ACC 557 (Strayer) WK 9 Chapter 12 Quiz
TRUE-FALSE STATEMENTS
Corporations purchase investments in debt or stock securities generally for one of two reasons.
2. A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.
3. The accounting for short-term debt investments and for long-term debt investments is similar.
4. When debt investments, are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds.
5. Debt investments are investments in government and corporation bonds.
6. In accordance with the cost principle, brokerage fees should be added to the cost of an investment.
7. In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest.
8. In accounting for stock investments of less than 20%, the equity method is used.
9. Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.
10. If an investor owns between 20% and 50% of an investee’s common stock, it is presumed that the investor has significant influence on the investee.
11. The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.
12. Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.
13. Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.
14. Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee’s common stock.
15. Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.
16. Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.
17. The valuation of non-trading securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.
18. An unrealized gain or loss on trading securities is reported as a separate component of stockholders’ equity.
19. For non-trading securities, the unrealized gain or loss account is carried forward to future periods.
20. A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair value Adjustment account.
21. If the fair value of a non-trading security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.
22. The Fair Value Adjustment account can only have a credit balance or a zero balance.
23. To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.
24. An investment is readily marketable if it is management’s intent to sell the investment.
25. Stocks traded on the New York Stock Exchange are considered readily marketable.
26. When a parent company acquires a wholly owned subsidiary for an amount in excess of the book value of the net assets acquired, the excess is always allocated to good will.
27. A consolidated income statement will reflect only revenue and expense transactions between the consolidated entity and parties outside the affiliated group.
28. The process of excluding intercompany transactions in preparing consolidated statements is referred to as intercompany eliminations.
29. One of the reasons a corporation may purchase investments is that it has excess cash.
30. When recording bond interest, Interest Receivable is reported as a long-term asset in the balance sheet.
31. Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received.
32. Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.
33. Non-trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.
34. “Intent to convert” does not include an investment used as a resource that will be used whenever the need for cash arises.
MULTIPLE CHOICE QUESTIONS
35. Corporations invest excess cash for short periods of time in each of the following except
a. equity securities.
b. highly liquid securities.
c. low-risk securities.
d. government securities.
36. Corporations invest in other companies for all of the following reasons except to
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. increase trading of the other companiesÂ’ stock.
37. A typical investment to house excess cash until needed is
a. stocks of companies in a related industry.
b. debt securities.
c. low-risk, highly liquid securities.
d. stock securities.
38. A company may purchase a noncontrolling interest in another firm in a related industry
a. to house excess cash until needed.
b. to generate earnings.
c. for strategic reasons.
d. for speculative reasons.
39. Pension funds and mutual funds regularly invest in debt and stock securities primarily to
a. generate earnings.
b. house excess cash until needed.
c. meet strategic goals.
d. control the company in which they invest.
40. At the time of acquisition of a debt investment,
a. no journal entry is required.
b. the cost principle applies.
c. the Stock Investments account is debited when bonds are purchased.
d. the Investment account is credited for its cost plus brokerage fees.
41. Which of the following is not a true statement regarding short-term debt investments?
a. The securities usually pay interest.
b. Investments are frequently government or corporate bonds.
c. This type of investment must be currently traded in the securities market.
d. Debt investments are recorded at the price paid less brokerage fees.
42. On January 1, 2013, Danner Company purchased at face value, a $1,000, 8% bond that pays interest on January 1 and July 1. Danner Company has a calendar year end.
The entry for the receipt of interest on July 1, 2013, is
a. Cash…………………………………………………………………………… 40
Interest Revenue…………………………………………………. 40
b. Cash…………………………………………………………………………… 80
Interest Revenue…………………………………………………. 80
c. Interest Receivable………………………………………………………. 40
Interest Revenue…………………………………………………. 40
d. Interest Receivable………………………………………………………. 80
Interest Revenue…………………………………………………. 80
43. On January 1, 2013, Danner Company purchased at face value, a $1,000, 10% bond that pays interest on January 1 and July 1. Danner Company has a calendar year end.
The adjusting entry on December 31, 2013, is
a. not required.
b. Cash…………………………………………………………………………… 50
Interest Revenue…………………………………………………. 50
c. Interest Receivable………………………………………………………. 50
Interest Revenue…………………………………………………. 50
d. Interest Receivable………………………………………………………. 50
Debt Investments…………………………………………………. 50
44. On January 1, 2013, Milton Company purchased at face value, a $1,000, 4% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end.
The entry for the receipt of interest on January 1, 2014 is
a. Cash…………………………………………………………………………… 40
Interest Revenue…………………………………………………. 40
b. Cash…………………………………………………………………………… 40
Interest Receivable………………………………………………. 40
c. Cash…………………………………………………………………………… 20
Interest Revenue…………………………………………………. 20
d. Cash…………………………………………………………………………… 20
Interest Receivable………………………………………………. 20
45. On January 1, Talent Company purchased as a short-term investment a $1,000, 8% bond for $1,050. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,200 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?
a. Cash…………………………………………………………………………… 1,200
Debt Investments ………………………………………………… 1,200
b. Cash…………………………………………………………………………… 1,220
Debt Investments…………………………………………………. 1,050
Gain onSaleof Debt Investments…………………………. 150
Interest Revenue…………………………………………………. 20
c. Cash…………………………………………………………………………… 1,220
Debt Investments…………………………………………………. 1,200
Interest Revenue…………………………………………………. 20
d. Cash…………………………………………………………………………… 1,200
Debt Investments…………………………………………………. 1,050
Gain onSaleof Debt Investments…………………………. 150
46. Which of the following is not a true statement about the accounting for debt investments?
a. At acquisition, the cost principle applies.
b. The cost includes any brokerage fees.
c. Debt investments include investments in government and corporation bonds.
d. The cost includes any accrued interest.
47. The cost of debt investments includes each of the following except
a. brokerage fees.
b. commissions.
c. accrued interest.
d. the price paid.
48. If a short-term debt investment is sold, the Investment account is
a. credited for the face value of the bonds at the sale date.
b. credited for the cost of the bonds at the sale date.
c. credited for the fair value of the bonds at the sale date.
d. debited for the cost of the bonds at the sale date.
49. In accounting for debt investments, entries are made to recordeach of the following except the
a. acquisition.
b. interest revenue.
c. amortization of any discount or premium.
d. sale.
50. Key Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2013 for $61,250. This includes a brokerage commission of $1,250.
The journal entry to record this investment includes a debit to
a. Debt Investments for $60,000.
b. Debt Investments for $61,250.
c. Cash for $61,250.
d. Stock Investments for $60,000.
51. Key Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2013 for $61,250. This includes a brokerage commission of $1,250.
Assume Community pays interest on January 1 and July 1, and the July 1 entry was made correctly. The journal entry at December 31, 2013 would include a credit to
a. Interest Receivable for $3,000.
b. Interest Revenue for $6,000.
c. Accrued Expense for $6,000.
d. Interest Revenue for $3,000.
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