FOR INSTRUCTOR USE ONLY
APPENDIX E
REPORTING AND ANALYZING INVESTMENTS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
Item
LO
BT
True-False Statements
1.
1
K
9.
2
C
17.
3
C
25.
4
K
33.
5
K
2.
1
K
10.
2
K
18.
3
K
26.
4
K
34.
5
C
3.
1
K
11.
3
C
19.
3
C
27.
5
C
35.
5
C
4.
1
K
12.
3
K
20.
3
K
28.
5
C
36.
5
C
5.
1
K
13.
3
K
21.
3
K
29.
5
K
37.
6
K
6.
2
K
14.
3
C
22.
3
C
30.
5
K
38.
6
K
7.
2
K
15.
3
K
23.
3
K
31.
5
K
39.
6
K
8.
2
K
16.
3
C
24.
4
K
32.
5
C
40.
6
K
Multiple Choice Questions
41.
1
K
67.
2
AP
93.
3
AP
119.
3
K
145.
5
AP
42.
1
K
68.
2
AP
94.
3
K
120.
3
C
146.
5
AP
43.
1
K
69.
2
AP
95.
3
C
121.
3
C
147.
5
AP
44.
1
K
70.
2
AP
96.
3
C
122.
3
C
148.
5
K
45.
1
K
71.
2
AP
97.
3
K
123.
3
C
149.
5
C
46.
1
K
72.
2
K
98.
3
C
124.
3
AP
150.
5
K
47.
1
K
73.
2
AP
99.
3
K
125.
3
K
151.
5
C
48.
2
K
74.
2
K
100.
3
K
126.
3
K
152.
5
K
49.
2
AP
75.
3
AP
101.
3
K
127.
3
AP
153.
5
K
50.
2
AP
76.
3
AP
102.
3
K
128.
3
AP
154.
5
AP
51.
2
AP
77.
3
AP
103.
3
K
129.
3
AP
155.
5
AP
52.
2
C
78.
3
AP
104.
3
C
130.
4
K
156.
5
AP
53.
2
AP
79.
3
AP
105.
3
K
131.
4
K
157.
5
AP
54.
2
AP
80.
3
K
106.
3
AP
132.
4
K
158.
5
K
55.
2
AP
81.
3
AP
107.
3
AP
133.
4
K
159.
5
AP
56.
2
AP
82.
3
K
108.
3
AP
134.
4
K
160.
5
AP
57.
2
AP
83.
3
AP
109.
3
AP
135.
4
C
161.
5
K
58.
2
AP
84.
3
AP
110.
3
AP
136.
4
K
162.
5
C
59.
2
AP
85.
3
K
111.
3
AP
137.
5
C
163.
6
C
60.
2
AP
86.
3
AP
112.
3
AP
138.
5
K
164.
6
K
61.
2
AP
87.
3
AP
113.
3
AP
139.
5
K
165.
6
K
62.
2
AP
88.
3
AP
114.
3
AP
140.
5
AP
166.
6
K
63.
2
AP
89.
3
AP
115.
3
K
141.
5
K
167.
6
K
64.
2
AP
90.
3
AP
116.
3
K
142.
5
K
168.
6
K
65.
2
AP
91.
3
AP
117.
3
K
143.
5
K
66.
2
AP
92.
3
AP
118.
3
K
144.
5
AP
Brief Exercises
169.
2
AP
171.
3
AP
173.
3
AP
170.
3
AP
172.
3
AP
174.
5
AP
Exercises
175.
2
AP
178.
3
AP
181.
3
AP
184.
3
AP
187.
3, 5,
AP
176.
2
AP
179.
3
AP
182.
3
AP
185.
3
AP
188.
3, 5,
AP
177.
2, 3
AP
180.
3
AP
183,
3
AP
186.
3, 5
AP
189.
5, 6
AP
Completion Statements
190.
1
K
193.
3
K
196.
5
K
199.
5
K
191.
2
K
194.
3
AP
197.
5
K
200.
5
K
192.
3
K
195.
4
K
198.
