Deck 15: Investments

Question 1

An equity security represents a credit relationship with another company or governmental entity.

Answer 1

False

Question 2

Investment income may come from interest earned from debt investments, dividends earned from stock investments, and/or increases in the market value of the security.

Answer 2

True

Question 3

Equity securities are represented by a certificate, such as a stock certificate, and are commonly traded in the stock market.

Answer 3

True

Question 4

An equity security does not represent an ownership interest in a corporation, although it pays dividends.

Question 5

Which of the following is an example of a security?

A) dividends
B) municipal bond
C) interest expense
D) depreciation

Question 6

Which of the following is true of securities?

A) They are commonly traded on an exchange.
B) They are assets traded between companies working in the same industry.
C) They are intangible assets traded in the stock exchange.
D) They don't represent any ownership interests.

Question 7

A(n) ________ is represented by a certificate and is commonly traded on an exchange.

A) inventory
B) intangible asset
C) interest
D) security

Question 8

Long-term investments are also known as marketable securities.

Question 9

A security is a:

A) regulation dealing with the transactions of investments.
B) system aimed at protecting the interests of the market participants.
C) share or interest representing financial value.
D) process related to the valuation of a financial instrument.

Question 10

A security is a share or interest representing financial value.

Question 11

Long-term investments are all investments that are not short-term.

Question 12

Held-to-maturity investments are categorized as long-term assets on the balance sheet, irrespective of the maturity date.

Question 13

Trading investments are categorized as noncurrent assets.

Question 14

A preferred stock is an example of a debt security.

Question 15

Held-to-maturity investments are categorized as current assets or long-term assets on the balance sheet, depending on the maturity date.

Question 16

Short-term investments are investments in debt and equity securities that are highly illiquid.

Question 17

Depending on the maturity date, the held-to-maturity investment will be reported as a current asset or a long-term asset on the balance sheet.

Question 18

The owner of a bond or stock of a corporation is referred to as the investor.

Question 19

Debt securities do not include U.S. government securities.

Question 20

All available-for-sale investments are reported as long-term assets on the balance sheet.

Question 21

Which of the following is classified as a current asset in the balance sheet?

A) marketable securities
B) real estate investments
C) fixed assets
D) equipment

Question 22

Which of the following financial instruments pay dividends?

A) futures contracts
B) real estate securities
C) debt securities
D) equity investments

Question 23

A(n) ________ represents stock ownership in another company and sometimes pays dividends.

A) debt security
B) forward contracts
C) futures contract
D) equity security

Question 24

Trading investments:

A) include debt and equity securities that the investor expects to hold longer than one year or debt or equity securities that are not readily marketable.
B) are investments in debt and equity securities that are highly illiquid and that the investor intends to keep till their maturity.
C) are investments in debt securities, the investor intends to hold until maturity.
D) are investments in debt securities or equity securities in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future.

Question 25

Which of the following securities pay a dividend?

A) corporate bonds
B) common stocks
C) debt securities
D) U.S. Government bonds

Question 26

Which of the following is an example of investment income from securities?

A) deferred tax assets
B) depreciation of long-term assets
C) sale of fixed assets
D) interest earned from debt investments

Question 27

U.S. government securities are:

A) real estate investments.
B) equity securities.
C) debt securities.
D) forward contracts.

Question 28

Companies invest in trading investments with the intent of:

A) increasing the amount of long-term assets.
B) gaining the controlling rights of the investee.
C) holding the investment till maturity.
D) generating a profit on a quick sale.

Question 29

Long-term investments:

A) should be reported in the liabilities section of the balance sheet.
B) are investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less.
C) include debt and equity securities that the investor expects to hold longer than one year or debt or equity securities that are not readily marketable.
D) are investments in debt securities or equity securities in which the investor holds less than 20% of the voting stock and that the investor plans to sell in the very near future.

Question 30

Trading investments are categorized in the balance sheet as:

A) fixed assets.
B) current assets.
C) intangible assets.
D) short-term liabilities.

Question 31

Which of the following will be classified as a held-to-maturity investment?

