APPENDIX: TEST BANK

REPORTING AND ANALYZING INVESTMENTS

APPENDIX LEARNING OBJECTIVES

1. Explain how to account for debt investments. Corporations invest for three common reasons: (a) They have excess cash. (b) They view investment income as a significant revenue source, and (c) They have strategic goals such as gaining control of a competitor or supplier or moving into a new line of business.

Entries for investments in debt securities are required when companies purchase bonds, receive or accrue interest, and sell bonds.

2. Explain how to account for stock investments. Entries for investments in common stock are required when companies purchase stock, receive dividends, and sell stock. When ownership is less than 20%, the cost method is used–the investment is recorded at cost. When ownership is between 20% and 50%, the equity method should be used–the investor records its share of the net income of the investee in the year it is earned. When ownership is more than 50%, consolidated financial statements should be prepared.

When a company owns more than 50% of the common stock of another company, consolidated financial statements are usually prepared. These statements are especially useful to the stockholders, board of directors, and management of the parent company.

3. Discuss how debt and stock investments are reported in the financial statements. Investments in debt securities are classified as trading, available-for-sale, or held-to-maturity for valuation and reporting purposes. Trading securities are reported as current assets at fair value, with changes from cost reported in net income. Available-for-sale securities are also reported at fair value, with the changes from cost reported as items of other comprehensive income. Available-for-sale securities are classified as short-term or long-term depending on their expected realization.

Short-term investments are securities held by a company that are readily marketable and intended to be converted to cash within the next year or operating cycle, whichever is longer. Investments that do not meet both criteria are classified as long-term investments.

Difficulties:

Easy: 123

Medium: 87

Hard: 2

Question List by Section

Accounting for Debt Investments

Why Corporations Invest: 1, 2, 3, 4, 5, 41, 42, 44, 45, 46, 47, 190, 203

Accounting for Debt Investments: 6, 7, 8, 10, 43, 48, 191

Recording Acquisition of Bonds: 49, 52, 56, 62, 72, 74, 75, 169, 175, 176

Recording Bond Interest: 50, 53, 54, 55, 57, 58, 59, 60, 61, 63, 64, 68, 69, 70, 175, 176

Recording Sale of Bonds: 9, 51, 65, 66, 67, 71, 73, 175, 176

Accounting for Stock Investments: 82, 85, 125, 126, 180, 181

Holdings of Less than 20%: 94, 97, 98, 99, 102, 117, 118, 194, 206

Recording Acquisition of Stock: 75, 76, 83, 84, 90, 92, 170, 171, 172, 177, 178, 182, 183

Recording Dividends: 11, 16, 17, 91, 93, 95, 96, 107, 110, 170, 171, 172, 177, 178, 182, 183

Recording Sale of Stock: 75, 77, 86, 87, 88, 89, 120, 124, 129, 170, 171, 177, 178, 182, 183

Holdings Between 20% and 50%: 13, 14, 18, 23, 78, 79, 80, 81, 100, 101, 103, 104, 105, 106, 108, 109, 111,112, 113, 114, 115,116, 119, 121, 122, 123, 127, 128,192, 193, 204, 205, 206

Recording Acquisition of Stock: 19, 20, 173, 185

Recording Revenue and Dividends: 12, 15, 21, 22, 173, 185

Holdings of More than 50%: 24, 25, 26, 130, 131, 132, 133, 134, 135, 136, 195, 207

Reporting Investments in Financial Statements: 28, 139, 142, 143, 186, 187, 188, 211

Debt Securities: 152

Trading Securities: 30, 32, 36, 138, 140, 141, 156, 158, 196

Available-for-Sale Securities: 27, 148, 149, 157, 160

Equity Securities: 162

Illustration of Stock Holdings Less than 20%: 144, 145, 146, 147, 154, 155, 174, 179, 184

Balance Sheet Presentation

Short-term Investments: 37, 38, 39, 40, 137, 163, 164, 165, 166, 167, 168, 201

Long-term Investments: 207, 211

Presentation of Realized and Unrealized Gain or Loss: 29, 31, 33, 34, 35, 139, 150, 151, 153, 156, 159, 161, 189, 197, 198, 199, 200, 208, 209, 210, 212

TRUE-FALSE STATEMENTS

1. Corporations purchase investments in debt or equity securities generally for several reasons.

2. A reason some companies purchase investments is because they generate a significant portion of their earnings from investment income.

