Question 1

On January 1, Kingman Corporation purchased a 30% equity in Lewis Company for $360,000. At December 31, Lewis declared and paid a $40,000 cash dividend and reported net income of $98,000. Prepare the necessary journal entries for Kingman Corporation.

Accepted Answer

The answer of On January 1, Kingman Corporation purchased a...

Question 2

On January 2, Groneman Corporation acquired 30% of the outstanding common stock of Coulson Company for $550,000. For the year ended December 31, Coulson reported net income of $90,000 and paid cash dividends of $30,000 on its common stock. At December 31, the carrying value of Groneman's investment in Coulson under the equity method is

Accepted Answer

Under the equity method, the initial investment is recorded at cost and adjusted for the investor's share of the investee's net income or loss and dividends paid.

Groneman's initial investment in Coulson was $550,000. Since Groneman acquired 30% of the outstanding common stock of Coulson, it has significant influence over Coulson and should use the equity method to account for its investment.

The investor's share of net income is calculated as follows: 
Investor's share of net income = Percentage of ownership × Coulson's net income 
Investor's share of net income = 30% × $90,000 = $27,000

The carrying value of the investment at December 31 is calculated as follows: 
Carrying value = Cost + Investor's share of net income - Dividends received 
Carrying value = $550,000 + $27,000 - $30,000 = $547,000

Therefore, the correct choice is D) $568,000, which is the carrying value of Groneman's investment in Coulson under the equity method at December 31.

Question 3

Which of the following would not be classified as a short-term investment?

Accepted Answer

Idle cash in a bank checking account is not considered a short-term investment because it typically earns very little interest and is meant to be readily available for day-to-day transactions. The other choices are all considered short-term investments as they have a maturity date of one year or less and are easily convertible to cash.

Question 4

Under the equity method, the investor records dividends received by crediting

Accepted Answer

Under the equity method, dividends received from the investee reduce the carrying amount of the investment on the investor's books. Therefore, when dividends are received, the investor credits (decreases) the "Stock Investments" account, rather than recognizing dividend income. This approach reflects the investor's share of the investee's earnings that have already been recognized in the investor's income, and the dividends are considered a return of investment rather than income.

Question 5

On January 2, Westies Company purchased 40, 10%, $1,000 Boswell Company bonds for $41,000 cash, plus brokerage fees of $1,000. Interest is payable semiannually on July 1 and January 1. On July 1, the company received a semiannual interest payment on the Boswell Company bonds. Journalize the entries to record the purchase of the bonds and the receipt of the interest payment.

Accepted Answer

The answer of On January 2, Westies Company purchased 40,...

Question 6

On April 25, Donnoly Company buys 4,200 shares of Carpenter common stock for $92,500, plus brokerage fees of $2,000. On October 31, Donnoly sells 600 shares of Corpenter stock for $15,500, less brokerage fees of $500. Prepare journal entries for the purchase and sale of the Carpenter common stock.

Accepted Answer

The answer of On April 25, Donnoly Company buys 4,200...

Question 7

Which of the following reasons best explains why a company that experiences seasonal fluctuations in sales may purchase investments in debt or stock securities?

Accepted Answer

A company with seasonal fluctuations in sales may have excess cash during peak seasons and may choose to invest in debt or stock securities to earn additional income during off-seasons or to increase liquidity in case of unexpected expenses.

Question 8

Which one of the following would not be classified as a short-term investment?

Accepted Answer

Equity method investments are a type of long-term investment where the investor has significant influence over the investee's decisions. The other options (marketable stock securities, marketable debt securities, and short-term paper) are all types of short-term investments.

Question 9

An unrealized loss on available-for-sale securities is

Accepted Answer

An unrealized loss on available-for-sale securities is reported as a separate component of stockholders' equity. It is not recognized in the income statement or deducted from the cost of the investment, and it is not closed-out at the end of the accounting period. Instead, it is reported in the comprehensive income section of the statement of stockholders' equity, which is a separate statement from the income statement.

Question 10

A company that acquires less than 20% ownership interest in another company should account for the stock investment in that company using

Accepted Answer

The cost method is appropriate for stock investments in which the ownership interest is less than 20%. Under the cost method, the investor records the stock investment at cost and does not recognize the investee's income on its income statement.

Question 11

On January 14, Blackwell Corporation purchased 20, 11%, $1,000 Eastman Company bonds for $21,000, plus brokerage fees of $400. On November 30, the company sold 10 of the Eastman Company bonds for $11,700, less $300 brokerage fees. Prepare journal entries for the purchase and sale of the Eastman Company bonds.

Accepted Answer

The answer of On January 14, Blackwell Corporation purchased 20,...

Question 12

Securities bought and held primarily for sale in the near term to generate income on short-term price differences are

Accepted Answer

Securities bought and held primarily for sale in the near term to generate income on short-term price differences are called trading securities.

Question 13

Available-for-sale securities are classified as

Accepted Answer

Available-for-sale securities can be either short-term or long-term investments depending on their maturity dates. They are not considered current assets as they are not expected to be converted to cash within a year.

Question 14

Stein Company had the following transactions pertaining to its short-term stock investments.
Jan. 1 Purchased 600 shares of Pine Company stock for $7,000 cash plus brokerage fees of $350.
June 1 Received cash dividends of $0.60 per share on the Pine Company stock.
Sept. 15 Sold 300 shares of the Pine Company stock for $3,600 less brokerage fees of $200.
Instructions
Journalize the transactions.

Accepted Answer

The answer of Stein Company had the following transactions pertaining...

Question 15

Short-term investments are

Accepted Answer

The answer of Short-term investments are
...

Question 16

Debt investments are recorded at the

Accepted Answer

Debt investments are recorded at the price paid for the bonds, which includes any brokerage fees incurred during the purchase. This method ensures that the investment is recorded at its actual acquisition cost.

Question 17

When bonds are sold, the gain or loss on sale is the difference between the

Accepted Answer

The gain or loss on sale of bonds is calculated by subtracting the cost of the bonds from the net proceeds received from the sale. The net proceeds are the sales price minus any selling costs, such as brokerage fees or commissions. The market value of the bonds is not relevant for calculating the gain or loss on sale.

Question 18

The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment

Accepted Answer

The equity method is used when the investor has significant influence over the investee, which is generally defined as owning between 20% and 50% of the investee's voting stock. Choice A only applies if the investor has the intent to vote the common stock, but that alone does not determine the use of the equity method. Choice B describes a different type of investment, not one where significant influence is present. Choice D is also not a requirement for using the equity method.

Question 19

Short-term investments are securities held by a company that are

Accepted Answer

Short-term investments are securities that a company plans to hold for a short period of time and that are readily marketable. They are also intended to be converted into cash within the next year or operating cycle, whichever is longer. This classification allows investors and analysts to better understand a company's liquidity and operating cycle. Choice A is not specific enough as not all marketable securities are short-term investments. Choice B is almost correct, but fails to include the operating cycle as a possible timeframe. Choice D is incorrect because short-term investments are not intended to be held until maturity.

Question 20

Short-term investments are securities that are readily marketable and intended to be converted into cash within the next

Accepted Answer

The answer of Short-term investments are securities that are readily...

Quiz 16: Investments