Deck 15: Investments

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

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

Debt securities are recorded at cost when purchased.

Question 5

A company holds $40,000 of 7% bonds as a held-to-maturity security.The bonds were purchased at par value.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.

Question 6

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

Question 7

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

Question 8

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

Question 9

Short-term investments are intended to be converted into cash within 3 and 12 months and are readily convertible to cash.

Question 10

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

Question 11

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.

Question 12

Short-term investments are also called marketable securities.

Question 13

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

Question 14

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

Question 15

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

Question 16

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 17

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 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

The adjustment to fair value of trading securities is included in the calculation of net income.

Question 24

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

Question 25

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 26

Consolidated financial statements show the financial statements of all entities under the parent's control,including all subsidiaries.

Question 27

Profit margin is net sales divided by net income.

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

All companies desire a low return on total assets.

Question 39

Trading securities are always reported as current assets.

Question 40

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 41

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

Question 42

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

Question 43

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

Question 44

On May 1,Jorge Co.purchases Radiotech bonds 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 bonds had a market value of $28,000.Jorge should record a credit to Unrealized Gain−Equity for $3,000.

Question 45

Other comprehensive income includes unrealized gains and losses on available-for-sale securities.

Question 46

Any unrealized gain or loss for the portfolio of available-for-sale securities is reported as a component of other comprehensive income.

Question 47

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 48

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 Equity Method Investments for $6,500.

Question 49

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

Question 50

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

Question 51

When an investor owns less than 20% of another company's stock,it is presumed to have insignificant influence.

Question 52

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

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

When using the equity method for investments in equity securities,the investor records the receipt of cash dividends as a debit to Cash and a Credit to the Equity Method Investment.

Question 55

On May 15,Tumbleweed,Inc.purchased Dansell Corp.bonds 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 bonds 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 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

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)$500.
C)$1,250.
D)$2,500.
E)$1,500.

Question 62

Long-term investments:

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

Question 63

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

Question 64

At acquisition,debt securities are:

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

Question 65

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

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

Question 66

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

A)Debt securities should be recorded at cost when acquired.
B)Debt securities are valued at fair value if classified as trading securities.
C)Debt securities are valued at fair value if classified as held-to-maturity.
D)Debt securities are valued at fair value if classified as available-for-sale securities.
E)Debt securities classified as available-for-sale record the interest revenue when earned.

Question 67

Long-term investments include:

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

Question 68

Unrealized gains and losses on stock investments with insignificant influence are reported as a component of stockholders' equity.

Question 69

All of the following are true about debt securities except:

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

Question 70

Unrealized gains and losses on stock investments with insignificant influence are reported on the income statement.

Question 71

Stock investments with insignificant influence are classified as short- or long-term based on managers' intent and the stock's marketability.

Question 72

Dividends received from stock investments with insignificant influence are recorded as a reduction in the investment account.

Question 73

Short-term investments:

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

Question 74

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 by Roe is:

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

Question 75

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

Question 76

Strickland Corporation has invested in bonds of Nez Corporation.Strickland intends to actively manage this investment for profit.This investment is classified as:

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

Question 77

When an investor has insignificant influence over another company's stock,presumably when it owns more than 20%,the stock investment is reported at fair value.

Question 78

Dividends received from stock investments with insignificant influence are recorded as dividend revenue.

Question 79

Long-term investments are reported in the:

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

Question 80

When an investor has insignificant influence over another company's stock,presumably when it owns less than 20%,the stock investment is reported at fair value.