3. Avoiding takeover offers is a reason companies regularly invest.

4. Some companies attempt to generate investment income through speculative investments.

5. When investing excess cash for short periods of time, corporations invest in debt securities and stock securities.

6. Following the historical cost principle, brokerage fees should be added to the cost of a debt investment.

7. Under the historical cost principle, the cost of debt investments includes brokerage fees and accrued interest.

8. The accounting for short-term debt investments and long-term debt investments is similar.

9. When investments in bonds are sold, any difference between the sales price and the fair value of the bonds is recorded as a gain or loss.

10. Debt investments are investments in government and corporation bonds.

11. Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

12. Dividends received on investments are accounted for in the same way under the cost and the equity methods.

13. Unless there is evidence to the contrary, an investor owning 25% of the stock of an investee is assumed to have significant influence.

14. If the cost method is used to account for a stock investment, the Stock Investments account is increased by the amount of dividends received during the period.

15. Under the equity method the investor records a proportionate share of the investee’s income in the year when it is earned.

16. When the cost method is used to account for a stock investment, dividends received are accounted for as a reduction in the investment account.

17. Using the cost method of accounting for a stock investment, the journal entry to record the receipt of dividends involves a credit to Dividend Revenue.

18. If an investor owns between 20% and 50% of an investee's common stock, it is presumed that the investor has significant influence on the investee.

19. The Stock Investments account is debited at acquisition under both the equity method and cost method of accounting for investments in common stock.

20. Under the equity method, the investment in common stock is initially recorded at cost, and the Stock Investments account is adjusted at least annually.

21. Under the equity method, the receipt of dividends from the investee company increases the Stock Investments account.

22. Under the equity method, the receipt of dividends from the investee company results in a credit to the Dividend Revenue account.

23. In accounting for stock investments of less than 20%, the equity method is typically used.

24. Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

25. Consolidated financial statements should be prepared only when a subsidiary company has a controlling interest in the parent company.

26. Consolidated financial statements are appropriate when an investor controls an investee by ownership of more than 50% of the investee's common stock.

27. If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

28. The Fair Value Adjustment account can only have a credit balance or a zero balance.

29. Unrealized gains and losses are recognized on trading securities.

30. Trading securities are valued on the balance sheet at market value.

31. Unrealized gains and losses on available-for-sale securities are reported on the income statement.

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

33. An unrealized gain or loss on trading securities is reported as a separate component of stockholders' equity.

34. For available-for-sale securities, the unrealized gain or loss account is carried forward to future periods.

35. The account Fair Value Adjustment—Trading appears as a contra account in the income statement.

36. A decline in the fair value of a trading security is recorded by debiting an unrealized loss account and crediting the Fair Value Adjustment account.

37. To be classified as a short-term investment, the investment must be readily marketable and intended to be converted into cash within the next year or operating cycle.

38. An investment in short-term equity securities should be charged to a nominal account since the investment is temporary.

39. An investment is readily marketable if management intends to sell the investment.

40. Stocks traded on the New York Stock Exchange are considered readily marketable.

MULTIPLE CHOICE QUESTIONS

41. 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’ stock.

42. When investing excess cash for short periods of time, corporations primarily invest in

a. stocks of companies in a related industry.

b. debt securities.

c. low-risk, highly liquid securities.

d. stock securities.

43. In accounting for debt investments, companies make entries for each of the following except:

a. acquisition

b. interest revenue

c. sale

d. share of investee income

44. Banks and financial institutions often purchase debt securities to

a. house excess cash until needed.

b. generate earnings.

c. meet strategic goals.

d. improve their public image.

45. Which of the following is not a reason that corporations typically invest in debt or equity securities?

a. They have excess cash.

b. They want to generate earnings from interest and dividends.

c. They invest for strategic reasons.

d. They have excess payables.

46. Why do companies invest in debt and equity securities?

a. They have excess cash.

b. They want to generate earnings from investment income.

c. They invest for strategic reasons.

d. All of these are reasons why companies invest.

47. Which is not a strategic reason to invest?

a. There has been a change in the economic climate.

b. To establish a presence in a related industry.

c. To exercise some influence over a customer or supplier.

d. To enter a new industry without starting from scratch.

48. A company acquired fifty 4%, 7 year, convertible $1,000 bonds on January 1, 2025 for $65,000. The journal entry to record this investment includes a debit to

a. Cash for $50,000.

b. Debt Investments for $65,000.

c. Discount on Bonds Payable for $15,000.

d. Premium on Bonds Payable for $15,000.

