ACCT 3021 Chapter 17 TB

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income.

a. a reduction of the carrying value of the investment.

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are a. available-for-sale securities where a company has holdings of less than 20%. b. trading securities where a company has holdings of less than 20%. c securities where a company has holdings of between 20% and 50%. d. securities where a company has holdings of more than 50%.

a. available-for-sale securities where a company has holdings of less than 20%.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Available-for-Sale Securities. b. debit to the discount account. c. debit to Interest Revenue. d. none of these.

a. debit to Available-for-Sale Securities.

Debt securities that are accounted for at amortized cost, not fair value, are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

a. held-to-maturity debt securities.

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date. b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

a. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

The fair value option allows a company to a. value its own liabilities at fair value. b. record income when the fair value of its bonds increases. c. report most financial instruments at fair value by recording gains and losses as a separate component of stockholders' equity. d. All of the above are true of the fair value option.

a. value its own liabilities at fair value.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment.

b. The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.

Use of the effective-interest method in amortizing bond premiums and discounts results in a. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. b. a varying amount being recorded as interest income from period to period. c. a variable rate of return on the book value of the investment. d. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

b. a varying amount being recorded as interest income from period to period.

Held-to-maturity securities are reported at a. acquisition cost. b. acquisition cost plus amortization of a discount. c. acquisition cost plus amortization of a premium. d. fair value

b. acquisition cost plus amortization of a discount.

A correct valuation is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. none of these.

b. held-to-maturity at amortized cost.

Which of the following is not a debt security? a. Convertible bonds b. Commercial paper c. Loans receivable d. All of these are debt securities.

c. Loans receivable

Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. Accrued interest will be received by the seller even though it is not an interest payment date. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities. d. A gain or loss on the sale is not extraordinary.

c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Investments in Debt Securities.

Watt Co. purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes a. a debit to Held-to-Maturity Securities at $300,000. b. a credit to Premium on Investments of $15,000. c. a debit to Held-to-Maturity Securities at $315,000. d. none of these.

c. a debit to Held-to-Maturity Securities at $315,000.

When investments in debt securities are purchased between interest payment dates, preferably the a. securities account should include accrued interest. b. accrued interest is debited to Interest Expense. c. accrued interest is debited to Interest Revenue. d. accrued interest is debited to Interest Receivable.

c. accrued interest is debited to Interest Revenue.

In accounting for investments in debt securities that are classified as trading securities, a. a discount is reported separately. b. a premium is reported separately. c. any discount or premium is not amortized. d. none of these.

c. any discount or premium is not amortized.

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses and are included as other comprehensive income and as a separate component of stockholders' equity are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

c. available-for-sale debt securities.

Investments in debt securities are generally recorded at a. cost including accrued interest. b. maturity value. c. cost including brokerage and other fees. d. maturity value with a separate discount or premium account.

c. cost including brokerage and other fees.

Investments in debt securities should be recorded on the date of acquisition at a. lower of cost or market. b. market value. c. market value plus brokerage fees and other costs incident to the purchase. d. face value plus brokerage fees and other costs incident to the purchase.

c. market value plus brokerage fees and other costs incident to the purchase.

Securities which could be classified as held-to-maturity are a. redeemable preferred stock. b. warrants. c. municipal bonds. d. treasury stock.

c. municipal bonds.

Unrealized holding gains or losses which are recognized in income are from securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. none of these.

c. trading.

Which of the following is not correct in regard to trading securities? a. They are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is not amortized. d. All of these are correct.

d. All of these are correct.

A requirement for a security to be classified as held-to-maturity is a. ability to hold the security to maturity. b. positive intent. c. the security must be a debt security. d. All of these are required.

d. All of these are required.

Which of the following is correct about the effective-interest method of amortization? a. The effective interest method applied to investments in debt securities is different from that applied to bonds payable. b. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.

d. The effective-interest method produces a constant rate of return on the book value of the investment from period to period.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements.

d. earnings are reported by the investee in its financial statements.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the a. cost method. b. fair value method. c. divesture method. d. equity method.

d. equity method.

Impairments are a. based on discounted cash flows for securities. b. recognized as a realized loss if the impairment is judged to be temporary. c. based on fair value for available-for-sale investments and on negotiated values for held-to-maturity investments. d. evaluated at each reporting date for every investment.

d. evaluated at each reporting date for every investment.