Chapter 16: Investments Flashcards
- Which of the following is not a primary reason why
corporations invest in debt and equity securities?
(a) They wish to gain control of a competitor.
(b) They have excess cash.
(c) They wish to move into a new line of business.
(d) They are required to by law
- (d) Corporations are not required to by law to invest in debt and equity securities
- Debt investments are initially recorded at:
(a) cost.
(b) cost plus accrued interest.
(c) fair value.
(d) face value
- (a) When debt investments are purchased, they are recorded at cos
- Hanes Company sells debt investments costing
$26,000 for $28,000. In journalizing the sale, credits
are to:
(a) Debt Investments and Loss on Sale of Debt Investments.
(b) Debt Investments and Gain on Sale of Debt Investments.
(c) Stock Investments and Gain on Sale of Stock
Investments.
(d) No correct answer is given
- (b) Credits are made to Debt Investments $26,000 and Gain on Sale of Debt Investments $2,000
($28,000 - $26,000).
- Pryor Company receives net proceeds of $42,000 on the sale of stock investments that cost $39,500. This transaction will result in reporting in the income
statement a:
(a) loss of $2,500 under “Other expenses and losses.”
(b) loss of $2,500 under “Operating expenses.”
(c) gain of $2,500 under “Other revenues and gains.”
(d) gain of $2,500 under “Operating revenues.”
- (c) Because the cash received ($42,000) is greater than the cost ($39,500), this sale results in a gain, not a loss, which will be reported under “Other revenues and gains” in the income statement
- The equity method of accounting for long-term investments in stock should be used when the investor has significant influence over an investee and owns:
(a) between 20% and 50% of the investee’s common
stock.
(b) 20% or more of the investee’s common stock.
(c) more than 50% of the investee’s common stock.
(d) less than 20% of the investee’s common stock.
- (a) The equity method is used when the investor can exercise signifi cant infl uence and owns between 20% and 50% of the investee’s common stock
- Assume that Horicon Corp. acquired 25% of the common stock of Sheboygan Corp. on January 1, 2017,
for $300,000. During 2017, Sheboygan Corp. reported
net income of $160,000 and paid total dividends of
$60,000. If Horicon uses the equity method to account
for its investment, the balance in the investment
account on December 31, 2017, will be:
(a) $300,000.
(b) $325,000.
(c) $400,000.
(d) $340,000.
- (b) Horicon records the acquisition of the stock investment by debiting Stock Investments $300,000 and crediting Cash $300,000.
Then, Horicon records (1) its share in Sheboygan Corp.’s net income ($160,000 x .25) by debiting Stock Investments $40,000 and
crediting Revenue from Stock Investments $40,000 and (2) the reduction in the investment account for the dividends received
($60,000 x .25) by debiting Cash $15,000 and crediting Stock Investments $15,000. Thus, the balance in the investment account on
December 31 will be $325,000
($300,000 + $40,000 - $15,000), not (a) $300,000, (c) $400,000, or (d) $340,000.
- Using the information in Question 6, what entry
would Horicon make to record the receipt of the dividend from Sheboygan?
(a) Debit Cash and credit Revenue from Stock Investments.
(b) Debit Cash Dividends and credit Revenue from
Stock Investments.
(c) Debit Cash and credit Stock Investments.
(d) Debit Cash and credit Dividend Revenue.
- (c) Horicon records the receipt of the dividend from Sheboygan by debiting Cash and crediting Stock Investments. The other choices are therefore incorrect.
- You have a controlling interest if:
(a) you own more than 20% of a company’s stock.
(b) you are the president of the company.
(c) you use the equity method.
(d) you own more than 50% of a company’s stock
- (d) You have a controlling interest if you own more than 50% of a company’s stock
- Which of the following statements is false? Consolidated fi nancial statements are useful to:
(a) determine the profi tability of specifi c subsidiaries.
(b) determine the total profi tability of companies
under common control.
(c) determine the breadth of a parent company’s
operations.
(d) determine the full extent of total obligations of
companies under common control.
- (a) Consolidated fi nancial statements are not useful in determining the profi tability of specific subsidiaries (legal entities) because consolidated financial statements represent the results of the single economic entity
- At the end of the fi rst year of operations, the total cost of the trading securities portfolio is $120,000. Total
fair value is $115,000. The fi nancial statements should
show:
(a) a reduction of an asset of $5,000 and a realized
loss of $5,000.
(b) a reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders’ equity section.
(c) a reduction of an asset of $5,000 in the current
assets section and an unrealized loss of $5,000 in
“Other expenses and losses.”
(d) a reduction of an asset of $5,000 in the current
assets section and a realized loss of $5,000 in
“Other expenses and losses.”
- (c) The difference between the fair value ($115,000) and total cost ($120,000) of trading securities at the end of the first year would result in a reduction of an asset of $5,000 through the valuation allowance account in the current assets section and an unrealized loss of $5,000 in “Other expenses and losses.”
- At December 31, 2017, the fair value of available-forsale securities is $41,300 and the cost is $39,800. At
January 1, 2017, there was a credit balance of $900 in
the Fair Value Adjustment—Available-for-Sale account.
The required adjusting entry would be:
(a) Debit Fair Value Adjustment—Available-for-Sale
for $1,500 and credit Unrealized Gain or Loss—
Equity for $1,500.
(b) Debit Fair Value Adjustment—Available-for-Sale
for $600 and credit Unrealized Gain or Loss—
Equity for $600.
(c) Debit Fair Value Adjustment—Available-for-Sale
for $2,400 and credit Unrealized Gain or Loss—
Equity for $2,400.
(d) Debit Unrealized Gain or Loss—Equity for $2,400
and credit Fair Value Adjustment—Available-forSale for $2,400.
- (c) In this case, there is an unrealized gain of $1,500 because total fair value of $41,300 is $1,500 greater than the total cost of $39,800. The desired balance in the market adjustment account is $1,500 debit. The required adjusting entry considers the existing
credit balance of $900 and is a debit to Fair Value Adjustment—Available-for-Sale for $2,400
($1,500 + $900) and a credit to Unrealized Gain or Loss—Equity for $2,400 ($1,500 +900)
- If a company wants to increase its reported income by manipulating its investment accounts, which should
it do?:
(a) Sell its “winner” trading securities and hold its
“loser” trading securities.
(b) Hold its “winner” trading securities and sell its
“loser” trading securities.
(c) Sell its “winner” available-for-sale securities and
hold its “loser” available-for-sale securities.
(d) Hold its “winner” available-for-sale securities and
sell its “loser” available-for-sale securities.
- (c) When a company sells its winners as related to available-for-sale securities, it has a realized gain that increases net income.
Selling the winners will affect the balance in Unrealized Holding Gain or Loss—Equity, but any change in this balance does not
affect net income.
- In the balance sheet, a debit balance in Unrealized
Gain or Loss—Equity is reported as a(n):
(a) increase to stockholders’ equity.
(b) decrease to stockholders’ equity.
(c) loss in the income statement.
(d) loss in the retained earnings statement.
- (b) A debit balance in Unrealized Gain or Loss—Equity is reported on the balance sheet as a separate component of stockholders’ equity, decreasing stockholders’ equity
- Short-term debt investments must be readily marketable and expected to be sold within:
(a) 3 months from the date of purchase.
(b) the next year or operating cycle, whichever is
shorter.
(c) the next year or operating cycle, whichever is
longer.
(d) the operating cycle.
- (c) Short-term investments are current assets that are expected to be consumed, sold, or converted to cash within one year or the operating cycle, whichever is longer
