Reporting and Analyzing Investments
H-21
89. A purchase of common stock of Blue Wave Corporation for $29,000 was sold three months
later for $30,000. The entry to record the sale would include a
a. debit to Cash of $29,000.
b. credit to Gain on Sale of Stock Investments of $1,000.
c. credit to Stock Investments of $30,000.
d. credit to Interest Revenue of $1,000.
90. Hardin Park Company had these transactions pertaining to stock investments
Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash.
June 1 Received cash dividends of $1 per share on Raley stock.
Oct. 1 Sold 2,000 shares of Raley stock for 39,000.
Dec. 1 Received cash dividends of $2 per share on Reley stock.
The entry to record the purchase of the Raley stock would include a
a. credit to the Stock Investments account for $89,000.
b. credit to Cash for $90,000
c. debit to the Stock Investments account for $89,000.
d. debit to Investment Expense for $1,000.
91. Hardin Park Company had these transactions pertaining to stock investments
Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash.
June 1 Received cash dividends of $1 per share on Raley stock.
Oct. 1 Sold 2,000 shares of Raley stock for $39,000.
Dec. 1 Received cash dividends of $2 per share on Raley stock.
The entry to record the receipt of the dividends June 1 would include a
a. debit to Stock Investments of $5,000.
b. credit to Dividend Revenue of $5,000.
c. debit to Dividend Revenue of $5,000.
d. credit to the Stock Investments of $5,000.
92. Hardin Park Company had these transactions pertaining to stock investments
Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash.
June 1 Received cash dividends of $1 per share on Raley stock.
Oct. 1 Sold 2,000 shares of Raley stock for $39,000.
Dec. 1 Received cash dividends of $2 per share on Raley stock.
The entry to record the sale of the stock would include a
a. debit to Cash for $35,600.
b. credit to Gain on Sale of Stock Investments for $1,360.
c. debit to Stock Investment for $35,600.
d. credit to Gain on Sale of Stock Investments of $3,400.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-22
93. Hardin Park Company had these transactions pertaining to stock investments
Feb. 1 Purchased 5,000 shares of Raley Company (10%) for $89,000 cash.
June 1 Received cash dividends of $1 per share on Raley stock.
Oct. 1 Sold 2,000 shares of Raley stock for $39,000.
Dec. 1 Received cash dividends of $2 per share on Raley stock.
The entry to record the receipt of the dividends Dec. 1 would include a
a. debit to Stock Investments of $6,000.
b. credit to Dividend Revenue of $6,000.
c. debit to Dividend Revenue of $6,000.
d. credit to the Stock Investments of $6,000.
94. If an investor owns less than 20% of the common stock of another corporation as an
investment
a. the equity method of accounting for the investment should be employed.
b. no dividends can be expected.
c. it is presumed that the investor has relatively little influence on the investee.
d. it is presumed that the investor has significant influence on the investee.
95. If the cost method is used to account for an investment in common stock, dividends
received should be
a. credited to the Stock Investments account.
b. credited to the Dividend Revenue account.
c. debited to the Stock Investments account.
d. recorded only when 20% or more of the stock is owned.
96. Under the cost method of accounting for dividends
a. Revenue is credited when dividends are received.
b. the Investment account is credited when the investee reports a net income.
c. the Investment account is credited when dividends are received.
d. Investment Revenue is credited when the investee reports a net income.
97. If 10% of the common stock of an investee company is purchased as an investment, the
appropriate method of accounting for the investment is
a. the cost method.
b. the equity method.
c. the preparation of consolidated financial statements.
d. determined by agreement with whomever owns the remaining 90% of the stock.
Reporting and Analyzing Investments
H-23
98. When the cost method is used to account for a stock investment the carrying value of the
investment is affected by
a. the earnings of the investee.
b. the dividend distributions of the investee.
c. the earnings and dividend distributions of the investee.
d. neither the earnings nor the dividends of the investee.
99. The cost method of accounting for investments in stock should be employed when the
a. investor owns more than 50% of the investee’s stock.
b. investor has significant influence on the investee and the stock held by the investor are
marketable equity securities.
c. market value of the shares held is greater than their historical cost.
d. investor’s influence on the investee is insignificant.
100. The equity method should generally be used to account for an investment in stock when
the level of ownership is
a. less than 10%.
b. between 10% and 20%.
c. between 20% and 50%.
d. 10% or more.
101. When an investor owns between 20% and 50% of the common stock of a corporation, it is
generally presumed that the investor
a. has insignificant influence on the investee and that the cost method should be used to
account for the investment.
b. should apply the cost method in accounting for the investment.
c. will prepare consolidated financial statements.
d. has significant influence on the investee and that the equity method should be used to
account for the investment.
102. The cost method of accounting for investments in stock should be used when the
investment is
a. influential and controlling.
b. influential and noncontrolling.
c. controlling.
d. non-influential and noncontrolling.
103. The ability of an investing company to affect the operating and financial activities of
another company, even though the investor holds less than 50% of the stock, is known as
a. significant influence.
b. control.
c. a combination.
d. influence and control.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-24
104. Under the equity method of accounting for investments in common stock, when a dividend
is received from the investee company
a. the Dividend Revenue account is credited.
b. the Stock Investments account is increased.
c. the Stock Investments account is decreased.
d. no entry is necessary.
105. The receipt of dividends on an investment affects the Stock Investment account when
which of the following methods is used?
a. Cost method.
b. Equity method.
c. Combination method.
d. Market method.
106. Bing Company owns 30% interest in the stock of Yeti Corporation. During the year, Yeti
pays $75,000 in dividends to Bing, and reports $400,000 in net income. Bing Company’s
investment in Yeti will increase Bing net income by
a. $120,000.
b. $97,500.
c. $75,000.
d. $22,500.
107. Chopper Company owns 15% interest in the stock of Elton Corporation. During the year,
Elton pays $10,000 in dividends to Chopper, and reports $400,000 in net income. Chopper
Company’s investment in Elton will increase Chopper net income by
a. $10,000.
b. $50,000.
c. $60,000.
d. $1,500.
108. Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year,
ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income.
Barcelona Company’s investment in ABX will increase Barcelona net income by
a. $104,000.
b. $120,000.
c. $80,000.
d. $16,000.
Reporting and Analyzing Investments
H-25
109. Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year,
ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income.
Barcelona Company’s investment in ABX will increase by
a. $104,000.
b. $120,000.
c. $16,000.
d. $80,000.
110. Jambon Company owns 10% interest in the stock of Fanth Corporation. During the year,
Fanth pays $12,000 in dividends to Jambon, and reports $200,000 in net income. Jambon
Company’s investment in Fanth will increase Jambon net income by
a. $20,000.
b. $19,200.
c. $12,000.
d. $8,000.
111. Eglin Company owns 30% interest in the stock of Bosco Corporation. During the year,
Bosco pays $10,000 in dividends to Eglin, and reports a net loss of $200,000. Eglin
Company’s investment in Bosco will affect Eglin net income by a
a. $10,000 increase.
b. $60,000 increase.
c. $60,000 decrease.
d. $10,000 decrease.
112. FTX Company owns 10% interest in the stock of Zip Corporation. During the year, Zip pays
$5,000 in dividends to FTX, and reports a net loss of $100,000. FTX Company’s
investment in Zip will affect FTX net income by a
a. $5,000 increase.
b. $10,000 increase.
c. $10,000 decrease.
d. $5,000 decrease.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-26
113. On January 1, 2017, Valentine Corporation purchased 25% of the common stock
outstanding of Betz Corporation for $200,000. During 2017, Betz Corporation reported net
income of $80,000 and paid cash dividends of $48,000. The balance of the Stock
Investments—Betz account on the books of Valentine Corporation at December 31, 2017,
is
a. $200,000.
b. $208,000.
c. $220,000.
d. $192,000.
114. On January 1, 2017, the Express Corporation purchased 30% of the common stock
outstanding of the Bangor Corporation for $300,000. During 2017, the Bangor Corporation
reported net income of $120,000 and paid cash dividends of $30,000. The balance of the
Stock Investments—Bangor account on the books of Express Corporation at December
31, 2017, is
a. $300,000.
b. $330,000.
c. $420,000.
d. $327,000.
115. Under the equity method, the Stock Investments account is increased when the
a. investee company reports net income.
b. investee company pays a dividend.
c. investee company reports a loss.
d. stock investment is sold at a gain.
116. Which of the following is the correct matching concerning an investor’s influence on the
operations and financial affairs of an investee?
% of Investor Ownership Presumed Influence
a. Less than 20% Short-term
b. Between 20%-50% Significant
c. More than 50% Long-term
d. Between 20%-50% Controlling
117. Which of the following is the correct matching concerning the appropriate accounting for
long-term stock investments?
% of Investor Ownership Accounting Guidelines
a. Less than 20% Cost method
b. Between 20%-50% Cost method
c. More than 50% Cost or equity method
d. Between 20%-50% Consolidated financial statements
Reporting and Analyzing Investments
H-27
118. If the cost method is used to account for an investment in common stock
a. it is presumed that the investor has significant influence on the investee.
b. the earning of net income by the investee is considered a proper basis for recognition
of income by the investor.
c. net income of the investee is not considered earned by the investor until dividends are
declared by the investee.
d. the investment account may be at times greater than the acquisition cost.
119. If a company acquires a 40% common stock interest in another company
a. the equity method is usually applicable.
b. all influence is classified as controlling.
c. the cost method is usually applicable.
d. the ability to exert significant influence over the activities of the investee does not exist.
120. If a stock investment is sold at a gain, the gain
a. is reported as operating revenue.
b. is reported under a special section, “Discontinued investments,” on the income
statement.
c. is reported in the Other Revenue and Gain section of the income statement.
d. contributes to gross profit on the income statement.
121. If the equity method is being used, cash dividends received
a. are credited to the Dividend Revenue account.
b. require no entry because investee net income has already been recorded at the proper
proportion on the investor’s books.
c. are credited to the Stock Investments account.
d. are credited to the Revenue from Investment in Stock account.
122. If the equity method is being used, the Revenue from Investment in Stock account is
a. just another name for a Dividend Revenue account.
b. credited when dividends are declared by the investee.
c. credited when net income is reported by the investee.
d. debited when dividends are declared by the investee.
123. Under the equity method, the Stock Investments account is credited when the
a. investee reports net income.
b. investee reports a net loss.
c. investment is originally acquired.
d. investee reports net income and when the investment is originally acquired.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-28
124. King Corporation purchased 2,000 shares of Cable common stock ($50 par) at $73 per
share as a short-term investment. The shares were subsequently sold at $77 per share.
The cost of the securities purchased and gain or loss on the sale were
Cost Gain or Loss
a. $100,000 $54,000 loss
b. $100,000 $54,000 gain
c. $146,000 $8,000 loss
d. $146,000 $8,000 gain
125. Which of the following is not a method of accounting for stock investments?
a. Cost method.
b. Stock method.
c. Consolidated financial statements.
d. Equity method.
126. In order to use the cost method of accounting for stock investments, how much stock must
the investor own?
a. Less than 20%.
b. More than 50%.
c. Between 20% and 50%.
d. The cost method is always used for stock investments of any size.
127. Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. If
Celdon declares and pays $120,000 in total dividends on February 14th, the journal entry
would include a credit to
a. Dividend Revenue for $120,000.
b. Dividend Revenue for $36,000.
c. Stock Investments for $36,000.
d. No entry is necessary.
128. Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017.
The journal entry on Oslo’s books assuming Celdon’s net income for 2017 was $600,000
would include a debit to
a. No entry is necessary.
b. Cash for $600,000.
c. Cash for $180,000.
d. Stock Investments for $180,000.
Reporting and Analyzing Investments
H-29
129. Mega Company receives net proceeds of $73,000 on the sale of stock investments that
cost $79,000. This transaction will result in reporting in the income statement a
a. loss of $6,000 under “Other expenses and losses.”
b. loss of $6,000 under “Operating expenses.”
c. gain of $6,000 under “Other revenues and gains.”
d. gain of $6,000 under “Operating revenues.”
130. Consolidated financial statements are useful to all of the following except
a. creditors of subsidiary companies.
b. management of the parent company.
c. stockholders of the parent company.
d. board of directors of the parent company.
131. When a company owns more than 50% of the common stock of another company
a. consolidated financial statements are usually prepared.
b. the cost method of accounting is used.
c. they are referred to as the subsidiary.
d. they recognize revenue when dividends are received.
132. The company whose stock is owned by the parent company is called the
a. controlled company.
b. subsidiary company.
c. investee company.
d. sibling company.
133. A company that owns more than 50% of the common stock of another company is known
as the
a. charge company.
b. subsidiary company.
c. parent company.
d. management company.