A) machinery
B) land
C) bond
D) equity investment

Question 32

An equity security:

A) represents a credit relationship with another company or governmental entity.
B) is a standardized contract between two parties to buy oil at a set price.
C) represents stock ownership in another company and sometimes pays dividends.
D) is a financial instrument which entitles the holder to receive periodic interest.

Question 33

Marketable securities are also known as:

A) short-term investments.
B) held-to-maturity investments.
C) debt investments.
D) long-term investments.

Question 34

Short-term investments:

A) include debt and equity securities that the investor expects to hold for more than a year.
B) are investments in debt securities or equity securities in which the investor holds less than 50% of the voting stock and that the investor plans to sell in the very near future.
C) are investments in debt and equity securities that are highly liquid and that the investor intends to sell in one year or less.
D) are investments in debt securities, and the investor intends to hold them until maturity.

Question 35

A debt security:

A) represents a credit relationship with another company or governmental entity, and typically pays interest for a fixed period.
B) represents stock ownership in another company and sometimes pays dividends.
C) is a standardized contract between two parties to buy or sell an underlying security at a predetermined price on a specific date.
D) is a cash market transaction in which the ownership of the underlying asset is deferred until a specific date.

Question 36

Which of the following securities make an interest payment?

A) equity securities
B) preferred stocks
C) corporate bonds
D) significant interest investment

Question 37

A ________ is an example of equity securities.

A) preferred stock
B) municipal bond
C) corporate bond
D) U.S. Government bond

Question 38

________ are categorized as either current assets or long-term assets on the balance sheet, depending on the maturity date.

A) Equity investments
B) Matured investments
C) Trading investments
D) Held-to-maturity investments

Question 39

Which of the following is true of debt securities?

A) The payments made by debt securities are perpetual in nature.
B) Debt securities typically pay interest for a fixed period.
C) Debt securities include preferred stocks.
D) Debt securities represent ownership interests of the investors.

Question 40

Which of the following is an example of debt securities?

A) preferred stocks
B) forex investment
C) common stocks
D) corporate bonds

Question 41

Which of the following is true of available-for-sale (AFS) investments?

A) They are always reported as current assets in the balance sheet.
B) They are always reported as long-term assets in the balance sheet.
C) They are reported as current assets on the balance sheet only if the business expects to sell them within the first two years.
D) They are reported as long-term assets on the balance sheet only if they are planned to be held for longer than a year.

Question 42

Which of the following is a condition to record an investment as an available-for-sale security?

A) There should not be any annual cash flows from the investment.
B) It should have a maturity of less than two years.
C) It should be a debt security.
D) The ownership in the voting stock of the investee should be less than 20%.

Question 43

When a company invests in a long-term bond investment by paying cash, the total assets remain unchanged

Question 44

When a firm collects the face value of a bond investment at maturity, the total assets increase.

Question 45

When a firm collects the face value of a long-term investment in bonds at maturity:

A) both assets and equity of the firm remains unchanged.
B) both assets and liabilities of the firm increase.
C) both assets and equity of the firm increase.
D) liabilities decrease and equity increases.

Question 46

Available-for-sale (AFS) investments are reported as ________ if the business expects to sell them within one year.

A) current assets
B) equity
C) long-term assets
D) either current assets or long-term assets

Question 47

Accruex Corporation has excess cash of $25,000 and invests the same amount in corporate bonds on March 30, 2015. The bonds will mature in two years from the date of purchase. The company plans to use the cash from the bonds for its business expansion after the bonds mature in 2017. Based on the information provided, which of the following will be included in the journal entry on March 30, 2015?

A) a debit to Long-term Investments-Held-to-Maturity for $25,000
B) a debit to Short-term Investments-US Treasury Notes for $25,000
C) a debit to Long-term Investments-Available-for-Sale for $25,000
D) a credit to Long-term Investments-Available-for-Sale for $25,000

Question 48

When a firm receives interest revenue on a bond, the equity remains unchanged.

Question 49

Held-to-maturity investments applies only to debt securities because:

A) these securities earn periodic interest.
B) equity securities do not mature on a specific date.
C) these are long-term investments.
D) equity securities are held for a very short period.

