Question 1

Bond sinking funds are examples of short-term investments.

Accepted Answer

Bond sinking funds are not examples of short-term investments. Sinking funds are created by issuers of bonds to set aside money periodically to retire part of the bond issue before maturity. This is a form of long-term financial planning by the issuer.

Question 2

A company holds $40,000 of 7% bonds as a held-to-maturity security.Assuming all prior interest entries have been accounted for,the bondholder's journal entry to record receipt of the semiannual interest payment includes a debit to Cash for $2,800 and a credit to Interest Revenue for $2,800.

Accepted Answer

$40,000 * 7% * ½ year = $1,400

Question 3

Long-term investments can include funds earmarked for special purposes such as bond sinking funds.

Accepted Answer

Long-term investments can include various types of funds, including those that are set aside for specific purposes such as bond sinking funds, which are used to retire a company's outstanding debt. These types of investments are typically meant to be held for an extended period of time and are intended to provide a steady stream of income or to achieve a specific financial goal.

Question 4

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

Accepted Answer

Comprehensive income includes all changes in equity other than those resulting from owners' investments and distributions (dividends), such as unrealized gains/losses on investments, changes in foreign currency translation, and gains/losses from certain financial instruments.

Question 5

Any cash dividends received from equity securities are recorded as Dividend Expense.

Accepted Answer

Cash dividends received from equity securities are recorded as Dividend Income, not Dividend Expense. Dividend Expense is a term used when a company declares dividends to be paid to shareholders.

Question 6

When an equity security 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.

Accepted Answer

When an equity security is sold, the sale proceeds are compared with the cost, and if the cost is greater than the proceeds, a loss on the sale of the security is recorded.

Question 7

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.

Accepted Answer

The answer of When the cost of a short-term held-to-maturity...

Question 8

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

Accepted Answer

Long-term investments are intended to be held for a period longer than one year and are typically made to generate income or capital gains. They are not intended for use in current operations, but rather for future growth or other strategic purposes.

Question 9

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

Accepted Answer

Debt securities are recorded at cost when purchased and interest revenue is recognized when earned, in accordance with the cost accounting method. This approach is consistent with generally accepted accounting principles.

Question 10

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

Accepted Answer

Short-term investments are defined as investments that are expected to be converted into cash within one year or the current operating cycle of the business, whichever is longer. They are also expected to be easily convertible into cash. Therefore, this statement is true.

Question 11

Consolidated statements are prepared as if a company is organized as one entity,with the amounts allocated for subsidiaries reported in the investment accounts.

Accepted Answer

Consolidated statements are prepared by combining the financial statements of the parent company and its subsidiaries, presenting them as one single entity. The amounts for subsidiaries are not merely reported in the investment accounts; they are fully integrated into the consolidated balance sheet, income statement, etc., eliminating intercompany transactions and balances.

Question 12

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

Accepted Answer

Equity securities represent ownership in a company, while creditor relationships are represented by debt securities such as notes, bonds, and certificates of deposit. Therefore, the statement is false.

Question 13

An investor purchased $50,000 of bonds and holds them to maturity.The investor's journal entry to record the proceeds should include a debit to Cash for $50,000 and a credit to Long-Term Investments for $50,000.

Accepted Answer

The investor purchased bonds worth $50,000, so when the bonds mature, they will receive the full face value of the bonds. Hence, the journal entry to record the proceeds should include a debit to Cash for $50,000, and a credit to Long-Term Investments for $50,000.

Question 14

Consolidated financial statements show the financial position,results of operations,and cash flows of all entities under the parent's control.

Accepted Answer

This statement is true.

Question 15

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

Accepted Answer

The equity method with consolidation is used for investments where the investor has significant influence over the investee and can control its operations. It is therefore used for investments with controlling influence.

Question 16

When an investor company owns more than 25% of the voting stock of an investee company,it has a controlling influence.

Accepted Answer

The answer of When an investor company owns more than...

Question 17

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

Accepted Answer

Long-term investments are investments made by a company in land, building or other assets that are not used in the company’s operations but have the potential to earn a profit in the future. These investments are typically held for a longer period of time, usually more than one year.

Question 18

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

Accepted Answer

Cash equivalents are investments that can be quickly converted to cash and have a maturity date of three months or less. Examples include Treasury bills, money market funds, and commercial paper.

Question 19

Investments in trading securities are accounted for using the equity method with consolidation.

Accepted Answer

Investments in trading securities are usually accounted for using the fair value method, where changes in the market value of the securities are recorded in the income statement. The equity method with consolidation is typically used for long-term investments in other companies where the investor has significant influence or control over the investee.

Question 20

Debt securities are recorded at cost when purchased.

Accepted Answer

Debt securities are recorded at cost when purchased, which is the amount paid to acquire them including any transaction costs. This cost is then adjusted for any amortization of premiums or accretion of discounts over the life of the security.

Quiz 15: Investments and International Operations