ACC 206 Week 8 Quiz – Strayer
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Quiz 6 Chapter16
CHAPTERSTUDYOBJECTIVES
1.Discusswhycorporationsinvestindebtandstocksecurities.
2.Explaintheaccountingfordebtinvestments.
3.Explaintheaccountingforstockinvestments.
4.Describetheuseofconsolidatedfinancialstatements.
5.Indicatehowdebtandstockinvestmentsarereportedinfinancialstatements.
6.Distinguishbetweenshort-termandlong-terminvestments.
TRUE-FALSESTATEMENTS
1. Corporationspurchaseinvestmentsindebtorstocksecuritiesgenerallyforoneoftwo reasons.
2. Areasonsomecompaniespurchaseinvestmentsisbecausetheygenerateasignificant portion of theirearningsfrom
investmentincome.
3. Theaccountingforshort-termdebtinvestmentsandforlong-termdebtinvestmentsis similar.
4. Forshort-termdebtinvestments,anybondpremiumordiscountisamortizedtointerest
revenue over theremainingtermofthebonds.
5. Debtinvestmentsareinvestmentsingovernmentandcorporationbonds.
6. Inaccordancewiththecostprinciple,brokeragefeesshouldbeaddedtothecostofan investment.
7. Inaccordancewiththecostprinciple,thecostofdebtinvestmentsincludesbrokerage
feesandaccruedinterest.
8. Inaccountingforstockinvestmentsof lessthan20%,the equity methodis used.
9. Dividendsreceivedon stock investmentsoflessthan 20%shouldbe
creditedtothe Stock Investmentsaccount.
10. Ifaninvestor
owns between 20%and50%ofaninvestee'scommonstock,itispresumed that the investorhassignificantinfluenceontheinvestee.
11. The StockInvestmentsaccountis
debitedatacquisitionunderboththe equitymethodand cost methodof accountingfor
investmentsincommonstock.
12. Undertheequity method,
the investmentin commonstockis
initiallyrecordedatcost, and the
Stock Investments
accountisadjustedannually.
13. Undertheequity method,
thereceiptofdividendsfrom theinvesteecompanyresultsin
an increase intheStockInvestmentsaccount.
14. Consolidatedfinancialstatementsareappropriatewhenaninvestorcontrolsaninvestee
byownershipof morethan50% ofthe investee'scommonstock.
15. Consolidatedfinancial statementsare preparedinplace ofthe
financialstatementsforthe parent andsubsidiarycompanies.
16. Consolidatedfinancialstatementsshouldbepreparedonlywhenasubsidiarycompany
has a controllinginterestintheparentcompany.
17. Thevaluationofavailable-for-salesecuritiesissimilartotheproceduresfollowedfor tradingsecurities,exceptthatchangesinfairvaluearenotrecognizedincurrentincome.
Investments 16-5
18. Anunrealizedgainorlossontradingsecuritiesisreportedasaseparatecomponentof
stockholders' equity.
19. Foravailable-for-salesecurities,theunrealizedgainorlossaccountiscarriedforwardto future
periods.
20. Adeclineinthefairvalueofatradingsecurityisrecordedbydebitinganunrealizedloss accountandcreditingtheMarketAdjustmentaccount.
21. Ifthefairvalueofanavailable-for-salesecurityexceedsitscost,thesecurityshouldbe writtenup tofairvalueandarealizedgainshouldberecognized.
22. TheMarketAdjustmentaccountcanonlyhavea
creditbalanceora
zero balance.
23. Tobeclassifiedasashort-terminvestment,theinvestmentmustbereadilymarketable and intendedtobeconvertedinto
cashwithinthenextyearor operatingcycle.
24. Aninvestmentisreadilymarketableifit ismanagement'sintenttoselltheinvestment.
25. StockstradedontheNewYork StockExchangeare
consideredreadilymarketable.
Additional
True-FalseQuestions
26. Oneofthereasonsacorporationmaypurchaseinvestmentsisthat
it hasexcesscash.
27. Whenrecordingbondinterest,InterestReceivableisreportedasafixedassetinthe balance sheet.
28. Underthecost
method,the investmentisrecordedatcost
andrevenueis recognizedonly when
cashdividendsarereceived.
29. Consolidatedfinancialstatementspresentacondensedversionofthefinancial
statements so investorswillnot experienceinformationoverload.
30. Available-for-salesecuritiesaresecuritiesboughtandheldprimarilyforsaleinthenear
term togenerateincomeonshort-termpricedifferences.
31. "Intenttoconvert"doesnotincludeaninvestmentusedasaresourcethatwillbeused
whenever theneedfor casharises.
MULTIPLECHOICEQUESTIONS
32. Corporationsinvestexcesscashforshortperiodsof timeineachof thefollowingexcept a.equitysecurities.
b.highlyliquidsecurities. c.low-risksecurities.
d.governmentsecurities.
33. Corporationsinvestinother
companiesfor allof thefollowingreasonsexceptto a.houseexcesscash
untilneeded.
b.generateearnings.c.meetstrategicgoals.
d.increasetradingof theothercompanies’stock.
34. A typicalinvestmenttohouseexcesscashuntilneeded
is a.stocksof
companies inarelatedindustry.
b.debtsecurities.
c.low-risk,highlyliquidsecurities. d.stocksecurities.
35. A companymaypurchaseanoncontrollinginterest inanotherfirminarelatedindustry a.tohouseexcesscash until
needed.
b.togenerateearnings.
c.for
strategicreasons.
d.for speculativereasons.
36. Pensionfundsandmutualfundsregularlyinvestin debtandstocksecuritiesto a.generateearnings.
b.houseexcesscashuntilneeded. c.meetstrategicgoals.
d.controlthecompanyin
whichtheyinvest.
37. At thetimeofacquisitionofadebtinvestment, a.no
journalentry
isrequired.
b.thecostprincipleapplies.
c.theStockInvestments accountisdebitedwhenbondsarepurchased.
d.the Investmentaccountiscreditedfor
itscostplusbrokeragefees.
38. Whichofthefollowingisnot atrue statement
regardingshort-termdebtinvestments? a.Thesecuritiesusuallypayinterest.
b.Investmentsarefrequentlygovernmentor corporatebonds.
c.Thistypeofinvestmentmustbecurrentlytradedinthesecuritiesmarket.
d.Anybondpremiumordiscount isamortizedtointerestrevenue.
Usethefollowing
informationforquestions39–41.
OnJanuary1,2008,TurnerCompanypurchasedatfacevalue,a$1,000,7%bondthatpays interest
onJanuary1andJuly1.TurnerCompanyhas
a calendaryearend.
