Deck 8: Long-Term Investments the Time Value of Money

Question 1

Market prices of bonds have no correlation to market interest rate.

Answer 1

False

Question 2

The accounting rules for investments in stock have no bearing on the percentage of ownership by the investor

Answer 2

False

Question 3

The interest rate on a bond determines the amount of interest the debtor company is expected to pay.

Answer 3

True

Question 4

On the balance sheet, assets are listed by dollar amount (lowest to highest).

Question 5

Investments can never be classified as short-term investments.

Question 6

Bonds of publicly traded companies are traded similarly to stocks.

Question 7

Long-term investments are listed on the balance sheet after current assets and property, plant, and equipment.

Question 8

On the balance sheet, Interest Receivable is reported as a fixed asset.

Question 9

If the market interest rate is greater than the face rate of interest on a bond, the bond will sell at a discount.

Question 10

Stocks and bonds projected to be held for longer than one year are long-term investments.

Question 11

Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has 100,000 shares of common stock outstanding. Big League Corporation is the:

A) investee.
B) investor.
C) controlling company.
D) parent company.

Question 12

The carrying amount of bonds at maturity should be equal to the face value of the bonds.

Question 13

If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face value of the bonds until it reaches the maturity date.

Question 14

Long-term investments are more liquid than property, plant, and equipment, but less liquid than current assets.

Question 15

If $125,000 face value bonds are issued at 103, the bond is selling for $103,000.

Question 16

Bond investments are initially recorded at cost.

Question 17

Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has 100,000 shares of common stock outstanding. Small Time Company is the:

A) investee.
B) investor.
C) controlling company.
D) parent company.

Question 18

Assets are listed on the balance sheet from the smallest dollar amount to the largest dollar amount.

Question 19

Big League Corporation owns 500 shares of Small Time Company's common stock. Small Time has 100,000 shares of common stock outstanding. Big League Corporation will show the investment on their books as:

A) an asset.
B) an equity.
C) a liability.
D) other comprehensive income.

Question 20

An investment is a held-to-maturity investment if it is management's intent to sell the investment.

Question 21

When the investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is shown on the balance sheet as:

A) short-term.
B) long-term.
C) equity.
D) either long-term or short-term.

Question 22

On January 1, 2012, Winston Company purchased 6% bonds for $50,000 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 $1,500.
B) credit to Interest Revenue for $1,500.
C) credit to Interest Revenue for $3,000.
D) debit to Interest Receivable for $3,000.

Question 23

Available-for-sale investments are adjusted from cost to market value.

Question 24

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry for the receipt of interest on July 1, 2012 would include a:

A) debit to Cash for $3,000.
B) debit to Cash for $6,000.
C) debit to Interest Receivable for $3,000.
D) debit to Interest Receivable for $6,000.

Question 25

Carmel Corporation purchased 5% bonds for $42,000 on January 1, 2012. On July 1, 2012, Carmel received cash interest of $1,050. The journal entry to record the purchase on January 1 would include a:

A) debit to Cash $ 1,050.
B) debit to Long-Term Investment in Bonds $42,000.
C) credit to Interest Revenue $1,050.
D) credit to Interest Revenue $42,000.

Question 26

All investments not classified as available-for-sale investments or trading securities are:

A) equity investments.
B) debt investments.
C) held-to-maturity investments.
D) profitable investments.

Question 27

Unrealized Gain/Loss on investments account appears under other comprehensive income on a separate section of the income statement.

Question 28

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The adjusting entry to amortize the bond investment on December 31, 2012 would include a:

A) debit to Cash $200.
B) debit to Cash $1,200.
C) debit to Long-Term Investment in Bonds $1,200.
D) debit to Long-Term Investment in Bonds $ 200.

Question 29

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The adjusting entry to accrue interest on December 31, 2012 would include a:

A) debit to Cash $3,000.
B) debit to Cash $6,000.
C) debit to Interest Receivable $3,000.
D) debit to Interest Receivable $6,000.

