Question 1

The equity method of accounting for investments
A)requires a year-end adjustment to revalue the stock to lower of cost or market
B)requires the investment to be reported at its original cost
C)requires the investment be increased by the reported net income of the investee
D)requires the investment be increased by the dividends paid by the investee

Accepted Answer

The equity method of accounting for investments requires the investment to be increased by the investor's share of the investee's reported net income, reflecting the investor's proportional share of the earnings of the investee.

Question 2

When shares of stock held as an investment are sold, the difference between the proceeds and the balance of the investment account is recorded as a(n)
A)prior period adjustment
B)operating income and losses
C)paid-in capital addition
D)gain or loss

Accepted Answer

When shares of stock held as an investment are sold, the difference between the proceeds and the balance of the investment account is recorded as a gain or loss. This represents the difference between the amount the investment was originally purchased for and the amount it was sold for. It is important to record this gain or loss in order to accurately reflect the financial performance of the investment, as well as to make any necessary tax calculations.

Question 3

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 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
A)debit to Interest Receivable for $2,000
B)debit to Investment in Bonds for $202,000
C)debit to Cash for $200,000
D)credit to Interest Revenue for $2,000

Accepted Answer

The answer of Jacks Corporation purchases $200,000 bonds plus accrued...

Question 4

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?
A)$12,750 gain
B)$600 gain
C)$600 loss
D)$9,250 loss

Accepted Answer

The investor initially purchased the shares at a total cost of $21,750 for 500 shares, which means the purchase price per share was $21,750 / 500 = $43.50. When selling 100 shares at $49.50 each, the total received from the sale was 100 * $49.50 = $4,950. The cost of the 100 shares sold was 100 * $43.50 = $4,350. Therefore, the gain on the sale is $4,950 - $4,350 = $600.

Question 5

On May 1, Pierce Company purchased $60,000 of Stanton Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest.​
-The journal entry Pierce will record on February 1 will include a
A)credit to Interest Revenue for $1,500
B)credit to Gain on Sale of Investments for $1,500
C)credit to Cash for $52,500
D)credit to Interest Receivable for $600

Accepted Answer

When Pierce sells the bonds, it will realize a gain equal to the difference between the selling price and the carrying value of the bonds, which includes the initial cost and any accrued interest. In this case, the carrying value of the bonds at the time of sale is $63,600 ($60,000 + $2,400 accrued interest), and the selling price is $66,950 ($50,000 x 103% + $1,150 accrued interest). Therefore, the gain on sale of investments is $3,350 ($66,950 - $63,600), and this amount should be credited to recognize the gain.

Question 6

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
A)debit Cash, $4,000; credit Interest Revenue, $4,000
B)debit Cash, $4,000; credit Interest Receivable, $4,000
C)debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500
D)debit Cash, $2,500; credit Interest Revenue, $2,500

Accepted Answer

The correct entry accounts for both the receipt of the semiannual interest payment ($4,000) and the adjustment for the $1,500 of interest that was already paid at the time of purchase, resulting in $2,500 recognized as interest revenue for the current period.

Question 7

What are the total proceeds from the February 1 sale?
A)$52,400
B)$51,500
C)$50,000
D)$52,000

Accepted Answer

The answer of What are the total proceeds from the...

Question 8

Interest revenue on bonds is reported
A)as an addition to the Investment in Bonds account
B)as part of comprehensive income but not as part of net income
C)as part of other revenue
D)as part of operating income

Accepted Answer

The answer of Interest revenue on bonds is reported
A)as an...

Question 9

Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of bonds at 97. The journal entry for the purchase would include a
A)credit to Interest Receivable for $4,500
B)credit to Interest Revenue for $4,500
C)debit to Interest Receivable for $4,500
D)debit to Interest Revenue for $4,500

Accepted Answer

When purchasing bonds, the buyer must pay the accrued interest to the seller in addition to the purchase price. Therefore, the journal entry for the purchase would include a debit to Bonds Payable for $400,000 and a credit to Cash for $404,500 ($400,000 + $4,500). There is no revenue or receivable involved at the time of purchase. 
When selling bonds at a discount, the seller will receive less than the face value of the bonds. The journal entry for the sale would include a debit to Cash for $242,500 ($250,000 x 0.97) and a credit to Bonds Payable for $250,000, resulting in a loss on sale.

Question 10

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
A)credit to Interest Payable for $2,000
B)debit to Investments-Tetter Company Bonds for $52,000
C)debit for Cash of $50,000
D)debit to Investments-Tetter Company Bonds for $50,000

Accepted Answer

When Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000, it means that Alliance bought the bonds for $50,000 + $2,000 = $52,000. Therefore, the journal entry should include a debit to Investments-Tetter Company Bonds for $50,000, representing the cost of the bonds, and a credit to Cash for $50,000, representing the amount paid for the bonds. The Interest Payable account is not affected yet because the interest will be received on June 30, while the bond purchase was made on April 1.

Question 11

The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the
A)fair value method
B)market method
C)income method
D)equity method

Accepted Answer

The equity method is used for accounting for investments in equity securities where the investor has significant influence over the investee (20-50% ownership). Under this method, the investor records its share of periodic net income of the investee on its income statement, increasing or decreasing the carrying value of the investment on the balance sheet. The fair value method is used for investments where the investor has less than 20% ownership and records the investment at its fair value with unrealized gains or losses reflected in the income statement. The market method is not a recognized method of accounting for investments. The income method is a general term used for various methods used to calculate income or earnings.

