1. Corporations invest in other companies for all of the following reasons except to

1.  Corporations invest in other companies for all of the following reasons except to

house excess cash until needed. 

increase trading of the other companies' stock. 

generate earnings. 

meet strategic goals.

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

debt securities. 

stock securities. 

low-risk, highly liquid securities. 

stocks of companies in a related industry.

3.  Pension funds and mutual funds regularly invest in debt and stock securities to

control the company in which they invest. 

generate earnings. 

house excess cash until needed. 

meet strategic goals.

4.  On January 1, 2008, Turner Company purchased at face value, a $1,000, 7% bond that pays interest on January 1 and July 1. Turner Company has a calendar year end.

The entry for the receipt of interest on July 1, 2008, is:

A.   Cash.............. 35 

      Interest Revenue    35 

B.  Cash......................... 70 

      Interest Revenue............... 70 

C.  Interest Receivable.......... 35 

      Interest Revenue................... 35 

D.  Interest Receivable............ 70 

        Interest Revenue..................... 70

b 

a       

c 

d

5.  If a short-term debt investment is sold, the Investment account is

credited for the fair value of the bonds at the sale date. 

credited for the book value of the bonds at the sale date. 

debited for the cost of the bonds at the sale date. 

credited for the cost of the bonds at the sale date.

6.  Steven Co. purchased 30, 6% Johnston Company bonds for $30,000 cash plus brokerage fees of $300. Interest is payable semiannually on July 1 and January 1. The entry to record the December 31 interest accrual would include a

debit to Interest Revenue for $900. 

debit to Interest Receivable for $900.     

credit to Interest Revenue for $909. 

debit to Debt Investments for $900.

7.  If an investor owns less than 20% of the common stock of another corporation as a long-term investment,

it is presumed that the investor has significant influence on the investee. 

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

it is presumed that the investor has relatively little influence on the investee. 

no dividends can be expected.

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

are credited to the Stock Investments account. 

are credited to the Revenue from Investment in Stock account. 

are credited to Dividend Revenue. 

require no entry because investee net income has already been recorded at the proper proportion on the investor's books.

9.  If one company owns more than 50% of the common stock of another company,

the cost method should be used to account for the investment. 

the company whose stock is owned must be liquidated. 

a partnership exists. 

a parent-subsidiary relationship exists.

10.  The contra-account, Market Adjustment, is also called a(n)

opposite account. 

valuation account.

 offset account. 

adjustment account.

11.  The balance in the Unrealized Loss—Equity account will

not be shown on the financial statements until the securities are sold. 

appear on the balance sheet as a contra asset. 

appear on the income statement under Other Expenses and Losses. 

appear as a deduction in the stockholders' equity section.

12.  If the cost of an available-for-sale security exceeds its fair value by $40,000, the entry to recognize the loss

will show a credit to a contra-asset account that appears in the stockholders' equity section of the balance sheet. 

will show a debit to an unrealized loss account that is deducted in the stockholders' equity section of the balance sheet. 

is not required since the share prices will likely rebound in the long run. 

will show a debit to an expense account.

13.  Which of the following is a major difference when accounting for long-term debt investments versus short-term debt investments?

When selling long-term investments, no gain or loss is recognized. 

At the end of the year, any unrealized gain or loss on long-term debt investments must be recognized in the stockholders' equity section of the balance sheet. 

Interest revenue is not recognized for long-term investments. 

For short-term investments, bond premium or discount is not amortized to interest revenue.

14.  A company that acquires less than 20% ownership interest in another company should account for the stock investment in that company using

the equity method. 

the cost method. 

the significant method. 

consolidated financial statements.

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

available-for-sale securities. 

never-sell securities. 

trading securities. 

held-to-maturity securities.