Question 1

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 company has a contingent liability from the time the note is discounted until its maturity date. This means that if the borrower (the company) fails to pay the note at maturity, the bank can demand payment from the company instead of solely taking on the credit risk themselves. This option is known as recourse, and it allows the bank to protect themselves from potential losses. Therefore, choice C is the best answer.

Question 2

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 3

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 card...

Question 4

Discounting a note receivable

Accepted Answer

The answer of Discounting a note receivable
...

Question 5

A company is referred to as a parent if it owns

Accepted Answer

A company is referred to as a parent if it owns more than 50% of the equity securities of a second company. This means that the parent company has control over the subsidiary company and can make decisions on its behalf. Owning a certain percentage of debt securities or equity securities does not necessarily give a company control over another company.

Question 6

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 7

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 8

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 or investee company). This is because the parent company has control over the financial and operating decisions of the subsidiary, and therefore the two companies are considered to be part of a single economic entity. Consolidated financial statements provide a comprehensive view of the financial position, performance, and cash flows of the parent and subsidiary companies together. Option A and B are incorrect because the decision to prepare consolidated financial statements is not at the option of either the investee or investor company. Option D is incorrect because consolidated financial statements can be prepared even if one company does not own 100% of another company.

Question 9

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 10

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 another company, it is generally considered to have made an investment and the second company is referred to as the investee. The terms parent and subsidiary are used when one company owns more than 50% of the equity securities of the other, indicating a control relationship.

Question 11

On July 1,2014,Tipper Corp.purchased $100,000 of 8% bonds at face value.Interest is paid annually on June 30.If the accounting year for Tipper ends at December 31,2014,what will be reported with respect to the bonds on that date?

Accepted Answer

Since the accounting year ends on December 31, 2014, only 6 months of interest (from July 1, 2014 to December 31, 2014) have been accrued but not yet received. Therefore, interest income of $4,000 (8% x $100,000 x 6/12) will be accrued and reported on the December 31, 2014 financial statements. The carrying value of the bonds will still be $100,000 as no amortization is required when bonds are purchased at face value, and no cash received in interest will be reported until the following year when the interest payment is actually received on June 30, 2015. There is no loss to report as the bonds were purchased at face value and will be received at face value upon maturity.

Question 12

Tippi Corp.invested cash in a 9-month certificate of deposit (CD)on October 1,2014.If Tippi has an accounting period which ends on December 31,2014,when would it most likely recognize interest revenue from the CD?

Accepted Answer

The answer of Tippi Corp.invested cash in a 9-month certificate...

Question 13

On February 1,2014,Shine Corp.pays $50,000 for shares of Cloud common stock and another $1,000 in commissions.Assume that Shine sells the Cloud stock on May 20,2014,for $53,000.In this case,Shine recognizes

Accepted Answer

Shine Corp. recognizes a gain of $2,000, which is the difference between the selling price ($53,000) and the total cost ($51,000, including commissions). This gain increases both assets and stockholders' equity.

Question 14

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 investment) and decrease cash, but there would not be any effect on liabilities or stockholders' equity. Therefore, the accounting equation remains balanced.

Question 15

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 calculate the gain or loss, we need to subtract the cost of buying and commission from the selling price. 
Total cost = $18,000 + $350 = $18,350 
Selling price = $19,000 
Gain or loss = Selling price - Total cost 
= $19,000 - $18,350 
= $650 
Since the result is positive, the answer is a gain. Therefore, the correct choice is D, a $650 gain.

Question 16

Hedron Corp.invested cash in a 6-month certificate of deposit (CD)on November 1,2014.If Hedron Corp.has an accounting period that ends on December 31,2014,when should Hedron recognize interest revenue from the CD?

Accepted Answer

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

Question 17

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 18

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 is used to account for investments in which the investing company has significant influence over the operating and financial policies of the investee. With less than 20% ownership, the investor likely only has a passive interest in the investee and would not require the use of the equity method.

Question 19

Why do businesses invest in short-term investments?

Accepted Answer

Businesses invest in short-term investments to earn interest on excess cash that they currently do not need in their operations, but may need in the near future for operations or investments. It is a way for them to earn a return on their idle cash while still having it readily available for their needs. Option A is incorrect because short-term investments do not provide control over other companies. Option C is also incorrect because short-term investments are typically low-risk investments and do not involve lending money to other companies.

Question 20

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 interest earned on the CD for three months can be calculated as: 
$12,000 x 6% x (3/12) = $240
This means that Interest Receivable will increase by $240, and Interest Revenue will also increase by $240. There will be no other impact on the financial statements until the CD matures and the principal and remaining interest are paid.

Quiz 7: Receivables and Investments