Deck 10: Investments

Question 1

Which of the following is true of debt securities?

A) Debt securities entitle the holder to receipt of a share of profit in the form of dividends.
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.

Answer 1

B

Question 2

A company's investments in stock or bonds cannot include the acquisition of an entire company.

Answer 2

False

Question 3

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

Answer 3

C

Question 4

Debt securities represent a credit relationship with another company or governmental entity.

Question 5

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

Question 6

Investments in equity securities are classified into three specific types based on the investor's level of influence over the investee company.

Question 7

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

A) inventory
B) investee
C) interest
D) security

Question 8

Just as individuals invest in a variety of companies' stocks and bonds, the same is true for businesses.

Question 9

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

Question 10

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

A) Debt securities represent stock ownership in a company whereas equity securities represent a credit relationship with the company.
B) Equity securities may earn dividend revenue whereas debt securities earn interest revenue.
C) Neither debt securities nor equity securities mature at a stated date.
D) Both debt securities and equity securities pay interest.

Question 11

Securities are ________.

A) commonly traded on an exchange
B) assets traded between companies working in the same industry
C) owned by the investee
D) always considered to be long-term investments

Question 12

A preferred stock is an example of a debt security.

Question 13

An investor is the corporation that issued the bond or stock to the investee.

Question 14

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

Question 15

Securities are represented by a certificate and are commonly traded on an exchange.

Question 16

A security is a share or interest representing financial value.

Question 17

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

Question 18

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 19

Which of the following is an example of debt securities?

A) preferred stocks
B) real estate
C) common stocks
D) corporate bonds

Question 20

Which of the following is NOT an example of a security?

A) preferred stock
B) municipal bond
C) Treasury bills
D) All are examples of a security.

Question 21

Which of the following securities typically pay interest?

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

Question 22

In considering whether a company should invest in debt or equity securities of another company, which of the following statements is incorrect?

A) The company wants to make the best use of its excess cash to generate investment income.
B) Investment income consists of interest earned from equity securities and dividends earned from debt investments.
C) Investment income includes increases in the market value of debt or equity securities.
D) The excess cash that can be invested could be the result of temporary or seasonal business fluctuations.

Question 23

Treasury bills are ________.

A) investments that pay cash dividends
B) equity securities
C) U. S. government debt securities
D) a credit relationship with another company

Question 24

Which of the following securities pay dividends?

A) corporate bonds
B) common stocks
C) debt securities
D) Treasury bills

Question 25

Short-term investments are investments in debt and equity securities that the investor intends to hold for longer than one year.

Question 26

Trading debt investments are categorized as noncurrent assets.

Question 27

A ________ is an example of equity securities.

A) preferred stock
B) municipal bond
C) corporate bond
D) Treasury bill

Question 28

Trading debt investments are categorized as current assets.

Question 29

Regarding debt securities, which of the following statements is incorrect?

A) Debt securities include Treasury bills.
B) Debt securities represent a credit relationship with another company or governmental entity.
C) Debt securities typically pay interest for a fixed period.
D) Debt securities include common and preferred stock.

Question 30

A company may invest in debt or equity securities of other companies to ________.

A) further enhance a business relationship with a key vendor
B) invest borrowed money in an effort to decrease the company's net income
C) weaken the relationship between the investing company and one of its vendors
D) allow the company to use investment income to decrease its annual dividend

Question 31

Which of the following is the least desirable business reason for a company to invest in debt or equity securities?

A) to generate investment income
B) to invest short-term, excess cash
C) C) $\text {to pursue certain business strategies }$

D) to weaken the relationship between the investing company and a key vendor.

Question 32

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

Question 33

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.

Question 34

Depending on the maturity date, held-to-maturity debt investments are categorized as current assets or long-term assets on the balance sheet.

Question 35

An equity security ________.

A) represents a credit relationship with another company or governmental entity
B) is a standardized contract between two parties to acquire various forms of investments
C) represents stock ownership in another company and sometimes pays dividends
D) is a financial instrument that entitles the holder to receive periodic interest

Question 36

Long-term investments 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.

