ACC 206 Week 8 Quiz – New

ACC 206 Accounting Principles II Week 8 Quiz – Strayer

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CHAPTER 16

INVESTMENTS

CHAPTERSTUDY OBJECTIVES

1. Discuss why corporations invest in debt and stock securities.

2. Explain the accounting for debt investments.

3. Explain the accounting for stock investments.

4. Describe the use of consolidated financial statements.

5. Indicate how debt and stock investments are reported in financial statements.

6. Distinguish between short-term and long-term investments.

TRUE-FALSESTATEMENTS

1. Corporations purchase investments in debt or stock securities generally for one of two reasons.

2. A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

3. The accounting for short-term debt investments and for long-term debt investments is similar.

4. For short-term debt investments, any bond premium or discount is amortized to interest revenue over the remaining term of the bonds.

5. Debt investmentsare investments in government and corporation bonds.

6. In accordance with the cost principle, brokerage fees should be added to the cost of an investment.

7. In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest.

8. In accounting for stock investments of less than 20%, the equity method is used.

9. Dividends received on stock investments of less than 20% should be credited to the Stock Investmentsaccount.

10. If an investor owns between 20% and 50% of an investee’s common stock, it is presumed that the investor has significant influence on the investee.

11. The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

12. Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.

13. Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account.

14. Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee’s common stock.

15. Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

16. Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

17. The valuation of available-for-sale securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.
Investments 16 – 5

18. An unrealized gain or loss on trading securities is reported as a separate component of stockholders’ equity.

19. For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

20. A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Market Adjustment account.

21. If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

22. The Market Adjustment account can only have a credit balance or a zero balance.

23. To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

24. An investment is readily marketable if it is management’s intent to sell the investment.

25. Stocks traded on the New York Stock Exchangeare considered readily marketable.

Additional True-False Questions

26. One of the reasons a corporation may purchase investments is that it has excess cash.

27. When recording bond interest, Interest Receivable is reported as a fixed asset in the balance sheet.

28. Under the cost method, the investment is recorded at cost and revenue is recognized only when cash dividends are received.

29. Consolidated financial statements present a condensed version of the financial statements so investors will not experience information overload.

30. Available-for-sale securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

31. “Intent to convert” does not include an investment used as a resource that will be used whenever the need for cash arises.

MULTIPLECHOICE QUESTIONS

32. Corporations invest excess cash for short periods of time in each of the following except a. equity securities.
b. highly liquid securities. c. low-risk securities.
d. government securities.

33. Corporations invest in other companiesfor all of the following reasons except to a. house excess cash until needed.
b. generate earnings. c. meet strategic goals.
d. increase trading of the other companies’ stock.

34. A typical investment to house excess cash until needed is a. stocks of companies in a related industry.
b. debt securities.
c. low-risk, highly liquid securities. d. stock securities.

35. A company may purchase a noncontrolling interest in another firm in a related industry a. to house excess cash until needed.
b. to generate earnings. c. for strategic reasons.
d. for speculative reasons.

36. Pension funds and mutual funds regularly invest in debt and stock securities to a. generate earnings.
b. house excess cash until needed. c. meet strategic goals.
d. control the company in which they invest.

37. At the time of acquisition of a debt investment, a. no journal entry is required.
b. the cost principle applies.
c. the Stock Investments account is debited when bonds are purchased. d. the Investment account is credited for its cost plus brokerage fees.

38. Which of the following is not a true statement regarding short-term debt investments? a. The securities usually pay interest.
b. Investmentsare frequently government or corporate bonds.
c. This type of investment must be currently traded in the securities market. d. Any bond premium or discount is amortized to interest revenue.

Use the following information for questions 39–41.

On January 1, 2008, Turner Company purchased at face value, a $1,000, 7% bond that pays interest on January 1 and July 1. Turner Company has a calendar year end.
Investments 16 – 7

39. The entry for the receipt of interest on July 1, 2008, is

a. Cash…………………………………………………………………………. 35

Interest Revenue………………………………………………… 35

b. Cash…………………………………………………………………………. 70
Interest Revenue………………………………………………… 70

c. Interest Receivable……………………………………………………… 35
Interest Revenue………………………………………………… 35

d. Interest Receivable……………………………………………………… 70
Interest Revenue………………………………………………… 70

40. The adjusting entry on December 31, 2008, is a. not required.

b. Cash…………………………………………………………………………. 35
Interest Revenue………………………………………………… 35

c. Interest Receivable……………………………………………………… 35
Interest Revenue………………………………………………… 35

d. Interest Receivable……………………………………………………… 35

Debt Investments………………………………………………… 35

41. The entry for the receipt of interest on January 1, 2009 is

a. Cash…………………………………………………………………………. 70

Interest Revenue………………………………………………… 70

b. Cash…………………………………………………………………………. 70
Interest Receivable……………………………………………… 70

c. Cash…………………………………………………………………………. 35
Interest Revenue………………………………………………… 35

d. Cash…………………………………………………………………………. 35
Interest Receivable……………………………………………… 35

42. On January 1, Barone Company purchased as a short-term investment a $1,000, 8% bond for $1,050. The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,200 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?

a. Cash…………………………………………………………………………. 1,200
Debt Investments ……………………………………………….. 1,200

b. Cash…………………………………………………………………………. 1,220
Debt Investments………………………………………………… 1,050 Gain on Sale of Debt Investments…………………………. 150 Interest Revenue………………………………………………… 20

c. Cash…………………………………………………………………………. 1,220
Debt Investments………………………………………………… 1,200 Interest Revenue………………………………………………… 20

d. Cash…………………………………………………………………………. 1,200
Debt Investments………………………………………………… 1,050 Gain on Sale of Debt Investments…………………………. 150
16 – 8

43. Which of the following is not a true statement about the accounting for long-term debt investments?
a. The investment is initially recorded at cost. b. The cost includes any brokerage fees.
c. The accounting for long-term debt investments is similar to the accounting for short-term debt investments.
d. The cost includes any accrued interest.

