Question 1

Long-term investments in held-to-maturity debt securities are accounted for using the:
A)Fair value method with fair value adjustment to income.
B)Fair value method with fair value adjustment to equity.
C)Cost method without amortization.
D)Cost method with amortization.
E)Equity method.

Accepted Answer

Long-term investments in held-to-maturity debt securities should be accounted for using the cost method with amortization. This means that the investment is initially recorded at cost and then amortized over the life of the security using the effective interest method. The amortization is recorded as an adjustment to interest income on the income statement. The fair value method is not appropriate for held-to-maturity securities as they are intended to be held until maturity and the amortization method reflects this intention.

Question 2

A company had net income of $43,000,net sales of $380,500,and average total assets of $220,000.Its profit margin and total asset turnover were,respectively:
A)11.3%; 1.73.
B)11.3%; 19.5.
C)1.7%; 19.5.
D)1.7%; 11.3.
E)19.5%; 11.3.

Accepted Answer

Profit margin = Net income / Net sales
Profit margin = $43,000 / $380,500
Profit margin = 0.113 or 11.3%

Total asset turnover = Net sales / Average total assets
Total asset turnover = $380,500 / $220,000
Total asset turnover = 1.73

Therefore, the correct choice is A, with a profit margin of 11.3% and a total asset turnover of 1.73.

Question 3

Kendall Corp.purchased at par value $75,000 of Shrem Company's 8% bonds that mature in three-years.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.When the bonds mature,Kendall should prepare the following journal entry:
A)debit Debt Investments−HTM,$75,000; credit Cash,$75,000.
B)debit Cash,$6,000; credit,Unrealized Gain-Equity,$6,000.
C)debit Cash,$75,000; credit Debt Investments−HTM,$75,000.
D)debit Unrealized Gain-Equity,$6,000; credit Cash,$6,000.
E)debit Cash,$75,000; credit Debt Investments−Trading,$75,000.

Accepted Answer

When the bonds mature, Kendall will receive the full face value of $75,000 as well as any accrued interest. Therefore, the journal entry will involve debiting Cash for $75,000 and crediting the original investment account, Debt Investments - HTM, for the same amount. There is no reason to record an unrealized gain or to switch to the trading portfolio, as the company has already stated its intention to hold the bonds until maturity.

Question 4

Accounting for long-term investments in equity securities with controlling influence uses the:
A)Controlling method.
B)Equity method with consolidation.
C)Investor method.
D)Investment method.
E)Consolidated method.

Accepted Answer

The equity method with consolidation is used when an entity has significant influence over another entity but does not have full control. This method allows for the investor to account for their share of the investee's income, dividends, and changes in equity through their own financial statements. Additionally, consolidation is required to show the combined financial statements of the investor and investee.

Question 5

Select the correct statement from the following:
A)Profit margin reflects a company's ability to produce net sales from total assets.
B)Total asset turnover reflects the percent of net income in each dollar of net sales.
C)Return on total assets can be separated into gross margin ratio and price-earnings ratio.
D)High returns on total assets are desirable.
E)Return on total assets analysis is beneficial in evaluating a company but is not useful for competitor analysis.

Accepted Answer

High returns on total assets are desirable because they indicate that a company is effectively using its assets to generate income.

Question 6

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value as a long-term investment.The company intends to hold the bonds to maturity.The correct entry to record the purchase of the bond investment is:
A)Debit Debt Investments−HTM $37,800; credit Cash $37,800.
B)Debit Debt Investments−HTM $38,325; credit Cash $38,325.
C)Debit Cash $40,000; credit Debt Investments−HTM $40,000.
D)Debit Debt Investments−HTM $37,800; debit Investment Expense $525; credit Cash $38,325
E)Debit Debt Investments−HTM $37,800; debit Loss on Investment $525; credit Cash $38,325.

Accepted Answer

The entry to record the purchase of the bond investment should include the cost of the bonds ($37,800) plus the broker's fee ($525), which equals $38,325. The account to debit is Debt Investments−HTM, which represents a long-term investment in bonds held to maturity. The account to credit is Cash, which represents the payment made for the investment. Therefore, the correct entry is Debit Debt Investments−HTM $38,325; credit Cash $38,325.

Question 7

Comprehensive income includes all except:
A)Revenues and expenses reported in the income statement.
B)Dividends paid to shareholders.
C)Unrealized gains and losses on long-term available-for-sale debt securities.
D)All changes in equity for a period except those due to investments and distributions to owners.
E)Gains and losses reported in the income statement.

