Question 1

Comfort Shoes received a promissory note from a customer on April 1, 2016.The face amount of the note is $2,000; the terms are 12 months and 8% annual interest.At the maturity date, the customer pays for the note and interest.Comfort Shoes made the proper adjustment at the end of December for interest.The effect of recognizing the transaction on the maturity date is

Accepted Answer

At the maturity date, when the customer pays for the note and interest, Comfort Shoes would record the receipt of cash, thereby decreasing the Notes Receivable account (as the note is paid off). Interest income would also be recognized, but it's not one of the options provided.

Question 2

Why do businesses invest in short-term investments?

Accepted Answer

Businesses invest in short-term investments to earn returns on excess cash that is not immediately needed for current operations or investments. This helps them to ensure they have adequate funds available for future business needs.

Question 3

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, it means that the company is selling the note to the bank at a discounted value before its maturity date. However, if the borrower defaults on their payment obligation, the bank can go back to the company for repayment. This means that the company has a contingent liability from the time the note is discounted until its maturity date.

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 a company purchases more than 20% of the equity securities of a second company. This method allows the investor to record its share of the investee's profits and losses on its own income statement.

Question 5

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

Accepted Answer

The answer of For what reason would a company buy...

Question 6

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

Significant influence is generally indicated by the ownership of 20% or more of the voting stock of the investee, but less than 50%, as this does not constitute control over the company.

Question 7

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

The 6% $12,000 certificate of deposit will earn 6%/12=$60 in interest each month. Since the CD was purchased on September 1, there are 3 months left until maturity on December 31. Therefore, the interest earned is $60 x 3 = $180. This means the Interest Receivable account will increase by $180 and the Interest Revenue account will increase by the same amount, for a total of $240.

Question 8

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 would increase assets (cash or marketable securities) and decrease assets (cash or marketable securities) by the same amount. Therefore, there is no effect on stockholders' equity or liabilities. The accounting equation remains in balance.

Question 9

Toppson Corp.invested cash in a 9-month certificate of deposit (CD) on October 1, 2016.If Toppson has an accounting period which ends on December 31, 2016, when would it most likely recognize interest revenue from the CD?

Accepted Answer

Interest revenue from a certificate of deposit is typically recognized at the end of the term, which for Toppson would be July 1, 2017. However, because Toppson's accounting period ends on December 31, 2016, it would also need to recognize any interest earned from the date of purchase (October 1, 2016) through December 31, 2016. Therefore, interest revenue would be recognized on both December 31, 2016 and July 1, 2017.

Question 10

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

Accepted Answer

Samsing's initial cost for the stock was $18,000 + $350 in commissions, which equals $18,350.

When the stock is sold for $19,000, Samsing realizes a gain of $650 ($19,000 - $18,350).

Therefore, the correct answer is D, a $650 gain.

Question 11

Router Inc.lends $70,000 on a 120-day, 9% promissory note.The total interest that Router will receive at maturity is

Accepted Answer

The answer of Router Inc.lends $70,000 on a 120-day, 9%...

Question 12

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 13

Discounting a note receivable

Accepted Answer

Discounting a note receivable involves selling a promissory note to a financial institution before its maturity date, allowing the holder to receive immediate cash.

Question 14

When are consolidated financial statements prepared?

Accepted Answer

Consolidated financial statements are prepared when one company (the parent company) owns more than 50% of another company (the subsidiary company). This is because the parent company has control over the subsidiary company and can influence its financial decisions. Consolidated financial statements combine the financial information of both the parent and subsidiary companies, giving a more accurate picture of their combined financial performance. The preparation of consolidated financial statements is mandatory under accounting standards such as GAAP and IFRS. Therefore, option A and B are incorrect. Option D is also incorrect as consolidated financial statements can be prepared even if the parent company does not own 100% of the subsidiary company.

Question 15

Textbooks.com accepts VISA for payments of purchases made by students.The credit card drafts are deposited directly in a bank account.VISA charges a 2% collection fee.Credit card drafts totaling $12,000 are deposited during September.The effect on the accounting equation to record the sales and deposits will include

Accepted Answer

The answer of Textbooks.com accepts VISA for payments of purchases...

Question 16

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 17

A company is referred to as a parent if it owns

Accepted Answer

A company is referred to as a parent company primarily based on its ownership of a controlling interest in another company (usually through owning more than 50% of the subsidiary's equity securities), not through owning debt securities or a small percentage of equity.

Question 18

Clarion Corp.invested cash in a 6-month certificate of deposit (CD) on November 1, 2016.If Clarion Corp.has an accounting period that ends on December 31, 2016, when should Clarion recognize interest revenue from the CD?

Accepted Answer

Interest revenue should be recognized as it is earned. Since the CD is a 6-month investment, interest is earned over time. Clarion should recognize interest revenue on December 31, 2016, for the interest earned up to that date, and again on May 1, 2017, when the CD matures.

Question 19

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

Accepted Answer

When a company purchases less than 50% of equity securities in a second company, it is considered an investment rather than acquisition. The company whose securities are purchased is the investee, not the subsidiary. Therefore, option D is the correct answer. Option A and B are incorrect because they refer to the purchaser as the parent or subsidiary, which is not applicable in this scenario. Option C is incorrect because the company whose securities are purchased is not considered a subsidiary if the purchasing company holds less than 50% of its equity securities.

Question 20

If Rope 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 amount received from credit card collections is after the credit card company has taken its fee. To find the original sales amount, divide the amount received by (1 - the rate charged). So, $23,825 / (1 - 0.047) = $23,825 / 0.953 = $25,000.

Quiz 7: Receivables and Investments