Deck 14: Investments

Question 1

Consolidated financial statements are prepared when one company has:

A) Accounted for the investment using the equity method.
B) Accounted for the investment as available-for-sale securities.
C) Control over another company.
D) None of these is correct.

Answer 1

C

Question 2

Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet?

A) Debt securities.
B) Equity securities.
C) Common stock.
D) All of these are correct.

Answer 2

A

Question 3

Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly classified as a trading security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income?

A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.

Answer 3

C

Question 4

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?

A) The investment in available-for-sale securities would be reported in the balance sheet at its $100,000 cost.
B) The investment in available-for sale securities would be reported in the balance sheet at its $105,000 market value.
C) An unrealized holding gain would be reported in other comprehensive income.
D) Both b and c are correct.

Question 5

On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. Gilman can exercise significant influence over Burke and properly records the investment using the equity method. The records of Burke Corporation showed the following at December 31, 2012: $$\begin{array} { | l | l | } \hline \text { Net Income } & \$ 500,000 \\\hline \text { Dividends Paid } & \$ 200,000 \\\hline \text { Market Price per Share } & \$ 38 \\\hline\end{array}$$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?

A) $380,000.
B) $400,000.
C) $475,000.
D) $425,000.

Question 6

On January 1, 2012, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. The records of Burke Corporation showed the following at December 31, 2012: $$\begin{array} { | l | l | } \hline \text { Net Income } & \$ 500,000 \\\hline \text { Dividends Paid } & \$ 200,000 \\\hline \text { Market Price per Share } & \$ 38 \\\hline\end{array}$$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?

A) $380,000.
B) $400,000.
C) $415,000.
D) $425,000.

Question 7

Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income under the equity method?

A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.

Question 8

Libby Company purchased equity securities for $100,000 and classified them as trading securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?

A) The investment in trading securities would be reported in the balance sheet at its $100,000 cost.
B) The investment in trading securities would be reported in the balance sheet at its $105,000 fair value.
C) An unrealized holding gain would be reported in other comprehensive income.
D) Both b and c are correct.

Question 9

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds for:

A) $200,000.
B) $194,758.
C) $242,000.
D) Cannot be determined from the given information.

Question 10

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: The investment in bonds has a maturity in:

A) Two years.
B) Three years.
C) Six years.
D) Cannot be determined from the given information.

Question 11

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds:

A) At par.
B) At a discount.
C) At a premium.
D) Cannot be determined from the given information.

Question 12

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: What is the annual market interest rate on the bonds?

A) 4%.
B) 3.5%.
C) 7%.
D) 8%.

Question 13

One of the primary reasons for investing in debt securities includes:

A) Receiving dividend payments.
B) Acquiring significant influence.
C) Earning interest revenue.
D) Deducting interest payments for tax purposes.

Question 14

Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly classified as an available-for-sale security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income?

A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.

Question 15

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: Recording the bond purchase would have what effect on the financial statements?

A) Increase assets.
B) Increase liabilities.
C) Increase assets and liabilities.
D) No effect on total assets and total liabilities.

Question 16

When the equity method of accounting for investments is used by the investor, the Investments account increases when:

A) A cash dividend is received from the investee.
B) The investee reports a net income for the year.
C) The investor records additional depreciation related to the investment.
D) The investee reports a net loss for the year.

Question 17

The primary difference in accounting for available-for-sale securities and accounting for trading securities is:

A) Measuring the fair value of the long-term and short-term stock portfolios.
B) Computing the cost at acquisition.
C) Determining where the unrealized holding gain or loss on investments is reported in the financial statements; in current net income or in comprehensive income.
D) Accounting for dividends received.

Question 18

The equity method of accounting for investments in voting common stock is appropriate when:

A) The investor can significantly influence the investee.
B) The investor has voting control over the investee.
C) The investor intends to hold the common stock indefinitely.
D) The investor is assured of a continued supply of a valuable raw material.

Question 19

One of the primary reasons for investing in equity securities includes:

A) Acquiring debt of competing companies.
B) Appreciation in the value of the stock.
C) Earning interest revenue.
D) Deducting dividend payments for tax purposes.

Question 20

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:

A) As a reduction in the Investments account.
B) As an increase in the Investments account.
C) As dividend income.
D) As a contra item to stockholders' equity.

Question 21

Because the carrying value of bonds purchased at a premium increases over time, interest revenue will also increase each semi-annual interest period.

Question 22

Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income.

Question 23

Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements.

Question 24

The statement of comprehensive income is a statement that includes net income plus investment by stockholders less payment of dividends.

Question 25

Investments are reported at fair value when a company has an insignificant influence over another company in which it invests.

Question 26

Gains and losses on the sale of equity investments are recorded in the income statement as part of net income.

Question 27

Under the equity method, the investor includes in net income its portion of the investee's net income.

Question 28

The cash received from interest equals the face value of the investment in bonds times the stated interest rate.

Question 29

When significant influence exists, the investment should be accounted for by the equity method.

Question 30

Investments are reported at fair value when a company has a significant influence over another company in which it invests.

Question 31

Unrealized gains and losses from changes in the fair value of trading securities are reported as part of current net income.

Question 32

Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year.

Question 33

Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends.

Question 34

Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term liabilities that incur interest expense.

Question 35

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12. What gain or loss, if any, would GIC record on this date?

A) No gain or loss.
B) $370 loss.
C) $4,000 loss.
D) $4,000 gain.

Question 36

The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investment by stockholders and payment of dividends.

Question 37

Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate.

Question 38

When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue.

Question 39

When the investor has insignificant influence, the receipt of cash dividends is recorded as dividend revenue.

Question 40

When insignificant influence exists, the investment should be accounted for by the equity method.

Question 41

Under what circumstances do we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method.

Question 42

How can an investor benefit from an equity investment that does not pay dividends?

Question 43

Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 7%. Interest is received semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.

Question 44

Athletic Accessories has the following transactions related to investments in common stock. 1. Record each of these transactions, including an entry on December 31 to adjust the investment to fair value.
2. Calculate the balance of the investment account on December 31.

Question 45

Because the carrying value of bonds purchased at a discount increases over time, interest revenue will also increase each semi-annual interest period.

Question 46

California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in the common stock of Oregon Outfitters. California Designs engages in the following transactions relating to its investment: 1. Record each of these transactions, including the December 31 adjustment to fair value.
2. Calculate the balance of the Investments account on December 31.

Question 47

Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories. What are these two categories? How do we report unrealized holding gains and losses under each of these two categories?

Question 48

On September 1, Investors, Inc. purchases 1,000 shares (insignificant influence) of $1 par value common stock of Hamilton International at $15 per share. On October 15, the investment is sold for $18 per share. Record the purchase and sale of the investment in Hamilton International.

Question 49

Investments in debt securities are classified for reporting purposes in one of three categories. List these three categories and explain which investments are included in each category. Also briefly describe how the reporting differs for each category.

Question 50

Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $21,488 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received semi-annually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.

Question 51

Discuss the meaning of consolidated financial statements. When is it appropriate to consolidate financial statements of two companies?

Question 52

Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $18,641 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 8%. Interest is received semiannually on June 30 and December 31.
1. Record the investment in bonds.
2. Record receipt of the first interest payment on June 30, 2012.