Question 50

When a company receives interest revenue on a bond which has a maturity of five years:

A) long-term assets decrease.
B) long-term assets increase.
C) equity increases.
D) current assets decrease.

Question 51

At the maturity of a bond investment, the journal entry has:

A) a debit to Cash and a credit to the Short-term Investments account.
B) a debit to the Short-term Investments account and a credit to Cash.
C) a debit to the Interest Revenue and a credit to Cash.
D) a debit to Cash and a credit to Interest Revenue.

Question 52

If a debt security is purchased at a discount, the discount must be amortized when the interest revenue is earned.

Question 53

Debra Technologies invested $50,000 to buy $50,000 face value, 8%, five-year in municipal bonds on January 2, 2010. The bonds will mature on January 2, 2015. The bonds pay interest semiannually on January 2 and July 2 every year till maturity. Based on the information provided, which of the following will be included in the journal entry for the transaction on January 2, 2014?

A) a credit to Interest Revenue for $4,000
B) a debit to Interest Revenue for $4,000
C) a credit to Interest Revenue for $2,000
D) a debit to Interest Revenue for $2,000

Question 54

When a company invests in a bond which has a maturity greater than one year and pays cash:

A) equity remains unchanged.
B) current asset increases.
C) liabilities increase.
D) total assets increases.

Question 55

Significant interest investments are reported as ________ on the balance sheet.

A) current assets
B) either current assets or current liabilities
C) long-term assets
D) either current assets or long-term assets.

Question 56

Which of the following is true of the accounting entries for debt securities?

A) The receipt of interest revenue is recorded with a debit to Interest Revenue and a credit to Cash.
B) Investments in debt securities are recorded at cost, including any brokerage fees paid.
C) The receipt of interest revenue is recorded with a debit to Cash and a credit to Long-term Securities-Held-to-Maturity.
D) Debt securities disposed of at maturity are recorded with a debit to the Short-term or Long-term Investments account and a credit to Cash.

Question 57

Debra Technologies invested $50,000 to buy $50,000 face value, 8%, five-year in municipal bonds on January 2, 2010. The bonds will mature on January 2, 2015. The bonds pay interest semiannually on January 2 and July 2 every year till maturity. When the company receives interest payments, how will the balance sheet line items be affected?

A) Assets will decrease.
B) Total asset will remain unchanged.
C) Liabilities will decrease.
D) Equity will increase.

Question 58

Available-for-sale (AFS) investments that are planned to be held longer than a year are reported as:

A) equity.
B) current assets.
C) long-term assets.
D) either current assets or long-term assets.

Question 59

Jane Company has excess cash of $100,000 and invests the same amount in corporate bonds on March 30, 2015 that mature twenty years from the date of purchase. The company plans to keep the bonds until maturity. Based on the information provided, which of the following is true of the balance sheet line items on March 30, 2015?

A) Liabilities will increase.
B) Equity will decrease.
C) Long-term assets will decrease.
D) Total assets will remain unchanged.

Question 60

________ are equity securities in which the investor owns 20% or more, but less than 50%, of the investee's voting stock.

A) Held-to-maturity investments
B) Significant interest investments
C) Controlling interest investments
D) Available-for-sale investments

Question 61

Significant interest investments must be accounted for using the equity method.

Question 62

Green Services invests its excess cash in Creative Technologies and acquires 1,300 shares for $22.50. Green Services owns less than 1% of Creative's voting stock and plans to hold the stock for two years. Which of the following is the correct journal entry for the transaction?

A) $$\begin{array} { | c | r | r | } \hline \text { Long-term Investments-Held-to-Maturity } & 29,250 & \\\hline \text { Cash } & & 29,250 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 29,250 & \\\hline \text { Long-term Investments-Held-to-Maturity } & & 29,250 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 29,250 & \\\hline \text { Long-term Investments-Available-for-Sale } & & 29,250 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Long-term Investments-Available-for-Sale } & 29,250 & \\\hline \text { Cash } & & 29,250 \\\hline\end{array}$$

Question 63

Gain on Disposal of a trading investment is an equity account and is reported in the Other Revenues and (Expenses) section of the income statement.

