Deck 29: Investments

Question 1

Held-to-maturity securities are reported on the balance sheet at fair value.

Answer 1

False

Question 2

The investor carrying an investment by the equity method records cash dividends received as an increase in the carrying amount of the investment.

Answer 2

False

Question 3

As with other assets, the cost of a bond investment includes all costs related to the purchase.

Answer 3

True

Question 4

An equity investment in less than 20% of another company's stock is accounted for using the fair value method.

Question 5

If the proceeds from the sale of bond investments exceed the balance of the investment amount, a gain is realized.

Question 6

Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of the investment.

Question 7

If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment.

Question 8

The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.

Question 9

When a corporation owns less than 20% of the stock of another company, dividends received are not treated as income.

Question 10

When bonds held as long-term investments are purchased at a price other than the face value, the premium or discount should be amortized over the remaining life of the bonds.

Question 11

When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded.

Question 12

To record a bond investment made between interest payment dates, Investment in Bonds would be debited and Cash and Interest Revenue would be credited.

Question 13

The financial statements resulting from combining parent and subsidiary statements are called consolidated statements.

Question 14

It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company.

Question 15

The equity method is usually more appropriate for accounting for investments where the purchaser does not have significant influence over the investee.

Question 16

Any gains or losses on the sale of bonds normally would be reported in the Other revenue (loss) section of the income statement.

Question 17

When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued interest since the last interest payment date from the selling price.

Question 18

The corporation owning all or a majority of the voting stock of another corporation is known as the parent company.

Question 19

Accounting for the sale of stock is the same for both the fair value and the equity methods of accounting for investments.

Question 20

Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for the investment using the equity method.

Question 21

Temporary investments such as in trading securities are

A)recorded at cost but reported at fair value
B)recorded at cost and reported at cost
C)recorded at cost but reported at lower of cost or fair value
D)recorded at fair value and reported at fair value

Question 22

Trading securities are reported on the balance sheet at fair value.

Question 23

Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and liabilities.

Question 24

In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited or credited to the account Valuation Allowance for Trading Investments.

Question 25

Any difference between the fair values of the securities and their cost is a realized gain or loss.

Question 26

Which of the following is not a reason to invest excess cash in temporary investments?

A)earn interest revenue
B)influence the operations of another company
C)receive dividends
D)realize gains from the increase in market value of the securities

Question 27

Temporary investments are recorded at their cost, which would include brokers' commissions.

Question 28

Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.

Question 29

Unrealized gains and losses on trading securities are not included in the calculation of income from operations.

Question 30

On June 1, $50,000 of treasury bonds were purchased between interest dates. The broker commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to the Investment-Treasury Bonds account?

A)$50,000
B)$50,500
C)$49,500
D)$53,000

Question 31

Investment in Bonds is reported on the balance sheet at lower of cost or market.

Question 32

Investment in Bonds is listed on the balance sheet after Bonds Payable.

Question 33

Investments in stocks that are expected to be held for the long term are listed in the stockholder's equity section of the balance sheet.

Question 34

On June 1, $40,000 of treasury bonds were purchased between interest dates. The broker commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1?

A)$400
B)$406
C)$2,000
D)$2,400

Question 35

Temporary investments

A)are reported as current assets
B)include cash equivalents
C)do not include equity securities
D)all are correct

Question 36

Long-term investments are held for all of the listed reasons below except

A)to earn the interest or dividend income
B)for their long-term gain potential
C)to have influence over another business entity
D)to meet current cash needs

Question 37

Trading securities should be reported on the financial statements at fair value.

Question 38

The primary objectives of investing in temporary investments is to

A)all of these
B)realize gains from increases in market price of the securities
C)receive dividends
D)earn interest revenue

Question 39

Investments in bonds that management intends to hold to maturity are called trading securities.

Question 40

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be

A)debit Investment-Evans Company Bonds, $101,500; credit Cash, $101,500
B)debit Investment-Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500
C)debit Investment-Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash $101,500
D)debit Investment-Evans Company Bonds, $100,000; credit Cash $100,000

Question 41

The equity method of accounting for investments

A)requires a year-end adjustment to revalue the stock to lower of cost or market
B)requires the investment to be reported at its original cost
C)requires the investment be increased by the reported net income of the investee
D)requires the investment be increased by the dividends paid by the investee

Question 42

When shares of stock held as an investment are sold, the difference between the proceeds and the balance of the investment account is recorded as a(n)

A)prior period adjustment
B)operating income and losses
C)paid-in capital addition
D)gain or loss

Question 43

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include a

A)debit to Interest Receivable for $2,000
B)debit to Investment in Bonds for $202,000
C)debit to Cash for $200,000
D)credit to Interest Revenue for $2,000

Question 44

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

A)$12,750 gain
B)$600 gain
C)$600 loss
D)$9,250 loss

Question 45

On May 1, Pierce Company purchased $60,000 of Stanton Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest.​
The journal entry Pierce will record on February 1 will include a

A)credit to Interest Revenue for $1,500
B)credit to Gain on Sale of Investments for $1,500
C)credit to Cash for $52,500
D)credit to Interest Receivable for $600

Question 46

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be

A)debit Cash, $4,000; credit Interest Revenue, $4,000
B)debit Cash, $4,000; credit Interest Receivable, $4,000
C)debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500
D)debit Cash, $2,500; credit Interest Revenue, $2,500

Question 47

What are the total proceeds from the February 1 sale?

A)$52,400
B)$51,500
C)$50,000
D)$52,000

Question 48

Interest revenue on bonds is reported

A)as an addition to the Investment in Bonds account
B)as part of comprehensive income but not as part of net income
C)as part of other revenue
D)as part of operating income

Question 49

Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of bonds at 97. The journal entry for the purchase would include a

A)credit to Interest Receivable for $4,500
B)credit to Interest Revenue for $4,500
C)debit to Interest Receivable for $4,500
D)debit to Interest Revenue for $4,500

Question 50

On April 1, Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a

A)credit to Interest Payable for $2,000
B)debit to Investments-Tetter Company Bonds for $52,000
C)debit for Cash of $50,000
D)debit to Investments-Tetter Company Bonds for $50,000

Question 51

The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the

A)fair value method
B)market method
C)income method
D)equity method

Question 52

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is

Question 53

The fair value method of accounting for stock

A)recognizes dividends as income
B)is only appropriate as part of a consolidation
C)requires the investment be increased by the reported net income of the investee
D)requires the investment be decreased by the reported net income of the investee

Question 54

Which of the following stock investments should be accounted for using the fair value method?

A)investments of less than 20%
B)investments between 20% and 50%
C)investments of less than 20% and investments between 20% and 50%
D)all stock investments should be accounted for using the fair value method

Question 55

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to

A)Investment in Vallerio Corporation Stock
B)Retained Earnings
C)Dividend Revenue
D)Dividend Receivables

Question 56

Which of the following items would not affect the investor's income for the period?

A)interest received on a temporary investment in bonds
B)dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock
C)dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock
D)interest received on a long-term investment in bonds

Question 57

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the

A)equity method
B)market method
C)cost or market method
D)fair value method

Question 58

Which of the following statements is not a reason a company may purchase another company's stock?

A)earning a return on excess cash
B)sustain the other company's stock price
C)gaining control of another company's operations
D)developing or maintaining business relationships

Question 59

On May 1, Pierce Company purchased $60,000 of Stanton Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest.​
The journal entry Pierce will record on June 30 will include a

A)credit to Interest Revenue for $2,400
B)debit to Cash for $3,600
C)credit to Cash for $2,400
D)credit to Interest Receivable for $1,200

Question 60

Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be

A)debit Cash, $105,000; credit Investment-Evans Company Bonds, $104,500, and Interest Revenue, $500
B)debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000
C)debit Cash, $104,500, and Interest Receivable, $500; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500
D)debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500

Question 61

Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to as the

A)parent
B)minority interest
C)affiliate
D)subsidiary

Question 62

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

A)investment only
B)investment plus Wendell's share of Porter's net income earned since the investment was purchased
C)investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased
D)investment plus Wendell's share of Porter's net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased

Question 63

Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the

A)parent
B)minority interest
C)affiliate
D)subsidiary

Question 64

When the fair value method is used to account for an investment, the carrying value of the investment is affected by

A)the dividend distributions of the investee
B)the periodic net income of the investee
C)the earnings and dividend distributions of the investee
D)neither the earnings nor the dividends of the investee

Question 65

An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale?

