Corporations invest in other companies for all of the
following reasons except to
increase trading of the other companies’ stock.
meet strategic goals.
house excess cash until needed.
If a short-term debt investment is sold, the Investment
credited for the cost of the bonds at the sale date.
debited for the cost of the bonds at the sale date.
credited for the book value of the bonds at the sale date.
credited for the fair value of the bonds at the sale date.
Blaine Company had these transactions pertaining to stock
â€¢ Feb. 1
Purchased 2,000 shares of Horton Company (10%) for $51,000.
â€¢ June 1
Received cash dividends of $2 per share on Horton stock.
â€¢ Oct. 1
Sold 1,200 shares of Horton stock for $33,000 less brokerage fees of $600.
The entry to record the sale of the stock would include a
debit to Cash for $32,400.
credit to Gain on Sale of Stock Investments for $1,800.
credit to Gain on Sale of Stock Investments for $1,200.
debit to Stock Investments for $30,600.
Mize Company owns 30% interest in the stock of Lyte
Corporation. During the year, Lyte pays $20,000 in dividends to Mize, and
reports $300,000 in net income. Mize Company’s investment in Lyte will increase
Mize?s net income by
For accounting purposes, the method used to account for
long-term investments in common stock is determined by
the extent of an investor’s influence on the operating and
financial affairs of the investee.
whether the acquisition of the stock by the investor was
friendly or hostile.
the amount paid for the stock by the investor.
whether the stock has paid dividends in past years.
If an investor owns less than 20% of the common stock of
another corporation as a long-term investment,
no dividends can be expected.
the equity method of accounting for the investment should be
it is presumed that the investor has significant influence
on the investee.
it is presumed that the investor has relatively little
influence on the investee.
When an investor owns between 20% and 50% of the common
stock of a corporation, it is generally presumed that the investor
should apply the cost method in accounting for the
has insignificant influence on the investee and that the
cost method should be used to account for the investment.
will prepare consolidated financial statements.
has significant influence on the investee and that the
equity method should be used to account for the investment.
Revenue is recognized when cash dividends are received under
the cost method.
the equity method.
both the cost and equity methods.
the controlling interest method.
Viejo Inc. earns $450,000 and pays cash dividends of
$150,000 during 2014. Cruz Corporation owns 73,500 of the 210,000 outstanding
shares of Viejo. How much revenue from investment should Viejo report in 2014?
When a company owns more than 50% of the common stock of
controlling financial statements are prepared.
affiliated financial statements are prepared.
consolidated financial statements are prepared.
significant financial statements are prepared.
Short-term stock investments should be valued on the balance
the higher of cost or fair value.
the lower of cost or fair value.
If the cost of an available-for-sale security exceeds its
fair value by $40,000, the entry to recognize the loss
is not required since the share prices will likely rebound
in the long run.
will show a credit to a contra-asset account that appears in
the stockholders’ equity section of the balance sheet.
will show a debit to an unrealized loss account that is
deducted in the stockholders’ equity section of the balance sheet.
will show a debit to an expense account.
At the end of the first year of operations, the total cost
of the trading securities portfolio is $245,000. Total fair value is $250,000. The financial statements should show
an addition to an asset of $5,000 and a realized gain of
an addition to an asset of $5,000 and an unrealized gain of
$5,000 in the stockholders’ equity section.
an addition to an asset of $5,000 in the current assets
section and an unrealized gain of $5,000 in “Other revenues and
an addition to an asset of $5,000 in the current assets
section and a realized gain of $5,000 in “Other revenues and gains.”
Comanic Corp. has common stock of $5,400,000, retained
earnings of $2,000,000, unrealized gains on trading securities of $100,000 and
unrealized losses on available-for-sale securities of $200,000. What is the total amount of its stockholders’
Beak Corporation sells 200 shares of common stock being held
as an investment. The shares were acquired six months ago at a cost of $25 a
share. Beak sold the shares for $40 a share. The entry to record the sale is
Stock Investments 8,000
Stock Investments 3,000
Bonds Payable 3,000
Stock Investments 8,000
Gain on Sale of Stock Investments 3,000
Stock Investments 5,000
A legal document which summarizes the rights and privileges
of bondholders as well as the obligations and commitments of the issuing
company is called
a bond debenture.
a bond indenture.
a term bond.
trading on the equity.
Stockholders of a company may be reluctant to finance
expansion through issuing more equity because
their earnings per share may decrease.
the price of the stock will automatically decrease.
leveraging with debt is always a better idea.
dividends must be paid on a periodic basis.
Which of the following is not an advantage of issuing bonds
instead of common stock?
Income to common shareholders may increase.
Stockholder control is not affected.
Earnings per share on common stock may be lower.
Tax savings result.
A major disadvantage resulting from the use of bonds is that
taxes may increase.
bondholders have voting rights.
earnings per share may be lowered.
interest must be paid on a periodic basis.
If the market interest rate is greater than the contractual
interest rate, bonds will sell
at face value.
at a premium.
only after the stated interest rate is increased.
at a discount.
If the market interest rate is 5%, a $10,000, 6%, 10-year
bond, that pays interest semiannually would sell at an amount
that cannot be determined.
greater than face value.
less than face value.
equal to face value.
Martinez Corporation issues 2,000, 10-year, 8%, $1,000 bonds
dated January 1, 2014, at 98. The journal entry to record the issuance will
debit to Cash for $1,960,000.
credit to Bonds Payable for $2,040,000.
debit to Cash of $2,000,000.
credit to Discount on Bonds Payable for $40,000.
If bonds are issued at a discount, it means that the
bondholder will receive effectively less interest than the
contractual interest rate.
market interest rate is lower than the contractual interest
financial strength of the issuer is suspect.
market interest rate is higher than the contractual interest
In the balance sheet, the account, Premium on Bonds Payable,
classified as a revenue account.
added to bonds payable.
deducted from bonds payable.
classified as a stockholders’ equity account.
Bond interest paid is
the same whether bonds sell at a discount or a premium.
lower when bonds sell at a premium.
higher when bonds sell at a discount.
higher when bonds sell at a discount and lower when bonds
sell at a premium.
Bond Corporation issues 5,000, 10-year, 8%, $1,000 bonds
dated January 1, 2014, at 103. The journal entry to record the issuance will
credit to Bonds Payable for $5,030,000.
credit to Premium on Bonds Payable for $150,000.
debit to Cash of $5,000,000.
credit to Cash for $5,150,000.
Lowe Company has $1,500,000 of bonds outstanding. The
unamortized premium is $19,600. If the company redeemed the bonds at 101, what
would be the gain or loss on the redemption?
Robin Corporation retires its $800,000 face value bonds at
104 on January 1, following the payment of annual interest. The carrying value of the bonds at the
redemption date is $829,960. The entry
to record the redemption will include a
debit of $2,040 to Loss on Bond Redemption.
debit of $32,000 to Premium on Bonds Payable.
credit of $2,040 to Loss on Bond Redemption.
credit of $32,040 to Premium on Bonds Payable.
If there is a loss on bonds redeemed early, the
bonds’ carrying value was less than the redemption price.
bonds’ carrying value was greater than the redemption price.
loss is debited to Interest Expense, as a cost of financing.
loss is debited directly to Retained Earnings.
Over the term of the bonds, the balance in the Discount on
Bonds Payable account will
fluctuate up and down if the market is volatile.
be unaffected until the bonds mature.