Question 1

On March 1, 2011, Anya's Toy Store purchased Hasbro stock for $33,400 with the intent of selling the stock at a profit within a few months. On April 10, dividends of $1,075 were received from the Hasbro stock. On December 31, 2011, the end of Anya's Toy Store's calendar year, the Hasbro stock had a market value of $32,300. On January 3, 2012, Anya's Toy Store sold all of the Hasbro stock for $34,000.
Prepare the journal entries needed to record the transactions for 2011 and 2012.

Accepted Answer

The answer of On March 1, 2011, Anya's Toy Store...

Question 2

On April 3, Evan's Boat Store purchased Yacht stock for $26,000 with the intent of selling the stock at a profit before the boating season starts in two months. On April 28, Evan's Boat Store received dividends from Yacht of $850. On May 25, the Yacht stock was sold for $24,500.
Required:
1. How will Evan's Boat Store classify the investment?
2. Prepare the journal entries needed to record the transactions.
3. What will Evan's Boat Store report on its income statement for the year ended December 31?

Accepted Answer

The answer of On April 3, Evan's Boat Store purchased...

Question 3

An unrealized gain:

Accepted Answer

An unrealized gain is recorded when the fair value of a trading security is more than its cost. "Unrealized" means that the gain has not been realized through a sale, meaning the security is still held by the company. If the company sells the security for more than its cost, then it would be a realized gain. If the company sells the security for less than its cost, it would be a realized loss.

Question 4

The ABC Company has current assets of $10,000 and current liabilities of $8,000. They are concerned about their current ratio and are considering paying liabilities totaling $3,000. The ABC Company has a loan with First 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 ABC Company pays the $3,000 in current liabilities.
4. What are some possible consequences if ABC's current ratio falls below the required 1.4?

Accepted Answer

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

Question 5

When a company sells a trading investment, the gain or loss on the sale is reported in the:

Accepted Answer

The gain or loss on the sale of a trading investment is reported as a revenue, gain, or loss in the income statement. Therefore, the most appropriate choice is option D, which refers to the other revenue, gains, and losses section of the income statement.

Question 6

ABC Company purchases a trading security for $12,000. The entry to record this transaction will include a:

Accepted Answer

The purchase of a trading security is recorded by debiting the Investment account to reflect the increase in assets.

Question 7

When a company receives a cash dividend on a trading security:

Accepted Answer

When a company receives a cash dividend on a trading security, it increases its cash (an asset) and recognizes dividend income, which increases revenue.

Question 8

Trading securities purchased in 2011 for $90,000 were valued at $92,000 on December 31, 2011. 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 increase in fair value of the securities from $92,000 to $95,000 represents an unrealized gain of $3,000 ($95,000 - $92,000). Therefore, the journal entry on December 31, 2013 should include a debit to the Investment account for the original cost of $90,000 and a credit to the Unrealized Gain account for $3,000, resulting in a total credit of $93,000. The answer choices of A and C both involve a credit of $5,000, which is incorrect. The answer choice of D involves a debit to the Unrealized Loss account, which is not applicable since there is an unrealized gain.

Question 9

Strategies to increase the current ratio may include:

Accepted Answer

Increasing sales can boost current assets, paying off current liabilities reduces them, and reclassifying investments can artificially improve the ratio.

Question 10

Trading securities are:

Accepted Answer

Trading securities need to be adjusted to their current fair value before the financial statements are prepared in order to reflect their market value accurately. This is because trading securities are bought and sold frequently with the intention of generating profits from short-term price fluctuations. As a result, they are shown at fair value on the balance sheet, and any unrealized gains or losses are reported on the income statement. While trading securities may be adjusted to their current fair value on a daily basis, it is not necessary to do so in order to prepare financial statements accurately.

Question 11

A realized gain occurs when the:

Accepted Answer

A realized gain occurs when the sales price is greater than the carrying amount of the investment. This means that the investor has sold the investment for a profit, resulting in a gain. Conversely, a realized loss would occur if the sales price is less than the carrying amount of the investment. The fair value of the investment versus its cost may be relevant in determining the carrying amount, but the critical factor for realizing a gain is the sales price exceeding the carrying amount. Choice C may be true, but it does not necessarily indicate a realized gain unless the investor has sold the investment at a price greater than the cost. Choice D reflects an unrealized loss, where the current value is less than the cost, but does not address the question of realized gain or loss.

Question 12

A company's trading security has a fair value which exceeds its cost. When recording the journal entry:

Accepted Answer

If the fair value of a trading security exceeds its cost, this means that the security has unrealized gains. The Unrealized Gain account should be credited to reflect the increase in the value of the investment. Therefore, option B is the correct answer. The Investment account would not be credited as this account is typically used to record the cost of the investment. Additionally, the Unrealized Loss account would not be debited as there is no loss to record.

Question 13

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

Accepted Answer

The adjusting entry to record the increase in value of trading securities involves a credit to the unrealized gain on investments account, which is a component of comprehensive income. Retained earnings would be affected only if the securities were sold, while short-term investments account is used to record the initial purchase.

Question 14

Trading securities:

Accepted Answer

Trading securities are bought and held with the intention of selling them for a profit in a relatively short period of time. As such, they can generate dividend revenue as companies often pay out a portion of their profits in the form of dividends to their shareholders. Option A is not necessarily true as trading securities can be sold for less than their cost if market conditions change. Option B is incorrect as trading securities can include debt securities of another company. Option C is not a requirement for trading securities as their value can fluctuate.

Question 15

Orange Company purchased a trading investment that had a carrying amount of $35,000 when they decided to sell it. Orange purchased the investment for $31,000. If Orange Company sold this investment for $43,000, Orange will have a(n):

Accepted Answer

The answer of Orange Company purchased a trading investment that...

Question 16

Johnson Corporation purchases $620,000 of PM Corporation stock on October 18, 2012. Johnson classifies this investment as a trading security. On December 31, 2012, Johnson Corporation's investment in PM Corporation has a fair value of $610,000. Prepare the necessary journal entries.

Accepted Answer

The answer of Johnson Corporation purchases $620,000 of PM Corporation...

Question 17

Unrealized gains or losses on trading securities are reported on the:

Accepted Answer

The answer of Unrealized gains or losses on trading securities...

Question 18

When a company receives a cash dividend from a trading security, the journal entry includes:

Accepted Answer

When a company receives a cash dividend from a trading security, it is treated as revenue and increases the cash balance of the company. Therefore, the journal entry should include a debit to cash and credit to dividend revenue.

Question 19

Credit Company purchases 1,000 shares of Microsoft Corporation stock at $35 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 $42 per share.
1. What type of investment is this for Credit Company? Explain your answer.
2. Journalize the purchase on July 31 and the necessary adjustment on December 31.
3. Discuss how Credit 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 Credit Company purchases 1,000 shares of Microsoft...

Question 20

When dealing with gains and losses on trading securities:

Accepted Answer

Unrealized gains and losses on trading securities are recognized in the income statement and must be labeled as "unrealized" to distinguish them from realized gains and losses.

Quiz 5: Short-Term Investments Receivables