Deck 13: Investments and Long-Term Receivables

Question 1

In order to classify an investment as held-to-maturity, the company has to have the ability and the intent to hold the investment until it matures.

Answer 1

True

Question 2

Transferring an investment from the trading category into any other category does not require that any entry be made to the company's accounts because any unrealized holding gains or losses on that investment have already been recognized.

Answer 2

True

Question 3

For Held-to-Maturity investments in debt securities, the investor company is required to disclose both the aggregate fair value of the investment and also the change in the net unrealized holding gains or loss to be included in the income statement.

Answer 3

False

Question 4

For an investment classified as held-to-maturity, any unrealized gains and losses are both reported in the financial statements and also disclosed in the notes to the financial statements.

Question 5

The transfer of a security between investment categories is accounted for either at fair value at the time of the transfer or at cost, depending upon the type of transfer.

Question 6

When the investor owns more than 50% of the voting common stock of the investee, the investee is considered to be under the legal control of the investor.

Question 7

Significant influence of another company generally occurs when the investor owns between 25% and 45%. Due to this relationship the investor is required to issue consolidated financial statements.

Question 8

Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of shareholders' equity?

A) held-to-maturity debt securities
B) marketable securities
C) available-for-sale securities
D) trading securities

Question 9

Under U.S. GAAP investments are classified into three categories based upon management's intent. IFRS also divides investments into three classifications, but those classifications are based on the company's business model for managing financial assets and the characteristics of the cash flows of the financial asset.

Question 10

Investment securities are classified based upon management's intent. This may present difficulties to readers of financial statements because

A) management's judgment of intent and ability may lack comparability.
B) management's judgment may lack relevance.
C) gain trading may result in not producing sufficient gains.
D) gain trading may result in not producing sufficient reliability.

Question 11

Investments in debt securities include all of the following except

A) U.S. treasury securities.
B) corporate bonds.
C) preferred stocks that are redeemable at the option of the issuer.
D) commercial paper.

Question 12

Investments that are typically held for short periods of time and sold by the company in the expectation of a profit on the short-term differences in price are classified as

A) available-for-sale securities.
B) trading securities.
C) held-to-maturity securities.
D) marketable securities.

Question 13

Which of the following securities are reported at their amortized cost on the balance sheet date?

A) held-to-maturity debt securities
B) marketable securities
C) available-for-sale securities
D) trading securities

Question 14

A note receivable should always be recorded at its present value using the borrower's incremental interest rate.

Question 15

The Unrealized Holding Gain/Loss-Trading Securities account is a temporary account that would be closed to
Retained Earnings during the closing process.

Question 16

When a life insurance policy contains a guarantee that the company that purchased the policy is entitled to a return equal to the amount of the cash surrender value of the policy, a portion of the premium is recorded to a long term liability account.

Question 17

In order for a derivative to be considered a hedge, it must be mostly effective in offsetting a substantial amount of risk exposure associated with changes in fair values or cash flows of the hedged item.

Question 18

Available-for-sale securities are recorded at cost, which equals fair value on the acquisition date.

Question 19

Investments in debt and equity securities that are held for current resale by banks and brokerage firms are termed

A) available-for-sale securities.
B) trading securities.
C) held-to-maturity securities.
D) marketable securities.

Question 20

When an available-for-sale security is sold, any unrealized gains or losses would need to be reclassified from the Allowance for Change in Fair Value of Investments account in order to avoid double counting any gains or losses recorded in comprehensive income.

Question 21

The generally accepted accounting principles for trading securities include all of the following except

A) initially recording the investment at cost.
B) subsequently valuing the investment at fair value.
C) including unrealized holding gains and losses as a component of shareholders' equity.
D) including interest and dividend revenue as part of income.

Question 22

When bonds are purchased between interest dates, the accrued interest should be

A) debited to Interest Receivable.
B)
B) debited to Interest Income.
C) debited to Investment in Bonds.
D) either a or

Question 23

How is the premium or discount on held-to-maturity bond investments presented on the balance sheet?

