Deck 14: Understanding Investments in Debt and Equity Securities

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.

Answer 3

False

Question 4

Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.

Question 5

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

Question 6

Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Question 7

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

Question 8

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

Question 9

Debt investments are investments in government and corporation bonds.

Question 10

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 11

When the cost method is used to account for an investment in stock, dividends received are accounted for as a reduction in the investment account.

Question 12

If the cost method is used to account for an investment in stock, the Stock Investments account is increased by the amount of dividends received during the period.

Question 13

Dividends received on investments are accounted for in the same way under the cost and the equity method.

Question 14

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

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

Under the equity method the investor records a proportionate share of the investee's income in the year when it is earned.

Question 17

Pension funds and mutual funds are corporations that regularly invest for strategic reasons.

Question 18

When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.

Question 19

Some companies attempt to generate investement income through speculative investements.

Question 20

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

Question 21

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 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 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 24

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

Question 25

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

Question 26

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

Question 27

An investment in short-term equity securities should be charged to a nominal account since the investment is temporary.

Question 28

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

Question 29

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

Question 30

Unrealized gains and losses on available-for-sale securities are reported on the income statement.

Question 31

Under the equity method, the receipt of dividends from the investee company results in a credit to the Dividend Revenue account.

Question 32

The account Fair Value Adjustment-Trading appears as a contra account in the income statement.

Question 33

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 34

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

Question 35

Unrealized gains and losses are recognized on trading securities.

Question 36

Trading securities are valued on the balance sheet at market value.

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

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

Question 39

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

Question 40

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

Question 41

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2022 for $80,000.The journal entry to record this investment includes a debit to

A)Debt Investments for $88,000.
B)Debt Investments for $80,000.
C)Cash for $80,000.
D)Stock Investments for $80,000.

Question 42

On January 1, 2022, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1.LaRoche Company has a calendar year end.The adjusting entry on December 31, 2022, is

Question 43

On January 1, 2022, Tri-State Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1.Tri-State Company has a calendar year end.The entry for the receipt of interest on January 1, 2023 is

Question 44

On January 1, 2022, Tri-State Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1.Tri-State Company has a calendar year end.The entry on January 1, 2022, is

Question 45

On January 1, 2022, the LaRoche Company purchased at face value, a $1,000, 5%, bond that pays interest on January 1.LaRoche Company has a calendar year end.The entry for the receipt of interest on January 1, 2023 is

Question 46

On January 1, 2022, Tri-State Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1.Tri-State Company has a calendar year end.The adjusting entry on December 31, 2022, is

Question 47

On January 1, 2022, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1.JBT Company has a calendar year end.The adjusting entry on December 31, 2022, is

Question 48

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2022 for $80,000.If Mazzeo sells all of its Dodd's Bonds for $78,900 what gain or loss is recognized?

A)Loss of $9,100
B)Loss of $1,100
C)Gain of $1,100
D)Gain of $9,100

Question 49

Banks and financial institutions often purchase debt securities to

A)house excess cash until needed.
B)generate earnings.
C)meet strategic goals.
D)improve their public image.

Question 50

Why do corporations generally invest in debt or equity securities?

A)They have excess cash.
B)They want to generate earnings from investment income.
C)They invest for strategic reasons.
D)All of these answer choices are correct.

Question 51

Why do pension and mutual funds invest in debt and equity securities?

A)They have excess cash.
B)They want to generate earnings from investment income.
C)They invest for strategic reasons.
D)They invest for speculative reasons.

Question 52

On January 1, 2022, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1.JBT Company has a calendar year end.The entry on January 1, 2022, is

Question 53

On January 1, 2022, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1.LaRoche Company has a calendar year end.The entry for the receipt of interest on January 1, 2023, Is

Question 54

In accounting for debt investments, companies make entries for each of the following:

A)acquisition
B)interest revenue
C)sale
D)share of investee income

Question 55

Which is not a strategic reason to invest?

A)There has been a change in the economic climate.
B)To establish a presence in a related industry.
C)To exercise some influence over a customer or supplier.
D)To enter a new industry without starting from scratch.

Question 56

Which of the following is a debt security?

A)IBM stock.
B)Treasury stock.
C)Treasury bills.
D)None of these answer choices are correct.

Question 57

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2022 for $80,000.Assume Dodd's pays interest annually on January 1.Mazzeo's journal entry at December 31, 2022 would include a credit to

A)Interest Receivable for $4,000.
B)Interest Receivable for $8,000.
C)Interest Expense for $8,000.
D)Interest Revenue for $8,000.

