Question 1

Which of the following is not a true statement regarding short-term debt investments?

Accepted Answer

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. 
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. D

Question 2

On January 1 Skills Company purchased as a short-term investment a $1000 6% bond for $1000. The bond pays interest on January 1. The bond is sold on July 1 for $1200 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. 
$\begin{array}{llr}
  \text {  Cash} &1,200\
 \text { Debt Investments } &&1,200\
 
\end{array}$

b. 
$\begin{array}{llr}
  \text { Cash } &1,230\
 \text {  Debt Investments} &&1,000\
 \text {  Gain on Sale of Debt Investments} &&200\
\text {Interest Revenue.  } &&30
\end{array}$

c. 
$\begin{array}{llr}
  \text { Cash } &1,230\
 \text { Debt Investments } &&1,200\
 \text { Interest Revenue. } &&30
\end{array}$

d. 
$\begin{array}{llr}
  \text { Cash } &1,200\
 \text { Debt Investments } &&1,000\
 \text { Gain on Sale of Debt Investments } &&200
\end{array}$

Accepted Answer

B

Question 3

At December 31 2017 the trading securities for Eddy Company are as follows: $\begin{array}{lrr}
 \underline{\text { Security}}& \underline{\text {  Cost}}& \underline{\text {  Fair Value }}\
\text { A } & \$ 16,000 & \$ 20,000 \
\text { B } & \underline{34,000}& \underline{32,000}\
&\underline{\$50,000}&\underline{\$52,000}
\end{array}$ Prepare the adjusting entry at December 31 2017 to report the securities at fair value.

Accepted Answer

Fair Value Adjustment-Trading $( \$ 52,000 - \$ 50,000 ) $$\quad $$\quad $$\quad $$\quad $2,000
 Unrealized Gain-Income$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $2,000

Question 4

Distinguish between the cost and equity methods of accounting for investments in stocks.

Accepted Answer

Under the cost method an investment is o

Question 5

Stewart Corporation's balance sheet at December 31 2016 showed the following:
Short-term investments at fair value $46500
Stewart Corporation's trading portfolio of stock investments consisted of the following at December 31 2016: $\begin{array}{ccc}
 \underline{\text { Stock }}& \underline{\text { Number of Shares }}& \underline{\text { Cost }}\
\text { Conn Common Stock } & 200 & \$ 28,000 \
\text { Ares Preferred Stock } & 400 & 6,000 \
\text { Hall Common Stock } & 300 &  \underline{\$9, 000} \
& &  \underline{\$ 43,000}
\end{array}$ During 2017 the following transactions took place:
Feb. 5 Sold 100 shares of Conn common stock for $18000.
Mar. 30 Purchased 25 shares of Hall common stock for $1000.
Sept. 9 Purchased 50 shares of Hall common stock for $3000.
At year end on December 31 2017 the fair values per share were: $$\begin{array} { l c } 
&  \underline{\text { Fair Value Per Share }} \
\text { Conn Common Stock }&\$158,00\
\text { Ares Preferred Stock } & \$ 14.00 \
\text { Hall Common Stock } & \$ 24.00
\end{array}$$ Instructions
(a) Prepare the journal entries to record the 2017 stock transactions.
(b) On December 31 2017 prepare any adjusting entry that might be necessary relative to the trading portfolio.
(c) Show how the stock investments will appear on Stewart Corporation's balance sheet at December 31 2017.

Accepted Answer

None

Question 6

When an investor owns between 20% and 50% of the common stock of a corporation it is generally presumed that the investor has _______________ influence over the investee and therefore the appropriate method of accounting for this type of investment is the _______________ method.

Accepted Answer

The answer of When an investor owns between 20% and...

Question 7

If the equity method is being used cash dividends received

Accepted Answer

A)  are credited to Dividend Revenue. 
B)  require no entry because investee net income has already been recorded at the proper proportion on the investor's books. 
C)  are credited to the Stock Investments account. 
D)  are credited to the Revenue from Stock Investments account. 
A)  are credited to Dividend Revenue. 
B)  require no entry because investee net income has already been recorded at the proper proportion on the investor's books. 
C)  are credited to the Stock Investments account. 
D)  are credited to the Revenue from Stock Investments account.

Question 8

The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Accepted Answer

A) True 
 B)False

Question 9

Under the equity method the Stock Investments account is credited when the

Accepted Answer

A)  investee reports net income. 
B)  investee reports a net loss. 
C)  investment is originally acquired. 
D)  investee reports net income and when the investment is originally acquired. 
A)  investee reports net income. 
B)  investee reports a net loss. 
C)  investment is originally acquired. 
D)  investee reports net income and when the investment is originally acquired.

Question 10

The contra-account Fair Value Adjustment is a(n)

Accepted Answer

A)  offset account. 
B)  adjustment account. 
C)  valuation account. 
D)  opposite account. 
A)  offset account. 
B)  adjustment account. 
C)  valuation account. 
D)  opposite account.

Question 11

On February 1 Brutus Company purchased 1000 shares (2% ownership) of Wynne Company common stock for $25 per share. On March 20 Brutus Company sold 200 shares of Wynne stock for $4700. Brutus received a dividend of $1.20 per share on April 25. On June 15 Marcus sold 300 shares of Wynne stock for $8500.
Instructions
Prepare the journal entries to record the transactions described above.

Accepted Answer

The answer of On February 1 Brutus Company purchased 1000...

Question 12

Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.

Accepted Answer

A) True 
 B)False

Question 13

Cost and fair value data for the trading securities of McMahon Company at December 31 2017 are $110000 and $85000 respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value? a.
$\begin{array}{llr}
  \text {Dec. 31 Unrealized Loss - Income.  } &25,000\
 \text { Trading Securities.  } &&25,000\
\end{array}$

b.
$\begin{array}{llr}
  \text { Dec. 31 Unrealized Loss - Income. } &25,000\
 \text {  Trading Securities. } &&25,000\
\end{array}$

c.
$\begin{array}{llr}
  \text { Dec. 31 Unrealized Loss - Income. } &25,000\
 \text {   Fair Value Adjustment-Trading} &&25,000\
\end{array}$

d.
$\begin{array}{llr}
  \text {Dec. 31 Unrealized Loss - Income.  } &25,000\
 \text { Unrealized Loss-Income. } &&25,000\
\end{array}$

Accepted Answer

The answer of Cost and fair value data for the...

Question 14

On January 1 Hamm Company purchased as an investment a $1000 6% bond for $1050. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31? a. 
$\begin{array}{llr}
  \text { Interest Receivable } &60\
 \text { Interest Revenue  } &&60\
\end{array}$

b.
$\begin{array}{llr}
  \text {Debt Investments   } &60\
 \text { Interest Revenue  } &&60\
\end{array}$

c. 
$\begin{array}{llr}
  \text {  Interest Receivable} &63\
 \text {   Interest Revenue} &&63\
\end{array}$

d. 
$\begin{array}{llr}
  \text { Debt Investments  } &63\
 \text {  Interest Revenue } &&63\
\end{array}$

Accepted Answer

The answer of On January 1 Hamm Company purchased as...

Question 15

Greyhound Stables Inc. operates several dog racing tracks throughout the United States. Since most facilities are outdoor tracks only most of the cash receipts for Greyhound are received from April through October. These funds are usually invested in short-term very liquid investments such as stocks and bonds. Among the stocks purchased last year was Servitronics a company specializing in automatic vending equipment.
The company decided not to sell its Servitronics stock at the end of last year and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as short-term until the takeover is accomplished so that less attention will be directed to it. (Presently Greyhound has no long-term investment in stock at all.)
Required:
1. Is it ethical for Greyhound to attempt to take over another company? Explain.
2. Is it ethical for Greyhound to leave its investment in the short-term investment category? Explain.

Accepted Answer

1. Yes Greyhound may attempt to "take ov

Question 16

A company that owns more than 50% of the common stock of another company is known as the ______________ company and _____________ financial statements are usually prepared.

Accepted Answer

The answer of A company that owns more than 50%...

Question 17

The company whose stock is owned by the parent company is usually called the

Accepted Answer

A)  controlled company. 
B)  subsidiary company. 
C)  investee company. 
D)  sibling company. 
A)  controlled company. 
B)  subsidiary company. 
C)  investee company. 
D)  sibling company.

Question 18

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? $\begin{array}{cc} 
& \underline{ \% \text { of Investor Ownership } }& \underline{ \text { Presumed Influence} } \\end{array}$
A)$\begin{array}{cc} & \text { Less than } 20 \% &&&&&& \text { Short-term } \\end{array}$
B)$\begin{array}{cc}  & \text { Between } 20 \%-50 \% &&& \text { Significant } \\end{array}$
C)$\begin{array}{cc}  & \text { More than } 50 \% &&&&& \text { Long-term } \\end{array}$
D)$\begin{array}{cc} & \text { Between } 20 \%-50 \% &&& \text { Controlling }
\end{array}$

Accepted Answer

The answer of Which of the following is the correct...

Question 19

One of the reasons a corporation may purchase investments is that it has excess cash.

Accepted Answer

A) True 
 B)False

Question 20

Terra Cotta Company has the following data at December 31 2017 for its securities: $$\begin{array} { l r r } 
\text { Securities } & \text { Cost }&  \text { Fair Value } \
\text { Available-for-sale } & \$ 34,000 & \$ 39,000 \
\text { Trading } & 46,000 & 42,000
\end{array}$$ Instructions
Journalize the December 31 adjusting entries.

Accepted Answer

None

Exam 16: Investments

Which of the following is not a true statement regarding short-term debt investments?

At December 31 2017 the trading securities for Eddy Company are as follows: A \ 16,000 \ 20,000 B Prepare the adjusting entry at December 31 2017 to report the securities at fair value.

Distinguish between the cost and equity methods of accounting for investments in stocks.

When an investor owns between 20% and 50% of the common stock of a corporation it is generally presumed that the investor has _______________ influence over the investee and therefore the appropriate method of accounting for this type of investment is the _______________ method.

If the equity method is being used cash dividends received

The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

Under the equity method the Stock Investments account is credited when the

The contra-account Fair Value Adjustment is a(n)

Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.

A company that owns more than 50% of the common stock of another company is known as the ______________ company and _____________ financial statements are usually prepared.

The company whose stock is owned by the parent company is usually called the

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee? A) Less than 20\% Short-term B) Between 20\%-50\% Significant C) More than 50\% Long-term D) Between 20\%-50\% Controlling

One of the reasons a corporation may purchase investments is that it has excess cash.

Terra Cotta Company has the following data at December 31 2017 for its securities: Securities Cost Fair Value Available-for-sale \ 34,000 \ 39,000 Trading 46,000 42,000 Instructions Journalize the December 31 adjusting entries.

Accounting in Action

The Recording Process

Adjusting the Accounts

Completing the Accounting Cycle

Accounting for Merchandising Operations

Inventories

Accounting Information Systems

Fraud, Internal Control, and Cash

Accounting for Receivables

Plant Assets, Natural Resources, and Intangible Assets

Current Liabilities and Payroll Accounting

Accounting for Partnerships

Corporations: Organization and Capital Stock Transactions

Corporations: Dividends, Retained Earnings, and Income Reporting

Long-Term Liabilities

Statement of Cash Flows

Financial Statement Analysis

Managerial Accounting

Job Order Costing

Process Costing

Cost-Volume-Profit

Budgetary Planning

Budgetary Control and Responsibility Accounting

Standard Costs and Balanced Scorecard

Incremental Analysis and Capital Budgeting

Time Value of Money

Filters

When an investor owns between 20% and 50% of the common stock of a corporation it is generally presumed that the investor has _ influence over the investee and therefore the appropriate method of accounting for this type of investment is the _ method.

A company that owns more than 50% of the common stock of another company is known as the __ company and _ financial statements are usually prepared.