Question 12

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is

Accepted Answer

The answer of Jarvis Corporation makes an investment in 100...

Question 13

The fair value method of accounting for stock
A)recognizes dividends as income
B)is only appropriate as part of a consolidation
C)requires the investment be increased by the reported net income of the investee
D)requires the investment be decreased by the reported net income of the investee

Accepted Answer

The fair value method of accounting for stock recognizes dividends as income. Under this method, investments are recorded at their fair value, and dividends received from the investee are recognized as income in the investor's financial statements. Changes in fair value are also recognized in the income statement, but the investment is not adjusted for the investee's net income or loss as it would be under the equity method.

Question 14

Which of the following stock investments should be accounted for using the fair value method?
A)investments of less than 20%
B)investments between 20% and 50%
C)investments of less than 20% and investments between 20% and 50%
D)all stock investments should be accounted for using the fair value method

Accepted Answer

Investments of less than 20% are typically accounted for using the fair value method because the investor does not have significant influence over the investee. For investments between 20% and 50%, the equity method is generally used, reflecting the investor's ability to exercise significant influence over the investee.

Question 15

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to
A)Investment in Vallerio Corporation Stock
B)Retained Earnings
C)Dividend Revenue
D)Dividend Receivables

Accepted Answer

Under the equity method, the receipt of cash dividends is considered a return on the investment rather than income. Therefore, it reduces the carrying amount of the investment, leading to a debit to Cash and a credit to Investment in Vallerio Corporation Stock.

Question 16

Which of the following items would not affect the investor's income for the period?
A)interest received on a temporary investment in bonds
B)dividends received on a long-term investment in stock where the investor owns 10% of the investee's stock
C)dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock
D)interest received on a long-term investment in bonds

Accepted Answer

Dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock typically imply significant influence over the investee. In such cases, the equity method of accounting is used, where dividends received are treated as a return of investment rather than income, thus not affecting the investor's income for the period.

Question 17

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the
A)equity method
B)market method
C)cost or market method
D)fair value method

Accepted Answer

According to the description, Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. This implies that Armando has between 20% and 50% ownership in Tito, which requires the use of the equity method of accounting under generally accepted accounting principles (GAAP). This method allows the investor to report its share of the investee's net income or loss on its income statement and adjust its investment account for its share of the investee's dividends or retained earnings. Thus, the equity method is the best choice for accounting for this investment.

Question 18

Which of the following statements is not a reason a company may purchase another company's stock?
A)earning a return on excess cash
B)sustain the other company's stock price
C)gaining control of another company's operations
D)developing or maintaining business relationships

Accepted Answer

Sustaining another company's stock price is not a typical reason for a company to purchase another company's stock. The other options listed (earning a return on excess cash, gaining control of operations, and developing/maintaining business relationships) are all common reasons for a company to invest in another company's stock.

Question 19

On May 1, Pierce Company purchased $60,000 of Stanton Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds at 103 plus accrued interest.​
-The journal entry Pierce will record on June 30 will include a
A)credit to Interest Revenue for $2,400
B)debit to Cash for $3,600
C)credit to Cash for $2,400
D)credit to Interest Receivable for $1,200

Accepted Answer

The journal entry on June 30 will include a debit to Cash for $3,600, which represents the semiannual interest payment (6 months) on the $60,000 of bonds at a 12% annual interest rate ($60,000 * 12% * 6/12 = $3,600).

Question 20

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
A)debit Cash, $105,000; credit Investment-Evans Company Bonds, $104,500, and Interest Revenue, $500
B)debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, and Gain on Sale of Investments, $5,000
C)debit Cash, $104,500, and Interest Receivable, $500; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500
D)debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000, Gain on Sale of Investments, $4,500, and Interest Revenue, $500

Accepted Answer

The purchase price of the bonds was $100,000 and they were sold for $104,500 plus $500 in accrued interest. Therefore, the total proceeds received from the sale were $105,000. The journal entry to record the sale of the bonds would be to debit Cash for $105,000 and credit Investment-Evans Company Bonds for $100,000 to remove the bonds from the books. The difference between the proceeds ($105,000) and the cost of the investment ($100,000) is a gain on sale of investments, which should be credited for $4,500. Lastly, the accrued interest of $500 should be recognized as Interest Revenue, which should also be credited. Thus, the journal entry would be: 
Debit: Cash $105,000 
Credit: Investment-Evans Company Bonds $100,000 
Credit: Gain on Sale of Investments $4,500 
Credit: Interest Revenue $500

Quiz 29: Investments

The equity method of accounting for investments

When shares of stock held as an investment are sold, the difference between the proceeds and the balance of the investment account is recorded as a(n)

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 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

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

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

What are the total proceeds from the February 1 sale?

Interest revenue on bonds is reported

Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of bonds at 97. The journal entry for the purchase would include a

The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is

The fair value method of accounting for stock

Which of the following stock investments should be accounted for using the fair value method?

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to

Which of the following items would not affect the investor's income for the period?

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the

Which of the following statements is not a reason a company may purchase another company's stock?

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