ACC 557 Week 9 Quiz – Strayer NEW
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Chapter 12
All
possible questions with answers
TRUE-FALSE
STATEMENTS
Corporations
purchase investments in debt or stock securities generally for one of two
reasons.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource Management,
AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA: Business Economics
A reason
some companies purchase investments is because they generate a significant
portion of their earnings from investment income.
Ans:LO:
1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Decision Modeling, AICPA PC: Problem Solving, IMA:
Business Economics
The
accounting for short-term debt investments and for long-term debt investments
is similar.
Ans:LO:
2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None, AICPA FN:
Measurement, AICPA PC: Problem Solving, IMA: FSA
When
debt investments, are sold, the gain or loss is the difference between the net
proceeds from the sale and the fair value of the bonds.
Ans:LO:
2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Debt
investments are investments in government and corporation bonds.
Ans:LO:
2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business Economics
In
accordance with the cost principle, brokerage fees should be added to the cost
of an investment.
Ans:LO:
2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
In
accordance with the cost principle, the cost of debt investments includes
brokerage fees and accrued interest.
Ans:LO:
2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
In
accounting for stock investments of less than 20%, the equity method is used.
Ans:LO:
3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business
Economics
Dividends
received on stock investments of less than 20% should be credited to the Stock
Investments account.
Ans:LO:
3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business
Economics
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.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Business
Economics
The
Stock Investments account is debited at acquisition under both the equity
method and cost method of accounting for investments in common stock.
Ans:LO:
3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Under
the equity method, the investment in common stock is initially recorded at
cost, and the Stock Investments account is adjusted annually.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Under
the equity method, the receipt of dividends from the investee company results
in an increase in the Stock Investments account.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Consolidated
financial statements are appropriate when an investor controls an investee by
ownership of more than 50% of the investee's common stock.
Ans:LO:
4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Consolidated
financial statements are prepared in place of the financial statements for the
parent and subsidiary companies.
Ans:LO:
4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Consolidated
financial statements should be prepared only when a subsidiary company has a
controlling interest in the parent company.
Ans:LO:
4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
The
valuation of non-trading securities is similar to the procedures followed for
trading securities, except that changes in fair value are not recognized in
current income.
Ans:LO:
5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
An
unrealized gain or loss on trading securities is reported as a separate
component of stockholders' equity.
Ans:LO:
5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
For
non-trading securities, the unrealized gain or loss account is carried forward
to future periods.
Ans:LO:
5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
A
decline in the fair value of a trading security is recorded by debiting an
unrealized loss account and crediting the Fair value Adjustment account.
Ans:LO:
5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
If the
fair value of a non-trading security exceeds its cost, the security should be
written up to fair value and a realized gain should be recognized.
Ans:LO:
5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
The Fair
Value Adjustment account can only have a credit balance or a zero balance.
Ans:LO:
5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
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.
Ans:LO:
6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
An
investment is readily marketable if it is management's intent to sell the
investment.
Ans:LO:
6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Stocks
traded on the New York Stock Exchange are considered readily marketable.
Ans:LO:
6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
When a
parent company acquires a wholly owned subsidiary for an amount in excess of
the book value of the net assets acquired, the excess is always allocated to
good will.
Ans:LO:
7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business
Economics
A
consolidated income statement will reflect only revenue and expense
transactions between the consolidated entity and parties outside the affiliated
group.
Ans:LO:
7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business
Economics
The
process of excluding intercompany transactions in preparing consolidated
statements is referred to as intercompany eliminations.
Ans:LO:
7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business
Economics
One of
the reasons a corporation may purchase investments is that it has excess cash.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA: Business
Economics
When
recording bond interest, Interest Receivable is reported as a long-term asset in
the balance sheet.
Ans:LO:
2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Under
the cost method, the investment is recorded at cost and revenue is recognized
only when cash dividends are received.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Consolidated
financial statements present a condensed version of the financial statements so
investors will not experience information overload.
Ans:LO:
4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting
Non-trading
securities are securities bought and held primarily for sale in the near term
to generate income on short-term price differences.
Ans:LO:
5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
"Intent
to convert" does not include an investment used as a resource that will be
used whenever the need for cash arises.
Ans:LO:
6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
MULTIPLE
CHOICE QUESTIONS
Corporations
invest excess cash for short periods of time in each of the following except
equity
securities.
highly
liquid securities.
low-risk
securities.
government
securities.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
Corporations
invest in other companies for all of the following reasons except to
house
excess cash until needed.
generate
earnings.
meet
strategic goals.
increase
trading of the other companies’ stock.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics
A
typical investment to house excess cash until needed is
stocks
of companies in a related industry.
debt
securities.
low-risk,
highly liquid securities.
stock
securities.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
A
company may purchase a noncontrolling interest in another firm in a related
industry
to house
excess cash until needed.
to
generate earnings.
for strategic
reasons.
for
speculative reasons.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
Pension
funds and mutual funds regularly invest in debt and stock securities primarily
to
generate
earnings.
house
excess cash until needed.
meet
strategic goals.
control
the company in which they invest.
Ans:LO:
1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
At the
time of acquisition of a debt investment,
no
journal entry is required.
the cost
principle applies.
the
Stock Investments account is debited when bonds are purchased.
the
Investment account is credited for its cost plus brokerage fees.
Ans:LO:
2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics
Which of
the following is not a true statement regarding short-term debt investments?
The
securities usually pay interest.
Investments
are frequently government or corporate bonds.
This
type of investment must be currently traded in the securities market.
Debt
investments are recorded at the price paid less brokerage fees.
Ans:LO:
2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Resource
Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics
On
January 1, 2013, Danner Company purchased at face value, a $1,000, 8% bond that
pays interest on January 1 and July 1. Danner Company has a calendar year end.
The
entry for the receipt of interest on July 1, 2013, is
Cash.......................................................................................
40
Interest
Revenue........................................................... 40
Cash.......................................................................................
80
Interest
Revenue........................................................... 80
Interest
Receivable................................................................ 40
Interest
Revenue........................................................... 40
Interest
Receivable................................................................ 80
Interest
Revenue........................................................... 80
Ans:LO:
2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On
January 1, 2013, Danner Company purchased at face value, a $1,000, 10% bond
that pays interest on January 1 and July 1. Danner Company has a calendar year
end.
The
adjusting entry on December 31, 2013, is
not
required.
Cash.......................................................................................
50
Interest
Revenue........................................................... 50
Interest
Receivable................................................................ 50
Interest
Revenue........................................................... 50
Interest
Receivable................................................................ 50
Debt
Investments.......................................................... 50
Ans:LO:
2, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On
January 1, 2013, Milton Company purchased at face value, a $1,000, 4% bond that
pays interest on January 1 and July 1. Milton Company has a calendar year end.
The
entry for the receipt of interest on January 1, 2014 is
Cash.......................................................................................
40
Interest
Revenue........................................................... 40
Cash.......................................................................................
40
Interest
Receivable....................................................... 40
Cash.......................................................................................
20
Interest
Revenue........................................................... 20
Cash.......................................................................................
20
Interest
Receivable....................................................... 20
Ans:LO:
2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On
January 1, Talent 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?
Cash.......................................................................................
1,200
Debt
Investments ......................................................... 1,200
Cash.......................................................................................
1,220
Debt
Investments.......................................................... 1,050
Gain on
Sale of Debt Investments................................. 150
Interest
Revenue........................................................... 20
Cash.......................................................................................
1,220
Debt
Investments.......................................................... 1,200
Interest
Revenue........................................................... 20
Cash.......................................................................................
1,200
Debt
Investments.......................................................... 1,050
Gain on
Sale of Debt Investments................................. 150
Ans:LO:
2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Which of
the following is not a true statement about the accounting for debt
investments?
At
acquisition, the cost principle applies.
The cost
includes any brokerage fees.
Debt
investments include investments in government and corporation bonds.
The cost
includes any accrued interest.
Ans:LO:
2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
The cost
of debt investments includes each of the following except
brokerage
fees.
commissions.
accrued interest.
the
price paid.
Ans:LO:
2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If a
short-term debt investment is sold, the Investment account is
credited
for the face value of the bonds at the sale date.
credited
for the cost of the bonds at the sale date.
credited
for the fair value of the bonds at the sale date.
debited
for the cost of the bonds at the sale date.
Ans:LO:
2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: FSA
In
accounting for debt investments, entries are made to recordeach of the
following except the
acquisition.
interest
revenue.
amortization
of any discount or premium.
sale.
Ans:LO:
2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: FSA
Key
Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2013 for
$61,250. This includes a brokerage commission of $1,250.
The
journal entry to record this investment includes a debit to
Debt
Investments for $60,000.
Debt
Investments for $61,250.
Cash for
$61,250.
Stock
Investments for $60,000.
Ans:LO:
2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Key
Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2013 for
$61,250. This includes a brokerage commission of $1,250.
Assume
Community pays interest on January 1 and July 1, and the July 1 entry was made
correctly. The journal entry at December 31, 2013 would include a credit to
Interest
Receivable for $3,000.
Interest
Revenue for $6,000.
Accrued
Expense for $6,000.
Interest
Revenue for $3,000.
Ans:LO:
2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Key
Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1, 2013 for
$61,250. This includes a brokerage commission of $1,250. If Key sells all of
its Community bonds for $62,500 and pays $1,500 in brokerage commissions, what
gain or loss is recognized?
Gain of
$2,500
Loss of
$250
Gain of
$250
Gain of
$1,250
Ans:LO:
2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Locke
Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage
fees of $500. Interest is payable semiannually on July 1 and January 1. The
entry to record the July 1 semiannual interest payment would include a
debit to
Interest Receivable for $1,500.
credit
to Interest Revenue for $1,500.
credit
to Interest Revenue for $1,515.
credit
to Debt Investments for $1,515.
Ans:LO:
2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Locke
Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage
fees of $500. Interest is payable semiannually on July 1 and January 1. The
entry to record the December 31 interest accrual would include a
debit to
Interest Receivable for $1,500.
debit to
Interest Revenue for $1,500.
credit
to Interest Revenue for $1,515.
debit to
Debt Investments for $1,500.
Ans:LO:
2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Temper
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 30 of the
securities are sold on July 1 for $32,000 less $300 brokerage fees, the entry
would include a credit to Gain on Sale of Debt Investments for
$2,000.
$1,700.
$2,300.
$1,400.
Ans:LO:
2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On
January 1, Bacon Company purchased as an investment a $1,000, 7% 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?
Interest
Receivable................................................................ 35
Interest
Revenue .......................................................... 35
Debt
Investments ..................................................................
35
Interest
Revenue .......................................................... 35
Interest
Receivable................................................................ 70
Interest
Revenue .......................................................... 70
Debt
Investments ..................................................................
70
Interest
Revenue .......................................................... 70
Ans:LO:
2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Eck
Corporation sells 250 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $25 a share. Eck sold the
shares for $40 a share. The entry to record the sale is
Cash.......................................................................................
6,250
Loss on
Sale of Stock Investments ...................................... 3,750
Stock
Investments ........................................................ 10,000
Stock
Investments .................................................................
10,000
Cash
.............................................................................
10,000
Cash.......................................................................................
10,000
Gain on
Sale of Stock Investments .............................. 3,750
Stock
Investments ........................................................ 6,250
Cash.......................................................................................
10,000
Stock
Investments ........................................................ 10,000
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
White
Corporation sells 300 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $60 a share. White sold the
shares for $40 a share. The entry to record the sale is
Cash.......................................................................................
12,000
Loss on
Sale of Stock Investments ...................................... 6,000
Stock
Investments ........................................................ 18,000
Cash.......................................................................................
18,000
Gain on
Sale of Stock Investments .............................. 6,000
Stock
Investments ........................................................ 12,000
Cash.......................................................................................
12,000
Stock
Investments ........................................................ 12,000
Stock
Investments .................................................................
12,000
Loss on
Sale of Stock Investments ...................................... 6,000
Cash..............................................................................
18,000
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Tan
Company had these transactions pertaining to stock investments:
Feb. 1
Purchased 3,000 shares of Norton Company (10%) for $48,800 cash plus brokerage
fees of $1,400.
June 1
Received cash dividends of $2 per share on Norton stock.
Oct. 1
Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600.
The
entry to record the purchase of the Norton stock would include a
debit to
Stock Investments for $48,800.
credit
to Cash for $48,800.
debit to
Stock Investments for $50,200.
debit to
Investment Expense for $1,400.
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Tan
Company had these transactions pertaining to stock investments:
Feb. 1
Purchased 3,000 shares of Norton Company (10%) for $49,800 cash plus brokerage
fees of $1,200.
June 1
Received cash dividends of $3 per share on Norton stock.
Oct. 1
Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600.
The
entry to record the receipt of the dividends on June 1 would include a
debit to
Stock Investments for $9,000.
credit
to Dividend Revenue for $9,000.
debit to
Dividend Revenue for $9,000.
credit
to Stock Investments for $9,000.
Ans:LO:
3, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Tan
Company had these transactions pertaining to stock investments:
Feb. 1
Purchased 3,000 shares of Norton Company (10%) for $49,800 cash plus brokerage
fees of $1,200.
June 1
Received cash dividends of $2 per share on Norton stock.
Oct. 1
Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600.
The
entry to record the sale of the stock would include a
debit to
Cash for $24,000.
credit
to Gain on Sale of Stock Investments for $1,200.
debit to
Stock Investments for $20,400.
credit
to Gain on Sale of Stock Investments for $3,000.
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Wise
Company owns 30% interest in the stock of Dark Corporation. During the year,
Dark pays $20,000 in dividends to Wise, and reports $200,000 in net income.
Wise Company’s investment in Dark will increase Wise’s net income by
$6,000.
$60,000.
$66,000.
$80,000.
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA:
Reporting
Nickel
Company owns 30% interest in the stock of Finn Corporation. During the year,
Finn pays $25,000 in dividends, and reports $200,000 in net income. Nickel
Company’s investment in Finn will increase by
$25,000.
$60,000.
$67,500.
$52,500.
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
On
January 1, 2013, Great Corporation purchased 25% of the common stock
outstanding of Long Corporation for $250,000. During 2013, Long Corporation
reported net income of $80,000 and paid cash dividends of $40,000. The balance
of the Stock Investments—Long account on the books of Great Corporation at
December 31, 2013 is
$250,000.
$290,000.
$330,000.
$260,000.
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: Problem Solving, IMA: Reporting
Dayton
Corporation purchased 1,000 shares of Kart common stock at $77 per share plus
$2,000 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
$77,000
$3,000 gain
$77,000
$1,400 loss
$79,000
$2,000 gain
$79,000
$2,400 loss
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA:
Reporting
In
accounting for stock investments between 20% and 50%, the _______ method is
used.
consolidated
statements
controlling
interest
cost
equity
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: FSA
When a
company holds stock of several different corporations, the group of securities
is identified as a(n)
affiliated
investment.
consolidated
portfolio.
investment
portfolio.
controlling
interest.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Jerome
Corporation makes a short-term investment in 160 shares of Singer Company's
common stock. The stock is purchased for $50 a share plus brokerage fees of
$550. The entry for the purchase is
Debt
Investments...................................................................
8,000
Cash..............................................................................
8,000
Stock
Investments..................................................................
8,550
Cash..............................................................................
8,550
Stock
Investments..................................................................
8,000
Brokerage
Fee Expense........................................................ 550
Cash..............................................................................
8,550
Stock
Investments..................................................................
8,000
Cash..............................................................................
8,000
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
Cooke
Corporation sells 400 shares of common stock being held as a short-term
investment. The shares were acquired six months ago at a cost of $55 a share.
Cooke sold the shares for $40 a share. The entry to record the sale is
Cash.......................................................................................
16,000
Loss on
Sale of Stock Investments....................................... 6,000
Stock
Investments......................................................... 22,000
Cash.......................................................................................
22,000
Gain on
Sale of Stock Investments............................... 6,000
Stock
Investments......................................................... 16,000
MC 69.
(cont.)
Cash.......................................................................................
16,000
Stock
Investments......................................................... 16,000
Stock
Investments..................................................................
16,000
Loss on
Sale of Stock Investments....................................... 6,000
Cash..............................................................................
22,000
Ans:LO:
3, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
For
accounting purposes, the method used to account for long-term investments in
common stock is determined by
the
amount paid for the stock by the investor.
the
extent of an investor's influence on the operating and financial affairs of the
investee.
whether
the stock has paid dividends in past years.
whether
the acquisition of the stock by the investor was "friendly" or
"hostile."
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If an
investor owns less than 20% of the common stock of another corporation as a
long-term investment,
the
equity method of accounting for the investment should be employed.
no
dividends can be expected.
it is
presumed that the investor has relatively little influence on the investee.
it is
presumed that the investor has significant influence on the investee.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
If the
cost method is used to account for a long-term investment in common stock,
dividends received should be
credited
to the Stock Investments account.
credited
to the Dividend Revenue account.
debited
to the Stock Investments account.
recorded
only when 20% or more of the stock is owned.
Ans:LO:
3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Measurement, AICPA PC: None, IMA: FSA
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
the cost
method.
the
equity method.
the
preparation of consolidated financial statements.
determined
by agreement with whomever owns the remaining 90% of the stock.
Ans:LO:
3, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
The cost
method of accounting for long-term investments in stock should be employed when
the
investor
owns more than 50% of the investee's stock.
investor
has significant influence on the investee and the stock held by the investor
are marketable equity securities.
market
value of the shares held is greater than their historical cost.
investor's
influence on the investee is insignificant.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
When an
investor owns between 20% and 50% of the common stock of a corporation, it is
generally presumed that the investor
has
insignificant influence on the investee and that the cost method should be used
to account for the investment.
should
apply the cost method in accounting for the investment.
will
prepare consolidated financial statements.
has
significant influence on the investee and that the equity method should be used
to account for the investment.
Ans:LO:
3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory,
AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
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