Question 1

Which of the following is part of the primary objective of investing in temporary investments?

Accepted Answer

The primary objective of investing in temporary investments includes all of these choices - realizing gains from increases in market price of the securities, receiving dividends, and earning interest revenue.

Question 2

Foreign currency translation adjustment is an example of an item that would be included in other comprehensive income.

Accepted Answer

Foreign currency translation adjustment is a common example of an item that is included in other comprehensive income (OCI) on a company's financial statements. Other examples of OCI items include changes in pension plan assets and liabilities, unrealized gains or losses on available-for-sale securities, and certain gains or losses on derivative instruments. These items are considered part of a company's comprehensive income, but they are not included in the calculation of net income or earnings per share.

Question 3

Investment in certificates of deposit and other securities that do not change in value are reported on the balance sheet as

Accepted Answer

Certificates of deposit are considered cash equivalents because they are short-term, highly liquid investments that are readily convertible to known amounts of cash and so close to their maturity that they present insignificant risk of changes in value due to changes in interest rates.

Question 4

On June 1, $50,000 of treasury bonds were purchased between interest dates. The brokerage commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to Investments-Treasury Bonds?

Accepted Answer

The total cost will be:
- $50,000 for the bonds
- $500 for the brokerage commission
- Plus accrued interest between the last interest payment date (January 1) and the date of purchase (June 1).

To calculate the accrued interest, we need to consider how many days have passed from January 1 to June 1. There are 31 days in January and 28 days in February (assuming a non-leap year), so that's 59 days. July 1 minus June 1 is another 30 days. So, a total of 89 days have passed since the last interest payment.

To find the amount of accrued interest, we need to calculate what portion of the semiannual interest payment has accrued during those 89 days. The semiannual interest payment is 12% of $50,000, or $6,000. Divide that by 2 to get the amount of interest paid for each six-month period, which is $3,000.

To calculate the portion of that interest payment that has accrued during the 89-day period, we need to prorate it based on the number of days.

$3,000/180 days * 89 days = $1,475

So, the total cost to be debited to Investments-Treasury Bonds is:

$50,000 + $500 + $1,475 = $50,975, rounded to $50,500.

Question 5

A company uses cash to pay all of the following except

Accepted Answer

All the options listed (interest to creditors, current expenses, and dividends to stockholders) are payments that a company would typically use cash to settle.

Question 6

The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet.

Accepted Answer

Other comprehensive income items are reported in a separate component of shareholders' equity, not in retained earnings. They are accumulated in the accumulated other comprehensive income (AOCI) account until they are realized.

Question 7

Jacks Corporation purchases $200,000 bonds plus accrued interest for two months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include a

Accepted Answer

The accrued interest of $2,000 is recorded as a debit to Interest Receivable, as it represents interest earned but not yet received.

Question 8

Comprehensive income does not affect net income or retained earnings.

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which means it does not directly affect net income or retained earnings, as these are components of the equity affected by other factors.

Question 9

Which of the following is not a reason to invest excess cash in temporary investments?

Accepted Answer

Investing excess cash in temporary investments is done to earn interest revenue, receive dividends, and realize gains from the increase in market value of the securities. However, influencing the operations of another company is not a reason to invest in temporary investments. This answer option seems to mix up investing with strategic business decisions or acquisitions.

Question 10

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8%, and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be

Accepted Answer

Ruben Company purchased the bonds at 100, so they paid the face value of $100,000, plus $1,500 in accrued interest for a total cost of $101,500. The bond interest rate is 8%, so the semiannual interest payment is $4,000 ($100,000 x 0.08 x 6/12). Since Ruben Company purchased the bonds in the middle of an interest period, they would have accrued $1,500 in interest from the last interest payment date until the date of purchase, which would be credited to Interest Receivable.

Therefore, the journal entry to record the next interest payment would be:
Debit Cash $4,000 
Credit Interest Receivable $1,500 
Credit Interest Revenue $2,500

Question 11

Cash is used for all of the following activities except

Accepted Answer

Cash should not be used for illegal activities like bribing government officials. It should only be used for legitimate business activities such as supporting current operating activities, replacing worn-out machinery, and expanding current operations.

Question 12

Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be

Accepted Answer

The journal entry to record the sale of the bonds would be to debit Cash for the total amount received ($105,000), credit Investments-Evans Company Bonds for the original cost of the bonds ($100,000), credit Gain on Sale of Investments for the difference between the amount received and the original cost ($4,500), and credit Interest Revenue for the $500 in accrued interest that Ruben received upon selling the bonds. Therefore, the correct choice is D.

Question 13

On June 1, $40,000 of treasury bonds were purchased between interest dates. The brokerage commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1?

Accepted Answer

The answer of On June 1, $40,000 of treasury bonds...

Question 14

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be

Accepted Answer

The purchase includes the bond at face value ($100,000) and accrued interest ($1,500), so Investments is debited for $100,000 and Interest Receivable for $1,500, with Cash credited for the total $101,500.

Question 15

Temporary investments

Accepted Answer

The answer of Temporary investments
...

Question 16

Temporary investments such as in trading securities are

Accepted Answer

Temporary investments such as in trading securities are recorded at cost but reported at fair market value. This approach reflects the current market conditions and provides a more accurate representation of the investment's value on the balance sheet.

Question 17

On April 1, Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a

Accepted Answer

When Alliance Company purchased the Tetter Company bonds, they paid $50,000 plus accrued interest of $2,000, for a total of $52,000. Therefore, the journal entry will include a debit to Investments-Tetter Company Bonds for $50,000 (the cost of the bonds) and a credit to Cash for $50,000 (the amount paid in cash). The accrued interest will be recorded separately with a credit to Interest Payable for $2,000.

Question 18

The cumulative effects of other comprehensive income items may be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income.

Accepted Answer

This statement is true. According to US GAAP, accumulated other comprehensive income may be reported separately from retained earnings and paid-in capital on the balance sheet. This allows users of financial statements to better understand the nature and impact of certain items that do not flow through the income statement, such as gains or losses on available-for-sale securities or foreign currency translation adjustments.

Question 19

Long-term investments are held for all of the following reasons except to

Accepted Answer

Long-term investments are not meant to meet current cash needs, but rather to provide future growth and stability for the company.

Question 20

The journal entry Pierce will record on June 30 will include a

Accepted Answer

On June 30, Pierce will receive $3,600 in interest revenue ($2,400 for June and $1,200 for July). Therefore, he will record a debit to Cash for $3,600. There is no need to record a credit to Interest Revenue or Interest Receivable since the interest revenue has already been earned and the interest receivable has already been recorded in a prior accounting period.

Quiz 15: Investments and Fair Value Accounting