chapter 16 EXTRA PRACTICE

Question 1

If a firm has an unrealized loss on available-for-sale securities, where is the most appropriate place to report this loss?

Answer 1

ON THE BALANCE SHEET UNDER STOCKHOLDERS EQUITY

Question 2

If a firm has an unrealized gain on trading securities, where would be the most appropriate place to report this gain?

Answer 2

in the income statement under “Other revenues and gains”

Question 3

Short-term investments are reported at ________, just ________ Cash in the “Current Assets” section of a firm’s balance sheet.

Answer 3

FAIR VALUE; BELOW

Question 4

SHORT TERM INVESTMENTS ARE

Answer 4

(1) readily marketable and (2) intended to be converted into cash within the current year or operating cycle, whichever is longer.

Question 5

n December 31, 2017, Dunston Co. has the following investments that are classified as available-for-sale securities:

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The amount of the unrealized gain or loss would be reported on the income statement as a

Answer 5

No unrealized loss or gain is reported on the income statement.

Question 6

Securities bought and held primarily for sale in the near term to generate income on short-term price differences are

Answer 6

TRADING SECURITIES

Question 7

On January 2, Matthews Corporation acquired 20% of the outstanding common stock of Dernier Company for $700,000. For the year ended December 31, Dernier reported net income of $180,000 and paid cash dividends of $60,000 on its common stock. At December 31, the carrying value of Matthews’ investment in Dernier under the equity method is

Answer 7

724,000

Question 8

When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as

Answer 8

a deduction from the investment account.

Question 9

On January 1, 2016, Moreland Company bought 15% of Lopes Corporation’s common stock for $30,000. Lopes’s net income was $10,000 in 2016 and $50,000 in 2017. During 2017, Lopes paid a cash dividend of $70,000. How much should Moreland show on its 2017 income statement as income from this investment under the cost method?

Answer 9

10,500

Question 10

Which of the following firms is investing for strategic reasons?

Answer 10

A firm purchases 20% of the outstanding common stock of another corporation which is one of its suppliers.

Question 11

Sutcliff Company acquires 100 Trout Inc. 10%, semiannual, 20-year, $1,000 bonds on January 1, 2016, for $106,000, plus brokerage fees of $2,000. Sutcliff receives net proceeds of $103,000 on the sale of the Trout Inc. bonds on January 1, 2017, after receiving the interest due. The entry to record the sale would include

Answer 11

A DEBIT TO LOSS ON SALE OF DEBIT INVESTMENTS OF 5,000

Question 12

Sutcliff Company acquires 100 Trout Inc. 10%, semiannual, 20-year, $1,000 bonds on January 1, 2016, for $106,000, plus brokerage fees of $2,000. The entry for the receipt of interest on July 1 includes a credit to Interest Revenue of

Answer 12

5,000

Question 13

Sutcliff Company acquires 100 Trout Inc. 10%, semiannual, 20-year, $1,000 bonds on January 1, 2016, for $106,000, plus brokerage fees of $2,000. The entry to record the investment includes a debit to Debt Investments of

Answer 13

108,000

Question 14

The interest revenue earned on bond investments is recorded under “other revenues and gains” on the income statement.

Answer 14

TRUE

Question 15

Which of the following are securities bought and held primarily for sale in the near term to generate income on short-term price differences?

Answer 15

TRADING SECURITIES

Question 16

When used to describe investments,

means frequent buying or selling.

Answer 16

TRADING

Question 17

Short-term investments are securities that are readily marketable and intended to be converted into cash within which of the following time periods?

Answer 17

within the next year or operating cycle, whichever is longer

Question 18

_____ securities are bought and held primarily for sale in the near term to generate income on short-term price differences.

Answer 18

AVAILABLE FOR SALEE

Question 19

Which of the following only applies to debt securities?

Answer 19

HELD-TO-MATURITY

Question 20

Readily marketable is the term used to describe those stocks traded on the New York Stock Exchange.

Answer 20

TRUE

Question 21

With the exception of the fact that changes in fair value are not recognized in current income, the valuation of available-for-sale securities is similar to the procedures followed for trading securities.

Answer 21

TRUE

Question 22

Which of the following journal entries would be made when a firm collects bond interest revenue accrued in the preceding accounting period?

Answer 22

a debit to Cash and a credit to Interest Receivable

Question 23

The unrealized gain or loss account is carried forward to future periods for available-for-sale securities.

Answer 23

TRUE

Question 24

How are short-term stock investments valued on the balance sheet?

Answer 24

AT FAIR VALUE

Question 25

The balance in the Unrealized Gain or Loss—Equity account will

Answer 25

APPEAR IN THE STOCKHOLDERS EQUITY SECTION

Question 26

Which of the following is true of the Fair Value Adjustment account?

Answer 26

It is carried forward into future accounting periods.

Question 27

A company that experiences seasonal sales fluctuations typically chooses to invest in debt or stock securities because

Answer 27

it has excess cash that is not immediately needed to purchase operating assets.

Question 28

Which of the following statements accurately describes short-term debt investments?

Answer 28

When recording these investments, a firm should include both the price paid and any brokerage fees.

Question 29

When a firm realizes a loss on the sale of bonds,

Answer 29

it should record a debit to Loss on Sale of Debt Investments.

Question 30

Which of the following statements about short-term investments is true?

Answer 30

TRADING SECURITIES ARE ALWAYS CLASSIFIED AS SHORT-TERM INVESTMENTS