Question 1

MotorCity,Inc.purchased 40,000 shares of Shaw common stock for $232,000.This represents 40% of the outstanding stock.The entry to record the transaction includes a:

Accepted Answer

When a company purchases between 20% to 50% of another company's outstanding stock, it is considered a significant influence investment and the equity method of accounting is used. Therefore, the entry to record the transaction would include a debit to Equity Method Investments for $232,000, representing the cost of the investment. Option A is incorrect because Debt Investments are used for investments with a maturity date, not for significant influence investments. Option C is incorrect because a credit would not be used to record the purchase of an investment. Option D and E are incorrect because they pertain to different investment classifications and are not applicable to this scenario.

Question 2

Available-for-sale debt securities are:

Accepted Answer

Available-for-sale debt securities are reported at fair value on the balance sheet. While unrealized gains and losses are recorded in other comprehensive income until realized.

Question 3

On July 31,Potter Co.purchased 2,000 shares of GigaTech stock for $16,000.GigaTech has 100,000 shares currently outstanding.This is the company's first and only stock investment.On October 31,which is Potter's year-end,the stock had a fair value of $20,000.Potter should record a:

Accepted Answer

Potter Co. should recognize an unrealized gain of $4,000 ($20,000 fair value - $16,000 cost) in its income statement, as the investment is likely classified as a trading security.

Question 4

On March 15,Alan Company purchased 10% of Cameo Corp.'s stock for $35,000.This is the company's first and only stock investment.On Alan's June 30 year-end,the stock had a fair value of $34,000.Alan should do which of the following:

Accepted Answer

When an investment is classified as available-for-sale, unrealized gains and losses are recognized in other comprehensive income (OCI) until the investment is sold. In this case, since the fair value of the investment at June 30 is less than its cost, Alan would record a debit to the Unrealized Loss-Income account. There is no need to adjust the fair value of the stock investment account, as the fair value adjustment is already reflected in the investment's carrying value. Additionally, there has been no sale of the investment, so there is no gain or loss to recognize in the income statement. The asset section of the balance sheet would not increase, as the investment's carrying value remains at its cost of $35,000. A credit to the Unrealized Gain-Income account would be appropriate only if the fair value of the investment had increased above its cost.

Question 5

Investments in trading securities:

Accepted Answer

Trading securities are typically reported as current assets because they are intended to be sold in the near term.

Question 6

Carpark Services began operations in 20X1 and maintains long-term investments in available-for-sale debt securities.The year-end cost and fair values for its portfolio of these debt securities follows.The year-end adjusting entry to record the unrealized gain/loss at December 31,20X1 is:

Accepted Answer

The answer of Carpark Services began operations in 20X1 and...

Question 7

Six months ago,a company purchased stock investments with insignificant influence for $70,000.This is the company's first and only purchase of stock.The current year-end fair value of the stock is $68,500.The company should record a:

Accepted Answer

When the fair value of an investment with insignificant influence decreases below its cost, the company should recognize an unrealized loss in the income statement. In this case, the fair value is lower than the cost, so the company should record a debit to Unrealized Loss-Income for the difference between the two amounts, which is $1,500 ($70,000 - $68,500). Therefore, the correct answer is A.

B) Debit to Unrealized Gain-Equity is not correct because the fair value decreased, so there is no gain.

C) Debit to Investment Revenue is not correct because the company did not sell the investment or receive any dividends.

D) Credit to Dividend Revenue is not correct because the company did not receive any dividends.

E) Credit to Investment Revenue is not correct because the company did not sell the investment or receive any dividends.

Question 8

Segmental Manufacturing owns 35% of Glesson Corp stock.Glesson pays a total of $47,000 in cash dividends for the period.Segmental's entry to record the cash dividend received from Glesson would include a:

Accepted Answer

Segmental Manufacturing owns 35% of Glesson Corp stock, so it is entitled to 35% of the cash dividends paid by Glesson. Therefore, Segmental's entry to record the cash dividend received from Glesson would include a credit to Equity Method Investments for $16,450 (35% of $47,000).

Question 9

Investments can be classified as all but which of the following:

Accepted Answer

Intangible investments, such as patents or trademarks, are not classified in the same way as financial investments like held-to-maturity debt securities, available-for-sale debt securities, stock investments, or trading debt securities. These financial investments are specific categories used in accounting and finance to classify how an entity holds or intends to use various financial instruments.

Question 10

A company had a profit margin of 10.5% and total asset turnover of 1.84.Its return on total assets was:

Accepted Answer

The answer of A company had a profit margin of...

Question 11

Trading (debt)securities are:

Accepted Answer

Trading (debt) securities are recorded at cost initially, but are then reported at fair value on the balance sheet. Changes in fair value are recognized in the income statement.

Question 12

All of the following are true for available-for-sale debt securities except for:

Accepted Answer

Available-for-sale debt securities are not actively managed like trading securities. Trading securities are actively managed with the intention of making a profit on short-term price fluctuations, while available-for-sale securities are held for longer periods of time and are not actively traded. The other options are true for available-for-sale debt securities.

Question 13

A company had net income of $40,000,net sales of $300,000,and average total assets of $200,000.Its profit margin and total asset turnover were respectively:

Accepted Answer

Profit margin = net income/net sales = 40,000/300,000 = 0.133 or 13.3%
Total asset turnover = net sales/average total assets = 300,000/200,000 = 1.5
Therefore, the correct answer is B, which has both the calculated profit margin and total asset turnover.

Question 14

Held-to-maturity securities are:

Accepted Answer

Held-to-maturity securities are debt securities that a company intends and is able to hold to maturity. They are reported as long-term investments in the balance sheet. They are not always classified as short-term or long-term investments, as this depends on the maturity of the security and the company's intent to hold it to maturity. They are also not equity securities, so choices D and E are incorrect.

Question 15

Lessington Corporation purchases 4,000 shares of Gonzalez Company common stock for $150,000 cash.Gonzalez has 500,000 shares of stock currently outstanding.Lessington's entry to record the purchase would include a:

Accepted Answer

The correct entry to record the purchase of another company's stock is a debit to Stock Investments (or a similarly named account) for the cost of the purchase, which in this case is $150,000. This reflects the increase in the asset account due to the investment.

Question 16

Investments in debt securities that the company actively manages and trades for profit are referred to as short-term debt investments in:

Accepted Answer

Short-term debt securities that the company actively manages and trades for profit are referred to as trading securities. Option A, available-for-sale securities, refers to debt securities that are not actively managed and may be sold if the company needs cash. Option B, held-to-maturity securities, refers to debt securities that the company intends to hold until maturity. Option D, realizable securities, is not a commonly used term in accounting for debt securities. Option E, liquid securities, does not specify whether the securities are actively managed and traded for profit.

Question 17

A decrease in the fair value of a security that has not yet been realized through an actual sale of the security is called a(n):

Accepted Answer

An unrealized loss refers to a decrease in the fair value of a security that has not yet been realized through an actual sale of the security. A contingent loss refers to a potential loss depending on the outcome of a future event, a realizable loss refers to a loss that has been realized through an actual sale, a capitalized loss refers to a loss that has been recorded as part of the cost of an asset, and a market loss is a general term that refers to any loss incurred in the market.

Question 18

J.P.Industries purchased Yang's notes for $143,375 as a long-term investment.The investment is classified as available-for-sale.J.P.'s entry to record the purchase transaction would include a:

Accepted Answer

The purchase of Yang's notes as a long-term investment classified as available-for-sale would be recorded with a debit to Debt Investments-AFS for $143,375, reflecting the acquisition of the debt security.

Question 19

If a company owns more than 20% of the stock of another company and the stock is being held as a long-term investment,which method would the investor normally use to account for this investment?

Accepted Answer

If a company owns more than 20% of the stock of another company and the stock is being held as a long-term investment, the investor would normally use the equity method to account for this investment. Under the equity method, the investor recognizes its share of the investee's income or loss in its own income statement and records its share of the investee's equity on its balance sheet. The other methods listed (fair value, historical cost, cost with amortization, and effective method) are not typically used for investments in which the investor owns more than 20% of the investee's stock, as they do not account for the investor's significant influence over the investee.

Question 20

Carpark Services began operations in 20X1 and maintains long-term investments in available-for-sale debt securities.The year-end cost and fair values for its portfolio of debt securities follows.The year-end adjusting entry to record the unrealized gain/loss at December 31,20X2 is:

Accepted Answer