Finance Ch 13 Quiz Multiple Choice

Finance Ch 13 Quiz Multiple Choice

1. Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firms
2. are termed
3. available-for-sale securities
4. trading securities
5. held-to-maturity securities

marketable securities

2. Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of stockholders’ equity?
3. held-to-maturity debt securities
4. marketable securities
5. available-for-sale securities
6. trading securities
7. Which of the following securities are reported at their amortized cost on the balance sheet date?
8. held-to-maturity debt securities
9. marketable securities
10. available-for-sale securities
11. trading securities
12. With consolidation, control generally occurs when the investor owns what percentage of the voting stock of the investee?
13. over 50%
14. between 20% and 50%
15. less than 20%
16. over 40%
17. Which of the following methods of accounting for investments is appropriate when the investor has significant influence over the investee?
18. equity method
19. consolidation
20. cost method
21. lower of cost or market method
22. How is the premium or discount on held-to-maturity bond investments presented on the balance sheet?
23. as a part of the cost of the investment and amortized over a period not to exceed five years
24. as a part of the cost of the investment and amortized over the remaining life of the bonds
25. in a separate account that is reported separately from the bonds and amortized over a period not to exceed five years
26. in a separate account that is reported separately from the investment account and not amortized
27. On January 1, 2014, Macie Company purchased Jefferson Company’s 9% bonds with a face amount of $200,000 for $213,420 to yield 8%. The bonds mature on January 1, 2024, and Macie has both the intent and ability to hold these bonds to maturity. The bonds pay interest annually on December 31. Assuming Macie uses the effective interest method of amortizing the bond premium; interest income reported on the December 31, 2014, balance sheet would be
28. $16,000
29. $17,074
30. $18,000
31. $18,926
32. On October 1, 2014, the Sun Company acquired 9% bonds of Jack’s Company with a face value of $400,000 for $412,000 plus accrued interest. Interest is payable on June 30 and December 31. How would Sun record the initial bond investment to be held-to-maturity?
33. Investment in Held-to-Maturity Debt Securities 412,000

Interest Income 9,360

Cash 421,360

1. Investment in Held-to-Maturity Debt Securities 412,000

Interest Income 9,000

Cash 421,000

1. Investment in Held-to-Maturity Debt Securities 421,000

Cash 421,000

1. Investment in Held-to-Maturity Debt Securities 412,000

Cash 412,000

9. On July 1, 2015, Jason Company purchased $60,000 of ten-year 6% bonds of Santo, Inc., for $51,850, to be held-to-maturity. Interest is payable semiannually on June 30 and December 31. The effective yield on the investment is 8%. What amount of interest income should Jason record for the six-month period ended December 31, 2015?
10. $2,063.04
11. $2,084.96
12. $2,074.00
13. $2,400.00

10.On January 1, 2014, Old World Company purchased $300,000 of ten-year 10% bonds of New Company for $326,840. Interest is payable annually. The effective yield on the investment is 8%. What is the balance in Old World’s investment in held-to-maturity debt securities account (rounded to the nearest dollar, if necessary) at December 31, 2015?

1. $330,693
2. $326,840
3. $322,987
4. $318,826

11.On July 1, 2014, James Company purchased Timothy Company’s six-year 9% bonds with a face value of $200,000 for $196,000, which included $6,000 of accrued interest. The bonds, which mature on March 1, 2020, are to be held-to-maturity and pay interest semiannually on March 1 and September 1. James uses the straight-line method of amortization. The amount of income James should report for the calendar year 2014 as a result of this investment would be

823. $8,823.52
824. $9,882.36
825. $9,529.40
826. $8,117.64
827. The carrying value of held-to-maturity debt securities is the
828. original purchase amount
829. amortized cost
830. market value
831. lower of amortized cost or market value
832. Unrealized holding gains and losses occur because a company
833. actively trades securities
834. holds securities until maturity
835. holds securities through the end of the reporting period
836. records a change in fair value of the securities held even if they are not sold
837. Which of the following regarding trading securities is correct?
838. Trading securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
839. Trading securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
840. Trading securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
841. Trading securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
842. Unrealized gains and losses on investments in trading securities are reported
843. as a current asset
844. on the income statement
845. on the balance sheet as part of stockholders’ equity
846. as a contra asset
847. The Reba Company purchased 10%, $800,000 bonds of the Trading Up Company at par plus accrued interest on April 1, 2014, as an investment in trading securities. The bonds pay interest on June 30 and December 31 each year. The entry by Reba on April 1, 2014, would include a
848. debit to Investment in Trading Securities of $820,000
849. credit to Cash of $820,000
850. credit to Interest Income of $20,000
851. debit to Interest Expense of $20,000
852. In its first year of operations, Roger Company purchased trading securities at a total cost of $53,000. On December 31, the end of Roger’s fiscal year, the fair market value of those investments totaled $57,000. As a result of these investments, Roger Company will report
853. Investment in Trading Securities of $57,000
854. Investment in Trading Securities of $53,000
855. Unrealized Holding Gain/Loss-Trading Securities of $4,000 on the income statement as

ordinary income

1. a credit balance in the contra account to Investment in Trading Securities of $4,000
2. Chapin Company purchased investments in 2017 at a cost of $200,000 they recorded as trading securities. Their market values totaled $250,000 and $230,000 on December 31, 2017, and December 31, 2018, respectively. The entry required on December 31, 2018, would include a
3. debit to Unrealized Holding Gain/Loss-Trading Securities of $20,000
4. credit to Unrealized Holding Gain/Loss-Trading Securities of $20,000
5. credit to Unrealized Holding Gain/Loss-Trading Securities of $30,000
6. debit to Unrealized Holding Gain/Loss-Trading Securities of $30,000
7. The entry to record a sale of trading securities for $65,000 on January 3, 2018, that were purchased for $52,000 on November 21, 2017, and had a fair value on December 31, 2017, of $57,000 would include a
8. credit to Unrealized Holding Gain/Loss-Trading Securities of $8,000
9. debit to Unrealized Holding Gain/Loss-Trading Securities of $5,000
10. debit to Investment in Trading Securities of $5,000
11. credit to Gain on Sale of Trading Securities of $8,000
12. Which of the following regarding available-for-sale securities is correct?
13. Available-for-sale securities are reported at cost on the balance sheet date, and unrealized

holding gains and losses are included in income of the current period.

1. Available-for-sale securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
2. Available-for-sale securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
3. Available-for-sale securities are reported at cost on the balance sheet date, but unrealized

holding gains and losses are not included in income of the current period.

21. Realized gains and losses on investments available-for-sale are reported
22. as a current asset
23. on the income statement
24. on the balance sheet as part of stockholders’ equity
25. as a contra asset
26. A realized gain or loss on the sale of an available-for-sale security is determined by comparing
27. the carrying value of the security with the proceeds from the sale
28. the original cost of the security with the proceeds from the sale
29. the market value at the latest balance sheet date with the proceeds from the sale
30. the original cost with the security’s carrying value
31. Wright Company has available-for-sale debt and equity securities that on December 31, 2014, had a cost of $110,000 and a market value of $108,000. The market value rose to $123,000 by December 31, 2015. What accounting action is required on December 31, 2015?
32. Allowance for Change in Fair Value of Investments should be credited for $15,000.
33. Unrealized Holding Gain/Loss-Available-for-Sale Securities should be debited for

$13,000.

1. Allowance for Change in Fair Value of Investments should be debited for $15,000.
2. Unrealized Holding Gain/Loss-Available-for-Sale Securities should be credited for

$13,000.

24. Reagan Company purchased 10,000 shares of Clinton’s Company at $45 per share plus $15,000 of Delta Company’s 12% bonds, acquired at par, as an available-for-sale securities. The bond pays interest on June 30 and December 31 each year. What amount should be recorded to the Investment in Available-for-Sale Securities account?
25. $450,000
26. $466,800
27. $15,000
28. $465,000
29. Chang Company purchased several investments in December 2015. Costs and market values of those investments on December 31, 2015, are presented below:

Cost Market Value

XYZ stock $200,000 $180,000

ABC stock 400,000 420,000

DEF stock 600,000 540,000

Assuming all of the securities are classified as available-for-sale, the journal entry required on December 31, 2015, the end of Chang’s fiscal year, would include a

1. debit to Unrealized Holding Gain/Loss-Available-for-Sale of $60,000
2. credit to Unrealized Holding Gain/Loss-Available-for-Sale of $60,000
3. credit to Unrealized Holding Gain/Loss-Available-for-Sale of $80,000
4. debit to Investment in Available-for-Sale Securities of $60,000
5. On January 1, 2014, the Leaf Company acquired a 5% interest in the Trunk Corporation through the purchase of 100,000 shares of Trunk’s common stock for $640,000; the investment is recorded on Leaf’s books as available-for-sale. During 2014, Trunk paid $40,000 in dividends and reported net income of $100,000. The market price of Trunk’s common stock was $6.20 per share on December 31, 2014. Leaf should report the investment in the Trunk Corporation on its December 31, 2014, balance sheet at
6. $620,000
7. $627,000
8. $640,000
9. $645,000
10. A transfer of a security between categories is accounted for at the
11. investment’s carrying value
12. fair value
13. original investment cost
14. lower of the original cost or fair value
15. Permanent value declines in available-for-sale securities should be
16. recorded in the allowance account
17. included in income as a realized loss
18. amortized over the remaining life of the security
19. recorded similarly to temporary declines in value
20. The Plutonium Company has a bond investment classified as held-to-maturity, which has a carrying value of $62,000 and a fair value of $24,000. The decline in value is considered as other than temporary. Plutonium should record the decline as
21. Unrealized Loss on Value Decline 38,000

Allowance for Change in Fair

Value of Investment 38,000

1. Investment in Held-to-Maturity Securities 38,000

Realized Loss on Decline in Value 38,000

1. Realized Loss on Decline in Value 38,000

Investment in Held-to-Maturity Securities 38,000

1. Unrealized Loss on Value Decline 38,000

Investment in Held-to-Maturity Securities 38,000

30. With the equity method, the investor recognizes its share of the earnings of the subsidiary when the
31. investor sells the investment
32. investee pays a cash dividend
33. investee declares a cash dividend
34. investee reports earnings on its income statement
35. Under the equity method, dividends received by the investor should be recorded as
36. a reduction in the carrying value of the investment
37. an addition to the carrying value of the investment
38. dividend income
39. investment income
40. Waldo Company owns 30% of Randy Company. During 2014, Randy reported earnings of $650,000 and paid cash dividends of $345,000. What effect would this have on Waldo’s investment account and net income?

Investment Account Net Income

1. +$195,000 +$103,500
2. — +$103,500

III. +$ 91,500 +$103,500

IV.+$ 91,500 +$195,000

1. I
2. II
3. III
4. IV

Exhibit 13-1

On January 1, 2014, Oak Corporation paid $900,000 for 80,000 shares of Beech Company’s common stock, which represents 35% of Beech’s outstanding common stock. Beech reported income of $300,000 and paid a cash dividend of $100,000 during 2014.

33. Refer to Exhibit 13-1. Oak should report income from the investment in Beech Company for 2014 of
34. $70,000
35. $140,000
36. $105,000
37. $300,000
38. Refer to Exhibit 13-1. Oak should report the investment in Beech Company on its December 31, 2014, balance sheet at
39. $900,000
40. $970,000
41. $935,000
42. $1,005,000
43. The Wise Company acquired an 20% interest in the outstanding common stock of the Smith Company. The Wise Company can exercise significant influence over the operating and financial policies of the Smith Company. The Wise Company should account for its investment in the Smith Company by using the
44. equity method
45. cost method
46. securities held-to-maturity method
47. lower of cost or market method
48. The Master Company acquired a 40% interest in the Dickerson Company on January 2, 2014, for $1,000,000. During 2014, Dickerson Company paid $100,000 in dividends and reported net income of $270,000. At the end of 2014, the balance in Investment in Dickerson Company should be
49. $1,000,000
50. $1,068,000
51. $1,040,000
52. $1,108,000
53. David, Inc. used the equity method of accounting for its investment in Russell Company. At December 31, 2014, the investment balance was $4,500 after all adjustments were recorded. The following is additional in -formation:

David’s share of Russells’ 2014 net income $2,300

David’s share of 2014 depreciation of Russell equipment 100

David’s dividends received from Russell in 2014 700

What was the January 1, 2014 balance in Investment in Russell Company?

1. $3,800
2. $3,000
3. $2,900
4. $2,300
5. Which type of investment in securities must always be classified as a current asset?

held-to-maturity debt securities

1. available-for-sale securities
2. trading securities
3. none of the these, they may all be classified as current or long-term assets

____

39. Warren, Inc. purchased a $400,000 life insurance policy on the company president on January 1, 2017. The premium that was paid on January 1 amounted to $11,600. In the first year, cash surrender value increased by $900 and dividends received by Warren from the insurance company for the year amounted to $300. What was Warren’s insurance expense for 2017?
40. $10,400
41. $11,000
42. $12,500
43. $12,800
44. The cash surrender value of the insurance policy on the corporation’s president would be presented on the balance sheet as
45. cash
46. marketable securities
47. long-term investment
48. prepaid expense

____

41. The journal entry to recognize the impairment of a note receivable includes a
42. debit to Bad Debt Expense
43. credit to Notes Receivable
44. credit to Interest Expense
45. debit to Interest Income
46. A note receivable is considered impaired when
47. the debtor misses an interest or principal payment
48. it is probable that the creditor will be unable to collect all amounts due
49. the market value of the note is less than its book value
50. the market value of interest exceeds the original contract interest rate