Deck 14: Investments

Question 1

Both debt securities and equity securities can be classified as held-to-maturity.

Answer 1

False

Question 2

Amortization of discount or premium on available-for-sale debt securities is debited or credited to the Available-for-Sale Securities account.

Answer 2

True

Question 3

Amortization of discount or premium on trading debt securities is debited or credited to the Securities Fair Value Adjustment (Trading) account.

Answer 3

False

Question 4

The fair value method requires that companies classify equity securities at acquisition as held-to-maturity securities or available-for-sale securities.

Question 5

When an investor has holdings of less than 20% in an investee and the securities are classified as trading securities, unrealized holding gains or losses are reported as part of net income.

Question 6

In instances of "significant influence" (generally an investment of 20% or more), the investor is required to account for the investment using the equity method.

Question 7

The equity method gives recognition to the fact that investee earnings increase investee net assets that underlie the investment and investee losses and dividends decrease the net assets.

Question 8

Once the equity method is adopted by an investor, the method must continue in use until the investment to which it has been applied is sold or liquidated by some other means.

Question 9

Trading securities and available-for-sale securities are classified as current or noncurrent assets depending on the circumstances.

Question 10

When a company sells available-for-sale securities, a reclassification adjustment is neces-sary to avoid counting gains and losses twice.

Question 11

Held-to-maturity securities should be classified as current or noncurrent, based on the maturity date of the individual securities.

Question 12

For debt securities, the impairment test is to determine whether "it is probable that the investor will be unable to collect all amounts due according to the contractual terms."

Question 13

Subsequent increases and decreases in the fair value of impaired available-for-sale securities are included in other comprehensive income.

Question 14

The transfer of securities from trading to available-for-sale and from available-for-sale to trading has the same impact on stockholders' equity and net income.

Question 15

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

A) make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.
B) notify the issuer and request that a special payment be made for the appropriate portion of the interest period.
C) make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date.
D) do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

Question 16

Use of the effective-interest method in amortizing bond premiums and discounts results in

A) a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method.
B) a varying amount being recorded as interest income from period to period.
C) a variable rate of return on the book value of the investment.
D) a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

Question 17

Solo Co. purchased $300,000 of bonds for $315,000. If Solo intends to hold the securities to maturity, the entry to record the investment includes

A) a debit to Held-to-Maturity Securities at $300,000.
B) a credit to Premium on Investments of $15,000.
C) a debit to Held-to-Maturity Securities at $315,000.
D) none of these.

Question 18

If a company has acquired a 20% to 50% interest in another corporation, this generally results in a(n)

A) insignificant level of influence. b passive level of influence.
B) passive level of influence.
C) significant level of influence.
D) controlling level of influence.

Question 19

McCoy Corporation purchased 7,400 shares of Chudzick Company's common stock. The purchase price was $362,600, which is equal to 50% of Chudzick Company's retained earnings balance. Chudzick Company's 46,000 shares of common stock are actively traded, and each share has a par value of $10. McCoy Corporation should account for this long-term investment using the

A) fair value method.
B) equity method.
C) consolidation method.
D) amortized cost method.

Question 20

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

A) The investor should always use the equity method to account for its investment.
B) The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
C) The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
D) The investor should always use the fair value method to account for its investment.

Question 21

On August 1, 2008, Witten Co. acquired 200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2008, and mature on April 30, 2014, with interest paid each October 31 and April 30. The bonds will be added to Witten's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2008 is

A)
$\begin{array}{llr} \text {Available-for-Sale Securities. } &198,500\\ \text { Cash } &&198,000\\\end{array}$

B)
$\begin{array}{llr} \text {Available-for-Sale Securities. } &194,000\\ \text { Interest Receivable}&4,500\\ \text { Cash } &&198,000\\\end{array}$

C)
$\begin{array}{llr} \text {Available-for-Sale Securities. } &194,000\\ \text { Interest Revenue}&4,500\\ \text { Cash } &&198,500\\\end{array}$

D)
$\begin{array}{llr} \text {Available-for-Sale Securities. } &200,000\\ \text { Interest Revenue}&4,500\\ \text { Discount on Debt Securities}&&6,000\\ \text { Cash } &&198,000\\\end{array}$

Question 22

Oliver Company purchased $400,000 of 10% bonds of McGee Co. on January 1, 2008, paying $376,100. The bonds mature January 1, 2018; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Oliver Company uses the effective-interest method and plans to hold these bonds to maturity.

-On July 1, 2008, Oliver Company should increase its Held-to-Maturity Debt Securities account for the McGee Co. bonds by

A) $2,392.
B) $1,371.
C) $1,196.
D) $686.

Question 23

Oliver Company purchased $400,000 of 10% bonds of McGee Co. on January 1, 2008, paying $376,100. The bonds mature January 1, 2018; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Oliver Company uses the effective-interest method and plans to hold these bonds to maturity.

-For the year ended December 31, 2008, Oliver Company should report interest revenue from the McGee Co. bonds of

A) $42,392.
B) $41,409.
C) $41,368.
D) $40,000.

