Question 1

Meta Inc.pays $18,000 to buy stock in another company and an additional $350 in commissions.Three months later, Meta sells the stock for $19,000.At the time of sale, Meta will recognize a:

Accepted Answer

To determine the gain or loss, we need to subtract the cost of the stock plus commission ($18,000 + $350 = $18,350) from the selling price ($19,000), which gives us a gain of $650. Therefore, the answer is D, a $650 gain.

Question 2

The equity method of accounting for an investment is used when a company purchases

Accepted Answer

The equity method of accounting is used when an investment represents a significant influence on the second company, generally when the investor holds 20% to 50% of the outstanding voting shares of the second company. Therefore, choice D, which states that the company purchases more than 20% of the equity securities of a second company, is the correct answer.

Question 3

Clarion Corp.invested cash in a 6-month certificate of deposit CD) on November 1, 2015.If Clarion Corp.has an accounting period that ends on December 31, 2015, when should Clarion recognize interest revenue from the CD?

Accepted Answer

Interest revenue should be recognized over the period it is earned. Since the CD spans two accounting periods, Clarion should recognize interest revenue on December 31, 2015, for the interest earned up to that date, and again on May 1, 2016, for the remaining interest.

Question 4

On July 1, 2015, Frank Corp.purchased $100,000 of 8% bonds at face value.Interest is paid annually on June 30.If the accounting year for Frank ends at December 31, 2015, what will be reported with respect to the bonds on that date?

Accepted Answer

Since the accounting year for Frank ends on December 31, 2015 and interest is paid annually on June 30, 2016, only six months of interest income ($4,000) will be accrued and reported on the December 31, 2015 balance sheet. The carrying value of the bonds will remain at $100,000 until the next interest payment is made, and therefore, there will be no loss reported in the income statement. The cash received in interest is not relevant to the question.

Question 5

Significant influence of one company over another has been defined by the accounting profession as the ownership of what minimum percent of the second company's stock?

Accepted Answer

Significant influence is typically defined as owning 20% or more of another company's voting stock, according to accounting standards.

Question 6

What are the effects on the accounting equation from the purchase of a short-term investment?

Accepted Answer

The accounting equation is Assets = Liabilities + Stockholders' Equity.

When a short-term investment is purchased, there is an increase in the asset account (short-term investment) and a corresponding decrease in the cash account (or whichever asset account was used to make the purchase).

Since both the increase and the decrease are on the asset side of the equation and of the same amount, there is no net effect on the equation. Therefore, the answer is B.

Question 7

On February 1, 2015, Vermont Corp.pays $50,000 for shares of Stream, Inc.common stock and another $1,000 in commissions.Assume that Vermont sells the Stream stock on May 20, 2015, for $53,000.In this case, Vermont recognizes

Accepted Answer

The answer of On February 1, 2015, Vermont Corp.pays $50,000...

Question 8

When a company discounts an interest-bearing note at a bank with recourse:

Accepted Answer

When a company discounts an interest-bearing note at a bank with recourse, it means that the company is responsible for repaying the note if the borrower defaults before its maturity. This creates a contingent liability for the company from the time the note is discounted until its maturity date, as the bank can demand repayment from the company if the borrower fails to pay. The company will not necessarily receive the full amount of the note plus interest, and the bank does not assume credit risk on non-payment at the maturity date.

Question 9

Cushion Sports accepted a credit card account receivable in exchange for $5,000 of services provided to a customer.The credit card company charges a 5% service charge.Recording the transaction in the company's accounting records will have what effect on the accounting equation?

Accepted Answer

Accepting the credit card account receivable will increase the assets and equity of Cushion Sports by $5,000. However, the service charge of 5% ($250) will be deducted from the total amount, leaving a net increase of $4,750 in assets and equity.

Question 10

For what reason would a company buy 10% of the common stock of a second company?

Accepted Answer

The answer of For what reason would a company buy...

Question 11

If Cable Inc.receives $23,825 from credit card collections and has an average rate of 4.7% charged by the credit card company, its credit card sales during the period were:

Accepted Answer

To find the credit card sales, divide the amount received by (1 - credit card fee rate): $23,825 / (1 - 0.047) = $25,000.

Question 12

When a note receivable has been discounted by a company

Accepted Answer

When a company discounts a note receivable, it essentially sells the note to a financial institution before its maturity date, usually for less than its face value. This process does not slow down the collection process; instead, it accelerates the cash inflow, albeit at a reduced amount. The note is no longer shown as an asset on the company's balance sheet because the rights to receive the cash have been transferred to another entity. However, if there is a possibility that the company might have to repay the amount to the financial institution (for example, if the debtor fails to pay the note at maturity), this potential obligation is disclosed as a contingent liability in the footnotes of the financial statements. There is no specific account called "discount on notes receivable" used in this context; instead, the discount represents the interest expense or finance charge for obtaining early cash from the note.

Question 13

Davis Corp.invested cash in a 9-month certificate of deposit CD) on October 1, 2015.If Davis has an accounting period which ends on December 31, 2015, when would it most likely recognize interest revenue from the CD?

Accepted Answer

Since the CD has a maturity of 9 months, the interest revenue will most likely be recognized at the end of the accounting periods which fall within the 9-month period. In this case, the accounting periods ending on December 31, 2015 and June 30, 2016 fall within the 9-month period, so interest revenue will be recognized on both dates.

Question 14

When are consolidated financial statements prepared?

Accepted Answer

Consolidated financial statements are prepared when one company, known as the parent company, owns more than 50% of another company, known as the subsidiary. This is because the parent company has control over the subsidiary's financial and operating decisions. The purpose of consolidated financial statements is to show the overall financial position and performance of the parent company and its subsidiaries as a single entity. Option A and B are not correct because the decision to prepare consolidated financial statements is based on ownership percentage, not the choice of either the investee or investor company. Option D is incorrect because consolidated financial statements can be prepared even if one company does not own 100% of the other.

Question 15

A company is referred to as a parent if it owns

Accepted Answer

A company is considered a parent if it owns more than 50% of the equity securities of another company, giving it control over the second company's operations and decisions. Owning a percentage of debt securities or equity securities below 50% does not provide enough control to be considered a parent company.

Question 16

Why do businesses invest in short-term investments?

Accepted Answer

Businesses invest in short-term investments to earn a return on their excess cash while ensuring that the funds are readily available to meet their operational or investment needs. It provides quick access to liquidity without putting the principal amount at risk for an extended period of time. Option A is not relevant as short-term investments do not give control over other companies. Option C is incorrect as businesses invest in short-term instruments like Treasury bills, commercial paper, certificates of deposit, etc., which are typically considered as safe and secure investments.

Question 17

Discounting a note receivable

Accepted Answer

Discounting a note receivable is the process of selling a promissory note to a financial institution before its maturity date, usually at a discount.

Question 18

When one company purchases less than 50% of equity securities in a second company, which of the following statements is true?

Accepted Answer

When one company purchases less than 50% of equity securities in a second company, the company whose securities are purchased is considered an investee rather than a subsidiary. The purchaser would not be referred to as the parent or subsidiary in this scenario.

Question 19

Wagner's Bookstore acquires a 6% $12,000 certificate of deposit on September 1.The term of the CD is six months.At that time, all principal and accrued interest will be paid in cash.Indicate the effect on the financial statements at December 31.

Accepted Answer

The interest for 4 months (September to December) is calculated as follows: $12,000 * 6% * (4/12) = $240. This means Interest Receivable and Interest Revenue both increase by $240.

Question 20

Which of the following statements is true regarding dividend income?

Accepted Answer

Dividend income is reported on the income statement as it represents earnings received by the company from its investments in other companies' stock.

Quiz 7: Receivables and Investments