Deck 26: Investments

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Any cash dividends received from stock investments with insignificant influence are recorded as Dividend Expense.

Answer 3

False

Question 4

If a company has a controlling influence over another company,the controlling investor is called the parent,and the investee company is called the subsidiary.

Question 5

When an investor company owns between 20% and 50% of the voting stock of an investee company,it has a controlling influence.

Question 6

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

Question 7

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

Question 8

Debt securities are recorded at cost when purchased.

Question 9

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

Question 10

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

Question 11

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

Question 12

A company holds $40,000 of 7% bonds as a held-to-maturity security.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 13

The consolidation method is used to account for long-term investments in equity securities with controlling influence.

Question 14

A company received dividends of $0.35 per share on 300 shares of stock it holds as a stock investment with insignificant influence.The journal entry to record this transaction would be to debit Cash for $105 and credit Dividend Revenue for $105.

Question 15

When a stock investment with insignificant influence 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 16

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

Question 17

Short-term investments are intended to be converted into cash within the longer of one year or the operating cycle of the business,and are readily convertible to cash.

Question 18

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 19

Short-term investments are also called marketable securities.

Question 20

Trading debt securities are reported as long-term assets.

Question 21

If the exchange rate for Canadian and U.S.dollars is 0.7382 to 1,this implies that 2 Canadian dollars can be purchased for $1.48 U.S.dollars.

Question 22

Trading securities are debt securities a company plans to hold long-term,possibly until maturity.

Question 23

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 24

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

Question 25

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

Question 26

The price of one currency stated in terms of another currency is called a foreign exchange rate.

Question 27

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

Question 28

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

Question 29

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

Question 30

Profit margin is net sales divided by operating income.

Question 31

Trading debt securities are always reported as current assets.

Question 32

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

Question 33

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 34

Held-to-maturity securities are equity securities a company intends to hold until dividends have been paid.

Question 35

Multinational corporations can be U.S.companies with operations in other countries.

Question 36

Foreign exchange rates fluctuate due to many factors including changing political and economic conditions.

Question 37

All companies desire a low return on total assets.

Question 38

When consolidated financial statements are prepared,the parent company uses the equity method and reports the subsidiaries as investment accounts on the balance sheet.

Question 39

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

Question 40

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

Question 41

The account,Fair Value Adjustment-Available-for-Sale,is reported as an adjunct asset on the balance sheet.

Question 42

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

Question 43

On May 1,Jorge Co.purchases notes of Radiotech for $25,000.This investment is considered to be an available-for-sale debt investment.This is the company's first and only investment in available-for-sale debt securities.On July 31 (Jorge's year-end),the notes had a fair value of $28,000.Jorge should record a credit to Unrealized Gain-Equity for $3,000.

Question 44

If a long-term investment in an equity security gives the investor significant influence over the investee,the investment is always classified as short-term.

Question 45

When individual AFS securities are sold,the difference between the cost of the individual securities sold and the net proceeds (sale price less fees)is recorded as a gain or loss on sale of debt investments.

Question 46

The cost method of accounting,which does not adjust for changes in fair value,is used to account for long-term investments in equity securities with insignificant influence.

Question 47

Available-for-sale securities are reported at fair value on the balance sheet.

Question 48

If a U.S.company's credit sale to an international customer allows payment to be made in a foreign currency,the sale transaction is recorded using the exchange rate on the date of sale.

Question 49

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

Question 50

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 51

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

Question 52

Kim Manufacturing purchased on credit £20,000 worth of parts from a British company when the exchange rate was $1.66 per British pound.At the year-end balance sheet date,the exchange rate increased to $1.69.Kim must record a gain of $600.

Question 53

To prepare consolidated financial statements when a U.S.parent company has an international subsidiary,the international subsidiary's financial statements must be translated into U.S.dollars.

Question 54

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

Question 55

An investor presumed to have significant influence owns between 20% and 50% of another company's voting stock.

Question 56

Any unrealized gain or loss for the portfolio of available-for-securities is reported in the equity section of the balance sheet.

Question 57

Hamasaki Company owns 30% of CDW Corp.stock and has significant influence.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 58

On May 15,Tumbleweed,Inc.purchased notes of Dansell Corp.for $80,000.This is considered to be an available-for-sale debt investment.This is the company's first and only investment in available-for-sale debt securities.On Tumbleweed's September 30 year-end,the notes had a fair value of $85,000.The $5,000 difference in fair value must be reported on Tumbleweed's income statement as a $5,000 unrealized gain.

