Chapter 15: Investments and Fair Value Accounting
On May 1, Pierce Company purchased $60,000 of Stanton Company’s 12% bonds at 100 plus accrued interest of
$2,400. On June 30, Pierce received its first semiannual interest. On February 1, Pierce sold $50,000 of the bonds
at
103 plus accrued interest.
60.
The journal entry Pierce will record on June 30 will include a
a.
credit to Interest Revenue for $2,400
b.
debit to Cash for $3,600
c.
credit to Cash for $2,400
d.
credit to Interest Receivable for $1,200
61.
The journal entry Pierce will record on February 1 will include a
a.
credit to Interest Revenue for $1,500
b.
credit to Gain on Sale of Investments for $1,500
c.
credit to Cash for $52,500
d.
credit to Interest Receivable for $600
62.
What are the total proceeds from the February 1 sale?
a. $52,400
b. $51,500
c. $50,000
d. $52,000
Chapter 15: Investments and Fair Value Accounting
63.
Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold
$250,000 of bonds at 97. The journal entry for the purchase would include a
a.
credit to Interest Receivable for $4,500
b.
credit to Interest Revenue for $4,500
c.
debit to Interest Receivable for $4,500
d.
debit to Interest Revenue for $4,500
64.
Interest revenue on bonds is reported
a.
as an addition to the Investment in Bonds account
b.
as part of comprehensive income but not as part of net income
c.
as part of other income
d.
as part of operating income
65.
Which of the following stock investments should be accounted for using the cost method?
a.
investments of less than 20%
b.
investments between 20% and 50%
c.
investments of less than 20% and investments between 20% and 50%
d.
all stock investments should be accounted for using the cost method
Chapter 15: Investments and Fair Value Accounting
66.
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
a.
Cash 4,500
Investments—Saxton Company Stock 4,500
b.
Investments—Saxton Company Stock 4,780
Cash 4,780
c. Investments—Saxton Company Stock
4,500
Brokerage Fee Expense
280
Cash
4,780
d. Investments—Saxton Company Stock 4,500
Cash 4,500
67.
Which of the following statements is not a reason a company may purchase another company’s stock?
a.
earning a return on excess cash
b.
sustain the other company’s stock price
c.
gaining control of another company’s operations
d.
developing or maintaining business relationships
Chapter 15: Investments and Fair Value Accounting
68.
The cost method of accounting for stock
a.
recognizes dividends as income
b.
is only appropriate as part of a consolidation
c.
requires the investment be increased by the reported net income of the investee
d.
requires the investment be decreased by the reported net income of the investee
69.
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?
a. $12,750 gain
b.
$600 gain
c.
$600 loss
d.
$9,250 loss
70.
The equity method of accounting for investments
a.
requires a year-end adjustment to revalue the stock to lower of cost or market
b.
requires the investment to be reported at its original cost
c.
requires the investment be increased by the reported net income of the investee
d.
requires the investment be increased by the dividends paid by the investee
Chapter 15: Investments and Fair Value Accounting
71.
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
a.
equity method
b.
market method
c.
cost or market method
d.
cost method
72.
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
a.
Investment in Vallerio
b.
Retained Earnings
c.
Dividend Revenue
d.
Dividend Receivables
73.
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
a.
cost method
b.
market method
c.
income method
d.
equity method
Chapter 15: Investments and Fair Value Accounting
74.
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)
a.
prior period adjustment
b.
operating income and losses
c.
paid-in capital addition
d.
gain or loss
75.
Which of the following items would not affect the investor’s income for the period?
a.
interest received on a temporary investment in bonds
b.
dividends received on a long-term investment in stock where the investor owns 10% of the investee’s stock
c.
dividends received on a long-term investment in stock where the investor owns 30% of the investee’s stock
d.
interest received on a long-term investment in bonds
76.
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
a.
investment only
b.
investment plus Wendell’s share of Porter’s net income earned since the investment was purchased
c.
investment plus the total amount of dividends Wendell has received from Porter since the investment
was
purchased
d.
investment plus Wendell’s share of Porter’s net income earned since the investment was purchased minus the total
amount of dividends Wendell has received from Porter since the investment was purchased
Chapter 15: Investments and Fair Value Accounting
77.
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?
a.
debit Investment in Worton Corporation; credit Cash
b.
debit Cash; credit Dividend Revenue
c.
debit Investment in Worton Corporation; credit Income of Worton Corporation
d.
debit Cash; credit Investment in Worton Corporation
78.
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?
a.
debit Investment in Worton Corporation Stock; credit Cash
b.
debit Cash; credit Dividend Revenue
c.
debit Investment in Worton Corporation Stock; credit Income of Worton Corporation
d.
debit Cash; credit Investment in Worton Corporation Stock
79.
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
a.
credit to cash for $9,000
b.
debit to the investment account for $9,000
c.
credit to the investment account for $9,000
d.
credit to a loss account for $9,000
Chapter 15: Investments and Fair Value Accounting
80.
Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the
a.
parent
b.
minority interest
c.
affiliate
d.
subsidiary
81.
Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to
as
the
a.
parent
b.
minority interest
c.
affiliate
d.
subsidiary
82.
Financial statements in which financial data for two or more companies are combined as a single entity are called
a.
conventional statements
b.
consolidated statements
c.
audited statements
d.
constitutional statements
Chapter 15: Investments and Fair Value Accounting
83.
In general, consolidated financial statements should be prepared
a.
when a corporation owns more than 20% and less than 40% of the common stock of another company
b.
when a corporation owns more than 50% of the common stock of another company
c.
only when a corporation owns 100% of the common stock of another company
d.
whenever the market value of the stock investment is significantly lower than its cost
84.
For accounting purposes, the method used to account for investments in common stock is determined by
a.
the amount paid for the stock by the investor
b.
whether the acquisition of the stock by the investor was “friendly” or “hostile”
c.
the extent of an investor’s influence over the operating and financial affairs of the investee
d.
whether the stock has paid dividends in past years
85.
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?
a.
$3,500 gain
b.
$350 gain
c.
$350 loss
d.
$500 gain
Chapter 15: Investments and Fair Value Accounting
86.
When the cost method is used to account for an investment, the carrying value of the investment is affected by
a.
the dividend distributions of the investee
b.
the periodic net income of the investee
c.
the earnings and dividend distributions of the investee
d.
neither the earnings nor the dividends of the investee
87.
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 a
a.
debit to Investments for $132,000
b.
credit to Cash for $132,000
c.
debit to Investments for $132,240
d.
credit to Investments for $240
88.
The company whose stock is more than 50% owned by another company is called the
a.
controlling company
b.
investee company
c.
subsidiary company
d.
sibling company
Chapter 15: Investments and Fair Value Accounting
89.
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 a
a.
debit to Cash, $111,840
b.
credit to Investments, $112,000
c.
credit to Loss on Sale, $23,680
d.
debit to Cash, $112,000
90.
If one company owns more than 50% of the common stock of another company
a.
a partnership exists
b.
a parent-subsidiary relationship exists
c.
the company whose stock is owned must be liquidated
d.
the cost method should be used to account for the investment
91.
Held-to-maturity securities
a.
are reported at fair market value
b.
include stocks as well as bonds
c.
may be reported as current or noncurrent assets
d.
all of these
Chapter 15: Investments and Fair Value Accounting
92.
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
a.
a loss of $2,000 on the income statement and net trading securities of $13,000 on the balance sheet
b.
no loss on the income statement and net trading securities of $13,000 on the balance sheet
c.
no loss on the income statement, net trading securities of $11,000, and an unrealized loss of $2,000 as a
stockholders’ equity adjustment on the balance sheet
d.
a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet
93.
Yankton Company began the year without an investment portfolio. During the year, it 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
a.
a loss of $2,000 on the income statement and available-for-sale investments of $13,000 on the balance sheet
b.
no loss on the income statement and available-for-sale investments of $13,000 on the balance sheet
c.
no loss on the income statement, available-for-sale investments netting to of $11,000, and an unrealized loss of
$2,000 as a stockholders’ equity adjustment on the balance sheet
d.
a loss of $2,000 on the income statement and temporary investments of $11,000 on the balance sheet
Chapter 15: Investments and Fair Value Accounting
94.
The price that would be received to sell an asset or pay off a liability is
a.
the fair value
b.
the market value
c.
the investing value
d.
the historical value
95.
The account Unrealized Gain (Loss) on Available-for-Sale Investments should be included on the
a.
income statement as other revenue (expense)
b.
balance sheet as an adjustment to the asset account
c.
balance sheet as an adjustment to stockholders’ equity
d.
statement of retained earnings
96.
The account Unrealized Gain (Loss) on Trading Investments should be included in the
a.
income statement as other revenue (expense)
b.
balance sheet as an adjustment to the asset account
c.
balance sheet as an adjustment to stockholders’ equity
d.
statement of retained earnings
Chapter 15: Investments and Fair Value Accounting
97.