44. The cost of debt investments includes each of the following except a. brokerage fees.
b. commissions.
c. accrued interest. d. the price paid.

45. If a short-term debt investment is sold, the Investment account is a. credited for the book value of the bonds at the sale date.
b. credited for the cost of the bonds at the sale date.
c. credited for the fair value of the bonds at the sale date. d. debited for the cost of the bonds at the sale date.

46. Any premium or discount on a long-term debt investment is amortized a. to interest expense over the remaining term of the bonds.
b. only if the effective-interestmethod is used.
c. to interest revenue over the remaining term of the bonds. d. if the investor owns 20% or more of the bonds.

Use the following information for questions 47–49.

Pima Company acquires 50, 10%, 5 year, $1,000 Community bonds on January 1, 2008 for $51,250. This includes a brokerage commission of $1,250.

47. The journal entry to record this investment includes a debit to a. Debt Investmentsfor $50,000.
b. Debt Investments for $51,250. c. Cash for $51,250.
d. Stock Investments for $50,000.

48. Assume Community pays interest on January 1 and July 1, and the July 1 entry was done correctly. The journal entry at December 31, 2008 would include a credit to
a. Interest Receivable for $2,500. b. Interest Revenue for $5,000. c. Accrued Expense for $5,000. d. Interest Revenue for $2,500.

49. If Pima sells all of its Community bonds for $52,000 and pays $1,500 in brokerage commissions, what gain or loss is recognized?
a. Gain of $2,000 b. Loss of $750 c. Gain of $750 d. Gain of $3,000
Investments 16 – 9

50. Steven Co. purchased 30, 6% Johnston Company bonds for $30,000 cash plus brokerage fees of $300. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a
a. debit to Interest Receivable for $900. b. credit to Interest Revenue for $900. c. credit to Interest Revenue for $909. d. credit to Debt Investments for $909.

51. Steven Co. purchased 30, 6% Johnston Company bonds for $30,000 cash plus brokerage fees of $300. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a
a. debit to Interest Receivable for $900. b. debit to Interest Revenue for $900. c. credit to Interest Revenue for $909. d. debit to Debt Investments for $900.

52. Tolan Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage fees of $600. Interest is payable semiannually on July 1 and January 1. If 15 of the securities are sold on July 1 for $31,000 less $300 brokerage fees, the entry would include a credit to Gain on Sale of Debt Investmentsfor
a. $1,000. b. $700. c. $1,300. d. $400.

53. On January 1, Burkett Company purchased as an investment a $1,000, 8% bond for $1,020. The bond pays interest on January 1 and July 1. What is the entry to record the interest accrual on December 31?
a. Interest Receivable……………………………………………………… 40
Interest Revenue ……………………………………………….. 40 b. Debt Investments ………………………………………………………. 40
Interest Revenue ……………………………………………….. 40 c. Interest Receivable……………………………………………………… 80
Interest Revenue ……………………………………………….. 80 d. Debt Investments ………………………………………………………. 80
Interest Revenue ……………………………………………….. 80

54. Darnet Corporation sells 100 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $30 a share. Darnet sold the shares for $40 a share. The entry to record the sale is
a. Cash…………………………………………………………………………. 3,000 Loss on Sale of Stock Investments ………………………………. 1,000
Stock Investments ……………………………………………… 4,000

b. Stock Investments ……………………………………………………… 4,000
Cash ………………………………………………………………… 4,000

c. Cash…………………………………………………………………………. 4,000
Gain on Sale of Stock Investments ………………………. 1,000 Stock Investments ……………………………………………… 3,000

d. Cash…………………………………………………………………………. 4,000
Stock Investments ……………………………………………… 4,000
16 – 10

55. Browne Corporation sells 200 shares of common stock being held as an investment. The shares were acquired six months ago at a cost of $50 a share. Browne sold the shares for $40 a share. The entry to record the sale is
a. Cash………………………………………………………………………… 8,000 Loss on Sale of Stock Investments ………………………………. 2,000
Stock Investments …………………………………………….. 10,000

b. Cash………………………………………………………………………… 10,000
Gain on Sale of Stock Investments ………………………. 2,000 Stock Investments …………………………………………….. 8,000

c. Cash………………………………………………………………………… 8,000
Stock Investments …………………………………………….. 8,000

d. Stock Investments …………………………………………………….. 8,000 Loss on Sale of Stock Investments ………………………………. 2,000
Cash ………………………………………………………………… 10,000

Use the following information for questions 56–58.

Nagen Company had these transactions pertaining to stock investments:

Feb. 1 Purchased 2,000 shares of Cagney Company (10%) for $33,200 cash plus brokerage fees of $800.
June 1 Received cash dividends of $2 per share on Cagney stock.
Oct. 1 Sold 800 shares of Cagney stock for $16,000 less brokerage fees of $400.

56. The entry to record the purchase of the Cagney stock would include a a. debit to Stock Investments for $33,200.
b. credit to Cash for $33,200.
c. debit to Stock Investments for $34,000. d. debit to Investment Expense for $800.

57. The entry to record the receipt of the dividends on June 1 would include a a. debit to Stock Investments for $4,000.
b. credit to Dividend Revenue for $4,000. c. debit to Dividend Revenue for $4,000. d. credit to Stock Investments for $4,000.