A) as a part of the cost of the investment and amortized over a period not to exceed five years
B) as a part of the cost of the investment and amortized over the remaining life of the bonds
C) in a separate account that is reported separately from the bonds and amortized over a period not to exceed five years
D) in a separate account that is reported separately from the investment account and not amortized

Question 24

On January 1, 2017, Macie Company purchased Jefferson Company's 9% bonds with a face amount of $200,000 for $213,420 to yield 8%. The bonds mature on January 1, 2027, and Macie has both the intent and ability to hold these bonds to maturity. The bonds pay interest annually on December 31. Assuming Macie uses the effective interest method of amortizing the bond premium; interest income reported on the income statement for the year ended December 31, 2017, would be

A) $16,000.
B) $17,074.
C) $18,000.
D) $18,926.

Question 25

On July 1, 2017, Rectangle, Inc. purchased Diamond Company's five-year 12% bonds with a face value of $500,000 for $569,000, which included $25,000 of accrued interest. The bonds, which mature on February 1, 2022, are to be held-to-maturity and pay interest on February 1 and August 1. Rectangle uses the straight-line method of amortization. The amount of income that Rectangle would report for the calendar year 2017 as a result of this long- term investment would be

A) $20,400.
B) $25,200.
C) $30,000.
D) $34,800.

Question 26

On July 1, 2017, Jason Company purchased $60,000 of ten-year 6% bonds of Santo, Inc., for $51,850, to be held-to- maturity. Interest is payable semiannually on June 30 and December 31. The effective yield on the investment is 8%. What amount of interest income should Jason record for the six-month period ended December 31, 2017?

A) $2,063.04
B) $2,084.96
C) $2,074.00
D) $2,400.00

Question 27

The carrying value of held-to-maturity debt securities is the

A) original purchase amount.
B) amortized cost.
C) market value.
D) lower of amortized cost or market value.

Question 28

Each of the three categories of investments in debt and equity securities has similar accounting for all of the following transactions except

A) initial recording of cost.
B) recognition of dividend and interest income.
C) recognition of realized gains or losses on sales.
D) recognition of unrealized holding gains and losses.

Question 29

All of the following statements regarding held-to-maturity debt securities are true except

A) premiums and discounts must be amortized over the remaining life of the bonds.
B) the debt securities should be valued at market value.
C) the realized gain or loss is the difference between their amortized cost and the proceeds from their sale.
D) interest income may be debited at the time of acquisition.

Question 30

Which of the following methods of accounting for investments is appropriate when the investor controls the investee?

A) equity method
B) consolidation
C) cost method
D) lower of cost or market method

Question 31

Which of the following regarding trading securities is correct?

A) Trading securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B) Trading securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C) Trading securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D) Trading securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

Question 32

The use of the effective interest method to amortize a discount associated with the acquisition of an investment in bonds results in

A) the recognition of more interest income over the life of the investment than would result from the use of the straight-line method.
B) the recognition of a constant amount of interest income each period.
C) the recognition of less interest income over the life of the investment than would result from the use of the straight-line method.
D) the recognition of a varying amount of interest income each period.

Question 33

With consolidation, control generally occurs when the investor owns what percentage of the voting stock of the investee?

A) over 50%
B) between 20% and 50%
C) less than 20%
D) over 40%

Question 34

On October 1, 2017, the Sun Company acquired 9% bonds of Jack's Company with a face value of $400,000 for $412,000 plus accrued interest. Interest is payable on June 30 and December 31. How would Sun record the initial bond investment to be held-to-maturity?

Question 35

Unrealized holding gains and losses occur because a company

A) actively trades securities.
B) holds securities until maturity.
C) holds securities through the end of the reporting period.
D) records a change in fair value of the securities held even if they are not sold.