A)$3,500 gain
B)$350 gain
C)$350 loss
D)$500 gain

Question 66

Financial statements in which financial data for two or more companies are combined as a single entity are called

A)conventional statements
B)consolidated statements
C)audited statements
D)constitutional statements

Question 67

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

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

Question 68

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry to record the purchase under the fair value method would include a

A)debit to Investments for $132,000
B)credit to Cash for $132,000
C)debit to Investments for $132,240
D)credit to Investments for $240

Question 69

The account Unrealized Gain (Loss) on Available-for-Sale Investments should be included on the

A)income statement as other revenue (expense)
B)balance sheet as an adjustment to the asset account
C)balance sheet as an adjustment to stockholders' equity
D)statement of stockholder's equity

Question 70

Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

A)debit Investment in Worton Corporation Stock; credit Cash
B)debit Cash; credit Dividend Revenue
C)debit Investment in Worton Corporation Stock; credit Income of Worton Corporation
D)debit Cash; credit Investment in Worton Corporation Stock

Question 71

Yankton Company began the year without an investment portfolio. During the year, it purchased investments classified as trading securities at a cost of $13,000. At the end of the year, the market value of the securities was $11,000. Yankton Company's financial statements for the current year should show

A)an unrealized loss of $2,000 on the income statement and net trading securities of $13,000 on the balance sheet
B)no unrealized loss on the income statement and net trading securities of $13,000 on the balance sheet
C)no unrealized loss on the income statement; net trading securities of $11,000 and an unrealized loss of $2,000 as a stockholders' equity adjustment on the balance sheet
D)an unrealized loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet

Question 72

Held-to-maturity securities

A)are reported at fair value
B)include stocks as well as bonds
C)may be reported as current or noncurrent assets
D)all of these

Question 73

If one company owns more than 50% of the common stock of another company

A)a partnership exists
B)a parent-subsidiary relationship exists
C)the company whose stock is owned must be liquidated
D)the fair value method should be used to account for the investment

Question 74

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale under the fair value method would include a

A)debit to Cash, $111,840
B)credit to Investments, $112,000
C)credit to Loss on Sale, $23,680
D)debit to Cash, $112,000

Question 75

The account Unrealized Gain on Trading Investments should be included on the

A)income statement as other revenue (expense)
B)balance sheet as an adjustment to the asset account
C)balance sheet as an adjustment to stockholders' equity
D)statement of stockholder's equity

Question 76

In general, consolidated financial statements should be prepared

A)when a corporation owns more than 20% and less than 40% of the common stock of another company
B)when a corporation owns more than 50% of the common stock of another company
C)only when a corporation owns 100% of the common stock of another company
D)whenever the market value of the stock investment is significantly lower than its cost

Question 77

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

A)credit to cash for $9,000
B)debit to the investment account for $9,000
C)credit to the investment account for $9,000
D)credit to a loss account for $9,000

Question 78

Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives?

A)debit Investment in Worton Corporation; credit Cash
B)debit Cash; credit Dividend Revenue
C)debit Investment in Worton Corporation; credit Income of Worton Corporation
D)debit Cash; credit Investment in Worton Corporation

Question 79

The account Unrealized Loss on Trading Investments should be included on the

A)income statement as other revenue
B)income statement as other expense
C)balance sheet as an adjustment to the asset account
D)balance sheet as an adjustment to stockholders' equity

Question 80

The company whose stock is more than 50% owned by another company is called the

A)controlling company
B)investee company
C)subsidiary company
D)sibling company