Deck 14: Understanding Investments and Acquisitions in Accounting

Question 1

The purchase of a company that is in the same industry, but involved in a different activity, is called a vertical acquisition.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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

Question 6

When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.

Question 7

If the cost method is used to account for an investment in stock, the Stock Investments account is increased by the amount of dividends received during the period.

Question 8

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

Question 9

Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

Question 10

Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.

Question 11

When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.

Question 12

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

Question 13

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

Question 14

Dividends received on investments are accounted for in the same way under the cost and the equity method.

Question 15

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

Question 16

When the cost method is used to account for an investment in stock, dividends received are accounted for as a reduction in the investment account.

Question 17

Pension funds and mutual funds are corporations that regularly invest for strategic reasons.

Question 18

Under the equity method the investor records a proportionate share of the investee's income in the year when it is earned.

Question 19

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

Question 20

Debt investments are investments in government and corporation bonds.

Question 21

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

Question 22

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 23

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 24

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 25

Trading securities are valued on the balance sheet at market value.

Question 26

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

Question 27

Unrealized gains and losses are recognized on trading securities.

Question 28

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

Question 29

Under the equity method, the receipt of dividends from the investee company results in a credit to the Dividend Revenue account.

Question 30

The account Fair Value Adjustment-Trading appears as a contra account in the income statement.

Question 31

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

Question 32

Unrealized gains and losses on available-for-sale securities are reported on the income statement.

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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 39

An investment in short-term equity securities should be charged to a nominal account since the investment is temporary.

Question 40

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

Question 41

When investing excess cash for short periods of time, corporations invest in

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

Question 42

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 43

On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1 and July 1. JBT Company has a calendar year end. The entry for the receipt of interest on January 1, 2015 is

Question 44

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2014 for $80,000. Assume Dodd's pays interest semiannually and the July 1 entry was done correctly. Mazzeo's journal entry at December 31, 2014 would include a credit to

A) Interest Receivable for $4,000.
B) Interest Revenue for $8,000.
C) Interest Expense for $8,000.
D) Interest Revenue for $4,000.

Question 45

The purchase of a company that is in the same industry and involved in the same activity is called a

A) controlling acquisition.
B) horizontal acquisition.
C) parent acquisition.
D) vertical acquisition.

Question 46

On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1 and July 1. LaRoche Company has a calendar year end. The entry for the receipt of interest on January 1, 2015 is

Question 47

Which of the following is a debt security?

A) IBM stock.
B) Treasury stock.
C) Treasury bills.
D) None of these answer choices are correct.

Question 48

Why do pension and mutual funds invest in debt and equity securities?

A) They have excess cash.
B) They want to generate earnings from investment income.
C) They invest for strategic reasons.
D) They invest for speculative reasons.

Question 49

On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1 and July 1. LaRoche Company has a calendar year end. The adjusting entry on December 31, 2014, is

Question 50

On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1 and July 1. JBT Company has a calendar year end. The entry for the receipt of interest on July 1, 2014, is

Question 51

On January 1, 2014, Tri-State Supply Company purchased at face value, a $1,000 7%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The adjusting entry on June 30, 2014, is

Question 52

On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays interest on January 1 and July 1. JBT Company has a calendar year end. The adjusting entry on December 31, 2014, is

Question 53

Which is not a strategic reason to invest?

A) There has been a change in the economic climate.
B) To establish a presence in a related industry.
C) To exercise some influence over a customer or supplier.
D) To enter a new industry without starting from scratch.

Question 54

On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1 and July 1. LaRoche Company has a calendar year end. The entry for the receipt of interest on July 1, 2014, is

Question 55

On January 1, 2014, Tri-State Supply Company purchased at face value, a $1,000 7%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The adjusting entry on December 31, 2014, is

Question 56

The purchase of a company that is in the same industry but involved in a different activity is called a

A) controlling acquisition.
B) horizontal acquisition.
C) parent acquisition.
D) vertical acquisition.

Question 57

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2014 for $80,000. The journal entry to record this investment includes a debit to

A) Debt Investments for $88,000.
B) Debt Investments for $80,000.
C) Cash for $80,000.
D) Stock Investments for $80,000.

Question 58

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 59

Mazzeo Company acquires 80 Dodd's 10%, 5 year, $1,000 bonds on January 1, 2014 for $80,000. If Mazzeo sells all of its Dodd's Bonds for $78,400 what gain or loss is recognized?

A) Loss of $9,600
B) Loss of $1,600
C) Gain of $1,600
D) Gain of $9,600

Question 60

Why do corporations generally invest in debt or equity securities?