Question 58

When investing excess cash for short periods of time, corporations invest in

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

Question 59

On January 1, 2022, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1.JBT Company has a calendar year end.The entry for the receipt of interest on January 1, 2023 is

Question 60

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 61

On January 1, Bay View Company purchased as an investment a $1,000, 5% bond for $1,000.The bond pays interest on January 1.The bond is sold on July 1 for $1,070 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 62

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

Question 63

McComb Inc.earns $1,350,000 and pays cash dividends for $450,000 during 2022.SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb.What amount should SFX show in the investment account at December 31, 2022 if the beginning of the year balance in the account was $150,000?

A)$450,000
B)$300,000
C)$420,000
D)$600,000

Question 64

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

Question 65

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

A)The investment is initially recorded at cost.
B)The cost includes any brokerage fees.
C)Debt investments include investment in government and corporation bonds.
D)The cost includes any accrued interest.

Question 66

If a debt investment is sold, the investment account is

A)debited 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 67

Vangaurd Co.purchased 80, 5% McLaughlin Company bonds for $80,000 cash.Interest is payable annually on January 1.The entry to record the purchase would include a debit to

A)Debt Investments for $82,000.
B)Cash for $84,000.
C)Debt Investments for $80,000.
D)Stock Investments for $80,000.

Question 68

On January 1, 2022, Chic Corp.paid $750,000 for 100,000 shares of Toto Company's common stock, which represents 25% of Toto's outstanding common stock.Toto reported income of $300,000 and paid cash dividends of $80,000 during 2022 Chic should report the investment in Toto Company on its December 31, 2022, balance sheet at

A)$750,000
B)$825,000
C)$770,000
D)$805,000

Question 69

On January 1, 2022, Orleans industries acquired a 15% interest in Florida Corporation through the purchase of 12,000 shares of Florida Corporation common stock for $640,000.During 2022, Florida Corp.paid $160,000 in dividends and reported a net loss of $200,000.Orleans is able to exert significant influence on Florida.However, Orleans mistakenly records these transactions using the cost method rather than the equity method of accounting.Which of the following would show the correct presentation for Orlean's investment using the equity method?

Question 70

McComb Inc.earns $1,350,000 and pays cash dividends for $450,000 during 2022.SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb.How much revenue from investment should SFX report in 2022?

A)$150,000
B)$300,000
C)$450,000
D)$600,000

Question 71

Cedar Co.purchased 80, 6% LKN Company bonds for $80,000 cash.Interest is payable annually on January 1.If 40 of the securities are sold January 1 for $41,000 the entry would include a credit to Gain on Sale of Debt Investments of

A)$500.
B)$1,200.
C)$5,400.
D)$1,000.

Question 72

Charleston Co.purchased 60, 6% APS Company bonds on January 1, 2022 for $60,000 cash.Interest is payable annually on January 1.The entry to record the January 1, 2023 annual interest payment would include a

A)debit to Interest Receivable for $3,600.
B)credit to Interest Receivable for $3,600.
C)credit to Interest Revenue for $3,600.
D)credit to Debt Investments for $3,600.

Question 73

Porter Brothers Company purchased a debt investment for $80,000 on January 1, 2022.On January 1, 2023, Porter received cash interest of $4,000.Which of the following correctly presents the journal entries for the purchase and the receipt of interest?

Question 74

On January 1, Vega Company purchased as an investment a $1,000, 6% bond for $1,000.The bond pays interest on January 1.The bond is sold on July 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 75

On January 1, Connid Company purchased as an investment a $1,000, 8% bond for $1,000.The bond pays interest on January 1.What is the entry to record the interest accrual on December 31?

Question 76

Charleston Co.purchased 60, 6% APS Company bonds on January 1, 2022 for $60,000 cash.Interest is payable annually on January 1.The entry to record the December 31 interest accrual would include a

A)debit to Interest Receivable for $3,600.
B)debit to Interest Revenue for $3,600.
C)credit to Cash Revenue for $3,600.
D)debit to Debt Investments for $3,600.

Question 77

On January 1, U.K.Enterprise purchased as an investment a $1,000, 7% bond for $1,000.The bond pays interest on January 1.The bond is sold on July 1 for $1,120 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 78

All of the following factors would be signs of an investor's significant influence over an investee except

A)the investor has representation on the investee's board of directors.
B)the investor participates in the investee's policy-making process.
C)there are immaterial transactions between the investor and the investee.
D)the common stock held by other stockholders is dispersed.

Question 79

Buford Industries owns 40% of Appalachian Company.For the current year, Appalachian reports net income of $250,000 and declares and pays a $70,000 cash dividend.Which of the following correctly presents the journal entries to record Buford's equity in Appalachian net income and the receipt of dividends from Appalachian?

Question 80

On August 1, Basil Company buys 2,000 shares of Zingo common stock for $61,500 cash.On December 1, the stock investments are sold for $71,000 in cash.Which of the following are the correct journal entries of record for the purchase and sale of the common stock?