Question 36

On July 1, 2017, James Company purchased Timothy Company's six-year 9% bonds with a face value of $200,000 for $196,000, which included $6,000 of accrued interest. The bonds, which mature on March 1, 2023, are to be held- to-maturity and pay interest semiannually on March 1 and September 1. James uses the straight-line method of amortization. The amount of income James should report for the calendar year 2017 as a result of this investment would be

A) $8,823.52.
B) $9,882.36.
C) $9,529.40.
D) $8,117.64.

Question 37

When selecting the appropriate accounting for held-to-maturity securities, the company must

A) never sell the equity instrument before maturity.
B) never sell the debt instrument before maturity.
C) have the intent and ability to hold the equity investment to maturity.
D) have the intent and ability to hold the debt instrument to maturity.

Question 38

On January 1, 2017, Old World Company purchased $300,000 of ten-year 10% bonds of New Company for $340,260. Interest is payable annually. The effective yield on the investment is 8%. What is the balance in Old World's investment in held-to-maturity debt securities account rounded to the nearest dollar, if necessary) at December 31, 2018?

A) $343,039
B) $360,260
C) $337,481
D) $334,480

Question 39

Which of the following methods of accounting for investments is appropriate when the investor has significant influence over the investee?

A) equity method
B) consolidation
C) cost method
D) lower of cost or market method

Question 40

Investments in equity securities include all of the following except

A) common stocks.
B) preferred stocks.
C) convertible debt.
D) put and call stock options.

Question 41

Realized gains and losses on investments in available-for-sale securities are reported

A) as a current asset.
B) on the income statement.
C) on the balance sheet as part of shareholders' equity.
D) as a contra asset.

Question 42

A transfer of a security between categories is accounted for at the

A) investment's carrying value.
B) investment's fair value.
C) original investment cost.
D) lower of the original cost of the investment or its fair value.

Question 43

Chang Company purchased several investments in December 2017. Costs and market values of those investments on December 31, 2017, are presented below: Assuming all of the securities are classified as trading securities, the journal entry required on December 31, 2017, the end of Chang's fiscal year, would include a

A) debit to Unrealized Holding Gain/Loss-Trading Securities of $60,000.
B) credit to Unrealized Holding Gain/Loss-Trading Securities of $60,000.
C) credit to Unrealized Holding Gain/Loss-Trading Securities of $80,000.
D) debit to Investment in Trading Securities of $60,000.

Question 44

On April 1, 2017 the Reba Company purchased 10%, $800,000 bonds of the Trading Up Company at par plus accrued interest. These bonds were classified as an investment in trading securities. The bonds pay interest on June 30 and December 31 each year. The entry by Reba on April 1, 2017, would include a

A) debit to Investment in Trading Securities of $820,000.
B) credit to Cash of $820,000.
C) credit to Interest Income of $20,000.
D) debit to Interest Expense of $20,000.

Question 45

On January 6, 2017, Michael Company acquired 4,000 shares or 10%) of George Corporation's common stock at $25 per share. The securities are classified as trading securities. On October 24, 2017, George declared and paid a cash dividend of $1 per share. On December 31, 2017, the market value of George's common stock was $35 per share. George also reported a net income of $250,000 for 2017. At what value should Michael report the investment in George's common stock on its December 31, 2017 balance sheet?

A) $100,000
B) $140,000
C) $144,000
D) $104,000

Question 46

Which of the following is correct regarding available-for-sale securities?

A) Available-for-sale securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B) Available-for-sale securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C) Available-for-sale securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D) Available-for-sale securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

Question 47

In its first year of operations, Roger Company purchased trading securities at a total cost of $53,000. On December 31, the end of Roger's fiscal year, the fair market value of those investments totaled $57,000. As a result of these investments, Roger Company will report

A) Investment in Trading Securities of $57,000.
B) Investment in Trading Securities of $53,000.
C) Unrealized Holding Gain/Loss-Trading Securities of $4,000 on the income statement as ordinary income.
D) a credit balance in the contra account to Investment in Trading Securities of $4,000.