58. The entry to record the sale of the stock would include a a. debit to Cash for $16,000.
b. credit to Gain on Sale of Stock Investmentsfor $800. c. debit to Stock Investments for $13,600.
d. credit to Gain on Sale of Stock Investmentsfor $2,000.

59. Mouns Company owns 40% interest in the stock of Darian Corporation. During the year, Darian pays $20,000 in dividends to Mouns, and reports $100,000 in net income. Mouns Company’s investment in Darian will increase Mouns’ net income by
a. $20,000. b. $40,000. c. $32,000. d. $8,000.
Investments 16 – 11

60. Mouns Company owns 40% interest in the stock of Darian Corporation. During the year, Darian pays $25,000 in dividends to Mouns, and reports $100,000 in net income. Mouns Company’s investment in Darian will increase by
a. $25,000. b. $40,000. c. $32,000. d. $15,000.

61. On January 1, 2008, Jonsey Corporation purchased 30% of the common stock outstanding of Karsen Corporation for $200,000. During 2008, Karsen Corporation reported net income of $80,000 and paid cash dividends of $40,000. The balance of the Stock Investments—Karsenaccount on the books of Jonsey Corporation at December 31, 2008 is
a. $200,000. b. $240,000. c. $280,000. d. $212,000.

62. Decker Corporation purchased 1,000 shares of Kent common stock at $70 per share plus $3,000 brokerage fees as a short-term investment. The shares were subsequently sold at $80 per share less $3,400 brokerage fees. The cost of the securities purchased and gain or loss on the sale were
Cost Gain or Loss a. $70,000 $10,000gain b. $70,000 $3,600gain c. $73,000 $7,000gain d. $73,000 $3,600gain

63. In accounting for stock investments between 20% and 50%, the method is used. a. consolidated statements
b. controlling interest c. cost
d. equity

64. When a company holds stock of several different corporations, the group of securities is identified as a(n)
a. affiliated investment. b. consolidated portfolio. c. investment portfolio. d. controlling interest.

65. Jacobs Corporation makes a short-term investment in 100 shares of Starr Company’s common stock. The stock is purchased for $50 a share plus brokerage fees of $300. The entry for the purchase is

a. Debt Investments……………………………………………………….. 5,000 Cash…………………………………………………………………. 5,000

b. Stock Investments………………………………………………………. 5,300 Cash…………………………………………………………………. 5,300

c. Stock Investments………………………………………………………. 5,000 BrokerageFee Expense………………………………………………. 300
Cash…………………………………………………………………. 5,300
16 – 12

d. Stock Investments……………………………………………………… 5,000
Cash ………………………………………………………………… 5,000

66. Dobson Corporation sells 200 shares of common stock being held as a short-term investment. The shares were acquired six months ago at a cost of $50 a share. Dobson sold the shares for $40 a share. The entry to record the sale is

a. Cash………………………………………………………………………… 8,000 Loss on Sale of Stock Investments……………………………….. 2,000
Stock Investments ……………………………………………… 10,000

b. Cash………………………………………………………………………… 10,000
Gain on Sale of Stock Investments……………………….. 2,000 Stock Investments ……………………………………………… 8,000

c. Cash………………………………………………………………………… 8,000
Stock Investments ……………………………………………… 8,000

d. Stock Investments……………………………………………………… 8,000 Loss on Sale of Stock Investments……………………………….. 2,000
Cash ………………………………………………………………… 10,000

67. For accounting purposes, the method used to account for long-term investments in common stock is determined by
a. the amount paid for the stock by the investor.
b. the extent of an investor’s influence on the operating and financial affairs of the investee.
c. whether the stock has paid dividends in past years.
d. whether the acquisition of the stock by the investor was “friendly” or “hostile.”

68. If an investor owns less than 20% of the common stock of another corporation as a long-term investment,
a. the equity method of accounting for the investment should be employed. b. no dividends can be expected.
c. it is presumed that the investor has relatively little influence on the investee. d. it is presumed that the investor has significant influence on the investee.

69. If the cost method is used to account for a long-term investment in common stock, dividends received should be
a. credited to the Stock Investments account. b. credited to the Dividend Revenue account. c. debited to the Stock Investments account.
d. recorded only when 20% or more of the stock is owned.

70. If 10% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is
a. the cost method. b. the equity method.
c. the preparation of consolidated financial statements.
d. determined by agreement with whomever owns the remaining 90% of the stock.
Investments 16 – 13

71. The cost method of accounting for long-term investments in stock should be employed when the
a. investor owns more than 50% of the investee’s stock.
b. investor has significant influence on the investee and the stock held by the investor are marketable equity securities.
c. market value of the shares held is greater than their historical cost. d. investor’s influence on the investee is insignificant.

72. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor
a. has insignificant influence on the investee and that the cost method should be used to account for the investment.
b. should apply the cost method in accounting for the investment. c. will prepare consolidated financial statements.
d. has significant influence on the investee and that the equity method should be used to account for the investment.

73. Under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company,
a. the Dividend Revenue account is credited. b. the Stock Investments account is increased.
c. the Stock Investments account is decreased. d. no entry is necessary.

74. On January 1, 2008, Calis Corporation purchased 25% of the common stock outstanding of Lane Corporation for $700,000. During 2008, Lane Corporation reported net income of $200,000 and paid cash dividends of $100,000. The balance of the Stock Investments— Lane account on the books of Calis Corporation at December 31, 2008 is
a. $700,000. b. $725,000. c. $750,000. d. $675,000.

