Question 1

On February 15,Jewel Company buys 7,000 shares of Marcelo Corp.common stock at $28.53 per share plus a brokerage fee of $400.The stock is classified as long-term available-for-sale securities.This is the company's first and only investment in available-for-sale securities.On March 15,Marcelo declares a dividend of $1.15 per share payable to stockholders of record on April 15.Jewel received the dividend on April 15 and ultimately sells half of the Marcelo stock on November 17 of the current year for $29.30 per share less a brokerage fee of $250.The journal entry to record the purchase on February 15 is:

Accepted Answer

The correct journal entry to record the purchase of available-for-sale (AFS) securities includes the cost of the securities ($28.53 per share * 7,000 shares = $199,710) plus the brokerage fee ($400), totaling $200,110. Therefore, the entry debits Debt Investments-AFS and credits Cash for $200,110.

Question 2

On January 4,Year 1,Barber Company purchased 5,000 shares of Convell Company for $59,500 plus a broker's fee of $1,000.Convell Company has a total of 25,000 shares of common stock outstanding and it is presumed the Barber Company will have a significant influence over Convell.During each of the next two years,Convell declared and paid cash dividends of $0.85 per share,and its net income was $72,000 and $67,000 for Year 1 and Year 2,respectively.The January 12,Year 3,entry to record Barber's sale of 3,000 shares of Convell Company stock,which represents 60% of Barber's total investment,for $39,000 cash should be:

Accepted Answer

Under the equity method, the investor records its share of the investee's net income as an increase to the investment account and dividends received as a reduction of the investment account. The investment account is adjusted for the investor's share of any changes in the investee's equity, including gains and losses on the investee's assets or liabilities.

In Year 1, Barber's share of Convell's net income is $18,000 ($72,000 x 20%), which increases Barber's investment account to $78,500 ($59,500 + $18,000 + $1,000). In Year 2, Barber's share of Convell's net income is $13,400 ($67,000 x 20%), which further increases Barber's investment account to $91,900 ($78,500 + $13,400 + $1,000).

When Barber sells 3,000 shares of Convell on January 12, Year 3, it will recognize a loss on sale of investment equal to the difference between the sale price of $39,000 and the carrying amount of the sold shares of $47,880 ($91,900 x 60% = $55,140 - $1,000 broker's fee = $54,140 - 3,000 shares x $18.96 carrying amount per share = $5,760). The loss on sale of investment is $8,880 ($5,760 - $39,000).

The entry to record the sale of 3,000 shares of Convell Company stock is:
Debit Cash $39,000
Debit Loss on Sale of Investment $8,880
Credit Equity Method Investments $47,880

Question 3

Landmark Corp.buys $300,000 of Schroeter Company's 8%,5-year bonds payable at par value on September 1.Interest payments are made semiannually.Landmark plans to hold the bonds for the 5-year life.When the bonds mature,the journal entry to record the proceeds will be:

Accepted Answer

When the bonds mature, the investor will receive the face value of the bonds, which is equal to the amount paid for the bonds at the time of purchase. Therefore, the journal entry to record the proceeds will be a debit to Cash for $300,000, and a credit to the Debt Investments held to maturity (HTM) account for $300,000. The Interest Revenue account is used to record the periodic interest payments received from the bond issuer, and Interest Receivable is used to record interest that has been earned but not yet received. Bonds Payable is the account used by the bond issuer to record the outstanding balance of their bond debt.

Question 4

Madison Corporation purchased 40% of Jay Corporation for $125,000 on January 1.On June 20 of the same year,Jay Corporation declared total cash dividends of $30,000.At year-end,Jay Corporation reported net income of $150,000.The balance in Madison Corporation's Long-Term Investment-Jay Corporation account as of December 31 should be:

Accepted Answer

Madison Corporation owns 40% of Jay Corporation, indicating significant influence.

On June 20, the company received $30,000 in cash dividends (40% of $30,000 = $12,000).

To record the investment, Madison Corporation debited Long-Term Investment-Jay Corporation for $125,000.

To record the share of net income, Madison would credit Long-Term Investment-Jay Corporation for $60,000 (40% of $150,000).

Therefore, the balance in the Long-Term Investment-Jay Corporation account as of December 31 should be $173,000 ($125,000 + $12,000 + $60,000).

Question 5

On January 1,Jewel Company buys $200,000 of Marcelo Corp.12%,36-month notes.Interest is paid on the last day of each month.The notes are classified as available-for-sale securities.This is the company's first and only investment in available-for-sale securities.On December 31,the notes have a fair value of $204,000.The journal entry on January 1 to record the investment is:

Accepted Answer

The correct journal entry to record the purchase of available-for-sale (AFS) securities is to debit the investment account for the purchase price (in this case, Debt Investments - AFS) and credit cash for the same amount. The fair value at the end of the year does not affect the initial purchase entry.

Question 6

Pravis Corporation owns 30% of Kuster Corporation.Pravis Corporation received $9,000 in cash dividends from Kuster Corporation.The entry to record receipt of these dividends is:

Accepted Answer

Pravis Corporation owns 30% of Kuster Corporation, so the dividends received are considered as equity method investments. The entry to record the receipt of these dividends is to debit Cash for $9,000 and credit Equity Method Investments for $9,000.

Question 7

Landmark Corp.buys $300,000 of Schroeter Company's 8%,5-year bonds payable at par value on September 1.Interest payments are made semiannually.Landmark plans to hold the bonds for the 5-year life.The journal entry to record the purchase should include:

Accepted Answer

Landmark Corp. plans to hold Schroeter Company's bonds for the full 5-year life, indicating an intention to hold the bonds until maturity. Therefore, the investment should be classified as held-to-maturity (HTM) and a debit should be made to Debt Investments-HTM for the full amount of $300,000. The other investment classifications (available-for-sale and trading) are inappropriate because they are used for investments that are intended to be sold or traded in the short-term. The cash payment of $300,000 will be credited.

Question 8

All of the following statements regarding other comprehensive income are true except:

Accepted Answer

Other comprehensive income is included when calculating comprehensive income. Comprehensive income is the sum of net income and other comprehensive income.

Question 9

All of the following statements regarding accounting for trading securities under U.S.GAAP are true except:

Accepted Answer

The period-end fair value adjustment for a portfolio of trading securities includes only the securities still held at the end of the period, not those that have been sold. The gain or loss from the sale of securities is calculated based on the cost and selling price of the sold securities, not on their fair value adjustments prior to sale.

Question 10

Landmark Corp.buys $300,000 of Schroeter Company's 8%,5-year bonds at par value on September 1.Interest payments are made semiannually.All of the following regarding accounting for the securities are true except:

Accepted Answer

The semiannual interest payment amount is not $24,000. The 8% annual interest rate is divided by two to get a semiannual interest rate of 4%. The semiannual interest payment amount will be calculated as $300,000 x 4% = $12,000.

Question 11

On January 1,Jewel Company buys $200,000 of Marcelo Corp.12%,36-month notes.Interest is paid on the last day of each month.The notes are classified as available-for-sale securities.This is the company's first and only investment in available-for-sale securities.On December 31,the notes have a fair value of $204,000.The journal entry to record the receipt of the monthly interest on January 31 is:

Accepted Answer

The journal entry to record the receipt of monthly interest on January 31 would be to debit Cash $2,000 and credit Interest Revenue $2,000. This is because the notes are classified as available-for-sale securities, and interest revenue is recognized when it is earned, regardless of changes in fair value. Therefore, choices A, B, C, and E are incorrect as they do not properly account for the recognition of interest revenue.

Question 12

Marjam Company owns 30,000 shares of MacKenzie Company's 100,000 outstanding shares of common stock.MacKenzie Company pays $25,000 in total cash dividends to its shareholders.Marjam's entry to record this transaction should include a:

Accepted Answer

Marjam Company owns 30% of MacKenzie Company's outstanding shares, so Marjam's share of the cash dividends is $7,500 (30% x $25,000). The entry to record this transaction should include a credit to Equity Method Investments for $7,500.

Question 13

All of the following statements regarding accounting for trading securities under U.S.GAAP are true except:

Accepted Answer

An unrealized gain or loss is not recorded with an adjusting entry when the securities are sold. Instead, a realized gain or loss is recognized at the time of sale.

Question 14

On January 4,Year 1,Barber Company purchased 5,000 shares of Convell Company for $59,500 plus a broker's fee of $1,000.Convell Company has a total of 25,000 shares of common stock outstanding and it is presumed the Barber Company will have a significant influence over Convell.During each of the next two years,Convell declared and paid cash dividends of $0.85 per share,and its net income was $72,000 and $67,000 for Year 1 and Year 2,respectively.What is the book value of Barber's investment in Convell at the end of Year 2?

Accepted Answer

To calculate the book value of Barber's investment in Convell at the end of Year 2, we need to account for the dividends received and any changes in the value of the shares.

Step 1: Calculate the total dividends received by Barber in Year 1 and Year 2:
- Dividends per share = $0.85
- Total dividends received in Year 1 = 5,000 shares x $0.85 per share = $4,250
- Total dividends received in Year 2 = 5,000 shares x $0.85 per share = $4,250
- Therefore, the total dividends received by Barber over the two years = $4,250 + $4,250 = $8,500

Step 2: Calculate the net income attributable to Barber for Year 1 and Year 2, based on the percentage of ownership (i.e., Barber's share of the total net income):
- Barber's percentage of ownership = 5,000 shares / 25,000 shares = 20%
- Net income attributable to Barber in Year 1 = 20% x $72,000 = $14,400
- Net income attributable to Barber in Year 2 = 20% x $67,000 = $13,400

Step 3: Calculate the total value of Barber's investment in Convell at the end of Year 2, using the cost method (i.e., the original cost of the investment plus or minus any adjustments based on dividends received and changes in value):
- Original cost of investment = $59,500 + $1,000 broker's fee = $60,500
- Total dividends received over the two years = $8,500
- Net increase (decrease) in value based on net income attributable to Barber = $14,400 - $13,400 = $1,000
- Book value of investment at end of Year 2 = $60,500 + $8,500 + $1,000 = $79,800

Therefore, the correct answer is B) $79,800.

Question 15

On February 15,Jewel Company buys 7,000 shares of Marcelo Corp.common stock at $28.53 per share plus a brokerage fee of $400.The stock is classified as available-for-sale securities.This is the company's first and only investment in available-for-sale securities.On March 15,Marcelo Corp.declares a dividend of $1.15 per share payable to stockholders of record on April 15.Jewel Company received the dividend on April 15 and ultimately sells half of the Marcelo Corp.stock on November 17 of the current year for $29.30 per share less a brokerage fee of $250.The journal entry to record the dividend on April 15 is:

Accepted Answer

The journal entry to record the dividend received should be a debit to Cash for the amount received ($8,050) and a credit to Dividend Revenue for the same amount. Therefore, option B is the correct choice. Option A is incorrect because it does not specify the correct amount of the dividend received. Option C is incorrect because the transaction is related to dividends, not interest. Option D is incorrect for the same reason. Option E is incorrect because it relates to the sale of investments, not the receipt of dividends.

Question 16

Bharrat Corporation purchased 40% of Ferris Corporation for $100,000 on January 1.On October 17 of the same year,Ferris Corporation declared total cash dividends of $12,000.At year-end,Ferris Corporation reported net income of $60,000.The balance in the Bharrat Corporation's Long-Term Investment-Ferris account at December 31 should be:

Accepted Answer

Bharrat Corporation's investment in Ferris would increase by its share of Ferris's net income and decrease by the dividends received. Bharrat's share of Ferris's net income is 40% of $60,000 = $24,000. Bharrat's share of dividends is 40% of $12,000 = $4,800. The investment account increases by net income share and decreases by dividends received: $100,000 + $24,000 - $4,800 = $119,200.

