Deck 13: Investments and Long-Term Receivables

Question 1

Unrealized Holding Gain/Loss-Ttrading Securities account is a temporary account that would be closed to Retained Earnings during the closing process.

Answer 1

True

Question 2

Available-for-sale securities are recorded at cost which equals fair value on the acquisition date.

Answer 2

True

Question 3

The intent to purchase investments to profit on short-term changes in price a company would classify these investments as available-for-sale.

Answer 3

False

Question 4

A note receivable should always be recorded at its present value using the borrower's incremental interest rate.

Question 5

The transfer of a security between investment categories is accounted for at fair value at the time of the transfer or at cost depending upon the type of transfer.

Question 6

In order to classify an investment as held-to-maturity the company has to have the ability and the intent to hold the investment until it matures.

Question 7

An investment of 20% or more in the outstanding common stock of the investee leads to the presumption of significant influence and the use of the consolidation method.

Question 8

Significant influence of another company generally occurs when the investor owns between 25% to 45%, due to this relationship the investor is required to issue consolidated financial statements.

Question 9

Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firms are termed

A) available-for-sale securities
B) trading securities
C) held-to-maturity securities
D) marketable securities

Question 10

For an investment classified as held-to-maturity any unrealized gains and losses are recorded, as well as disclosed in the notes to the financial statements.

Question 11

When the investor owns more than 50% of the voting common stock of the investee, the investee is considered to be under the legal control of the investor.

Question 12

Under U.S. GAAP investments are classified into three categories based upon management's intent, IFRS divides investments into three classifications as well but they based on the business model for managing financial assets and the characteristic of the cash flows of the financial asset.

Question 13

In order for a derivative to be considered a hedge it must be mostly effective in offsetting a substantial amount of risk exposure associated with changes in fair values or cash flows of the hedged item.

Question 14

When a guarantee exists that a company is entitled to a return equal to the amount of the cash surrender value of the policy, a portion of the premium is recorded to a long term liability account.

Question 15

A company is required to disclose for Held-to-Maturity debt securities the aggregate fair value and the change in the net unrealized holding gains or loss to be included in the income statement.

Question 16

Investment securities are classified based upon management's intent. This may present difficulties to readers of financial statements because

A) management's judgment of intent and ability may lack comparability
B) management's judgment may lack relevance
C) gain trading may result in not producing sufficient gains
D) gain trading may result in not producing sufficient reliability

Question 17

When an available-for-sale security is sold any unrealized gains or losses need to be reclassified from the Allowance for Change in Fair Value of Investments account in order to not double count any gains or losses recorded in comprehensive income.

Question 18

For a cash flow hedge a company would not recognize any change in the value of the financial instrument being hedged in its financial statements.

Question 19

For a minority active investment, a company should disclose the investor's accounting policies with respect to equity method of investments.

Question 20

A transfer from the trading category into any other category does not require any accounting because unrealized holding gains or losses have already been recognized.

Question 21

Which of the following methods of accounting for investments is appropriate when the investor has significant influence over the investee?

A) equity method
B) consolidation
C) cost method
D) lower of cost or market method

Question 22

Investments in debt securities include all of the following except

A) U.S. treasury securities
B) corporate bonds
C) preferred stocks that are redeemable at the option of the issuer
D) commercial paper

Question 23

Which of the following securities are reported at their amortized cost on the balance sheet date?

A) held-to-maturity debt securities
B) marketable securities
C) available-for-sale securities
D) trading securities

Question 24

On July 1, 2017, Rectangle, Inc. purchased Diamond Company's five-year 12% bonds with a face value of $500,000 for $569,000, which included $25,000 of accrued interest. The bonds, which mature on February 1, 2022, are to be held-to-maturity and pay interest on February 1 and August 1. Rectangle uses the straight-line method of amortization. The amount of income that Triangle would report for the calendar year 2017 as a result of this long-term investment would be

A) $20,400
B) $25,200
C) $30,000
D) $34,800

Question 25

With consolidation, control generally occurs when the investor owns what percentage of the voting stock of the investee?