Investments 16-7
39. TheentryforthereceiptofinterestonJuly1,
2008,is
a.Cash..................................................................................... 35
InterestRevenue......................................................... 35
b.Cash..................................................................................... 70
InterestRevenue......................................................... 70
c.InterestReceivable............................................................... 35
InterestRevenue......................................................... 35
d.InterestReceivable............................................................... 70
InterestRevenue......................................................... 70
40. TheadjustingentryonDecember31,2008,is
a.notrequired.
b.Cash..................................................................................... 35
InterestRevenue......................................................... 35
c.InterestReceivable............................................................... 35
InterestRevenue......................................................... 35
d.InterestReceivable............................................................... 35
DebtInvestments......................................................... 35
41. TheentryforthereceiptofinterestonJanuary1,2009is
a.Cash..................................................................................... 70
InterestRevenue......................................................... 70
b.Cash..................................................................................... 70
InterestReceivable...................................................... 70
c.Cash..................................................................................... 35
InterestRevenue......................................................... 35
d.Cash..................................................................................... 35
InterestReceivable...................................................... 35
42. OnJanuary1,BaroneCompanypurchasedasashort-terminvestmenta$1,000,8%
bondfor$1,050.ThebondpaysinterestonJanuary1andJuly1.Thebondissoldon October1for$1,200plusaccruedinterest.Interesthasnotbeenaccruedsincethelast interestpaymentdate.Whatistheentrytorecordthecashproceedsatthetimethebond issold?
a.Cash..................................................................................... 1,200
DebtInvestments........................................................ 1,200
b.Cash..................................................................................... 1,220
DebtInvestments......................................................... 1,050
Gainon Sale of DebtInvestments............................... 150 InterestRevenue......................................................... 20
c.Cash..................................................................................... 1,220
DebtInvestments......................................................... 1,200
InterestRevenue......................................................... 20
d.Cash..................................................................................... 1,200
DebtInvestments......................................................... 1,050
Gainon Sale of DebtInvestments............................... 150
16-8
43. Whichofthefollowingisnotatruestatementabouttheaccountingforlong-termdebt investments?
a.The investmentisinitiallyrecordedatcost. b.Thecostincludes anybrokeragefees.
c.Theaccountingforlong-termdebtinvestmentsissimilartotheaccountingforshort-termdebtinvestments.
d.Thecostincludes anyaccruedinterest.
44. Thecostof
debtinvestmentsincludeseachofthefollowingexcept a.brokeragefees.
b.commissions.
c.accruedinterest. d.thepricepaid.
45. Ifa
short-termdebtinvestmentis sold,theInvestmentaccountis
a.creditedforthebook valueof
thebondsatthesaledate.
b.creditedforthecostof
thebondsatthe saledate.
c.creditedforthefairvalueof thebondsatthesaledate.
d.debitedforthecostof
thebondsatthesaledate.
46. Anypremiumor
discountonalong-termdebtinvestmentisamortized
a.tointerestexpense overtheremainingterm ofthebonds.
b.onlyif the effective-interestmethodisused.
c.to interestrevenueovertheremainingtermof thebonds.
d.iftheinvestorowns 20%ormoreofthebonds.
Usethefollowing
informationforquestions47–49.
PimaCompanyacquires50,10%,5year,$1,000CommunitybondsonJanuary1,2008for
$51,250.This includesabrokeragecommissionof $1,250.
47. Thejournalentrytorecordthis
investmentincludesa debitto
a.DebtInvestmentsfor$50,000.
b.DebtInvestmentsfor$51,250. c.Cashfor$51,250.
d.StockInvestmentsfor$50,000.
48. AssumeCommunitypaysinterestonJanuary1and
July1,and theJuly1entry
was done correctly.Thejournalentry at
December31,2008wouldincludea creditto
a.InterestReceivablefor
$2,500. b.InterestRevenuefor$5,000.c.AccruedExpensefor$5,000.d.InterestRevenuefor$2,500.
49. IfPimasellsallofitsCommunitybondsfor$52,000andpays$1,500inbrokerage
commissions,whatgainor lossis recognized?
a.Gainof $2,000 b.Lossof$750c.Gain of $750d.Gainof
$3,000
Investments 16-9
50. StevenCo.purchased
30,6%JohnstonCompanybondsfor$30,000cashplusbrokerage
feesof$300.InterestispayablesemiannuallyonJuly1andJanuary1.Theentryto recordtheJuly1 semiannualinterestpaymentwouldincludea
a.debitto Interest
Receivablefor$900. b.credittoInterest Revenuefor
$900.c.credittoInterestRevenuefor
$909.d.creditto
Debt
Investmentsfor$909.
51. StevenCo.purchased
30,6%JohnstonCompanybondsfor$30,000cashplusbrokerage
feesof$300.InterestispayablesemiannuallyonJuly1andJanuary1.Theentryto recordthe December31interestaccrualwouldinclude a
a.debitto Interest Receivablefor$900. b.debittoInterest Revenuefor
$900.c.credittoInterestRevenuefor
$909.d.debitto DebtInvestmentsfor $900.
52. TolanCo.purchased60,6%IrickCompanybondsfor$60,000cashplusbrokeragefees
of$600.InterestispayablesemiannuallyonJuly1andJanuary1.If15ofthesecurities aresoldonJuly1for$31,000less$300brokeragefees,theentrywouldincludeacredit
to Gainon Saleof
Debt Investmentsfor
a.$1,000. b.$700.c.$1,300.
d.$400.
53. OnJanuary1,BurkettCompanypurchasedasaninvestmenta$1,000,8%bondfor
$1,020.ThebondpaysinterestonJanuary1andJuly1.Whatistheentrytorecordthe interest
accrualon December31?
a.InterestReceivable............................................................... 40
InterestRevenue........................................................ 40 b.DebtInvestments................................................................ 40
InterestRevenue........................................................ 40
c.InterestReceivable............................................................... 80
InterestRevenue........................................................ 80 d.DebtInvestments................................................................ 80
InterestRevenue........................................................ 80
54. DarnetCorporationsells100sharesofcommonstockbeingheldasaninvestment.The shareswereacquired
sixmonthsagoatacostof$30ashare.Darnetsoldtheshares for
$40a share.Theentrytorecordthesaleis
a.Cash..................................................................................... 3,000
Losson Saleof StockInvestments..................................... 1,000
StockInvestments...................................................... 4,000
b.StockInvestments............................................................... 4,000
Cash........................................................................... 4,000
c.Cash..................................................................................... 4,000
Gainon Sale of
StockInvestments............................ 1,000
StockInvestments...................................................... 3,000
d.Cash..................................................................................... 4,000
StockInvestments...................................................... 4,000
16-10
55. BrowneCorporationsells200sharesofcommonstockbeingheldasaninvestment.The
shareswere acquiredsixmonthsagoata
costof$50 ashare.Brownesoldthe sharesfor
$40a share.Theentrytorecordthesaleis
a.Cash.................................................................................... 8,000 Losson Saleof StockInvestments..................................... 2,000
StockInvestments..................................................... 10,000
b.Cash.................................................................................... 10,000
Gainon Sale of
StockInvestments............................ 2,000 StockInvestments..................................................... 8,000
c.Cash.................................................................................... 8,000
StockInvestments..................................................... 8,000
d.StockInvestments.............................................................. 8,000 Losson Saleof StockInvestments..................................... 2,000
Cash........................................................................... 10,000
Usethefollowing
informationforquestions56–58.
NagenCompanyhadthesetransactionspertainingto stockinvestments:
Feb.1 Purchased 2,000sharesofCagneyCompany(10%)for$33,200 cashplusbrokerage
feesof$800.