Question 37

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

A) debt security
B) Treasury bill
C) corporate bond
D) equity security

Question 38

List and discuss two common reasons why companies invest in debt or equity securities.

Question 39

Trading debt investments are debt securities which the investor intends to sell in the very near future with the intent of generating a profit on the quick sale.

Question 40

Which of the following may pay dividends?

A) preferred stock
B) investors
C) Treasury bills
D) notes payable

Question 41

Long-term investments ________.

A) include all trading debt investments and held-to-maturity debt investments
B) are investments in debt and equity securities that are readily marketable 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 percent of the voting stock and that the investor plans to sell in the very near future

Question 42

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 until maturity
D) generating a profit on a quick sale

Question 43

Significant influence equity 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 44

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 short period of time

Question 45

No significant influence equity investments generally involve the ownership of less than 20% of the investee's voting stock.

Question 46

Available-for-sale (AFS) debt 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

Which type of debt security is always categorized as a current asset?

A) available-for-sale debt investments
B) trading debt investments
C) held-to-maturity debt investments
D) Each of these choices can be categorized as long-term if the investor intends to hold the investment for longer than one year.

Question 48

________ are equity securities in which the investor owns between 20% and 50% of the investee's voting stock.

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

Question 49

Available-for-sale debt investments include all trading debt and held-to-maturity debt investments.

Question 50

Trading debt investments include ________.

A) debt securities that the investor expects to hold longer than one year or debt securities that are not readily marketable
B) investments in debt securities that are not readily marketable and that the investor intends to hold until they mature
C) investments in debt securities that the investor intends to hold until they mature
D) debt securities that the investor plans to sell in the very near future

Question 51

Which statement regarding investments in equity securities is incorrect?

A) Significant influence equity investments are always reported as long-term assets on the balance sheet.
B) Significant influence equity investments are consolidated into the investor's financial statements.
C) Investments in equity securities are classified into three specific types based on the investor's level of influence over the investee company.
D) Generally, no significant influence exists if there is an ownership interest of less than 20% of the investee's voting stock.

Question 52

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

A) Held-to-maturity debt
B) Serial bond debt
C) Trading debt
D) Available-for-sale debt

Question 53

Available-for-sale (AFS) debt investments that are expected 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 54

Equity securities in which the investor owns less than 20% ownership in the voting stock of the investee generally can be classified as ________ equity investments.

A) significant influence
B) controlling interest
C) held-to-maturity
D) no significant influence

Question 55

Trading debt investments are classified on the balance sheet as ________.

A) current or long-term assets, depending on how long the investor intends to hold the debt securities
B) current assets
C) intangible assets
D) current liabilities

Question 56

Short-term investments ________.

A) are 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 percent of the voting stock and that the investor plans to sell two years after the balance sheet date
C) are investments in debt and equity securities that are readily marketable and that the investor intends to convert to cash within one year
D) are investments in debt securities that the investor intends to hold until maturity

Question 57

Significant influence equity investments are reported as current assets on the balance sheet.

Question 58

Controlling interest equity investments are debt securities in which the investor owns more than 50% of the investee's voting stock.

Question 59

Which of the following will be classified as an available-for-sale debt investment?

A) debt securities which the investor intends to sell in the very near future
B) debt securities the investor intends to hold and has the ability to hold until they mature
C) all investments in Treasury bills
D) all debt securities that are not trading debt investments or held-to-maturity debt investments

Question 60

Equity securities in which the investor lacks the ability to participate in the decisions of the investee company are classified as ________ investments.

A) controlling interest equity
B) no significant influence equity
C) significant influence equity
D) available-for-sale equity

Question 61

Dynamic Software, Inc. invests excess cash of $100,000 in corporate bonds on March 30, 2019. The bonds mature 20 years from the date of purchase. Dynamic plans to hold the bonds until maturity and has the ability to do so. How does the March 30, 2019 transaction affect the accounting equation?