A) over 50%
B) between 20% and 50%
C) less than 20%
D) over 40%

Question 26

How is the premium or discount on held-to-maturity bond investments presented on the balance sheet?

A) as a part of the cost of the investment and amortized over a period not to exceed five years
B) as a part of the cost of the investment and amortized over the remaining life of the bonds
C) in a separate account that is reported separately from the bonds and amortized over a period not to exceed five years
D) in a separate account that is reported separately from the investment account and not amortized

Question 27

Investments in equity securities include all of the following except

A) common stocks
B) preferred stocks
C) convertible debt
D) put and call options

Question 28

The use of the effective interest method to amortize a discount associated with the acquisition of an investment in bonds results in

A) the recognition of more interest income over the life of the investment than would result from the use of the straight-line method
B) the recognition of a constant amount of interest income each period
C) the recognition of less interest income over the life of the investment than would result from the use of the straight-line method
D) the recognition of a varying amount of interest income each period

Question 29

On January 1, 2014, Macie Company purchased Jefferson Company's 9% bonds with a face amount of $200,000 for $213,420 to yield 8%. The bonds mature on January 1, 2024, and Macie has both the intent and ability to hold these bonds to maturity. The bonds pay interest annually on December 31. Assuming Macie uses the effective interest method of amortizing the bond premium; interest income reported on the December 31, 2014, balance sheet would be

A) $16,000
B) $17,074
C) $18,000
D) $18,926

Question 30

All of the following statements regarding held-to-maturity debt securities are true except

A) premiums and discounts must be amortized over the remaining life of the bonds
B) the debt securities should be valued at market value
C) the realized gain or loss is the difference between the original cost and the proceeds from their sale
D) interest income may be debited at the time of acquisition

Question 31

On October 1, 2014, the Sun Company acquired 9% bonds of Jack's Company with a face value of $400,000 for $412,000 plus accrued interest. Interest is payable on June 30 and December 31. How would Sun record the initial bond investment to be held-to-maturity?

A) Investment in Held-to-Maturity Debt Securities $\quad$ 412,000
Interest Income $\quad$$\quad$$\quad$ 9,360
Cash $\quad$$\quad$$\quad$ 421,360

B) Investment in Held-to-Maturity Debt Securities $\quad$ 412,000
Interest Income $\quad$$\quad$$\quad$ 9,000
Cash $\quad$$\quad$$\quad$ 421,000

C) Investment in Held-to-Maturity Debt Securities $\quad$ 421,000
Cash $\quad$$\quad$$\quad$ 421,000

D) Investment in Held-to-Maturity Debt Securities $\quad$ 412,000
Cash $\quad$$\quad$$\quad$ 412,000

Question 32

Which of the following methods of accounting for investments is appropriate when the investor controls the investee?

A) equity method
B) consolidation
C) cost method
D) lower of cost or market method

Question 33

On January 1, 2014, Old World Company purchased $300,000 of ten-year 10% bonds of New Company for $326,840. Interest is payable annually. The effective yield on the investment is 8%. What is the balance in Old World's investment in held-to-maturity debt securities account (rounded to the nearest dollar, if necessary) at December 31, 2015?

A) $330,693
B) $326,840
C) $322,987
D) $318,826

Question 34

The carrying value of held-to-maturity debt securities is the

A) original purchase amount
B) amortized cost
C) market value
D) lower of amortized cost or market value

Question 35

When bonds are purchased between interest dates, the accrued interest should be

A) debited to Interest Receivable
B) debited to Interest Income
C) debited to Investment in Bonds
D) either a or b

Question 36

Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of stockholders' equity?

A) held-to-maturity debt securities
B) marketable securities
C) available-for-sale securities
D) trading securities

Question 37

On July 1, 2015, Jason Company purchased $60,000 of ten-year 6% bonds of Santo, Inc., for $51,850, to be held-to-maturity. Interest is payable semiannually on June 30 and December 31. The effective yield on the investment is 8%. What amount of interest income should Jason record for the six-month period ended December 31, 2015?

A) $2,063.04
B) $2,084.96
C) $2,074.00
D) $2,400.00

Question 38

Investments that are typically held for short periods of time and sold by the company in the expectation of a profit on the short-term differences in price are classified as

A) available-for-sale securities
B) trading securities
C) held-to-maturity securities
D) marketable securities

Question 39

Each of the three categories of investments in debt and equity securities has similar accounting for all of the following transactions except

A) initial recording of cost
B) recognition of dividend and interest income
C) recognition of realized gains or losses on sales
D) recognition of unrealized holding gains and losses

Question 40

On July 1, 2014, James Company purchased Timothy Company's six-year 9% bonds with a face value of $200,000 for $196,000, which included $6,000 of accrued interest. The bonds, which mature on March 1, 2020, are to be held-to-maturity and pay interest semiannually on March 1 and September 1. James uses the straight-line method of amortization. The amount of income James should report for the calendar year 2014 as a result of this investment would be

A) $8,823.52
B) $9,882.36
C) $9,529.40
D) $8,117.64

Question 41

The Reba Company purchased 10%, $800,000 bonds of the Trading Up Company at par plus accrued interest on April 1, 2014, as an investment in trading securities. The bonds pay interest on June 30 and December 31 each year. The entry by Reba on April 1, 2014, would include a

A) debit to Investment in Trading Securities of $820,000
B) credit to Cash of $820,000
C) credit to Interest Income of $20,000
D) debit to Interest Expense of $20,000

Question 42

Wright Company has available-for-sale debt and equity securities that on December 31, 2014, had a cost of $110,000 and a market value of $108,000. The market value rose to $123,000 by December 31, 2015. What accounting action is required on December 31, 2015?

A) Allowance for Change in Fair Value of Investments should be credited for $15,000.
B) Unrealized Holding Gain/Loss-Available-for-Sale Securities should be debited for $13,000.
C) Allowance for Change in Fair Value of Investments should be debited for $15,000.
D) Unrealized Holding Gain/Loss-Available-for-Sale Securities should be credited for $13,000.

Question 43

Realized gains and losses on investments available-for-sale are reported

A) as a current asset
B) on the income statement
C) on the balance sheet as part of stockholders' equity
D) as a contra asset

Question 44

Reagan Company purchased 10,000 shares of Clinton's Company at $45 per share plus $15,000 of Delta Company's 12% bonds, acquired at par, as an available-for-sale securities. The bond pays interest on June 30 and December 31 each year. What amount should be recorded to the Investment in Available-for-Sale Securities account?

A) $450,000
B) $466,800
C) $ 15,000
D) $465,000

Question 45

When selecting the appropriate accounting for held-to-maturity securities, the company must

A) never sell the equity instrument before maturity
B) never sell the debt instrument before maturity
C) have the intent and ability to hold the equity investment to maturity
D) have the intent and ability to hold the debt instrument to maturity

Question 46

Unrealized gains and losses on investments in trading securities are reported

A) as a current asset
B) on the income statement
C) on the balance sheet as part of stockholders' equity
D) as a contra asset

Question 47

For available-for-sale equity securities, the receipt of a cash dividend would be reported as

A) a reduction from retained earnings
B) an increase in investment in available-for-sale securities
C) a reduction in investments in available-for-sale securities
D) dividend income

Question 48

The entry to record a sale of trading securities for $65,000 on January 3, 2018, that were purchased for $52,000 on November 21, 2017, and had a fair value on December 31, 2017, of $57,000 would include a

A) credit to Unrealized Holding Gain/Loss-Trading Securities of $8,000
B) debit to Unrealized Holding Gain/Loss-Trading Securities of $5,000
C) debit to Investment in Trading Securities of $5,000
D) credit to Gain on Sale of Trading Securities of $8,000

Question 49

Which of the following regarding trading securities is correct?

A) Trading securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B) Trading securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C) Trading securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D) Trading securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

Question 50

Dividends that are declared at year-end but not received on investments in securities held for sale or trading should be recognized when

A) received as cash
B) the new year begins
C) declared
D) accrued

Question 51

Which of the following regarding available-for-sale securities is correct?

A) Available-for-sale securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B) Available-for-sale securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C) Available-for-sale securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D) Available-for-sale securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

Question 52

The generally accepted accounting principles for trading securities include all of the following except

A) initially recording the investment at cost
B) subsequently valuing the investment at fair value
C) including unrealized holding gains and losses as a component of stockholders' equity
D) including interest and dividend revenue as part of income

Question 53

In its first year of operations, Roger Company purchased trading securities at a total cost of $53,000. On December 31, the end of Roger's fiscal year, the fair market value of those investments totaled $57,000. As a result of these investments, Roger Company will report

A) Investment in Trading Securities of $57,000
B) Investment in Trading Securities of $53,000
C) Unrealized Holding Gain/Loss-Trading Securities of $4,000 on the income statement as ordinary income
D) a credit balance in the contra account to Investment in Trading Securities of $4,000

Question 54

Unrealized holding gains and losses occur because a company

A) actively trades securities
B) holds securities until maturity
C) holds securities through the end of the reporting period
D) records a change in fair value of the securities held even if they are not sold

Question 55

Bark Corporation began operations on January 1, 2014. At December 31, 2014, Bark appropriately had a credit balance in Allowance for Change in Fair Value of Investments of $330. No transactions related to these investments occurred during 2015, and the cost and market values on December 31, 2015, are as follows: In the December 31, 2015 adjusting entry, there will be a

A) credit of $140 to Unrealized Holding Gain/Loss-Available for Sale Securities
B) debit of $800 to Unrealized Holding Gain/Loss-Available for Sale Securities
C) debit of $140 to Allowance for Change in Fair Value of Investments
D) debit of $800 to Allowance for Change in Fair Value of Investments

Question 56

All of the following statements regarding available-for-sale debt securities are true except

A) premiums and discounts are not amortized
B) Interest Income may be debited at the time of acquisition
C) the securities will be valued using the lower of cost or market method
D) realized gain or loss is the difference between the amortized cost of the bonds and the proceeds from their sale

Question 57

The carrying value of available-for-sale debt and equity securities is

A) historical cost
B) the current fair value
C) the lower of cost or current market value
D) the higher of cost or current market value

Question 58

A realized gain or loss on the sale of an available-for-sale security is determined by comparing

A) the carrying value of the security with the proceeds from the sale
B) the original cost of the security with the proceeds from the sale
C) the market value at the latest balance sheet date with the proceeds from the sale
D) the original cost with the security's carrying value

Question 59

Chang Company purchased several investments in December 2015. Costs and market values of those investments on December 31, 2015, are presented below: Assuming all of the securities are classified as available-for-sale, the journal entry required on December 31, 2015, the end of Chang's fiscal year, would include a

A) debit to Unrealized Holding Gain/Loss-Available-for-Sale of $60,000
B) credit to Unrealized Holding Gain/Loss-Available-for-Sale of $60,000
C) credit to Unrealized Holding Gain/Loss-Available-for-Sale of $80,000
D) debit to Investment in Available-for-Sale Securities of $60,000

Question 60

Chapin Company purchased investments in 2017 at a cost of $200,000 they recorded as trading securities. Their market values totaled $250,000 and $230,000 on December 31, 2017, and December 31, 2018, respectively. The entry required on December 31, 2018, would include a

A) debit to Unrealized Holding Gain/Loss-Trading Securities of $20,000
B) credit to Unrealized Holding Gain/Loss-Trading Securities of $20,000
C) credit to Unrealized Holding Gain/Loss-Trading Securities of $30,000
D) debit to Unrealized Holding Gain/Loss-Trading Securities of $30,000

Question 61

Which of the following statements regarding available-for-sale equity investments is true?

A) The realized gain on sale is determined by comparing the carrying value of the investment with its selling price.
B) Income is affected by temporary changes in market value.
C) All equity security investments are classified as noncurrent.
D) Permanent declines in value are reported on the income statement.

Question 62

On January 1, 2014, Peach, Inc. purchased 40% of the common stock of Apple Company for $61,000. At the date of acquisition, the following information for Apple Company was available:
In 2014, Apple earned $18,000 of net income and distributed $12,500 of dividends. How much investment income would Peach record in 2014?

A) $6,700
B) $7,000
C) $7,200
D) $7,400

Question 63

Acquisition of greater than 20% of the outstanding stock of a company normally suggests the use of the

A) consolidation method
B) equity method
C) fair-value method
D) straight-line method

Question 64

The Wise Company acquired an 20% interest in the outstanding common stock of the Smith Company. The Wise Company can exercise significant influence over the operating and financial policies of the Smith Company. The Wise Company should account for its investment in the Smith Company by using the

A) equity method
B) cost method
C) securities held-to-maturity method
D) lower of cost or market method

Question 65

On January 1, 2014, the Leaf Company acquired a 5% interest in the Trunk Corporation through the purchase of 100,000 shares of Trunk's common stock for $640,000; the investment is recorded on Leaf's books as available-for-sale. During 2014, Trunk paid $40,000 in dividends and reported net income of $100,000. The market price of Trunk's common stock was $6.20 per share on December 31, 2014. Leaf should report the investment in the Trunk Corporation on its December 31, 2014, balance sheet at

A) $620,000
B) $627,000
C) $640,000
D) $645,000

Question 66

Exhibit 13-1 On January 1, 2014, Oak Corporation paid $900,000 for 80,000 shares of Beech Company's common stock, which represents 35% of Beech's outstanding common stock. Beech reported income of $300,000 and paid a cash dividend of $100,000 during 2014.
Refer to Exhibit 13-1. Oak should report income from the investment in Beech Company for 2014 of

A) $ 70,000
B) $140,000
C) $105,000
D) $300,000

Question 67

Exhibit 13-2 On January 1, 2014, the Cluzt Company purchased 30% of the 1,000,000 shares of Nancy's common stock for $15,000,000 when 30% of Nancy's net assets totaled $12,000,000. The excess purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years. Nancy reported net income of $8,000,000 and paid cash dividends of $2,000,000 during 2014.
Refer to Exhibit 13-2. The income reported by Clutz during 2014 from its investment in the Nancy Company should be

A) $ 600,000
B) $2,100,000
C) $2,400,000
D) $2,900,000

Question 68

Exhibit 13-1 On January 1, 2014, Oak Corporation paid $900,000 for 80,000 shares of Beech Company's common stock, which represents 35% of Beech's outstanding common stock. Beech reported income of $300,000 and paid a cash dividend of $100,000 during 2014.
Refer to Exhibit 13-1. Oak should report the investment in Beech Company on its December 31, 2014, balance sheet at

A) $ 900,000
B) $ 970,000
C) $ 935,000
D) $1,005,000

Question 69

The Plutonium Company has a bond investment classified as held-to-maturity, which has a carrying value of $62,000 and a fair value of $24,000. The decline in value is considered as other than temporary. Plutonium should record the decline as

A) Unrealized Loss on Value Decline $\quad$ 38,000
Allowance for Change in Fair
Value of Investment $\quad$$\quad$$\quad$ 38,000

B) Investment in Held-to-Maturity Securities $\quad$ 38,000
Realized Loss on Decline in Value $\quad$$\quad$ 38,000

