Question

1. Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firms are termed

a. available-for-sale securities

b. trading securities

c. held-to-maturity securities

d. marketable securities

2. Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of stockholders’ equity?

a. held-to-maturity debt securities

b. marketable securities

c. available-for-sale securities

d. trading securities

3. Which of the following securities are reported at their amortized cost on the balance sheet date?

a. held-to-maturity debt securities

b. marketable securities

c. available-for-sale securities

d. trading securities

4. With consolidation, control generally occurs when the investor owns what percentage of the voting stock of the investee?

a. over 50%

b. between 20% and 50%

c. less than 20%

d. over 40%

5. Which of the following methods of accounting for investments is appropriate when the investor has significant influence over the investee?

a. equity method

b. consolidation

c. cost method

d. lower of cost or market method

6. How is the premium or discount on held-to-maturity bond investments presented on the balance sheet?

a. as a part of the cost of the investment and amortized over a period not to exceed five years

b. as a part of the cost of the investment and amortized over the remaining life of the bonds

c. in a separate account that is reported separately from the bonds and amortized over a period not to exceed five years

d. in a separate account that is reported separately from the investment account and not amortized

7. On January 1, 2014, Macie Company purchased Jefferson Company’s 9% bonds with a face amount of $200,000 for $213,420 to yield 8%. The bonds mature on January 1, 2024, and Macie has both the intent and ability to hold these bonds to maturity. The bonds pay interest annually on December 31. Assuming Macie uses the effective interest method of amortizing the bond premium; interest income reported on the December 31, 2014, balance sheet would be

a. $16,000

b. $17,074

c. $18,000

d. $18,926

8. On October 1, 2014, the Sun Company acquired 9% bonds of Jack’s Company with a face value of $400,000 for $412,000 plus accrued interest. Interest is payable on June 30 and December 31. How would Sun record the initial bond investment to be held-to-maturity?

a. Investment in Held-to-Maturity Debt Securities 412,000

Interest Income 9,360

Cash 421,360

b. Investment in Held-to-Maturity Debt Securities 412,000

Interest Income 9,000

Cash 421,000

c. Investment in Held-to-Maturity Debt Securities 421,000

Cash 421,000

d. Investment in Held-to-Maturity Debt Securities 412,000

Cash 412,000

9. On July 1, 2015, Jason Company purchased $60,000 of ten-year 6% bonds of Santo, Inc., for $51,850, to be held-to-maturity. Interest is payable semiannually on June 30 and December 31. The effective yield on the investment is 8%. What amount of interest income should Jason record for the six-month period ended December 31, 2015?

a. $2,063.04

b. $2,084.96

c. $2,074.00

d. $2,400.00

10. On January 1, 2014, Old World Company purchased $300,000 of ten-year 10% bonds of New Company for $326,840. Interest is payable annually. The effective yield on the investment is 8%. What is the balance in Old World’s investment in held-to-maturity debt securities account (rounded to the nearest dollar, if necessary) at December 31, 2015?

a. $330,693

b. $326,840

c. $322,987

d. $318,826

11. On July 1, 2014, James Company purchased Timothy Company’s six-year 9% bonds with a face value of $200,000 for $196,000, which included $6,000 of accrued interest. The bonds, which mature on March 1, 2020, are to be held-to-maturity and pay interest semiannually on March 1 and September 1. James uses the straight-line method of amortization. The amount of income James should report for the calendar year 2014 as a result of this investment would be

a. $8,823.52

b. $9,882.36

c. $9,529.40

d. $8,117.64

12. The carrying value of held-to-maturity debt securities is the

a. original purchase amount

b. amortized cost

c. market value

d. lower of amortized cost or market value

13. Unrealized holding gains and losses occur because a company

a. actively trades securities

b. holds securities until maturity

c. holds securities through the end of the reporting period

d. records a change in fair value of the securities held even if they are not sold

14. Which of the following regarding trading securities is correct?

a. Trading securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.

b. Trading securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.

c. Trading securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

d. Trading securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

15. Unrealized gains and losses on investments in trading securities are reported

a. as a current asset

b. on the income statement

c. on the balance sheet as part of stockholders’ equity

d. as a contra asset

16. The Reba Company purchased 10%, $800,000 bonds of the Trading Up Company at par plus accrued interest on April 1, 2014, as an investment in trading securities. The bonds pay interest on June 30 and December 31 each year. The entry by Reba on April 1, 2014, would include a

a. debit to Investment in Trading Securities of $820,000

b. credit to Cash of $820,000

c. credit to Interest Income of $20,000

d. debit to Interest Expense of $20,000

17. In its first year of operations, Roger Company purchased trading securities at a total cost of $53,000. On December 31, the end of Roger’s fiscal year, the fair market value of those investments totaled $57,000. As a result of these investments, Roger Company will report

a. Investment in Trading Securities of $57,000

b. Investment in Trading Securities of $53,000

c. Unrealized Holding Gain/Loss-Trading Securities of $4,000 on the income statement as ordinary income

d. a credit balance in the contra account to Investment in Trading Securities of $4,000 

18. Chapin Company purchased investments in 2017 at a cost of $200,000 they recorded as trading securities. Their market values totaled $250,000 and $230,000 on December 31, 2017, and December 31, 2018, respectively. The entry required on December 31, 2018, would include a

a. debit to Unrealized Holding Gain/Loss-Trading Securities of $20,000

b. credit to Unrealized Holding Gain/Loss-Trading Securities of $20,000

c. credit to Unrealized Holding Gain/Loss-Trading Securities of $30,000

d. debit to Unrealized Holding Gain/Loss-Trading Securities of $30,000

19. The entry to record a sale of trading securities for $65,000 on January 3, 2018, that were purchased for $52,000 on November 21, 2017, and had a fair value on December 31, 2017, of $57,000 would include a

a. credit to Unrealized Holding Gain/Loss-Trading Securities of $8,000

b. debit to Unrealized Holding Gain/Loss-Trading Securities of $5,000

c. debit to Investment in Trading Securities of $5,000

d. credit to Gain on Sale of Trading Securities of $8,000

20. Which of the following regarding available-for-sale securities is correct?

a. Available-for-sale securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.

b. Available-for-sale securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.

c. Available-for-sale securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

d. Available-for-sale securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

21. Realized gains and losses on investments available-for-sale are reported 

a. as a current asset

b. on the income statement

c. on the balance sheet as part of stockholders’ equity

d. as a contra asset

22. A realized gain or loss on the sale of an available-for-sale security is determined by comparing

a. the carrying value of the security with the proceeds from the sale

b. the original cost of the security with the proceeds from the sale

c. the market value at the latest balance sheet date with the proceeds from the sale

d. the original cost with the security’s carrying value

23. Wright Company has available-for-sale debt and equity securities that on December 31, 2014, had a cost of $110,000 and a market value of $108,000. The market value rose to $123,000 by December 31, 2015. What accounting action is required on December 31, 2015?

a. Allowance for Change in Fair Value of Investments should be credited for $15,000.

b. Unrealized Holding Gain/Loss-Available-for-Sale Securities should be debited for $13,000.

c. Allowance for Change in Fair Value of Investments should be debited for $15,000.

d. Unrealized Holding Gain/Loss-Available-for-Sale Securities should be credited for

$13,000.

24. Reagan Company purchased 10,000 shares of Clinton’s Company at $45 per share plus $15,000 of Delta Company’s 12% bonds, acquired at par, as an available-for-sale securities. The bond pays interest on June 30 and December 31 each year. What amount should be recorded to the Investment in Available-for-Sale Securities account?

a. $450,000

b. $466,800

c. $15,000

d. $465,000

25. Chang Company purchased several investments in December 2015. Costs and market values of those investments on December 31, 2015, are presented below:

                        Cost            Market Value

XYZ stock                     $200,000         $180,000

ABC stock                     400,000         420,000

DEF stock                     600,000         540,000

Assuming all of the securities are classified as available-for-sale, the journal entry required on December 31, 2015, the end of Chang’s fiscal year, would include a

a. debit to Unrealized Holding Gain/Loss-Available-for-Sale of $60,000

b. credit to Unrealized Holding Gain/Loss-Available-for-Sale of $60,000

c. credit to Unrealized Holding Gain/Loss-Available-for-Sale of $80,000

d. debit to Investment in Available-for-Sale Securities of $60,000

26. On January 1, 2014, the Leaf Company acquired a 5% interest in the Trunk Corporation through the purchase of 100,000 shares of Trunk’s common stock for $640,000; the investment is recorded on Leaf’s books as available-for-sale. During 2014, Trunk paid $40,000 in dividends and reported net income of $100,000. The market price of Trunk’s common stock was $6.20 per share on December 31, 2014. Leaf should report the investment in the Trunk Corporation on its December 31, 2014, balance sheet at 

a. $620,000

b. $627,000

c. $640,000

d. $645,000

27. A transfer of a security between categories is accounted for at the

a. investment’s carrying value

b. fair value

c. original investment cost

d. lower of the original cost or fair value

28. Permanent value declines in available-for-sale securities should be

a. recorded in the allowance account

b. included in income as a realized loss

c. amortized over the remaining life of the security

d. recorded similarly to temporary declines in value

29. The Plutonium Company has a bond investment classified as held-to-maturity, which has a carrying value of $62,000 and a fair value of $24,000. The decline in value is considered as other than temporary. Plutonium should record the decline as

a. Unrealized Loss on Value Decline 38,000

Allowance for Change in Fair

Value of Investment 38,000

b. Investment in Held-to-Maturity Securities 38,000

Realized Loss on Decline in Value 38,000

c. Realized Loss on Decline in Value 38,000

Investment in Held-to-Maturity Securities 38,000

d. Unrealized Loss on Value Decline 38,000

Investment in Held-to-Maturity Securities 38,000

30. With the equity method, the investor recognizes its share of the earnings of the subsidiary when the

a. investor sells the investment

b. investee pays a cash dividend

c. investee declares a cash dividend

d. investee reports earnings on its income statement

31. Under the equity method, dividends received by the investor should be recorded as

a. a reduction in the carrying value of the investment

b. an addition to the carrying value of the investment

c. dividend income

d. investment income

32. Waldo Company owns 30% of Randy Company. During 2014, Randy reported earnings of $650,000 and paid cash dividends of $345,000. What effect would this have on Waldo’s investment account and net income?

1.             Investment Account                     Net Income

            +$195,000                        +$103,500

            +$103,500 +$ 91,500                     +$195,000

a. I

b. II

c. III

d. IV

Exhibit 13-1

33. On January 1, 2014, Oak Corporation paid $900,000 for 80,000 shares of Beech Company’s common stock, which represents 35% of Beech’s outstanding common stock. Beech reported income of $300,000 and paid a cash dividend of $100,000 during 2014.

a. $70,000

b. $140,000

c. $105,000

d. $300,000

34. Refer to Exhibit 13-1. Oak should report the investment in Beech Company on its December 31, 2014, balance sheet at

a. $900,000

b. $970,000

c. $935,000

d. $1,005,000

35. The Wise Company acquired an 20% interest in the outstanding common stock of the Smith Company. The Wise Company can exercise significant influence over the operating and financial policies of the Smith Company. The Wise Company should account for its investment in the Smith Company by using the

a. equity method

b. cost method

c. securities held-to-maturity method

d. lower of cost or market method

36. The Master Company acquired a 40% interest in the Dickerson Company on January 2, 2014, for  $1,000,000.During 2014, Dickerson Company paid $100,000 in dividends and reported net income of $270,000. At the end of 2014, the balance in Investment in Dickerson Company should be

a. $1,000,000

b. $1,068,000

c. $1,040,000

d. $1,108,000

37. David, Inc. used the equity method of accounting for its investment in Russell Company. At December 31, 2014, the investment balance was $4,500 after all adjustments were recorded. The following is additional information: 

David’s share of Russells’ 2014 net income $2,300

David’s share of 2014 depreciation of Russell equipment 100

David’s dividends received from Russell in 2014 700

What was the January 1, 2014 balance in Investment in Russell Company?

a. $3,800

b. $3,000

c. $2,900

d. $2,300

38. Which type of investment in securities must always be classified as a current asset?

a. held-to-maturity debt securities

b. available-for-sale securities

c. trading securities

d. none of the these, they may all be classified as current or long-term assets

39. Warren, Inc. purchased a $400,000 life insurance policy on the company president on January 1, 2017. The premium that was paid on January 1 amounted to $11,600. In the first year, cash surrender value increased by $900 and dividends received by Warren from the insurance company for the year amounted to $300. What was Warren’s insurance expense for 2017?

a. $10,400

b. $11,000

c. $12,500

d. $12,800

40. The cash surrender value of the insurance policy on the corporation’s president would be presented on the balance sheet as

a. cash

b. marketable securities

c. long-term investment

d. prepaid expense

41. The journal entry to recognize the impairment of a note receivable includes a

a. debit to Bad Debt Expense

b. credit to Notes Receivable

c. credit to Interest Expense

d. debit to Interest Income

42. A note receivable is considered impaired when

a. the debtor misses an interest or principal payment

b. it is probable that the creditor will be unable to collect all amounts due

c. the market value of the note is less than its book value

d. the market value of interest exceeds the original contract interest rate