Question 1

When the investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is shown on the balance sheet as:

Accepted Answer

Investments that are readily convertible to cash and expected to be sold within one year are considered short-term investments and should be reported on the balance sheet as such.

Question 2

On January 1, 2012, Winston Company purchased 6% bonds for $50,000 cash. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a:

Accepted Answer

Since the bond has a 6% interest rate, the semiannual interest payment would be $50,000 x 6% x 1/2 = $1,500. Therefore, the entry to record the July 1 semiannual interest payment would include a credit to Interest Revenue for $1,500. Interest Receivable is debited when interest is earned but not yet received, which would be the case at January 1. Hence, there would be no need to debit Interest Receivable in the July 1 entry.

Question 3

Available-for-sale investments are adjusted from cost to market value.

Accepted Answer

Available-for-sale investments are reported at their fair market value on the balance sheet, and any changes in their value are reflected in the other comprehensive income section of the income statement, until it is sold, in which case the gain or loss is recognized in the income statement. Therefore, available-for-sale investments are adjusted from cost to market value.

Question 4

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry for the receipt of interest on July 1, 2012 would include a:

Accepted Answer

The interest payment is calculated as $100,000 (face value) * 6% (annual interest rate) / 2 (semiannual) = $3,000. Therefore, the entry would include a debit to Cash for $3,000.

Question 5

Carmel Corporation purchased 5% bonds for $42,000 on January 1, 2012. On July 1, 2012, Carmel received cash interest of $1,050. The journal entry to record the purchase on January 1 would include a:

Accepted Answer

The journal entry to record the purchase of bonds on January 1 would include a debit to Long-Term Investment in Bonds for $42,000, since that is the amount paid for the bonds. None of the other options are appropriate for the initial purchase.

Question 6

All investments not classified as available-for-sale investments or trading securities are:

Accepted Answer

Investments that are not classified as available-for-sale or trading securities are classified as held-to-maturity investments. Held-to-maturity investments are debt securities that the company intends to hold until maturity.

Question 7

Unrealized Gain/Loss on investments account appears under other comprehensive income on a separate section of the income statement.

Accepted Answer

Unrealized Gain/Loss on investments account is a form of comprehensive income and generally appears under the other comprehensive income section on the income statement.

Question 8

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The adjusting entry to amortize the bond investment on December 31, 2012 would include a:

Accepted Answer

The bond was purchased at a discount, which means over time, its carrying value will increase. To expense this increase in value and recognize interest revenue, the company needs to amortize the bond investment. The annual interest payment on the bond is $6,000 (i.e., $100,000 x 6%), which is paid semi-annually. Therefore, the semi-annual interest payment is $3,000 (i.e., $6,000 / 2). Since the bond was purchased at a discount, the amortization will increase by $200 (i.e., $3,000 x 6.67% -- the semiannual interest rate). There is no impact on cash, as the interest was already received earlier in the year. The adjusting entry should be a debit to Long-Term Investment in Bonds for $1,200 (i.e., $200 amortization x 6 periods), and a credit to Interest Revenue for $1,200.

Question 9

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The adjusting entry to accrue interest on December 31, 2012 would include a:

Accepted Answer

The interest for one period is $3,000 ($100,000 * 6% / 2). Since interest is paid semiannually, the adjusting entry on December 31, 2012, would accrue the interest earned but not yet received, which is $3,000.

Question 10

Available-for-sale investments in stock are reported on the balance sheet at cost.

Accepted Answer

Available-for-sale investments in stock are reported on the balance sheet at fair value, not cost. Any unrealized gains or losses are reported as a separate component of stockholders' equity until the investment is sold.

Question 11

Dividend revenue is recorded in a stock dividend.

Accepted Answer

Dividend revenue is recorded in a cash dividend, not a stock dividend. In a stock dividend, shareholders receive additional shares of stock in proportion to the number of shares they already own, but no cash is exchanged.

Question 12

Carmel Corporation purchased 5% bonds for $42,000 on January 1, 2012. On July 1, 2012, Carmel received cash interest of $1,050. The journal entry to record the receipt of interest on July 1 would include a:

Accepted Answer

When interest is received on an investment in bonds, the journal entry includes a debit to Cash and a credit to Interest Income. Therefore, the correct choice is A, which shows a debit to Cash. Choices B and D are incorrect because they do not reflect the receipt of interest income on July 1. Choice C is incorrect because it represents an account that would have been used if the interest had not been received yet.

Question 13

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry for the receipt of interest on January 1, 2012 would include a:

Accepted Answer

The answer of On January 1, 2012, Plymouth Company purchases...

Question 14

Bond investments are initially recorded at:

Accepted Answer

Bond investments are initially recorded at cost, which includes the purchase price plus any transaction costs incurred in acquiring the bond. Accrued interest is not included in the initial recording of the investment. Fair value and market value may be used to adjust the carrying value of the bond in subsequent periods, but not for initial recording.

Question 15

On January 1, Bucket Company purchased as an investment a $1,000, 7% bond for $760. Bucket plans to hold the bond for two years. The bond pays interest on January 1 and July 1. The entry to record the amortization of the bond on December 31 would include a:

Accepted Answer

The bond was purchased at a discount ($760 instead of $1,000). The discount is amortized over the life of the bond. Since the bond pays interest semi-annually, the amortization for each period is calculated. The entry to record the amortization of the bond on December 31 would include a debit to Long-Term Investment in Bonds for $10, which represents the amortization of the discount for the period.

Question 16

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry to amortize the bond investment on July 1, 2012 would include a:

Accepted Answer

To amortize the bond investment, we need to recognize interest revenue and adjust the carrying value of the investment. Since interest is paid semiannually, on January 1 and July 1, it means that from January 1 to July 1, 2012, 6/12 of the annual interest rate of 6% will have accrued.

The bond investment was purchased at a discount, so its carrying value needs to be adjusted upward to the face value by amortizing the discount over the term of the bonds. The discount is the difference between the purchase price and the face value, which is $100,000 - ($100,000 x 90.4%) = $9,600.

Therefore, the entry on July 1, 2012, would be:
Debit: Long-Term Investment in Bonds $1,200 ($100,000 x 6% x 6/12)
Credit: Interest Revenue $1,200
Debit: Discount on Bond Investment $200 ($9,600 x 6/24)
Credit: Long-Term Investment in Bonds $200

The debit to Long-Term Investment in Bonds for $1,200 is the adjustment for interest revenue earned, and the debit to Discount on Bond Investment for $200 is the adjustment for the amortization of the bond discount. The debit to Cash is not necessary because we are not recording any cash transactions at this time.

Question 17

On January 1, 2012, Plymouth Company purchases $100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2016. Interest is paid semiannually, on January 1 and July 1. Plymouth Company has a calendar year end. The entry to record the purchase of the bond investment on January 1, 2012, would include a:

Accepted Answer

The bonds are purchased at a price of 90.4, which means 90.4% of the face value, so the debit should be for $90,400. Since the bonds mature in 2016, they are considered a long-term investment.

Question 18

The following is the proper order for assets on a balance sheet:

Accepted Answer

The answer of The following is the proper order for...

Question 19

On January 1, 2012, Winston Company purchased 6% bonds for $50,000 cash. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a:

Accepted Answer

Since interest is payable semiannually on July 1 and January 1, the bondholders would have earned interest for the period July 1 to December 31. As a result, the company would have an obligation to pay interest of $1,500 ($50,000 x 6% x 6/12) on January 1. Therefore, the company will record a debit to Interest Receivable for $1,500 and a credit to Interest Revenue for $1,500 to accrue for the interest expense. Choice A is the correct answer.

Question 20

On January 1, Bucket Company purchased as an investment a $1,000, 7% bond for $980. Bucket plans to hold the bond for two years. The bond pays interest on January 1 and July 1. The entry to record the interest accrual on December 31 would include a:

Accepted Answer

Since the interest payment date is January 1, the interest has not yet been received or recognized. Therefore, the entry to accrue the interest on December 31 would include a debit to Interest Receivable for $35 (7% of $1,000) and a credit to Interest Revenue. The investment account would not be affected until the interest is actually received or the bond is sold.

Quiz 8: Long-Term Investments the Time Value of Money