Deck 5: Short-Term Investments Receivables

Question 1

Short-term investments are the most liquid asset.

Answer 1

False

Question 2

Which of the following statement is correct?

A) Trading securities can be current or long-term assets.
B) Available-for-sale securities are always current assets.
C) Held-to-maturity securities are always current assets.
D) Trading securities are always current assets.

Answer 2

D

Question 3

Stock investments that are to be sold in the near future with the intent of generating profits on the sale are:

A) investments.
B) trading securities.
C) available-for-sale securities.
D) debt securities.

Answer 3

B

Question 4

Trading securities are originally recorded at their cost.

Question 5

It takes good judgment, which includes ethics, to become a successful accountant.

Question 6

Another name for short-term investments is:

A) equity investments.
B) marketable securities.
C) market investments.
D) available-for-sale securities.

Question 7

Which of the following is an incorrect statement regarding short-term investments?

A) Short-term investments are also called marketable securities.
B) Short-term investments are easily convertible to cash.
C) Short-term investments must be held for less than three months.
D) Short-term investments allow a company to invest cash and earn a return.

Question 8

Unrealized gains and losses on trading securities are reported as part of current income.

Question 9

All investments in marketable securities NOT classified as trading securities or held-to-maturity securities are classified as:

A) debt securities.
B) equity securities.
C) marketable securities.
D) available-for-sale securities.

Question 10

Short-term investments may be divided into held-to-maturity securities, trading securities and available-for-sale securities.

Question 11

Another term for short-term investments is held-to-maturity securities.

Question 12

Trading securities may generate dividend revenue.

Question 13

The purpose of owning trading securities is to:

A) increase cash reserves.
B) hold the investment for at least one year.
C) sell the investment for more than its cost.
D) sell the investment to decrease net income.

Question 14

Short-term investments:

A) are reported after accounts receivable on the balance sheet.
B) are more liquid than cash.
C) are reported at historical cost on the balance sheet.
D) include trading securities.

Question 15

A company will have an unrealized loss if the fair value of the investment is greater than its cost.

Question 16

An unrealized gain occurs when a company sells a trading security.

Question 17

The purpose of a trading security is to hold it for a short term and then sell it for its cost.

Question 18

Investments in marketable securities fall into three categories, including:

A) available-for-exchange securities.
B) available for maturity securities.
C) accounts receivable securities.
D) trading securities.

Question 19

Fair value is the amount for which the securities can be sold.

Question 20

An unrealized loss occurs when the current market value is more than the original cost of the investment.

Question 21

On March 1, 2011, Anya's Toy Store purchased Hasbro stock for $33,400 with the intent of selling the stock at a profit within a few months. On April 10, dividends of $1,075 were received from the Hasbro stock. On December 31, 2011, the end of Anya's Toy Store's calendar year, the Hasbro stock had a market value of $32,300. On January 3, 2012, Anya's Toy Store sold all of the Hasbro stock for $34,000.
Prepare the journal entries needed to record the transactions for 2011 and 2012.

Question 22

On April 3, Evan's Boat Store purchased Yacht stock for $26,000 with the intent of selling the stock at a profit before the boating season starts in two months. On April 28, Evan's Boat Store received dividends from Yacht of $850. On May 25, the Yacht stock was sold for $24,500.
Required:
1. How will Evan's Boat Store classify the investment?
2. Prepare the journal entries needed to record the transactions.
3. What will Evan's Boat Store report on its income statement for the year ended December 31?

Question 23

An unrealized gain:

A) is recorded when a trading security is sold for more than its cost.
B) is recorded when a trading security is sold for less than its cost.
C) is recorded when the fair value of the trading security is more than its cost.
D) is recorded when the fair value of the trading security is less than its cost.

Question 24

The ABC Company has current assets of $10,000 and current liabilities of $8,000. They are concerned about their current ratio and are considering paying liabilities totaling $3,000. The ABC Company has a loan with First Bank which requires them to maintain a minimum current ratio of 1.4.
Required:
1. What is the formula for the current ratio?
2. Compute the current ratio before the possible payment of the liabilities of $3,000.
3. Compute the current ratio assuming that ABC Company pays the $3,000 in current liabilities.
4. What are some possible consequences if ABC's current ratio falls below the required 1.4?

Question 25

When a company sells a trading investment, the gain or loss on the sale is reported in the:

A) revenues section of the income statement.
B) short-term investments section of the balance sheet.
C) other revenue, gains, and losses section of the balance sheet.
D) other revenue, gains, and losses section of the income statement.

Question 26

ABC Company purchases a trading security for $12,000. The entry to record this transaction will include a:

A) debit to the Investment account.
B) credit to the Investment account.
C) debit to the Unrealized Gain account.
D) credit to the Dividend Revenue account.

Question 27

When a company receives a cash dividend on a trading security:

A) revenue is increased.
B) revenue is decreased.
C) assets are decreased.
D) liabilities are decreased.

Question 28

Trading securities purchased in 2011 for $90,000 were valued at $92,000 on December 31, 2011. At December 31, 2013 the securities had a fair value of $95,000. The journal entry on December 31, 2013 would include a:

A) debit to the Investment account for $5,000.
B) debit to the Investment account for $3,000.
C) credit to the Unrealized Gain account for $5,000.
D) debit to the Unrealized Loss account for $3,000.

Question 29

Strategies to increase the current ratio may include:

A) increasing sales.
B) paying off current liabilities before the end of the year.
C) the questionable practice of reclassifying long-term investments as short-term investments.
D) all of the above.

Question 30

Trading securities are:

A) reported on the income statement at fair value.
B) reported on the balance sheet at cost.
C) adjusted to their current fair value before the financial statements are prepared.
D) adjusted to their current fair value on a daily basis.

Question 31

A realized gain occurs when the:

A) sales price is greater than the trading investment carrying amount.
B) sales price is less than the trading investment carrying amount.
C) fair value exceeds the cost of the trading investment.
D) cost of the investments exceeds the fair value of the trading investment.

Question 32

A company's trading security has a fair value which exceeds its cost. When recording the journal entry:

A) the Investment account will be credited.
B) the Unrealized Gain account will be credited.
C) the Unrealized Loss account will be debited.
D) no journal entry is needed for this transaction.

Question 33

Trading securities purchased for $400,000 were valued at $410,000 at the end of the year. The adjusting entry to record this difference included a credit to:

A) retained earnings.
B) unrealized gain on investments.
C) short-term investments.
D) none of the accounts since no adjusting entry is required.

Question 34

Trading securities:

A) must be sold for more than their cost.
B) do not include debt securities of another company.
C) must increase in fair value.
D) can generate dividend revenue.

Question 35

Orange Company purchased a trading investment that had a carrying amount of $35,000 when they decided to sell it. Orange purchased the investment for $31,000. If Orange Company sold this investment for $43,000, Orange will have a(n):

A) realized gain of $12,000.
B) realized gain of $8,000.
C) an unrealized loss of $3,000
D) an unrealized gain of $11,000.

Question 36

Johnson Corporation purchases $620,000 of PM Corporation stock on October 18, 2012. Johnson classifies this investment as a trading security. On December 31, 2012, Johnson Corporation's investment in PM Corporation has a fair value of $610,000. Prepare the necessary journal entries.

Question 37

Unrealized gains or losses on trading securities are reported on the:

A) income statement as Other Revenue, Gains, and Losses.
B) balance sheet.
C) income statement as Revenues or Expenses.
D) statement of cash flows.

Question 38

When a company receives a cash dividend from a trading security, the journal entry includes:

A) a debit to cash and credit to dividend revenue.
B) a debit to dividend revenue and credit to cash.
C) a debit to cash and credit to trading investment.
D) none of the above.

Question 39

Credit Company purchases 1,000 shares of Microsoft Corporation stock at $35 per share on July 31. The company expects to hold the stock for 6 months and then sell it. At December 31, the market price of the stock is $42 per share.
1. What type of investment is this for Credit Company? Explain your answer.
2. Journalize the purchase on July 31 and the necessary adjustment on December 31.
3. Discuss how Credit Company would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31.

Question 40

When dealing with gains and losses on trading securities:

A) the word "realized" must be used in the account title.
B) unrealized gains and losses must be labeled "unrealized."
C) unrealized gains go on the balance sheet and realized gains go on the income statement.
D) unrealized losses and realized losses are both part of other expenses on the income statement.

Question 41

The shipping terms in the sales contract determine when ownership of goods changes hands between the buyer and the seller.

Question 42

By selling on credit, companies run the risk of not collecting some receivables.

Question 43

The amount of revenue to be recognized is the cash value of the goods or services transferred from the seller to the buyer.

Question 44

Businesses that sell on credit receive most of their cash receipts from collections of accounts receivable.

Question 45

When goods are shipped FOB destination, revenue is recognized by the seller when the goods leave their shipping dock.

Question 46

More Shoes, Inc., reported the following transactions in December:
Dec. 1 Sold merchandise on account to T. Melda, $950, terms 2/10, n/20.
Dec. 4 Sold merchandise on account to N. Moore, $880, terms 2/10, n/20.
Dec. 10 N. Moore returned $100 of merchandise.
Dec. 11 Received payment from T. Melda for the Dec. 1 purchase.
Dec. 31 Received payment from N. Moore for the balance of the Dec 4 sale.
Prepare the adjusting journal entries needed for each INDEPENDENT situation.

Question 47

When goods are shipped FOB destination:

A) revenue is recognized when the goods leave the shipping dock.
B) revenue is recognized after any returns are received by the seller.
C) revenue is recognized only after cash payment is received.
D) revenue is recognized when the goods are received by the customer.

Question 48

Accounts receivable have a maturity date.

Question 49

Sales discounts and sales returns and allowances are deducted from gross revenue to determine net revenue.

Question 50

The Accounts Receivable account in the general ledger has a separate account for each customer.

Question 51

A business offers credit terms of 1/15, n/30. These terms indicate that:

A) the total amount of the invoice must be paid within 15 days.
B) a discount of 1% can be taken if the invoice is paid within 15 days.
C) the buyer can take a 1% discount if the bill is paid within 15 or 30 days.
D) no discount is offered for early payment.

