Deck 16: Investments

Question 1

For available-for-sale securities the unrealized gain or loss account is carried forward to future periods.

Answer 1

True

Question 2

When debt investments are sold the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds.

Answer 2

False

Question 3

An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

Answer 3

False

Question 4

Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

Question 5

The accounting for short-term debt investments and for long-term debt investments is similar.

Question 6

In accordance with the historical cost principle the cost of debt investments includes brokerage fees and accrued interest.

Question 7

In accounting for stock investments of less than 20% the equity method is used.

Question 8

Debt investments are investments in government and corporation bonds.

Question 9

A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

Question 10

The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Question 11

Corporations purchase investments in debt or stock securities generally for one of two reasons.

Question 12

The valuation of available-for-sale securities is similar to the procedures followed for trading securities except that changes in fair value are not recognized in current income.

Question 13

Under the equity method the receipt of dividends from the investee company results in an increase in the Stock Investments account.

Question 14

Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.

Question 15

In accordance with the historical cost principle brokerage fees should be added to the cost of an investment.

Question 16

A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

Question 17

Under the equity method the investment in common stock is initially recorded at cost and the Stock Investments account is adjusted annually.

Question 18

If an investor owns between 20% and 50% of an investee's common stock it is presumed that the investor has significant influence on the investee.

Question 19

Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

Question 20

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

Question 21

To be classified as a short-term investment the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

Question 22

Which of the following is not a true statement regarding short-term debt investments?

A) The securities usually pay interest.
B) Investments are frequently government or corporate bonds.
C) This type of investment must be currently traded in the securities market.
D) Debt investments are recorded at the price paid less brokerage fees.

Question 23

Under the cost method the investment is recorded at cost and revenue is recognized only when cash dividends are received.

Question 24

Corporations invest excess cash for short periods of time in each of the following except

A) equity securities.
B) highly liquid securities.
C) low-risk securities.
D) government securities.

Question 25

At the time of acquisition of a debt investment

A) no journal entry is required.
B) the historical cost principle applies.
C) the Stock Investments account is debited when bonds are purchased.
D) the Investment account is credited for its cost plus brokerage fees.

Question 26

Stocks traded on the New York Stock Exchange are considered readily marketable.

Question 27

When recording bond interest Interest Receivable is reported as a fixed asset in the balance sheet.

Question 28

On January 1 2017 Brenner Company purchased at face value a $1000 8% bond that pays interest on January 1. Brenner Company has a calendar year end. The adjusting entry on December 31 2017 is
a. not required.
b.
$\begin{array}{llr} \text { Cash } &80\\ \text { Interest Revenue } &&80\\\end{array}$

c.
$\begin{array}{llr} \text { Interest Receivable } &80\\ \text { Interest Revenue} &&80\\\end{array}$

d.
$\begin{array}{llr} \text { Interest Receivable } &80\\ \text { Debt Investments } &&80\\\end{array}$

Question 29

If the fair value of an available-for-sale security exceeds its cost the security should be written up to fair value and a realized gain should be recognized.

Question 30

An investment is readily marketable if it is management's intent to sell the investment.

Question 31

A typical investment to house excess cash until needed is

A) stocks of companies in a related industry.
B) debt securities.
C) low-risk highly liquid securities.
D) stock securities.

Question 32

Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.

Question 33

One of the reasons a corporation may purchase investments is that it has excess cash.

Question 34

The Fair Value Adjustment account can only have a credit balance or a zero balance.

Question 35

A company may purchase a noncontrolling interest in another firm in a related industry

A) to house excess cash until needed.
B) to generate earnings.
C) for strategic reasons.
D) for speculative reasons.

Question 36

"Intent to convert" does not include an investment used as a resource that will be used whenever the need for cash arises.

Question 37

Pension funds and mutual funds regularly invest in debt and stock securities to

A) generate earnings.
B) house excess cash until needed.
C) meet strategic goals.
D) control the company in which they invest.

