Accounting 201 - Chapter 12 Quiz

T/F An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

False

T/F Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

False

T/F Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

False

T/F Corporations purchase investments in debt or stock securities generally for one of two reasons

False

T/F Dividends received on stock investments of less than 20% should be credited to the Stock Investments account

False

T/F In accordance with the cost principle, the cost of debt investments includes brokerage fees and accrued interest

False

T/F In accounting for stock investments of less than 20%, the equity method is used

False

T/F Under the equity method, the receipt of dividends from the investee company results in an increase in the Stock Investments account

False

T/F When debt investments are sold, the gain or loss is the difference between the net proceeds from the sale and the fair value of the bonds

False

T/F 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.

True

T/F A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income

True

T/F Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock

True

T/F Debt investments are investments in government and corporation bonds

True

T/F For non-trading securities, the unrealized gain or loss account is carried forward to future periods.

True

T/F 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

True

T/F In accordance with the cost principle, brokerage fees should be added to the cost of an investment

True

T/F The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock

True

T/F The accounting for short-term debt investments and for long-term debt investments is similar

True

T/F The equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted annually.

True

T/F The valuation of non-trading securities is similar to the procedures followed for trading securities, except that changes in fair value are not recognized in current income.

True

On January 1, 2013, Danner Company purchased at face value, a $1,000, 8% bond that pays interest on January 1 and July 1. Danner Company has a calendar year end. The entry for the receipt of interest on July 1, 2013, is: a. Cash 40 Interest Revenue 40 b. Cash 80 Interest Revenue 80 c. Interest Receivable 40 Interest Revenue 40 d. Interest Receivable 80 Interest Revenue 80

a. Cash 40 Interest Revenue 40

Corporations invest excess cash for short periods of time in each of the following EXCEPT: a. Equity Securities b. Highly Liquid Securities c. Low-Risk Securities d. Government Securities

a. Equity Securities

Pension funds and mutual funds regularly invest in debt and stock securities primarily to a. generate earnings b. house excess cash until needed c. meet strategic goals d. control the company in which they invest

a. generate earnings

At the time of acquisition of a debt investment a. no journal entry is required b. the 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

b. the cost principle applies

On January 1, 2013, Danner Company purchased at face value, a $1,000, 10% bond that pays interest on January 1 and July 1. Danner Company has a calendar year end. The entry for the receipt of interest on December 31, 2013, is: a. Not required b. Cash 50 Interest Revenue 50 c. Interest Receivable 50 Interest Revenue 50 d. Interest Receivable 50 Debt Investments 50

c. Interest Receivable 50 Interest Revenue 50

A company may purchase a non-controlling interest in another firm in a related industry a. to house excess cash until needed b. to generate earnings c. for strategic reasons d. for speculative reasons

c. for strategic reasons

A typical investment to house excess cash until needed is: a. stocks of companies in a related industry b. debt securities c. low-risk, highly liquid securities d. stock securities

c. low-risk, highly liquid securities

On January 1, 2013, Milton Comany purchased at face value, a $1,000, 4% bond that pays interest on January 1 and July 1. Milton Company has a calendar year end. The entry for the receipt of interest on January 1, 2014 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

d. Cash 20 Interest Receivable 20

Which one of the following is NOT a true statement regarding short-term debt investments? a. The securities usually pay interest b. Investments are frequently government or corporate bonds c. This type of investment must be currently traded in the securities market d. Debt investments are recorded at the price paid less brokerage fees

d. Debt investments are recorded at the price paid less brokerage fees

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

d. increase trading of the other companies' stock