June1 Receivedcashdividends of
$2pershareonCagneystock.
Oct.1 Sold800shares of
Cagneystockfor $16,000lessbrokeragefeesof$400.
56. Theentrytorecordthe purchaseofthe Cagneystockwouldincludea
a.debit toStockInvestmentsfor$33,200.
b.creditto Cashfor$33,200.
c.debittoStockInvestmentsfor$34,000. d.debittoInvestmentExpensefor $800.
57. Theentrytorecordthereceiptofthedividendson
June1wouldincludea a.debit toStockInvestmentsfor$4,000.
b.credittoDividendRevenuefor$4,000. c.debittoDividendRevenuefor$4,000. d.credit to StockInvestmentsfor$4,000.
58. Theentrytorecordthe saleof
thestockwouldinclude a a.debitto Cashfor
$16,000.
b.credittoGainon Saleof StockInvestmentsfor$800.
c.debitto StockInvestmentsfor$13,600.
d.credittoGainon Saleof StockInvestmentsfor$2,000.
59. MounsCompanyowns40%interestinthestockofDarianCorporation.Duringtheyear,
Darianpays$20,000individendstoMouns,andreports$100,000innetincome.Mouns Company’sinvestmentinDarianwillincreaseMouns’net
incomeby
a.$20,000. b.$40,000. c.$32,000. d.$8,000.
Investments 16-11
60. MounsCompanyowns40%interestinthestockofDarianCorporation.Duringtheyear,
Darianpays$25,000individendstoMouns,andreports$100,000innetincome.Mouns Company’sinvestmentinDarianwillincreaseby
a.$25,000. b.$40,000. c.$32,000. d.$15,000.
61. OnJanuary1,2008,JonseyCorporationpurchased30%ofthecommonstock outstandingofKarsenCorporationfor$200,000.During2008,KarsenCorporation reportednetincomeof$80,000andpaidcashdividendsof$40,000.Thebalanceofthe StockInvestments—KarsenaccountonthebooksofJonseyCorporationatDecember31,
2008is
a.$200,000. b.$240,000. c.$280,000. d.$212,000.
62. DeckerCorporation purchased1,000sharesofKentcommonstockat$70pershareplus
$3,000brokeragefeesasashort-terminvestment.Thesharesweresubsequentlysoldat $80pershareless$3,400brokerage fees.Thecostofthesecuritiespurchasedandgain
orloss on thesale were
Cost Gain orLoss a. $70,000
$10,000gain b. $70,000 $3,600gain
c. $73,000 $7,000gain
d. $73,000 $3,600gain
63. Inaccountingforstockinvestmentsbetween20%and50%,the methodisused. a.consolidatedstatements
b.controllinginterest
c.cost
d.equity
64. Whenacompanyholdsstockofseveraldifferentcorporations,thegroupofsecuritiesis
identifiedas a(n)
a.affiliatedinvestment.b.consolidatedportfolio. c.investmentportfolio.d.controllinginterest.
65. JacobsCorporationmakesashort-terminvestmentin100sharesofStarrCompany's commonstock.Thestockispurchasedfor$50ashareplusbrokeragefeesof$300.The entryforthepurchaseis
a.DebtInvestments................................................................. 5,000
Cash............................................................................ 5,000
b.StockInvestments................................................................ 5,300 Cash............................................................................ 5,300
c.StockInvestments................................................................ 5,000
BrokerageFeeExpense....................................................... 300
Cash............................................................................ 5,300
16-12
d.StockInvestments............................................................... 5,000
Cash........................................................................... 5,000
66. DobsonCorporationsells200sharesofcommonstockbeingheldasashort-term
investment.Theshareswereacquiredsixmonthsagoatacostof$50ashare.Dobson sold
thesharesfor $40ashare.Theentryto recordthesaleis
a.Cash.................................................................................... 8,000
Losson Saleof StockInvestments...................................... 2,000
StockInvestments...................................................... 10,000
b.Cash.................................................................................... 10,000
Gainon Sale of
StockInvestments............................. 2,000
StockInvestments...................................................... 8,000
c.Cash.................................................................................... 8,000
StockInvestments...................................................... 8,000
d.StockInvestments............................................................... 8,000
Losson Saleof StockInvestments...................................... 2,000
Cash........................................................................... 10,000
67. Foraccountingpurposes,themethodusedtoaccountforlong-terminvestmentsin
commonstockisdeterminedby
a.the amountpaidfor thestockbytheinvestor.
b.theextentofaninvestor'sinfluenceontheoperatingandfinancialaffairsofthe
investee.
c.whetherthe stockhaspaid dividendsinpast years.
d.whethertheacquisitionof thestockbythe
investorwas"friendly"or"hostile."
68. Ifaninvestorownslessthan20%ofthecommonstockofanothercorporationasalong-terminvestment,
a.the equitymethodofaccountingforthe
investmentshouldbeemployed. b.nodividendscan
beexpected.
c.it ispresumedthatthe investorhasrelativelylittleinfluenceontheinvestee.
d.it ispresumedthatthe investorhassignificantinfluence ontheinvestee.
69. Ifthecostmethodisusedtoaccountforalong-terminvestmentincommonstock, dividends
receivedshouldbe
a.creditedtotheStockInvestmentsaccount.
b.creditedtotheDividendRevenue account. c.debitedtotheStockInvestmentsaccount.
d.recordedonlywhen20% ormoreofthestockis owned.
70. If10%ofthecommonstockofaninvesteecompanyispurchasedasalong-term
investment,
theappropriatemethodof accountingfortheinvestmentis
a.thecostmethod.b.the equitymethod.
c.thepreparationof consolidatedfinancialstatements.
d.determinedbyagreementwithwhomeverownstheremaining90% ofthestock.
Investments 16-13
71. Thecostmethodofaccountingforlong-terminvestmentsinstockshouldbeemployed
when the
a.investorownsmorethan50% of
the
investee'sstock.
b.investorhassignificantinfluenceontheinvesteeandthestockheldbytheinvestor
aremarketableequitysecurities.
c.marketvalueof thesharesheldisgreaterthantheirhistoricalcost. d.investor'sinfluenceonthe
investeeis insignificant.
72. Whenan
investorownsbetween20%and 50%
ofthecommonstock ofa
corporation,itis generallypresumedthatthe investor
a.hasinsignificant influenceontheinvesteeandthatthecost
methodshouldbeused
to account forthe investment.
b.shouldapplythe
costmethodinaccountingforthe investment.
c.will
prepareconsolidatedfinancialstatements.
d.hassignificantinfluenceontheinvestee
and thattheequitymethod should beusedto account forthe investment.
73. Undertheequity methodofaccounting forlong-terminvestmentsincommonstock,when a dividendis receivedfromtheinvesteecompany,
a.theDividendRevenueaccount is credited.b.theStockInvestmentsaccountis increased.
c.theStockInvestments accountisdecreased. d.noentryis necessary.
