Question 1

The year-end adjusting entry to reflect an increase in the value of trading securities includes a

Accepted Answer

The adjusting entry to reflect an increase in the value of trading securities involves recognizing an unrealized gain on the short-term investments. Therefore, the correct option is A, credit to Unrealized Gain on Short-Term Investments. The other options do not accurately reflect the adjustment required for an increase in the value of trading securities.

Question 2

Trading securities are valued on the balance sheet at

Accepted Answer

Trading securities are reported at market value on the balance sheet, reflecting their fair value as they are intended to be sold in the short term.

Question 3

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the balance of the Short-Term Investments account appearing on the balance sheet will be

Accepted Answer

The answer of Stock categorized as trading securities is purchased...

Question 4

At year-end,a company's trading portfolio appears as follows:  The adjusting entry will include

Accepted Answer

The answer of At year-end,a company's trading portfolio appears as...

Question 5

All of the following are ways one corporation could affect the operating and financial policies of another corporation except

Accepted Answer

Analyzing data regarding profitability does not directly impact another corporation's operating and financial policies. The other choices (B, C, and D) are all ways that one corporation could affect the policies of another corporation. Material transactions between two companies can impact the financial policies of both companies. Representation on the board of directors allows one corporation to have a significant say in the other corporation's decisions. An exchange of managerial personnel could also result in changes to the operating and financial policies of the corporation they join.

Question 6

Kirk Corporation owns 25 percent of the voting stock of Allen Corporation and accounts for the investment using the equity method.Allen reports a net loss of $40,000.Kirk Corporation's entry to record its share of loss is:

Accepted Answer

Kirk Corporation owns 25% of Allen Corporation, so it must recognize 25% of Allen's net loss. 25% of $40,000 is $10,000. Therefore, Kirk will debit "Loss, Allen Corporation Investment" and credit "Investment in Allen Corporation" for $10,000.

Question 7

Singletary Corporation owns a 40 percent interest in the stock of Fleming Corporation.During 2014,Fleming pays $50,000 in dividends to Singletary and reports $214,000 in net income.Singletary Corporation's investment in Fleming will increase Singletary's income before income taxes by

Accepted Answer

The answer of Singletary Corporation owns a 40 percent interest...

Question 8

When the equity method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is affected by

Accepted Answer

The equity method accounts for an investment in another company based on the investor's proportional share of the investee's earnings and dividends. Therefore, the carrying value of the investment is affected by the earnings and dividends of the investee. Option A, declines in the market value of the stock, may affect the value of the investment, but it is not the primary factor in the equity method. Option C, an excess of market price over cost, is not relevant as the equity method considers the investor's share of earnings and dividends, not the market price of the stock. Option D, neither the earnings nor the dividends of the investee, is incorrect as the equity method specifically considers the investor's share of these factors.

Question 9

When the cost-adjusted-to-market method is used to account for a long-term investment in the stock of another company,the carrying value of the investment is directly affected by

Accepted Answer

The cost-adjusted-to-market method adjusts the carrying value of an investment based on market value changes, not on the earnings or dividends of the investee.

Question 10

Barkely Corporation has invested in the stock of two other corporations,Hayes Corporation and Motz Corporation.Barkely does not own a controlling interest or exercise significant influence over either corporation.Barkely's accountant is preparing financial statements and has compiled the following information:  What should be the balance in the Allowance to Adjust Long-Term Investments to Market account,based on the above information?

Accepted Answer

The answer of Barkely Corporation has invested in the stock...

Question 11

Camp Corporation purchased 8,500 shares of Tent Corporation common stock for $80 per share on January 1,2014.Tent reported net income of $220,000 for 2014 and paid dividends of $90,000 during 2014.As of December 31,2014,the market value of Tent Corporation common stock was $80 per share.Assuming the shares owned by Camp represent 30 percent of the total outstanding stock of Tent,Camp Corporation should report the long-term investment on December 31,2014,at a carrying value of

Accepted Answer

Camp Corporation should use the equity method since it owns 30% of Tent Corporation. The carrying value is calculated as the initial investment ($680,000) plus 30% of Tent's net income ($66,000) minus 30% of dividends received ($27,000), resulting in $719,000.

Question 12

A credit balance in the account Allowance to Adjust Long-Term Investments to Market is disclosed in the financial statements as a

Accepted Answer

A credit balance in the account Allowance to Adjust Long-Term Investments to Market is typically used to offset the original cost of long-term investments on the balance sheet. Therefore, it is a contra account to Long-Term Investments rather than its own regular account or a current asset. It may also be disclosed in the notes to the financial statements, but it is not typically its own separate line item on the balance sheet.

Question 13

The equity method generally should be used to account for an investment in stock when the level of ownership is

Accepted Answer

The equity method is generally used when an investor owns between 20 and 50 percent of the investee's voting stock. This level of ownership gives the investor significant influence over the investee's operations and decision-making processes. When an investor owns less than 20 percent, it is generally presumed that the investor does not have significant influence and the investment is accounted for using either the cost or fair value method. If the investor owns 10 percent or more of the investee's voting stock and does not have significant influence, the investment should be accounted for using the fair value method. Therefore, the best choice is A.

Question 14

For available-for-sale equity securities,the Allowance to Adjust Long-Term Investments to Market account should be reported as a(n)

Accepted Answer

The answer of For available-for-sale equity securities,the Allowance to Adjust...

Question 15

Under the cost-adjusted-to-market method of accounting for an investment,

Accepted Answer

Under the cost-adjusted-to-market method, dividend income is recognized as income when dividends are received, so Dividend Income is credited.

Question 16

The cost-adjusted-to-market method of accounting for investments is used when the investment is

Accepted Answer

The cost-adjusted-to-market method is used for noninfluential and noncontrolling investments, typically when the investor holds less than 20% of the investee's voting stock.

Question 17

Stock categorized as trading securities is purchased for $52,000.At year end,when the market value of the stock is $61,000,the adjusting entry that would be recorded is:

Accepted Answer

Since the market value of the trading security is higher than its original cost, an unrealized gain has been realized. To adjust for this gain, we need to increase the market value of the investment on the balance sheet.

The adjusting entry would be:

Allowance to Adjust Short-Term Investments to Market 9,000
Unrealized Gain on Short-Term Investments 9,000

Option A is the best choice because it correctly reflects the increase in market value of the trading security and the corresponding unrealized gain. Option B and C are incorrect because they do not reflect the increase in value of the trading security. Option D is incorrect because the gain is unrealized and should not be recorded as a realized gain until the security is sold.

Question 18

Which of the following statements is true about investments categorized as trading securities?

Accepted Answer

Trading securities are bought and held with the intention of selling them in the near future to generate profits from short-term price movements. Changes in the market value of trading securities are reflected in net income through the income statement. A is incorrect because trading securities are valued on the balance sheet at fair value, not cost. B is incorrect because trading securities can consist of both debt and equity securities. C is incorrect because trading securities are not purchased to be held to maturity.

Question 19

Stock categorized as trading securities is purchased for $72,000.At year end,when the market value of the stock is $63,000,the adjusting entry that would be recorded is:

Accepted Answer

The adjusting entry for trading securities involves recognizing an unrealized loss, which is recorded by debiting "Unrealized Loss on Short-Term Investments" and crediting "Allowance to Adjust Short-Term Investments to Market" for the difference between the cost and market value.

Question 20

For available-for-sale equity securities,the Unrealized Loss on Long-Term Investments account should be reported as a(n)

Accepted Answer

Unrealized Loss on Long-Term Investments for available-for-sale equity securities should be reported as other comprehensive income (loss) on the balance sheet. Unrealized gains and losses on available-for-sale securities are not recognized on the income statement until they are sold. Therefore, they are reported as a separate component of other comprehensive income on the balance sheet.

Quiz 19: Accounting for Investments