C) Realized Loss on Decline in Value $\quad$$\quad$$\quad$ 38,000
Investment in Held-to-Maturity Securities $\quad$ 38,000

D) Unrealized Loss on Value Decline $\quad$$\quad$$\quad$ 38,000
Investment in Held-to-Maturity Securities $\quad$ 38,000

Question 70

When an investor currently using the fair value method acquires significant influence over the investee at mid-year, the investor should

A) restate its investment in the investee by debiting the investment account and crediting Retained Earnings for its previous percentage of investee earnings (less dividends) for the period from the original date of acquisition to the date significant influence was obtained
B) begin using the equity method from the date of acquiring significant influence and make no retroactive adjustments
C) restate its investment in the investee by debiting the investment account and crediting Investment Income for its percentage of investee earnings for the period from the last financial statement until the date significant influence was obtained
D) continue to use the fair value method until the end of the accounting period and then switch to the equity method in order to comply with the accounting conventions of consistency and conservatism

Question 71

On January 6, 2014, Michael Company acquired 4,000 shares (or 10%) of George Corporation's common stock at $25 per share. The securities are classified as available-for-sale investments. On October 24, 2014, George declared and paid a cash dividend of $1 per share. On December 31, 2014, the market value of George's common stock was $35 per share. George also reported a net income of $250,000 for 2014. At what value should Michael report the investment in George's common stock on its December 31, 2014 balance sheet?

A) $100,000
B) $140,000
C) $144,000
D) $104,000

Question 72

A transfer of a security between categories is accounted for at the

A) investment's carrying value
B) fair value
C) original investment cost
D) lower of the original cost or fair value

Question 73

Permanent value declines in available-for-sale securities should be

A) recorded in the allowance account
B) included in income as a realized loss
C) amortized over the remaining life of the security
D) recorded similarly to temporary declines in value

Question 74

The Master Company acquired a 40% interest in the Dickerson Company on January 2, 2014, for $1,000,000. During 2014, Dickerson Company paid $100,000 in dividends and reported net income of $270,000. At the end of 2014, the balance in Investment in Dickerson Company should be

A) $1,000,000
B) $1,068,000
C) $1,040,000
D) $1,108,000

Question 75

Waldo Company owns 30% of Randy Company. During 2014, Randy reported earnings of $650,000 and paid cash dividends of $345,000. What effect would this have on Waldo's investment account and net income?

A) I
B) II
C) III
D) IV

Question 76

With the equity method, the investor recognizes its share of the earnings of the subsidiary when the

A) investor sells the investment
B) investee pays a cash dividend
C) investee declares a cash dividend
D) investee reports earnings on its income statement

Question 77

Exhibit 13-2 On January 1, 2014, the Cluzt Company purchased 30% of the 1,000,000 shares of Nancy's common stock for $15,000,000 when 30% of Nancy's net assets totaled $12,000,000. The excess purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years. Nancy reported net income of $8,000,000 and paid cash dividends of $2,000,000 during 2014.
Refer to Exhibit 13-2. The investment in Nancy Company stock should be reported on Clutz's December 31, 2014, balance sheet at

A) $15,000,000
B) $15,600,000
C) $16,500,000
D) $17,400,000

Question 78

Under the equity method, dividends received by the investor should be recorded as

A) a reduction in the carrying value of the investment
B) an addition to the carrying value of the investment
C) dividend income
D) investment income

Question 79

Under the equity method, a receipt of cash dividends by the investor would

A) increase total assets and stockholders' equity
B) increase total assets and liabilities
C) decrease the investment account
D) increase the investment account

Question 80

When transferring investments between categories, unrealized holding gains for securities transferred from trading to available-for-sale

A) must be realized on the income statement
B) must be recognized on the income statement
C) must be realized and reported in comprehensive income
D) need no accounting since it has already been recognized in net income