74. OnJanuary1,2008,CalisCorporationpurchased25%ofthecommonstockoutstanding ofLaneCorporation for$700,000.During2008,LaneCorporationreportednetincomeof $200,000
andpaidcashdividendsof$100,000.ThebalanceoftheStockInvestments—
Lane accountonthebooks
of CalisCorporationatDecember31,2008is
a.$700,000.
b.$725,000. c.$750,000. d.$675,000.
75. Underthe
equitymethod,theStockInvestmentsaccountisincreasedwhen the a.investeecompany
reportsnetincome.
b.investeecompanypays adividend. c.investeecompanyreportsaloss.d.stockinvestmentissoldat
again.
76. Theaccount,StockInvestments,is
a.asubsidiaryledgeraccount.
b.a long-termliabilityaccount.
c.ageneralledgercontrolaccount.
d.anothernameforDebt Investments.
77. Which
ofthefollowing wouldnotbeconsideredamotive
formakingastockinvestmentin
anothercorporation?
a.Appreciationinthemarketvalueofthestock investment b.Useof theinvestmentfor expandingits
ownoperations c.Useof the investmenttodiversifyits ownoperations
d.An increaseinthe
amountof interestrevenuefromthestockinvestment
16-14
78. Revenueisrecognizedwhencashdividendsarereceivedunder
a.thecontrollinginterestmethod.
b.thecostmethod.c.the equitymethod.
d.boththecostand equitymethods.
79. Whichofthefollowingisthecorrectmatchingconcerninganinvestor'sinfluenceonthe operationsandfinancialaffairsof aninvestee?
%of InvestorOwnership a. Lessthan20%
b. Between20%-50%
c. Morethan50%
d. Between20%-50%
PresumedInfluence Short-term Significant
Long-term Controlling
80. Whichofthefollowingisthecorrectmatchingconcerningtheappropriateaccountingfor
long-termstockinvestments?
%ofInvestorOwnership a. Lessthan20%
b. Between20%–50% c. Morethan50%
d. Between20%–50%
AccountingGuidelinesCostmethod
Costmethod
Costor equitymethod
Consolidatedfinancialstatements
81. If thecost method is usedtoaccountfor along-terminvestmentincommonstock,
a.it ispresumedthatthe investorhassignificantinfluence ontheinvestee.
b.theearningofnetincomebytheinvesteeisconsideredaproperbasis forrecognition
ofincomebythe investor.
c.netincomeoftheinvestee isnotconsideredearnedby
theinvestoruntil dividendsare
declared bytheinvestee.
d.theInvestmentaccountmaybe,attimes,greaterthantheacquisitioncost.
82. Ifa companyacquiresa40%commonstockinterest in anothercompany, a.theequitymethodisusuallyapplicable.
b.all influenceisclassified ascontrolling.
c.thecostmethodisusuallyapplicable.
d.theabilitytoexertsignificantinfluenceovertheactivitiesoftheinvesteedoesnot exist.
83. Ifa commonstockinvestmentissoldat
again,thegain
a.isreportedasoperatingrevenue.
b.isreportedunderaspecialsection,"Discontinuedinvestments,"ontheincome
statement.
c.isreportedinthe Other RevenueandGainsectionof
theincomestatement.
d.contributestogrossprofitontheincomestatement.
84. If the equitymethodisbeingused,cashdividendsreceived a.arecreditedtoDividendRevenue.
b.requirenoentrybecauseinvesteenetincomehasalreadybeenrecordedatthe properproportionontheinvestor'sbooks.
c.arecreditedtotheStockInvestmentsaccount.
d.are creditedtotheRevenuefromInvestmentinStockaccount.
Investments 16-15
85. If the equitymethodisbeingused,the
RevenuefromInvestmentinStockaccountis a.justanothernamefora DividendRevenue account.
b.creditedwhendividends aredeclaredbytheinvestee. c.creditedwhennetincomeisreportedbytheinvestee.
d.debitedwhendividendsaredeclaredbytheinvestee.
86. Underthe
equitymethod,theStockInvestmentsaccountis creditedwhenthe a.investeereportsnetincome.
b.investeereportsanetloss.
c.investmentisoriginallyacquired.
d.investeereportsnetincomeandwhenthe
investmentisoriginallyacquired.
87. Consolidatedfinancialstatementsarepreparedwhenacompany owns ofthe
commonstockofanothercompany.
a.lessthan20%
b.between20%and 50%
c.lessthan50%
d.morethan50%
88. Consolidatedfinancialstatements
presentallof thefollowingexceptthe
a.individualassetsandliabilities
of theparentcompany
b.individualassetsandliabilitiesof thesubsidiary. c.totalrevenuesandexpensesof thesubsidiary.
d.Allof
theseare presentedinconsolidatedfinancialstatements.
89. Thecompanywhosestockisownedbytheparentcompanyiscalledthe
a.controlledcompany.
b.subsidiarycompany.
c.investeecompany.d.siblingcompany.
90. Acompanythatownsmorethan50%ofthecommonstockofanothercompanyisknown
as the
a.chargecompany.
b.subsidiarycompany.
c.parentcompany.
d.managementcompany.
91. Ifonecompanyownsmorethan50%ofthecommon
stock of anothercompany, a.thecostmethodshouldbeusedtoaccountforthe investment.
b.a partnershipexists.
c.a parent-subsidiaryrelationshipexists.
d.thecompanywhosestock isownedmustbeliquidated.
92. Ifaparentcompanyhastwowhollyownedsubsidiaries,howmanylegalandeconomic
entities aretherefromtheviewpointof
theshareholdersof
theparentcompany?
Legal Economic
a. 3 3
b. 1 2 c. 3 1 d. 2 1
16-16
93. Whenacompanyownsmorethan50%ofthecommonstockof anothercompany, a.affiliatedfinancial statementsare
prepared.
b.consolidatedfinancialstatements areprepared.
c.controllingfinancialstatementsareprepared.d.significantfinancialstatementsareprepared.
94. Changesfromcostarereportedaspartof
netincomefor a.available-for-salesecurities.
b.held-to-maturitysecurities. c.debtsecurities.
d.tradingsecurities.
95. Short-terminvestmentsare
listedonthebalancesheetimmediatelybelow a.cash.
b.inventory.
c.accountsreceivable.
d.prepaidexpenses.
96. Short-termstockinvestmentsshouldbevaluedon thebalancesheetat a.thelower of
cost orfair
value.
b.thehigherofcostor fairvalue. c.cost.
d.fairvalue.
97. Inrecognizingadeclineinthefairvalueofshort-termstockinvestments,anunrealized
loss accountis debitedbecause
a.managementintendstorealize this loss
inthenearfuture. b.thesecuritieshavenot beensold.
c.thestockmarket is
volatile.
d.managementcannotdeterminetheexactamountofthe lossinvalue.
98. TheMarketAdjustmentaccount
a.issetupforeachsecurityinthecompany'sportfolio.
b.relatestotheentireportfolioofsecuritiesheldbythecompany.
c.is closedatthe endof
each accountingperiod.
d.appearsontheincomestatementasOtherExpenses
andLosses.
99. Thecontra-account,MarketAdjustment,isalso calleda(n) a.offsetaccount.
b.adjustmentaccount. c.valuationaccount.d.oppositeaccount.