Question 17

Landmark buys $300,000 of Schroeter Company's 8%,5-year bonds payable at par value on September 1.Interest payments are made semiannually on March 1 and September 1.The journal entry Landmark should record to accrue interest earned at year-end December 31 is:

Accepted Answer

The bond has an 8% interest rate and a par value of $300,000, which means the annual interest payment is $24,000 ($300,000 x 8%). Since the interest is paid semiannually, each payment will be $12,000 ($24,000/2).
Landmark bought the bond on September 1, so it will only receive one interest payment of $12,000 on that date. However, at year-end December 31, three months have passed since the last interest payment on September 1, so Landmark has earned $8,000 ($12,000 x 3/6) in interest that has not been received yet. Therefore, Landmark should debit Interest Receivable for $8,000 and credit Interest Revenue for $8,000 to record the accrual of interest earned but not yet received.

Question 18

All of the following statements regarding accounting for noninfluential securities under U.S.GAAP and IFRS are true except:

Accepted Answer

Trading securities are accounted for using fair values with unrealized gains and losses reported in net income, not in other comprehensive income. This makes option A incorrect.

Question 19

All of the following statements regarding accounting for influential securities under U.S.GAAP and IFRS are true except:

Accepted Answer

Under the equity method, the investment account equals the acquisition cost plus the share of investee income minus the share of investee dividends, not plus the share of investee dividends. Dividends received from the investee reduce the carrying amount of the investment.

Question 20

McVeigh Corp.owns 40% of Gondor Company's common stock.McVeigh received $41,200 in cash dividends from Gondor.The entry to record this transaction should include a:

Accepted Answer

The answer of McVeigh Corp.owns 40% of Gondor Company's common...

Quiz 15: Investments

Landmark Corp.buys $300,000 of Schroeter Company's 8%,5-year bonds payable at par value on September 1.Interest payments are made semiannually.Landmark plans to hold the bonds for the 5-year life.When the bonds mature,the journal entry to record the proceeds will be:

Pravis Corporation owns 30% of Kuster Corporation.Pravis Corporation received $9,000 in cash dividends from Kuster Corporation.The entry to record receipt of these dividends is:

Landmark Corp.buys $300,000 of Schroeter Company's 8%,5-year bonds payable at par value on September 1.Interest payments are made semiannually.Landmark plans to hold the bonds for the 5-year life.The journal entry to record the purchase should include:

All of the following statements regarding other comprehensive income are true except:

All of the following statements regarding accounting for trading securities under U.S.GAAP are true except:

Landmark Corp.buys $300,000 of Schroeter Company's 8%,5-year bonds at par value on September 1.Interest payments are made semiannually.All of the following regarding accounting for the securities are true except:

Marjam Company owns 30,000 shares of MacKenzie Company's 100,000 outstanding shares of common stock.MacKenzie Company pays $25,000 in total cash dividends to its shareholders.Marjam's entry to record this transaction should include a:

All of the following statements regarding accounting for trading securities under U.S.GAAP are true except:

Landmark buys $300,000 of Schroeter Company's 8%,5-year bonds payable at par value on September 1.Interest payments are made semiannually on March 1 and September 1.The journal entry Landmark should record to accrue interest earned at year-end December 31 is:

All of the following statements regarding accounting for noninfluential securities under U.S.GAAP and IFRS are true except:

All of the following statements regarding accounting for influential securities under U.S.GAAP and IFRS are true except:

McVeigh Corp.owns 40% of Gondor Company's common stock.McVeigh received $41,200 in cash dividends from Gondor.The entry to record this transaction should include a: