Question 1

Which of the following statements is true regarding dividend income?

Accepted Answer

Dividend income is reported on the income statement as it represents earnings received by the company from its investments in other companies' stock.

Question 2

A company is referred to as a parent if it owns

Accepted Answer

A company is considered a parent of another company if it owns more than 50% of the equity securities of the second company. This means that the parent company has a controlling interest and can make important business decisions for the subsidiary. Owning a certain percentage of debt securities or equity securities below 50% does not necessarily give a company control over another company.

Question 3

On February 1, 2015, Vermont Corp. pays $50,000 for shares of Stream, Inc. common stock and another $1,000 in commissions. Assume that Vermont sells the Stream stock on May 20, 2015, for $53,000. In this case, Vermont recognizes

Accepted Answer

The answer of On February 1, 2015, Vermont Corp. pays...

Question 4

The equity method of accounting for an investment is used when a company purchases

Accepted Answer

The equity method of accounting is used when one company purchases more than 20% of the equity securities of a second company. This allows the owning company to have significant influence over the operations and financial decisions of the second company, and therefore, the investment is accounted for using the equity method.

Question 5

Davis Corp. invested cash in a 9-month certificate of deposit CD on October 1, 2015. If Davis has an accounting period which ends on December 31, 2015, when would it most likely recognize interest revenue from the CD?

Accepted Answer

Since the CD has a maturity of 9 months, the interest revenue will most likely be recognized at the end of the accounting periods which fall within the 9-month period. In this case, the accounting periods ending on December 31, 2015 and June 30, 2016 fall within the 9-month period, so interest revenue will be recognized on both dates.

Question 6

Clarion Corp. invested cash in a 6-month certificate of deposit CD on November 1, 2015. If Clarion Corp. has an accounting period that ends on December 31, 2015, when should Clarion recognize interest revenue from the CD?

Accepted Answer

The answer of Clarion Corp. invested cash in a 6-month...

Question 7

On July 1, 2015, Frank Corp. purchased $100,000 of 8% bonds at face value. Interest is paid annually on June 30. If the accounting year for Frank ends at December 31, 2015, what will be reported with respect to the bonds on that date?

Accepted Answer

The bonds were purchased on July 1, 2015, which means that there were only six months left until the interest payment on June 30, 2016. Therefore, only half of the annual interest should be accrued for the 2015 accounting year, which is $4,000 (8% of $100,000 divided by 2). The carrying value of the bonds remains at $100,000 since they were purchased at face value and no gains or losses have been recognized yet. No cash received in interest will be reported since the interest payment is not made until June 30, 2016. No loss on the bonds will be reported since they have not been sold or impaired.

Question 8

When a note receivable has been discounted by a company

Accepted Answer

When a company discounts a note receivable, it essentially sells the note to a financial institution before its maturity date, usually for less than its face value. This process does not slow down the collection process; instead, it accelerates the cash inflow, albeit at a reduced amount. The note is no longer shown as an asset on the company's balance sheet because the rights to receive the cash have been transferred to another entity. However, if there is a possibility that the company might have to repay the amount to the financial institution (for example, if the debtor fails to pay the note at maturity), this potential obligation is disclosed as a contingent liability in the footnotes of the financial statements. There is no specific account called "discount on notes receivable" used in this context; instead, the discount represents the interest expense or finance charge for obtaining early cash from the note.

Question 9

When a company discounts an interest-bearing note at a bank with recourse:

Accepted Answer

When a company discounts an interest-bearing note at a bank with recourse, the bank can hold the company liable if the borrower fails to pay back the loan. Therefore, the company has a contingent liability from the time the note is discounted until its maturity date. The company is not assured payment at maturity and does not receive the full amount of the note plus interest. The bank may assume some credit risk, but this risk is ultimately shared between the bank and the company.

Question 10

Wagner's Bookstore acquires a 6% $12,000 certificate of deposit on September 1. The term of the CD is six months. At that time, all principal and accrued interest will be paid in cash. Indicate the effect on the financial statements at December 31.

Accepted Answer

Since the certificate of deposit has a 6% interest rate and a $12,000 principal amount, the interest earned for 4 months (from September 1 to December 31) is calculated as:

$12,000 x 6% x 4/12 = $240

As of December 31, the interest has accrued but has not yet been received, so it increases the Interest Receivable account. The Interest Revenue account will also increase by the same amount. Therefore, the correct choice is A.

Question 11

What are the effects on the accounting equation from the purchase of a short-term investment?

Accepted Answer

The purchase of a short-term investment will increase the assets (as the investment is considered an asset) and decrease the cash, which is also an asset. Therefore, there is no effect on the overall accounting equation as the increase in one asset is offset by the decrease in another asset.

Question 12

Why do businesses invest in short-term investments?

Accepted Answer

Businesses invest in short-term investments to make use of excess cash that is not needed for current business operations. These investments can be easily liquidated and provide a source of funds for future business investments or operations.

Question 13

Cushion Sports accepted a credit card account receivable in exchange for $5,000 of services provided to a customer. The credit card company charges a 5% service charge. Recording the transaction in the company's accounting records will have what effect on the accounting equation?

Accepted Answer

Accepting the credit card account receivable will increase the assets and equity of Cushion Sports by $5,000. However, the service charge of 5% ($250) will be deducted from the total amount, leaving a net increase of $4,750 in assets and equity.

Question 14

When are consolidated financial statements prepared?

Accepted Answer

Consolidated financial statements are prepared when one company owns more than 50% of another company. This means that the parent company has a controlling interest in the subsidiary, and the financial statements of both companies need to be combined to show a true and fair view of the group's financial performance and position. It is not at the option of either the investee or investor company and doesn't require 100% ownership of one company by another.

Question 15

When one company purchases less than 50% of equity securities in a second company, which of the following statements is true?

Accepted Answer

When one company purchases less than 50% of equity securities in a second company, the purchasing company is not considered a parent and the purchased company is not considered a subsidiary. Instead, the purchased company is referred to as an investee. Therefore, the correct answer is D.

Question 16

Significant influence of one company over another has been defined by the accounting profession as the ownership of what minimum percent of the second company's stock?

Accepted Answer

The answer of Significant influence of one company over another...

Question 17

If Cable Inc. receives $23,825 from credit card collections and has an average rate of 4.7% charged by the credit card company, its credit card sales during the period were:

Accepted Answer

The answer of If Cable Inc. receives $23,825 from credit...

Question 18

Meta Inc. pays $18,000 to buy stock in another company and an additional $350 in commissions. Three months later, Meta sells the stock for $19,000. At the time of sale, Meta will recognize a:

Accepted Answer

To find the gain or loss, we need to subtract the total cost (purchase price and commissions) from the selling price. 
Total cost = $18,000 + $350 = $18,350 
Selling price = $19,000

Gain/Loss = Selling price - Total cost 
= $19,000 - $18,350 
= $650

Since the gain is positive, the answer is a $650 gain (choice D).

Question 19

For what reason would a company buy 10% of the common stock of a second company?

Accepted Answer

Buying 10% of the common stock of a second company allows the first company to become a significant minority shareholder and potentially have some influence over the second company's operations. This could result in a higher return on investment compared to temporary money market investments. Purchasing shares for the purpose of insuring a steady source of goods or preparing consolidated financial statements does not necessarily require buying 10% of the common stock.

Question 20

Discounting a note receivable

Accepted Answer

The answer of Discounting a note receivable
...

Quiz 7: Receivables and Investments