Question 52

A company has gross revenue of $400,000; sales discounts of $4,500; and sales returns and allowances of $3,000. Net revenue is:

A) $392,500.
B) $398,500.
C) $401,500.
D) $407,500.

Question 53

Which of the following is a true statement about sales?

A) Net revenue is gross revenue plus sales discounts less sales returns and allowances.
B) Sales discounts are offered to customers in order to speed up cash flow.
C) Sales returns and allowances increase a company's profit.
D) Retailers do not generally record sales returns and allowances in a separate account.

Question 54

ABC Company has shipped goods to one of its customers FOB shipping point. ABC Company will recognize sales revenue when:

A) their customer has received and inspected the goods.
B) when the goods leave ABC's shipping dock.
C) whenever the two parties agree that revenue should be recognized.
D) when the customer pays the invoice.

Question 55

The two major types of receivables are accounts receivable and trade receivables.

Question 56

If a buyer takes advantage of a sales discount, the journal entry recorded by the seller will include a(n):

A) debit to Cash and a credit to Sales Discount.
B) debit to Cash and a debit to Sales Discount.
C) debit to Cash and debit to Accounts Receivable.
D) debit to Cash and debit to Sales Returns and Allowances.

Question 57

If the credit terms are 2/10, n/30, the buyer can get a 2% discount if the invoice is paid within 30 days.

Question 58

ABC company sells goods to the XYZ Company for $1,000, It offers credit terms of 2/10, n/30. If XYZ Company pays the invoice within the discount period, ABC Company will record a debit to cash in the amount of:

A) $20.
B) $200.
C) $980.
D) $1,000.

Question 59

Accounts (trade) receivables are amounts to be collected from customers from the sale of goods or services.

Question 60

Formal monetary claims against others acquired mainly by lending money are:

A) accounts receivable.
B) notes receivable.
C) accounts payable.
D) notes payable.

Question 61

The most important internal control over cash is to:

A) have all customers pay by check.
B) separate cash-handling duties from cash-accounting duties.
C) separate cash-handling from the mailroom.
D) have an imprest petty cash fund.

Question 62

________ may be required on a note receivable as security for the loan.

A) Maturity value
B) Interest
C) Collateral
D) Principal

Question 63

The journal entry to record uncollectible-account expense includes a credit to Accounts Receivable.

Question 64

A ledger that contains a separate account for each customer is called a:

A) general ledger.
B) trade ledger.
C) control ledger.
D) subsidiary ledger.

Question 65

Other receivables will include:

A) notes receivable.
B) accounts receivable.
C) loans to employees.
D) none of the above.

Question 66

The most acceptable way to measure bad debts is by:

A) the direct write-off method.
B) the percent-of-sales method.
C) the allowance method.
D) none of the above.

Question 67

Tom is the accountant for ABC Auto Stores. Tom receives and opens all mail. Tom follows company policies by separating customer checks from the remittance advices. Tom deposits the checks in the bank and posts the payments indicated on the remittance advices to the customers' accounts in the subsidiary ledger. At the end of each day, Tom totals the amounts posted to the customers' accounts and compares the total to the bank deposit slip ensure that all receipts are deposited in the bank.
List any internal control weaknesses and propose ways to strengthen the controls.

Question 68

The biggest risk of selling on credit is:

A) the risk of posting a payment to the wrong subsidiary account.
B) the risk of not collecting some of the receivables.
C) the risk of losing a sale.
D) none of the above.

Question 69

A separate account for each customer is kept in a(n):

A) control account.
B) subsidiary ledger.
C) general ledger.
D) control ledger.

Question 70

Monetary claims against others acquired mainly by selling goods and services are:

A) accounts receivable.
B) notes receivable.
C) accounts payable.
D) notes payable.

Question 71

There are two basic ways to estimate uncollectibles-the direct write off method and the allowance method.

Question 72

Uncollectible-account expense is an operating expense on the income statement.

Question 73

One method of establishing proper internal control over the collection of accounts receivable is to:

A) set up a petty cash fund.
B) make all disbursements by cash.
C) establish a bank lock box.
D) designate an authorized check signer.

Question 74

Selling on credit creates both a benefit and a cost.

Question 75

When evaluating the collectability of accounts receivable:

A) the uncollectible-account expense is a contra account.
B) the allowance for uncollectible accounts is an operating expense in the selling, general and administrative category.
C) the allowance method uses estimates developed from the company's collection experience.
D) the direct write-off method uses the allowance for uncollectible accounts to record bad debts.

Question 76

Under the direct write-off method, uncollectible-account expense is recorded in the same accounting period as the sale.

Question 77

Companies are prohibited from combining the percent-of sales and the aging methods when estimating uncollectible accounts.

Question 78

The net realizable value of accounts receivable is the difference between accounts receivable and:

A) sales discounts.
B) allowance for uncollectible accounts.
C) uncollectible-account expense.
D) net revenue.

Question 79

The Allowance for Uncollectible Accounts normally has a credit balance.

Question 80

Accounts receivable are shown on the balance sheet at their net realizable value.