Deck 15: Investments

Question 1

A company holds $40,000 of 7% bonds as a held-to-maturity security. The journal entry to record receipt of a semiannual interest payment includes a debit to Cash for $2,800 and a credit to Interest Revenue for $2,800.

Answer 1

False

Question 2

A company received dividends of $0.35 per share on 300 shares of stock it holds as an investment. The journal entry to record this transaction would be to debit Cash for $105 and credit Dividend Revenue for $105.

Answer 2

True

Question 3

The equity method with consolidation is used to account for long-term investments in equity securities with controlling influence.

Answer 3

True

Question 4

Investments in trading securities are accounted for using the equity method with consolidation.

Question 5

When an investor company owns more than 25% of the voting stock of an investee company, it has a controlling influence.

Question 6

A controlling investor is called the parent, and the investee company is called the subsidiary.

Question 7

When the cost of a short-term held-to-maturity debt security is different from the maturity value, the difference is amortized over the remaining life of the security.

Question 8

Long-term investments are usually held as an investment of cash for use in current operations.

Question 9

Long-term investments include investments in land or other assets not used in a company's operations.

Question 10

Land used in the company's operations is reported as a long-term investment.

Question 11

Equity securities reflect a creditor relationship such as investments in notes, bonds, and certificates of deposit.

Question 12

When an investment in an equity security is sold, the sale proceeds are compared with the cost, and if the cost is greater than the proceeds, a gain on the sale of the security is recorded.

Question 13

Comprehensive income refers to all changes in equity during a period except those from owners' investments and dividends.

Question 14

Debt securities are recorded at cost when purchased, and interest revenue for investments in debt securities is recorded when earned.

Question 15

Any cash dividends received from equity securities are recorded as Dividend Expense.

Question 16

Short-term investments are also called temporary investments or marketable securities.

Question 17

Short-term investments are intended to be converted into cash within the longer of one year or the current operating cycle of the business, and are readily convertible to cash.

Question 18

Debt securities are recorded at cost when purchased.

Question 19

An investor purchased $50,000 of 10-year bonds it intends to hold to maturity. The investor's journal entry to record the purchase is a debit to Long-Term Investments for $50,000 and a credit to Cash for $50,000.

Question 20

Cash equivalents are investments that are readily converted to known amounts of cash and mature within three months.

Question 21

Equity securities giving an investor significant influence over an investee are always considered short-term investments.

Question 22

Foreign exchange rates fluctuate due to many factors including changing political and economic conditions.

Question 23

Multinational corporations can be U.S. companies with operations in other countries.

Question 24

Trading securities are always reported as current assets.

Question 25

Held-to-maturity securities are equity securities a company intends and is able to hold until maturity.

Question 26

Trading securities are securities that are purchased by trading securities with other companies rather than by paying cash.

Question 27

A company has net income of $130,500. Its net sales were $1,740,000 and its average total assets were $2,750,000. Its profit margin equals 7.5%.

Question 28

A company should report its portfolio of trading securities at its fair value.

Question 29

When consolidated financial statements are prepared, the parent company uses the equity method and reports the investment accounts for the subsidiaries on the balance sheet.

Question 30

Accounting for long-term investments in held-to-maturity securities requires companies to record interest revenue as it is earned.

Question 31

If the exchange rate for Canadian and U.S. dollars is 0.7382 to 1, this implies that 2 Canadian dollars can be purchased for $1.48 U.S. dollars.

Question 32

Profit margin is net sales divided by net income.

Question 33

Profit margin reflects the percent of net income in each dollar of net sales.

Question 34

Investments in held-to-maturity debt securities are always current assets.

Question 35

All companies desire a low return on total assets.

Question 36

Unrealized gains and losses on trading securities are reported on the income statement.

Question 37

A company has net income of $130,500. Its net sales were $1,740,000 and its average total assets were $2,750,000. Its total asset turnover equals 4.7%.

Question 38

The price of one currency stated in terms of another currency is called a foreign exchange rate.

Question 39

Return on total assets can be separated into the profit margin ratio and total asset turnover.

Question 40

Consolidated financial statements show the financial position, results of operations, and cash flows of all entities under the parent's control, including all subsidiaries.

Question 41

To prepare consolidated financial statements when a U.S. parent company has an international subsidiary, the international subsidiary's financial statements must be translated into U.S. dollars.

Question 42

If a U.S. company's credit sale to an international customer allows payment to be made in a foreign currency, the sale transaction is recorded using the exchange rate on the date of sale.

Question 43

When using the equity method for investments in equity securities, the investor records the receipt of cash dividends as revenue.

Question 44

Both U.S. GAAP and IFRS permit companies to use fair value in reporting available-for-sale and held-to-maturity securities.

Question 45

Unrealized Loss-Equity and Unrealized Gain-Equity are permanent equity accounts.

Question 46

Long-term investments in debt securities not classified as trading or held-to-maturity securities are classified as available-for-sale securities.

Question 47

On May 15, Tumbleweed, Inc. purchased 10,000 shares of Dansell Corp. for $80,000. The securities are considered available-for-sale securities. This is the company's first and only investment in available-for-sale securities. On September 30, the stock had a market value of
$85,000. The $5,000 difference must be reported on Tumbleweed's income statement as a $5,000 gain.

Question 48

Management's intent determines whether an available-for-sale security is classified as long-term or short-term.

Question 49

The cost method of accounting is used for long-term investments in equity securities with significant influence.

Question 50

Available-for-sale securities are actively managed like trading securities because the company intends to trade them for profit in the short term.

Question 51

Security prices are sometimes listed in fractions. For example, a debt security with a price of 22¾ is the same as $22.25.

Question 52

Hamasaki Company owns 30% of CDW Corp. stock. Hamasaki received $6,500 in cash dividends from its investment in CDW. The entry to record receipt of these dividends includes a debit to Cash for $6,500 and a credit to Long-Term Investments for $6,500.

Question 53

If a long-term investment in an equity security gives the investor significant influence over the investee, the investment is classified as available-for-sale.

Question 54

Any unrealized gain or loss for the portfolio of available-for-sale securities is reported on the income statement in the other gain or loss section.

Question 55

An investor presumed to have significant influence owns at least 20% but not more than 50% of another company's voting stock.

Question 56

If a U.S. Company's credit sale to an international customer allows payment to be made in a foreign currency, the same exchange rate must be used for the date of sale and the cash payment date.

Question 57

Kim Manufacturing purchased on credit £20,000 worth of parts from a British company when the exchange rate was $1.66 per British pound. At the year-end balance sheet date, the exchange rate increased to $1.69. Kim must record a gain of $600.

Question 58

When using the equity method, receipt of cash dividends increases the carrying (book) value of an investment in equity securities.

Question 59

On May 1, Jorge Co. purchases 2,000 shares of Radiotech stock for $25,000. This investment is considered to be an available-for-sale investment. This is the company's first and only investment in available-for-sale securities. On July 31 (Jorge's year-end), the stock had a market value of
$28,000. Jorge should record a credit to Unrealized Gain-Equity for $3,000.

Question 60

Long-term investments in available-for-sale securities are reported at fair value on the balance sheet.

Question 61

Strickland Corporation has invested in 10% of the outstanding stock of Nez Corporation. Strickland intends to actively manage this investment for profit. This investment is classified as:

A) a held-to-maturity security.
B) a significant influence security.
C) a trading security.
D) a controlling influence security.
E) an available-for-sale security.

Question 62

At acquisition, debt securities are:

A) Recorded at cost.
B) Recorded at the amount of interest that will be received over the life of the security.
C) Not recorded, because no interest is due yet.
D) Recorded at cost plus the amount of dividend income to be received.
E) Recorded at their cost, plus total interest that will be received over the life of the security.

Question 63

Long-term investments:

A) Include only equity securities.
B) Are expected to be converted into cash within one year.
C) Must be readily convertible to cash.
D) Can include funds designated for a special purpose, or investments in land not used in the company's operations.
E) Are current assets.

Question 64

At the end of the accounting period, the owners of debt securities:

A) Must record a gain or loss on the interest income earned.
B) Must report the dividend income accrued on the debt securities.
C) Must record any interest earned on the debt securities during the period.
D) Must retire the debt.
E) Must record a gain or loss on the dividend income earned.

Question 65

Long-term investments include:

A) Investments in marketable bonds that are intended to be converted into cash in the short-term.
B) Investments intended to be converted to cash within one year.
C) Investments in marketable stocks that are intended to be converted into cash in the short-term.
D) Investments in bonds and stocks that are not readily convertible to cash or not intended to be converted to cash in the short term.
E) Only investments readily convertible to cash.

Question 66

A company has an investment in 9% bonds with a par value of $100,000 that pay interest on October 1 and April 1. The amount of interest accrued on December 31 (the company's year-end) would be:

A) $9,000.
B) $1,500.
C) $2,250.
D) $750.
E) $4,500.

Question 67

Maroon Company sold supplies in the amount of €15,000 (euros) to a French company when the exchange rate was $1.15 per euro. At the time of payment, the exchange rate decreased to $1.12. Maroon must record a loss of $450.

Question 68

Kendall Corp. purchased at par value $75,000 of Shrem Company's 8% bonds that mature in three-years. The bonds pay interest semiannually on June 1 and December 1. Kendall plans to hold the bonds until they mature. When the bonds mature, Kendall should prepare the following journal entry:

A) debit Unrealized Gain-Equity, $6,000; credit Cash, $6,000.
B) debit Cash, $75,000; credit Long-Term Investments-Trading, $75,000.
C) debit Long-Term Investments-HTM, $75,000; credit Cash, $75,000.
D) debit Cash, $75,000; credit Long-Term Investments-HTM, $75,000.
E) debit Cash, $6,000; credit, Unrealized Gain-Equity, $6,000.

Question 69

All of the following are true about debt securities except:

A) They can have a cost higher than the maturity value.
B) They can be short-term investments.
C) They can be long-term investments.
D) They can have a cost lower than the maturity value.
E) They reflect an owner relationship.

Question 70

Roe Corporation owns 2,000 shares of WRJ Corporation stock. WRJ Corporation has 25,000 shares of stock outstanding. WRJ paid $4 per share in cash dividends to its stockholders. The entry to record the receipt of these dividends is:

A) Debt Long-Term Investment, $8,000; credit Cash, $8,000.
B) Debit Unrealized Gain-Equity, $8,000; credit Cash, $8,000.
C) Debit Cash, $8,000; credit Long-Term Investments, $8,000.
D) Debit Cash, $8,000; credit Unrealized Gain-Equity, $8,000.
E) Debit Cash, $8,000; credit Dividend Revenue, $8,000.

Question 71

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value as a long-term investment. The company intends to hold the bonds to maturity. The correct entry to record the purchase of the bond investment is:

A) Debit Long-Term Investments-HTM $38,325; credit Cash $38,325.
B) Debit Long-Term Investments-HTM $37,800; credit Cash $37,800.
C) Debit Long-Term Investments-HTM $37,800; debit Loss on Investment $525; credit Cash $38,325.
D) Debit Long-Term Investments-HTM $37,800; debit Investment Expense $525; credit Cash $38,325.
E) Debit Cash $40,000; credit Long-Term Investments-HTM $40,000.

Question 72

A company purchased $60,000 of 5% bonds on May 1 at par value. The bonds pay interest on March 1 and September 1. The amount of interest accrued on December 31 (the company's year-end) would be:

A) $1,000.
B) $2,500.
C) $500.
D) $1,250.
E) $1,500.

Question 73

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value. The company intends to hold the bonds to maturity. The cash proceeds the company will receive when the bonds mature equal:

A) $40,000.
B) $40,525.
C) $43,200.
D) $37,800.
E) $38,325.

Question 74

Barnes Company purchased $50,000 of 8% bonds at par. The bonds mature in six years and are a held-to-maturity security. Which of the following is the correct journal entry to record the receipt of the semiannual interest payment?

A) debit Cash, $2,000; credit Interest Revenue, $2,000.
B) debit Cash, $4,000; credit Long-Term Investments-HTM, $4,000.
C) debit Unrealized Gain-Equity, $2,000; credit Cash, $2,000.
D) debit Cash, $4,000; credit Unrealized Gain-Equity, $4,000.
E) debt Cash, $2,000; credit Long-Term Investments-HTM, $2000.

Question 75

Long-term investments are reported in the:

A) Equity section of the balance sheet.
B) Plant assets section of the balance sheet.
C) Non-current section of the balance sheet called long-term investments.
D) Current asset section of the balance sheet.
E) Intangible asset section of the balance sheet.

Question 76

Short-term investments:

A) Include funds earmarked for a special purpose such as bond sinking funds.
B) Include bonds not intended to be converted into cash.
C) Include stocks not intended to be converted into cash.
D) Are securities that management intends to convert to cash within the longer of one year or the current operating cycle, and are readily convertible to cash.
E) Include sinking funds not intended to be converted into cash.

Question 77

The controlling investor is called the:

A) Senior entity.
B) Parent.
C) Owner.
D) Investee.
E) Subsidiary.

Question 78

Accounting for long-term investments in equity securities with controlling influence uses the:

A) Controlling method.
B) Consolidated method.
C) Equity method with consolidation.
D) Investment method.
E) Investor method.

Question 79

All of the following statements regarding equity securities are true except:

A) Equity securities should be recorded at cost when acquired.
B) Equity securities are valued at fair value if classified as significant influence securities.
C) Equity securities are valued at fair value if classified as trading securities.
D) Equity securities classified as available-for-sale record the dividend revenue when received.
E) Equity securities are valued at fair value if classified as available-for-sale securities.

Question 80

Kendall Corp. purchased at par value $160,000 of Barker Company's 7% bonds that mature in 10 months. The bonds pay interest semiannually on June 1 and December 1. Kendall plans to hold the bonds until they mature. The journal entry to record Kendall's purchase of the bonds is:

A) debit Short-Term Investments-HTM $160,000; credit Cash, $160,000.
B) debit Long-Term Investments-HTM $160,000; credit Cash $160,000.
C) debit Cash, $160,000; credit Short-Term Investments-HTM $160,000.
D) debit Cash, $169,333; credit, Short-Term Investments-HTM $169,333.
E) debit Cash, $160,000; credit Long-Term Investments-HTM $160,000.