CHAPTER 15: INVESTMENTS AND FAIR VALUE ACCOUNTING
1.
Most companies invest excess cash in bonds as investments in order to profit long-term from the growth of
the
investment.
a.
True
b.
False
2.
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.
a.
True
b.
False
3.
As with other assets, the cost of a bond investment includes all costs related to the purchase.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
4.
If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last
interest payment.
a.
True
b.
False
5.
When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus
any
accrued interest is recorded.
a.
True
b.
False
6.
The amount of interest paid when buying a bond as an investment should be credited to Interest Revenue.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
7.
To record a bond investment made between interest payment dates, Investment in Bonds would be debited
and
Cash and Interest Revenue would be credited.
a.
True
b.
False
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.
a.
True
b.
False
9.
If the proceeds from the sale of bond investments exceed the carrying amount of the bonds, a gain is realized.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
10.
Any gains or losses on the sale of bonds normally would be reported in the Other Income (Loss) section of
the
income statement.
a.
True
b.
False
11.
An equity investment in less than 20% of another company’s stock is accounted for using the cost method.
a.
True
b.
False
12.
Ordinarily, a corporation owning a significant portion of the voting stock of another corporation accounts for
the
investment using the equity method.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
13.
The investor carrying an investment by the equity method records cash dividends received as an increase in
the
carrying amount of the investment.
a.
True
b.
False
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.
a.
True
b.
False
15.
The equity method causes the investment account to mirror the proportional changes in book value of the investee.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
16.
Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for
investments.
a.
True
b.
False
17.
The corporation owning all or a majority of the voting stock of another corporation is known as the parent company.
a.
True
b.
False
18.
When a corporation owns less than 20% of the stock of another company, dividends received are not treated as
income.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
19.
The financial statements resulting from combining parent and subsidiary statements are called
consolidated
statements.
a.
True
b.
False
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.
a.
True
b.
False
21.
The equity method is usually more appropriate for accounting for investments where the purchaser does not
have
significant influence over the investee.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
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.
a.
True
b.
False
23.
Held-to-maturity securities are reported on the balance sheet at fair market value.
a.
True
b.
False
24.
Held-to-maturity securities maturing beyond a year are reported as noncurrent assets.
a.
True
b.
False
25.
Trading securities should be reported on the financial statements at fair market value.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
26.
Investments in bonds that management intends to hold to maturity are called trading securities.
a.
True
b.
False
27.
Investment in Bonds is reported on the balance sheet at lower of cost or market.
a.
True
b.
False
28.
Investment in Bonds is listed on the balance sheet after Bonds Payable.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
29.
Temporary investments are recorded at their cost, which would include broker’s commissions.
a.
True
b.
False
30.
Available-for-sale securities are securities that management expects to sell in the future, but are not actively
traded
for profit.
a.
True
b.
False
31.
Trading securities are reported on the balance sheet at cost.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
32.
Any difference between the fair market values of the securities and their cost is a realized gain or loss.
a.
True
b.
False
33.
Unrealized gains and losses on trading securities are not included in the calculation of income from operations.
a.
True
b.
False
34.
Investments in stocks that are expected to be held for the long term are listed in the stockholder’s equity section
of
the balance sheet.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
35.
In order to maintain a record of the original cost of a trading security, the fair value adjustments are debited
or
credited to the account Valuation Allowance for Trading Investments.
a.
True
b.
False
36.
Generally accepted accounting principles (GAAP) require the use of fair value accounting for all assets
and
liabilities.
a.
True
b.
False
37.
A disadvantage of fair value use is that the comparability between companies may be impacted by different
fair
value measurements.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
38.
Growth firms generally pay regular dividends to stockholders.
a.
True
b.
False
39.
Comprehensive income is all changes in stockholders’ equity during the period except those resulting from
dividends
and stockholders’ investments.
a.
True
b.
False
40.
Comprehensive income must be reported on the income statement.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
41.
The cumulative effects of other comprehensive income items may be reported separately from retained earnings
and paid-in capital, on the balance sheet, as accumulated other comprehensive income.
a.
True
b.
False
42.
Comprehensive income does not affect net income or retained earnings.
a.
True
b.
False
43.
The cumulative effects of other comprehensive income items are included in retained earnings on the
balance
sheet.
a.