Question 30

Available-for-sale investments in stock are reported on the balance sheet at cost.

Question 31

Dividend revenue is recorded in a stock dividend.

Question 32

Carmel Corporation purchased 5% bonds for $42,000 on January 1, 2012. On July 1, 2012, Carmel received cash interest of $1,050. The journal entry to record the receipt of interest on July 1 would include a:

A) debit to Cash $1,050.
B) debit to Long-Term Investment in Bonds $42,000.
C) credit to Interest Receivable $1,050.
D) credit to Interest Receivable $42,000.

Question 33

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry for the receipt of interest on January 1, 2012 would include a:

A) credit to Interest Revenue $6,000.
B) credit to Interest Receivable $6,000.
C) credit to Interest Revenue $3,000.
D) credit to Interest Receivable $3,000.

Question 34

Bond investments are initially recorded at:

A) cost.
B) cost plus accrued interest.
C) fair value.
D) market value.

Question 35

On January 1, Bucket Company purchased as an investment a $1,000, 7% bond for $760. Bucket plans to hold the bond for two years. The bond pays interest on January 1 and July 1. The entry to record the amortization of the bond on December 31 would include a:

A) debit to Interest Receivable for $35.
B) debit to Long-Term Investment in Bonds for $35.
C) debit to Interest Receivable for $10.
D) debit to Long-Term Investment in Bonds for $10.

Question 36

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry to amortize the bond investment on July 1, 2012 would include a:

A) debit to Cash for $ 200.
B) debit to Cash for $1,200.
C) debit to Long-Term Investment in Bonds for $ 200.
D) debit to Long-Term Investment in Bonds for $1,200.

Question 37

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry to record the purchase of the bond investment on January 1, 2012, would include a:

A) debit to Short-Term Investment in Bonds for $100,000.
B) debit to Short-Term Investment in Bonds for$ 90,400.
C) debit to Long-Term Investment in Bonds for $100,000.
D) debit to Long-Term Investment in Bonds for$ 90,400.

Question 38

The following is the proper order for assets on a balance sheet:

A) Cash, intangibles, inventories, and long-term investments.
B) Cash, accounts receivable, property, plant and equipment, and long-term investments.
C) Cash, long-term investments, property, plant and equipment, and intangibles.
D) Cash, long-term investments, prepaid expenses and property, plant and equipment.

Question 39

On January 1, 2012, Winston Company purchased 6% bonds for $50,000 cash. 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) credit to Interest Revenue for $1,500.
C) credit to Interest Revenue for $3,000.
D) debit to Interest Receivable for $3,000.

Question 40

On January 1, Bucket Company purchased as an investment a $1,000, 7% bond for $980. Bucket plans to hold the bond for two years. The bond pays interest on January 1 and July 1. The entry to record the interest accrual on December 31 would include a:

A) debit to Interest Receivable for $35.
B) debit to Long-Term Investment in Bonds for $35.
C) debit to Interest Receivable for $70.
D) debit to Long-Term Investment in Bonds for $70.

Question 41

An investment in common stock acquired during the year at a cost of $50,000 has a market value at year end of $50,290. The adjusting entry requires a credit to Allowance to Adjust Investment to Market for $290.

Question 42

For a stock dividend, the investor records dividend revenue.

Question 43

If 15% 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 available-for-sale method (Market value method).
B) the equity method.
C) the preparation of the consolidated financial statements.
D) agreed upon with owners of the remaining 90% of stock.

Question 44

Perdue Company had the following transactions pertaining to stock investments: - February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17 per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the sale of the stock would include a:

A) debit to Long-Term Investment for $51,000.
B) credit to Long-Term Investment for $51,000.
C) debit to Gain on Sale of Investment $3,000.
D) debit to Loss on Sale of Investment $3,000.

Question 45

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

Question 46

The Allowance to Adjust Investments account is a Long-Term Asset account.

