ACTG II Test 1
Bonds are securities that can be readily bought and sold. A bond issue consists of a number of bonds, usually in denominations of ______ or ______ and is sold to many different lenders
$1,000; $5,000
What happens to equity when treasury shares of preferred stock are purchased?
decrease
The _____ lists the beginning and ending balances of key equity accounts and describes the changes that occur during the period
statement of stockholders' equity
What type of bond can be exchanged for shares of the issuer's stock?
convertible bond
Long Co. holds $60,000 of available-for-sale securities. The securities mature in three months. Long should report these securities as a ______
current asset
Wendall Co. purchases 500 shares of Orison Inc. common stock at par value for $15,000. Wendall records the purchase of equity investments with insignificant influence with a ______ to Stock Investments
debit
Wyatt Co. plans to purchase 2,500 shares of Outer Wear Co., which will represent a 30% ownership. Wyatt would record this transaction with a ______ to the Equity Method Investments account
debit
Allen Co. holds a long-term investment with significant influence in Rodney Inc. Rodney paid Allen a $5,000 cash dividend. Allen would record the dividend with a debit to Cash and a credit to ______ investments
equity method
The journal entry to purchase 3,000 shares of a company, which represents a insignificant influence, would be recorded with a debit to the ______ account
equity method investments
Interest revenue earned on debit investments is reported on the ______
income statement
What happens to equity when no par common stock is issued?
increase
While the straight-line method of amortizing bond premium or discounts keeps the amortization equal over the life of the bond, the effective interest method keeps the ______ equal over the life of a bond
interest rate
Dean Co. purchased securities that are NOT readily convertible to cash and are NOT intended to be converted to cash in the short term. Dean should record these investments as ______ investments on the balance sheet
long-term
______ investments in securities are defined as those securities that are NOT readily convertible to cash or are NOT readily convertible to cash in the short term
long-term
What is not a right of common stockholders?
manage operations
The ______ value per share is the price at which a stock is bought and sold
market
The ______ value of a bond, also called the face amount or face value, is paid at a stated future date, known as the bond's maturity date (contract rate is equal to market rate)
par
A stock ______ is the distribution of additional shares to stockholders according to their percent ownership. When this occurs, the corporation "calls in" its outstanding shares and issues more than one new share in exchange for each old share
split
What is not a reason why companies make investments?
to reduce risk of bankruptcy
What are the advantages of the corporate form of business?
-continuous life -limited liability of stockholders -easier capital accumulation -separate legal entity -transferable ownership rights -no mutual agency for stockholders
The amount of income earned per each share of a company's outstanding common stock is known as
earnings per share
The ______ method allocates total bonds interest expense over the bonds' life in a way that yields a constant rate of interest
effective interest
True or false: a corporation has agreed to pay a $0.10 cash dividend on shares of common stock. On the date of record, no formal entry is required
true
What type of bond is backed by the issuer's general credit standing?
unsecured bond
Stockholders have the right to ______ at stockholders' meetings
vote
In the computation of basic earnings per share, a company will use the ______
weight-average common shares outstanding
Baird Co. owns 1,000 shares of Denver Inc.'s common stock and classifies them as equity investments with insignificant influence. On Sept. 26, Baird received $1,200 of cash dividends from Denver. The journal entry to record this transaction would include a ______ to Dividend Revenue
credit
Ladder Co. holds $20,000 in debt securities. On December 31, interest earned during the period on the securities equal $500. The journal entry to record interest earned will include the following accounts?
debit to cash; credit to interest revenue
Forever, Inc. announces an offer to issue bonds with a $100,000 par value, an 8% annual contract rate (paid semiannually) and a two-year life. The market rate is 10%, so the bonds will be sold at ______
discount
Alice Co. owns 1,000 shares of Ryder, Inc. and classifies them as an equity investment with insignificant influence. On Sept. 2, Alice received $4,200 of cash dividends from Ryder. The journal entry to record this transaction would include a credit to which account?
dividend revenue
The price-______ ratio reveals market expectation (market value per share/earnings per share)
earnings
Ivers Co. holds $30,000 of available-for-sale securities. Ivers intends to hold these securities as a ______ on the balance sheet
long-term asset
Lyle Co. borrowed $20,000 from First Bank by signing a written promise to pay a definite sum of money on a specific future date. Lyle will record this in the general ledger as a _______ payable
notes
Statutory and contractual restrictions are called ______ retained earnings
restricted
A statement of stockholders' equity lists balances of ______
retained earnings, common stock shares, net income, and cash dividends
What are advantages of bond financing for a company?
-interest on bonds is tax-deductible -bonds do not affect owner control -a company earns a higher return with borrowed funds than it pays in interest (increase return on equity)
What are disadvantages of bond financing for a company?
-large payments of par value are made at maturity -a company earns a lower return with borrowed funds than it pays in interest (decrease return on equity) -bonds require payment of period interest
A long-term investment classified as equity securities with significant influence implies that the investor can exert significant influence over the investee. An investor that owns ______ or more (but no more than ______) of a company's voting stock is usually presumed to have a significant influence over the investee
20%; 50%
______ securities are debt investments NOT classified as trading or held-to-maturity securities
Available-for-sale
A corporation is created by obtaining a charter from ______
a state government
When a debt security measures, the journal entry to record the maturity will include a ______ to Debt Investments
credit
______ preferred stockholders have a right to be paid both the current and all prior periods' unpaid dividends before any dividend is paid to common stockholders
cumulative
Alan Co. holds trading securities that the company intends to actively buy and sell for profit. These are reported on Alan's balance sheet under ______ assets
current
Available-for-sale securities are reported at fair value. Unrealized losses are reported in the ______ section of the balance sheet
equity
The receipt of cash dividends on a long-term investment in common stock is accounted for as a debit to Cash and a credit to Long-Term Investment. Which of the following methods is being used to account for the investment?
equity method
Total bond interest ______ is the sum of the interest payments plus the bond discount
expense
The principle of each bond is also called the
face value
Johnson Co. holds trading securities. Johnson should report these investments on the balance sheet at ______ value
fair
Companies must value and report most debt investments at ______
fair value
True or false: an advantage of purchasing preferred stock is that preferred stockholders are guaranteed to receive dividend payments each year
false
True or false: preferred stock can be issued to raise money with voting rights
false
True or false: when a trading security is sold and the net proceeds are greater than the cost of the security, no grain or loss is recognized
false
What is a disadvantage of the corporate form of business?
government regulation and corporate taxation
______ securities are debt securities a company intends and is able to hold until maturity. They are reported in current assets or long-term assets, depending on their maturity date
held to maturity
What investment classification is used only when a company has the positive intent and ability to hold an investment to maturity?
held-to-maturity securities
Income from long-term investments in equity securities with significant influence is reported in the Earnings from Equity Method Investment account. This account is a temporary account, closed to the ______ account
income summary
What happens to equity when new shares of preferred stock are sold for cash?
increase
What happens to equity when treasury stock is sold above cost for cash?
increase
The legal document that describes the rights and obligations of both the bondholders and the issuer is called the bond ______. This document describes the number of bonds authorized, their par value, and the contract interest rate
indenture
An ______ note is an obligation requiring a series of payments to the lenders
installment
A bond discount increases ______ at each semi-annual interest payment
interest expense
The bond's ______ rate of interest is the rate that borrowers are willing to accept for a particular bond and its risk level
market
A ______ is a legal agreement that helps to protect a lender if a borrower does not make required payments on notes or bonds. This agreement gives the lender the right to be paid from the cash proceeds of the sale of the borrower's assets, as identified in the agreement
mortgage
What happens to equity when a small stock dividend is distributed?
no effect
What happens to equity when a stock split of 5-for-1 occurs?
no effect
______ preferred stock confers no right period unpaid dividends
noncumulative
A ______ is similar to a bond payable to a bond payable but is normally transacted with a single lender such as a bank
note payable
The bond contract rate determines the annual interest paid by multiplying the bond ______ value by the contract rate
par
How can the bond carrying value be determined?
par value - discount of bonds payable
The consolidation method states that the controlling investor is called the ______ and the investee is called the subsidiary
parent
When the board of directors authorizes a cash dividend to investors, there are three important dates involved- the date of declaration, date of record, and date of ______
payment
The group of trading securities is reported together as a ______ at fair value (the market value that is not yet confirmed by sales)
portfolio
Stock that typically includes preference for receiving dividends and for distribution of corporate assets during a liquidation is called ______ stock
preferred
______ has special rights that give it priority over other types of stock in one of more areas
preferred stock
A ______ on stock occurs when a corporation issues its stock for more than par (or stated) value
premium
When the contract rate of the bonds is higher than the market rate, the bond sells at a higher price than par value. The amount by which the bond price exceeds par value is the ______ on bonds
premium
Under the effective interest amortization of a premium bond, the ______ account is debited for the amortization of the interest expense
premium on bonds payable
A ______ held corporation does no offer it stock for public sale and usually has a few stockholders
privately
When trading security is sold, a gain or loss is recognized based on the net ______ less the cost of the security
proceeds
A charter application usually must be signed by the prospective stockholders called incorporates or ______. Then, it is filled with the appropriate state official
promoters
A ______ held corporation offers its stock for public sale and can have thousands of stockholders
publicly
What type of bond records and tracks the bondholders' names?
