Deck 12: Investments

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

If an investor owns 30% of the ordinary shares of a corporation, it is generally presumed that the investor cannot exert significant influence overt the financial and operating activities of the business.

Question 5

When an investor has significant influence but not control over an investee, the investee is referred to as an associate.

Question 6

Under the equity method, the investment account is increased by the investor's share of the associate's dividends.

Question 7

A company that owns more than 50% of the ordinary shares of another entity is known as the parent company and usually prepares consolidates financial statements.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

Debt investments are investments in government and corporation bonds.

Question 13

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

Question 14

The cost of debt investments includes brokerage fees and accrued interest.

Question 15

Under the equity method, the investment in ordinary shares is initially recorded at cost, and the Share Investments account is adjusted annually.

Question 16

Under the equity method, the investor records its share of the associate's net income in the year in which it is earned.

Question 17

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

Question 18

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.

Question 19

The Share Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in ordinary shares.

Question 20

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

Question 21

Available-for-sale securities are investments in either trading securities or investments for which the company chooses to apply the fair value option.

Question 22

Fair value through profit or loss securities include securities that the company has chosen to account for at fair value as allowed by the IFRS fair value option.

Question 23

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, whichever is longer.

Question 24

Unrealized gains and losses on available-for-sale securities are reported as a separate component of equity on the statement of financial position.

Question 25

Because they are highly liquid, short-term investments are included as part of cash in the current assets section of the statement of cash flows.

Question 26

When recording bond interest, Interest Receivable is reported as a fixed asset in the statement of financial position.

Question 27

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

Question 28

A consolidated income statement will reflect only revenue and expense transactions between the consolidated entity and parties outside the affiliated group.

Question 29

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

Question 30

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

Question 31

The fair value option can only be applied to fair value through profit or loss securities.

Question 32

Fair value through profit or loss securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Question 33

A decline in the fair value of a fair value through profit or loss security is recorded by debiting an unrealized loss account and crediting the Market Adjustment account.

Question 34

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 35

Companies generally report long-term assets in a separate section immediately above current assets on the statement of financial position.

Question 36

When a parent company acquires a wholly owned subsidiary for an amount in excess of the book value of the net assets acquired, the excess is always allocated to goodwill.

Question 37

Available-for-sale securities should always be reported at fair value and classified as current assets on the statement of financial position.

Question 38

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

Question 39

An unrealized gain or loss on fair value through profit or loss securities is reported as a separate component of equity.

Question 40

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

Question 41

On January 1, 2011, Milton Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1.Milton Company has a calendar year end. The entry for the receipt of interest on July 1, 2011, is

A) $\begin{array} { l } \text { Cash}&30\\\quad\text { Interest Revenue}&&30\\\end{array}$

B) $\begin{array} { l } \text { Cash}&60\\\quad\text {Interest Revenue }&&60\\\end{array}$

C) $\begin{array} { l } \text { Interest Receivable }&30\\\quad \text { Interest Revenue.}&&30\\\end{array}$

D) $\begin{array} { l } \text { Interest Receivable}&60\\\quad \text {Interest Revenue. }&&60\\\end{array}$

Question 42

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

A)At acquisition, investments are recorded at cost.
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 43

Tolan Co.purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage fees of $600.Interest is payable semiannually on July 1 and January 1.If 30 of the securities are sold on July 1 for $32,000 less $300 brokerage fees, the entry would include a credit to Gain on Sale of Debt Investments for

A)$2,000.
B)$1,700.
C)$2,300.
D)$1,400.

Question 44

Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for €61,250.This includes a brokerage commission of €1,250. Assume Community pays interest on January 1 and July 1, and the July 1 entry was done correctly.The journal entry at December 31, 2011 would include a credit to

A)Interest Receivable for €3,000.
B)Interest Revenue for €6,000.
C)Accrued Expense for €6,000.
D)Interest Revenue for €3,000.

Question 45

On January 1, Barone Company purchased as a short-term investment a $1,000, 8% bond for $1,050.The bond pays interest on January 1 and July 1.The bond is sold on October 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?

A) $\begin{array} { l } \text {Cash. } &1,100\\ \text {Debt Investments } &&1,100\\\end{array}$

B) $\begin{array} { l }\text { Cash. } &1,120\\ \text {Debt Investments } &&1,050\\ \text { Gain on Sale of Debt Investments} &&50\\ \text {Interest Revenue } &&20\\\end{array}$

C) $\begin{array} { l }\text { Cash.} &1,120\\ \text {Debt Investments } &&1,100\\ \text {Interest Revenue } &20\\\end{array}$

D) $\begin{array} { l }\text { Cash } &1,100\\ \text {Debt Investments. } &&1,050\\ \text { Gain on Sale of Debt Investments} &&50\\\end{array}$

Question 46

Winrow Co.purchased 50, 6% Johnston Company bonds for $50,000 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 $1,500.
B)debit to Interest Revenue for $1,500.
C)credit to Interest Revenue for $1,515.
D)debit to Debt Investments for $1,500.

Question 47

On January 1, 2011, Milton Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1.Milton Company has a calendar year end. The entry for the receipt of interest on January 1, 2012 is

A) $\begin{array} { l } \text { Cash}& 60\\ \text { Interest Revenue}&&60 \\\end{array}$

B) $\begin{array} { l }\text { Cash }& 60\\ \text {Interest Receivable }&&60 \\\end{array}$

C) $\begin{array} { l } \text { Cash }&30 \\ \text { Interest Revenue}&&30 \\\end{array}$

D) $\begin{array} { l } \text { Cash}& 30\\ \text { Interest Receivable}&&30 \\\end{array}$

Question 48

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 49

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 50

A typical investment to house excess cash until needed is

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

Question 51

On January 1, 2011, Milton Company purchased at face value, a $1,000, 6% bond that pays interest on January 1 and July 1.Milton Company has a calendar year end. The adjusting entry on December 31, 2011, is

A) $\begin{array} { l }\text { not required. }\end{array}$

B) $\begin{array} { l }\text {Cash } &30\\ \text {Interest Revenue } &&30\\\end{array}$

C) $\begin{array} { l }\text {Interest Receivable } &30\\ \text {Interest Revenue } &&30\\\end{array}$

D) $\begin{array} { l }\text { Interest Receivable} &30\\ \text { Debt Investments} &&30\\\end{array}$

Question 52

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 53

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

A)credited 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 54

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 55

The cost of debt investments includes each of the following except

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

Question 56

Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for €61,250.This includes a brokerage commission of €1,250. The journal entry to record this investment includes a debit to

A)Debt Investments for €60,000.
B)Debt Investments for €61,250.
C)Cash for €61,250.
D)Share Investments for €60,000.

Question 57

Winrow Co.purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage fees of $500.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 $1,500.
B)credit to Interest Revenue for $1,500.
C)credit to Interest Revenue for $1,515.
D)credit to Debt Investments for $1,515.

Question 58

Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for €61,250.This includes a brokerage commission of €1,250. If Barr sells all of its Community bonds for €62,500 and pays €1,500 in brokerage commissions, what gain or loss is recognized?

A)Gain of €2,500
B)Loss of €250
C)Gain of €250
D)Gain of €1,250

Question 59

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

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

Question 60

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' shares.

Question 61

Use the following information for questions . Desmond Corporation owns 3,000 of the 10,000 outstanding ordinary shares of Wetmore Corporation. During 2011, Wetmore earned $£ 2,400,000$ and paid cash dividends of $£ 800,000$ .

-How much investment revenue should Desmond report in 2011?

A) $\quad £ 800,000$ .
B) $\quad £ 720,000$ .
C) $\quad£ 480,000$ .
D) $\quad £ 2,400,000$ .

Question 62

Osaka Co.acquired a 10% interest in Chen Corp.on December 31, 2010 for HK$945,000.During 2011, Chen had net income of HK$600,000 and paid cash dividends of HK$150,000.Osaka's 2011 income statement will report

A)dividend income of HK$15,000.
B)investment income of HK$45,000.
C)investment income of HK$60,000.
D)cannot be determined from the information given.

Question 63

Nagen Company had these transactions pertaining to share investments:

Feb. 1 Purchased 3,000 shares of Horton Company (10\%) for $£ 49,800$ cash plus brokerage fees of $£ 1,200$ .
June 1 Received cash dividends of $£ 2$ per share on Horton stock.
Oct. 1 Sold 1,200 shares of Horton stock for $£ 24,000$ less brokerage fees of $£ 600$ .

The entry to record the sale of the shares would include a

A) debit to Cash for $£ 24,000$ .
B) credit to Gain on Sale of share Investments for $£ 1,200$ .
C) debit to Share Investments for $£ 20,400$ .
D) credit to Gain on Sale of Share Investments for $£ 3,000$ .

Question 64

On January 1, Burkett Company purchased as an investment a $1,000, 7% bond for $1,020.The bond pays interest on January 1 and July 1.What is the entry to record the interest accrual on December 31?

A) $\begin{array} { l }\text {Interest Receivable. } &35\\ \text {Interest Revenue } &&35\\\end{array}$

B) $\begin{array} { l }\text {Debt Investments } &35\\ \text { Interest Revenue} &&35\\\end{array}$

C) $\begin{array} { l }\text {Interest Receivable. } &70\\ \text {nterest Revenue } &&70\\\end{array}$

D) $\begin{array} { l }\text {Debt Investments } &70\\ \text {Interest Revenue } &&70\\\end{array}$

Question 65

On January 1, 2011, Garner Corporation purchased $25 \%$ of the ordinary shares outstanding of Landon Corporation for $\$ 250,000$ . During 2011, Landon Corporation reported net income of $\$ 80,000$ and paid cash dividends of $\$ 40,000$ . The balance of the Share Investments Landon account on the books of Garner Corporation at December 31.2010 is

A)$ 250,000 .
B)$ 290,000 .
C)$ 330,000 .
D)$ 260,000 .