Question 38

On January 1 2017 Brenner Company purchased at face value a $1000 6% bond that pays interest on January 1. Brenner Company has a calendar year end. The entry for the receipt of interest on January 1 2017 is a.
$\begin{array}{llr} \text { Cash} &60\\ \text { Interest Receivable } &&60\\\end{array}$

b.
$\begin{array}{llr} \text {Cash } &60\\ \text { Interest Receivable} &&60\\\end{array}$

c.
$\begin{array}{llr} \text {Interest Receivable } &60\\ \text { Cash} &&60\\\end{array}$

d.
$\begin{array}{llr} \text { Interest Receivable} &60\\ \text { Interest Revenue } &&60\\\end{array}$

Question 39

Corporations invest in other companies for all of the following reasons except to

A) house excess cash until needed.
B) generate earnings.
C) meet strategic goals.
D) increase trading of the other companies' stock.

Question 40

Available-for-sale securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Question 41

Ban Co. purchased 50 5% Waylan Company bonds on January 1 2016 for $50500 cash. Interest is payable annually on January 1. The entry to record the January 1 2017 annual interest payment would include a

A) debit to Interest Revenue for $2500.
B) credit to Interest Receivable for $2500.
C) credit to Interest Revenue for $2525.
D) credit to Debt Investments for $2525.

Question 42

Yeloe Corporation sells 400 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $60 a share. Yeloe sold the shares for $40 a share. The entry to record the sale is a.
$\begin{array}{llr} \text { Cash } &16,000\\ \text { Loss on Sale of Stock Investments } &8,000\\ \text { Stock Investments } &&24,000\end{array}$

b.
$\begin{array}{llr} \text {Cash } &24,000\\ \text { Gain on Sale of Stock Investments } &&8,000\\ \text { Stock Investments } &&16,000\end{array}$

c.
$\begin{array}{llr} \text { Cash } &16,000\\ \text { Stock Investments } &&6,000\\\end{array}$

d.
$\begin{array}{llr} \text { Stock Investments } &16,000\\ \text { Loss on Sale of Stock Investments } &8,000\\ \text {Cash } &&24,000\end{array}$

Question 43

Which of the following is not a true statement about the accounting for debt investments?

A) At acquisition the historical cost principle applies.
B) The cost includes any brokerage fees.
C) Debt investments include investments in government and corporation bonds.
D) The cost includes any accrued interest.

Question 44

Beak Corporation sells 200 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $25 a share. Beak sold the shares for $40 a share. The entry to record the sale is a.
$\begin{array}{llr} \text { Cash } &5,000\\ \text { Loss on Sale of Stock Investments} &3,000\\ \text { Stock Investments } &&8,000\end{array}$

b.
$\begin{array}{llr} \text {Stock Investments } &8,000\\ \text { Cash } &&8,000\\\end{array}$

c.
$\begin{array}{llr} \text {Cash } &8,000\\ \text { Loss on Sale of Stock Investments } &&3,000\\ \text { Stock Investments } &&5,000\end{array}$

d.
$\begin{array}{llr} \text { Cash } &8,000\\ \text { Stock Investments } &&8,000\\\end{array}$

Question 45

On January 1 2017 Brenner Company purchased at face value a $1000 10% bond that pays interest on January 1. Brenner Company has a calendar year end. The entry for the receipt of interest on January 1 2018 is a.
$\begin{array}{llr} \text { Cash } &110\\ \text { Interest Revenue } &&110\\\end{array}$

b.
$\begin{array}{llr} \text { Cash } &100\\ \text { Interest Revenue } &&100\\\end{array}$

c.
$\begin{array}{llr} \text { Cash } &40\\ \text { Interest Revenue } &&40\\\end{array}$

d.
$\begin{array}{llr} \text { Cash } &100\\ \text { Interest Receivable} &&100\\\end{array}$

Question 46

Ban Co. purchased 50 5% Waylan Company bonds on January 1 2016 for $50500 cash. Interest is payable annually on January 1. The entry to record the December 31 2016 interest accrual would include a

A) debit to Interest Receivable for $2500.
B) debit to Interest Revenue for $2500.
C) credit to Interest Revenue for $2525.
D) debit to Debt Investments for $2525.

Question 47

In accounting for debt investments entries are made for each of the following except the

A) acquisition.
B) interest revenue.
C) amortization of any discount or premium.
D) sale.

Question 48

Blaine Company had these transactions pertaining to stock investments: Feb. 1 Purchased 2000 shares of Horton Company (10%) for $51000 cash.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct.1 Sold 1200 shares of Horton stock for $32400.
The entry to record the purchase of the Horton stock would include a

A) debit to Stock Investments for $45900.
B) credit to Cash for $45900.
C) debit to Stock Investments for $51000.
D) debit to Investment Expense for $5100.

Question 49

Bay Company acquires 60 8% 5 year $1000 Community bonds on January 1 2017 for $60000. If Bay sells all of its Community bonds for $64500 what gain or loss is recognized?

A) Loss of $9300
B) Loss of $4500
C) Gain of $9300
D) Gain of $4500

Question 50

If a short-term debt investment is sold the Investment account is

A) debited for the fair value of the bonds at the sale date.
B) credited for the cost of the bonds at the sale date.
C) credited for the fair value of the bonds at the sale date.
D) debited for the cost of the bonds at the sale date.

Question 51

Tempest Co. purchased 60 6% Urich Company bonds for $60000 cash. Interest is payable annually on January 1. If 30 of the securities are sold on January 1 for $32000 the entry would include a credit to Gain on Sale of Debt Investments for

A) $1600.
B) $1750.
C) $1800.
D) $2000.

Question 52

On January 1 Hamm Company purchased as an investment a $1000 6% bond for $1050. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a.
$\begin{array}{llr} \text { Interest Receivable } &60\\ \text { Interest Revenue } &&60\\\end{array}$

b.
$\begin{array}{llr} \text {Debt Investments } &60\\ \text { Interest Revenue } &&60\\\end{array}$

c.
$\begin{array}{llr} \text { Interest Receivable} &63\\ \text { Interest Revenue} &&63\\\end{array}$

d.
$\begin{array}{llr} \text { Debt Investments } &63\\ \text { Interest Revenue } &&63\\\end{array}$

Question 53

Penny Company owns 20% interest in the stock of Lynn Corporation. During the year Lynn pays $25000 in dividends and reports $200000 in net income. Penny Company's investment in Lynn will increase by

A) $25000.
B) $40000.
C) $45000.
D) $35000.

Question 54

Bay Company acquires 60 8% 5 year $1000 Community bonds on January 1 2017 for $60000. Assume Community pays interest on January 1. The journal entry at December 31 2017 would include a credit to

A) Interest Receivable for $2400.
B) Interest Receivable for $4800.
C) Accrued Expense for $4800.
D) Interest Revenue for $4800.

Question 55

Blaine Company had these transactions pertaining to stock investments: Feb. 1 Purchased 2000 shares of Norton Company (10%) for $51000.
June 1 Received cash dividends of $2 per share on Horton stock.
Oct) 1 Sold 1200 shares of Horton stock for $33000 less brokerage fees of $600.
The entry to record the sale of the stock would include a

A) debit to Cash for $32400.
B) credit to Gain on Sale of Stock Investments for $1200.
C) debit to Stock Investments for $30600.
D) credit to Gain on Sale of Stock Investments for $1800.

Question 56

Blaine Company had these transactions pertaining to stock investments:
Feb. 1 Purchased 2,000 shares of Horton Company (10%) for $51,000 cash.
June 1 Received cash dividends of $3 per share on Horton stock.
Oct. 1 Sold 1,200 shares of Horton stock for $32,400.
The entry to record the receipt of the dividends on June 1 would include a

A) debit to Stock Investments for $6000.
B) credit to Dividend Revenue for $6000.
C) debit to Dividend Revenue for $6000.
D) credit to Stock Investments for $6000.

Question 57

On January 1 Skills Company purchased as a short-term investment a $1000 6% bond for $1000. The bond pays interest on January 1. The bond is sold on July 1 for $1200 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?a.
$\begin{array}{llr} \text { Cash} &1,200\\ \text { Debt Investments } &&1,200\\ \end{array}$

b.
$\begin{array}{llr} \text { Cash } &1,230\\ \text { Debt Investments} &&1,000\\ \text { Gain on Sale of Debt Investments} &&200\\\text {Interest Revenue. } &&30\end{array}$

c.
$\begin{array}{llr} \text { Cash } &1,230\\ \text { Debt Investments } &&1,200\\ \text { Interest Revenue. } &&30\end{array}$

d.
$\begin{array}{llr} \text { Cash } &1,200\\ \text { Debt Investments } &&1,000\\ \text { Gain on Sale of Debt Investments } &&200\end{array}$

Question 58

Mize Company owns 30% interest in the stock of Lyte Corporation. During the year Lyte pays $20000 in dividends to Mize and reports $300000 in net income. Mize Company's investment in Lyte will increase Mize's net income by

A) $6000.
B) $90000.
C) $96000.
D) $10000.

Question 59

Bay Company acquires 60 8% 5 year $1000 Community bonds on January 1 2017 for $60000. The journal entry to record this investment includes a debit to

A) Debt Investments for $64800.
B) Debt Investments for $60000.
C) Cash for $60000.
D) Stock Investments for $60000.

Question 60

The cost of debt investments includes each of the following except

A) brokerage fees.
B) commissions.
C) accrued interest.
D) the price paid.

Question 61

The account Stock Investments is

A) a subsidiary ledger account.
B) a long-term liability account.
C) a general ledger control account.
D) another name for Debt Investments.

Question 62

The cost method of accounting for long-term investments in stock should be employed when the

A) investor owns more than 50% of the investee's stock.
B) investor has significant influence on the investee and the stock held by the investor are marketable equity securities.
C) market value of the shares held is greater than their historical cost.
D) investor's influence on the investee is insignificant.

Question 63

Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments? $\begin{array}{llcc} \underline{ \text {\( \% \) of Investor Ownership }} & \underline{ \text { Accounting Guidelines }} \\\end{array}$

A) $\begin{array}{ll}\text { Less than } 20 \% &&&&& \text { Cost method } \\\end{array}$
B) $\begin{array}{ll}\text { Between } 20 \%-50 \% && \text { Cost method } \\\end{array}$
C) $\begin{array}{ll}\text { More than } 50 \% &&&& \text { Cost or equity method } \\\end{array}$
D) $\begin{array}{ll}\text { Between } 20 \%-50 \% && \text { Consolidated financial statements }\end{array}$

Question 64

On January 1 2017 Grgante Corporation purchased 25% of the common stock outstanding of Sheat Corporation for $270000. During 2017 Long Corporation reported net income of $80000 and paid cash dividends of $40000. The balance of the Stock Investments-Long account on the books of Grgante Corporation at December 31 2017 is

A) $270000.
B) $310000.
C) $350000.
D) $280000.

Question 65

When a company holds stock of several different corporations the group of securities is identified as a(n)

A) affiliated investment.
B) consolidated portfolio.
C) investment portfolio.
D) controlling interest.

Question 66

If 10% of the common stock of an investee company is purchased as a long-term investment the appropriate method of accounting for the investment is

A) the cost method.
B) the equity method.
C) the preparation of consolidated financial statements.
D) determined by agreement with whomever owns the remaining 90% of the stock.

Question 67

Revenue is recognized when cash dividends are received under

A) the controlling interest method.
B) the cost method.
C) the equity method.
D) both the cost and equity methods.

Question 68

When an investor owns between 20% and 50% of the common stock of a corporation it is generally presumed that the investor

A) has insignificant influence on the investee and that the cost method should be used to account for the investment.
B) should apply the cost method in accounting for the investment.
C) will prepare consolidated financial statements.
D) has significant influence on the investee and that the equity method should be used to account for the investment.

Question 69

If an investor owns less than 20% of the common stock of another corporation as a long-term investment

A) the equity method of accounting for the investment should be employed.
B) no dividends can be expected.
C) it is presumed that the investor has relatively little influence on the investee.
D) it is presumed that the investor has significant influence on the investee.