75. Under the equity method, the Stock Investments account is increased when the a. investee company reports net income.
b. investee company pays a dividend. c. investee company reports a loss. d. stock investment is sold at a gain.

76. The account, Stock Investments, is a. a subsidiary ledger account.
b. a long-term liability account.
c. a general ledger control account.
d. another name for Debt Investments.

77. Which of the following would not be considered a motive for making a stock investment in another corporation?
a. Appreciationin the market value of the stock investment b. Use of the investment for expanding its own operations c. Use of the investment to diversify its own operations
d. An increase in the amount of interest revenue from the stock investment
16 – 14

78. Revenue is recognized when cash dividends are received under a. the controlling interest method.
b. the cost method. c. the equity method.
d. both the cost and equity methods.

79. Which of the following is the correct matching concerning an investor’s influence on the operations and financial affairs of an investee?

% of Investor Ownership a. Less than 20%
b. Between20%-50% c. More than 50%
d. Between20%-50%
Presumed Influence Short-term Significant
Long-term Controlling

80. Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

% of Investor Ownership a. Less than 20%
b. Between20%–50% c. More than 50%
d. Between20%–50%
Accounting Guidelines Cost method
Cost method
Cost or equity method Consolidated financial statements

81. If the cost method is used to account for a long-term investment in common stock, a. it is presumed that the investor has significant influence on the investee.
b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor.
c. net income of the investee is not considered earned by the investor until dividends are declared by the investee.
d. the Investment account may be, at times, greater than the acquisition cost.

82. If a company acquires a 40% common stock interest in another company, a. the equity method is usually applicable.
b. all influence is classified as controlling. c. the cost method is usually applicable.
d. the ability to exert significant influence over the activities of the investee does not exist.

83. If a common stock investment is sold at a gain, the gain a. is reported as operating revenue.
b. is reported under a special section, “Discontinued investments,” on the income statement.
c. is reported in the Other Revenue and Gain section of the income statement. d. contributesto gross profit on the income statement.

84. If the equity method is being used, cash dividends received a. are credited to Dividend Revenue.
b. require no entry because investee net income has already been recorded at the proper proportion on the investor’s books.
c. are credited to the Stock Investments account.
d. are credited to the Revenue from Investment in Stock account.
Investments 16 – 15

85. If the equity method is being used, the Revenue from Investment in Stock account is a. just another name for a Dividend Revenue account.
b. credited when dividends are declared by the investee. c. credited when net income is reported by the investee. d. debited when dividends are declared by the investee.

86. Under the equity method, the Stock Investments account is credited when the a. investee reports net income.
b. investee reports a net loss.
c. investment is originally acquired.
d. investee reports net income and when the investment is originally acquired.

87. Consolidated financial statements are prepared when a company owns of the common stock of another company.
a. less than 20%
b. between 20% and 50% c. less than 50%
d. more than 50%

88. Consolidated financial statements present all of the following except the a. individual assets and liabilities of the parent company
b. individual assets and liabilities of the subsidiary. c. total revenues and expenses of the subsidiary.
d. All of these are presented in consolidated financial statements.

89. The company whose stock is owned by the parent company is called the a. controlled company.
b. subsidiary company. c. investee company. d. sibling company.

90. A company that owns more than 50% of the common stock of another company is known as the
a. charge company.
b. subsidiary company. c. parent company.
d. management company.

91. If one company owns more than 50% of the common stock of another company, a. the cost method should be used to account for the investment.
b. a partnership exists.
c. a parent-subsidiary relationship exists.
d. the company whose stock is owned must be liquidated.

92. If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?

Legal Economic a. 3 3
b. 1 2 c. 3 1 d. 2 1
16 – 16

93. When a company owns more than 50% of the common stock of another company, a. affiliated financial statements are prepared.
b. consolidated financial statements are prepared. c. controlling financial statements are prepared. d. significant financial statements are prepared.

94. Changes from cost are reported as part of net income for a. available-for-salesecurities.
b. held-to-maturitysecurities. c. debt securities.
d. trading securities.

95. Short-term investments are listed on the balance sheet immediatelybelow a. cash.
b. inventory.
c. accounts receivable. d. prepaid expenses.

96. Short-term stock investments should be valued on the balance sheet at a. the lower of cost or fair value.
b. the higher of cost or fair value. c. cost.
d. fair value.

97. In recognizing a decline in the fair value of short-term stock investments, an unrealized loss account is debited because
a. management intends to realize this loss in the near future. b. the securities have not been sold.
c. the stock market is volatile.
d. management cannot determine the exact amount of the loss in value.

98. The Market Adjustment account
a. is set up for each security in the company’s portfolio.
b. relates to the entire portfolio of securities held by the company. c. is closed at the end of each accounting period.
d. appears on the income statement as Other Expenses and Losses.

99. The contra-account, Market Adjustment, is also called a(n) a. offset account.
b. adjustment account. c. valuation account. d. opposite account.

100. Reporting investments at fair value is a. applicable to stock securities only. b. applicable to debt securities only.
c. applicable to both debt and stock securities.
d. a conservative approach because only losses are recognized.
Investments 16 – 17

Use the following information for questions 101–102.

Grier Corporation’strading portfolio at the end of the year is as follows:

Security
CommonStock A CommonStock B
Cost
$10,000
9,000 $19,000
Market Value $12,000
5,000 $17,000

101. At the end of the year, Grier Corporation should
a. set up a Market Adjustment account for Stock B.
b. set up a Market Adjustment account for the portfolio.
c. recognize an Unrealized Gain or Loss—Incomefor $4,000.
d. report a loss on the income statement for $4,000 under “Other Expenses and Losses.”

102. Grier subsequentlysells Stock B for $12,000. What entry is made to record the sale?

a. Cash…………………………………………………………………………. 12,000
Stock Investments………………………………………………. 12,000

b. Cash…………………………………………………………………………. 12,000
Market Adjustment………………………………………………. 3,000 Stock Investments………………………………………………. 9,000

c. Cash…………………………………………………………………………. 12,000
Stock Investments………………………………………………. 9,000 Gain on Sale of Stock Investments ……………………….. 3,000

d. Cash…………………………………………………………………………. 12,000
Stock Investments………………………………………………. 5,000 Gain on Sale of Stock Investments ……………………….. 7,000

103. Which of the following would not be reported under “Other Revenues and Gains” on the income statement?
a. Unrealized gain on available-for-salesecurities b. Dividend revenue
c. Interest revenue
d. Gain on sale of short-term debt investments

104. The balance in the Unrealized Loss—Equityaccount will a. appear on the balance sheet as a contra asset.
b. appear on the income statement under Other Expenses and Losses. c. appear as a deduction in the stockholders’ equity section.
d. not be shown on the financial statements until the securities are sold.

105. If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognize the loss
a. is not required since the share prices will likely rebound in the long run. b. will show a debit to an expense account.
c. will show a credit to a contra-asset account that appears in the stockholders’ equity section of the balance sheet.
d. will show a debit to an unrealized loss account that is deducted in the stockholders’ equity section of the balance sheet.
16 – 18

106. The balance sheet presentation of an unrealized loss on an available-for-sale security is similar to the statement presentation of
a. treasury stock.
b. discount on bonds payable.
c. allowance for doubtful accounts. d. prepaid expenses.

Use the following information for questions 107–108.

At the end of its first year, the trading securities portfolio consisted of the following common stocks.
Cost Market Able Corporation $ 46,400 $ 50,000 Baker Inc. 60,000 53,800 Cole Corporation 80,000 76,000
$186,400 $179,800

107. The unrealized loss to be recognized under the fair value method is a. $6,200.
b. $10,200. c. $6,600. d. $4,000.

108. In the following year, the Baker common stock is sold for cash proceeds of $58,000. The gain or loss to be recognized on the sale is a
a. gain of $4,200. b. loss of $2,000. c. gain of $2,200. d. loss of $400.

109. At the end of the first year of operations, the total cost of the trading securities portfolio is $240,000. Total fair value is $250,000. The financial statements should show
a. an addition to an asset of $10,000 and a realized gain of $10,000.
b. an addition to an asset of $10,000 and an unrealized gain of $10,000 in the stockholders’ equity section.
c. an addition to an asset of $10,000 in the current assets section and an unrealized gain of $10,000 in ―Other revenues and gains.‖
d. an addition to an asset of $10,000 in the current assets section and a realized gain of $10,000in ―Other revenues and gains.‖

110. Noell Corp. has common stock of $5,000,000, retained earnings of $3,000,000, unrealized gains on trading securities of $100,000 and unrealized losses on available-for-sale securities of $200,000. What is the total amount of its stockholders’ equity?
a. $7,800,000 b. $8,000,000 c. $7,900,000 d. $8,100,000

111. Available-for-salesecurities are classified as a. short-term investments only.
b. long-term investments only.
c. either short-term or long-term investments. d. current assets only.
Investments 16 – 19

112. Which one of the following would not be classified as a short-term investment? a. Marketable stock securities
b. Equity method investments c. Marketable debt securities d. Short-term paper

113. Short-term investments are securities that are readily marketable and intended to be converted into cash within the next
a. year.
b. two years.
c. year or operating cycle, whichever is shorter. d. year or operating cycle, whichever is longer.

114. Which of the following would not be classified as a short-term investment? a. Short-term commercial paper
b. Idle cash in a bank checking account c. Marketable stock securities
d. Marketable debt securities

Additional Multiple Choice Questions

115. Which of the following reasons best explains why a company that experiences seasonal fluctuations in sales may purchase investments in debt or stock securities?
a. The company may have excess cash.
b. The company may generate a significant portion of its earnings from investment income.
c. The company may invest for the strategic reason of establishing a presence in a related industry.
d. The company may invest for speculative reasons to increase the value in pension funds.

116. When bonds are sold, the gain or loss on sale is the difference between the a. sales price and the cost of the bonds.
b. net proceeds and the cost of the bonds.
c. sales price and the market value of the bonds. d. net proceeds and the market value of the bonds.

117. Which of the following is a major difference when accounting for long-term debt investments versus short-term debt investments?
a. When selling long-term investments, no gain or loss is recognized.
b. At the end of the year, any unrealized gain or loss on long-term debt investments must be recognized in the stockholders’ equity section of the balance sheet.
c. Interest revenue is not recognized for long-term investments.
d. For short-term investments, bond premium or discount is not amortized to interest revenue.

118. Under the equity method, the investor records dividends received by crediting a. Dividend Revenue.
b. Investment Income.
c. Revenue from Investment. d. Stock Investments.
16 – 20

119. A company that acquires less than 20% ownership interest in another company should account for the stock investment in that company using
a. the cost method. b. the equity method.
c. the significant method.
d. consolidated financial statements.

120. The equity method of accounting for an investment in the common stock of another company should be used by the investor when the investment
a. is composed of common stock and it is the investor’s intent to vote the common stock. b. ensures a source of supply of raw materials for the investor.
c. enables the investor to exercise significant influence over the investee. d. is obtained by an exchange of stock for stock.

