Question 1

Investment in Available-for-Sale Securities is reported on the:

Accepted Answer

Investment in Available-for-Sale Securities is reported on the balance sheet at fair value. This is because available-for-sale securities are considered as a component of the company's investments and are expected to be held for an indefinite period of time, subject to management's discretion to sell them at any time. Therefore, fair value is the appropriate valuation method in accordance with Generally Accepted Accounting Principles (GAAP). The income statement is not affected by changes in the fair value of available-for-sale securities, but rather by gains or losses realized when they are actually sold.

Question 2

When a company sells a short-term available-for-sale security,the Gain on the Sale of the Investment in Available-for-Sale Securities is reported on the:

Accepted Answer

The gain on the sale of the investment in available-for-sale securities is reported on the "other revenues and gains" section of the income statement. This section includes any non-operating gains or losses that do not result from the company's main business activities. Selling a short-term available-for-sale security is not a part of the company's main business activities, so the gain on the sale would be reported in this section of the income statement.

Question 3

On March 1,2014,Emma's Toy Store purchased Hasbro stock for $33,400,as a short-term available-for-sale security.On April 10,dividends of $1,075 were received from the Hasbro stock.On December 31,2014,the end of Emma's Toy Store's accounting year,the Hasbro stock had a market value of $34,300.On January 1,2015,Emma's Toy Store sold all of the Hasbro stock for $35,000.
Required:
Prepare the journal entries needed to record the transactions for 2014 and 2015.Explanations are not required.

Accepted Answer

The answer of On March 1,2014,Emma's Toy Store purchased Hasbro...

Question 4

The Target Company has current assets of $10,000 and current liabilities of $8,000.They are concerned about their current ratio and are considering paying Accounts Payable totaling $3,000.The Target Company has a loan with National Bank which requires them to maintain a minimum current ratio of 1.4.
Required:
1.What is the formula for the current ratio?
2.Compute the current ratio before the possible payment of the liabilities of $3,000.
3.Compute the current ratio assuming that Target Company pays the $3,000 in current liabilities.
4.Compute the current ratio assuming that Target Company buys inventory of $3,000 on account.Ignore Requirement 3.
5.Compute the current ratio assuming that Target Company sells short-term investments with a carrying value of $3,000 for $3,000.Ignore Requirements 3 and 4.

Accepted Answer

The answer of The Target Company has current assets of...

Question 5

On April 3,Jenny's Store purchased stock in New Company for $36,000,and classified it as a short-term available-for-sale security.On April 28,Jenny's Store received dividends from New Company of $1,250.On June 30,the New Company stock had a fair value of $32,000.
Required:
1.Prepare the journal entries needed to record the transactions.Explanations are not required.
2.What will Jenny's Store report on its income statement for the year ended December 31?

Accepted Answer

The answer of On April 3,Jenny's Store purchased stock in...

Question 6

The amount of revenue to be recognized in a sale transaction is the cash value of the goods or services transferred from the seller to the buyer.

Accepted Answer

Revenue is recognized based on the fair value of the consideration received or receivable, which is typically the cash value of the goods or services transferred.

Question 7

Smith Corporation purchases $620,000 of TMI Corporation stock on October 18,2015.Smith Corporation classifies this investment as a trading security.On December 1,Smith Corporation received a cash dividend of $12,000 on the TMI Corporation stock.On December 31,2015,Smith Corporation's investment in TMI Corporation has a fair value of $600,000.
Required:
Prepare the necessary journal entries.Explanations are not required.

Accepted Answer

The answer of Smith Corporation purchases $620,000 of TMI Corporation...

Question 8

An Investment in Available-for-Sale Securities are purchased for $400,000 and have a fair value of $420,000 at the end of the year.The required journal entry at year-end will have a credit to:

Accepted Answer

The unrealized gain on investment in available-for-sale securities should be credited at year-end. This is because these securities are classified as available-for-sale, which means that they are not held for trading purposes but are intended to be held for a longer period of time. Any changes in the fair value of available-for-sale securities are recognized as unrealized gains or losses in other comprehensive income (OCI), which is a component of stockholders' equity. Therefore, the credit entry should be made to Unrealized Gain on Investment in Available-for-Sale Securities.