Question 24

On October 1, 2008, Porter Co. purchased to hold to maturity, 1,000, $1,000, 9% bonds for $990,000 which includes $15,000 accrued interest. The bonds, which mature on February 1, 2017, pay interest semiannually on February 1 and August 1. Porter uses the straight-line method of amortization. The bonds should be reported in the December 31, 2008 balance sheet at a carrying value of

A) $975,000.
B) $975,750.
C) $990,000.
D) $990,250.

Question 25

On November 1, 2008, Little Company purchased 600 of the $1,000 face value, 9% bonds of Player, Incorporated, for $632,000, which includes accrued interest of $9,000. The bonds, which mature on January 1, 2013, pay interest semiannually on March 1 and September 1. Assuming that Little uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Little's December 31, 2008, balance sheet at

A) $600,000.
B) $623,000.
C) $622,080.
D) $632,000.

Question 26

On November 1, 2008, Morton Co. purchased Gomez, Inc., 10-year, 9% bonds with a face value of $250,000, for $225,000. An additional $7,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2015. Morton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Morton's 2008 income statement as a result of Morton's available-for-sale investment in Gomez was

A) $4,375.
B) $4,167.
C) $3,750.
D) $3,333.

Question 27

On October 1, 2008, Lyman Co. purchased to hold to maturity, 200, $1,000, 9% bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2012. Lyman uses straight-line amortization. Ignoring income taxes, the amount reported in Lyman's 2008 income statement from this investment should be

A) $4,500.
B) $4,020.
C) $4,980.
D) $5,460.

Question 28

On January 1, 2008, Alton Co. purchased $100,000 of 10%, Olson, Inc. bonds with interest payable on July 1 and January 1 for $107,000. On February 1, 2008, Alton purchased $100,000 of 12%, Ehrlich Co. bonds with interest payable on August 1 and February 1 for $95,000. Alton classifies the Olson and Ehrlich bonds as trading debt securities. On December 31, 2008, the fair value of the Olson and Ehrlich bonds are $110,000 and $94,000, respectively. At December, 2008, what adjusting entry should be made by Alton?

A) No entry should be made.
B)
C)
D)

Question 29

On January 3, 2008, Slezak Company purchased 22% of Urban Corporation's common stock for $250,000. Shortly after the purchase, Slezak Company executives tried to obtain representation on Urban Corporation's board of directors and failed. During 2008, Urban reported net income of $150,000 and paid cash dividends of $80,000 on the common stock. The balance in Slezak Company's Investment in Urban Corporation account at December 31, 2008, should be

A) $265,400.
B) $234,600.
C) $250,000.
D) $300,600.

Question 30

On its December 31, 2007, balance sheet, Quinn Co. reported its investment in available-for-sale securities, which had cost $600,000, at fair value of $550,000. At December 31, 2008, the fair value of the securities was $585,000. What should Quinn report on its 2008 income statement as a result of the increase in fair value of the investments in 2008?

A) $0
B) Unrealized loss of $15,000
C) Realized gain of $35,000
D) Unrealized gain of $35,000

Question 31

During 2007, Ellis Company purchased 20,000 shares of Hiller Corp. common stock for $315,000 as an available-for-sale investment. The fair value of these shares was $300,000 at December 31, 2007. Ellis sold all of the Hiller stock for $17 per share on December 3, 2008, incurring $14,000 in brokerage commissions. Ellis Company should report a realized gain on the sale of stock in 2008 of

A) $11,000.
B) $25,000.
C) $26,000.
D) $40,000.

Question 32

Garrison Co. owns 20,000 of the 50,000 outstanding shares of Steele, Inc. common stock.
During 2008, Steele earns $800,000 and pays cash dividends of $640,000.

-If the beginning balance in the investment account was $500,000, the balance at December 31, 2008 should be

A) $820,000.
B) $660,000.
C) $564,000.
D) $500,000.

Question 33

Garrison Co. owns 20,000 of the 50,000 outstanding shares of Steele, Inc. common stock.
During 2008, Steele earns $800,000 and pays cash dividends of $640,000.

-Garrison should report investment revenue for 2008 of

A) $320,000.
B) $256,000.
C) $64,000.
D) $0.

Question 34

If Karter Company uses the equity method of accounting for its investment in Flynn Company, its Investment in Flynn Company account at December 31, 2008 should be

A) $290,000.
B) $300,000.
C) $330,000.
D) $340,000.

Question 35

Barry Corporation earns $240,000 and pays cash dividends of $80,000 during 2008. Glenon Corporation owns 3,000 of the 10,000 outstanding shares of Barry.

-What amount should Glenon show in the investment account at December 31, 2008 if the beginning of the year balance in the account was $320,000?

A) $392,000
B) $320,000
C) $368,000
D) $480,000

Question 36

Barry Corporation earns $240,000 and pays cash dividends of $80,000 during 2008. Glenon Corporation owns 3,000 of the 10,000 outstanding shares of Barry.