121. On January 2, Matthews Corporation acquired 20% of the outstanding common stock of Dennehy Company for $450,000. For the year ended December 31, Dennehy reported net income of $90,000 and paid cash dividends of $30,000 on its common stock. At December 31, the carrying value of Matthews’ investment in Dennehy under the equity method is
a. $444,000. b. $450,000. c. $456,000. d. $462,000.

122. An unrealized loss on available-for-sale securities is
a. reported under Other Expenses and Losses in the income statement. b. closed-out at the end of the accounting period.
c. reported as a separate component of stockholders’ equity. d. deducted from the cost of the investment.

123. Securities bought and held primarily for sale in the near term to generate income on short-term price differences are
a. trading securities.
b. available-for-salesecurities. c. never-sell securities.
d. held-to-maturitysecurities.

124. Short-term investments are
a. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is shorter.
b. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is longer.
c. (1) readily marketable and (2) intended to be converted into cash after the current year or operating cycle, whichever is longer.
d. (1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is shorter.
Investments 16 – 21

125. Short-term investments are securities held by a company that are a. readily marketable.
b. intended to be converted into cash within the next year.
c. readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.
d. readily marketable and intended to be held until maturity.

BRIEFEXERCISES

BE 126

On January 14, Blackwell Corporation purchased 20, 11%, $1,000 Gooding Company bonds for $20,000, plus brokerage fees of $400. On November 30, the company sold 10 of the Gooding Company bonds for $11,000, less $300 brokerage fees. Prepare journal entries for the purchase and sale of the Gooding Company bonds.

BE 127

On January 2, Westies Company purchased 30, 10%, $1,000 Arkansas Company bonds for $31,000 cash, plus brokerage fees of $1,000. Interest is payable semiannually on July 1 and January 1. On July 1, the company received a semiannual interest payment on the Arkansas Company bonds. Journalize the entries to record the purchase of the bonds and the receipt of the interest payment.

BE 128

On April 25, Braxton Company buys 4,200 shares of Computech common stock for $82,000, plus brokerage fees of $2,000. On October 31, Braxton sells 600 shares of Computech stock for $15,500, less brokerage fees of $500. Prepare journal entries for the purchase and sale of the Computechcommon stock.

BE 129

On January 1, Hillard Corporation purchased a 40% equity in Lewis Company for $360,000. At December 31, Lewis declared and paid a $40,000 cash dividend and reported net income of $98,000. Prepare the necessary journal entries for Hillard Corporation.

BE 130

Stein Company had the following transactions pertaining to its short-term stock investments.

Jan. 1 Purchased 600 shares of Rice Company stock for $6,700 cash plus brokerage fees of $350.

June 1 Received cash dividends of $0.50 per share on the Rice Company stock.

Sept. 15 Sold 300 shares of the Rice Company stock for $3,600 less brokerage fees of $200.

Instructions Journalizethe transactions.

BE 131

On January 1, 2008, Owen Company purchased 5,000 shares of Jen Company stock for $300,000. Owen’s investment represents 30 percent of the total outstanding shares of Jen. During 2008, Jen paid total dividends of $100,000 and reported net income of $250,000. What revenue does Owen report related to this investment and what is the amount to be reported as an investment in Jen stock at December 31?

BE 132

At January 1, 2008, the trading securities portfolio held by the Darin Corporation consisted of the following investments:

1. 2,000 shares of Stitch common stock purchased for $42 per share. 2. 1,500 shares of Marvel common stock purchased for $50 per share.

At December 31, 2008, the fair values per share were Stitch $36 and Marvel $54.

Instructions
(a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2008.

(b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2008.

BE 133

At December 31, 2008, the trading securities for Carter Company are as follows:

Security X Y
Cost
$17,000
34,000 $51,000
Fair Value $20,000
33,000 $53,000

Preparethe adjusting entry at December 31, 2008, to report the securities at fair value.

BE 134

At January 1, 2008, Gulfport Corporation held one available-for-sale security: 1,500 shares of Netblaster common stock purchased for $40 per share. At December 31, 2008, the market value per share for Netblaster was $44. Prepare the adjusting entry to report the portfolio at fair value at December 31, 2008.
Investments 16 – 25

BE 135

Terra Firma Company has the following data at December 31, 2008 for its securities:

Securities Available-for-sale Trading
Cost
$35,000 45,000
Fair Value $38,000
40,000

EXERCISES

Ex. 136

Milner Corporation had the following transactions pertaining to debt investments.

Jan. 1 Purchased 80, 8%, $1,000 Vanoy Company bonds for $80,000, plus brokerage fees of $800.

July 1 Sold 20 Vanoy Company bonds for $24,000, less $400 brokeragefees.

Instructions
Preparejournal entries for the purchase and sale of the Vanoy Company bonds.

Ex. 137

Glaser Company had the following transactions pertaining to debt securities held as a short-term investment.

Jan. 1 Purchased 40, 8%, $1,000 Cotter Company bonds for $40,000 cash plus brokerage fees of $800. Interest is payable semiannuallyon July 1 and January 1.

July 1 Received semiannual interest on Cotter Company bonds.

Oct. 1 Sold 30 Cotter Company bonds for $32,000 plus accrued interest less $500 brokerage fees.

Instructions

(a) Journalize the transactions.

(b) Prepare the adjusting entry for the accrual of interest on December 31.

Ex. 138

The following transactions were made by Waite Company. Assume all investments are short-term and are readily marketable.

June 2 July 1 30
Sept. 15 Dec. 31
31
Purchased300 shares of Beaty Corporation common stock for $45 per share. Purchased200 Meng Corporation bonds for $220,000.
Receiveda cash dividend of $2 per share from Beaty Corporation. Sold 90 shares of Beaty Corporation stock for $50 per share.
Receivedsemiannual interest check for $11,000 from Meng Corporation.

