

Jacobs Corporation makes a short-term investment in 150 shares of Starr Company's common stock. The stock is purchased for $50 a share plus brokerage fees of $450. The entry for the purchase is

Question 75

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 76

On January 1, 2010, Daley Corporation purchased 30% of the common stock outstanding of King Corporation for $600,000. During 2010, King Corporation reported net income of $200,000 and paid cash dividends of $100,000. The balance of the Stock Investments-King account on the books of Daley Corporation at December 31, 2010 is

A) $600,000.
B) $630,000.
C) $660,000.
D) $570,000.

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

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 79

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 80

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.