Chapter 12—Investments: Debt and Equity Securities Key
1. Which of the following is NOT typically a reason why one company would invest in another company?
2. Which of the following is NOT typically a reason why one company would invest in another company?
3. Which type of securities are purchased with the intent of selling them in the near future?
4. Unless there is compelling evidence to the contrary, significant influence is presumed when a company owns
5. Which category includes only debt securities?
6. Accounting for investments under the equity method generally applies when the level of ownership in
another company is at what percentage?
7. The equity method of accounting for an investment in the common stock of another company should be used
when the investment
8. Consolidated financial statements are typically prepared when one company has
9. What are the two general types of securities purchased by companies?
10. Which category of security does NOT include debt securities?
11. The equity method is used to account for an investment of more than 20% of another company’s
12. Which of the following is NOT one of the acceptable classifications for investments?
13. A financial instrument that carries with it the promise to pay interest payments and repay the principal
amount is a(n)
14. A financial instrument that represents actual ownership in a corporation is a(n)
15. The most common type of debt security is
16. Which of the following is NOT a typical reason that a company would prefer a debt security over an equity
security?
17. Which type of securities is purchased with the intent of holding the security until it matures?
18. Harvey Corporation purchased 1,200 of the 3,000 outstanding shares of Michael Company common stock
for $50 per share. Given this information, Harvey Corporation should account for the investment in Michael
Company stock using the
19. If a trading security is bought, the investment account is
20. If a trading security is sold, the investment account is
21. Which of the following is NOT one of the issues associated with accounting for securities?
22. A realized gain or loss indicates that
23. On January 1, 2011, Ailey Company purchased a $30,000, 8% bond, at face value. Interest is paid annually
each January 1. The entry related to this investment on December 31, 2011, would include a
24. Exhibit 12-1
Augsburg Corporation recorded the following transactions for its long-term investments during 2012:
May 22
Purchased 1,000 shares of Miller Corporation stock at $55 per share plus brokerage fees of $1,000 and classified the
shares as trading securities. Miller Corporation has 30,000 shares outstanding.
June 30
Received a cash dividend of $0.80 per share on Miller Corporation stock.
August 26
Sold 400 shares of Miller Corporation stock for $60 per share.
December 31
Miller common stock had a closing market price of $50 per share. The decline is considered to be temporary.
Refer to Exhibit 12-1. Given the information above, on May 22, Augsburg should
25. Exhibit 12-1
Augsburg Corporation recorded the following transactions for its long-term investments during 2012:
May 22
Purchased 1,000 shares of Miller Corporation stock at $55 per share plus brokerage fees of $1,000 and classified the
shares as trading securities. Miller Corporation has 30,000 shares outstanding.
June 30
Received a cash dividend of $0.80 per share on Miller Corporation stock.
August 26
Sold 400 shares of Miller Corporation stock for $60 per share.
December 31
Miller common stock had a closing market price of $50 per share. The decline is considered to be temporary.
Refer to Exhibit 12-1. Given the information above, on August 26, Augsburg should
26. On January 5, 2012, Gannon Corporation purchased 100 shares of Hedney Company stock at $12 per share
and paid a $50 brokerage commission. Gannon classified the shares as available-for-sale securities. On May 31,
2012, the entry to record the receipt of the 60-cent-per-share dividend would include a credit to
27. If 2,500 shares of stock are purchased for $90 per share and are sold one year later for $82 per share, what is
the net gain or loss on sale? (Assume that there are no transaction costs.)
28. In July 2011, Leaf Company acquired 5,000 shares of the common stock of Ryan Corporation and classified
the shares as trading securities. The following January, Ryan announced net income of $100,000 for 2011 and
declared a cash dividend of $0.50 per share on its 100,000 shares of outstanding common stock. The Leaf
Company dividend revenue from Ryan Corporation in January 2012 would be
29. On January 2, 2012, Murray Corporation bought 15 percent of Castro Corporation’s capital stock for
$60,000 and classified it as available-for-sale securities. Castro’s net income for the year ended December 31,
2012, was $100,000. During 2012, Castro declared a dividend of $140,000. On December 31, 2012, the fair
value of the Castro stock owned by Murray had increased to $90,000. How much should Murray show on its
2012 income statement as income from this investment?
30. On January 2, 2012, Forsyth Co. acquired 4,000 shares of Hiram Company common stock for $44,000 and
classified these shares as available-for-sale securities. During 2012, Forsyth received $12,000 of cash dividends.
The fair value of Hiram’s stock on December 31, 2012, was $14 per share. Forsyth should report the following
amount in 2012 related to Hiram Co.
31. Unrealized holding gains or losses which are recognized in income are from securities classified as
32. Changes in fair value of securities are reported in the income statement for which type of securities?
33. Changes in fair value of securities are reported in the stockholders’ equity section of the balance sheet for
which type of securities?
34. Unrealized losses on trading securities are
35. A net unrealized increase in the value of available-for-sale securities (considered as a whole) should be
reflected in the current financial statements as
36. A net unrealized decrease in the value of available-for-sale securities (considered as a whole) should be
reflected in the current financial statements as
37. Augsburg Corporation recorded the following transactions for its short-term investments during 2012:
May 22
Purchased 1,000 shares of Miller Corporation stock at $55 per share plus brokerage fees of $1,000 and classified the
shares as trading securities. Miller Corporation has 30,000 shares outstanding.
June 30
Received a cash dividend of $0.80 per share on Miller Corporation stock.
August 26
Sold 400 shares of Miller Corporation stock for $60 per share.
December 31
Miller common stock had a closing market price of $53 per share. The decline is considered to be temporary.
Given this information, the adjusting entry that Augsburg needs to make on December 31 is
38. During 2012, Walker Corp. acquired 500 shares of Wychek stock at $30 per share. Walker accounted for the
stock as trading securities. The market price per share of Wychek’s stock as of December 31, 2012 and 2013, is
$22.50 and $37.50, respectively. How much unrealized gain or loss on long-term investments should Walker
report on its December 31, 2012, income statement?
39. During 2012, Walker Corporation acquired 500 shares of Wychek stock at $30 per share. Walker
Corporation accounted for the stock as available-for-sale securities. All declines in market value are considered
to be temporary. The market price per share of Wychek’s stock as of December 31, 2012 and 2013, is $22.50
and $37.50, respectively. Given this information, the correct adjusting entry by walker at December 31, 2013,
would include a credit to
40. On May 1, one hundred shares of stock were originally purchased for $124 per share and are being held as
trading securities. The price decreased to $116 per share on August 1 and then increased to $132 on December
31. At what amount should the investment be valued in the December 31 balance sheet?
41. On January 1, 2012, Ya-Ling Co. paid $500,000 for 20,000 shares of Chen Co.’s common stock and
classified these shares as trading securities. The fair value of Chen Co.’s stock at December 31, 2012, is $27 per
share. What is the net asset amount (which includes both investments and any related market adjustments)
attributable to the investment in Chen that will be included on Ya-Ling’s balance sheet at December 31, 2012?
42. Nguyen Inc. began business on January 1, 2012, and at December 31, 2012, Nguyen had the following
investment portfolios of equity securities:
Available-
Trading
For-Sale
Total cost
$150,000
$225,000
Total market value
110,000
195,000
Unrealized losses at December 31, 2012, should be recorded with corresponding charges against Income and Stockholders’ Equity of
43. Rouen Corporation recorded the following transactions for its short-term investments during 2012:
April 22
Purchased 1,000 shares of Miller Corporation stock at $110 per share plus brokerage fees of $2,000 and classified the
shares as trading securities. Miller Corporation has 30,000 shares outstanding.
June 30
Received a cash dividend of $0.80 per share on Miller Corporation stock.
September 26
Sold 400 shares of Miller Corporation stock for $120 per share.
December 31
Miller common stock had a closing market price of $106 per share. The decline is considered to be temporary.
Given this information, the adjusting entry that Rouen needs to make on December 31 is
44. When investors purchase bonds between interest dates, they
45. The total amount of interest earned when bonds are purchased at a premium is the amount of the cash
interest payments
46. When bonds that are held as a long-term investment are sold before their maturity dates, the difference
between the sales price and the balance in the Investment account is
47. The amortization of a bond discount
48. The journal entry to record the amortization of a premium resulting from an investment in bonds would
cause
49. The entry to amortize an investment in bonds purchased at a discount includes a debit to
50. If a 12 percent, $16,000 face value bond sells for $14,000, the effective interest rate will be
51. On April 1, 2012, Fiedler purchased $10,000 of Hun Corporation Bonds at 96 plus accrued interest. The
bonds pay interest of 10 percent semiannually on March 1 and September 1. To record this acquisition, Fiedler
should debit Investments in Held-to-Maturity Securities – Hun’s Bonds for
52. On April 1, 2012, Bering Inc. purchased $20,000 of Warner Corporation’s 10-year, 8 percent bonds at par
plus accrued interest. Interest is payable on June 30 and December 31. How much interest revenue should
Bering report on its December 31, 2012, income statement as a result of this investment?
53. Farve purchased ten $1,000, 10 percent bonds issued by Marino Corporation for 104 on July 1, 2012. The
bonds will mature on July 1, 2022, and pay interest on June 30 and December 31. Farve uses the straight-line
method to amortize premiums and discounts. How much interest revenue should Farve recognize from its
investment for the year ending December 31, 2012?
54. Janis Corporation purchased $60,000 of Keller Corporation’s 10 percent bonds at 96 plus accrued interest on
March 1, 2012. The bonds mature on January 1, 2022, and interest is payable on June 30 and December 31.
How much did Simpson pay in total on March 1, 2012?
55. On January 1, 2012, Young Inc. purchased $50,000 of Montana Corporation 14 percent bonds for $53,000.
Interest is payable semiannually. If Young desires a 12 percent rate of return, how much premium should be
amortized on June 30, 2012, using the effective-interest method?
56. Cleveland purchased $100,000 of Rob Company’s 10-year, 9 percent bonds for $83,050 on July 1, 2012.
Cleveland purchased the bonds to yield 12 percent interest. If Cleveland uses the effective-interest method to
amortize discounts, how much interest revenue should Cleveland recognize for 2012 as a result of the
investment?
57. On January 1, 2012, Roswell purchased ten $1,000, 12 percent, 10-year bonds issued by E. T. Corporation
at 101. The bonds pay interest on June 30 and December 31. When the bonds showed an unamortized balance
of $10,070, Roswell sold them for $10,050. How much gain or loss should Roswell record on the sale?
58. Lilburn Inc. purchased $56,000 of Metter Corporation’s 12 percent, 10-year bonds on January 1, 2011, for
$59,360 plus accrued interest. Interest on the bonds is payable on April 1 and October 1. On January 1, 2012,
Lilburn sold the bonds for 103 plus accrued interest. As a result of the sale, Lilburn should debit Cash for
59. Mel Company purchased $60,000 of Gibson Company’s 20-year, 8 percent bonds at 98 on July 1, 2012. The
bonds pay interest each January 1 and July 1, and they mature on July 1, 2029. Given this information, the entry
to record the purchase of Gibson Company bonds would include a
60. Mel Company purchased $60,000 of Gibson Company’s 20-year, 8 percent bonds at 98 on November 1,
2012. The bonds pay interest each January 1 and July 1, and they mature on July 1, 2029. Given this
information, the entry to record the purchase of Gibson Company bonds would include a
61. Mel Company purchased $60,000 of Gibson Company’s 20-year, 8 percent bonds at 98 on July 1, 2012. The
bonds pay interest each January 1 and July 1, and they mature on July 1, 2029. Given this information, the entry
needed on December 31, 2012 (year-end), to account for the interest on Gibson Company’s bonds would
include a debit to