Receiveda cash dividend of $2 per share from Beaty Corporation.

Instructions Journalizethe transactions.
Investments 16 – 27

Ex. 139

On April 1, Smith Company buys 3,000 shares of Thomas common stock for $60,000, plus brokerage fees of $900. On October 1, Smith sells 1,000 shares of Thomas stock for $23,000, less brokerage fees of $500.

Instructions
Preparejournal entries for the purchase and sale of the Thomas common stock.

Ex. 140

Stone Company had the following transactions pertaining to short-term investments in equity securities.

Jan. 1

June 1 Sept. 15
Dec. 1
Purchased 1,000 shares of Renfro Company stock for $9,450 cash plus brokerage fees of $300.

Receivedcash dividends of $.50 per share on Renfro Company stock.

Sold 400 shares of Renfro Company stock for $3,800 less brokerage fees of $100.

Receivedcash dividends of $.50 per share on Renfro Company stock.

Instructions
(a) Journalize the transactions.
(b) Indicate the income statement effects of the transactions.

Ex. 141

Stine Corporation’s balance sheet at December 31, 2007, showed the following: Short-term investments, at fair value $46,500

Stine Corporation’s trading portfolio of stock investments consisted of the following at December 31, 2007:

Stock
DooleyCommon Stock Adler Preferred Stock GriggsCommon Stock
Number of Shares 200
400 300
Cost
$30,000 6,000
9,000 $45,000
Investments 16 – 29

Ex. 141 (cont.)

During 2008, the following transactions took place:

Feb. 5 Sold 50 shares of Dooley common stock for $8,000. Mar. 30 Purchased25 shares of Griggs common stock for $950.
Sept. 9 Purchased50 shares of Griggs common stock for $2,000.

At year end on December 31, 2008, the market values per share were:

DooleyCommon Stock Adler Preferred Stock GriggsCommon Stock
Market Value Per Share $158.00
$14.00 $25.00

Instructions
(a) Prepare the journal entries to record the 2008 stock transactions.
(b) On December 31, 2008, prepare any adjusting entry that might be necessary relative to the trading portfolio.
(c) Show how the stock investments will appear on Stine Corporation’s balance sheet at December31, 2008.

Ex. 142

On January 5, 2008, Storey Company purchased the following stock securities as a long-term investment:

300 shares Marks Corporation common stock for $4,200. 500 sharesWood Corporation common stock for $10,000. 600 shares Logen Corporation common stock for $19,800.

Assume that Storey Company cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments.

On June 30, 2008, Storey Company received the following cash dividends:

Marks Corporation…………………………………. Wood Corporation…………………………………. LogenCorporation………………………………….
$2.00 per share $1.00 per share $1.50 per share

On November 15, 2008, Storey Company sold 200 shares of Logen Corporation common stock for $7,500.

On December 31, 2008, the fair value of the securities held by Storey Company is as follows:

Marks Corporation common stock Wood Corporation common stock LogenCorporation common stock
Per Share $10
16 32

Instructions
Preparethe appropriatejournal entries that Storey Company should make on the following dates:

January5, 2008 June 30, 2008 November 15, 2008 December31, 2008

Ex. 143

Seely Company purchased 42,000 shares of common stock of Otto Corporation as a long-term investment for $1,000,000. During the year, Otto Corporation reported net income of $300,000 and paid dividends of $100,000.

Instructions
(a) Assuming that the 42,000 shares represent a 15% interest in Otto Corporation: 1. Prepare the journal entry to record the investment in Otto stock.
2. Prepare any entries that Seely Company should make in accounting for its investment in Otto stock during the year.
3. What is the balance of the Stock Investments account on Seely Company’s books at the end of the year?

(b) Repeat requirement (a) above except assume that the 42,000 shares represent a 25% interest in Otto Corporation.

Ex. 144

On January 1, Neely Corporation purchased a 30% equity in Poole Company for $120,000. At December 31, Poole declared and paid a $40,000 cash dividend and reported net income of $100,000.

Instructions

Preparethe necessary journal entries for Neely Corporation.

Ex. 145

Informationpertaining to long-term stock investments in 2008 by Tate Corporation follows:

Acquired 10% of the 250,000 shares of common stock of Friend Company at a total cost of $8 per share on January 1, 2008. On July 1, Friend Company declared and paid a cash dividend of $2 per share. On December 31, Friend’s reported net income was $654,000 for the year.
Investments 16 – 33

Ex. 145 (cont.)

Obtained significant influence over Unruh Company by buying 25% of Unruh’s 100,000 outstanding shares of common stock at a total cost of $22 per share on January 1, 2008. On June 15, Unruh Company declared and paid a cash dividend of $1.50 per share. On December 31, Unruh’s reported net income was $280,000.

Instructions
Prepareall necessary journal entries for 2008 for Tate Corporation.

Ex. 146

At December 31, 2008, the trading securities for Carter Company are as follows:

Security A B
Cost
$25,000
46,000 $71,000
Fair Value $28,000
40,000 $68,000

Instructions

Preparethe adjusting entry at December 31, 2008, to report the securities at fair value.

Ex. 147

Rison Corporation has the following trading portfolio of stock investments as of December 31, 2008.

Security A
B C
Cost
$19,000 22,000
34,000 $75,000
Fair Value $16,000
26,000
31,000 $73,000

On January 22, 2009, Rison Corporation sold security C for $30,000.

Instructions
(a) Prepare the adjusting entry for Rison Corporation on December 31, 2008, to report the portfolio at fair value.