Question 64

In the journal entry for the dividends received for available-for-sale investments, the Dividend Revenue account will be debited.

Question 65

Maurice Corporation invested $100,000 to acquire 20,000 shares of Delta Technologies on March 1, 2015. Delta pays a cash dividend of $0.25 per share on July 2, 2015. The investment is classified as an available-for-sale investment. Based on the information provided, which of the following is true of the balance sheet as of July 2, 2015?

A) Total assets in the balance sheet will remain unchanged.
B) Current assets in the balance sheet will remain unchanged.
C) Equity in the balance sheet will increase.
D) Total liabilities in the balance sheet will increase.

Question 66

A company that is controlled by another corporation is called a parent company.

Question 67

Consolidation accounting is the way to combine the financial statements of two or more companies that have the same owners.

Question 68

The Long-term Investments account is debited for the receipt of a dividend on an equity-method investment because the dividend increases the investee's equity.

Question 69

Which of the following is true of the comparison between equity securities and debt securities?

A) Both debt securities and equity securities represent the ownership interest of a firm.
B) Equity securities earn dividend revenue, whereas debt securities earn interest revenue.
C) Neither debt securities nor equity securities mature at a particular date.
D) Both debt securities and equity securities pay interest.

Question 70

When a company receives a cash dividend on its equity investments, which represents 2% of the investee, its total equity will remain unaffected.

Question 71

Investments accounted for by the equity method are recorded at cost at the time of purchase.

Question 72

Consolidated statements combine the balance sheets, income statements, and cash flow statements of the parent company with those of its controlling interest affiliates.

Question 73

When a company makes investments in equity securities with less than 20% ownership using idle cash, its total equity will increase.

Question 74

When a company invests in equity securities with 20% or more, but less than 50%, ownership in the investee's voting stock, the investor can significantly influence the investee's decisions.

Question 75

Which of the following is the major difference between the accounting for equity securities and debt securities?

A) Debt securities are classified as liabilities, while equity securities are classified as assets.
B) Most equity securities are classified as held-to-maturity and most debt securities are classified as trading investments.
C) The revenue from debt securities is interest, while revenue from equity securities is dividends.
D) All debt securities have a maturity date whereas only a few equity securities have a maturity date.

Question 76

Joan Steel purchases 10,000 shares of Smith Metals for $34,000 in exchange of cash and now holds 3.2% voting stock of Smith Metals. Assuming no other transaction happened during the year, the ________ in the balance sheet will increase.

A) long-term investments
B) cash
C) total assets
D) current assets

Question 77

Equity securities, in which the investor owns less than 20% ownership in the voting stock of the investee, can be either trading investments or available-for-sale investments.

Question 78

Green Services invests its excess cash in Creative Technologies and acquires 1,000 shares for $53.25. Green Services owns less than 1% of Creative's voting stock and plans to hold the stock for two years. While preparing the journal entry to record this transaction:

A) Long-term Investments-Available-for-Sale will be debited for $53,250.
B) Long-term Investments-Held-to-Maturity will be debited for $53,250.
C) Long-term Investments-Trading Investments will be credited for $53,250.
D) Long-term Investments-Significant Interest Investments will be debited for $53,250.

Question 79

Equity securities in which the investor owns less than 20% ownership in the voting stock of the investee can be:

A) significant interest investments.
B) controlling interest investments.
C) held-to-maturity investments.
D) either trading investments or available-for-sale investments.

Question 80

Maurice Corporation invested $100,000 to acquire 20,000 shares of Delta Technologies on March 1, 2015. On July 2, 2015, Delta pays a cash dividend of $0.25 per share. The investment is classified as an available-for-sale investment. Which of the following is the correct journal entry to record the transaction on July 2, 2015?

A) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 5,000 & \\\hline \text { Long-term Investments-Trading Investments } & & 5,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 5,000 & \\\hline \text { Long-term Investments-Available-for-Sale } & & 5,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 5,000 & \\\hline \text { Long-term Investments-Held-to-Maturity } & & 5,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 5,000 & \\\hline \text { Dividend Revenue } & & 5,000 \\\hline\end{array}$$