Deck 15: Investments

Question 1

An equity security does not represent an ownership interest in a corporation, although it pays dividends.

Answer 1

False

Question 2

Which of the following is an example of debt securities?

A) preferred stocks
B) real estate
C) common stocks
D) corporate bonds

Answer 2

D

Question 3

Debt securities do not include U.S. government securities.

Answer 3

False

Question 4

A preferred stock is an example of a debt security.

Question 5

Which of the following is an example of a security?

A) dividends
B) municipal bond
C) interest expense
D) depreciation

Question 6

A security is a ________.

A) regulation dealing with the transactions of investments
B) system aimed at protecting the interests of the market participants
C) share or interest representing financial value
D) process related to the valuation of a financial instrument

Question 7

A security is a share or interest representing financial value.

Question 8

A(n) ________ is represented by a certificate and is commonly traded on an exchange.

A) inventory
B) intangible asset
C) interest
D) security

Question 9

The owner of a bond or stock of a corporation is referred to as the investor.

Question 10

A(n) ________ is an example of equity securities.

A) preferred stock
B) municipal bond
C) corporate bond
D) Treasury bill

Question 11

Securities are represented by a certificate and are commonly traded on an exchange.

Question 12

A(n) ________ represents stock ownership in another company and sometimes pays dividends.

A) debt security
B) forward contracts
C) futures contract
D) equity security

Question 13

An equity security ________.

A) represents a credit relationship with another company or governmental entity
B) is a standardized contract between two parties to acquire various forms of investments
C) represents stock ownership in another company and sometimes pays dividends
D) is a financial instrument that entitles the holder to receive periodic interest

Question 14

Securities are ________.

A) commonly traded on an exchange
B) assets traded between companies working in the same industry
C) intangible assets traded in the stock exchange
D) always considered to be long-term investments

Question 15

Which of the following securities pay dividends?

A) corporate bonds
B) common stocks
C) debt securities
D) Treasury bills

Question 16

A debt security ________.

A) represents a credit relationship with another company or governmental entity, and typically pays interest for a fixed period
B) represents stock ownership in another company and sometimes pays dividends
C) is a standardized contract between two parties to buy or sell an underlying security at a predetermined price on a specific date
D) is a cash market transaction in which the ownership of the underlying asset is deferred until a specific date

Question 17

Which of the following is true of debt securities?

A) Debt securities entitle the holder to receipt of a share of profit in the form of dividends.
B) Debt securities typically pay interest for a fixed period.
C) Debt securities include preferred stocks.
D) Debt securities represent ownership interests of the investors.

Question 18

U.S. government securities are ________.

A) real estate investments
B) equity securities
C) debt securities
D) forward contracts

Question 19

An equity security represents a credit relationship with another company or governmental entity.

Question 20

Which of the following may pay dividends?

A) futures contracts
B) real estate securities
C) debt securities
D) equity securities

Question 21

Marketable securities are also known as ________.

A) short-term investments
B) held-to-maturity investments
C) debt investments
D) long-term investments

Question 22

In considering whether a company should invest in debt or equity securities of another company, which of the following statements is incorrect?

A) The company wants to make the best use of its excess cash to generate investment income.
B) Investment income consists of interest earned from equity securities and dividends earned from debt investments.
C) Investment income includes increases in the market value of debit or equity securities.
D) The excess cash that can be invested could be the result of temporary or seasonal business fluctuations.

Question 23

Long-term investments ________.

A) include all debt securities that are trading investments or held-to-maturity investments
B) are investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less
C) include debt and equity securities that the investor expects to hold longer than one year or debt or equity securities that are not readily marketable
D) are investments in debt securities or equity securities in which the investor holds less than 20 percent of the voting stock and that the investor plans to sell in the very near future

Question 24

Which one of the following is an example of investment income from securities?

A) deferred tax assets
B) depreciation of long-term assets
C) gain on the sale of fixed assets
D) interest earned from debt securities

Question 25

Long-term investments are investments in bonds or stocks in which the company intends to hold the investment for longer than one year.

Question 26

A company may invest in debt or equity securities of other companies to ________.

A) further enhance a business relationship with a key vendor
B) invest borrowed money in an effort to improve the company's net income
C) to weaken the investing company's supply chain source
D) to allow the company to use investment income to increase its annual dividend

Question 27

Trading investments are categorized on the balance sheet as ________.

A) fixed assets
B) current assets
C) intangible assets
D) short-term liabilities

Question 28

List and discuss two common reasons why companies invest in debt or equity securities.