134. If one company owns more than 50% of the common stock of another company
a. the cost method should be used to account for the investment.
b. a partnership exists.
c. a parent–subsidiary relationship exists.
d. the company whose stock is owned must be liquidated.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-30
135. If a parent company has two wholly owned subsidiaries, how many legal and economic
entities are there from the viewpoint of the shareholders of the parent company?
Legal Economic
a. 3 3
b. 1 2
c. 3 1
d. 2 1
136. When a company owns more than 50% of the common stock of another company
a. affiliated financial statements are prepared.
b. consolidated financial statements are prepared.
c. controlling financial statements are prepared.
d. significant financial statements are prepared.
137. In recognizing a decline in the fair value of short-term stock investments, an Unrealized
Loss account is debited because
a. management intends to realize this loss in the near future.
b. the securities have not been sold.
c. the stock market is volatile.
d. management cannot determine the exact amount of the loss in value.
138. Which of the following statements is true about investments classified as trading
securities?
a. The investor’s intent and ability is to hold them to maturity.
b. They are valued on the balance sheet at cost.
c. They can consist of debt, but not equity, securities.
d. Changes in market value are reflected as part of net income.
139. The Fair Value Adjustment account
a. is set up for each security in the company’s portfolio.
b. relates to the entire portfolio of securities held by the company.
c. is closed at the end of each accounting period.
d. appears on the income statement as Other Expenses and Losses.
Reporting and Analyzing Investments
H-31
140. At the end of the first year of operations, the total cost of the trading securities portfolio is
$179,000 and the total fair value is $174,000. What should the financial statements show?
a. A reduction of an asset of $5,000 and a realized loss of $5,000.
b. A reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders’
equity section.
c. A reduction of an asset of $5,000 in the current assets section and an unrealized loss
of $5,000 under “Other expenses and losses.”
d. A reduction of an asset of $5,000 in the current assets section and a realized loss of
$75,000 under “Other expenses and losses.”
141. Trading securities are reported on the balance sheet at
a. fair value.
b. cost.
c. cost, adjusted for the effects of interest.
d. lower of cost or market.
142. The Fair Value Adjustment account is a(n)
a. offset account.
b. adjustment account.
c. valuation allowance account.
d. opposite account.
143. Reporting investments at fair value is
a. applicable to equity securities only.
b. applicable to debt securities only.
c. applicable to both debt and equity securities.
d. a conservative approach because only losses are recognized.
144. Deutsche Corporation’s trading portfolio at the end of the year is as follows:
Investment Cost Market Value
Common Stock A $16,000 $18,000
Common Stock B 13,000 7,000
$29,000 $25,000
At the end of the year, Deutsche Corporation should
a. set up a Fair Value Adjustment account for Common Stock B.
b. set up a Fair Value Adjustment account for the portfolio.
c. recognize an Unrealized Gain or Loss—Income for $6,000.
d. report a loss on the income statement for $6,000 under “Other Expenses and Losses.”
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-32
145. Deutsche Corporation’s trading portfolio at the end of the year is as follows:
Investment Cost Fair Value
Common Stock A $16,000 $18,000
Common Stock B 13,000 7,000
$29,000 $25,000
The year-end adjusting entry to reflect a decrease in the value of stock trading securities
includes a
a. credit to Fair Value Adjustment—Trading.
b. debit to Fair Value; Market Adjustment—Trading.
c. debit to Unrealized Gain—Income.
d. credit to Stock Investments.
146. Deutsche Corporation’s trading portfolio at the end of the year is as follows:
Investment Cost Fair Value
Common Stock A $16,000 $18,000
Common Stock B 13,000 7,000
$29,000 $25,000
Deutsche subsequently sells Common Stock B for $15,000. What entry is made to record
the sale?
a. Cash 15,000
Stock Investments 15,000
b. Cash 15,000
Market Adjustment 2,000
Stock Investments 13,000
c. Cash 15,000
Stock Investments 13,000
Gain on Sale of Stock Investments 2,000
d. Cash 15,000
Stock Investments 7,000
Gain on Sale of Stock Investments 8,000
147. A stock investment classified as trading securities is purchased for $73,500. At year end,
when the market value of the stock is $65,000, the adjusting entry includes a
a. credit to Stock Investments.
b. debit to Loss on Sale of Stock Investment.
c. credit to Fair Value-Adjustment—Trading.
d. credit to Unrealized Loss—Income.
148. Which of the following would not be reported under “Other Revenues and Gains” on the
income statement?
a. Unrealized gain on available-for-sale securities.
b. Dividend revenue.
c. Interest revenue.
d. Gain on sale of debt investments.
Reporting and Analyzing Investments
FOR INSTRUCTOR USE ONLY
H-33
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-34
149. If the cost of an available-for-sale security exceeds its fair value by $29,000, the entry to
recognize the loss
a. is not required since the share prices will likely rebound in the long run.
b. will show a debit to an expense account.
c. will show a credit to a valuation allowance account that appears in the stockholders’
equity section of the balance sheet.
d. will show a debit to an unrealized loss account that is deducted in the stockholders’
equity section of the balance sheet.
150. The balance in the Unrealized Loss—Equity account will
a. appear on the balance sheet as a contra asset.
b. appear on the income statement under Other Expenses and Losses.
c. appear as a deduction in the stockholders’ equity section.
d. not be shown on the financial statements until the securities are sold.
151. Assume that Chapman’s Inc.’s trading securities have a total cost of $185,000 and a total
fair value of $215,000 at year end. The related adjusting entry would include a debit to
a. Unrealized Gain for $30,000.
b. Fair Value Adjustment – Trading for $30,000.
c. No adjustment since only realized gains are recorded.
d. Fair Value Adjustment – Trading for $215,000.
152. Which of the following is not a category used for valuing and reporting investments?
a. Securities held for investing purposes.
b. Trading securities.
c. Held-to-maturity securities.
d. Available-for-sale securities.
153. Unrealized gains or losses on available-for-sale securities are reported where in the
financial statements?
a. Nowhere since only realized gains are reported.
b. In the “Other revenues and gains” or “Other expenses and losses” sections of the
income statement.
c. Below extraordinary items in the income statement.
d. In the stockholders’ equity section of the balance sheet.
Reporting and Analyzing Investments
H-35
154. At the end of its first year, the trading securities portfolio consisted of the following common
stocks.
Cost Fair value
Draper Corporation $ 46,400 $ 50,000
Edmunds Inc. 60,000 55,800
Feazell Corporation 80,000 76,000
$186,400 $181,800
The unrealized loss to be recognized under the fair value method is
a. $4,200.
b. $8,200.
c. $4,600.
d. $4,000.
155. At the end of its first year, the trading securities portfolio consisted of the following common
stocks.
Cost Fair Value
Draper Corporation $ 46,400 $ 50,000
Edmunds Inc. 60,000 55,800
Feazell Corporation 80,000 76,000
$186,400 $181,800
In the following year, the Edmunds common stock is sold for cash proceeds of $57,000.
The gain or loss to be recognized on the sale is a
a. gain of $1,200.
b. loss of $3,000.
c. gain of $10,600.
d. loss of $1,200.
156. At the end of the first year of operations, the total cost of the trading securities portfolio is
$245,000. Total fair value is $250,000. The financial statements should show
a. an addition to an asset of $5,000 and a realized gain of $5,000.
b. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’
equity section.
c. an addition to an asset of $5,000 in the current assets section and an unrealized gain
of $5,000 in “Other revenues and gains.”
d. an addition to an asset of $5,000 in the current assets section and a realized gain of
$5,000 in “Other revenues and gains.”
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-36
157. Giphons Corp. has common stock of $3,500,000, Retained Earnings of $1,800,000,
unrealized gains on trading securities of $60,000 and unrealized losses on available-for-
sale securities of $110,000. What is the total amount of their stockholders’ equity?
a. $5,190,000.
b. $5,300,000.
c. $5,240,000.
d. $5,130,000.
158. Cost and fair value data for the trading securities of Beltway Company at December 31,
2017, are $100,000 and $88,000, respectively. Which of the following correctly presents
the adjusting journal entry to record the securities at fair value?
a. Dec. 31 Unrealized Loss⎯Income 12,000
Trading Securities 12,000
b. Dec. 31 Unrealized Gain⎯Income 12,000
Trading Securities 12,000
c. Dec. 31 Unrealized Loss⎯Income 12,000
Market Adjustment⎯Trading 12,000
d. Dec. 31 Fair Value Adjustment – Trading 12,000
Unrealized Gain-Income 12,000
159. At December 31, 2017, the trading securities for Blue Bell, Inc. are as follow
Fair Value
Security Cost 12/31/17
X-tra $ 90,000 $ 92,000
Yeti 150,000 144,000
Zeta 30,000 28,000
Blue Bell should report the following amount related to the securities transactions in its
2017 income statement
a. $2,000 gain.
b. $6,000 realized loss.
c. $6,000 unrealized loss.
d. $8,000 unrealized loss.
Reporting and Analyzing Investments
H-37
160. At December 31, 2017, Grey beard Inc. has these data on its security investments
Fair Value
Security Cost 12/31/17
Trading $140,000 $172,000
Available-for-sale 137,000 127,000
If the available-for-sale securities are held as long-term investments, which of the following
will be recorded to adjust the securities to fair value?
a. Securities 22,000
Unrealized Gain⎯Income 22,000
b. Unrealized Loss⎯Income 10,000
Securities 22,000
Unrealized Gain⎯Income 32,000
c. Fair Value Adjustment⎯Trading 32,000
Unrealized Gain⎯Income 32,000
Unrealized Gain or Loss⎯Equity 10,000
Fair Value Adjustment⎯Available-for-sale 10,000
d. Unrealized Gain – Income 32,000
Fair Value Adjustment⎯Trading 32,000
Fair Value Adjustment – Available-for-sale 10,000
Unrealized Gain or Loss⎯Equity 10,000
161. All of the following statements about financial statement gains and losses on investments
are true except
a. the account “Fair Value Adjustment – Available-For-Sale” is reported on the balance
sheet.
b. unrealized losses on trading securities are reported on the income statement.
c. unrealized losses on available-for-sale securities are reported on the income
statement.
d. the account “Fair Value Adjustment – Trading” is reported on the balance sheet.
162. Baggles Company owns stock in Hampshire Industries, which it intends to hold indefinitely
because of some negative tax consequences if sold. Which of the following statements is
true regarding Baggles’ reporting of the stock?
a. The stock would be classified as trading securities.
b. The stock would be classified as available-for-sale securities.
c. The stock requires no market adjustments since there are no plans to sell it.
d. Any losses on the stock are recorded in the income statement.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
H-38
163. All of the following statements about short-term investments are true except
a. short-term investments are also call marketable securities.
b. trading securities are always classified as short-term investments.
c. short-term investments are listed below accounts receivable in the current asset
section of the balance sheet.
d. short-term assets must be readily marketable.
164. Short-term investments are listed on the balance sheet immediately below
a. cash.
b. inventory.
c. accounts receivable.
d. prepaid expenses.
165. Short-term investments should be valued on the balance sheet at
a. the lower of cost or fair value.
b. the higher of cost or fair value.
c. cost.
d. fair value.
166. Which one of the following would not be classified as a short-term investment?
a. Marketable equity securities.
b. Marketable merchandise.
c. Marketable debt securities.
d. Short-term paper.
167. Short-term investments are securities that are readily marketable and intended to be
converted into cash within the next
a. year.
b. two years.
c. year or operating cycle, whichever is shorter.
d. year or operating cycle, whichever is longer.
168. Which of the following would not be classified as a short-term investment?
a. Short-term commercial paper.
b. Idle cash in a bank checking account.
c. Marketable equity securities.
d. Marketable debt securities.
Reporting and Analyzing Investments
H-39
Answers to Multiple Choice Questions
BRIEF EXERCISES
Be. 169
Ingles Company had the following transactions pertaining to debt securities held as an investment.
Jan. 1 Purchased 80, 6%, $1,000 Omega Company bonds for $80,000 cash. Interest is payable
annually on January 1.
Dec. 31 Accrued $4,800 annual interest on Omega Company bonds.
Instructions
Journalize the purchase and the receipt of interest. Assume no interest has been accrued.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
H-40
Be. 170
The following transactions were made by Aquavore Company. Assume all investments are
temporary.
July 1 Purchased 400 shares of Delta Corporation common stock for $35 per share.
30 Received a cash dividend of $1.25 per share from the Delta Corporation.
Sept. 15 Sold 80 shares of Delta Corporation stock for $38 per share.
Instructions
Journalize the transactions.
Be. 171
Cupcake Company had the following transactions pertaining to its temporary stock investments.
Jan. 1 Purchased 600 shares of La Crema Company stock for $7,050 cash .
June 1 Received cash dividends of $0.40 per share on the La Crema Company stock.
Sept. 15 Sold 300 shares of the La Crema Company stock for $3,400 cash.
Instructions
Journalize the transactions.