Question 59

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

Question 60

If a U.S.Company's credit sale to an international customer allows payment to be made in a foreign currency,the same exchange rate must be used for the date of sale and the cash payment date.

Question 61

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 62

A company has an investment in 9% bonds with a par value of $100,000 that pays 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 63

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.Roe's entry to record the receipt of these dividends is:

A)Debit Cash,$8,000; credit Long-Term Investments,$8,000.
B)Debt Long-Term 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 Interest Revenue,$8,000.

Question 64

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 65

Short-term investments include:

A)Securities that management intends to convert to cash within the longer of one year or the current operating cycle,and are readily convertible to cash.
B)Funds earmarked for a special purpose such as bond sinking funds.
C)Stocks not intended to be converted into cash.
D)Bonds not intended to be converted into cash.
E)Sinking funds not intended to be converted into cash.

Question 66

A company paid $37,800 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 67

The controlling investor of a long-term investment with controlling interest is called the:

A)Owner.
B)Subsidiary.
C)Parent.
D)Investee.
E)Senior entity.

Question 68

Kendall Corp.purchased at par value,$160,000 of Barker Company's 7% bonds that mature in 10 months.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.The journal entry to record Kendall's purchase of the bonds is:

A)debit Debt Investments-HTM $160,000; credit Cash,$160,000.
B)debit Cash,$169,333; credit,Short-Term Investments-HTM $169,333.
C)debit Cash,$160,000; credit Short-Term Investments-HTM $160,000.
D)debit Long-Term Investments-HTM $160,000; credit Cash $160,000.
E)debit Cash,$160,000; credit Long-Term Investments-HTM $160,000.

Question 69

All of the following statements regarding stock investments with insignificant influence are true except for:

A)They are recorded at cost when acquired.
B)They are valued at fair value.
C)They report realized gain (or loss)in a permanent asset account,Fair Value Adjustment-Stock.
D)They report any unrealized gain (or loss)in the income statement.
E)They are adjusted to fair value at the end of each period.

Question 70

Strickland Corporation has invested in debt securities.Strickland intends to actively buy and sell 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 71

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 72

Barnes Company purchased $50,000 of 8% bonds at par.The bonds mature in six years and are classified as a held-to-maturity security.Which of the following is the correct journal entry to record the receipt of the usual semiannual interest payment?

A)debit Cash,$4,000; credit Long-Term Investments-HTM,$4,000.
B)debt Cash,$2,000; credit Long-Term Investments-HTM,$2000.
C)debit Cash,$2,000; credit Interest Revenue,$2,000.
D)debit Unrealized Gain-Equity,$2,000; credit Cash,$2,000.
E)debit Cash,$4,000; credit Unrealized Gain-Equity,$4,000.

Question 73

Long-term investments include:

A)Investments 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 74

Kendall Corp.purchased at par value,$75,000 of Shrem Company's 8% bonds that mature in three-years.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.When the bonds mature,Kendall should prepare the following journal entry (assume the semiannual interest was separately recorded):

A)debit Long-Term Investments-HTM,$75,000; credit Cash,$75,000.
B)debit Cash,$6,000; credit,Unrealized Gain-Equity,$6,000.
C)debit Cash,$75,000; credit Debt Investments-HTM,$75,000.
D)debit Unrealized Gain-Equity,$6,000; credit Cash,$6,000.
E)debit Cash,$75,000; credit Long-Term Investments-Trading,$75,000.

Question 75

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 76

Maroon Company sold supplies in the amount of €15,000 (euros)to a French company when the exchange rate was $1.15 per euro.At the time of payment,the exchange rate decreased to $1.12.Maroon must record a loss of $450.

Question 77

Accounting for long-term investments in equity securities with controlling influence uses the:

A)Controlling method.
B)Consolidation method.
C)Investor method.
D)Investment method.
E)Trading method.

Question 78

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 79

A company paid $37,800 cash to acquire stock investments with insignificant influence (with a par value of $38,325).The correct entry to record the purchase of the investment is:

A)Debit Stock Investments $37,800; credit Cash $37,800.
B)Debit Stock Investments $38,325; credit Cash $38,325.
C)Debit Cash $40,000; credit Stock Investments $40,000.
D)Debit Stock Investments $37,800; debit Investment Expense $525; credit Cash $38,325.
E)Debit Stock Investments $37,800; debit Loss on Investment $525; credit Cash $38,325.

Question 80

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.