Question 29

Which of the following is the least desirable business reason for a company to invest in debt or equity securities?

A) to generate investment income
B) to invest short-term, excess cash
C) to pursue certain business strategies
D) to weaken the investing company's supply chain

Question 30

Short-term investments ________.

A) are debt and equity securities that the investor expects to hold for more than a year
B) are investments in debt securities or equity securities in which the investor holds less than 50 percent of the voting stock and that the investor plans to sell in the very near future
C) are investments in debt and equity securities that are highly liquid and that the investor intends to convert to cash within one year
D) are investments in debt securities that the investor intends to hold until maturity

Question 31

Trading investments are categorized as noncurrent assets.

Question 32

Depending on the maturity date, held-to-maturity investments are categorized as current assets or long-term assets on the balance sheet.

Question 33

Which of the following is classified as a short-term investment?

A) marketable securities
B) real estate investments
C) fixed assets
D) highly illiquid equity securities that are expected to be held for more than one year

Question 34

Trading investments include ________.

A) debt and equity securities that the investor expects to hold longer than one year or debt or equity securities that are not readily marketable
B) investments in debt and equity securities that are highly illiquid and that the investor intends to hold until they mature
C) investments in debt securities that the investor intends to hold until they mature
D) equity securities in which the investor holds less than 20 percent of the voting stock and that the investor plans to sell in the very near future

Question 35

Held-to-maturity investments are categorized as long-term assets on the balance sheet, regardless of the maturity date.

Question 36

Which of the following will be classified as a held-to-maturity investment?

A) machinery
B) land
C) bond
D) equity investment

Question 37

Investment income may come from interest earned from debt investments, dividends earned from stock investments, and/or increases in the market value of the security.

Question 38

Which of the following securities typically pays interest?

A) equity securities
B) preferred stocks
C) corporate bonds
D) significant interest investment

Question 39

Companies invest in trading investments with the intent of ________.

A) increasing the amount of long-term assets
B) gaining the controlling rights of the investee
C) holding the investment until maturity
D) generating a profit on a quick sale

Question 40

Short-term investments are investments in debt and equity securities that are highly illiquid.

Question 41

________ are equity securities in which the investor owns between 20% and 50% of the investee's voting stock.

A) Held-to-maturity investments
B) Significant interest investments
C) Controlling interest investments
D) Available-for-sale investments

Question 42

Available-for-sale (AFS) investments that are expected to be held longer than a year are reported as ________.

A) equity
B) current assets
C) long-term assets
D) either current assets or long-term assets

Question 43

Available-for-sale (AFS) investments are reported as ________ if the business expects to sell them within one year.

A) current assets
B) equity
C) long-term assets
D) either current assets or long-term assets

Question 44

Accruex Corporation invests excess cash of $25,000 in corporate bonds on March 30, 2017. The bonds will mature in two years from the date of purchase. When the bonds mature in 2019, Accruex plans to use the cash for its business expansion. Which of the following is included in the journal entry on March 30, 2017?

A) a debit to Long-term Investments-Held-to-Maturity for $25,000
B) a debit to Short-term Investments-U.S. Treasury Notes for $25,000
C) a debit to Long-term Investments-Available-for-Sale for $25,000
D) a credit to Long-term Investments-Available-for-Sale for $25,000

Question 45

When a company pays cash for a long-term investment in bonds, ________.

A) equity remains unchanged
B) current assets increase
C) liabilities increase
D) total assets increase

Question 46

Debra Technologies invests $50,000 to acquire $50,000 face value, 10%, five-year corporate bonds on December 31, 2010. The bonds will mature on December 31, 2015. The bonds pay interest semiannually on December 31 and June 30 every year until maturity. Assume Debra Technologies uses a calendar year. Based on the information provided, which of the following will be included in the journal entry for the transaction on December 31, 2014?

A) a credit to Interest Revenue for $5,000
B) a debit to Interest Revenue for $5,000
C) a credit to Interest Revenue for $2,500
D) a debit to Interest Revenue for $2,500

Question 47

Anglin Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of Richmond Corporation, at face value, on June 30, 2016. The bonds pay interest on June 30 and December 31. Anglin intends to hold the bonds to maturity. The bonds are disposed of, at face value, on June 30, 2021.
Prepare the journal entry for June 30, 2016 (omit the explanation).

Question 48

When a company receives interest revenue on a long-term investment in bonds, ________.

