Question 1

On June 1, $40,000 of treasury bonds were purchased between interest dates. The broker commission was $600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest revenue will be recorded on July 1?

Accepted Answer

The answer of On June 1, $40,000 of treasury bonds...

Question 2

Which of the following is not a reason to invest excess cash in temporary investments?

Accepted Answer

Investing in temporary investments aims to earn returns and generate income for the company. Influence on another company's operations is not a reason to invest in temporary investments.

Question 3

Temporary investments such as in trading securities are

Accepted Answer

Temporary investments such as in trading securities are recorded at cost but reported at fair market value. This approach reflects the current market conditions and provides a more accurate representation of the investment's value on the balance sheet.

Question 4

A company uses cash to pay all of the following except

Accepted Answer

All of the options listed require the use of cash, so choice A is the correct answer.

Question 5

Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The entry to record the purchase of the bonds would include a

Accepted Answer

The answer of Jacks Corporation purchases $200,000 bonds plus accrued...

Question 6

The cumulative effects of other comprehensive income items are included in retained earnings on the balance sheet.

Accepted Answer

Other comprehensive income items are reported in a separate component of shareholders' equity, not in retained earnings. They are accumulated in the accumulated other comprehensive income (AOCI) account until they are realized.

Question 7

On June 1, $50,000 of treasury bonds were purchased between interest dates. The broker commission was $500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total cost to be debited to the Investment-Treasury Bonds account?

Accepted Answer

The total cost to be debited to the Investment-Treasury Bonds account includes the purchase price of the bonds and the broker commission. 
Purchase price of bonds on June 1 = $50,000 
Broker commission = $500 
Therefore, total cost to be debited = $50,000 + $500 = $50,500

Question 8

Comprehensive income does not affect net income or retained earnings.

Accepted Answer

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, which means it does not directly affect net income or retained earnings, as these are components of the equity affected by other factors.

Question 9

Investment in certificates of deposit and other securities that do not change in value are reported on the balance sheet as

Accepted Answer

Certificates of deposit are considered cash equivalents because they are short-term, highly liquid investments that are readily convertible to known amounts of cash and so close to their maturity that they present insignificant risk of changes in value due to changes in interest rates.

Question 10

On April 1, Alliance Company purchased $50,000 of Tetter Company's 12% bonds at 100 plus accrued interest of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the bonds will include a

Accepted Answer

Alliance Company purchased Tetter Company's bonds for $50,000, which will be recorded as a debit to the Investments-Tetter Company Bonds account. There is no need to credit Interest Payable at this point because accrued interest is already included in the purchase price. Cash is also debited for $50,000, as that is the amount paid for the bonds.

Question 11

Cash is used for all of the following activities except

Accepted Answer

Cash should not be used for illegal or unethical activities such as bribing government officials. The other options are legitimate uses of cash in a business.

Question 12

Long-term investments are held for all of the listed reasons below except

Accepted Answer

Long-term investments are not held to meet current cash needs, as they are intended to be held for a longer period of time. The other choices are valid reasons for holding long-term investments.

Question 13

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the receipt of interest on the next interest payment date would be

Accepted Answer

The bond interest rate is 8%, which means the annual interest payment is $8,000 ($100,000 x 8%). Since interest is paid semiannually, each interest payment is $4,000 ($8,000 / 2). Ruben Company purchased the bonds at 100 plus $1,500 in accrued interest, which means they paid $101,500 in total. Therefore, $1,500 of the payment was for accrued interest and $100,000 was for the face value of the bonds.

On the next interest payment date, Ruben Company will receive $4,000 in interest. Since they already received $1,500 in accrued interest at the time of purchase, they only need to record the remaining $2,500 in interest as revenue. Therefore, the journal entry would be:
Debit Cash, $4,000
Credit Interest Receivable, $1,500
Credit Interest Revenue, $2,500

Question 14

Foreign currency translation adjustment is an example of an item that would be included in other comprehensive income.

Accepted Answer

Foreign currency translation adjustment is a type of unrealized gain or loss that occurs when a company translates financial statements from a foreign currency to its own reporting currency. Since this transaction has not yet resulted in a realized gain or loss, it is included in other comprehensive income as opposed to net income.

Question 15

The primary objectives of investing in temporary investments is to

Accepted Answer

The primary objectives of investing in temporary investments include earning interest revenue, receiving dividends, and realizing gains from increases in market price of the securities. Therefore, choice A, which includes all of these objectives, is the best choice.

Question 16

The cumulative effects of other comprehensive income items may be reported separately from retained earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income.

Accepted Answer

This is true according to Generally Accepted Accounting Principles (GAAP) in the United States. Accumulated other comprehensive income (AOCI) represents items that are not included in net income but are recognized in the financial statements. These items are reported separately on the balance sheet as AOCI, which is a component of equity. Examples of items that may be reported as AOCI include unrealized gains or losses on available-for-sale securities and foreign currency translation adjustment.

Question 17

The journal entry Pierce will record on June 30 will include a

Accepted Answer

On June 30, Pierce will receive $3,600 in interest revenue ($2,400 for June and $1,200 for July). Therefore, he will record a debit to Cash for $3,600. There is no need to record a credit to Interest Revenue or Interest Receivable since the interest revenue has already been earned and the interest receivable has already been recorded in a prior accounting period.

Question 18

Temporary investments

Accepted Answer

The answer of Temporary investments
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Question 19

Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be

Accepted Answer

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Question 20

Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be

Accepted Answer

The journal entry should reflect the price at which the bonds were sold and any gain or loss on the sale. The Cash account should be debited for the amount of cash received, which in this case is $105,000. The Investment-Evans Company Bonds account should be credited for the cost of the bonds, which is $100,000. The Gain on Sale of Investments account should be credited for the difference between the sale price and the cost of the bonds, which is $4,500. Finally, Interest Revenue should be credited for the accrued interest of $500. Therefore, the correct journal entry is: debit Cash, $105,000; credit Investment-Evans Company Bonds, $100,000; credit Gain on Sale of Investments, $4,500; credit Interest Revenue, $500.

Quiz 13: Investments and Fair Value Accounting