Question 70

In accounting for stock investments between 20% and 50% the _______ method is used.

A) consolidated statements
B) controlling interest
C) cost
D) equity

Question 71

Under the equity method of accounting for long-term investments in common stock when a dividend is received from the investee company

A) the Dividend Revenue account is credited.
B) the Stock Investments account is increased.
C) the Stock Investments account is decreased.
D) no entry is necessary.

Question 72

For accounting purposes the method used to account for long-term investments in common stock is determined by

A) the amount paid for the stock by the investor.
B) the extent of an investor's influence on the operating and financial affairs of the investee.
C) whether the stock has paid dividends in past years.
D) whether the acquisition of the stock by the investor was "friendly" or "hostile."

Question 73

Gayton Corporation purchased 1000 shares of Smart common stock ($50 par) at $80 per share as a short-term investment. The shares were subsequently sold at $78 per share. The cost of the securities purchased and gain or loss on the sale were $\begin{array} { l l l } & \underline{ \text { Cost } }&& \underline{\text { Gain or Loss }} \\\end{array}$

A) $\begin{array} { l l l } & \$ 50,000 & \$ 2,000 \text { gain } \\\end{array}$
B) $\begin{array} { l l l } & \$ 50,000 & \$ 2,000 \text { loss } \\\end{array}$
C) $\begin{array} { l l l } & \$ 80,000 & \$ 2,000 \text { gain } \\\end{array}$
D) $\begin{array} { l l l } & \$ 80,000 & \$ 2,000 \text { loss }\end{array}$

Question 74

On January 1 2017 Lark Corporation purchased 35% of the common stock outstanding of Dinc Corporation for $700000. During 2017 Dinc Corporation reported net income of $200000 and paid cash dividends of $100000. The balance of the Stock Investments-Run account on the books of Lark Corporation at December 31 2017 is

A) $700000.
B) $735000.
C) $770000.
D) $665000.

Question 75

Match the items below by entering the appropriate code letter in the space provided.

Question 76

Which of the following would not be considered a motive for making a stock investment in another corporation?

A) Appreciation in the market value of the stock investment
B) Use of the investment for expanding its own operations
C) Use of the investment to diversify its own operations
D) An increase in the amount of interest revenue from the stock investment

Question 77

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? $\begin{array}{cc} & \underline{ \% \text { of Investor Ownership } }& \underline{ \text { Presumed Influence} } \\\end{array}$

A) $\begin{array}{cc} & \text { Less than } 20 \% &&&&&& \text { Short-term } \\\end{array}$
B) $\begin{array}{cc} & \text { Between } 20 \%-50 \% &&& \text { Significant } \\\end{array}$
C) $\begin{array}{cc} & \text { More than } 50 \% &&&&& \text { Long-term } \\\end{array}$
D) $\begin{array}{cc} & \text { Between } 20 \%-50 \% &&& \text { Controlling }\end{array}$

Question 78

Roxy Corporation makes a short-term investment in 180 shares of Sager Company's common stock. The stock is purchased for $53 a share. The entry for the purchase is a.
$\begin{array}{llr} \text { Debt Investments } &9,540\\ \text { Cash } &&9,540\\\end{array}$

b.
$\begin{array}{llr} \text { Stock Investments } &9,540\\ \text { Cash } &&9,540\\\end{array}$

c.
$\begin{array}{llr} \text { Stock Investments } &9,047\\ \text { Cash } &&9,047\\\end{array}$

d.
$\begin{array}{llr} \text { Stock Investments } &9,000\\ \text { Cash} &&9,000\\\end{array}$

Question 79

Under the equity method the Stock Investments account is increased when the

A) investee company reports net income.
B) investee company pays a dividend.
C) investee company reports a loss.
D) stock investment is sold at a gain.

Question 80

If the cost method is used to account for a long-term investment in common stock dividends received should be

A) credited to the Stock Investments account.
B) credited to the Dividend Revenue account.
C) debited to the Stock Investments account.
D) recorded only when 20% or more of the stock is owned.