A) long-term assets decrease
B) long-term assets increase
C) equity increases
D) current assets decrease

Question 49

When a company acquires a long-term bond investment, by paying cash, total assets remain unchanged.

Question 50

Which of the following is a condition to record an investment as an available-for-sale security?

A) The investor plans to hold the debt security until it matures.
B) The investor should have a significant interest in the voting stock of the investee.
C) It must be a debt security.
D) The ownership in the voting stock of the investee should be less than 20 percent.

Question 51

Sagal Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of Richmond Corporation, at face value, on June 30, 2016. The bonds pay interest on June 30 and December 31. Sagal intends to hold the bonds to maturity. The bonds are disposed of, at face value, on June 30, 2021.
Prepare the journal entry for December 31, 2016 (omit the explanation).

Question 52

If a debt security is purchased at a discount, the discount must be amortized when the interest revenue is earned.

Question 53

Janus, Inc. invests excess cash of $100,000 in corporate bonds on March 30, 2017. The bonds mature 20 years from the date of purchase. Janus plans to hold the bonds until maturity. How does the March 30, 2017 transaction affect the accounting equation?

A) liabilities will increase
B) equity will decrease
C) long-term assets will decrease
D) total assets will remain unchanged

Question 54

When a company receives interest revenue on a bond, total stockholders' equity remains unchanged.

Question 55

Held-to-maturity investments applies only to debt securities because ________.

A) these securities earn periodic interest
B) equity securities do not mature on a specific date
C) these are long-term investments
D) equity securities are held for a short period of time

Question 56

Beige Corporation pays $500,000 to acquire 40% of the equity securities of Olive Technologies, Inc. on May 5, 2017. This investment will be classified as a(n) ________.

A) trading investment
B) available-for-sale
C) significant interest investment
D) held-to-maturity

Question 57

Becker Technologies invests $50,000 to acquire $50,000 face value, 8%, five-year corporate bonds on January 2, 2012. The bonds will mature on January 2, 2017. The bonds pay interest semiannually on January 2 and July 2 each year until maturity. When Becker Technologies receives interest payments, how is the accounting equation affected?

A) assets will decrease
B) total assets will remain unchanged
C) liabilities will decrease
D) equity will increase

Question 58

________ are categorized as either current assets or long-term assets on the balance sheet, depending on the maturity date.

A) Equity investments
B) Matured investments
C) Trading investments
D) Held-to-maturity investments

Question 59

Regarding accounting entries for debt securities, which of the following is true?

A) The receipt of interest revenue is recorded with a debit to Interest Revenue and a credit to Cash.
B) Investments in debt securities are recorded at cost, including any brokerage fees paid.
C) The receipt of interest revenue is recorded with a debit to Cash and a credit to Long-term Securities-Held-to-Maturity.
D) Debt securities disposed of at maturity are recorded with a debit to the Short-term or Long-term Investments account and a credit to Cash.

Question 60

Significant interest investments are reported as ________ on the balance sheet.

A) current assets
B) either current assets or current liabilities
C) long-term assets
D) either current assets or long-term assets

Question 61

Which of the following is true of the comparison between equity securities and debt securities?

A) Debt securities represent stock ownership in a company whereas equity securities represent a credit relationship with the company.
B) Equity securities earn dividend revenue whereas debt securities earn interest revenue.
C) Neither debt securities nor equity securities mature at a stated date.
D) Both debt securities and equity securities pay interest.

Question 62

At the beginning of the year, Joan Steel, Inc. purchased 10,000 shares of Smith Metals, Inc. for $34,000 in exchange for cash and now holds 3.2% of the voting stock of Smith Metals, Inc. The management of Joan Steel intends to hold this stock for two years. Assuming no other transaction happened during the year, the ________ in the balance sheet will increase.

A) long-term investments
B) cash
C) total assets
D) current assets

Question 63

When a company collects the face value of a long-term investment in bonds at maturity, ________.

A) total assets and equity of the firm remains unchanged
B) both assets and liabilities of the firm increase
C) both assets and equity of the firm increase
D) liabilities decrease and equity increases

Question 64

When a company collects the face value of a bond investment at maturity, total assets increase.

Question 65

Aurum Services, Inc. acquired 100,000 shares of Gamma Metals, Inc. on January 1, 2017. Gamma pays a cash dividend of $0.25 per share on March 2, 2017. With the current investment, Aurum Services, Inc. holds 8% of Gamma. In the journal entry on March 2, 2017, ________.