Question 48

A realized gain or loss on the sale of an available-for-sale debt security is determined by comparing

A) the amortized cost of the security with the proceeds from the sale.
B) the original cost of the security with the proceeds from the sale.
C) the market value at the latest balance sheet date with the proceeds from the sale.
D) the original cost with the security's carrying value.

Question 49

On January 1, Reagan Company purchased $15,000 of Delta Company's 12% bonds, acquired at par, as available- for-sale securities. The bonds pay interest on June 30 and December 31 each year. What amount should be recorded to the Investment in Available-for-Sale Securities account?

A) $15,900
B) $14,100
C) $15,000
D) $16,800

Question 50

Which of the following statements regarding available-for-sale debt investments is true?

A) The realized gain on sale is determined by comparing the amortized cost of the investment with its selling price.
B) Income is affected by temporary changes in market value.
C) All debt security investments can only be classified as current.
D) Unrealized holding gains/losses are reported on the income statement.

Question 51

Dividends on investments classified as trading that have been declared as of year-end but have not yet been received should be recognized in income when

A) received as cash.
B) the new year begins.
C) declared.
D) accrued.

Question 52

For available-for-sale debt securities purchased at par value, the receipt of interest would be reported as

A) a reduction from retained earnings.
B) an increase in investment in available-for-sale securities.
C) a reduction in investments in available-for-sale securities.
D) interest income.

Question 53

Trading securities were sold on January 3, 2018, for $65,000. Those securities were purchased for $52,000 on November 21, 2017, and they had a fair value on December 31, 2017, of $57,000. The entry to record the sale would include a

A) credit to Unrealized Holding Gain/Loss-Trading Securities of $8,000.
B) debit to Unrealized Holding Gain/Loss-Trading Securities of $5,000.
C) debit to Investment in Trading Securities of $5,000.
D) credit to Gain on Sale of Trading Securities of $8,000.

Question 54

All of the following statements regarding available-for-sale debt securities are true except

A) premiums and discounts are amortized.
B) Interest Income may be debited at the time of acquisition.
C) the securities will be valued using the lower of cost or market method.
D) realized gain or loss is the difference between the amortized cost of the bonds and the proceeds from their sale.

Question 55

Unrealized gains and losses on investments in trading securities are reported

A) as a current asset.
B) on the income statement.
C) on the balance sheet as part of shareholders' equity.
D) as a contra asset.

Question 56

On January 1, 2017, the Leaf Company acquired a 5% interest in the Trunk Corporation through the purchase of 100,000 shares of Trunk's common stock for $640,000; the investment is recorded on Leaf's books as trading securities. During 2017, Trunk paid $40,000 in dividends and reported net income of $100,000. The market price of Trunk's common stock was $6.20 per share on December 31, 2017. Leaf should report the investment in the Trunk Corporation on its December 31, 2017, balance sheet at

A) $620,000.
B) $627,000.
C) $640,000.
D) $645,000.

Question 57

The carrying value of available-for-sale debt securities is

A) historical cost.
B) the current fair value.
C) the amortized cost.
D) the higher of cost or current market value.

Question 58

Bark Corporation began operations on January 1, 2017. No transactions related to these investments occurred during 2018, and the cost and market values on December 31, 2018, are as follows:
In the December 31, 2018 adjusting entry, there will be a

A) credit of $470 to Unrealized Holding Gain/Loss-Trading Securities.
B) debit of $470 to Unrealized Holding Gain/Loss-Trading Securities.
C) debit of $470 to Allowance for Change in Fair Value of Investments.
D) credit of $470 to Investment in Trading Securities.

Question 59

Wright Company has available-for-sale debt securities that it had originally acquired at part for $110,000. On December 31, 2017, the securities had a market value of $108,000. The market value rose to $123,000 by December
31, 2018. What accounting action is required on December 31, 2018?