-How much investment income should Glenon report in 2008?

A) $80,000
B) $72,000
C) $48,000
D) $240,000

Question 37

Young Co. acquired a 60% interest in Tomlin Corp. on December 31, 2007 for $945,000. During 2008, Tomlin had net income of $600,000 and paid cash dividends of $150,000. At December 31, 2008, the balance in the investment account should be

A) $945,000.
B) $1,305,000.
C) $1,215,000.
D) $1,395,000.

Question 38

Stone Co. owns 4,000 of the 10,000 outstanding shares of Maye Corp. common stock. During 2008, Maye earns $120,000 and pays cash dividends of $40,000.

-If the beginning balance in the investment account was $240,000, the balance at December 31, 2008 should be

A) $240,000.
B) $272,000.
C) $288,000.
D) $320,000.

Question 39

Stone Co. owns 4,000 of the 10,000 outstanding shares of Maye Corp. common stock. During 2008, Maye earns $120,000 and pays cash dividends of $40,000.

-Stone should report investment revenue for 2008 of

A) $16,000.
B) $32,000.
C) $40,000.
D) $48,000.

Question 40

The following information relates to Vernon Company for 2008:
Vernon's 2008 other comprehensive income is

A) $25,000.
B) $40,000.
C) $50,000.
D) $60,000.

Question 41

On October 1, 2007, Ming Co. purchased 600 of the $1,000 face value, 8% bonds of Loy, Inc., for $702,000, including accrued interest of $12,000. The bonds, which mature on January 1, 2014, pay interest semiannually on January 1 and July 1. Ming used the straight-line method of amortization and appropriately recorded the bonds as available-for-sale. On Ming's December 31, 2008 balance sheet, the carrying value of the bonds is

A) $690,000.
B) $684,000.
C) $681,600.
D) $672,000.

Question 42

Unruh Corp. began operations in 2008. An analysis of Unruh's equity securities portfolio acquired in 2008 shows the following totals at December 31, 2008 for trading and available-for-sale securities:
What amount should Unruh report in its 2008 income statement for unrealized holding loss?

A) $40,000
B) $10,000
C) $15,000
D) $25,000

Question 43

On December 29, 2009, Greer Co. sold an equity security that had been purchased on January 4, 2008. Greer owned no other equity securities. An unrealized holding loss was reported in the 2008 income statement. A realized gain was reported in the 2009 income statement. Was the equity security classified as available-for-sale and did its 2008 market price decline exceed its 2009 market price recovery?

Question 44

Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2008 for $400,000. During 2008, Carne earned $160,000 and paid dividends of $100,000. Kimm's 30% interest in Carne gives Kimm the ability to exercise significant influence over Carne's operating and financial policies. During 2009, Carne earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2009, Kimm sold half of its stock in Carne for $264,000 cash.

-Before income taxes, what amount should Kimm include in its 2008 income statement as
A result of the investment?

A) $160,000
B) $100,000
C) $48,000
D) $30,000

Question 45

Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2008 for $400,000. During 2008, Carne earned $160,000 and paid dividends of $100,000. Kimm's 30% interest in Carne gives Kimm the ability to exercise significant influence over Carne's operating and financial policies. During 2009, Carne earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2009, Kimm sold half of its stock in Carne for $264,000 cash.

-The carrying amount of this investment in Kimm's December 31, 2008 balance sheet should be

A) $400,000.
B) $418,000.
C) $448,000.
D) $460,000.

Question 46

Kimm, Inc. acquired 30% of Carne Corp.'s voting stock on January 1, 2008 for $400,000. During 2008, Carne earned $160,000 and paid dividends of $100,000. Kimm's 30% interest in Carne gives Kimm the ability to exercise significant influence over Carne's operating and financial policies. During 2009, Carne earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2009, Kimm sold half of its stock in Carne for $264,000 cash.

-What should be the gain on sale of this investment in Kimm's 2009 income statement?

A) $64,000
B) $55,000
C) $49,000
D) $40,000

Question 47

On January 1, 2008, Sloane Co. purchased 25% of Orr Corp.'s common stock; no goodwill resulted from the purchase. Sloane appropriately carries this investment at equity and the balance in Sloane's investment account was $720,000 at December 31, 2008. Orr reported net income of $450,000 for the year ended December 31, 2008, and paid common stock dividends totaling $180,000 during 2008. How much did Sloane pay for its 25% interest in Orr?

A) $652,500
B) $765,000
C) $787,500
D) $877,500

Question 48

On December 31, 2007, Nance Co. purchased equity securities as trading securities. Pertinent data are as follows:
On December 31, 2008, Nance transferred its investment in security C from trading to available-for-sale because Nance intends to retain security C as a long- term investment. What total amount of gain or loss on its securities should be included in Nance's income statement for the year ended December 31, 2008?

A) $3,000 gain
B) $27,000 loss
C) $30,000 loss
D) $45,000 loss