49. Ace Company acquires 80 A1 Enterprise’s 10%, 5 year, $1,000 bonds on January 1, 2025 for $80,000. The journal entry to record this investment includes a debit to

a. Debt Investments for $88,000.

b. Debt Investments for $80,000.

c. Cash for $80,000.

d. Stock Investments for $80,000.

50. Ace Company acquires 80 A1 Enterprise’s 10%, 5 year, $1,000 bonds on January 1, 2025 for $80,000. Assume A1 Enterprise pays interest annually on January 1. Ace’s journal entry at December 31, 2025, would include a credit to

a. Interest Receivable for $4,000.

b. Interest Receivable for $8,000.

c. Interest Expense for $8,000.

d. Interest Revenue for $8,000.

51. Ace Company acquires 80 A1 Enterprise’s 10%, 5 year, $1,000 bonds on January 1, 2025 for $80,000. If Ace sells all of its A1 Enterprise’s Bonds for $78,900 what gain or loss is recognized?

a. Loss of $9,100

b. Loss of $1,100

c. Gain of $1,100

d. Gain of $9,100

52. At the time of acquisition of a debt investment

a. no journal entry is required.

b. the historical cost principle applies.

c. the Stock Investments account is debited when bonds are purchased.

d. the investment account is credited for its cost plus brokerage fees.

53. On January 1, 2025, the Acme Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1. Acme Company has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is

a. Cash 40

Interest Receivable 40

b. Cash 40

Interest Revenue 40

c. Interest Receivable 40

Cash 40

d. Interest Receivable 40

Interest Revenue 40

54. On January 1, 2025, the Acme Company purchased at face value, a $1,000, 4%, bond that pays interest on January 1. Acme Company has a calendar year-end. The adjusting entry on December 31, 2025, is

a. not required.

b. Cash 40

Interest Revenue 40

c. Interest Receivable 40

Interest Revenue 40

d. Interest Receivable 40

Debt Investments 40

55. On January 1, 2025, the Acme Company purchased at face value, a $1,000, 5%, bond that pays interest on January 1. Acme Company has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is

a. Cash 55

Interest Revenue 55

b. Cash 55

Interest Receivable 55

c. Cash 50

Interest Revenue 50

d. Cash 50

Interest Receivable 50

56. Suppose that on January 1, 2025, Target purchased at face value, a $1,000, 6%, bond that pays interest on January 1. Target has a calendar year-end. The entry on January 1, 2025, is

a. Cash 60

Interest Revenue 60

b. Debt Investments 1,000

Cash 1,000

c. Cash 1,000

Debt Investments 1,000

d. Interest Receivable 60

Interest Revenue 60

57. Suppose that on January 1, 2025, Target purchased at face value, a $1,000, 6%, bond that pays interest on January 1. Target has a calendar year-end. The adjusting entry on December 31, 2025, is

a. not required.

b. Cash 60

Interest Revenue 60

c. Interest Receivable 60

Interest Revenue 60

d. Interest Receivable 60

Debt Investments 60

58. On January 1, 2025, Target purchased at face value, a $1,000, 6%, bond that pays interest on January 1. Target has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is

a. Interest Receivable 60

Interest Revenue 60

b. Interest Receivable 60

Cash 60

c. Cash 60

Interest Revenue 60

d. Cash 60

Interest Receivable 60

59. On January 1, 2025, A1 Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. A1 has a calendar year-end. The entry on January 1, 2025, is

a. Debt investments 1,000

Cash 1,000

b. Cash 1,000

Interest Revenue 1,000

c. Interest Receivable 50

Interest Revenue 50

d. Cash 1,000

Debt Investments 1,000

60. On January 1, 2025, A1 Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. A1 has a calendar year-end. The adjusting entry on December 31, 2025, is

a. not required.

b. Cash 50

Interest Revenue 50

c. Interest Receivable 50

Interest Revenue 50

d. Interest Receivable 50

Debt Investments 50

61. On January 1, 2025, A1 Supply Company purchased at face value, a $1,000, 5%, bond that pays interest annually on January 1. A1 has a calendar year-end. The entry for the receipt of interest on January 1, 2026, is

a. Cash 50

Interest Revenue 50

b. Cash 50

Interest Receivable 50

c. Cash 55

Interest Revenue 55

d. Cash 55

Interest Receivable 55

62. Company A purchased 80, 5% Company B bonds for $80,000 cash. Interest is payable annually on January 1. The entry to record the purchase would include a debit to

a. Debt Investments for $82,000.

b. Cash for $84,000.

c. Debt Investments for $80,000.

d. Stock Investments for $80,000.