A) Allowance for Change in Fair Value of Investments should be credited for $15,000.
B) Unrealized Holding Gain/Loss-Available-for-Sale Securities should be debited for $13,000.
C) Allowance for Change in Fair Value of Investments should be debited for $15,000.
D) Unrealized Holding Gain/Loss-Available-for-Sale Securities should be credited for $13,000.

Question 60

Chapin Company purchased investments in 2017 at a cost of $200,000 and recorded them as trading securities. Their market values totaled $250,000 and $230,000 on December 31, 2017, and December 31, 2018, respectively. The entry required on December 31, 2018, would include a

A) debit to Unrealized Holding Gain/Loss-Trading Securities of $20,000
B) credit to Unrealized Holding Gain/Loss-Trading Securities of $20,000
C) credit to Unrealized Holding Gain/Loss-Trading Securities of $30,000
D) debit to Unrealized Holding Gain/Loss-Trading Securities of $30,000

Question 61

Exhibit 13-1
On January 1, 2017, Oak Corporation paid $900,000 for 87,500 shares of Beech Company's common stock, which represents 35% of Beech's outstanding common stock. Beech reported income of $300,000 and paid a cash dividend of $100,000 during 2017.
Refer to Exhibit 13-1. Oak should report the investment in Beech Company on its December 31, 2017, balance sheet at

A) $900,000.
B) $970,000.
C) $935,000.
D) $1,005,000.

Question 62

Under the equity method, dividends received by the investor should be recorded as

A) reductions in the carrying value of the investment.
B) additions to the carrying value of the investment.
C) dividend income.
D) investment income.

Question 63

Exhibit 13-1
On January 1, 2017, Oak Corporation paid $900,000 for 87,500 shares of Beech Company's common stock, which represents 35% of Beech's outstanding common stock. Beech reported income of $300,000 and paid a cash dividend of $100,000 during 2017.
Refer to Exhibit 13-1. Oak should report income from the investment in Beech Company for 2017 of

A) $70,000.
B) $140,000.
C) $105,000.
D) $300,000.

Question 64

The Master Company acquired a 40% interest in the Dickerson Company on January 2, 2017, for $1,000,000. During 2017, Dickerson Company paid $100,000 in dividends and reported net income of $270,000. At the end of 2017, the balance in Investment in Dickerson Company should be

A) $1,000,000.
B) $1,068,000.
C) $1,040,000.
D) $1,108,000.

Question 65

Exhibit 13-2
On January 1, 2017, the Clutz Company purchased 30% of the 1,000,000 shares of Nancy's common stock for
$15,000,000 when 30% of Nancy's net assets totaled $12,000,000. The excess of purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years. Nancy reported net income of $8,000,000 and paid cash dividends of $2,000,000 during 2017.
Refer to Exhibit 13-2. The investment in Nancy Company stock should be reported on Clutz's December 31, 2017, balance sheet at

A) $15,000,000.
B) $15,600,000.
C) $16,500,000.
D) $17,400,000.

Question 66

When transferring investments between categories, unrealized holding gains for securities transferred from trading to available-for-sale

A) must be realized on the income statement.
B) must be recognized on the income statement.
C) must be realized and reported in comprehensive income.
D) need no accounting since they have already been recognized in net income.

Question 67

The Plutonium Company has a bond investment classified as held-to-maturity, which has a carrying value of $62,000 and a fair value of $24,000. The decline in value is considered as other than temporary. What entry should Plutonium make to record the decline in value?

Question 68

Which of the following disclosures is not required by current GAAP for investments in securities?

A) the proceeds from sales and the gross realized gains and losses from the sale of available-for-sale securities.
B) the circumstances leading to the decision to sell or transfer a trading security.
C) the contractual maturities of held-to-maturity debt securities.
D) the change in net unrealized holding gain or loss that is included in each income statement for trading securities.