A) liabilities will increase
B) equity will decrease
C) long-term assets will decrease
D) total assets will remain unchanged

Question 63

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

Question 64

Jonas Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of Ridgeline Corporation, at face value, on June 30, 2018. The bonds pay interest on June 30 and December 31. Jonas intends to hold the bonds to maturity. The bonds are disposed of, at face value, on June 30, 2023.
Prepare the journal entry for December 31, 2018 (omit the explanation).

Question 65

Roger Technologies invests $50,000 to acquire $50,000 face value, 8%, five-year corporate bonds on January 2, 2017. The bonds will mature on January 2, 2022. The bonds pay interest semiannually on January 2 and July 2 each year until maturity. When Roger Technologies receives interest payments, how is the accounting equation affected?

A) assets will decrease
B) total assets will remain unchanged
C) liabilities will decrease
D) equity will increase

Question 66

Leonard Technologies invests $68,000 to acquire $68,000 face value, 10%, five-year corporate bonds on December 31, 2014. The bonds will mature on December 31, 2019. The bonds pay interest semiannually on December 31 and June 30 every year until maturity. Assume Leonard Technologies uses a calendar year. Based on the information provided, which of the following will be included in the journal entry for the transaction on December 31, 2018?

A) a credit to Interest Revenue for $6800
B) a debit to Interest Revenue for $6800
C) a credit to Interest Revenue for $3400
D) a debit to Interest Revenue for $3400

Question 67

Montgomery Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of Richmond Corporation, at face value, on June 30, 2018. The bonds pay interest on June 30 and December 31. Montgomery intends to hold the bonds to maturity and has the ability to hold the bonds to maturity. The bonds are disposed of, at face value, on June 30, 2023.
Prepare the journal entry for June 30, 2018 (omit the explanation).

Question 68

When a company pays cash for a long-term investment in bonds, ________.

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

Question 69

Amex Corporation invests excess cash to purchase $25,000 in corporate bonds on March 30, 2018. In addition to the $25,000, Amex also paid a brokerage fee of $1,000. Amex intends to hold the bonds until maturity and has the ability to do so. When the bonds mature on March 30, 2020, Amex plans to use the cash for its business expansion. Which of the following is included in the journal entry on March 30, 2018?

A) a debit to Held-to-Maturity Debt Investments for $25,000
B) a debit to Trading-Debt Investments for $25,000
C) a debit to Held-to-Maturity Debt Investments for $26,000
D) a debit to Trading-Debt Investments for $26,000

Question 70

Investments in debt securities are recorded at cost. Brokerage fees paid are treated as expenses.

Question 71

Hometown Resources, Inc. has a 9% rate of return on total assets and the industry average is 12%. How was the 9% rate of return on total assets computed? Comment on this information.

Question 72

When a company receives interest revenue on a long-term investment in bonds, ________.

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

Question 73

Provide definitions for the following types of investments.

A) Controlling interest equity investment
B) Available-for-sale debt investment
C) No significant influence equity investment

Question 74

Scott Enterprises has excess cash to invest and pays $200,000 to buy $200,000 face value, 8%, five year bonds of Hamilton Company bonds on July 1, 2018. The bonds are issued on July 1, 2018 and pay interest on June 30 and December 31. Scott will record interest revenue every six months for five years.

Question 75

When a company receives interest revenue on a bond investment, total stockholders' equity remains unchanged.

Question 76

Which of the following is a condition for recording an available-for-sale debt investment?

A) The investor intends to hold the debt security until it matures.
B) The investor intends to sell the security in the very near term.
C) The investment must be a debt security.
D) The investor has the ability to hold the security until it matures.

Question 77

Greene Corporation pays $500,000 to acquire 40% of the voting stock of Universal Technologies, Inc. on May 5, 2019. This investment will be classified as a(n) ________.

A) trading equity investment
B) available-for-sale equity investment
C) significant influence equity investment
D) held-to-maturity equity investment

Question 78

Provide definitions for the following types of investments.

A) Held-to-maturity debt investment
B) Significant influence equity investment
C) Trading debt investment

Question 79

When a company acquires a long-term bond investment, by paying cash, total assets remain unchanged.

Question 80

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