Chapter 13—Investments and Fair Value Accounting Key
1. Although marketable securities may be retained for several years, they continue to be classified as temporary,
provided they are readily marketable and can be sold for cash at any time.
2. As with other assets, the cost of a bond investment includes all costs related to the purchase.
3. If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last
interest payment.
4. When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any
accrued interest is recorded.
5. The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.
6. Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of
the investment.
7. To record a bond investment between interest payment periods, Investment in Bonds would be debited and
Cash and Interest Revenue would be credited.
8. When long-term investments in bonds are sold before their maturity date, the seller deducts any accrued
interest since the last interest payment date from the selling price.
9. If the proceeds from the sale of bond investments exceeds the carrying amount of the bonds, a gain is
realized.
10. Any gains or losses on the sale of bonds normally would be reported in the Other Income (Loss) section of
the income statement.
11. An equity investment in less than 20% of another company’s stock is accounted for using the cost method.
12. Ordinarily, a corporation owning more than 20% and less than 50% of voting stock of another corporation
accounts for the investment using the equity method.
13. The investor carrying an investment by the equity method records cash dividends received as an increase in
the carrying amount of the investment.
14. Under the equity method, a stock purchase is recorded at its original cost and is not adjusted to fair market
value each accounting period.
15. The equity method causes the investment account to mirror the proportional changes in book value of the
investee.
16. Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for
investments.
17. The corporation owning all or a majority of the voting stock of another corporation is known as the parent
company.
18. When a corporation owns less than 20% of the stock of another company, dividends received are not treated
as income.
19. The financial statements resulting from combining parent and subsidiary statements are called consolidated
statements.
20. It is not possible for one company to influence the operating policies of another company unless it owns
more than 50% interest in that company.
21. The equity method is usually more appropriate for accounting for investments where the purchaser does not
have significant influence over the investee.
22. When bonds held as long-term investments are purchased at a price other than the face value, the premium
or discount should be amortized over the remaining life of the bonds.
23. The amortization of discounts or premiums are recorded as part of interest income on the income statement.
24. Held-to-maturity securities are reported on the balance sheet at fair market value.
25. Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.
26. Trading securities should be reported on the financial statements at fair market value.
27. Investments in bonds that management intends to hold to maturity are called trading securities.
28. Investment in Bonds are reported on the balance sheet at lower of cost or market.
29. Investment in Bonds is listed on the balance sheet after Bonds Payable.
30. Temporary investments are recorded at their cost which would include broker’s commissions.
31. Available-for-sale securities are securities that management expects to sell in the future, but are not actively
traded for profit.
32. Trading securities are reported on the balance sheet at cost.
33. Any difference between the fair market values of the securities and their cost is a realized gain or loss.
34. Unrealized gains and losses on trading securities are not included in the calculation of net income.
35. Investments in stocks that are expected to be held for the long term are listed in the stockholders’ equity
section of the balance sheet.
36. In order to maintain the original value of a trading security, the fair value adjustments are debited or
credited to the account Valuation Allowance for Trading Investments.
37. Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets and
liabilities.
38. Fair value accounting is used more under Generally Accepted Accounting Principles (GAAP) than it is
under International Financial Reporting Standards (IRFS).
39. Growth firms generally pay regular dividends to stockholders.
40. Comprehensive income is all changes in stockholders’ equity during the period except those resulting from
dividends and stockholders’ investments.
41. Comprehensive income must be reported on the income statement.
42. The cumulative effects of other comprehensive income items must be reported separately from retained
earnings and paid-in capital, on the balance sheet, as accumulated other comprehensive income.
43. Comprehensive income does not affect net income or retained earnings.
44. The cumulative effects of other comprehensive income items is included in retained earnings, on the balance
sheet.
45. Foreign currency translation adjustment is an example of an item that would be included in Other
Comprehensive Income.
46. Temporary investments
47. Which of the following is not a reason to invest excess cash in temporary investments?
48. Investment in certificates of deposit and other securities that do not change in value are reported in the
balance sheet as:
49. Long-term investments are held for all of the listed reasons below except
50. Temporary investments such as in trading securities are
51. On June 1, $50,000 of treasury bonds were purchased between interest dates. The broker commission was
$500. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. What is the total
cost to be debited to the Investment – Treasury Bonds account?
52. On June 1, $40,000 of treasury bonds were purchased between interest dates. The broker commission was
$600. The bonds pay interest at 12%, which is paid semiannually on January 1 and July 1. How much interest
revenue will be recorded on July 1?
53. Interest revenue on bonds is reported
54. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The
bond interest rate is 8% and interest is paid semi-annually. The journal entry to record the purchase would be:
55. Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The
bond interest rate is 8% and interest is paid semi-annually. The journal entry to record the receipt of interest on
the next interest payment date would be:
56. Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at
$104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be:
57. Jarvis Corporation makes an investment in 100 shares of Saxton Company’s common stock. The stock is
purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is:
58. Jacks Corporation purchases $200,000 bonds plus accrued interest for 2 months of $2,000 from Kennedy
Company on March 1. The bonds have an annual interest rate of 6% payable on June 30 and December 31. The
entry to record the purchase of the bonds would include:
59. On April 1, 2011, Albert Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued
interest of $2,000. On June 30, 2011, Albert received its first semiannual interest. On February 1, 2012, Albert
sold $40,000 of the bonds at 103 plus accrued interest. The journal entry Albert will record on April 1, 2011
for the purchase of the bonds will include:
60. The journal entry Stanton will record on June 30, 2014, will include:
61. The journal entry Stanton will record on February 1, 2015, will include:
62. What are the total proceeds from the February 1, 2015 sale?
63. Which of the following stock investments should be accounted for using the cost method?
64. Which of the following statements below is not a reason a company may purchase another company’s
stock?
65. The cost method of accounting for stock
66. An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were
sold for $49.50 per share. What is the amount of gain or loss on the sale?
67. Held to maturity securities
68. The equity method of accounting for investments
69. Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and
exercises a significant influence over its operating and financial policies. The investment should be accounted
for by the
70. Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio
Corporation is accounted for as a debit to Cash and a credit to
71. The method of accounting for investments in equity securities in which the investor records its share of
periodic net income of the investee is the
72. When shares of stock held as an investment are sold, the difference between the proceeds and the carrying
amount of the investment is recorded as a(n)
73. Which one of the following items below would not affect the investor’s income for the period?
74. Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment
using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance
in the investment account would be equal to the cost of the
75. Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a
long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash
dividends. What journal entry would Blanton Corporation use to record the dividends it receives?
76. Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a
long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash
dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton
Corporation?
77. Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in
recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company’s entry would
include a
78. Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as
the
79. Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred
to as the
80. Financial statements in which financial data for two or more companies are combined as a single entity are
called
81. In general, consolidated financial statements should be prepared
82. An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were
sold for $35 per share. What is the amount of gain or loss on the sale?
83. For accounting purposes, the method used to account for investments in common stock is determined by
84. When the cost method is used to account for an investment, the carrying value of the investment is affected
by
85. The company whose more than 50% stock is owned by the another company is called the
86. If one company owns more than 50% of the common stock of another company
87. Yankton Company began the year without an investment portfolio. During the year they purchased
investments classified as trading securities at a cost of $13,000. At the end of the year, the market value of the
securities was $11,000. The Yankton Company’s financial statements for the current year should show
88. Yankton Company began the year without an investment portfolio. During the year they purchased
investments classified as available-for-sale securities at a cost of $13,000. At the end of the year, the market
value of the securities was $11,000. The Yankton Company’s financial statements for the current year should
show
89. The account Unrealized Gain (Loss) on Available-For-Sale Securities should be included in the
90. The account Unrealized Gain (Loss) on Trading Securities should be included in the
91. The account Valuation Allowance for Trading Securities is found on the:
92. Held-to-Maturity securities
93. On January 1, 2014, Blanton Company’s Valuation Allowance for Trading Investments account has a debit
balance of $23,200. On December 31, 2014, the cost of the trading securities portfolio was $80,000. The fair
value was $98,000. Which of the following would Blanton report on the income statement for 2014?
94. All of the following are disadvantages of fair value use except:
95. All of the following are factors contributing to the trend for regulators to adopt accounting principles using
fair value concepts except:
96. Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its
$20 par common stock. The market value of the common stock is $80 per share. Edison’s dividend yield is:
97. A company that has 25,000 shares of $5.00 par value common stock issued and outstanding paid a
dividend of $0.40 per share. The market value of the stock is $16 per share. The company’s dividend yield is:
98. Which of the following is not a part of comprehensive income?
99. Which of the following would be considered an “Other Comprehensive Income” item?
100. Companies may report comprehensive income on each of the statements below except
101. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240
brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas
stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale would include:
102. On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240
brokerage fee. On August 22, Lucas paid a $0.42 dividend per share. On November 10, 4,000 shares of Lucas
stock were sold for $28 per share less a $160 brokerage fee. The journal entry to record the purchase would
include:
103. Purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Sold $250,000 of
bonds at 97. The journal entry for the purchase would include:
104. Purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Sold $250,000 of
bonds at 97 plus accrued interest. The journal entry for the sale would include:
105. Match each of the following investment terms with the appropriate definition below.
1. The company whose stock is purchased by
2. Debt and equity securities purchased and sold to
earn short-term profits from changes in the market
3. Preferred and common stock that represent
ownership in a company and do not have a fixed
4. When using this, dividends are treated as a
5. Securities not held for trading or to maturity or
6. The method of reporting an investment that
represents less than 20% of the voting stock of
Held-to-maturity
7. The company investing in another company’s
Available-for-sale
8. What occurs when a company purchases 50% or
9. Debt investments that a company intends to keep
Business
10. Notes and bonds that pay interest and have a
106. Match each of the following investment terms with the appropriate definition below.
1. Recognition of changes in the fair value of
2. A corporation owning all or the majority of the
Valuation Allowance for
3. The value assigned to held-to-maturity
4. Appropriate method for accounting for small
5. The method for accounting for investments of
6. A balance sheet account where the fair value
7. A corporation controlled by another
corporation that owns all or the majority of its
Consolidated Financial
8. Combined reporting of a corporation and other
Unrealized Gain or Loss
9. Measurement of the rate of return to
10. The market price that would be received if an
107. Define (1) debt securities and (2) equity securities. Include their similarities and differences in your
discussion.
108. On May 1, 2015, Chase Inc. purchases $60,000 of 10-year, 6% Manus Corporation bonds dated March 1,
2015 at 100 plus accrued interest. What entry would Chase record when purchasing the bonds?
109. On May 1, 2015, Chase Inc. purchases $60,000 of 10-year, Manus Corporation 6% bonds dated March 1,
2015 at 100 plus accrued interest. What entry would Chase record when receiving its semiannual interest on
September 1?
110. On May 1, 2012, Chase Inc. purchases $60,000 of 10-year, Manus Corporation 8% bonds dated March 1,
2012 at 100 plus accrued interest. What entry would Chase record when receiving its semiannual interest on
March 1, 2013?