Question 1

A company purchased $60,000 of 5% bonds on May 1 at par value.The bonds pay interest on March 1 and September 1.The amount of interest accrued on December 31 (the company's year-end)would be:

Accepted Answer

The answer of A company purchased $60,000 of 5% bonds...

Question 2

Long-term investments:

Accepted Answer

Long-term investments are those investments that a company expects to hold on to for longer than one year. These investments can be in the form of funds designated for a special purpose or investments in land not used in the company's operations. Long-term investments do not need to be readily convertible to cash and can include both equity and debt securities.

Question 3

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value.The company intends to hold the bonds to maturity.The cash proceeds the company will receive when the bonds mature equal:

Accepted Answer

The company paid $37,800 + $525 = $38,325 to acquire the bonds.
The bonds have a maturity value of $40,000.
When the bonds mature, the company will receive the full maturity value of $40,000.
Therefore, the cash proceeds the company will receive when the bonds mature is $40,000.

Question 4

At acquisition,debt securities are:

Accepted Answer

Debt securities are recorded at cost upon acquisition, meaning the amount paid to purchase the security. This includes any costs such as brokerage fees or commissions, but not any interest to be received in the future.

Question 5

At the end of the accounting period,the owners of debt securities:

Accepted Answer

Interest earned on debt securities during the period must be recorded by the owners at the end of the accounting period. Debt securities typically generate interest income, not dividend income, which is associated with equity securities.

Question 6

All of the following statements regarding debt securities are true except:

Accepted Answer

Debt securities classified as held-to-maturity are recorded at amortized cost, not fair value. Choices A, B, D, and E correctly describe the accounting treatment for debt securities.

Question 7

Long-term investments include:

Accepted Answer

Long-term investments refer to investments that are held for an extended period, usually more than one year. These include investments in bonds and stocks that are not intended to be converted to cash in the short term. Therefore, the best choice is A. The other options, B, C, D, and E, refer to short-term investments or only investments readily convertible to cash.

Question 8

Unrealized gains and losses on stock investments with insignificant influence are reported as a component of stockholders' equity.

Accepted Answer

Unrealized gains and losses on stock investments with insignificant influence are reported as a component of other comprehensive income, not stockholders' equity.

Question 9

All of the following are true about debt securities except:

Accepted Answer

Debt securities, such as bonds and notes, do not reflect an owner relationship, but rather a creditor relationship. The holder of a debt security is typically owed a fixed or variable rate of interest and a repayment of principal at maturity, but does not have ownership rights or voting power in the issuing company. Choices A, B, C, and D are all true about debt securities.

Question 10

Unrealized gains and losses on stock investments with insignificant influence are reported on the income statement.

Accepted Answer

Unrealized gains and losses on stock investments classified as available-for-sale or held for trading are reported on the income statement, reflecting changes in fair value.

Question 11

Stock investments with insignificant influence are classified as short- or long-term based on managers' intent and the stock's marketability.

Accepted Answer

The statement is true as short- or long-term classification depends on the intent of managers and the marketability of the stock even if they have insignificant influence.

Question 12

Dividends received from stock investments with insignificant influence are recorded as a reduction in the investment account.

Accepted Answer

Dividends received from stock investments with insignificant influence are recorded as income, not as a reduction in the investment account.

Question 13

Short-term investments:

Accepted Answer

Short-term investments are securities that management intends to convert to cash within the year, and are readily convertible to cash. This option accurately describes short-term investments.

Question 14

Roe Corporation owns 2,000 shares of WRJ Corporation stock.WRJ Corporation has 25,000 shares of stock outstanding.WRJ paid $4 per share in cash dividends to its stockholders.The entry to record the receipt of these dividends by Roe is:

Accepted Answer

Roe Corporation received $8,000 in cash dividends from WRJ Corporation. This is an example of dividend income earned from an equity investment. Therefore, the entry to record the receipt of these dividends is a debit to Cash for $8,000 and a credit to Dividend Revenue for $8,000. The choice C is the best option as it follows the standard accounting principles.

Question 15

A company has an investment in 9% bonds with a par value of $100,000 that pay interest on October 1 and April 1.The amount of interest accrued on December 31 (the company's year-end)would be:

Accepted Answer

The interest payment dates are October 1 and April 1, so between those two dates, the bonds accrue interest at a rate of 9%/2 = 4.5% per six-month period. Since the company's year-end is December 31, there are 3 months left in the first interest accrual period. Therefore, the bonds have accrued 4.5%/2 * 3/12 * $100,000 = $2,250 in interest by December 31.

Question 16

Strickland Corporation has invested in bonds of Nez Corporation.Strickland intends to actively manage this investment for profit.This investment is classified as:

Accepted Answer

The fact that Strickland intends to actively manage this investment for profit implies that they will be buying and selling the bonds frequently, which meets the definition of a trading security. Available-for-sale and held-to-maturity securities are typically held for longer-term investment purposes, while significant influence and controlling influence securities refer to equity investments where the investor has some level of control over the investee company.

Question 17

When an investor has insignificant influence over another company's stock,presumably when it owns more than 20%,the stock investment is reported at fair value.

Accepted Answer

When an investor owns more than 20% of another company's stock, it is considered to have significant influence and the equity method is used to report the investment on the balance sheet, not fair value. If the investor owns less than 20%, the investment would be reported at fair value.

Question 18

Dividends received from stock investments with insignificant influence are recorded as dividend revenue.

Accepted Answer

Dividends received from stock investments with insignificant influence are recorded as dividend revenue in the income statement as per the Generally Accepted Accounting Principles (GAAP).

Question 19

Long-term investments are reported in the:

Accepted Answer

Long-term investments are classified as non-current assets, and are reported in a separate section of the balance sheet called long-term investments.

Question 20

When an investor has insignificant influence over another company's stock,presumably when it owns less than 20%,the stock investment is reported at fair value.

Accepted Answer

When an investor owns less than 20% of another company's stock and has insignificant influence, the stock investment is reported at fair value. This is in contrast to when an investor owns between 20% and 50% and has significant influence, in which case the investment is reported using the equity method. When an investor owns more than 50%, the investment is reported using the consolidation method.

Quiz 15: Investments

A company purchased $60,000 of 5% bonds on May 1 at par value.The bonds pay interest on March 1 and September 1.The amount of interest accrued on December 31 (the company's year-end) would be: