3) Amex Corporation invests excess cash to purchase $25,000 in corporate bonds on March 30, 2018. In
addition to the $25,000, Amex also paid a brokerage fee of $1,000. Amex intends to hold the bonds until
maturity and has the ability to do so. When the bonds mature on March 30, 2020, Amex plans to use the
cash for its business expansion. Which of the following is included in the journal entry on March 30,
2018?
A) a debit to Held–to–Maturity Debt Investments for $25,000
B) a debit to Trading-Debt Investments for $25,000
C) a debit to Held-to-Maturity Debt Investments for $26,000
D) a debit to Trading-Debt Investments for $26,000
4) Dynamic Software, Inc. invests excess cash of $100,000 in corporate bonds on March 30, 2019. The
bonds mature 20 years from the date of purchase. Dynamic plans to hold the bonds until maturity and
has the ability to do so. How does the March 30, 2019 transaction affect the accounting equation?
A) liabilities will increase
B) equity will decrease
C) long-term assets will decrease
D) total assets will remain unchanged
5) When a company pays cash for a long-term investment in bonds, ________.
A) equity remains unchanged
B) current assets increase
C) liabilities increase
D) total assets increase
6) Montgomery Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of
Richmond Corporation, at face value, on June 30, 2018. The bonds pay interest on June 30 and December
31. Montgomery intends to hold the bonds to maturity and has the ability to hold the bonds to maturity.
The bonds are disposed of, at face value, on June 30, 2023.
Prepare the journal entry for June 30, 2018 (omit the explanation).
7) When a company receives interest revenue on a bond investment, total stockholders’ equity remains
unchanged.
8) Scott Enterprises has excess cash to invest and pays $200,000 to buy $200,000 face value, 8%, five year
bonds of Hamilton Company bonds on July 1, 2018. The bonds are issued on July 1, 2018 and pay interest
on June 30 and December 31. Scott will record interest revenue every six months for five years.
9) Leonard Technologies invests $68,000 to acquire $68,000 face value, 10%, five-year corporate bonds on
December 31, 2014. The bonds will mature on December 31, 2019. The bonds pay interest semiannually
on December 31 and June 30 every year until maturity. Assume Leonard Technologies uses a calendar
year. Based on the information provided, which of the following will be included in the journal entry for
the transaction on December 31, 2018?
A) a credit to Interest Revenue for $6800
B) a debit to Interest Revenue for $6800
C) a credit to Interest Revenue for $3400
D) a debit to Interest Revenue for $3400
10) Roger Technologies invests $50,000 to acquire $50,000 face value, 8%, five-year corporate bonds on
January 2, 2017. The bonds will mature on January 2, 2022. The bonds pay interest semiannually on
January 2 and July 2 each year until maturity. When Roger Technologies receives interest payments, how
is the accounting equation affected?
A) assets will decrease
B) total assets will remain unchanged
C) liabilities will decrease
D) equity will increase
11) When a company receives interest revenue on a long-term investment in bonds, ________.
A) long-term assets decrease
B) long-term assets increase
C) equity increases
D) current assets decrease
12) Jonas Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of Ridgeline
Corporation, at face value, on June 30, 2018. The bonds pay interest on June 30 and December 31. Jonas
intends to hold the bonds to maturity. The bonds are disposed of, at face value, on June 30, 2023.
Prepare the journal entry for December 31, 2018 (omit the explanation).
13) When a company collects the face value of a bond investment at maturity, total assets increase.
14) If a held–to-maturity debt security is purchased at a discount, the discount must be amortized when
the interest revenue is earned.
15) When a company collects the face value of a long-term investment in bonds at maturity, ________.
A) total assets and equity of the firm remains unchanged
B) both assets and liabilities of the firm increase
C) both assets and equity of the firm increase
D) liabilities decrease and equity increases
16) On the maturity date of a bond investment, the journal entry includes ________.
A) a debit to Cash and a credit to Held-to–Maturity Debt Investments
B) a debit to Long-term Investments and a credit to Cash
C) a debit to the Interest Revenue and a credit to Cash
D) recording a gain or loss on disposition at maturity
17) Regarding accounting entries for debt securities, which of the following is true?
A) The receipt of interest revenue is recorded with a debit to Interest Revenue and a credit to Cash.
B) Investments in debt securities are recorded at cost, including any brokerage fees paid.
C) The receipt of interest revenue is recorded with a debit to Cash and a credit to Held–to-Maturity Debt
Investments.
D) Debt securities disposed of at maturity are recorded with a debit to the Short-term or Long-term
Investments account and a credit to Cash.
18) Which of the following statements regarding debt securities is incorrect?
A) Debt securities include Held-to–Maturity Debt Investments, Trading Debt Investments, and Available-
for-Sale Debt Investments.
B) When recording the receipt of interest revenue on Trading Debt Investments, Interest Revenue is
credited.
C) If a Held-to–Maturity Debt Investment is purchased at a discount or premium, the discount/premium
must be amortized when the interest revenue is earned.
D) All investments in debt securities are categorized as long-term assets.
19) National Corporation has excess cash to invest and pays $200,000 to buy 7%, five-year bonds of
International Corporation, at face value, on June 30, 2018. The bonds pay interest on June 30 and
December 31. At the date of purchase, National intended to hold the bonds to maturity and has the ability
to hold the bonds to maturity. The bonds are disposed of on June 30, 2023, the maturity date.
Prepare the journal entry for (omit the explanation) June 30, 2023 (assume that the last interest payment
has already been recorded).
20) Hardin Co. purchased $1,000,000 of 4% bonds of Westin Co. at face value on January 1, 2018. The
bonds pay interest on June 30 and December 31 each year. They mature on December 31, 2022. Hardin
intends to hold the Westin bond investment until maturity and has the ability to do so.
Requirements:
1. Journalize Hardin’s transactions related to the bonds for 2018. Omit explanations.
2. Journalize the entry that Hardin will make on the maturity date of the Westin Co. bonds. Assume the
last interest payment has already been recorded. Omit explanations.
21) For each of the following transactions related to Held–to-Maturity Debt securities, state the following:
(1) Which account(s) is (are) increased?
(2) Which account(s) is (are) decreased?
(3) What is the net effect on total assets and total equity? This net effect can be increase, decrease, or no
net effect.
Transaction:
a. The investment was purchased at $50,000 (face value) plus brokerage fees of $2,000.
b. Semi-annual interest of $1,500 was received.
c. The investment was disposed of at maturity. Cash in the amount of $50,000 was received.
Transaction
Account(s)
Increased
Account(s)
Decreased
Total Assets and
Total Equity:
Increase, Decrease, or
No Net Effect
a
b
c
Transaction
Account(s)
Increased
Account(s) Decreased
Total Assets and
Total Equity:
Increase, Decrease, or
No Net Effect
a
Held-to-Maturity Debt
Investments
Cash
Total Assets: No Net
Effect
Total Equity: No Net
Effect
b
Cash, Interest Revenue
None
Assets: Increase
Equity: Increase
c
Cash
Held-to-Maturity
Debt Investments
Assets: No Net Effect
Equity: No Net Effect
29
Copyright © 2018 Pearson Education, Inc.
Learning Objective 10-3
1) When a company uses excess cash to invest in equity securities with less than 20% ownership, its total
equity will increase.
2) Equity securities, in which the investor lacks the ability to participate in the decisions of the investee
company, are initially accounted for at the lower–of–cost-or-market value.
3) Dividends received for equity securities in which the investor lacks the ability to participate in the
decisions of the investee company are recorded with a debit to the Dividend Revenue account.
4) Short Company owns a 2% investment in the common stock of Long Company. The receipt of a cash
dividend from Long will have no effect on Short’s total equity.
5) Gain on Disposal of Equity Investments is a temporary equity account and is reported in the Other
Income and (Expenses) section of the income statement.
6) Amazon Services, Inc. invests its excess cash in Nile Technologies, Inc. and acquires 6000 shares for
$61.75 per share. Amazon Services, Inc. owns less than 2% of Nile’s voting stock and plans to hold the
stock for two years. While preparing the journal entry to record this transaction, ________.
A) Equity Investments is debited for $370,500
B) Common Stock is debited for $370,500
C) Long-term Investments is credited for $370,500
D) An equity account is debited for $370,500