63. Company A purchased 60, 6% Company B bonds on January 1, 2025, for $60,000 cash. Interest is payable annually on January 1. The entry to record the January 1, 2026, annual interest payment would include a

a. debit to Interest Receivable for $3,600.

b. credit to Interest Receivable for $3,600.

c. credit to Interest Revenue for $3,600.

d. credit to Debt Investments for $3,600.

64. Company A purchased 60, 6% Company B bonds on January 1, 2025, for $60,000 cash. Interest is payable annually on January 1. The entry to record the December 31 interest accrual would include a

a. debit to Interest Receivable for $3,600.

b. debit to Interest Revenue for $3,600.

c. credit to Cash Revenue for $3,600.

d. debit to Debt Investments for $3,600.

65. Company A purchased 80, 6% Company B bonds for $80,000 cash. Interest is payable annually on January 1. If 40 of the securities are sold January 1 for $41,000 the entry would include a credit to Gain on Sale of Debt Investments of

a. $500.

b. $1,200.

c. $5,400.

d. $1,000.

66. On January 1, Acme Company purchased as an investment a $1,000, 6% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,100 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?

a. Cash 1,100

Debt Investments 1,100

b. Cash 1,130

Debt Investments 1,000

Gain on Sale of Debt Investments 100

Interest Revenue 30

c. Cash 1,130

Debt Investments 1,100

Interest Revenue 30

d. Cash 1,130

Debt Investments 1,000

Interest Revenue 130

67. On January 1, A1 Enterprise purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,120 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?

a. Cash 1,120

Debt Investments 1,120

b. Cash 1,155

Debt Investments 1,000

Gain on Sale of Debt Investments 120

Interest Revenue 35

c. Cash 1,155

Debt Investments 1,120

Interest Revenue 35

d. Cash 1,155

Debt Investments 1,000

Interest Revenue 155

68. Suppose that on January 1, Old Navy purchased as an investment a $1,000, 8% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31?

a. Interest Receivable 80

Debt Investments 80

b. Cash 80

Interest Revenue 80

c. Interest Receivable 80

Interest Revenue 80

d. Cash 80

Debt Investments 80

69. On January 1, Acme Supply Company purchased as an investment a $1,000, 7% bond for $1,000. The bond pays interest on January 1. What is the entry to record the interest accrual on December 31?

a. Cash 70

Interest Receivable 70

b. Debt Investments 70

Interest Revenue 70

c. Interest Receivable 70

Interest Revenue 70

d. Cash 70

Interest Revenue 70

70. On January 1, 2024, Ace Service Company purchased as an investment a $1,000, 4% bond for $1,000. The bond pays interest on January 1. The company has a December 31 year-end. What is the entry to record the cash receipt of interest on January 1, 2025?

a. Cash 40

Interest Receivable 40

b. Cash 40

Interest Revenue 40

c. Interest Receivable 40

Interest Revenue 40

d. Interest Expense 40

Cash 40

71. On January 1, Acme Service Company purchased as an investment a $1,000, 5% bond for $1,000. The bond pays interest on January 1. The bond is sold on July 1 for $1,070 plus accrued interest. Interest has not been accrued since the last interest payment date. What is the entry to record the cash proceeds at the time the bond is sold?

a. Cash 1,070

Debt Investments 1,070

b. Cash 1,095

Debt Investments 1,000

Gain on Sale of Debt Investments 70

Interest Revenue 25

c. Cash 1,095

Debt Investments 1,070

Interest Revenue 25

d. Cash 1,070

Debt Investments 1,000

Interest Revenue 70

72. Which of the following is not a true statement about accounting for long-term debt investments?

a. The investment is initially recorded at cost.

b. The cost includes any brokerage fees.

c. Debt investments include investment in government and corporation bonds.

d. The cost includes any accrued interest.

73. If a debt investment is sold, the investment account is

a. debited 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.