True
b.
False
Chapter 15: Investments and Fair Value Accounting
44.
Foreign currency translation adjustment is an example of an item that would be included in other
comprehensive
income.
a.
True
b.
False
45.
Temporary investments
a.
are reported as current assets
b.
include cash equivalents
c.
do not include equity securities
d.
all are correct
46.
Which of the following is not a reason to invest excess cash in temporary investments?
a.
earn interest revenue
b.
influence the operations of another company
c.
receive dividends
d.
realize gains from the increase in market value of the securities
Chapter 15: Investments and Fair Value Accounting
47.
Investment in certificates of deposit and other securities that do not change in value are reported on the
balance
sheet as
a.
equity investments
b.
available-for-sale securities
c.
cash and cash equivalents
d.
held-to-maturity securities
48.
The primary objectives of investing in temporary investments is to
a.
all of these
b.
realize gains from increases in market price of the securities
c.
receive dividends
d.
earn interest revenue
49.
A company uses cash to pay all of the following except
a.
all of the options are uses of cash
b.
interest to creditors
c.
current expenses
d.
dividends to stockholders
Chapter 15: Investments and Fair Value Accounting
50.
Cash is used for all of the following activities except
a.
supporting current operating activities
b.
replacing worn-out machinery
c.
expanding current operations
d.
bribing government officials
51.
Long-term investments are held for all of the listed reasons below except
a.
to earn the interest or dividend income
b.
for their long-term gain potential
c.
to have influence over another business entity
d.
to meet current cash needs
52.
Temporary investments such as in trading securities are
a.
recorded at cost but reported at fair market value
b.
recorded at cost and reported at cost
c.
recorded at cost but reported at lower of cost or fair market value
d.
recorded at fair market value and reported at fair market value
Chapter 15: Investments and Fair Value Accounting
53.
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?
a. $50,000
b. $50,500
c. $49,500
d. $53,000
54.
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?
a. $400
b. $406
c. $2,000
d. $2,400
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 semiannually. The journal entry to record the purchase would be
a.
debit Investment—Evans Company Bonds, $101,500; credit Cash, $101,500
b.
debit Investment—Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500
c.
debit Investment—Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash $101,500
d.
debit Investment—Evans Company Bonds, $100,000; credit Cash $100,000
Chapter 15: Investments and Fair Value Accounting
56.
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 semiannually. The journal entry to record the receipt of interest on
the next
interest payment date would be
a.
debit Cash, $4,000; credit Interest Revenue, $4,000
b.
debit Cash, $4,000; credit Interest Receivable, $4,000
c.
debit Cash, $4,000; credit Interest Receivable, $1,500, and Interest Revenue, $2,500
d.
debit Cash, $2,500; credit Interest Revenue, $2,500
57.
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
a.
debit Cash, $105,000; credit Investment—Evans Company Bonds, $104,500, and Interest Revenue, $500
b.
debit Cash, $105,000; credit Investment—Evans Company Bonds, $100,000, and Gain on Sale
of
Investments, $5,000
c.
debit Cash, $104,500, and Interest Receivable, $500; credit Investment—Evans Company Bonds, $100,000, Gain
on Sale of Investments, $4,500, and Interest Revenue, $500
d.
debit Cash, $105,000; credit Investment—Evans Company Bonds, $100,000, Gain on Sale of Investments,
$4,500, and Interest Revenue, $500
Chapter 15: Investments and Fair Value Accounting
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 a
a.
debit to Interest Receivable for $2,000
b.
debit to Investment in Bonds for $202,000
c.
debit to Cash for $200,000
d.
credit to Interest Revenue for $2,000
59.
On April 1, Alliance Company purchased $50,000 of Tetter Company’s 12% bonds at 100 plus accrued interest
of $2,000. On June 30, Alliance received its first semiannual interest. On February 1, Alliance sold $40,000 of
the
bonds at 103 plus accrued interest. The journal entry Alliance will record on April 1 for the purchase of the
bonds
will include a
a.
credit to Interest Payable for $2,000
b.
debit to Investments—Tetter Company Bonds for $52,000
c.
debit for Cash of $50,000
d.
debit to Investments—Tetter Company Bonds for $50,000