Question 47

GAAP requires companies to adjust their available-for-sale-securities to market value as of the balance sheet date.

Question 48

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

A) the equity method of accounting should be used for the investment.
B) no dividends are expected to be received.
C) the investor usually has little or no influence on the investee.
D) the investor has significant influence on the investee.

Question 49

On purchase date, Available-for-sale investments in stock are recorded at:

A) their cost.
B) the lower-of-cost-or-market.
C) their amortized cost.
D) their realizable value.

Question 50

Unrealized gains and losses result from changes in the investments fair value.

Question 51

Realized gains on the sale of available-for-sale securities cannot be used to compute net income.

Question 52

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 investee's operating decisions and policies.
C) whether the stock has paid dividends in the past years.
D) whether the dividend declared is a cash or stock dividend.

Question 53

The available-for-sale method (market value method) of accounting for long-term investments in stock should be used when the:

A) investor owns more than 50% of the investee's stock.
B) investor has significant influence over the investee's operating decisions and policies.
C) investor has little or no influence on the investee.
D) investor is a parent company.

Question 54

On the balance sheet, Available-for-sale investments in stock are reported at:

A) their cost.
B) the lower-of-cost-or-market.
C) their amortized cost.
D) their current market value.

Question 55

The Allowance to Adjust Investment to Market is a companion to Interest Receivable.

Question 56

Perdue Company had the following transactions pertaining to stock investments: - February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17 per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the purchase of the Hudson stock would include a:

A) debit to Long-Term Investment for $51,000.
B) credit to Long-Term Investment for $51,000.
C) credit to Dividend Revenue for $6,000.
D) debit to Short-Term Investment for $6,000.

Question 57

The Allowance to Adjust Investment to Market account will always have a debit balance.

Question 58

An investee should report available-for-sale securities that might be sold in the next 12 months as a short-term investment.

Question 59

Perdue Company had the following transactions pertaining to stock investments: - February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of $17 per share.
- June 1, Received cash dividends of $6,000 on Hudson Company stock.
- October 1, Sold 3,000 shares of Hudson stock for $54,000.
The entry to record the receipt of the dividends would include a:

A) debit to Long-Term Investment for $6,000.
B) credit to Long-Term Investment for $6,000.
C) credit to Dividend Revenue for $6,000.
D) debit to Dividend Revenue for $6,000.

Question 60

For accounting purposes, receipt of a stock dividend is handled the same as a receipt of a cash dividend.

Question 61

Receiving a cash dividend from an available-for-sale investment requires the following journal entry:

A) a debit to Cash and a credit to Dividend Revenue.
B) a debit to Cash and a credit to Unrealized Gain on Investments.
C) a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
D) no journal entry. Investor makes a memorandum entry in the accounting records.

Question 62

The market value of an available-for-sale security has decreased from the last carrying value. The journal entry to record this decrease will include:

A) a debit to the Allowance to Adjust Investment to Market.
B) a credit to the Allowance to Adjust Investment to Market.
C) a credit to the Unrealized Loss on Investment.
D) a debit to the Unrealized Loss on Investment.

Question 63

Realized gains and losses from available-for-sale investments arise from:

A) the purchase of an investment.
B) the sale of the investment.
C) changes in the market value of the investment.
D) management's decision to adjust the value of the investment.

Question 64

The Unrealized Gain or the Unrealized Loss Account appears:

A) in Other expense.
B) in Other comprehensive income.
C) in Other comprehensive income and Accumulated other comprehensive income.
D) in Other revenue.

Question 65

Unrealized gains and losses from available-for-sale investments arise from:

A) the purchase of an investment.
B) the sale of the investment.
C) changes in the market value of the investment.
D) management's decision to adjust the value of the investment.

Question 66

Other comprehensive income:

A) is a separate section of stockholders' equity.
B) appears on the income statement under revenues.
C) appears on the income statement in a separate section below net income.
D) is shown as a memorandum.

