TestBank financial accounting 2n spiceland app d

App_D Student: _ Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends True Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year True False Unrealized gains and losses from changes in the fair value of trading securities are reported as part of current net income True False Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income True False Investments are reported at fair value when a company has an insignificant influence over another company in which it invests True False When the investor has insignificant influence, the receipt of cash dividends is recorded as dividend revenue True False When significant influence exists, the investment should be accounted for by the equity method True False When insignificant influence exists, the investment should be accounted for by the equity method True False False Gains and losses on the sale of equity investments are recorded in the income statement as part of net income True False 10 The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investment by stockholders and payment of dividends True False 11 The statement of comprehensive income is a statement that includes net income plus investment by stockholders less payment of dividends True False 12 Investments are reported at fair value when a company has a significant influence over another company in which it invests True False 13 Under the equity method, the investor includes in net income its portion of the investee's net income True False 14 When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue True False 15 Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial statements True False 16 Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term liabilities that incur interest expense True False 17 The cash received from interest equals the face value of the investment in bonds times the stated interest rate True False 18 Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate True False 19 Because the carrying value of bonds purchased at a premium increases over time, interest revenue will also increase each semi-annual interest period True False 20 Because the carrying value of bonds purchased at a discount increases over time, interest revenue will also increase each semi-annual interest period True False 21 One of the primary reasons for investing in equity securities includes: A B C D Acquiring debt of competing companies Appreciation in the value of the stock Earning interest revenue Deducting dividend payments for tax purposes 22 One of the primary reasons for investing in debt securities includes: A B C D Receiving dividend payments Acquiring significant influence Earning interest revenue Deducting interest payments for tax purposes 23 Which of the following is true with regard to how to account for company A's investment in company B's common stock? A B C D The fair value method is used when A owns more than 50% of B The equity method is used when A owns from 20% to 50% of B The consolidation method is used when A owns less than 20% of B All of the above are true (Is this type answer option OK??) 24 Libby Company purchased equity securities for $100,000 and classified them as trading securities At the end of the year, the fair value of the securities was $105,000 How should the investment be reported in the year-end financial statements? A The investment in trading securities would be reported in the balance sheet at its $100,000 cost B The investment in trading securities would be reported in the balance sheet at its $105,000 fair value C An unrealized holding gain would be reported in other comprehensive income D Both b and c are correct 25 Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities At the end of the year, the fair value of the securities was $105,000 How should the investment be reported in the year-end financial statements? A The investment in available-for-sale securities would be reported in the balance sheet at its $100,000 cost B The investment in available-for sale securities would be reported in the balance sheet at its $105,000 market value C An unrealized holding gain would be reported in other comprehensive income D Both b and c are correct 26 Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share The investment is properly classified as a trading security By the end of the year, the stock price has increased to $32 per share How would the change in stock price affect Sports Spectacular's net income? A B C D Increase net income by $32,000 Increase net income by $30,000 Increase net income by $2,000 No effect 27 Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share The investment is properly classified as an available-for-sale security By the end of the year, the stock price has increased to $32 per share How would the change in stock price affect Sports Spectacular's net income? A B C D Increase net income by $32,000 Increase net income by $30,000 Increase net income by $2,000 No effect 28 The primary difference in accounting for available-for-sale securities and accounting for trading securities is: A B C D Option a Option b Option c Option d 29 On January 1, 2012, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment The records of Burke Corporation showed the following at December 31, 2012: What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke? A B C D Option a Option b Option c Option d 30 When the equity method of accounting for investments is used by the investor, the Investments account increases when: A B C D A cash dividend is received from the investee The investee reports a net income for the year The investor records additional depreciation related to the investment The investee reports a net loss for the year 31 When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded: A B C D As a reduction in the Investments account As an increase in the Investments account As dividend income As a contra item to stockholders' equity 32 The equity method of accounting for investments in voting common stock is appropriate when: A B C D The investor can significantly influence the investee The investor has voting control over the investee The investor intends to hold the common stock indefinitely The investor is assured of a continued supply of a valuable raw material 33 Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share The investment is properly recorded using the equity method By the end of the year, the stock price has increased to $32 per share How would the change in stock price affect Sports Spectacular's net income under the equity method? A B C D Increase net income by $32,000 Increase net income by $30,000 Increase net