100. Reportinginvestmentsatfairvalueis a.applicableto stocksecuritiesonly. b.applicableto debtsecuritiesonly.
c.applicableto bothdebtandstocksecurities.
d.aconservativeapproachbecauseonlylossesarerecognized.
Investments 16-17
Usethefollowing
informationforquestions101–102.
GrierCorporation'stradingportfolioattheendof theyearis asfollows:
Security
CommonStockA CommonStockB
Cost
$10,000
9,000$19,000
MarketValue $12,000
5,000$17,000
101. At theendoftheyear,GrierCorporationshould
a.set upa MarketAdjustmentaccountforStockB.
b.set upa MarketAdjustmentaccountforthe
portfolio.
c.recognizeanUnrealizedGainor Loss—Incomefor $4,000.
d.reportalossontheincome statementfor
$4,000under"OtherExpensesandLosses."
102. GriersubsequentlysellsStockBfor$12,000.Whatentryismadetorecordthesale?
a.Cash..................................................................................... 12,000
StockInvestments....................................................... 12,000
b.Cash..................................................................................... 12,000
MarketAdjustment....................................................... 3,000 StockInvestments....................................................... 9,000
c.Cash..................................................................................... 12,000
StockInvestments....................................................... 9,000 Gainon Sale of StockInvestments............................. 3,000
d.Cash..................................................................................... 12,000
StockInvestments....................................................... 5,000 Gainon Sale of StockInvestments............................. 7,000
103. Whichofthefollowingwouldnotbereportedunder"OtherRevenuesandGains"onthe
income statement?
a.Unrealizedgainonavailable-for-salesecurities b.Dividendrevenue
c.Interestrevenue
d.Gainonsaleof
short-termdebtinvestments
104. ThebalanceintheUnrealizedLoss—Equityaccountwill
a.appearonthebalancesheetasacontraasset.
b.appearontheincomestatementunderOtherExpensesandLosses.
c.appearasadeductioninthestockholders'equitysection.
d.notbeshownonthefinancialstatementsuntilthesecuritiesaresold.
105. Ifthecostofanavailable-for-sale securityexceedsitsfairvalueby$40,000,theentryto recognizethe loss
a.isnotrequiredsincethesharepriceswill likelyreboundinthe
longrun. b.will showadebitto an expenseaccount.
c.willshowacredittoacontra-assetaccountthatappearsinthestockholders'equity
section of thebalancesheet.
d.willshowadebittoanunrealizedlossaccountthatisdeductedinthestockholders'
equitysectionof thebalancesheet.
16-18
106. Thebalancesheetpresentationofanunrealizedlossonanavailable-for-salesecurityis
similar to thestatementpresentationof
a.treasurystock.
b.discountonbondspayable.
c.allowancefor doubtfulaccounts.
d.prepaidexpenses.
Usethefollowing
informationforquestions107–108.
Attheendofitsfirstyear,thetradingsecuritiesportfolioconsistedofthefollowingcommon
stocks.
Cost Market AbleCorporation $46,400 $50,000 BakerInc. 60,000 53,800
ColeCorporation 80,00076,000
$186,400 $179,800
107. Theunrealizedlosstoberecognizedunderthefair valuemethodis a.$6,200.
b.$10,200. c.$6,600. d.$4,000.
108. Inthefollowingyear,theBakercommonstockissoldforcashproceedsof$58,000.The
gain orlosstoberecognizedonthesaleisa
a.gainof$4,200.
b.lossof$2,000. c.gainof$2,200.
d.lossof $400.
109. Attheendofthefirstyearofoperations, thetotalcostofthetradingsecuritiesportfoliois $240,000.Totalfair valueis
$250,000.Thefinancialstatementsshouldshow
a.anadditiontoanassetof$10,000andarealizedgain of $10,000.
b.anadditiontoanassetof$10,000andanunrealizedgainof$10,000inthe stockholders’ equitysection.
c.anadditiontoanassetof$10,000in
thecurrentassetssection
andanunrealizedgain of$10,000in―Otherrevenuesandgains.‖
d.anaddition toanassetof$10,000
inthecurrentassetssectionandarealizedgainof $10,000in―Otherrevenuesandgains.‖
110. NoellCorp.hascommonstockof$5,000,000,retainedearningsof$3,000,000,unrealized gainsontradingsecuritiesof$100,000andunrealizedlossesonavailable-for-sale securitiesof $200,000.Whatisthetotalamountofitsstockholders’equity?
a.$7,800,000 b.$8,000,000 c.$7,900,000 d.$8,100,000
111. Available-for-salesecuritiesareclassifiedas a.short-terminvestmentsonly.
b.long-terminvestmentsonly.
c.eithershort-termor
long-terminvestments. d.currentassetsonly.
Investments 16-19
112. Whichoneof thefollowing wouldnot beclassifiedasashort-terminvestment?
a.Marketablestocksecurities
b.Equitymethod investments c.Marketabledebtsecurities
d.Short-termpaper
113. Short-terminvestmentsaresecuritiesthatarereadilymarketableandintendedtobe convertedintocashwithinthenext
a.year.
b.twoyears.
c.yearoroperatingcycle,whicheveris
shorter. d.yearor operatingcycle,whicheveris
longer.
114. Whichofthefollowingwouldnot beclassifiedasa short-terminvestment? a.Short-termcommercialpaper
b.Idlecashinabankcheckingaccount c.Marketablestocksecurities
d.Marketabledebtsecurities
Additional MultipleChoiceQuestions
115. Whichofthefollowingreasonsbestexplainswhyacompanythatexperiencesseasonal fluctuationsinsalesmaypurchaseinvestments indebtorstocksecurities?
a.Thecompanymayhaveexcesscash.
b.Thecompanymaygenerateasignificantportionofitsearningsfrominvestment income.
c.Thecompanymayinvestforthestrategicreasonofestablishingapresenceina
related industry.
d.Thecompanymayinvestforspeculativereasonstoincreasethevalueinpension funds.
116.Whenbondsaresold,thegain or lossonsaleis thedifferencebetweenthe
a.salespriceandthecost ofthebonds.
b.netproceedsandthecostof thebonds.
c.salespriceandthemarketvalueof
thebonds.d.netproceedsandthemarketvalueof thebonds.
117.Whichofthefollowingisamajordifferencewhenaccountingforlong-termdebt
investmentsversusshort-termdebtinvestments?
a.Whensellinglong-terminvestments,nogain or
lossisrecognized.
b.Attheendof the year,
anyunrealizedgainorlosson
long-termdebt investments
must
be recognizedinthe
stockholders'equitysectionof thebalancesheet.
c.Interestrevenueis notrecognizedfor
long-terminvestments.
d.Forshort-terminvestments,bondpremiumordiscountisnotamortizedtointerest revenue.
118. Underthe
equitymethod,theinvestorrecordsdividendsreceivedbycrediting
a.DividendRevenue.
b.InvestmentIncome.
c.RevenuefromInvestment. d.StockInvestments.
16-20
119. Acompanythatacquireslessthan20%ownershipinterestinanothercompanyshould account
forthestockinvestmentinthatcompanyusing
a.thecostmethod.b.the equitymethod.
c.thesignificantmethod.
d.consolidatedfinancialstatements.
120. Theequitymethodofaccountingforaninvestmentinthecommonstockofanother companyshouldbeusedbythe investorwhentheinvestment
a.iscomposedof
commonstockanditistheinvestor'sintenttovotethecommonstock.
b.ensuresasourceofsupplyof
rawmaterialsfortheinvestor.
c.enablestheinvestortoexercisesignificantinfluenceovertheinvestee. d.isobtainedbyanexchangeofstockforstock.
121. OnJanuary2,MatthewsCorporationacquired20%oftheoutstandingcommonstockof DennehyCompanyfor$450,000.FortheyearendedDecember31,Dennehyreported
netincomeof$90,000andpaidcashdividendsof$30,000onitscommonstock.At December31,thecarryingvalueofMatthews'investmentinDennehyundertheequity method is
a.$444,000.
b.$450,000. c.$456,000. d.$462,000.
122. Anunrealizedlossonavailable-for-salesecuritiesis
a.reportedunderOtherExpensesandLossesinthe incomestatement. b.closed-outat
theendoftheaccountingperiod.
c.reportedasaseparatecomponentof stockholders'equity.
d.deductedfromthecostoftheinvestment.
123. Securitiesboughtandheldprimarilyforsaleintheneartermtogenerateincomeonshort-termpricedifferencesare
a.tradingsecurities.
b.available-for-salesecurities. c.never-sellsecurities.
d.held-to-maturitysecurities.
124. Short-terminvestments
are
a.(1)
readilymarketableand(2)
intendedto beconvertedinto cashafterthecurrentyear oroperatingcycle,whicheveris
shorter.
b.(1)readilymarketableand(2)intendedtobeconvertedintocashwithinthecurrent yearoroperatingcycle,whicheverislonger.
c.(1) readilymarketableand(2)
intendedto beconverted into cashafterthecurrentyear
oroperatingcycle,whicheveris
longer.
d.(1)readilymarketableand(2)intendedtobeconvertedintocashwithinthecurrent yearoroperatingcycle,whicheverisshorter.
Investments 16-21
125. Short-terminvestmentsare
securitiesheldbyacompanythat are a.readilymarketable.
b.intendedtobeconvertedintocashwithinthenextyear.
c.readilymarketableandintendedtobeconvertedintocashwithinthenextyearor
operatingcycle,whicheveris longer.
d.readilymarketableandintendedtobehelduntilmaturity.
BRIEFEXERCISES
BE126
OnJanuary14,BlackwellCorporationpurchased20,11%,$1,000GoodingCompanybondsfor $20,000,plusbrokeragefeesof$400.OnNovember30,thecompanysold10oftheGooding Companybondsfor$11,000,less$300brokeragefees.Preparejournalentriesforthepurchase and sale oftheGoodingCompanybonds.
BE127
OnJanuary2,WestiesCompanypurchased30,10%,$1,000ArkansasCompanybondsfor
$31,000cash,plusbrokeragefeesof$1,000.InterestispayablesemiannuallyonJuly1and January1.OnJuly1,thecompanyreceivedasemiannualinterestpaymentontheArkansas Companybonds.Journalizetheentriestorecord
thepurchaseofthebonds andthereceiptofthe interest
payment.
BE128
OnApril25,BraxtonCompanybuys4,200sharesofComputech
commonstock for$82,000,plus brokeragefeesof$2,000.OnOctober31,Braxtonsells600sharesofComputechstockfor
$15,500,lessbrokeragefeesof$500.Preparejournalentriesforthepurchaseandsaleofthe
Computechcommonstock.
BE129
OnJanuary1,HillardCorporationpurchaseda40%equityinLewisCompanyfor$360,000.At December31,Lewisdeclaredandpaida$40,000cashdividendandreportednetincomeof $98,000.Preparethenecessaryjournal
entriesfor
HillardCorporation.
BE130
SteinCompanyhadthefollowingtransactionspertaining toitsshort-termstock
investments.
Jan. 1 Purchased600sharesofRiceCompany stockfor$6,700cashplusbrokeragefees
of$350.
June 1 Receivedcashdividendsof
$0.50per shareontheRiceCompanystock.
Sept.15 Sold300shares
of theRiceCompanystockfor$3,600lessbrokeragefeesof$200.
InstructionsJournalizethetransactions.
BE131
OnJanuary1,2008,OwenCompanypurchased5,000sharesofJenCompanystockfor
$300,000.Owen’sinvestmentrepresents30percentofthetotaloutstandingsharesofJen. During2008,Jenpaidtotaldividendsof$100,000andreportednetincomeof$250,000.What revenuedoesOwen reportrelated tothisinvestmentandwhatistheamount tobereported asan
investmentinJenstock at December31?
BE132
AtJanuary1,2008,thetradingsecuritiesportfolioheldbytheDarinCorporationconsistedofthe
followinginvestments:
1.2,000shares of
Stitchcommonstockpurchasedfor
$42pershare. 2.1,500shares of Marvelcommonstockpurchasedfor$50pershare.
AtDecember31,2008,thefair valuesper sharewereStitch$36andMarvel$54.
Instructions
(a)Preparea scheduleshowing
thecostandfairvalueof theportfolioatDecember 31,2008.
(b)Preparetheadjustingentrytoreporttheportfolioatfair
valueat December31,2008.
BE133
AtDecember31,2008,thetradingsecuritiesforCarterCompanyareasfollows:
Security XY
Cost
$17,000
34,000$51,000
Fair Value $20,000
33,000$53,000
Preparetheadjustingentry at December31,2008,toreportthesecuritiesatfair value.
BE134
AtJanuary1,2008,GulfportCorporationheldone
available-for-salesecurity:1,500sharesof
Netblaster commonstockpurchasedfor$40pershare.AtDecember31,2008,themarketvalue
persharefor Netblasterwas$44.Preparetheadjustingentrytoreporttheportfolioatfairvalueat December
31, 2008.
Investments 16-25
BE135
TerraFirmaCompanyhas
thefollowingdataat December31,
2008for its securities:
Securities Available-for-sale
Trading
Cost
$35,000 45,000
Fair Value $38,000
40,000
EXERCISES
Ex.136
MilnerCorporationhadthefollowingtransactionspertainingto debtinvestments.
Jan.1 Purchased80,8%,$1,000VanoyCompanybondsfor$80,000,plusbrokeragefeesof $800.
July1 Sold20 VanoyCompanybondsfor
$24,000,less$400brokeragefees.
Instructions
Preparejournalentriesfor
thepurchaseandsaleof theVanoyCompanybonds.
Ex.137
Glaser Companyhadthe followingtransactions
pertaining
todebtsecuritiesheldasashort-term investment.
Jan.1 Purchased40,8%,$1,000CotterCompanybondsfor$40,000cashplusbrokerage feesof$800.InterestispayablesemiannuallyonJuly1 andJanuary1.
July1 Receivedsemiannualintereston CotterCompanybonds.
Oct.1 Sold30CotterCompanybondsfor$32,000plusaccruedinterestless$500brokerage fees.
Instructions
(a)Journalizethetransactions.
(b)PreparetheadjustingentryfortheaccrualofinterestonDecember31.
Ex.138
Thefollowingtransactionswere
made byWaite Company.Assumeall investmentsare short-term and arereadilymarketable.
June 2 July 1 30
Sept.15 Dec.31
31
Purchased300sharesofBeatyCorporationcommonstockfor$45 pershare. Purchased200MengCorporationbondsfor$220,000.
Receivedacashdividendof
$2persharefromBeatyCorporation.
Sold90shares
of BeatyCorporationstockfor$50pershare.
Receivedsemiannualinterestcheckfor$11,000fromMengCorporation.
Receivedacashdividendof
$2persharefromBeatyCorporation.
InstructionsJournalizethetransactions.
Investments 16-27
Ex.139
OnApril1,SmithCompanybuys3,000sharesofThomascommonstockfor$60,000,plus brokeragefeesof$900.OnOctober1,Smithsells1,000sharesofThomasstockfor$23,000,
less brokeragefeesof$500.
Instructions
Preparejournalentriesfor
thepurchaseandsaleof theThomas commonstock.
Ex.140
StoneCompanyhadthefollowingtransactionspertainingtoshort-terminvestmentsinequity
securities.
Jan. 1
June 1 Sept.15
Dec. 1
Purchased1,000sharesofRenfroCompanystockfor$9,450cashplusbrokerage feesof
$300.
Receivedcashdividendsof
$.50pershareon RenfroCompanystock.
Sold400 sharesof RenfroCompanystockfor $3,800 lessbrokeragefeesof$100.
Receivedcashdividendsof
$.50pershareon RenfroCompanystock.
Instructions
(a)Journalizethetransactions.
(b)Indicatetheincomestatementeffectsof thetransactions.
Ex.141
StineCorporation'sbalancesheetat December31,
2007,showed thefollowing: Short-term investments,atfair value $46,500
StineCorporation'stradingportfolioofstockinvestmentsconsistedofthefollowingatDecember 31,2007:
Stock
DooleyCommonStock AdlerPreferredStock
GriggsCommonStock
Numberof Shares 200
400 300
Cost
$30,000 6,000
9,000$45,000
Investments 16-29
Ex.141 (cont.)
During2008,thefollowingtransactionstookplace:
Feb. 5 Sold50shares
of Dooleycommonstockfor$8,000.Mar.30 Purchased25sharesofGriggscommonstockfor$950.
Sept. 9 Purchased50sharesofGriggscommonstockfor$2,000.
Atyearend onDecember31,2008,themarketvaluesper share were:
DooleyCommonStock AdlerPreferredStock
GriggsCommonStock
MarketValuePerShare $158.00
$14.00 $25.00
Instructions
(a)Preparethejournalentriestorecordthe2008stocktransactions.
(b)OnDecember31,2008,prepareanyadjustingentrythatmightbenecessaryrelativetothe
tradingportfolio.
(c)ShowhowthestockinvestmentswillappearonStineCorporation'sbalancesheetat December31, 2008.
Ex.142
OnJanuary5,2008,StoreyCompanypurchasedthefollowingstocksecuritiesasalong-term
investment:
300sharesMarksCorporationcommonstockfor$4,200. 500sharesWoodCorporationcommonstockfor$10,000.
600sharesLogenCorporationcommonstockfor$19,800.
AssumethatStoreyCompanycannotexercisesignificantinfluenceovertheactivitiesofthe
investee
companies andthatthe costmethodisusedtoaccountforthe investments.
OnJune30, 2008,StoreyCompany
receivedthefollowingcashdividends:
MarksCorporation........................................
WoodCorporation........................................
LogenCorporation........................................
$2.00pershare
$1.00pershare $1.50pershare
OnNovember15,2008,StoreyCompanysold200sharesofLogenCorporationcommonstock
for $7,500.
OnDecember31,2008,thefair valueof
thesecuritiesheldbyStoreyCompanyisasfollows:
MarksCorporationcommonstock
WoodCorporationcommonstock LogenCorporationcommonstock
PerShare $10
16 32
Instructions
PreparetheappropriatejournalentriesthatStoreyCompanyshouldmakeonthefollowingdates:
January5,2008
June30,2008 November15,2008
December31, 2008
Ex.143
SeelyCompanypurchased42,000sharesofcommonstockofOttoCorporationasalong-term
investmentfor$1,000,000.Duringtheyear,OttoCorporationreportednetincomeof$300,000
and paid dividendsof$100,000.
Instructions
(a) Assumingthatthe42,000sharesrepresenta15% interestinOttoCorporation: 1.Preparethejournalentrytorecordthe investmentinOtto stock.
2.Prepareanyentriesthat
SeelyCompanyshouldmake inaccountingforitsinvestmentin
Ottostockduring theyear.
3.What is thebalance of
theStockInvestmentsaccounton
SeelyCompany'sbooks
at
the end oftheyear?
(b) Repeatrequirement(a)aboveexceptassumethatthe42,000sharesrepresenta25% interestinOtto Corporation.
Ex.144
OnJanuary1,NeelyCorporationpurchaseda30%equityinPooleCompanyfor$120,000.At
December31,Pooledeclaredandpaida$40,000cashdividendandreportednetincomeof $100,000.
Instructions
PreparethenecessaryjournalentriesforNeelyCorporation.
Ex.145
Informationpertainingto long-termstockinvestments in2008byTateCorporationfollows:
Acquired10%ofthe250,000sharesofcommonstockofFriendCompanyatatotalcostof$8
pershareonJanuary1,2008.OnJuly1,FriendCompanydeclaredandpaidacashdividendof $2pershare.OnDecember31,Friend'sreportednet incomewas$654,000forthe
year.
Investments 16-33
Ex.145 (cont.)
ObtainedsignificantinfluenceoverUnruhCompanybybuying25%ofUnruh's100,000 outstandingsharesofcommonstockatatotalcostof$22pershareonJanuary1,2008.On
June15,UnruhCompanydeclaredandpaidacashdividendof$1.50pershare.OnDecember 31,Unruh'sreportednetincomewas$280,000.
Instructions
Prepareallnecessaryjournalentriesfor2008forTateCorporation.
Ex.146
AtDecember31,2008,thetradingsecuritiesforCarterCompanyareasfollows:
Security AB
Cost
$25,000
46,000$71,000
Fair Value $28,000
40,000$68,000
Instructions
Preparetheadjustingentry at December31,2008,toreportthesecuritiesatfair value.
Ex.147
RisonCorporationhasthefollowingtradingportfolioofstockinvestmentsasofDecember31, 2008.
Security A
B C
Cost
$19,000 22,000
34,000$75,000
Fair Value $16,000
26,000
31,000$73,000
OnJanuary22, 2009,RisonCorporationsoldsecurityCfor $30,000.
Instructions
(a) PreparetheadjustingentryforRisonCorporationonDecember31,2008,toreportthe portfolio at fairvalue.
(b) Indicatethebalancesheetandincomestatementpresentationofthefairvaluedatafor RisonCorporationat December31,2008.
(c) Preparethejournalentryforthe2009sale.
Ex.148
ThefollowinginformationisavailableforClooneyCorporation'savailable-for-salesecuritiesat December31, 2008.
Security XY
Cost
$35,000
22,000$57,000
Fair Value $33,000
28,000$61,000
Instructions
Preparetheadjustingentry
torecordthesecuritiesatfair valueat December31,2008.
Investments 16-35
Ex.149
AtJanuary1,2008,theavailable-for-salesecuritiesportfolioheldbyHoweCorporationconsisted of thefollowinginvestments:
1.2,500shares of
Meller
commonstockpurchasedfor $42pershare. 2.1,500shares of Kanecommonstockpurchasedfor $60pershare.
AtDecember31,2008,themarket valuespersharewere Meller $36and Kane$66.
Instructions
(a)Preparea scheduleshowing thecostandfairvalueof theportfolioatDecember 31,2008.
(b)Preparetheadjustingentrytoreporttheportfolioatfair valueat December31,2008.
Ex.150
WeaverCompany hasthefollowingdataat December31,2008for itssecurities.
SecuritiesTrading
Available-for-sale
Cost
$90,000 75,000
Fair Value $93,000
71,000
Instructions
(a) Preparetheadjustingentriestoreportthesecuritiesatfairvalue.
(b) Indicatethestatementpresentationoftherelatedunrealizedgain(loss)accountsforeach class
ofsecurities.
COMPLETIONSTATEMENTS
151.Debtinvestmentsareinvestmentsingovernmentand bonds.
152.Forlong-termdebtinvestments,anybondpremiumor isamortizedto
overtheremainingtermof thebonds.
153.Whenaninvestorownsbetween
20%and50%ofthecommonstockofacorporation,itis
generallypresumedthattheinvestorhas influenceovertheinvestee
andtherefore,theappropriatemethodofaccountingforthistypeofinvestmentisthe
method.
154.Underthecostmethod,dividendsreceivedfromaninvesteecompany arecreditedtothe
account,whereasundertheequitymethod,dividendsreceivedfrom
an investeecompanyarecreditedtothe account.
155.Atthebeginningoftheyear,GrantCorporationacquired15%ofDownsCompany
commonstockfor$400,000.DownsCompanyreportednetincomefortheyearof
$75,000andpaid$25,000cashdividendsduringtheyear.ThebalanceoftheStock
Investments accountonthebooksofGrantCorporationattheendoftheyearshouldbe$ .
156.Acompanythatownsmorethan50%ofthecommonstockofanothercompanyisknown asthe companyand financialstatementsareusually
prepared.
157. securitiesareboughtandheldprimarilyfor saleinthenearfuture.
158.MarketAdjustmentisavaluation accountwhichis
to(from)thecostof
the investments.
159.At theend of
anaccountingperiod,if thefairvalueof thetradingportfolioislessthanits
cost, thenthecompanyshouldrecognize an whichis reported
onthe
.
160.AnunrealizedlossontradingsecuritiesisreportedunderOther
ontheincomestatement.
161.Anunrealizedgainorlossonavailable-for-salesecuritiesisreportedasaseparate
componentof .
162.Short-terminvestmentsaresecuritiesthatare
and to be convertedintocash withinthenext year.
MATCHING
163. Matchthe itemsbelowbyenteringtheappropriatecodeletter inthespaceprovided.
A.Available-for-salesecurities B.Subsidiarycompany
C.Equitymethod
D.UnrealizedGainor
Loss—Equity
E.Fairvalue
F.Consolidatedfinancialstatements G.Controllinginterest
H.MarketAdjustment I.Parentcompany
J.Long-terminvestments
1. Valuationallowanceaccount.
2. Amountforwhicha securitycouldbesold.
3. Ownershipof
morethan50% of another
company'scommonstock.
4. Securitiesthatmaybesold
inthefuture.
5. Investmentsthatarenotreadilymarketableandnotintendedtobeconvertedinto cash withinthenextyear.
6. Financialstatementsthatpresentthetotalassetsandliabilitiescontrolledbythe
parent and thetotalrevenuesandexpensesof
the
subsidiarycompanies.
7. TheStockInvestmentsaccountisadjustedfornet incomeanddividendsreceived.
8. A companythatownsmorethan50%of thecommon
stock of anotherentity.
9. Entitywhosestockisowned
bytheparentcompany.
10. Anaccountthatisreportedinthe stockholders'equity section.
SHORT-ANSWERESSAYQUESTIONS
S-AE164
TheMarketAdjustmentaccountisabalancesheetaccount.Identifytheassetaccountitis
relatedto.Explainhowthisaccountisincreasedanddescribetheprocedurefollowedwhenits related assetaccountisdisposedof.
S-AE165
Aconsolidatedbalancesheetreportsthefinancialpositionoftwoormorelegalentitiesjustasif
theywereonereportingunit.Explainwhyalltheindividualitemsappearingontheseparate
balancesheetsofeachoftheaffiliatedcompaniescannotbeaddedtogethertoarriveata
consolidatedtotalfor
each
item.
S-AE166
Whenayear-endadjustmentismadetoreducethetradingsecuritiesportfoliotomarket,what effect,ifany,
willthe
adjustment haveonthebalancesheetandthe incomestatement?
S-AE167(Ethics)
GreyhoundStables,Inc.operatesseveraldogracingtracksthroughouttheUnitedStates.Since
mostfacilitiesareoutdoortracksonly,mostofthecashreceiptsforGreyhoundarereceivedfrom AprilthroughOctober.Thesefundsareusuallyinvestedinshort-term,veryliquidinvestments, suchasstocksandbonds.Amongthestockspurchasedlastyear,wasServitronics,acompany
specializinginautomaticvendingequipment.
Investments 16-39
S-AE167(cont.)
Thecompany decidednottosellitsServitronicsstockattheendoflastyear,andhaspurchased
moreofthestockthisyear.Thecompanyintendstocontinuetopurchasestockuntilitholds enoughtomakeatakeoverbidforthecompany.Theaccountantshavebeeninstructedto continuetoclassifytheinvestmentasshort-termuntilthetakeoverisaccomplished,sothatless attention willbedirectedto
it. (Presently,Greyhoundhasnolong-terminvestmentinstock at
all.)
Required:
1.IsitethicalforGreyhoundtoattempttotakeoveranothercompany?Explain.
2.IsitethicalforGreyhoundtoleaveitsinvestmentintheshort-terminvestmentcategory?
Explain.
S-AE168(Communication)
AnnHarmanisthedaughterofFredHarman,thefounderandpresidentofBigSkyEnterprises. Shehasbeenworkinginvariousdepartmentsduringschoolvacationsthroughouthighschool. Sheburstintotheaccountingdepartmentexcitedlyonemorning.Shesaidthatthestockpriceof
severalofthefirm'savailable-for-salesecuritiesareup,andthatherfathersaidthatthecompany hadmade
over$10,000becauseofthisjumpinstockprices.Sheasks toseehow theincreaseis recorded.It is a
verybusytimein theaccountingdepartment,andsoherquestionisdeferred.
Required:
Prepareabriefnoteto answerAnn'squestion.
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