Accepted Answer

Comprehensive income includes all changes in equity for a period except those due to investments and distributions to owners, such as dividends paid to shareholders. Therefore, choice B is the correct answer as it is not included in comprehensive income.

Question 8

A company has net income of $250,000,net sales of $2,000,000,and average total assets of $1,500,000.Its return on total assets equals:
A)12.5%.
B)13.3%.
C)16.7%.
D)75.0%.
E)600.0%.

Accepted Answer

The answer of A company has net income of $250,000,net...

Question 9

A company had net income of $2,660,000,net sales of $25,000,000,and average total assets of $8,000,000.Its return on total assets equals:
A)3.01%.
B)10.64%.
C)32.00%.
D)33.25%.
E)300.75%.

Accepted Answer

The answer of A company had net income of $2,660,000,net...

Question 10

The investee company in a long term investment with controlling interest is called the:
A)Owner.
B)Subsidiary.
C)Parent.
D)Creditor.
E)Senior entity.

Accepted Answer

When an investor holds a long-term investment with controlling interest in a company, it means that the investor owns more than 50% of the voting stock of the investee company. In this scenario, the investee company becomes a subsidiary of the investor, as the investor has control over the investee's operations and financial policies. Therefore, the correct answer is B) Subsidiary.

Question 11

Barnes Company purchased $50,000 of 8% bonds at par.The bonds mature in six years and are a held-to-maturity security.Which of the following is the correct journal entry to record the receipt of the semiannual interest payment?
A)debit Cash,$4,000; credit Debt Investments−HTM,$4,000.
B)debt Cash,$2,000; credit Debt Investments−HTM,$2,000.
C)debit Cash,$2,000; credit Interest Revenue,$2,000.
D)debit Unrealized Gain-Equity,$2,000; credit Cash,$2,000.
E)debit Cash,$4,000; credit Unrealized Gain-Equity,$4,000.

Accepted Answer

When recording receipt of semiannual interest payments on a held-to-maturity security, we debit Cash and credit Interest Revenue. Both choices A and B are incorrect as they erroneously credit Debt Investments−HTM instead of Interest Revenue. Choice D involves unrealized gains, which are not applicable to held-to-maturity securities. Choice E involves unrealized gains again and also errs by debiting Cash instead of crediting it. Therefore, the correct entry is choice C, debit Cash for the amount of the interest payment received and credit Interest Revenue.

Question 12

A company had a profit margin of 10.5% and total asset turnover of 1.84.Its return on total assets was:
A)5.71%
B)8.66%
C)12.34%
D)13.61%
E)19.32%

Accepted Answer

The answer of A company had a profit margin of...

Question 13

Consolidated financial statements:
A)Show the results of operations,cash flows,and the financial position of all entities under a parent's control,including all subsidiaries.
B)Show the results of operations,cash flows,and the financial position of the parent only.
C)Show the results of operations,cash flows,and the financial position of the subsidiary only.
D)Include the investments in the subsidiaries on the balance sheet.
E)Do not include a balance sheet.

Accepted Answer

Consolidated financial statements show the results and financial position of all entities under a parent's control, including all subsidiaries, therefore option A is the correct answer. Options B, C, and E are all incorrect, as they do not show the complete financial picture of all entities under the parent's control. Option D is partially correct, as investments in subsidiaries are included on the balance sheet, but it is not the main purpose of consolidated financial statements.

Question 14

Short-term investments in held-to-maturity debt securities are accounted for using the:
A)Fair value method with fair value adjustment to income.
B)Fair value method with fair value adjustment to equity.
C)Cost method with amortization.
D)Cost method without amortization.
E)Equity method.

Accepted Answer

The answer of Short-term investments in held-to-maturity debt securities are...

Question 15

A controlling influence over the investee is based on the investor owning voting stock exceeding:
A)10%.
B)20%.
C)30%.
D)40%.
E)50%.

Accepted Answer

A controlling influence over the investee is based on the investor owning voting stock exceeding 50%. This is because owning 50% or more of the voting stock gives the investor the ability to control the investee's operations and decision-making process. Owning less than 50% may still give the investor significant influence or even joint control depending on the specific circumstances, but it would not constitute a controlling influence.

Question 16

Long-term investments cannot include:
A)Held-to-maturity debt securities.
B)Securities with maturity dates within one year.
C)Available-for-sale equity securities.
D)Equity securities giving an investor significant influence over an investee.
E)Available-for-sale debt securities.

