Question 1

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 Long-Term Investments-HTM $37,800; credit Cash $37,800.
B) Debit Long-Term Investments-HTM $38,325; credit Cash $38,325.
C) Debit Cash $40,000; credit Long-Term Investments-HTM $40,000.
D) Debit Long-Term Investments-HTM $37,800; debit Investment Expense $525; credit Cash $38,325.
E) Debit Long-Term Investments-HTM $37,800; debit Loss on Investment $525; credit Cash $38,325.

Accepted Answer

Debt securities are recorded at cost when purchased. The broker fee is part of the cost of the investment and is recorded along with the investment in the appropriate asset account.

Question 2

At the end of the accounting period,the owners of debt securities:
A) Must report the dividend income accrued on the debt securities.
B) Must retire the debt.
C) Must record a gain or loss on the interest income earned.
D) Must record a gain or loss on the dividend income earned.
E) Must record any interest earned on the debt securities during the period.

Accepted Answer

Debt securities typically generate interest income rather than dividends, which are associated with equity securities. Therefore, at the end of the accounting period, owners of debt securities must record any interest income earned during the period.

Question 3

At acquisition,debt securities are:
A) Recorded at their cost, plus total interest that will be received over the life of the security.
B) Recorded at the amount of interest that will be received over the life of the security.
C) Recorded at cost.
D) Not recorded, because no interest is due yet.
E) Recorded at cost plus the amount of dividend income to be received.

Accepted Answer

Debt securities are recorded at cost at the time of acquisition. The amount of interest that will be received over the life of the security is recognized as interest income over time.

Question 4

Strickland Corporation has invested in 10% of the outstanding stock of Nez Corporation.Strickland intends to actively manage this investment for profit.This investment is classified as:
A) an available-for-sale security.
B) a held-to-maturity security.
C) a trading security.
D) a significant influence security.
E) a controlling influence security.

Accepted Answer

A trading security is an investment in debt or equity securities primarily purchased for the purpose of selling them in the near term with the intent of generating profits on short-term differences in price. Since Strickland Corporation intends to actively manage this investment for profit, it is classified as a trading security.

Question 5

All of the following statements regarding equity securities are true except:
A) Equity securities should be recorded at cost when acquired.
B) Equity securities are valued at fair value if classified as trading securities.
C) Equity securities are valued at fair value if classified as significant influence securities.
D) Equity securities are valued at fair value if classified as available-for-sale securities.
E) Equity securities classified as available-for-sale record the dividend revenue when received.

Accepted Answer

Equity securities that exert significant influence over the investee, typically ownership of 20% to 50% of the voting stock, are accounted for using the equity method, not at fair value. Under the equity method, the investment is initially recorded at cost and subsequently adjusted for the investor's share of the investee's profits or losses and dividends received.

Question 6

Long-term investments:
A) Are current assets.
B) Can include funds designated for a special purpose, or investments in land not used in the company's operations.
C) Must be readily convertible to cash.
D) Are expected to be converted into cash within one year.
E) Include only equity securities.

Accepted Answer

Long-term investments are assets that are expected to be held for more than one year. They can include funds earmarked for a specific purpose or investments in land that is not used in the company's operations, such as real estate or rental property. These investments are not expected to be readily convertible to cash, as their value is tied up in the asset itself. Long-term investments can include both equity and debt securities, but they are not limited to equity securities only.

Question 7

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 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 Investments-HTM $160,000; credit Cash $160,000.
E) debit Cash, $160,000; credit Long-Term Investments-HTM $160,000.

Accepted Answer

Because the bond investment matures in less than one year, it is classified as short-term.

Question 8

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 investor has controlling influence over an investee. This method is used to account for long-term investments in equity securities with controlling influence. The investor's financial statements are consolidated with the financial statements of the investee, allowing the investor to report its share of the investee's net income and equity on a consolidated basis.

Question 9

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:
A) $37,800.
B) $38,325.
C) $40,000.
D) $40,525.
E) $43,200.

Accepted Answer

The company paid $37,800 plus a broker's fee of $525 to acquire the 8% bonds with a $40,000 maturity value. The cost of the bonds is therefore $38,325 ($37,800 + $525). Since the company intends to hold the bonds to maturity, they will receive the full $40,000 when the bonds mature. Therefore, the cash proceeds the company will receive when the bonds mature is $40,000.

Question 10

All of the following are true about debt securities except:
A) They can be short-term investments.
B) They can be long-term investments.
C) They can have a cost higher than the maturity value.
D) They can have a cost lower than the maturity value.
E) They reflect an owner relationship.

Accepted Answer

Debt securities do not reflect an owner relationship. They represent a creditor relationship where the investor lends money to the issuer of the security.

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 Long-Term Investments-HTM, $4,000.
B) debt Cash, $2,000; credit Long-Term Investments-HTM, $2000.
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

($50,000 * 8% = $4,000) * 1/2 = $2,000

Question 12

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 or investee. A subsidiary is a company that is controlled by another company, while the investee is the company in which the investor holds a significant influence. However, the term "owner" can be vague and does not necessarily imply control.

Question 13

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 Long-Term 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 Long-Term Investments-HTM, $75,000.
D) debit Unrealized Gain-Equity, $6,000; credit Cash, $6,000.
E) debit Cash, $75,000; credit Long-Term Investments-Trading, $75,000.

Accepted Answer

When the bonds mature, Kendall will receive the face value of the bonds ($75,000) and should record the following journal entry:

Debit Cash $75,000
Credit Long-Term Investments-HTM $75,000

Question 14

Maroon Company sold supplies in the amount of €15,000 (euros)to a French company when the exchange rate was $1.15 per euro.At the time of payment,the exchange rate decreased to $1.12.Maroon must record a loss of $450.

Accepted Answer

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Question 15

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:
A) $1,000.
B) $500.
C) $1,250.
D) $2,500.
E) $1,500.

Accepted Answer

$60,000 * 5% * 4/12 year = $1,000

Question 16

Long-term investments are reported in the:
A) Current asset section of the balance sheet.
B) Intangible asset section of the balance sheet.
C) Non-current section of the balance sheet called long-term investments.
D) Plant assets section of the balance sheet.
E) Equity section of the balance sheet.

Accepted Answer

Long-term investments are reported in the non-current section of the balance sheet called long-term investments. This section includes investments in other companies, bonds, and other long-term assets held for investment purposes.

Question 17

Long-term investments include:
A) Investments in bonds and stocks that are not readily convertible to cash or not intended to be converted to cash in the short term.
B) Investments in marketable stocks that are intended to be converted into cash in the short-term.
C) Investments in marketable bonds that are intended to be converted into cash in the short-term.
D) Only investments readily convertible to cash.
E) Investments intended to be converted to cash within one year.

Accepted Answer

Long-term investments are those that are intended to be held for a period of more than one year and are not easily convertible to cash. This includes investments in bonds and stocks that are not intended to be sold in the short term. Therefore, option A is the best choice for long-term investments.

Question 18

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 is:
A) Debit Cash, $8,000; credit Long-Term Investments, $8,000.
B) Debt Long-Term Investment, $8,000; credit Cash, $8,000.
C) Debit Cash, $8,000; credit Dividend Revenue, $8,000.
D) Debit Unrealized Gain-Equity, $8,000; credit Cash, $8,000.
E) Debit Cash, $8,000; credit Unrealized Gain-Equity, $8,000.

Accepted Answer

2,000 shares * $4 = $8,000

Question 19

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:
A) $750.
B) $1,500.
C) $2,250.
D) $4,500.
E) $9,000.

Accepted Answer

$100,000 * 9% * 3/12 year = $2,250

Question 20

Short-term investments:
A) Are securities that management intends to convert to cash within the longer of one year or the current operating cycle, and are readily convertible to cash.
B) Include funds earmarked for a special purpose such as bond sinking funds.
C) Include stocks not intended to be converted into cash.
D) Include bonds not intended to be converted into cash.
E) Include sinking funds not intended to be converted into cash.

Accepted Answer

Short-term investments are defined as securities that management intends to convert to cash within the longer of one year or the current operating cycle, and are readily convertible to cash. Thus, option A is the correct choice. Option B refers to funds earmarked for a special purpose, but it may or may not be a short-term investment, depending on whether it is convertible to cash within a year or current operating cycle. Options C, D, and E do not satisfy the conditions of a short-term investment, as they are not intended to be converted into cash.

Quiz 15: Investments

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:

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

At acquisition,debt securities are:

Strickland Corporation has invested in 10% of the outstanding stock of Nez Corporation.Strickland intends to actively manage this investment for profit.This investment is classified as:

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

Long-term investments:

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:

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

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:

All of the following are true about debt securities except:

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?

The controlling investor is called the:

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:

Maroon Company sold supplies in the amount of €15,000 (euros)to a French company when the exchange rate was $1.15 per euro.At the time of payment,the exchange rate decreased to $1.12.Maroon must record a loss of $450.

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:

Long-term investments are reported in the:

Long-term investments include:

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 is:

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:

Short-term investments: