ACC 206 Week 8 Quiz – Strayer

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Quiz 6 Chapter16

INVESTMENTS

CHAPTERSTUDYOBJECTIVES

1.Discusswhycorporationsinvestindebtandstocksecurities.

2.Explaintheaccountingfordebtinvestments.

3.Explaintheaccountingforstockinvestments.

4.Describetheuseofconsolidatedfinancialstatements.

5.Indicatehowdebtandstockinvestmentsarereportedinfinancialstatements.

6.Distinguishbetweenshort-termandlong-terminvestments.

TRUE-FALSESTATEMENTS

1.     Corporationspurchaseinvestmentsindebtorstocksecuritiesgenerallyforoneoftwo reasons.

2.     Areasonsomecompaniespurchaseinvestmentsisbecausetheygenerateasignificant portion of theirearningsfrom investmentincome.

3.     Theaccountingforshort-termdebtinvestmentsandforlong-termdebtinvestmentsis similar.

4.     Forshort-termdebtinvestments,anybondpremiumordiscountisamortizedtointerest revenue over theremainingtermofthebonds.

5.     Debtinvestmentsareinvestmentsingovernmentandcorporationbonds.

6.     Inaccordancewiththecostprinciple,brokeragefeesshouldbeaddedtothecostofan investment.

7.     Inaccordancewiththecostprinciple,thecostofdebtinvestmentsincludesbrokerage feesandaccruedinterest.

8.     Inaccountingforstockinvestmentsof lessthan20%,the equity methodis used.

9.     Dividendsreceivedon stock investmentsoflessthan 20%shouldbe creditedtothe Stock Investmentsaccount.

10.     Ifaninvestor owns between 20%and50%ofaninvestee'scommonstock,itispresumed that the investorhassignificantinfluenceontheinvestee.

11.     The StockInvestmentsaccountis debitedatacquisitionunderboththe equitymethodand cost methodof accountingfor investmentsincommonstock.

12.     Undertheequity method, the investmentin commonstockis initiallyrecordedatcost, and the Stock Investments accountisadjustedannually.

13.     Undertheequity method, thereceiptofdividendsfrom theinvesteecompanyresultsin an increase intheStockInvestmentsaccount.

14.     Consolidatedfinancialstatementsareappropriatewhenaninvestorcontrolsaninvestee byownershipof morethan50% ofthe investee'scommonstock.

15.     Consolidatedfinancial statementsare preparedinplace ofthe financialstatementsforthe parent andsubsidiarycompanies.

16.     Consolidatedfinancialstatementsshouldbepreparedonlywhenasubsidiarycompany has a controllinginterestintheparentcompany.

17.     Thevaluationofavailable-for-salesecuritiesissimilartotheproceduresfollowedfor tradingsecurities,exceptthatchangesinfairvaluearenotrecognizedincurrentincome.

Investments     16-5

18.     Anunrealizedgainorlossontradingsecuritiesisreportedasaseparatecomponentof stockholders' equity.

19.     Foravailable-for-salesecurities,theunrealizedgainorlossaccountiscarriedforwardto future periods.

20.     Adeclineinthefairvalueofatradingsecurityisrecordedbydebitinganunrealizedloss accountandcreditingtheMarketAdjustmentaccount.

21.     Ifthefairvalueofanavailable-for-salesecurityexceedsitscost,thesecurityshouldbe writtenup tofairvalueandarealizedgainshouldberecognized.

22.     TheMarketAdjustmentaccountcanonlyhavea creditbalanceora zero balance.

23.     Tobeclassifiedasashort-terminvestment,theinvestmentmustbereadilymarketable and intendedtobeconvertedinto cashwithinthenextyearor operatingcycle.

24.     Aninvestmentisreadilymarketableifit ismanagement'sintenttoselltheinvestment.

25.     StockstradedontheNewYork StockExchangeare consideredreadilymarketable.

Additional True-FalseQuestions

26.     Oneofthereasonsacorporationmaypurchaseinvestmentsisthat it hasexcesscash.

27.     Whenrecordingbondinterest,InterestReceivableisreportedasafixedassetinthe balance sheet.

28.     Underthecost method,the investmentisrecordedatcost andrevenueis recognizedonly when cashdividendsarereceived.

29.     Consolidatedfinancialstatementspresentacondensedversionofthefinancial statements so investorswillnot experienceinformationoverload.

30.     Available-for-salesecuritiesaresecuritiesboughtandheldprimarilyforsaleinthenear term togenerateincomeonshort-termpricedifferences.