Question 66

Use the following information for questions . Huang Company owns 20,000 of the 50,000 outstanding ordinary shares of Xi Inc. The balance in the investment account at January 1,2012 was $¥ 500,000,000$ . During 2012, Xi earned $¥ 800,000,000$ and paid cash dividends of $¥ 640,000,000$ .

-The balance in the Investment in Xi account reported on Huang's December 31, 2012 statement of financial position should be

A) $¥ 820,000,000$ .
B) $¥ 660,000,000$ .
C) $¥ 564,000,000$ .
D) $¥ 500,000,000$ .

Question 67

Elston Corporation sells 200 ordinary shares being held as an investment. The shares were acquired six months ago at a cost of $\$ 30$ a share. Elston sold the shares for $\$ 40$ a share. The entry to record the sale is

A) $\begin{array} { l } \text {Cash }&6,000 \\ \text { Loss on Sale of Share Investments } &2,000\\ \text {Loss on Sale of Share Investments Share Investments }&&8,000 \\\end{array}$

B) $\begin{array} { l }\text {Share Investments } &8,000\\\text { Cash} &&8,000\\\end{array}$

C) $\begin{array} { l } \text { Cash} &8,000\\ \text { Gain on Sale of Share Investments}&&2,000 \\ \text { Share Investments} &&6,000\\\end{array}$

D) $\begin{array} { l } \text {Cash }&8,000 \\ \text {Share Investments }&&8,000 \\\end{array}$

Question 68

Decker - Corporation purchased 1,000 ordinary shares of Kent at $\$ 75$ per share plus $\$ 3,000$ brokerage fees as a short-term investment. The shares were subsequently sold at $\$ 80$ per share less $\$ 3,400$ brokerage fees. The cost of the securities purchased and gain or loss on the sale were
$\begin{array}{lll}&\text { Cost }&\text {\quad\quad Gain or Loss }\\\end{array}$

A) $\begin{array}{lll}\text { } & \$ 75,000 & \$ 5,000 \text { gain } \\\end{array}$

B) $\begin{array}{lll}\text { } & \$ 75,000 & \$ 1,400 \text { loss } \\\end{array}$

C) $\begin{array}{lll}\text { } & \$ 78,000 & \$ 2,000 \text { gain } \\\end{array}$

D) $\begin{array}{lll}\text { } & \$ 78,000 & \$ 1,400 \text { loss }\end{array}$

Question 69

Nagen Company had these transactions pertaining to share investments:

Feb. 1 Purchased 3,000 shares of Horton Company (10\%) for $£ 49,800$ cash plus brokerage fees of $£ 1,200$ .
June 1 Received cash dividends of $£ 2$ per share on Horton shares.
Oct. 1 Sold 1,200 Horton shares for $£ 24,000$ less brokerage fees of $£ 600$ .

The entry to record the purchase of the Horton shares mould include a

A) debit to Share Investments for $£ 49,800$ .
B) credit to Cash for $£ 49,800$ .
C) debit to Share Investments for 51,000 .
D) debit to Investment Expense for 1,200 .

Question 70

At December 31, 2010, EI Greco Company has an investment in 1,000 of the €1,000 8% bonds of Dublin Company with a carrying value of €1,060,500.The bonds, which mature on January 1, 2015, pay interest semiannually on July 1 and January 1.After collecting the interest on January 1, 2011, EI Greco sells the bonds for €1,110,000.EI Greco will recognize

A)an unrealized loss of €60,500.
B)a gain on the sale of debt investments for €49,500.
C)premium on bonds payable of €60,500.
D)a loss on the sale of debt investments of €110,000.

Question 71

Use the following information for questions . Huang Company owns 20,000 of the 50,000 outstanding ordinary shares of Xi Inc. The balance in the investment account at January 1,2012 was $¥ 500,000,000$ . During 2012, Xi earned $¥ 800,000,000$ and paid cash dividends of $¥ 640,000,000$ .

-Huang should report investment revenue for 2012 of

A) $\quad \neq 320,000,000$ .
B) $\quad ¥ 256,000,000$ .
C) $\quad ¥ 64,000,000$ .
D) $\quad \neq 0$ .