(b) Indicate the balance sheet and income statement presentation of the fair value data for Rison Corporation at December 31, 2008.

(c) Prepare the journal entry for the 2009 sale.

Ex. 148

The following information is available for Clooney Corporation’s available-for-sale securities at December31, 2008.

Security X Y
Cost
$35,000
22,000 $57,000
Fair Value $33,000
28,000 $61,000

Instructions
Preparethe adjusting entry to record the securities at fair value at December 31, 2008.
Investments 16 – 35

Ex. 149

At January 1, 2008, the available-for-salesecurities portfolio held by Howe Corporation consisted of the following investments:

1. 2,500 shares of Meller common stock purchased for $42 per share. 2. 1,500 shares of Kane common stock purchased for $60 per share.

At December 31, 2008, the market values per share were Meller $36 and Kane $66.

Instructions

(a) Prepare a schedule showing the cost and fair value of the portfolio at December 31, 2008.

(b) Prepare the adjusting entry to report the portfolio at fair value at December 31, 2008.

Ex. 150

Weaver Company has the following data at December 31, 2008 for its securities.

Securities Trading
Available-for-sale
Cost
$90,000 75,000
Fair Value $93,000
71,000

Instructions
(a) Prepare the adjusting entries to report the securities at fair value.
(b) Indicate the statement presentation of the related unrealized gain (loss) accounts for each class of securities.

COMPLETION STATEMENTS

151. Debt investmentsare investments in government and bonds.

152. For long-term debt investments, any bond premium or is amortized to

over the remaining term of the bonds.

153. When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has influence over the investee and therefore, the appropriate method of accounting for this type of investment is the
method.

154. Under the cost method, dividends received from an investee company are credited to the

account, whereas under the equity method, dividends received from an investee company are credited to the account.

155. At the beginning of the year, Grant Corporation acquired 15% of Downs Company common stock for $400,000. Downs Company reported net income for the year of $75,000 and paid $25,000 cash dividends during the year. The balance of the Stock Investments account on the books of Grant Corporation at the end of the year should be $ .

156. A company that owns more than 50% of the common stock of another company is known as the company and financial statements are usually prepared.

157. securities are bought and held primarily for sale in the near future.

158. Market Adjustment is a valuation account which is

to (from) the cost of the investments.

159. At the end of an accounting period, if the fair value of the trading portfolio is less than its cost, then the company should recognize an which is reported on the
.

160. An unrealized loss on trading securities is reported under Other

on the income statement.

161. An unrealized gain or loss on available-for-sale securities is reported as a separate component of .

162. Short-term investments are securities that are and to be converted into cash within the next year.

MATCHING

163. Match the items below by entering the appropriate code letter in the space provided.

A. Available-for-salesecurities B. Subsidiary company
C. Equity method
D. Unrealized Gain or Loss—Equity E. Fair value
F. Consolidated financial statements G. Controlling interest
H. Market Adjustment I. Parent company
J. Long-term investments

1. Valuation allowance account.

2. Amount for which a security could be sold.

3. Ownership of more than 50% of another company’s common stock.

4. Securities that may be sold in the future.

5. Investments that are not readily marketable and not intended to be converted into cash within the next year.

6. Financial statements that present the total assets and liabilities controlled by the parent and the total revenues and expenses of the subsidiary companies.

7. The Stock Investments account is adjusted for net income and dividends received.

8. A company that owns more than 50% of the common stock of another entity.

9. Entity whose stock is owned by the parent company.

10. An account that is reported in the stockholders’ equity section.

SHORT-ANSWERESSAY QUESTIONS
S-AE 164
The Market Adjustment account is a balance sheet account. Identify the asset account it is related to. Explain how this account is increased and describe the procedure followed when its related asset account is disposed of.

S-AE 165

A consolidated balance sheet reports the financial position of two or more legal entities just as if they were one reporting unit. Explain why all the individual items appearing on the separate balance sheets of each of the affiliated companies cannot be added together to arrive at a consolidated total for each item.

S-AE 166

When a year-end adjustment is made to reduce the trading securities portfolio to market, what effect, if any, will the adjustment have on the balance sheet and the income statement?

S-AE 167 (Ethics)

Greyhound Stables, Inc. operates several dog racing tracks throughout the United States. Since most facilities are outdoor tracks only, most of the cash receipts for Greyhound are received from April through October. These funds are usually invested in short-term, very liquid investments, such as stocks and bonds. Among the stocks purchased last year, was Servitronics, a company specializing in automatic vending equipment.
Investments 16 – 39

S-AE 167 (cont.)

The company decided not to sell its Servitronics stock at the end of last year, and has purchased more of the stock this year. The company intends to continue to purchase stock until it holds enough to make a takeover bid for the company. The accountants have been instructed to continue to classify the investment as short-term until the takeover is accomplished, so that less attention will be directed to it. (Presently, Greyhound has no long-term investment in stock at all.)

Required:
1. Is it ethical for Greyhound to attempt to take over another company? Explain.

2. Is it ethical for Greyhound to leave its investment in the short-term investment category? Explain.

S-AE 168 (Communication)

Ann Harman is the daughter of Fred Harman, the founder and president of Big Sky Enterprises. She has been working in various departments during school vacations throughout high school. She burst into the accounting department excitedly one morning. She said that the stock price of several of the firm’s available-for-sale securities are up, and that her father said that the company had made over $10,000 because of this jump in stock prices. She asks to see how the increase is recorded. It is a very busy time in the accountingdepartment, and so her question is deferred.

Required:

Preparea brief note to answer Ann’s question.