31.     "Intenttoconvert"doesnotincludeaninvestmentusedasaresourcethatwillbeused whenever theneedfor casharises.

MULTIPLECHOICEQUESTIONS

32.     Corporationsinvestexcesscashforshortperiodsof timeineachof thefollowingexcept a.equitysecurities.

b.highlyliquidsecurities. c.low-risksecurities.

d.governmentsecurities.

33.     Corporationsinvestinother companiesfor allof thefollowingreasonsexceptto a.houseexcesscash untilneeded.

b.generateearnings.c.meetstrategicgoals.

d.increasetradingof theothercompanies’stock.

34.     A typicalinvestmenttohouseexcesscashuntilneeded is a.stocksof companies inarelatedindustry.

b.debtsecurities.

c.low-risk,highlyliquidsecurities. d.stocksecurities.

35.     A companymaypurchaseanoncontrollinginterest inanotherfirminarelatedindustry a.tohouseexcesscash until needed.

b.togenerateearnings. c.for strategicreasons.

d.for speculativereasons.

36.     Pensionfundsandmutualfundsregularlyinvestin debtandstocksecuritiesto a.generateearnings.

b.houseexcesscashuntilneeded. c.meetstrategicgoals.

d.controlthecompanyin whichtheyinvest.

37.     At thetimeofacquisitionofadebtinvestment, a.no journalentry isrequired.

b.thecostprincipleapplies.

c.theStockInvestments accountisdebitedwhenbondsarepurchased. d.the Investmentaccountiscreditedfor itscostplusbrokeragefees.

38.     Whichofthefollowingisnot atrue statement regardingshort-termdebtinvestments? a.Thesecuritiesusuallypayinterest.

b.Investmentsarefrequentlygovernmentor corporatebonds.

c.Thistypeofinvestmentmustbecurrentlytradedinthesecuritiesmarket. d.Anybondpremiumordiscount isamortizedtointerestrevenue.

Usethefollowing informationforquestions39–41.

OnJanuary1,2008,TurnerCompanypurchasedatfacevalue,a$1,000,7%bondthatpays interest onJanuary1andJuly1.TurnerCompanyhas a calendaryearend.

Investments     16-7

39.     TheentryforthereceiptofinterestonJuly1, 2008,is

a.Cash.....................................................................................                    35

InterestRevenue.........................................................                                      35

b.Cash.....................................................................................                    70

InterestRevenue.........................................................                                      70

c.InterestReceivable...............................................................                     35

InterestRevenue.........................................................                                      35

d.InterestReceivable...............................................................                    70

InterestRevenue.........................................................                                      70

40.     TheadjustingentryonDecember31,2008,is a.notrequired.

b.Cash.....................................................................................                    35

InterestRevenue.........................................................                                      35

c.InterestReceivable...............................................................                     35

InterestRevenue.........................................................                                      35

d.InterestReceivable...............................................................                    35

DebtInvestments.........................................................                                      35

41.     TheentryforthereceiptofinterestonJanuary1,2009is

a.Cash.....................................................................................                    70

InterestRevenue.........................................................                                      70

b.Cash.....................................................................................                    70

InterestReceivable......................................................                                      70

c.Cash.....................................................................................                    35

InterestRevenue.........................................................                                      35

d.Cash.....................................................................................                   35

InterestReceivable......................................................                                      35

42.     OnJanuary1,BaroneCompanypurchasedasashort-terminvestmenta$1,000,8% bondfor$1,050.ThebondpaysinterestonJanuary1andJuly1.Thebondissoldon October1for$1,200plusaccruedinterest.Interesthasnotbeenaccruedsincethelast interestpaymentdate.Whatistheentrytorecordthecashproceedsatthetimethebond issold?

a.Cash.....................................................................................               1,200

DebtInvestments........................................................                                  1,200

b.Cash.....................................................................................               1,220

DebtInvestments.........................................................                                 1,050 Gainon Sale of DebtInvestments...............................                                 150 InterestRevenue.........................................................                                   20

c.Cash.....................................................................................               1,220

DebtInvestments.........................................................                                 1,200 InterestRevenue.........................................................                                   20

d.Cash.....................................................................................              1,200

DebtInvestments.........................................................                                 1,050 Gainon Sale of DebtInvestments...............................                                 150

16-8       

43.     Whichofthefollowingisnotatruestatementabouttheaccountingforlong-termdebt investments?

a.The investmentisinitiallyrecordedatcost. b.Thecostincludes anybrokeragefees.

c.Theaccountingforlong-termdebtinvestmentsissimilartotheaccountingforshort-termdebtinvestments.

d.Thecostincludes anyaccruedinterest.