registered bond
Generally consists of a company's cumulative net income less any net losses and dividends declared since its inception
retained earnings
What type of bond has varying maturity dates for amounts owed?
serial bond
______ investments are securities that management intends to convert to cash within one year or the operating cycle, whichever is longer, and are readily convertible to cash
short-term
A ______ dividend, declared by corporation's directors, is a distribution of additional shares of the corporation's own stock
stock
Two of the biggest disadvantages of the corporate form of business are government regulation and corporate ______
taxation
When making a fair-value adjustment for trading securities, the Unrealized Gain or Loss is a ______ account and the Fair Value Adjustment- Trading is a ______ account (closed to income summary account)
temporary; permanent
What is not a factor that helps determine how to account for investments in securities?
the dollar amount of the investment
What are three factors that help determine how to account for investments in securities?
the percent ownership, the intent to hold as either short-term or long-term, and the security type (debt or equity)
What is true about amortizing a premium bond using the effective interest amortization method?
the semiannual cash interest payment is larger than the bond interest expense and the excess of the cash payment over the interest expense reduces the principal
What are some reasons why companies make investments?
to produce income for pension funds and higher income using excess cash
Grady Co. purchased debt securities that it plans to actively buy and sell for profit. Grady will record these securities as ______ securities on its balance sheet (always classified as current assets)
trading
When a corporation purchases shares of its own stock, it is called ______ stock
treasury
When stock that was issued by a corporation is later reacquired it is classified as ______
treasury stock
True or false: Stockholders do no have the power to bind the corporation to contracts. This is referred to as lack of mutual agency
true
The difference between the cash interest paid and the bond interest expense is the premium ______ under the effective interest of amortization of a bond premium method
amortization
A voluntary transfer of amounts from Retained Earnings to inform users of special activities that require funds are called
appropriate retained earnings
Most bonds require par value to be repaid ______ and interest to be paid ______
at the maturity date; semiannually
______ stock is the number of shares that a corporation's charter allows it to sell. The number of these shares usually exceeds the number of shares issued (in outstanding), often by a large amount
authorized
What type of bond is a legal contract between the issuer and the bondholders?
bond indenture
What is a disadvantage of bond financing?
can decrease return on equity and require payment of interest and par value
A bond ______ is evidence of the company's debt
certificate
Investors who buy a corporation's stock sometimes receive a stock ______ as proof of share ownership
certificate
Light, Inc. accounts for several long-term investments with a controlling interest. Light, Inc. will report these investments using ______ financial statements
consolidated
Treasury stock is a ______ equity account, with a normal debit balance. It is reported on the stockholders' equity section of the balance sheet as a reduction to stockholders equity
contra
The ______ rate is the interest rate specified-sometimes referred to as the coupon rate, stated rate, or nominal rate
contract
When available-for-sale securities are sold, a gain or loss is recognized for the difference between net proceeds and the ______ of the security
cost
What type of bond has an interest coupon attached?
coupon bond
The journal entry is record the issuance of a bond at par value is ______
debit cash; credit bonds payable
The journal entry to record the issuance of a bond at a discount is ______
debit cash; debit discount on bonds payable; credit bonds payable
When a debit security matures, the journal entry will include a credit to ______
debit investments
The net effect to a corporation of the declaration and payment of a cash dividend is to ______
decrease assets and decrease stockholder's equity
A ______ on bonds payable occurs when a company issues bonds with a contract rate less than the market rate
discount
What type of bond occurs when the contract rate is less than the market value?
discount on bonds payable
The board of directors authorize a cash ______ or distribution of cash to its investors
dividend
When stock is cumulative preferred stock and the Board of Directors does not declare a dividend, the unpaid dividend amount is called
dividend in arrears
What is an advantage of bond financing?
do not affect owner control