A) Long-term Investments-Available-for-Sale is credited
B) Dividend Revenue is credited
C) Long-term Investments-Held-to-Maturity is debited
D) Long-term Investments-Available-for-Sale is debited

Question 66

Which of the following is the major difference between the accounting for equity securities and debt securities?

A) Debt securities are classified as liabilities, while equity securities are classified as assets.
B) Debt securities are classified as trading investments, while equity securities are classified as held-to-maturity investments.
C) Debt securities earn interest revenue, while equity securities earn dividend revenue.
D) Debt securities of all types have a maturity date, while only a few equity securities have a maturity date.

Question 67

On the maturity date of a bond investment, the journal entry includes ________.

A) a debit to Cash and a credit to Long-term Investments - Held-to-Maturity
B) a debit to Long-term Investments - Held-to-Maturity and a credit to Cash
C) a debit to the Interest Revenue and a credit to Cash
D) a debit to Cash and a credit to Interest Revenue

Question 68

Green Services, Inc. invests its excess cash in Creative Technologies, Inc. and acquires 1,000 shares for $53.75 per share. Green Services, Inc. owns less than 1% of Creative's voting stock and plans to hold the stock for two years. While preparing the journal entry to record this transaction, ________.

A) Long-term Investments-Available-for-Sale is debited for $53,750
B) Long-term Investments-Held-to-Maturity is debited for $53,750
C) Long-term Investments-Trading Investments is credited for $53,750
D) Long-term Investments-Significant Interest Investments is debited for $53,750

Question 69

Eliasen, Inc. invests its excess cash in Creative Technologies, Inc. and acquires 4,400 shares for $32.25 per share. Eliasen, Inc. owns less than 1% of Creative's voting stock and plans to hold the stock for two years. Which of the following is the correct journal entry for the transaction?

Question 70

Long Company owns a 2% investment in the common stock of Smith Company. The receipt of a cash dividend from Smith will have no effect on Long's total equity.

Question 71

Equity securities in which the investor owns less than 20% ownership in the voting stock of the investee can be ________.

A) significant interest investments
B) controlling interest investments
C) held-to-maturity investments
D) either trading investments or available-for-sale investments

Question 72

When a company receives a dividend payment on available-for-sale investments, the ________.

A) total assets will remain unaffected
B) long-term assets will decrease
C) total equity will increase
D) total liabilities will decrease

Question 73

Griffin Corporation invested $136,000 to acquire 27,000 shares of Delta Technologies, Inc. on March 1, 2017. On July 2, 2017, Delta pays a cash dividend of $1.00 per share. The investment is classified as an available-for-sale investment. Which of the following is the correct journal entry to record the transaction on July 2, 2017?

Question 74

Ashbrook Services, Inc. acquired 126,000 shares of Gamma Metals, Inc. on January 1, 2017. Gamma declares a cash dividend of $2.25 per share on February 15, 2017 and pays the cash dividend on March 2, 2017. With the current investment, Ashbrook Services, Inc. holds 11% of Gamma's voting stock. Which of the following will be the correct journal entry for the day when the dividend payment is made (March 2, 2017)?

Question 75

Dividends received from available-for-sale investments are recorded with a debit to the Dividend Revenue account.

Question 76

Anthem Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of Richmond Corporation, at face value, on June 30, 2016. The bonds pay interest on June 30 and December 31. At the date of purchase, Anthem intended to hold the bonds to maturity. The bonds are disposed of, at face value, on June 30, 2021.
Prepare the journal entry for (omit the explanation) June 30, 2021 (assume that the last interest payment has already been recorded).

Question 77

When a company uses idle cash to invest in equity securities with less than 20% ownership, its total equity will increase.

Question 78

Maurice Corporation invested $100,000 to acquire 20,000 shares of Delta Technologies, Inc. on March 1, 2017. Delta pays a cash dividend of $0.25 per share on July 2, 2018. The investment is classified as available-for-sale. Based on these two transactions, which of the following is true of the accounting equation as of July 2, 2018?

A) Total assets in the balance sheet will remain unchanged.
B) Current assets in the balance sheet will remain unchanged.
C) Equity in the balance sheet will increase.
D) Total liabilities in the balance sheet will increase.

Question 79

Gain on Disposal of a trading investment is an equity account and is reported in the Other Revenues and (Expenses) section of the income statement.

Question 80

Equity securities, in which the investor owns less than 20% ownership in the voting stock of the investee, can be either trading investments or available-for-sale investments.