A) They have excess cash.
B) They want to generate earnings from investment income.
C) They invest for strategic reasons.
D) All of these answer choices are correct.

Question 61

On January 1, 2014, Tri-State Company purchased at face value, a $1,000 7%, bond that pays interest annually on January 1. Tri-State Company has a calendar year end. The entry for the receipt of interest on January 1, 2015 is

Question 62

All of the following factors would be signs of an investor's significant influence over an investee except

A) the investor has representation on the investee's board of directors.
B) the investor participates in the investee's policy-making process.
C) there are immaterial transactions between the investor and the investee.
D) the common stock held by other stockholders is dispersed.

Question 63

On January 1, 2014, Chic Corp. paid $1,200,000 for 100,000 shares of Toto Company's common stock, which represents 40% of Toto's outstanding common stock. Toto reported income of $300,000 and paid cash dividends of $80,000 during 2014 Chic should report the investment in Toto Company on its December 31, 2014, balance sheet at

A) $1,200,000
B) $1,320,000
C) $1,232,000
D) $1,288,000

Question 64

On January 1, U.K. Enterprise purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on September 1 for $1,100 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?

Question 65

On January 1, Belvedere Company purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1 and July 1. What is the entry to record the interest accrual on December 31?

Question 66

Buford Industries owns 45% of Appalachian Company. For the current year, Appalachian reports net income of $250,000 and declares and pays a $70,000 cash dividend. Which of the following correctly presents the journal entries to record Buford's equity in Appalachian net income and the receipt of dividends from Appalachian?

Question 67

Charleston Co. purchased 60, 6% APS Company bonds for $60,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a

A) debit to Interest Receivable for $1,800.
B) debit to Interest Revenue for $1,800.
C) credit to Interest Revenue for $3,600.
D) debit to Debt Investments for $1,800.

Question 68

If a debt investment is sold, the investment account is

A) debited for the book 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 69

On January 1, Waverly Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1 and July 1. What is the entry to record the interest accrual on December 31?

Question 70

McComb Inc. earns $900,000 and pays cash dividends for $300,000 during 2014. SFXl Corporation owns 70,000 of the 210,000 outstanding shares of McComb. How much revenue from investment should Cornwell report in 2014?

A) $100,000
B) $200,000
C) $300,000
D) $400,000

Question 71

Charleston Co. purchased 60, 6% APS Company bonds for $60,000 cash. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a

A) debit to Interest Receivable for $1,800.
B) credit to Interest Revenue for $1,800.
C) credit to Interest Revenue for $3,600.
D) credit to Debt Investments for $1,800.

Question 72

McComb Inc. earns $900,000 and pays cash dividends for $300,000 during 2014. SFX Corporation owns 70,000 of the 210,000 outstanding shares of McComb. What amount should SFX show in the investment account at December 31, 2014 if the beginning of the year balance in the account was $100,000?

A) $300,000
B) $200,000
C) $280,000
D) $400,000

Question 73

On August 1, Basil Company buys 2,000 shares of Zingo common stock for $61,500 cash. On December 1, the stock investments are sold for $76,000 in cash. Which of the following are the correct journal entries of record for the purchase and sale of the common stock?

Question 74

Vangaurd Co. purchased 50, 6% McLaughlin Company bonds for $50,000 cash. Interest is payable semiannually on July 1 and January 1. The entry to record the purchase would include debit to

A) Debt Investments for $51,500.
B) Cash for $53,000.
C) Debt Investments for $50,000.
D) Stock Investments for $50,000.

Question 75

On January 1, Connid Company purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1 and July 1. What is the entry to record the interest payment on July 1?

Question 76

On January 1, Bay View Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on September 1 for $1,050 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?

Question 77

Porter Brothers Company purchased debt investment for $80,000 on January 1, 2014. On July 1, 2014, Jamison received cash interest of $2,905. Assuming no interest has been accrued, which of the following correctly presents the journals entries for the purchase and the receipt of interest?

Question 78

Cedar Co. purchased 120, 6% LKN Company bonds for $120,000 cash. Interest is payable semiannually on July 1 and January 1. If 60 of the securities are sold July 1 for $61,500 the entry would include a credit to Gain on Sale of Debt Investments of

A) $1,000.
B) $1,800.
C) $3,600.
D) $1,500.

Question 79

On January 1, Vega Company purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,080 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?

Question 80

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

A) The investment is initially recorded at cost.
B) The cost includes any brokerage fees.
C) Debt investments include investment in government and corporation bonds.
D) The cost includes any accrued interest.