Chapter 12 Investments

1. Corporations invest excess cash for short periods of time in each of the following except
a. equity securities.
b. highly liquid securities.
c. low-risk securities.
d. government securities.

2. Corporations invest in other companies for all of the following reasons except to
a. house excess cash until needed.
b. generate earnings.
c. meet strategic goals.
d. increase trading of the other companies’ shares.

3. A typical investment to house excess cash until needed is

a. shares of companies in a related industry.
b. debt securities.
c. low-risk, highly liquid securities.
d. share securities.

4. A company may purchase a noncontrolling interest in another firm in a related industry

a. to house excess cash until needed.
b. to generate earnings.
c. for strategic reasons.
d. for speculative reasons.

5. Pension funds and mutual funds regularly invest in debt and share securities to
a. generate earnings.
b. house excess cash until needed.
c. meet strategic goals.
d. control the company in which they invest.

6. The cost of debt investments includes each of the following except

a. brokerage fees.
b. commissions.
c. accrued interest.
d. the price paid.
7. If a short-term debt investment is sold, the Investment account is
a. credited for the book value of the bonds at the sale date.
b. credited for the cost of the bonds at the sale date.
c. credited for the fair value of the bonds at the sale date.
d. debited for the cost of the bonds at the sale date.
8. In accounting for debt investments, entries are made for each of the following except the
a. acquisition.
b. interest revenue.
c. amortization of any discount or premium.
d. sale.
Now
9. Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for €60,000.
The journal entry to record the purchase of this investment will be

Dr. Debt investments 60,000

Cr. Cash 60,000

10. Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for
€60,000. Assume Community pays interest on January 1 and July 1, and the July 1 entry was
done correctly. The journal entry at December 31, 2011 would be 60*1000*6/12 = 3000

Dr. Interest receivable 3000

Cr. interest revenue 3000

11. Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for
€60,000. If Barr sells all of its Community bonds for €62,500 and pays €1,500 in brokerage
commissions, what gain or loss is recognized?

Cost = 60,000….net proceeds = 62,500-1,500 = 61,000

Gain = 1000
12. Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for
€61,250. This includes a brokerage commission of €1,250. The journal entry to record this
investment includes a debit to

a. Debt Investments for €60,000.

b. Debt Investments for €61,250.
c. Cash for €61,250.
d. Share Investments for €60,000.

13. Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for
€61,250. This includes a brokerage commission of €1,250. Assume Community pays interest
on January 1 and July 1, and the July 1 entry was done correctly. The journal entry at
December 31, 2011 would include a credit to

a. Interest Receivable for €3,000.

b. Interest Revenue for €6,000.
c. Accrued Expense for €6,000.
d. Interest Revenue for €3,000.

14. Barr Company acquires 60, 10%, 5 year, €1,000 Community bonds on January 1, 2011 for
€61,250. This includes a brokerage commission of €1,250. If Barr sells all of its Community
 bonds for €62,500 and pays €1,500 in brokerage commissions, what gain or loss is
recognized?

Net proceeds = 62500-1500 = 61000…cost = 61250 ….

a. Gain of €2,500
b. Loss of €250
c. Gain of €250
d. Gain of €1,250

15. Winrow Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage fees of
$500. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1
semiannual interest payment would include a 50,000*6%*6/12=1500
a. debit to Interest Receivable for $1,500.
b. credit to Interest Revenue for $1,500.
c. credit to Interest Revenue for $1,515.
d. credit to Debt Investments for $1,515.

16. Winrow Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage fees of
$500. Interest is payable semiannually on July 1 and January 1. The entry to record the
December 31 interest accrual would include a
a. debit to Interest Receivable for $1,500.
b. debit to Interest Revenue for $1,500.
c. credit to Interest Revenue for $1,515.
d. debit to Debt Investments for $1,500.
17. Tolan Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage fees of $600.
Interest is payable semiannually on July 1 and January 1. If 30 of the securities are sold on
July 1 for $32,000 less $300 brokerage fees, the entry would include a credit to Gain on Sale
of Debt Investments for
Cost = 60600 *30/60= 30300…net proceeds = 32000-300 = 31700…1400
a. $2,000.
b. $1,700.
c. $2,300.
d. $1,400.

18. On January 1, Burkett Company purchased as an investment a $1,000, 7% bond for $1,020. The
bond pays interest on January 1 and July 1. What is the entry to record the interest accrual
on December 31? 1,000 *7%*6/12 = 35
a. Interest Receivable........................................................................ 35
Interest Revenue ................................................................. 35
b. Debt Investments ......................................................................... 35
Interest Revenue ................................................................. 35
c. Interest Receivable........................................................................ 70
Interest Revenue ................................................................. 70
d. Debt Investments ......................................................................... 70
Interest Revenue ................................................................. 70
Q: On January 1, 2011, Garner Corporation purchased 10% of the ordinary shares outstanding of
Landon Corporation for $250,000. During 2011, Landon Corporation reported net income of
$80,000 and paid cash dividends of $40,000.
- The entry to record the purchase of 10% ownership interest would be
Dr. share investments-Landon 250,000
Cr. Cash 250,00
- The amount of dividends that Garner would receive would be 10% *40,000 =4,000.

19. Osaka Co. acquired a 20,000 shares of Chen Corp. 200,000 outstanding ordinary shares on
December 31, 2010 for HK$1,000,000. During 2011, Chen had net income of HK$600,000
and paid cash dividends of HK$150,000.
19.1 the Osaka’s percentage of ownership interest would be 20,000/200,000 = 10%.

19.2 the entry to record the acquisition of 20,000 shares would be

Dr. share investments-chen 1,000,000
Cr. Cash 1,000,000

19.3 the entry to record the receipt of dividends 10% *150,000 = $15,000
Dr. cash 15,000
Cr. Dividends revenue 15,000
19.4 Osaka's 2011 income statement will report
a. dividend income of HK$15,000.
b. investment income of HK$45,000.
c. investment income of HK$60,000.
d. cannot be determined from the information given.

19.5 if Osaka sells 5,000 shares of Chen Corp. for HK$ 51 per share. The entry to record this sale
will be

Dr. cash (5,000*$51) 255,000

Cr. Share investment-chen (1,000,000 *5,000/20,000) 250,000

Cr. Gain on sale of share investments 5,000

20. Elston Corporation sells 200 ordinary shares being held as an investment. The shares were
acquired six months ago at a cost of $30 a share. Elston sold the shares for $40 a share. The
entry to record the sale is
a. Cash............................................................................................... 6,000
Loss on Sale of Share Investments ................................................ 2,000
Share Investments .............................................................. 8,000
b. Share Investments ........................................................................ 8,000
Cash .................................................................................... 8,000
c. Cash............................................................................................... 8,000
Gain on Sale of Share Investments ..................................... 2,000
Share Investments .............................................................. 6,000
d. Cash................................................................................................. 8,000
Gain on Sale of Debt Investments ....................................... 2,000
Share Investments .............................................................. 6,000
21. Decker Corporation purchased 1,000 ordinary shares of Kent at $75 per share plus $3,000
brokerage fees as a short-term investment. The shares were subsequently sold at $80 per
share less $3,400 brokerage fees. The cost of the securities purchased and gain or loss on
the sale were
Cost Gain or Loss
a. $75,000 $5,000 gain
b. $75,000 $1,400 loss
c. $78,000 $2,000 gain
d. $78,000 $1,400 loss

22. In accounting for share investments less than 20%, the _______ method is used.
a. consolidated statements
b. controlling interest
c. cost
d. equity

23. When a company holds shares of several different corporations, the group of securities is
identified as a(n)

a. affiliated investment.
b. consolidated portfolio.
c. investment portfolio.
d. controlling interest.

24. If an investor owns less than 20% of the ordinary shares of another corporation as a long-term
investment,

a. the equity method of accounting for the investment should be employed.

b. no dividends can be expected.
c. it is presumed that the investor has relatively little influence on the investee.
d. it is presumed that the investor has significant influence on the investee.
25. If 10% of the ordinary shares of an investee company is purchased as a long-term investment,
the appropriate method of accounting for the investment is

a. the cost method.

b. the equity method.
c. the preparation of consolidated financial statements.
d. determined by agreement with whomever owns the remaining 90% of the shares.
**************************************************

Q: Basil Corporation purchased 25,000 ordinary shares of Dana Corporation 100,000 shares of
ordinary shares outstanding for €40 per share on January 2, 2011. During 2011, Dana paid
cash dividends of €60,000, and reported net income of €200,000.

1. What is Basil’s percentage of ownership interest in Dana Corporation? 25,000/100,000 = 25%

2. In accounting for share investments of 25% (20%-50%), the equity method is used.

3. The entry to record the purchase of 25,000 ordinary shares of Dana Corporation?
Dr. share investments-dana 1,000,000
Cr. Cash 1,000,000

4. the entry to record the 25% equity (ownership interest) in Dana corporation net income?
25%*200,000 = 50,000
Dr. share investments-dana 50,000
Cr. Revenue from share investments 50,000
4. the entry to record the dividends received by Basil Corporation would be 25%*60,000 = 15,000
Dr. Cash 15,000
Cr. Share investments-Dana 15,000
5. Assuming no other transactions, what is the balance in share investments-Dana of Basil
corporation on December 31, 2011?
Share Investments- Dana
Dr Cr.
.
Jan.2 15,000
1,000,000
50,000
1,035,000

1,000,000+ [25%*(200,000-60,000)] = 1,035,000.

