Question 1

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:

Accepted Answer

Since Strickland intends to actively manage the investment for profit, it is classified as a trading security, which is typically bought and sold for short-term profit.

Question 2

At acquisition, debt securities are:

Accepted Answer

Debt securities are initially recorded at cost, which includes any transaction costs incurred (such as brokerage fees or commissions). The amount of interest that will be received over the life of the security is not factored into the initial recording of the security.

Question 3

Long-term investments:

Accepted Answer

Long-term investments can include funds designated for a special purpose, or investments in land not used in the company's operations. They are expected to be held for a period exceeding one year and are not required to be readily convertible to cash. This option is the only one that accurately describes long-term investments.

Question 4

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

Accepted Answer

At the end of the accounting period, the owners of debt securities must record any interest earned on the debt securities during the period. This interest income is recognized as revenue in the income statement and is recorded in the balance sheet as an asset. The owners do not need to record a gain or loss on the interest income earned, report the dividend income accrued on the debt securities, retire the debt, or record a gain or loss on the dividend income earned. These options are not applicable to debt securities.

Question 5

Long-term investments include:

Accepted Answer

Long-term investments are those that are not intended to be converted into cash in the short term. Investments in bonds and stocks that are not readily convertible to cash or not intended to be converted to cash in the short term fit this definition. Choice A and C both include investments that are intended to be converted into cash in the short term, while choice B includes investments intended to be converted to cash within one year, which may not be considered long-term. Choice E is too restrictive, as long-term investments may not be readily convertible to cash.

Question 6

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 accrues for 90 days (October 1 to December 31) and 60 days (April 1 to December 31). The total interest accrued is $9,000 x 90/360 + $9,000 x 60/360 = $2,250.

Question 7

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

The loss is calculated by the change in exchange rate: (€15,000 * $1.15) - (€15,000 * $1.12) = $17,250 - $16,800 = $450.

Question 8

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:

Accepted Answer

When the bonds mature, Kendall should record the repayment of the bonds by debiting Cash for the total face value of the bonds ($75,000) and crediting Long-Term Investments held-to-maturity (HTM) for the same amount ($75,000). Unrealized gain or loss is not recognized for HTM securities because they are reported at amortized cost on the balance sheet.

Question 9

All of the following are true about debt securities except:

Accepted Answer

Debt securities do not reflect an owner relationship as they represent a loan to the issuer and the holder of the security is a creditor, not an owner. Choices A, B, C, and D are all true statements about debt securities.

Question 10

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:

Accepted Answer

Roe Corporation receives $8,000 in cash dividends (2,000 shares x $4 per share). The correct entry is to debit Cash for $8,000 and credit Dividend Revenue for $8,000, recognizing the income from dividends received.

Question 11

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:

Accepted Answer

The total cost of acquiring the bonds includes both the purchase price and the broker's fee, so the entry should reflect the total cash outflow of $38,325.

Question 12

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 bonds pay interest semi-annually on March 1 and September 1. From September 1 to December 31, there are 4 months. The annual interest is $60,000 * 5% = $3,000. The monthly interest is $3,000 / 12 = $250. Therefore, the interest accrued for 4 months is $250 * 4 = $1,000.

Question 13

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 cash proceeds the company will receive when the bonds mature is the maturity value of the bonds, which is $40,000. The broker's fee and purchase price do not affect the maturity value.

Question 14

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?

Accepted Answer

The correct entry to record the receipt of the semiannual interest payment is to debit Cash for the amount received, which is $2,000, and credit Interest Revenue for the same amount. This entry recognizes the revenue earned from the bonds and reflects the cash inflow received. None of the other entries presented correctly record the transaction.

Question 15

Long-term investments are reported in the:

Accepted Answer

Long-term investments are reported in the non-current section of the balance sheet called long-term investments. This is because they are not expected to be sold or converted into cash within the next year.

Question 16

Short-term investments:

Accepted Answer

Short-term investments are securities that are expected to be converted into cash within one year or the operating cycle and are easily convertible to cash. This option accurately describes short-term investments. Options A, B, C, and E refer to specific types of funds or investments that may or may not be short-term investments depending on their convertibility and expected timeframe for conversion.

Question 17

The controlling investor is called the:

Accepted Answer

The controlling investor is referred to as the parent company, as it has control over the investee or subsidiary company. The other choices do not accurately describe the role of the controlling investor.

Question 18

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

Accepted Answer

The answer of Accounting for long-term investments in equity securities...

Question 19

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

Accepted Answer

Equity securities with significant influence are typically accounted for using the equity method, not at fair value.

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:

Accepted Answer

The bonds are purchased at par value and are intended to be held until maturity, which is less than a year away, so they are classified as short-term investments.

Quiz 15: Investments