44.     Thecostof debtinvestmentsincludeseachofthefollowingexcept a.brokeragefees.

b.commissions.

c.accruedinterest. d.thepricepaid.

45.     Ifa short-termdebtinvestmentis sold,theInvestmentaccountis a.creditedforthebook valueof thebondsatthesaledate.

b.creditedforthecostof thebondsatthe saledate.

c.creditedforthefairvalueof thebondsatthesaledate. d.debitedforthecostof thebondsatthesaledate.

46.     Anypremiumor discountonalong-termdebtinvestmentisamortized a.tointerestexpense overtheremainingterm ofthebonds.

b.onlyif the effective-interestmethodisused.

c.to interestrevenueovertheremainingtermof thebonds. d.iftheinvestorowns 20%ormoreofthebonds.

Usethefollowing informationforquestions47–49.

PimaCompanyacquires50,10%,5year,$1,000CommunitybondsonJanuary1,2008for $51,250.This includesabrokeragecommissionof $1,250.

47.     Thejournalentrytorecordthis investmentincludesa debitto a.DebtInvestmentsfor$50,000.

b.DebtInvestmentsfor$51,250. c.Cashfor$51,250.

d.StockInvestmentsfor$50,000.

48.     AssumeCommunitypaysinterestonJanuary1and July1,and theJuly1entry was done correctly.Thejournalentry at December31,2008wouldincludea creditto

a.InterestReceivablefor $2,500. b.InterestRevenuefor$5,000.c.AccruedExpensefor$5,000.d.InterestRevenuefor$2,500.

49.     IfPimasellsallofitsCommunitybondsfor$52,000andpays$1,500inbrokerage commissions,whatgainor lossis recognized?

a.Gainof $2,000 b.Lossof$750c.Gain of $750d.Gainof $3,000

Investments     16-9

50.     StevenCo.purchased 30,6%JohnstonCompanybondsfor$30,000cashplusbrokerage feesof$300.InterestispayablesemiannuallyonJuly1andJanuary1.Theentryto recordtheJuly1 semiannualinterestpaymentwouldincludea

a.debitto Interest Receivablefor$900. b.credittoInterest Revenuefor $900.c.credittoInterestRevenuefor $909.d.creditto Debt Investmentsfor$909.

51.     StevenCo.purchased 30,6%JohnstonCompanybondsfor$30,000cashplusbrokerage feesof$300.InterestispayablesemiannuallyonJuly1andJanuary1.Theentryto recordthe December31interestaccrualwouldinclude a

a.debitto Interest Receivablefor$900. b.debittoInterest Revenuefor $900.c.credittoInterestRevenuefor $909.d.debitto DebtInvestmentsfor $900.

52.     TolanCo.purchased60,6%IrickCompanybondsfor$60,000cashplusbrokeragefees of$600.InterestispayablesemiannuallyonJuly1andJanuary1.If15ofthesecurities aresoldonJuly1for$31,000less$300brokeragefees,theentrywouldincludeacredit to Gainon Saleof Debt Investmentsfor

a.$1,000. b.$700.c.$1,300. d.$400.

53.     OnJanuary1,BurkettCompanypurchasedasaninvestmenta$1,000,8%bondfor $1,020.ThebondpaysinterestonJanuary1andJuly1.Whatistheentrytorecordthe interest accrualon December31?

a.InterestReceivable...............................................................                     40

InterestRevenue........................................................                                        40 b.DebtInvestments................................................................              40

InterestRevenue........................................................                                        40 c.InterestReceivable...............................................................              80

InterestRevenue........................................................                                        80 d.DebtInvestments................................................................              80

InterestRevenue........................................................                                        80

54.     DarnetCorporationsells100sharesofcommonstockbeingheldasaninvestment.The shareswereacquired sixmonthsagoatacostof$30ashare.Darnetsoldtheshares for $40a share.Theentrytorecordthesaleis

a.Cash.....................................................................................               3,000 Losson Saleof StockInvestments.....................................                            1,000

StockInvestments......................................................                                  4,000

b.StockInvestments...............................................................                4,000

Cash...........................................................................                                  4,000

c.Cash.....................................................................................               4,000