Question 69

On January 1, 2017, Fargo Company purchased 30% of the common stock of Fairly Company for $80,000. The purchase was made at book value. Additional information for Fairly Company follows: On Fargo's books, what would be the balance of Investment in Fairly Company at December 31, 2018?

A) $104,000
B) $63,400
C) $84,200
D) $60,200

Question 70

Which type of investment in securities must always be classified as a current asset?

A) held-to-maturity debt securities
B) available-for-sale securities
C) trading securities
D) none of the these, they may all be classified as current or long-term assets

Question 71

With the equity method, the investor recognizes its share of the earnings of the subsidiary when the

A) investor sells the investment.
B) investee pays a cash dividend.
C) investee declares a cash dividend.
D) investee reports earnings on its income statement.

Question 72

The Wise Company acquired a 20% interest in the outstanding common stock of the Smith Company. The Wise Company can exercise significant influence over the operating and financial policies of the Smith Company. The Wise Company should account for its investment in the Smith Company by using the

A) equity method.
B) cost method.
C) securities held-to-maturity method.
D) lower of cost or market method.

Question 73

Under the equity method, a receipt of cash dividends by the investor would

A) increase total assets and shareholders' equity.
B) increase total assets and liabilities.
C) decrease the investment account.
D) increase the investment account.

Question 74

For available-for-sale securities, a decline in value due to a temporary decline in market value below cost is

A) disclosed in the financial statements by means of a footnote.
B) disclosed as a reduction from shareholders' equity on the balance sheet.
C) disclosed as a loss on the income statement.
D) not disclosed because the decline in value is only temporary.

Question 75

On January 1, 2017, Peach, Inc. purchased 40% of the common stock of Apple Company for $61,000. At the date of acquisition, the following information for Apple Company was available: All of Apple Company's other assets had book values equal to their fair values. In 2017, Apple earned $18,000 of net income and distributed $12,500 of dividends. How much investment income would Peach record in 2017?

A) $6,700
B) $7,000
C) $7,200
D) $7,400

Question 76

Waldo Company owns 30% of Randy Company. During 2017, Randy reported earnings of $650,000 and paid cash dividends of $345,000. What effect would this have on Waldo's investment account and net income?

A) I
B) II
C) III
D) IV

Question 77

Permanent declines in value for available-for-sale securities should be

A) recorded in the allowance account
B) included in income as a realized loss
C) amortized over the remaining life of the security
D) recorded similarly to temporary declines in value

Question 78

Exhibit 13-2
On January 1, 2017, the Clutz Company purchased 30% of the 1,000,000 shares of Nancy's common stock for
$15,000,000 when 30% of Nancy's net assets totaled $12,000,000. The excess of purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years. Nancy reported net income of $8,000,000 and paid cash dividends of $2,000,000 during 2017.
Refer to Exhibit 13-2. What should the income reported by Clutz during 2017 from its investment in the Nancy Company be?

A) $ 600,000
B) $2,100,000
C) $2,400,000
D) $2,900,000

Question 79

When an investor currently using the fair value method acquires significant influence over the investee at mid-year, the investor should

A) restate its investment in the investee by debiting the investment account and crediting Retained Earnings for its previous percentage of investee earnings less dividends) for the period from the original date of acquisition to the date significant influence was obtained.
B) begin using the equity method from the date of acquiring significant influence and make no retroactive adjustments.
C) restate its investment in the investee by debiting the investment account and crediting Investment Income for its percentage of investee earnings for the period from the last financial statement until the date significant influence was obtained.
D) continue to use the fair value method until the end of the accounting period and then switch to the equity method in order to comply with the accounting conventions of consistency and conservatism.

Question 80

Acquisition of greater than 20% of the outstanding stock of a company normally suggests that the investor should use the

A) consolidation method.
B) equity method.
C) fair-value method.
D) straight-line method.