Question 9

Trading securities purchased for $400,000,had a fair value of $410,000 at the end of the year.The adjusting entry to record this difference included a credit to:

Accepted Answer

When the fair value of trading securities increases, it generates an unrealized gain for the company. This gain is recorded in the Unrealized Gain on Trading Securities account, which is an equity account. Therefore, the adjusting entry to record the increase in the fair value of the securities would include a credit to the Unrealized Gain on Trading Securities account. The other options are not appropriate in this scenario because Retained Earnings is used to record net income, Investment in Trading Securities is a balance sheet account that reflects the cost of the securities, and Accumulated Other Comprehensive Income is used to record other types of gains and losses that are not considered part of net income.

Question 10

Which statement is FALSE?

Accepted Answer

Held-to-maturity securities can only be debt securities, not stock investments. Therefore, statement B is false.

Question 11

Strategies to increase the current ratio may include:

Accepted Answer

All of the strategies listed can potentially increase the current ratio. 
- Increasing sales will increase current assets, which will increase the current ratio. 
- Paying off current liabilities will decrease current liabilities, which will also increase the current ratio. 
- Reclassifying long-term investments as short-term investments will increase current assets and decrease long-term assets, leading to an increase in the current ratio.

Question 12

Trading securities purchased in 2012 for $90,000,had a fair value of $92,000 on December 31,2012.At December 31,2013 the securities had a fair value of $95,000.The journal entry on December 31,2013 would include a:

Accepted Answer

The fair value increased from $92,000 to $95,000, a $3,000 gain. Therefore, debit the Investment in Trading Securities account for $3,000 to reflect the increase in value.

Question 13

Unrealized Gains on Investment in Available-for-Sale Securities are reported on the:

Accepted Answer

Unrealized gains on investment in available-for-sale securities are reported as a component of other comprehensive income in the stockholders' equity section of the balance sheet, not on the income statement or statement of retained earnings. They are also not reported as a current asset on the balance sheet because their value may fluctuate depending on market conditions.

Question 14

The shipping terms in the sales contract determine when ownership of goods changes hands between the buyer and the seller.

Accepted Answer

The shipping terms, also known as "incoterms", establish who bears the risk and cost of transportation, as well as when the goods are transferred from the seller to the buyer. Therefore, they determine at what point ownership of goods changes hands.

Question 15

When a company receives a cash dividend from a short-term available-for-sale security,the journal entry is:

Accepted Answer

The answer of When a company receives a cash dividend...

Question 16

Michael Company purchased a trading investment that had a carrying amount of $35,000 when they decided to sell it.Michael Company purchased the investment for $31,000.If Michael Company sold this investment for $45,000,Michael will have a(n):

Accepted Answer

The gain on sale is calculated by subtracting the carrying amount from the sale price: $45,000 - $35,000 = $10,000. Since the sale price exceeds the purchase price, it is a gain. Therefore, the correct answer is B, Gain on Sale of Trading Security for $10,000.

Question 17

Which statement is TRUE?

Accepted Answer

Held-to-maturity securities are debt securities only as they are bought with the intention of holding them until maturity. Available-for-sale and trading securities can be both debt and equity securities. Additionally, held-to-maturity securities are reported as long-term assets only as they are not intended to be sold in the near future.

Question 18

Sales discounts and sales returns and allowances are deducted from gross revenue to determine net sales revenue.

Accepted Answer

This is correct. Sales discounts and sales returns and allowances are subtracted from gross sales to calculate net sales revenue. This is because these discounts and returns represent a reduction in revenue earned from the sale of goods or services. Net sales revenue is the amount of revenue that the company actually earns after accounting for these deductions.

Question 19

Jones Company purchases 1,000 shares of Microsoft Corporation stock at $34 per share on July 31.The company expects to hold the stock for 6 months and then sell it.At December 31,the market price of the stock is $32 per share.
Required:
1.What type of investment is this for Jones Company? Explain your answer.
2.Journalize the purchase on July 31 and the necessary adjustment on December 31.Explanations are not required.
3.Discuss how Jones Company would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31.

Accepted Answer

The answer of Jones Company purchases 1,000 shares of Microsoft...

Question 20

To be classified as a current asset,an investment must meet the following criteria which include:

Accepted Answer

All the choices listed are criteria that an investment must meet to be classified as a current asset. Therefore, the best choice is D, "all of the above."

Quiz 5: Short-Term Investments Receivables