26. Huang Company owns 20,000 of the 50,000 outstanding ordinary shares of Xi Inc. The
balance in the investment account at January 1, 2012 was ¥500,000,000. During 2012, Xi
earned ¥800,000,000 and paid cash dividends of ¥640,000,000.

26.1. The balance in the Investment in Xi account reported on Huang’s December 31, 2012
statement of financial position should be (20000/50000= 40%)
500,000,000 +[40%(800,000,000-640,000,000)] = 564,000,000
a. ¥820,000,000.
b. ¥660,000,000.
c. ¥564,000,000.
d. ¥500,000,000.

26.2. Huang should report investment revenue for 2012 of 40%*800,000,000= 320,000,000
a. ¥320,000,000.
b. ¥256,000,000.
c. ¥64,000,000.
d. ¥0.

27. Mouns Company owns 30% interest in the shares of Darian Corporation. During the year, Darian
pays $20,000 in dividends to Mouns, and reports $100,000 in net income. Mouns Company’s
investment in Darian will increase Mouns’ net income by 30%*100,000 =

a. $15,000.
b. $30,000.
c. $24,000.
d. $6,000.

28. Nance Company owns 30% interest in the shares of Finley Corporation. During the year, Finley
pays $25,000 in dividends, and reports $100,000 in net income. Nance Company’s
investment in Finley will increase by 30%*(100,000-25,000) = 22,500

a. $25,000.
b. $30,000.
c. $24,000.
d. $22,500.

29. On January 1, 2011, Garner Corporation purchased 25% of the ordinary shares outstanding of
Landon Corporation for $250,000. During 2011, Landon Corporation reported net income of
$80,000 and paid cash dividends of $40,000. The balance of the Share Investments—Landon
account on the books of Garner Corporation at December 31, 2011 is

250,000 +[25%*(80,000-40,000)]= 260,000

a. $250,000.
b. $290,000.
c. $330,000.
d. $260,000.
Q: On January 1, 2011, Garner Corporation purchased 15% of the ordinary shares outstanding of
Landon Corporation for $250,000. During 2011, Landon Corporation reported net income of
$80,000 and paid cash dividends of $40,000. The balance of the Share Investments—Landon
account on the books of Garner Corporation at December 31, 2011 is

a. $250,000.
b. $290,000.
c. $330,000.
d. $260,000.

30. In accounting for share investments between 20% and 50%, the _______ method is used.
a. consolidated statements
b. controlling interest
c. cost
d. equity

31. When an investor owns between 20% and 50% of the ordinary shares of a corporation, it is
generally presumed that the investor

a. has insignificant influence on the investee and that the cost method should be
used to account for the investment.
b. should apply the cost method in accounting for the investment.
c. will prepare consolidated financial statements.
d. has significant influence on the investee and that the equity method should be
used to account for the investment.

32. Under the equity method of accounting for long-term investments in ordinary shares, when a
dividend is received from the investee company,

a. the Dividend Revenue account is credited.

b. the Share Investments account is increased.
c. the Share Investments account is decreased.
d. no entry is necessary.

33. On January 1, 2011, Daley Corporation purchased 30% of the ordinary shares outstanding of King
Corporation for $600,000. During 2011, King Corporation reported net income of $200,000
and paid cash dividends of $100,000. The balance of the Share Investments—King account
on the books of Daley Corporation at December 31, 2011 is
a. $600,000.
b. $630,000.
c. $660,000.
d. $570,000.

34. Under the equity method, the Share Investments account is increased when the
a. investee company reports net income.
b. investee company pays a dividend.
c. investee company reports a loss.
d. share investment is sold at a gain.
35. Revenue is recognized when cash dividends are received under
a. the controlling interest method.
b. the cost method.
c. the equity method.
d. both the cost and equity methods.

36. If a company acquires a 40% ordinary share interest in another company,

a. the equity method is usually applicable.

b. all influence is classified as controlling.
c. the cost method is usually applicable.
d. the ability to exert significant influence over the activities of the investee does not
exist.

37. If an ordinary share investment is sold at a gain, the gain

a. is reported as operating revenue.
b. is reported under a special section, "Discontinued investments," on the income
statement.
c. is reported in the Other income and expense section of the income statement.
d. contributes to gross profit on the income statement.

38. If the equity method is being used, cash dividends received

a. are credited to Dividend Revenue.
b. require no entry because investee net income has already been recorded at the
proper proportion on the investor's books.
c. are credited to the Share Investments account.
d. are credited to the Revenue from Investment account.

39. Lanier industries owns 45% of McCoy Company. For the current year, McCoy reports net income
of $250,000 and declares and pays a $60,000 cash dividend. Which of the following correctly
presents the journal entries to record Lanier's equity in McCoy's net income and the receipt
of dividends from McCoy?
a. Dec. 31 Share Investments.......................................... 112,500
Revenue from Investment in McCoy
Company .................................................... 112,500
Dec. 31 Cash................................................................. 27,000
Share Investments.......................................... 27,000

b. Dec. 31 Share Investments........................................... 112,500

Revenue from Investment in McCoy
Company ..................................................... 112,500
Dec. 31 Cash.................................................................. 60,000
Share Investments........................................... 60,000
c. Dec. 31 Share Investments.......................................... 85,500
Revenue from Investment in McCoy
Company..................................................... 85,500
 d. Dec. 31 Revenue from Investment in
McCoy Company....................................... 112,500
Share Investments...................................... 112,500
Dec. 31 Share Investments........................................... 27,000
Cash.............................................................. 27,000

40. On January 1, 2011, Bartley Corp. paid $800,000 for 100,000 ordinary shares of Oak Company,
which represents 40% of Oak's outstanding shares. Oak reported net income of $200,000
and paid cash dividends of $60,000 during 2011. Bartley should report the investment in Oak
Company on its December 31, 2011, statement of financial position at:

a. $800,000
b. $744,000
c. $824,000
d. $856,000

41. Consolidated financial statements are prepared when a company owns _________ of the
ordinary shares of another company.

a. less than 20%

b. between 20% and 50%
c. less than 50%
d. more than 50%

42. The company whose shares are owned by the parent company is called the

a. controlled company.
b. subsidiary company.
c. investee company.
d. sibling company.

43. A company that owns more than 50% of the ordinary shares of another company is known as the

a. charge company.
b. subsidiary company.
c. parent company.
d. management company.

44. When a company owns more than 50% of the ordinary shares of another company,

a. affiliated financial statements are prepared.

b. consolidated financial statements are prepared.
c. controlling financial statements are prepared.
d. significant financial statements are prepared.
LUAY

45. Short-term investments are listed on the statement of financial position immediately above

a. cash.
b. inventory.
c. accounts receivable.
d. prepaid expenses.

46. Short-term share investments should be valued on the statement of financial position at

a. the lower of cost or fair value.

b. the higher of cost or fair value.
c. cost.
d. fair value.

47. Which of the following would not be reported under "Other income and expense" on the income
statement?

a. Unrealized gain or loss on non-trading securities

b. Dividend revenue
c. Interest revenue
d. Gain on sale of short-term debt investments

48. At the end of its first year, the fair value of trading securities consisted of the following ordinary
shares.
Cost Fair Value
Able Corporation $ 46,400 $ 50,000
Benes Inc. 60,000 55,800
Cole Corporation 80,000 76,000
$186,400 $181,800
48.1 The unrealized loss to be recognized under the fair value method is
181,800-186,400 = -4,600
a. $4,200.
b. $8,200.
c. $4,600.
d. $4,000.
48.2. the adjusting entry to record securities at fair value would be
Dr . Unrealised Loss-Income 4,600
Cr. Fair Value Adjustment-Trading 4,600
Q: At the end of the first year of operations, the total cost of trading securities portfolio is $244,000.
Total fair value is $250,000. The adjusting entry to record trading securities at fair value
would be

Dr. FVA-Trading 6,000

Cr. Unrealised Gain-Income 6,000

Q: At the end of the first year of operations, the total cost of non-trading securities portfolio is
$244,000. Total fair value is $250,000. The adjusting entry to record non-trading securities
at fair value would be

Dr. FVA-Non-Trading 6,000

Cr. Unrealised Gain or Loss-Equity 6,000

49. At the end of the first year of operations, the total cost of the trading securities portfolio is
$244,000. Total fair value is $250,000. The financial statements should show

a. an addition to an asset of $6,000 and a realized gain of $6,000.

b. an addition to an asset of $6,000 and an unrealized gain of $6,000 in the equity
section.
c. an addition to an asset of $6,000 in the current assets section and an unrealized
gain of $6,000 in “Other income and expense.”
d. an addition to an asset of $6,000 in the current assets section and a realized gain
of $6,000 in “Other income and expense.”

50. Short-term investments are securities that are readily marketable and intended to be converted
into cash within the next

a. year.
b. two years.
c. year or operating cycle, whichever is shorter.
d. year or operating cycle, whichever is longer.

51. non-trading securities are classified as

a. short-term investments only.

b. long-term investments only.
c. either short-term or long-term investments.
d. current assets only.