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Exam 15:Investments

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Question 41

Multiple Choice

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Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semiannually. The journal entry to record the purchase would be

A) debit Investment-Evans Company Bonds, $101,500; credit Cash, $101,500
B) debit Investment-Evans Company Bonds, $100,000; credit Interest Revenue, $1,500, and Cash, $98,500
C) debit Investment-Evans Company Bonds, $100,000, and Interest Receivable $1,500; credit Cash $101,500
D) debit Investment-Evans Company Bonds, $100,000; credit Cash $100,000

E) B) and D)
F) None of the above

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Question 42

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Held-to-maturity securities are reported on the balance sheet at fair value.

A) True
B) False

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Question 43

Multiple Choice

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Held-to-maturity securities

On January 1, the Valuation Allowance for Trading Investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000. ​ Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments.

Changes in the value of available-for-sale securities

GAAP requires trading and available-for-sale investments to be reported

When a bond is purchased for an investment, the purchase price, minus the brokerage commission, plus any accrued interest is recorded.

During the first year of operations, Makala Company purchased two trading investments as follows: ​ $\begin{array}{|l|c|r|}\hline \text { Security } & \text { Shares Purchased } &{\text { Cost }} \\\hline \text { Oceanna Company } & 700 & \$ 29,000 \\\hline \text { Rockledge, Inc. } & 1,900 & 41,000 \\\hline\end{array}$ ​ Assume that as of December 31, the Oceanna Company stock had a market value of $49 per share and Rockledge, Inc. stock had a market value of $20 per share. Makala had 10,000 shares of no-par stock outstanding that was issued for $150,000. For the year ending December 31, Makala had net income of $105,000. No dividends were paid. ​ (a) Frepare the current assets section of the balance sheet presentation for the trading securities as of December 31. (b) Explain how the gain or loss would be reported on the income statement. ​

Journalize the entries to record the following selected equity investment transactions completed by Perry Company during the current year. Perry accounts for this investment using the fair value method. ​

Define debt securities and equity securities. Include their similarities and differences in your discussion.

The investor carrying an investment by the equity method records cash dividends received as an increase in the carrying amount of the investment.

Ruben Company purchased $100,000 of Evans Company bonds at 100. Ruben later sold the bonds at $104,500 plus $500 in accrued interest. The journal entry to record the sale of the bonds would be

Prepare the journal entries for the following transactions for Batson Co. (a) Batson Co. purchased 1,200 shares of the total of 100,000 outstanding shares of Michael Corp. stock for $\$ 20.75$ per share plus a $\$ 70$ commission. (b) Michael's total earnings for the period are $\$ 84,000$ . (c) Michael's paid a total of $\$ 40,000$ in cash dividends to sharehol ders of record.

Trading securities are

An equity investment in less than 20% of another company's stock is accounted for using the fair value method.

On March 1, Year 1, Chase Inc. purchases 35% of the outstanding shares of Glory Corporation stock for $325,000. On December 31, Year 1, Glory reports net income of $162,000. On January 15, Year 2, Glory pays total dividends to stockholders of $33,000. Journalize the three transactions.

It is not possible for one company to influence the operating policies of another company unless it owns more than 50% interest in that company.

The corporation owning all or a majority of the voting stock of another corporation is known as the parent company.

As with other assets, the cost of a bond investment includes all costs related to the purchase.

On January 2, Todd Company acquired 40% of the outstanding stock of McGuire Company for $205,000. For the year ending December 31. McGuire earned income of $48,000 and paid dividends of $14,000. ​ Prepare the entries for Todd Company for the purchase of the stock, share of McGuire income, and dividends received from McGuire.