Gainon Sale of StockInvestments............................                                   1,000 StockInvestments......................................................                                  3,000

d.Cash.....................................................................................              4,000

StockInvestments......................................................                                  4,000

16-10

55.     BrowneCorporationsells200sharesofcommonstockbeingheldasaninvestment.The shareswere acquiredsixmonthsagoata costof$50 ashare.Brownesoldthe sharesfor $40a share.Theentrytorecordthesaleis

a.Cash....................................................................................                8,000 Losson Saleof StockInvestments.....................................                            2,000

StockInvestments.....................................................                                 10,000

b.Cash....................................................................................             10,000

Gainon Sale of StockInvestments............................                                   2,000 StockInvestments.....................................................                                   8,000

c.Cash....................................................................................                8,000

StockInvestments.....................................................                                   8,000

d.StockInvestments..............................................................                 8,000 Losson Saleof StockInvestments.....................................                            2,000

Cash...........................................................................                                10,000

Usethefollowing informationforquestions56–58.

NagenCompanyhadthesetransactionspertainingto stockinvestments:

Feb.1         Purchased 2,000sharesofCagneyCompany(10%)for$33,200 cashplusbrokerage feesof$800.

June1         Receivedcashdividends of $2pershareonCagneystock.

Oct.1         Sold800shares of Cagneystockfor $16,000lessbrokeragefeesof$400.

56.     Theentrytorecordthe purchaseofthe Cagneystockwouldincludea a.debit toStockInvestmentsfor$33,200.

b.creditto Cashfor$33,200.

c.debittoStockInvestmentsfor$34,000. d.debittoInvestmentExpensefor $800.

57.     Theentrytorecordthereceiptofthedividendson June1wouldincludea a.debit toStockInvestmentsfor$4,000.

b.credittoDividendRevenuefor$4,000. c.debittoDividendRevenuefor$4,000. d.credit to StockInvestmentsfor$4,000.

58.     Theentrytorecordthe saleof thestockwouldinclude a a.debitto Cashfor $16,000.

b.credittoGainon Saleof StockInvestmentsfor$800. c.debitto StockInvestmentsfor$13,600.

d.credittoGainon Saleof StockInvestmentsfor$2,000.

59.     MounsCompanyowns40%interestinthestockofDarianCorporation.Duringtheyear, Darianpays$20,000individendstoMouns,andreports$100,000innetincome.Mouns Company’sinvestmentinDarianwillincreaseMouns’net incomeby

a.$20,000. b.$40,000. c.$32,000. d.$8,000.

Investments     16-11

60.     MounsCompanyowns40%interestinthestockofDarianCorporation.Duringtheyear, Darianpays$25,000individendstoMouns,andreports$100,000innetincome.Mouns Company’sinvestmentinDarianwillincreaseby

a.$25,000. b.$40,000. c.$32,000. d.$15,000.

61.     OnJanuary1,2008,JonseyCorporationpurchased30%ofthecommonstock outstandingofKarsenCorporationfor$200,000.During2008,KarsenCorporation reportednetincomeof$80,000andpaidcashdividendsof$40,000.Thebalanceofthe StockInvestments—KarsenaccountonthebooksofJonseyCorporationatDecember31, 2008is

a.$200,000. b.$240,000. c.$280,000. d.$212,000.

62.     DeckerCorporation purchased1,000sharesofKentcommonstockat$70pershareplus $3,000brokeragefeesasashort-terminvestment.Thesharesweresubsequentlysoldat $80pershareless$3,400brokerage fees.Thecostofthesecuritiespurchasedandgain orloss on thesale were

Cost       Gain orLoss a.       $70,000                  $10,000gain b.                   $70,000                   $3,600gain c.                      $73,000                   $7,000gain d.                     $73,000                   $3,600gain

63.     Inaccountingforstockinvestmentsbetween20%and50%,the                          methodisused. a.consolidatedstatements

b.controllinginterest c.cost

d.equity

64.     Whenacompanyholdsstockofseveraldifferentcorporations,thegroupofsecuritiesis identifiedas a(n)

a.affiliatedinvestment.b.consolidatedportfolio. c.investmentportfolio.d.controllinginterest.

65.     JacobsCorporationmakesashort-terminvestmentin100sharesofStarrCompany's commonstock.Thestockispurchasedfor$50ashareplusbrokeragefeesof$300.The entryforthepurchaseis

a.DebtInvestments.................................................................               5,000 Cash............................................................................                             5,000