Question 1

At acquisition,debt securities are:

Accepted Answer

Debt securities are recorded at cost at the time of acquisition. Interest received over the life of the security is recognized as income over time using the effective interest method. The total interest that will be received over the life of the security is not recorded as part of the initial cost.

Question 2

A company has an investment in 9% bonds with a par value of $100,000 that pays interest on October 1 and April 1.The amount of interest accrued on December 31 (the company's year-end)would be:

Accepted Answer

The interest on the bond is calculated based on the face value of the bond, which is $100,000, and the coupon rate, which is 9%.

The formula for calculating the interest accrued is:

Interest = Face Value x Coupon Rate x Time

Time is the fraction of the year that has passed since the last coupon payment, which in this case is from April 1 to December 31, or 9 months out of a 12-month year.

Using the formula:

Interest = $100,000 x 0.09 x 9/12 = $6,750/2 = $3,375

The bond pays interest twice a year, so the amount of interest accrued on December 31 would be half of this amount, or $1,687.50.

Therefore, the best choice is C) $2,250.

Question 3

Roe Corporation owns 2,000 shares of WRJ Corporation stock.WRJ Corporation has 25,000 shares of stock outstanding.WRJ paid $4 per share in cash dividends to its stockholders.Roe's entry to record the receipt of these dividends is:

Accepted Answer

The entry to record the receipt of cash dividends is to debit Cash for the amount of $8,000 and credit Dividend Revenue for the same amount. This reflects the increase in cash and revenue for the company. Option A is incorrect as Long-Term Investments will only be credited when the shares are sold. Option B is incorrect as it debits Long-Term Investments instead of Cash. Option D is incorrect as Unrealized Gain-Equity is not relevant in this scenario. Option E is incorrect as Interest Revenue is not applicable to cash dividends.

Question 4

All of the following are true about debt securities except:

Accepted Answer

Debt securities do not reflect an owner relationship, as the investor is essentially lending money to the issuer of the security and does not have an ownership stake in the company. Choices A, B, C, and D are all true statements about debt securities.

Question 5

Short-term investments include:

Accepted Answer

Short-term investments are assets that management intends to convert to cash within one year or the current operating cycle. They must also be readily convertible to cash, which excludes options B, C, D and E from being short-term investments.

Question 6

A company paid $37,800 to acquire 8% bonds with a $40,000 maturity value.The company intends to hold the bonds to maturity.The cash proceeds the company will receive when the bonds mature equal:

Accepted Answer

The company will receive the maturity value of the bonds, which is $40,000, when they mature.

Question 7

The controlling investor of a long-term investment with controlling interest is called the:

Accepted Answer

The controlling investor of a long-term investment with controlling interest is called the parent.

Question 8

Kendall Corp.purchased at par value,$160,000 of Barker Company's 7% bonds that mature in 10 months.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.The journal entry to record Kendall's purchase of the bonds is:

Accepted Answer

The answer of Kendall Corp.purchased at par value,$160,000 of Barker...

Question 9

All of the following statements regarding stock investments with insignificant influence are true except for:

Accepted Answer

Statement C is incorrect because realized gains or losses from stock investments with insignificant influence are reported in the income statement, not in a permanent asset account like "Fair Value Adjustment-Stock." This account is typically used for adjusting the carrying amount of available-for-sale securities to their fair value, not for reporting realized gains or losses.

Question 10

Strickland Corporation has invested in debt securities.Strickland intends to actively buy and sell this investment for profit.This investment is classified as:

Accepted Answer

Since Strickland Corporation intends to actively buy and sell the investment for profit, it would be classified as a trading security. Trading securities are investments that are bought and held with the intention of selling them in the near term to generate profits on short-term price differences.

Question 11

Long-term investments:

Accepted Answer

Long-term investments can include funds designated for special purposes, such as a sinking fund or a pension fund, or investments in land not used in the company's operations. They are not expected to be converted into cash within one year and may not be readily convertible to cash. It is not limited to equity securities.

Question 12

Barnes Company purchased $50,000 of 8% bonds at par.The bonds mature in six years and are classified as a held-to-maturity security.Which of the following is the correct journal entry to record the receipt of the usual semiannual interest payment?

Accepted Answer

When a company owns held-to-maturity securities, they are recorded at cost and subsequently adjusted for amortization of premium or discount and for any impairment. The interest income received on held-to-maturity securities should be recorded as interest revenue. Therefore, the correct entry to record the receipt of the usual semiannual interest payment is to debit Cash for $2,000 and credit Interest Revenue for $2,000.

Question 13

Long-term investments include:

Accepted Answer

Long-term investments are intended to be held for an extended period, typically more than one year. These types of investments are not readily convertible to cash or not intended to be converted to cash in the short term. Examples of long-term investments include real estate, mutual funds, retirement accounts, and certain types of stocks and bonds. Therefore, the best choice for long-term investments is A.

Question 14

Kendall Corp.purchased at par value,$75,000 of Shrem Company's 8% bonds that mature in three-years.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.When the bonds mature,Kendall should prepare the following journal entry (assume the semiannual interest was separately recorded):

Accepted Answer

When the bonds mature, the investment in the bonds should be removed from the books and the cash received from the bonds should be recorded. Therefore, the journal entry should include a debit to Cash for the amount received ($75,000) and a credit to the investment account for the same amount ($75,000). The correct account to credit is Debt Investments-HTM (held-to-maturity) as Kendall intends to hold the bonds until they mature. Unrealized gains and losses apply to trading securities, not held-to-maturity securities, so options B and D are incorrect. Option A is incorrect because Long-Term Investments-HTM should not be debited; it is not affected by the maturity of the bonds. Option E is incorrect because the bonds were not classified as trading securities.

Question 15

A company purchased $60,000 of 5% bonds on May 1 at par value.The bonds pay interest on March 1 and September 1.The amount of interest accrued on December 31 (the company's year-end)would be:

Accepted Answer

The answer of A company purchased $60,000 of 5% bonds...

Question 16

Maroon Company sold supplies in the amount of €15,000 (euros)to a French company when the exchange rate was $1.15 per euro.At the time of payment,the exchange rate decreased to $1.12.Maroon must record a loss of $450.

Accepted Answer

To determine the loss or gain from a foreign currency transaction, the exchange rate at the time of sale and the exchange rate at the time of payment must be compared. In this case, the euro weakened against the dollar, so Maroon Company will record a loss of $450.

Question 17

Accounting for long-term investments in equity securities with controlling influence uses the:

Accepted Answer

The consolidation method is used when an entity has controlling influence over another entity through long-term investments in equity securities. This method requires the combining of the financial statements of both entities, with adjustments made for any intercompany transactions or balances. The controlling entity then reports the combined financial results as if it were a single entity. This method is different from the investor method, which is used for long-term investments in equity securities without controlling influence, and the controlling method, which is used for investments in subsidiaries that are consolidated according to the consolidation method. The trading method is used for short-term investments in securities that are bought and sold for profit.

Question 18

Long-term investments are reported in the:

Accepted Answer

Long-term investments are reported in the non-current section of the balance sheet called long-term investments because they are not expected to be liquidated or sold within a year.

Question 19

A company paid $37,800 cash to acquire stock investments with insignificant influence (with a par value of $38,325).The correct entry to record the purchase of the investment is:

Accepted Answer

The correct entry to record the purchase of the investment is to debit the Stock Investments account for the amount paid ($37,800) and credit the Cash account for the same amount ($37,800), reflecting the cash outflow to acquire the investment.

Question 20

At the end of the accounting period,the owners of debt securities:

Accepted Answer

Debt securities typically generate interest income, not dividend income. At the end of the accounting period, owners of debt securities must record any interest earned during the period. Dividends are associated with equity securities, not debt securities.

Quiz 26: Investments