Question 67

The market value of an available-for-sale security has increased from the last carrying value. The journal entry to record this increase will include:

A) a debit to the Allowance to Adjust Investment to Market.
B) a credit to the Allowance to Adjust Investment to Market.
C) a debit to the Unrealized Gain on Investment.
D) no adjustment is required.

Question 68

Able Company receives a stock dividend of 50 shares from Cole Company. Able previously owned 750 shares of Cole stock that had a cost basis of $4,800. The cost basis per share of Cole stock is:

A) $6.40.
B) $6.00.
C) $6.85.
D) $96.

Question 69

Receiving a stock dividend from an available-for-sale investment requires the following journal entry:

A) a debit to Cash and a credit to Dividend Revenue.
B) a debit to Cash and a credit to Unrealized Gain on Investments.
C) a debit to Unrealized Gain on Investment and a credit to Dividend Revenue.
D) no journal entry. Investor makes a memorandum entry in the accounting records.

Question 70

When accounting for available-for-sale securities, which of the following is used to compute net income?

A) Unrealized gains
B) Realized gains
C) Both unrealized gains and realized gains
D) Neither realized gains nor unrealized gains

Question 71

The gain or loss on the sale of an investment classified as "available-for-sale" is calculated by comparing the cost of the investment with the:

A) lower-of-cost-or-market value of the investment.
B) amount received from the sale of the investment.
C) market value of the investment.
D) amortized cost of the investment.

Question 72

Receiving a stock dividend affects what part of the balance sheet?

A) Increases assets and increases paid-in-capital
B) Increases assets and decreases stockholders' equity
C) Increases assets and increases retained earnings
D) Has no effect on assets or total equity

Question 73

The Allowance to Adjust Investment to Market has a debit balance. Therefore:

A) the Allowance account is subtracted from the carrying amount.
B) the Allowance account is added to the carrying amount.
C) the Allowance account is neither added nor subtracted from the carrying amount.
D) the Allowance account is added to Unrealized Gain or Loss.

Question 74

As a result of a stock dividend:

A) the investor's total cost in the investment increases.
B) the investor's cost per share decreases.
C) a journal entry is needed to record the receipt of the stock dividend
D) dividend revenue increases.

Question 75

An investment in common stock acquired during the year at a cost of $40,000 has a year-end market value of $42,250. The year-end adjusting entry requires a:

A) debit to Long-Term Investments for $2,250.
B) debit to Allowance to Adjust Investments to Market for $2,250.
C) credit to Allowance to Adjust Investments to Market for $2,250.
D) debit to Unrealized Gain on Investment for $2,250.

Question 76

The journal entry to record the sale of an available-for-sale investment includes a gain on sale of investment of $500. The income statement will reflect:

A) an increase in net sales of $500.
B) another income of $500.
C) an extraordinary gain of $500.
D) nothing, since the entry impacts only asset accounts.

Question 77

On the balance sheet, available-for-sale investments in stock are reported as:

A) long-term assets.
B) current assets.
C) both long-term assets and stockholders' equity.
D) either current assets or long-term assets, depending on when the investment is expected to be sold.

Question 78

Receiving a cash dividend affects what part of the balance sheet?

A) Increases assets and increases paid-in-capital
B) Increases assets and decreases stockholders' equity
C) Increases assets and increases retained earnings
D) Has no effect on assets or total equity

Question 79

The balance in the Unrealized Gains and Losses on Available-for-sale Securities account appear in which financial statement?

A) The balance sheet as a contra asset account.
B) The income statement under Other Expenses and Losses.
C) The balance sheet, as part of the stockholders' equity section.
D) Not shown on the financial statements until the securities are sold.

Question 80

Ace Company purchased 1,000 shares of Nott Company at $40 per share. Ace received an additional 250 shares from Nott Company as a stock dividend. After receiving the stock dividend, the total value of the investment in Nott and cost per share of Nott, respectively is:

A) $50,000 and $40.
B) $40,000 and $32.
C) $50,000 and $32.
D) $40,000 and $40.