The Valuation Allowance for Trading Investments account is found on the
a.
income statement as other revenue (expense)
b.
balance sheet as an adjustment to the asset account
c.
balance sheet as an adjustment to stockholders’ equity
d.
statement of retained earnings
98.
Held-to-maturity securities
a.
are reported at their fair market value on the balance sheet date
b.
include both stocks and bonds
c.
are primarily purchased to earn interest revenue
d.
all are correct
99.
On January 1, Butte Company’s Valuation Allowance for Trading Investments account has a debit balance of
$23,200. On December 31, the cost of the trading securities portfolio was $80,000. The fair value was $98,000.
Which of the following would Butte report on the income statement for the current year?
a.
an unrealized loss on trading investments, $5,200
b.
an unrealized gain on trading investments, $5,200
c.
an unrealized gain on trading investments, $18,000
d.
an unrealized loss on trading investments, $18,000
Chapter 15: Investments and Fair Value Accounting
100.
Trading securities are
a.
reported at fair value on the balance sheet and as unrealized gains or losses on the income statement
b.
not reported on the balance sheet
c.
reported as unrealized gains or losses on the income statement
d.
reported at fair value in the balance sheet
101.
GAAP requires trading and available-for-sale investments to be recorded
a.
at their fair value
b.
at their historical cost
c.
at their market value
d.
at their net realizable value
102.
Changes in the value of available-for-sale securities
a.
are reported as part of stockholders’ equity
b.
are recognized on the income statement
c.
are not recognized
d.
are recognized on the income statement and as part of stockholders’ equity
Chapter 15: Investments and Fair Value Accounting
103.
All of the following are disadvantages of fair value use except
a.
fair values may not be readily obtainable
b.
fair values may cause more fluctuations as change occurs from period to period
c.
comparability between companies may be impacted by different fair value measurement
d.
fair values only affect balance sheet accounts
104.
Financial statements include assets listed at
a.
all of these
b.
their fair value
c.
their historical cost
d.
their market value
105.
All of the following are factors contributing to the trend for regulators to adopt accounting principles using fair
value
concepts except
a.
a greater percentage of total assets existing as receivables and securities
b.
pressure on regulators to adopt an international set of accounting principles and standards
c.
hybrid measurement methods within GAAP that conflict with each other
d.
the ease of applying market values to assets and liabilities
Chapter 15: Investments and Fair Value Accounting
106.
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
a.
5%
b.
10%
c.
25%
d.
20%
107.
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
a. 2.5%
b. 400%
c. 16%
d. 40%
108.
The dividend yield is measured as
a.
Dividends per share of common stock/Market price per share of common stock
b.
Dividends per share of preferred stock/Market price per share of common stock
c.
Dividends per share of common stock × Market price per share of preferred stock
d.
Dividends per share of preferred stock × Market price per share of preferred stock
Chapter 15: Investments and Fair Value Accounting
109.
On July 5, Winter Company had a market price of $58 per share of common stock. For the prior year, Winter
Co.
had paid an annual dividend of $3.48 per share. What is the dividend yield for Winter Company?
a. 6.0%
b. 0.6%
c. 16.67%
d. 1.67%
110.
Which of the following is not a part of comprehensive income?
a.
foreign currency items
b.
cash flows from stock investments
c.
unrealized gains and losses on available-for-sale securities
d.
pension liability adjustments
111.
Which of the following would be considered an “other comprehensive income” item?
a.
net income
b.
extraordinary loss related to flood
c.
gain on disposal of discontinued operations
d.
unrealized loss on available-for-sale securities
Chapter 15: Investments and Fair Value Accounting
112.
Companies may report comprehensive income on each of the statements below except
a.
income statement
b.
separate statement of comprehensive income
c.
statement of cash flows
d.
retained earnings statement
113.
Compare and contrast why companies invest cash in short-term temporary investments vs. long-term investments.
Chapter 15: Investments and Fair Value Accounting
114.
Define debt securities and equity securities. Include their similarities and differences in your discussion.
115.
On May 1, Knox Inc. purchases $100,000 of 10-year, 6% Madison Corporation bonds dated March 1 at 100
plus
accrued interest. What entry would Knox record when purchasing the bonds?
116.
On May 1, Cedar Inc. purchases $100,000 of 10-year, Madison Corporation 6% bonds dated March 1 at 100
plus
accrued interest. What entry would Cedar record when receiving its semiannual interest on September 1?