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Exam 14: Investments

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Question 1

Multiple Choice

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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) $200,000.
B) $194,758.
C) $242,000.
D) Cannot be determined from the given information.

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B

Question 2

Multiple Choice

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Consolidated financial statements are prepared when one company has:

A) Accounted for the investment using the equity method.
B) Accounted for the investment as available-for-sale securities.
C) Control over another company.
D) None of these is correct.

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Question 3

True/False

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Bond investments are long-term assets that earn interest revenue, while bonds payable are long-term liabilities that incur interest expense.

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.

When the investor has insignificant influence, the receipt of cash dividends is recorded as dividend revenue.

The equity method of accounting for investments in voting common stock is appropriate when:

One of the primary reasons for investing in debt securities includes:

Under what circumstances do 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.

Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet?

When significant influence exists, the investment should be accounted for by the equity method.

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?

Because the carrying value of bonds purchased at a discount increases over time, interest revenue will also increase each semi-annual interest period.

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?

Investments are reported at fair value when a company has an insignificant influence over another company in which it invests.

The primary difference in accounting for available-for-sale securities and accounting for trading securities is:

Because the carrying value of bonds purchased at a premium increases over time, interest revenue will also increase each semi-annual interest period.

Interest revenue is calculated as the carrying value of the investment in bonds times the stated interest rate.

Seasonal refers to the revenue activities of a company varying based on the time (or season) of the year.

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: 1. Record each of these transactions, including the December 31 adjustment to fair value. 2. Calculate the balance of the Investments account on December 31.

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. 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2012.