Accepted Answer

Long-term investments are securities that a company plans to hold for more than one year. Securities with maturity dates within one year cannot be considered as long-term investments.

Question 17

Cloverton Corporation had net income of $30,000,net sales of $1,000,000,and average total assets of $500,000.Its return on total assets is:
A)3%
B)200%
C)6%
D)17%
E)1.5%

Accepted Answer

The return on total assets (ROTA) is calculated as net income divided by average total assets. So, $30,000 / $500,000 = 0.06 or 6%.

Question 18

The controlling investor is called the:
A)Owner.
B)Subsidiary.
C)Parent.
D)Investee.
E)Senior entity.

Accepted Answer

The controlling investor is referred to as the parent company, as it has control over the subsidiary through ownership of the majority of the subsidiary's voting shares. A subsidiary is a company that is controlled by another company, while an investee is a company in which an investor has made an investment. "Senior entity" is not a commonly used term in accounting and financial reporting.

Question 19

Canberry Corporation had net income of $80,000,beginning total assets of $640,000 and ending total assets of $580,000.Its return on total assets is:
A)13.1%
B)12.5%
C)13.8%
D)800%
E)725%

Accepted Answer

The answer of Canberry Corporation had net income of $80,000,beginning...

Question 20

Kendall Corp.purchased at par value $160,000 of Barker Company's 7% bonds that mature in 10 months.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.The journal entry to record Kendall's purchase of the bonds is:
A)debit Short-Term Debt Investments−HTM $160,000; credit Cash,$160,000.
B)debit Cash,$169,333; credit,Short-Term Investments−HTM $169,333.
C)debit Cash,$160,000; credit Short-Term Investments−HTM $160,000.
D)debit Long-Term Debt Investments-HTM $160,000; credit Cash $160,000.
E)debit Cash,$160,000; credit Long-Term Debt Investments-HTM $160,000.

Accepted Answer

CSince Kendall Corp. is purchasing the bonds at par value and plans to hold them until maturity, the correct entries involve debiting and crediting the investment and cash accounts, respectively, for the purchase amount of $160,000. The bonds are short-term because they mature in 10 months, making option A correct. Option C is also correct as it represents the same transaction but from a different perspective, focusing on the cash outflow for the purchase.

Quiz 15: Investments

Long-term investments in held-to-maturity debt securities are accounted for using the:

A company had net income of $43,000,net sales of $380,500,and average total assets of $220,000.Its profit margin and total asset turnover were,respectively:

Kendall Corp.purchased at par value $75,000 of Shrem Company's 8% bonds that mature in three-years.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.When the bonds mature,Kendall should prepare the following journal entry:

Accounting for long-term investments in equity securities with controlling influence uses the:

Select the correct statement from the following:

A company paid $37,800 plus a broker's fee of $525 to acquire 8% bonds with a $40,000 maturity value as a long-term investment.The company intends to hold the bonds to maturity.The correct entry to record the purchase of the bond investment is:

Comprehensive income includes all except:

A company has net income of $250,000,net sales of $2,000,000,and average total assets of $1,500,000.Its return on total assets equals:

A company had net income of $2,660,000,net sales of $25,000,000,and average total assets of $8,000,000.Its return on total assets equals:

The investee company in a long term investment with controlling interest is called the:

Barnes Company purchased $50,000 of 8% bonds at par.The bonds mature in six years and are a held-to-maturity security.Which of the following is the correct journal entry to record the receipt of the semiannual interest payment?

A company had a profit margin of 10.5% and total asset turnover of 1.84.Its return on total assets was:

Consolidated financial statements:

Short-term investments in held-to-maturity debt securities are accounted for using the:

A controlling influence over the investee is based on the investor owning voting stock exceeding:

Long-term investments cannot include:

Cloverton Corporation had net income of $30,000,net sales of $1,000,000,and average total assets of $500,000.Its return on total assets is:

The controlling investor is called the:

Canberry Corporation had net income of $80,000,beginning total assets of $640,000 and ending total assets of $580,000.Its return on total assets is:

Kendall Corp.purchased at par value $160,000 of Barker Company's 7% bonds that mature in 10 months.The bonds pay interest semiannually on June 1 and December 1.Kendall plans to hold the bonds until they mature.The journal entry to record Kendall's purchase of the bonds is: