Appendix H

Question 1

why do corps invest?

Answer 1

1) may have excess cash
2) to generate earnings from investment income
3) for strategic reasons

Question 2

recording acquisition of bonds (cost)

Answer 2

includes all expenditures necessary to acquire these investments, such as the price paid plus brokerage fees (commissions) if any

Question 3

bond interest

Answer 3

calculate/record interest revenue based upon the carrying value x int rate x the portion of the yr the bond is outstanding

Question 4

journal entry: acquiring a bond

Answer 4

dr. debt investments

cr. cash

Question 5

journal entry: receiving interest on bonds

Answer 5

dr. cash (price x int rate x amt of yr)

cr. interest revenue

Question 6

journal entry: interest accrued on bonds (going to receive)

Answer 6

dr. int receivable

cr. int revenue

Question 7

journal entry: accrued interest on bonds is received

Answer 7

dr. cash

cr. int receivable

Question 8

journal entry: sale of bonds (gain)

Answer 8

dr. cash (amt sold for)
cr. debt investments (price initially paid)
cr. gain on sale (dif)

Question 9

journal entry: sale of bonds (loss)

Answer 9

dr. cash (amt sold for)
dr. loss on sale (dif)
cr. debt investments (amt initially paid)

Question 10

0-20% method

Answer 10

cost method (not significant ownership)

Question 11

21-50% method

Answer 11

equity method (significant influence)

Question 12

51-100% method

Answer 12

consolidation- valued on parent cos books (control usually exists)

Question 13

cost method

Answer 13

valued at cost; recognize revenue only when cash dividends are received

Question 14

journal entry: acquiring stock (cost method)

Answer 14

dr. stock investments

cr. cash

Question 15

journal entry: dividends received (cost method)

Answer 15

dr. cash

cr. dividend revenue

Question 16

journal entry: loss on sale (cost method)

Answer 16

dr. cash
dr. loss
cr. stock investments

Question 17

journal entry: gain on sale (cost method)

Answer 17

dr. cash
cr. gain
cr. stock investments

Question 18

equity method

Answer 18

record the investment at cost/adjust amt each period for:

1) the investor’s proportionate earnings
2) dividends received by the investor

Question 19

journal entry: dividends received (equity method)

Answer 19

dr. cash

cr. stock investments

Question 20

revenues from dividends increase ______ not _____

Answer 20

SHE; net income

Question 21

categories of securities

Answer 21

trading
available for sale
held to maturity

Question 22

trading securities

Answer 22

intention of selling within a short period

-report at fair value; report changes from cost as net income

Question 23

available for sale securities

Answer 23

intent of selling at some point in the future

• classified as current or long term assets
• report at fair value;report changes from cost as a part of SHE

Question 24

journal entry: adjustment-gain from fair value (trading)

Answer 24

dr. mkt adjustment

cr. unrealized gain-income

Question 25

journal entry: adjustment-loss from fair value (available for sale)

Answer 25

dr. unrealized gain/loss-equity

cr. mkt adjustment

Question 26

short term investments

Answer 26

aka mktable securities

• readily mktable
• intended to be converted to cash within the next yr or operating cycle;whichever is longer