Question 72

Nance Company owns $30 \%$ interest in the shares of Finley Corporation. During the year, Finley pays $\$ 25,000$ in dividends, and reports $\$ 100,000$ in net income. Nance Company's investment in Finley will increase by

A) $\$ 25,000$ .
B) $\$ 30,000$ .
C) $\$ 24,000$ .
D) $\$ 22,500$ .

Question 73

Greene Corporation sells 300 ordinary shares being held as an investment.The shares were acquired six months ago at a cost of $50 a share.Greene sold the shares for $40 a share.The entry to record the sale is

A) $\begin{array} { l }\text {Cash. }&12,000 \\ \text { Loss on Sale of Share Investments}&3,000 \\ \text {Share Investments } &&15,000\\\end{array}$

B) $\begin{array} { l }\text {Cash } &15,000\\ \text { Gain on Sale of Share Investments}&&3,000 \\ \text {Share Investments } &&12,000\\\end{array}$

C) $\begin{array} { l }\text {Cash } &12,000\\ \text { Share Investments} &&12,000\\\end{array}$

D) $\begin{array} { l }\text { Share Investments } \\ \text {Loss on Sale of Share Investments } \\ \text { Cash} &&15,000\\\end{array}$

Question 74

Use the following information for questions . Desmond Corporation owns 3,000 of the 10,000 outstanding ordinary shares of Wetmore Corporation. During 2011, Wetmore earned $£ 2,400,000$ and paid cash dividends of $£ 800,000$ .

-What balance should Desmond report on its December 31, 2011 statement of financial position for the investment account if the beginning of the year balance in the account was $£ 3,200,000 ?$

A) $\quad £ 3,920,000$ .
B) $\quad £3,200,000$ .
C) $\quad £ 3,680,000$ .
D) $\quad £ 4,800,000$ .

Question 75

Use the following information for questions
On January 1, 2010, Bregeut Company, a calendar year corporation, purchased 600 of the $1,000 face value, 9% bonds of Clariant Incorporated, for CHF622,000, including brokerage fees.The bonds, which mature on January 1, 2015, pay interest semiannually on July 1 and January 1.

-The December 31, 2010 adjusting entry for the bonds on Bregeut's books will include

A)a credit to Interest Expense for CHF2,200.
B)a debit to Cash for CHF54,000.
C)a credit to Interest Receivable for CHF27,000.
D)a credit to Interest Revenue for CHF27,000.

Question 76

Mouns Company owns 30\% interest in the shares of Darian Corporation. During the year, Darian pays $\$ 20,000$ in dividends to Mouns, and reports $\$ 100,000$ in net income. Mouns Company's investment in Darian will increase Mouns' net income by

A)$ 15,000 .
B)$ 30,000 .
C)$ 24,000 .
D) 6,000 .

Question 77

Use the following information for questions
On January 1, 2010, Bregeut Company, a calendar year corporation, purchased 600 of the $1,000 face value, 9% bonds of Clariant Incorporated, for CHF622,000, including brokerage fees.The bonds, which mature on January 1, 2015, pay interest semiannually on July 1 and January 1.

-The entry on Bregeut's books to record the acquisition will include

A)a credit to Bonds Payable for CHF600,000.
B)a debit to Interest Receivable for CHF54,000.
C)a credit to Premium on Bonds Payable for CHF22,000.
D)a debit to Debt Investments for CHF622,000.

Question 78

Use the following information for questions
On January 1, 2010, Bregeut Company, a calendar year corporation, purchased 600 of the $1,000 face value, 9% bonds of Clariant Incorporated, for CHF622,000, including brokerage fees.The bonds, which mature on January 1, 2015, pay interest semiannually on July 1 and January 1.

-On July, 2010, Bregeut will make an entry to

A)amortize premium on bonds payable.
B)accrue interest expense.
C)recognize interest revenue.
D)adjust the investment to fair value.

Question 79

Beneteau Corporation purchased 25,000 ordinary shares of La Brea Corporation for €40 per share on January 2, 2011.During 2011, La Brea Corporation had 100,000 shares of common stock outstanding, paid cash dividends of €60,000, and reported net income of €200,000.Beneteau Corporation should report revenue from this investment for 2011 in the amount of

A)€15,000.
B)€35,000.
C)€50,000.
D)€55,000.

Question 80

Nagen Company had these transactions pertaining to share investments:

Feb. 1 Purchased 3,000 shares of Horton Company (10\%) for $£ 49,800$ cash plus brokerage fees of 1,200 .
June 1 Received cash dividends of 2 per share on Horton shares.
Oct. 1 Sold 1,200 Horton shares for $£ 24,000$ less brokerage fees of $£ 600$ .
The entry to record the receipt of the dividends on June 1 mould include a

A) debit to Share Investments for $£ 6,000$ .
B) credit to Dividend Revenue for 6,000 .
C) debit to Dividend Revenue for $£ 6,000$ .
D) credit to Share Investments for $£ 6,000$ .