5
K
201.
6
K
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
E-2
Matching
202.
1-6
K
Short-Answer Essay
203.
1
K
205.
3
C
207.
4
C
209.
5
C
211.
5
E
204.
3
K
206.
3
C
208.
5
K
210.
5
C
212.
5
C
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
1.
TF
4.
TF
42.
MC
45.
MC
190.
C
2.
TF
5.
TF
43.
MC
46.
MC
202.
Ma
3.
TF
41.
MC
44.
MC
47.
MC
203.
SA
Learning Objective 2
6.
TF
50.
MC
57.
MC
64.
MC
71.
MC
177.
Ex
7.
TF
51.
MC
58.
MC
65.
MC
72.
MC
191.
C
8.
TF
52.
MC
59.
MC
66.
MC
73.
MC
202.
Ma
9.
TF
53.
MC
60.
MC
67.
MC
74.
MC
10.
TF
54.
MC
61.
MC
68.
MC
169.
Be
48.
MC
55.
MC
62.
MC
69.
MC
175.
Ex
49.
MC
56.
MC
63.
MC
70.
MC
176.
Ex
Learning Objective 3
11.
TF
78.
MC
94.
MC
110.
MC
126.
MC
185.
Ex
12.
TF
79.
MC
95.
MC
111.
MC
127.
MC
186.
Ex
13.
TF
80.
MC
96.
MC
112.
MC
128.
MC
187.
Ex
14.
TF
81.
MC
97.
MC
113.
MC
129.
MC
188.
Ex
15.
TF
82.
MC
98.
MC
114.
MC
170.
Be
192.
C
16.
TF
83.
MC
99.
MC
115.
MC
171.
Be
193.
C
17.
TF
84.
MC
100.
MC
116.
MC
172.
Be
194.
C
18.
TF
85.
MC
101.
MC
117.
MC
173.
Be
202.
Ma
19.
TF
86.
MC
102.
MC
118.
MC
177.
Ex
204.
SA
20.
TF
87.
MC
103.
MC
119.
MC
178.
Ex
205.
SA
21.
TF
88.
MC
104.
MC
120.
MC
179.
Ex
206.
SA
22.
TF
89.
MC
105.
MC
121.
MC
180.
Ex
23.
TF
90.
MC
106.
MC
122.
MC
181.
Ex
75.
MC
91.
MC
107.
MC
123.
MC
182.
Ex
76.
MC
92.
MC
108.
MC
124.
MC
183.
Ex
77.
MC
93.
MC
109.
MC
125.
MC
184.
Ex
Learning Objective 4
24.
TF
130.
MC
133.
MC
136.
MC
207.
SA
25.
TF
131.
MC
134.
MC
195.
C
26.
TF
132.
MC
135.
MC
202.
Ma
Reporting and Analyzing Investments
FOR INSTRUCTOR USE ONLY
E-3
Learning Objective 5
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
27.
TF
36.
TF
145.
MC
154.
MC
174.
Be
200.
C
28.
TF
137.
MC
146.
MC
155.
MC
186.
Ex
202.
Ma
29.
TF
138.
MC
147.
MC
156.
MC
187.
Ex
208.
SA
30.
TF
139.
MC
148.
MC
157.
MC
188.
Ex
209.
SA
31.
TF
140.
MC
149.
MC
158.
MC
189.
Ex
210.
SA
32.
TF
141.
MC
150.
MC
159.
MC
196.
C
211.
SA
33.
TF
142.
MC
151.
MC
160.
MC
197.
C
212.
SA
34.
TF
143.
MC
152.
MC
161.
MC
198.
C
35.
TF
144.
MC
153.
MC
162.
MC
199.
C
Learning Objective 6
37.
TF
39.
TF
163.
MC
165.
MC
167.
MC
201.
C
38.
TF
40.
TF
164.
MC
166.
MC
168.
MC
202.
Ma
Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching
CHAPTER LEARNING OBJECTIVES
1. Identify the reasons corporations invest in stocks and debt securities. Corporations
invest for three common reasons: (a) They have excess cash. (b) They view investment
income as a significant revenue source. (c) They have strategic goals such as gaining
control of a competitor or supplier or moving into a new line of business.
2. Explain the accounting for debt investments. Entries for investments in debt securities
are required when companies purchase bonds, receive or accrue interest, and sell bonds.
3. Explain the accounting for stock investments. Entries for investments in common stock
are required when companies purchase stock, receive dividends, and sell stock. When
ownership is less than 20%, the cost method is used–the investment is recorded at cost.
When ownership is between 20% and 50%, the equity method should be used–the investor
records its share of the net income of the investee in the year it is earned. When ownership
is more than 50%, consolidated financial statements should be prepared.
4. Describe the purpose and usefulness of consolidated financial statements. When a
company owns more than 50% of the common stock of another company, consolidated
financial statements are usually prepared. These statements are especially useful to the
stockholders, board of directors, and management of the parent company.
5. Indicate how debt and stock investments are valued and reported in the financial
statements. Investments in debt and stock securities are classified as trading, available–for–
sale, or held–to-maturity for valuation and reporting purposes. Trading securities are reported
as current assets at fair value, with changes from cost reported in net income. Available-for–
sale securities are also reported at fair value, with the changes from cost reported in
stockholders’ equity. Available-for-sale securities are classified as short-term or long-term
depending on their expected realization.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-4
6. Distinguish between short-term and long-term investments. Short-term investments are
securities held by a company that are readily marketable and intended to be converted to
cash within the next year or operating cycle, whichever is longer. Investments that do not
meet both criteria are classified as long-term investments.
TRUE-FALSE STATEMENTS
1. Corporations purchase investments in debt or equity securities generally for one of two
reasons.
2. A reason some companies purchase investments is because they generate a significant
portion of their earnings from investment income.
3. Pension funds and mutual funds are corporations that regularly invest for strategic
reasons.
4. The purchase of a company that is in the same industry, but involved in a different activity,
is called a vertical acquisition.
5. When investing excess cash for short periods of time, corporations invest in debt securities
and stock securities.
6. In accordance with the historical cost principle, brokerage fees should be added to the cost
of an investment.
7. In accordance with the historical cost principle, the cost of debt investments includes
brokerage fees and accrued interest.
8. The accounting for short-term debt investments and for long-term debt investments is
similar.
9. When investments in bonds are sold, any difference between the sales price and the fair
value of the bonds is recorded as a gain or loss.
Reporting and Analyzing Investments
E-5
10. Debt investments are investments in government and corporation bonds.
11. Dividends received on stock investments of less than 20% should be credited to the Stock
Investments account.
12. Dividends received on investments are accounted for in the same way under the cost and
the equity method.
13. Unless there is evidence to the contrary, an investor owning 25% of the stock of an
investee is assumed to have significant influence.
14. If the cost method is used to account for an investment in stock, the Stock Investments
account is increased by the amount of dividends received during the period.
15. Under the equity method the investor records a proportionate share of the investee’s
income in the year when it is earned.
16. When the cost method is used to account for an investment in stock, dividends received
are accounted for as a reduction in the investment account.
17. Using the cost method of accounting for a stock investment, the journal entry to record the
receipt of dividends involves a credit to Dividend Revenue.
18. If an investor owns between 20% and 50% of an investee’s common stock, it is presumed
that the investor has significant influence on the investee.
19. The Stock Investments account is debited at acquisition under both the equity method and
cost method of accounting for investments in common stock.
20. Under the equity method, the investment in common stock is initially recorded at cost, and
the Stock Investments account is adjusted annually.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-6
21. Under the equity method, the receipt of dividends from the investee company results in an
increase in the Stock Investments account.
22. Under the equity method, the receipt of dividends from the investee company results in a
credit to the Dividend Revenue account.
23. In accounting for stock investments of less than 20%, the equity method is typically used.
24. Consolidated financial statements are prepared in place of the financial statements for the
parent and subsidiary companies.
25. Consolidated financial statements should be prepared only when a subsidiary company
has a controlling interest in the parent company.
26. Consolidated financial statements are appropriate when an investor controls an investee
by ownership of more than 50% of the investee’s common stock.
27. If the fair value of an available–for-sale security exceeds its cost, the security should be
written up to fair value and a realized gain should be recognized.
28. The Fair Value Adjustment account can only have a credit balance or a zero balance.
29. Unrealized gains and losses are recognized on trading securities.
30. Trading securities are valued on the balance sheet at market value.
31. Unrealized gains and losses on available–for-sale securities are reported on the income
statement.
32. The valuation of available–for-sale securities is similar to the procedures followed for
trading securities, except that changes in fair value are not recognized in current income.
Reporting and Analyzing Investments
FOR INSTRUCTOR USE ONLY
E-7
33. An unrealized gain or loss on trading securities is reported as a separate component of
stockholders’ equity.
34. For available-for-sale securities, the unrealized gain or loss account is carried forward to
future periods.
35. The account Fair Value Adjustment-Trading appears as a contra account in the income
statement.
36. A decline in the fair value of a trading security is recorded by debiting an unrealized loss
account and crediting the Fair Value Adjustment account.
37. To be classified as a short-term investment, the investment must be readily marketable
and intended to be converted into cash within the next year or operating cycle.
38. An investment in short-term equity securities should be charged to a nominal account
since the investment is temporary.
39. An investment is readily marketable if it is management’s intent to sell the investment.
40. Stocks traded on the New York Stock Exchange are considered readily marketable.
Answers to True-False Statements
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-8
MULTIPLE CHOICE QUESTIONS
41. Corporations invest in other companies for all of the following reasons except to
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. increase trading of the other companies’ stock.
42. When investing excess cash for short periods of time, corporations invest in
a. stocks of companies in a related industry.
b. debt securities.
c. low-risk, highly liquid securities.
d. stock securities.
43. The purchase of a company that is in the same industry but involved in a different activity
is called a
a. controlling acquisition.
b. horizontal acquisition.
c. parent acquisition.
d. vertical acquisition.
44. The purchase of a company that is in the same industry and involved in the same activity is
called a
a. controlling acquisition.
b. horizontal acquisition.
c. parent acquisition.
d. vertical acquisition.
45. Why do corporations generally invest in debt or equity securities?
a. They have excess cash.
b. They want to generate earnings from investment income.
c. They invest for strategic reasons.
d. All of these answer choices are correct.
46. Why do pension and mutual funds invest in debt and equity securities?
a. They have excess cash.
b. They want to generate earnings from investment income.
c. They invest for strategic reasons.
d. They invest for speculative reasons.
Reporting and Analyzing Investments
E-9
47. Which is not a strategic reason to invest?
a. There has been a change in the economic climate.
b. To establish a presence in a related industry.
c. To exercise some influence over a customer or supplier.
d. To enter a new industry without starting from scratch.
48. Which of the following is a debt security?
a. IBM stock.
b. Treasury stock.
c. Treasury bills.
d. None of these answer choices are correct.
49. Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2014 for
$80,000. The journal entry to record this investment includes a debit to
a. Debt Investments for $88,000.
b. Debt Investments for $80,000.
c. Cash for $80,000.
d. Stock Investments for $80,000.
50. Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2014 for
$80,000. Assume Dodd’s pays interest semiannually and the July 1 entry was done
correctly. Mazzeo’s journal entry at December 31, 2014 would include a credit to
a. Interest Receivable for $4,000.
b. Interest Revenue for $8,000.
c. Interest Expense for $8,000.
d. Interest Revenue for $4,000.
51. Mazzeo Company acquires 80 Dodd’s 10%, 5 year, $1,000 bonds on January 1, 2014 for
$80,000. If Mazzeo sells all of its Dodd’s Bonds for $78,400 what gain or loss is
recognized?
a. Loss of $9,600
b. Loss of $1,600
c. Gain of $1,600
d. Gain of $9,600
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-10
52. At the time of acquisition of a debt investment
a. no journal entry is required.
b. the historical cost principle applies.
c. the Stock Investments account is debited when bonds are purchased.
d. the investment account is credited for its cost plus brokerage fees.
53. On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond
that pays interest on January 1 and July 1. LaRoche Company has a calendar year end.
The entry for the receipt of interest on July 1, 2014, is
a. Cash 20
Interest Revenue 20
b. Cash 40
Interest Revenue 40
c. Interest Receivable 20
Interest Revenue 20
d. Interest Receivable 40
Interest Revenue 40
54. On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond
that pays interest on January 1 and July 1. LaRoche Company has a calendar year end.
The adjusting entry on December 31, 2014, is
a. not required.
b. Cash 20
Interest Revenue 20
c. Interest Receivable 20
Interest Revenue 20
d. Interest Receivable 20
Debt Investments 20
55. On January 1, 2014, the LaRoche Company purchased at face value, a $1,000, 4%, bond
that pays interest on January 1 and July 1. LaRoche Company has a calendar year end.
The entry for the receipt of interest on January 1, 2015 is
a. Cash 40
Interest Revenue 40
b. Cash 40
Interest Receivable 40
c. Cash 20
Interest Revenue 20
d. Cash 20
Interest Receivable 20
Reporting and Analyzing Investments
E-11
56. On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays
interest on January 1 and July 1. JBT Company has a calendar year end. The entry for the
receipt of interest on July 1, 2014, is
a. Cash 60
Interest Revenue 60
b. Cash 30
Interest Revenue 30
c. Interest Receivable 30
Interest Revenue 30
d. Interest Receivable 60
Interest Revenue 60
57. On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays
interest on January 1 and July 1. JBT Company has a calendar year end. The adjusting
entry on December 31, 2014, is
a. not required.
b. Cash 30
Interest Revenue 30
c. Interest Receivable 30
Interest Revenue 30
d. Interest Receivable 30
Debt Investments 30
58. On January 1, 2014, JBT Company purchased at face value, a $1,000 6%, bond that pays
interest on January 1 and July 1. JBT Company has a calendar year end. The entry for the
receipt of interest on January 1, 2015 is
a. Cash 60
Interest Revenue 60
b. Cash 60
Interest Receivable 60
c. Cash 30
Interest Revenue 30
d. Cash 30
Interest Receivable 30
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-12
59. On January 1, 2014, Tri-State Supply Company purchased at face value, a $1,000 7%,
bond that pays interest annually on January 1. Tri-State Company has a calendar year
end. The adjusting entry on June 30, 2014, is
a. not required.
b. Cash 35
Interest Revenue 35
c. Interest Receivable 35
Interest Revenue 35
d. Interest Receivable 35
Debt Investments 35
60. On January 1, 2014, Tri-State Supply Company purchased at face value, a $1,000 7%,
bond that pays interest annually on January 1. Tri-State Company has a calendar year
end. The adjusting entry on December 31, 2014, is
a. not required.
b. Cash 70
Interest Revenue 70
c. Interest Receivable 70
Interest Revenue 70
d. Interest Receivable 70
Debt Investments 70
61. On January 1, 2014, Tri-State Company purchased at face value, a $1,000 7%, bond that
pays interest annually on January 1. Tri-State Company has a calendar year end. The
entry for the receipt of interest on January 1, 2015 is
a. Cash 70
Interest Revenue 70
b. Cash 70
Interest Receivable 70
c. Cash 35
Interest Revenue 35
d. Cash 35
Interest Receivable 35
62. Vangaurd Co. purchased 50, 6% McLaughlin Company bonds for $50,000 cash. Interest is
payable semiannually on July 1 and January 1. The entry to record the purchase would
include debit to
a. Debt Investments for $51,500.
b. Cash for $53,000.
c. Debt Investments for $50,000.
d. Stock Investments for $50,000.
Reporting and Analyzing Investments
E-13
63. Charleston Co. purchased 60, 6% APS Company bonds for $60,000 cash. Interest is
payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual
interest payment would include a
a. debit to Interest Receivable for $1,800.
b. credit to Interest Revenue for $1,800.
c. credit to Interest Revenue for $3,600.
d. credit to Debt Investments for $1,800.
64. Charleston Co. purchased 60, 6% APS Company bonds for $60,000 cash plus brokerage
fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record
the December 31 interest accrual would include a
a. debit to Interest Receivable for $1,800.
b. debit to Interest Revenue for $1,800.
c. credit to Interest Revenue for $3,600.
d. debit to Debt Investments for $1,800.
65. Cedar Co. purchased 120, 6% LKN Company bonds for $120,000 cash. Interest is payable
semiannually on July 1 and January 1. If 60 of the securities are sold July 1 for $61,500 the
entry would include a credit to Gain on Sale of Debt Investments of
a. $1,000.
b. $1,800.
c. $3,600.
d. $1,500.
66. On January 1, Vega Company purchased as an investment a $1,000, 8% bond for $1,000.
The bond pays interest on January 1 and July 1. The bond is sold on October 1 for $1,080
plus accrued interest. Interest has not been accrued since the last interest payment date.
What is the entry to record the cash proceeds at the time the bond is sold?
a. Cash 1,080
Debt Investments 1,080
b. Cash 1,100
Debt Investments 1,000
Gain on Sale of Debt Investments 80
Interest Revenue 20
c. Cash 1,100
Debt Investments 1,080
Interest Revenue 20
d. Cash 1,100
Debt Investments 1,000
Interest Revenue 100
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-14
67. On January 1, U.K. Enterprise purchased as an investment a $1,000, 6% bond for $1,000.
The bond pays interest on January 1 and July 1. The bond is sold on September 1 for
$1,100 plus accrued interest. Interest has not been accrued since the last interest payment
date. What is the entry to record the cash proceeds at the time the bond is sold?
a. Cash 1,100
Debt Investments 1,100
b. Cash 1,100
Debt Investments 1,000
Gain on Sale of Debt Investments 100
Interest Revenue 10
c. Cash 1,110
Debt Investments 1,100
Interest Revenue 10
d. Cash 1,100
Debt Investments 1,000
Interest Revenue 160
68. On January 1, Connid Company purchased as an investment a $1,000, 8% bond for
$1,000. The bond pays interest on January 1 and July 1. What is the entry to record the
interest payment on July 1?
a. Cash 80
Debt Investments 80
b. Cash 80
Interest Revenue 80
c. Cash 40
Interest Revenue 40
d. Cash 40
Debt Investments 40
69. On January 1, Belvedere Company purchased as an investment a $1,000, 7% bond for
$1,000. The bond pays interest on January 1 and July 1. What is the entry to record the
interest accrual on December 31?
a. Interest Receivable 70
Interest Revenue 70
b. Debt Investments 35
Interest Revenue 35
c. Interest Receivable 35
Interest Revenue 35
d. Debt Investments 25
Interest Revenue 25
Reporting and Analyzing Investments
E-15
70. On January 1, Waverly Company purchased as an investment a $1,000, 6% bond for
$1,000. The bond pays interest on January 1 and July 1. What is the entry to record the
interest accrual on December 31?
a. Interest Receivable 30
Interest Revenue 30
b. Debt Investments 30
Interest Revenue 30
c. Interest Receivable 60
Interest Revenue 60
d. Debt Investments 60
Interest Revenue 60
71. On January 1, Bay View Company purchased as an investment a $1,000, 6% bond for
$1,000. The bond pays interest on January 1 and July 1. The bond is sold on September 1
for $1,050 plus accrued interest. Interest has not been accrued since the last interest
payment date. What is the entry to record the cash proceeds at the time the bond is sold?
a. Cash 1,050
Debt Investments 1,050
b. Cash 1,060
Debt Investments 1,000
Gain on Sale of Debt Investments 50
Interest Revenue 10
c. Cash 1,060
Debt Investments 1,050
Interest Revenue 10
d. Cash 1,050
Debt Investments 1,000
Interest Revenue 50
72. Which of the following is not a true statement about the accounting for long-term debt
investments?
a. The investment is initially recorded at cost.
b. The cost includes any brokerage fees.
c. Debt investments include investment in government and corporation bonds.
d. The cost includes any accrued interest.
73. If a debt investment is sold, the investment account is
a. debited for the book value of the bonds at the sale date.
b. credited for the cost of the bonds at the sale date.
c. credited for the fair value of the bonds at the sale date.
d. debited for the cost of the bonds at the sale date.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-16
74. Porter Brothers Company purchased debt investment for $80,000 on January 1, 2014. On
July 1, 2014, Jamison received cash interest of $2,905. Assuming no interest has been
accrued, which of the following correctly presents the journals entries for the purchase and
the receipt of interest?
a. Jan 1 Debt Investments 80,000
Cash 80,000
July 1 Cash 2,905
Interest Revenue 2,905
b. Jan 1 Cash 80,000
Debt Investments 80,000
July 1 Interest Revenue 2,905
Cash 2,905
c. Jan 1 Debt Investments 80,000
Cash 80,000
July 1 Interest Revenue 2,905
Cash 2,905
d. Jan 1 Cash 80,000
Debt Investments 80,000
July 1 Cash 2,905
Interest Revenue 2,905
75. On August 1, Basil Company buys 2,000 shares of Zingo common stock for $61,500 cash.
On December 1, the stock investments are sold for $76,000 in cash. Which of the following
are the correct journal entries of record for the purchase and sale of the common stock?
a. Aug. 1 Cash 61,500
Stock Investments 61,500
Dec. 1 Cash 76,000
Stock Investments 61,500
Gain on Sale of Stock Investments 14,500
b. Aug. 1 Stock Investments 61,500
Cash 61,500
Dec. 1 Cash 76,000
Stock Investments 61,500
Gain on Sale of Stock Investments 14,500
c. Aug 1 Stock Investments 61,500
Cash 61,500
Dec. 1 Stock Investment 76,000
Cash 60,000
Gain on Sale of Stock Investments 16,000
d. Aug. 1 Cash 61,500
Stock Investments 61,500
Dec 1 Stock Investments 76,000
Cash 61,500
Gain on Sale of Stock Investments 14,500
Reporting and Analyzing Investments
E-17
76. Buford Industries owns 45% of Appalachian Company. For the current year, Appalachian
reports net income of $250,000 and declares and pays a $70,000 cash dividend. Which of
the following correctly presents the journal entries to record Buford’s equity in Appalachian
net income and the receipt of dividends from Appalachian?
a. Dec. 31 Stock Investments 112,500
Revenue from Stock Investments 112,500
Dec. 31 Cash 31,500
Stock Investments 31,500
b. Dec. 31 Stock Investments 112,500
Revenue from Stock Investments 112,500
Dec. 31 Cash 70,000
Stock Investments 70,000
c. Dec. 31 Stock Investments 81,000
Revenue from Stock Investments 81,000
d. Dec. 31 Revenue from Stock Investments 112,500
Stock Investments 112,500
Dec. 31 Stock Investments 31,500
Cash 31,500
77. On January 1, 2014, Chic Corp. paid $1,200,000 for 100,000 shares of Toto Company’s
common stock, which represents 40% of Toto’s outstanding common stock. Toto reported
income of $300,000 and paid cash dividends of $80,000 during 2014 Chic should report
the investment in Toto Company on its December 31, 2014, balance sheet at
a. $1,200,000
b. $1,320,000
c. $1,232,000
d. $1,288,000
78. McComb Inc. earns $900,000 and pays cash dividends for $300,000 during 2014. SFX
Corporation owns 70,000 of the 210,000 outstanding shares of McComb. What amount
should SFX show in the investment account at December 31, 2014 if the beginning of the
year balance in the account was $100,000?
a. $300,000
b. $200,000
c. $280,000
d. $400,000
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-18
79. McComb Inc. earns $900,000 and pays cash dividends for $300,000 during 2014. SFXl
Corporation owns 70,000 of the 210,000 outstanding shares of McComb. How much
revenue from investment should Cornwell report in 2014?
a. $100,000
b. $200,000
c. $300,000
d. $400,000
80. All of the following factors would be signs of an investor’s significant influence over an
investee except
a. the investor has representation on the investee’s board of directors.
b. the investor participates in the investee’s policy-making process.
c. there are immaterial transactions between the investor and the investee.
d. the common stock held by other stockholders is dispersed.
81. On January 1, 2014, Orleans industries acquired a 15% interest in Florida Corporation
through the purchase of 12,000 shares of Florida Corporation common stock for $320,000.
During 2014, Florida Corp. paid $80,000 in dividends and reported a net loss of $100,000.
Orleans is able to exert significant influence on Florida. However, Orleans mistakenly
records these transactions using the cost method rather than the equity method of
accounting. Which of the following would show the correct presentation for Orlean’s
investment using the equity method?
Investment Net
Account Earnings (loss)
a. $100,000 ($20,000)
b. $293,000 ($15,000)
c. $305,000 ($15,000)
d. $305,000 ($3,000)
82. When a company holds stock of several different corporations, the group of securities is
identified as a(n)
a. affiliated investment.
b. consolidated portfolio.
c. investment portfolio.
d. controlling interest.
Reporting and Analyzing Investments
E-19
83. CGS Corporation makes an investment in 200 shares of Bama Company’s common stock.
The stock is purchased for $53 a share. The entry for the purchase is:
a. Debt Investments 10,000
Cash 10,000
b. Stock Investments 10,600
Cash 10,600
c. Stock Investments 10,000
Cash 10,000
d. Cash 10,600
Stock Investments 10,600
84. Gulf Coast Corporation makes an investment in 100 shares of Eta Company’s common
stock. The stock is purchased for $52 a share. The entry for the purchase is
a. Debt Investments 5,200
Cash 5,200
b. Stock Investments 5,200
Cash 5,200
c. Stock Investments 5,000
Cash 5,000
d. Cash 5,200
Stock Investments 5,200
85. 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. the extent of an investor’s influence over the operating and financial affairs of the
investee.
c. whether the stock has paid dividends in past years.
d. whether the acquisition of the stock by the investor was “friendly” or “hostile.”
86. Outer Banks Corporation sells 200 shares of common stock being held as an investment.
The shares were acquired six months ago at a cost of $40 a share. Outer Banks sold the
shares for $43 a share. The entry to record the sale is
a. Cash 8,000
Loss on Sale of Stock Investments 600
Stock Investments 8,600
b. Cash 8,600
Gain on Sale of Stock Investments 600
Stock Investments 8,000
c. Cash 8,600
Stock Investments 8,600
d. Stock Investments 8,000
Loss on Sale of Stock Investments 600
Cash 8,600
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
E-20
87. Ashland Corporation sells 100 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $30 a share. Ashl and Keller sold the
shares for $38 a share. The entry to record the sale is
a. Cash 3,000
Loss on Sale of Stock Investments 800
Stock Investments 3,800
b. Stock Investments 3,800
Cash 3,800
c. Cash 3,800
Gain on Sale of Stock Investments 800
Stock Investments 3,000
d. Cash 3,800
Stock Investments 3,800
88. Crosby Corporation sells 300 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $50 a share. Crosby sold the shares for
$46 a share. The entry to record the sale is:
a. Cash 13,800
Loss on Sale of Stock Investments 1,200
Stock Investments 15,000
b. Cash 15,000
Gain on Sale of Stock Investments 1,200
Stock Investments 13,800
c. Cash 13,800
Stock Investments 13,800
d. Stock Investments 13,800
Loss on Sale of Stock Investments 1,200
Cash 15,000
89. A purchase of common stock of Blue Wave Corporation for $14,500 was sold three months
later for $15,000. The entry to record the sale would include a
a. debit to Cash of $14,500.
b. credit to Gain on Sale of Stock Investments of $500.
c. credit to Stock Investments of $15,000.
d. credit to Interest Revenue of $500.