income by $2,000 No effect 34 On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment Gilman can exercise significant influence over Burke and properly records the investment using the equity method The records of Burke Corporation showed the following at December 31, 2012: What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke? A B C D Option a Option b Option c Option d 35 Consolidated financial statements are prepared when one company has: A B C D Accounted for the investment using the equity method Accounted for the investment as available-for-sale securities Control over another company None of these is correct (Is this type OK??) 36 Which of the following investment securities held by Zoogle Inc may be classified as held-to-maturity securities in its balance sheet? A B C D Debt securities Equity securities Common stock All of these are correct (Is this OK??) 37 General Investment Co (GIC) purchased bonds on January 1, 2012 GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds: A B C D At par At a discount At a premium Cannot be determined from the given information 38 General Investment Co (GIC) purchased bonds on January 1, 2012 GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds for: A B C D $200,000 $194,758 $242,000 Cannot be determined from the given information 39 General Investment Co (GIC) purchased bonds on January 1, 2012 GIC's accountant has projected the following amortization schedule from purchase until maturity: Recording the bond purchase would have what effect on the financial statements? A B C D Increase assets Increase liabilities Increase assets and liabilities No effect on total assets and total liabilities 40 General Investment Co (GIC) purchased bonds on January 1, 2012 GIC's accountant has projected the following amortization schedule from purchase until maturity: The investment in bonds has a maturity in: A B C D Two years Three years Six years Cannot be determined from the given information 41 General Investment Co (GIC) purchased bonds on January 1, 2012 GIC's accountant has projected the following amortization schedule from purchase until maturity: What is the annual market interest rate on the bonds? A B C D 4% 3.5% 7% 8% 42 General Investment Co (GIC) purchased bonds on January 1, 2012 GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12 What gain or loss, if any, would GIC record on this date? A B C D No gain or loss $370 loss $4,000 loss $4,000 gain 43 On September 1, Investors, Inc purchases 1,000 shares (insignificant influence) of $1 par value common stock of Hamilton International at $15 per share On October 15, the investment is sold for $18 per share Record the purchase and sale of the investment in Hamilton International 44 California Designs is diversifying its investment portfolio by making a small investment (less than 5%) in the common stock of Oregon Outfitters California Designs engages in the following transactions relating to its investment: January Purchases 1,000 shares of Oregon Outfitters common stock for $20 per share The investment is properly classified as an available-for-sale security July 12 Sells 300 shares of Oregon Outfitters stock for $18 per share September 30 Receives a cash dividend of $1 per share December 31 Adjusts the investment to fair value The fair value of Oregon Outfitters stock is now $15 per share Record each of these transactions, including the December 31 adjustment to fair value Calculate the balance of the Investments account on December 31 45 Athletic Accessories has the following transactions related to investments in common stock May Purchases 5,000 shares (insignificant influence) of Endurance Wear common stock for $22 per share The investment is properly classified as an available-for-sale security June 30 Receives a cash dividend of $1 per share October 18 Sells 2,000 shares of Endurance Wear common stock at $25 per share December 31 Adjusts the investments to fair value The fair value of Endurance Wear common stock is now $30 per share Record each of these transactions, including an entry on December 31 to adjust the investment to fair value Calculate the balance of the investment account on December 31 46 Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on January 1, 2012 The market interest rate for bonds of similar risk and maturity is 7% Interest is received semiannually on June 30 and December 31 Record the investment in bonds Record receipt of the first interest payment on June 30, 2012 47 Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $18,641 on January 1, 2012 The market interest rate for bonds of similar risk and maturity is 8% Interest is received semiannually on June 30 and December 31 Record the investment in bonds Record receipt of the first interest payment on June 30, 2012 48 Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $21,488 on January 1, 2012 The market interest rate for bonds of similar risk and maturity is 6% Interest is received semi-annually on June 30 and December 31 Record the investment in bonds Record receipt of the first interest payment on June 30, 2012 49 How can an investor benefit from an equity investment that does not pay dividends? 50 Investments in equity securities for which the investor has insignificant influence over the investee are classified for reporting purposes under the fair value method in one of two categories What are these two categories? How we report unrealized holding gains and losses under each of these two categories? 51 Under what circumstances we use the equity method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method 52 Discuss the meaning of consolidated financial statements When is it appropriate to consolidate financial statements of two companies? 53 Investments in debt securities are classified for reporting purposes in one of three categories List these three categories and explain which investments are included in each category Also briefly describe how the reporting differs for each category 54 Listed below are five terms followed by a list of phrases that describe or characterize the terms Match each phrase with the best term placing the letter designating the term in the space provided Held-tomaturity securities Used when an investor has controlling influence. Equity method This category is not used for equity investments. Trading securities Used when an investor has insignificant influence and does not expect to sell in the near future. Available-forsale securities Used when an investor has significant, but not controlling influence. Consolidation method Used when an investor expects to sell in the near future. 55 Listed below are five terms followed by a list of phrases that describe or characterize the terms Match each phrase with the best term placing the letter designating the term in the space provided Consolidation method Equity method Held-tomaturity securities Trading securities Available-forsale securities This category is used only for debt securities. An investor owns 40% of the common voting shares in the company and can exercise significant influence. Common stock not held for immediate resale and the investor owns 2% of the outstanding shares. An investor owns over 50% of the common voting shares in the company. Common stock held for immediate resale. App_D Key TRUE TRUE FALSE TRUE TRUE TRUE FALSE TRUE TRUE 10 TRUE 11 FALSE 12 FALSE 13 TRUE 14 FALSE 15 TRUE 16 TRUE 17 TRUE 18 FALSE 19 FALSE 20 TRUE 21 B 22 C 23 B 24 B 25 D 26 C 27 D 28 C 29 A 30 B 31 A 32 A 33 D 34 C 35 C 36 A 37 B 38 B 39 D 40 B 41 D 42 B 43 44 The balance in the Investments account on December 31 is $10,500, equal to the 700 remaining shares times $15 per share fair value The balance in the Investments account can be verified by posting all transactions to a T-account 45 The balance in the Investments account on December 31 is $90,000, equal to the 3,000 remaining shares times $30 per share fair value The balance in the Investments account can be verified by posting all transactions to a T-account 46 47 48 49 Companies can gain from the increase in the value of their investment Even without receiving dividends, investors still benefit when companies reinvest earnings, leading to even more profits in the future, and eventually higher stock prices Many companies also make investments for strategic purposes to develop closer business ties, increase market share, or expand into new industries 50 The two categories are trading securities and available-for-sale securities Trading securities are reported at fair value, and resulting holding gains and losses are included in the determination of net income for the period Available-for-sale securities are reported at fair value, and resulting holding gains and losses are not included in the determination of net income for the period Rather, they are reported as part of other comprehensive income 51 The equity method is used when an investor can't control, but can "significantly influence" the investee For example, if effective control is absent, the investor still might be able to exercise significant influence over the operating and financial policies of the investee if the investor owns a large percentage of the outstanding shares relative to other shareholders By voting those shares as a block, the investor often can sway decisions in the direction desired We presume, in the absence of evidence to the contrary, that the investor exercises significant influence over the investee when it owns between 20% and 50% of the investee's voting shares The investor should account for dividends from the investee as a reduction in the Investments account Since investment revenue is recognized as the investee earns it, it would be inappropriate to recognize revenue again when earnings are distributed as dividends 52 Consolidated financial statements combine the parent's and subsidiary's operating activities as if the two companies were a single reporting company, even though both companies continue to operate as separate legal entities It is appropriate to consolidate financial statements of two companies when the parent company owns a controlling interest (more than 50%) in the voting stock of the subsidiary 53 Investments in debt securities are classified as "held-to-maturity," "trading," or "available-for-sale" securities Held-to-maturity securities are debt securities that the company expects to hold until they mature, which means until they become payable Trading securities are securities that the investor expects to sell in the near future These investments are adjusted to fair value with the unrealized gain or loss included in net income Available-for-sale securities are investments that not fit the other two categories; they are not expected to be sold in the near future, yet they are not expected to be held to maturity either These investments are adjusted to fair value with the unrealized gain or loss included in comprehensive income 54 Consolidation method :: Used when an investor has controlling influence and Held-to-maturity securities :: This category is not used for equity investments and Available-for-sale securities :: Used when an investor has insignificant influence and does not expect to sell in the near future and Equity method :: Used when an investor has significant, but not controlling influence and Trading securities :: Used when an investor expects to sell in the near future 55 Held-to-maturity securities :: This category is used only for debt securities and Equity method :: An investor owns 40% of the common voting shares in the company and can exercise significant influence and Available-for-sale securities :: Common stock not held for immediate resale and the investor owns 2% of the outstanding shares and Consolidation method :: An investor owns over 50% of the common voting shares in the company and Trading securities :: Common stock held for immediate resale App_D Summary Category # of Questions AACSB: Analytic 16 AACSB: Reflective Thinking 39 AICPA: Critical Thinking 14 AICPA: Measurement 19 AICPA: Reporting 22 Blooms: Analysis 12 Blooms: Application Blooms: Comprehension 25 Blooms: Knowledge 14 Difficulty: Easy 13 Difficulty: Hard Difficulty: Medium 33 Learning Objective: AppD-01 Explain why companies invest in other companies Learning Objective: AppD-02 Account for investments in equity securities when the investor has insignificant 19 influence Learning Objective: AppD-03 Account for investments in equity securities when the investor has significant influence 11 Learning Objective: AppD-04 Account for investments in equity securities when the investor has controlling influence Learning Objective: AppD-05 Account for investments in debt securities 18 Spiceland - Appendix D 55 ... recorded as dividend revenue True False 15 Consolidated financial statements combine the separate financial statements of the purchasing company and the acquired company into a single set of financial. .. Earning interest revenue Deducting dividend payments for tax purposes 22 One of the primary reasons for investing in debt securities includes: A B C D Receiving dividend payments Acquiring significant... method to account for an investment in stock? Explain how we record dividends received from an investment in a company accounted for using the equity method 52 Discuss the meaning of consolidated