74. Ace Supply Company purchased a debt investment for $80,000 on January 1, 2025. On January 1, 2026, Ace received cash for $4,000 for interest on the investment. Which of the following correctly presents the journal entries for the purchase and the receipt of interest?

a. 1-1-25 Debt Investments 80,000

Cash 80,000

1-1-26 Cash 4,000

Interest Receivable 4,000

b. 1-1-25 Cash 80,000

Debt Investments 80,000

1-1-26 Interest Revenue 4,000

Cash 4,000

c. 1-1-25 Debt Investments 80,000

Cash 80,000

1-1-26 Interest Revenue 4,000

Cash 4,000

d. 1-1-25 Cash 80,000

Debt Investments 80,000

1-1-26 Cash 4,000

Interest Revenue 4,000

75. On August 1, Company A buys 2,000 shares of Company B common stock for $61,500 cash. On December 1, the stock investments are sold for $71,000 in cash. Which of the following are the correct journal entries of record for the purchase and sale of the common stock?

a. Aug. 1 Cash 61,500

Stock Investments 61,500

Dec. 1 Cash 71,000

Stock Investments 61,500

Gain on Sale of Stock Investments 9,500

b. Aug. 1 Stock Investments 61,500

Cash 61,500

Dec. 1 Cash 71,000

Stock Investments 61,500

Gain on Sale of Stock Investments 9,500

c. Aug 1 Stock Investments 61,500

Cash 61,500

Dec. 1 Stock Investment 71,000

Cash 60,000

Gain on Sale of Stock Investments 9,000

d. Aug. 1 Cash 61,500

Stock Investments 61,500

Dec 1 Stock Investments 71,000

Cash 61,500

Gain on Sale of Stock Investments 9,500

76. Company A owns 40% of Company B. For the current year, Company B reports net income of $250,000 and declares and pays a $70,000 cash dividend. Which of the following correctly presents the journal entries to record Company A’s equity in Company B’s net income and the receipt of dividends from Company B?

a. Dec. 31 Stock Investments 100,000

Revenue from Stock Investments 100,000

Dec. 31 Cash 28,000

Stock Investments 28,000

b. Dec. 31 Stock Investments 100,000

Revenue from Stock Investments 100,000

Dec. 31 Cash 70,000

Stock Investments 70,000

c. Dec. 31 Stock Investments 72,000

Revenue from Stock Investments 72,000

d. Dec. 31 Revenue from Stock Investments 100,000

Stock Investments 100,000

Dec. 31 Stock Investments 28,000

Cash 28,000

77. On January 1, 2025, Company A paid $750,000 for 100,000 shares of Company B's common stock, which represents 25% of Company B’s outstanding common stock. Company B reported income of $300,000 and paid cash dividends of $80,000 during 2025 Company A should report the investment in Company B on its December 31, 2025, balance sheet at

a. $750,000

b. $825,000

c. $770,000

d. $805,000

78. Ace Inc. earns $1,350,000 and pays cash dividends of $450,000 during 2025. A1 Corporation owns 70,000 of the 210,000 outstanding shares of Ace. What amount should A1 show in the investment account at December 31, 2025, if the beginning of the year balance in the account was $150,000?

a. $450,000

b. $300,000

c. $420,000

d. $600,000

79. Ace Inc. earns $1,350,000 and pays cash dividends for $450,000 during 2025. A1 Corporation owns 70,000 of the 210,000 outstanding shares of Ace. How much revenue from this investment should A1 report in 2025?

a. $150,000

b. $300,000

c. $450,000

d. $600,000

80. All of the following factors would be signs of an investor's significant influence over an investee except

a. the investor has representation on the investee's board of directors.

b. the investor participates in the investee's policy-making process.

c. there are immaterial transactions between the investor and the investee.

d. the common stock held by other stockholders is dispersed.

81. On January 1, 2025, Company A acquired a 20% interest in Company B through the purchase of 12,000 shares of Company B common stock for $640,000. In 2025, Company B paid $160,000 in dividends and reported a net loss of $200,000. Company A is able to exert significant influence on Company B. However, Company A mistakenly records these transactions using the cost method rather than the equity method of accounting. Which of the following would show the correct presentation for Company A’s investment using the equity method?

Investment 2025 Net

Account at 12/31/25 Earnings (loss)

a. $640,000 ($20,000)

b. $568,000 ($40,000)

c. $640,000 ($40,000)

d. $620,000 ($20,000)

82. When a company holds stock 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.

83. Corporation A invests in 300 shares of Corporation B's common stock. The stock is purchased for $53 a share. The entry for the purchase is:

a. Debt Investments 15,000

Cash 15,000

b. Stock Investments 15,900

Cash 15,900

c. Stock Investments 15,000

Cash 15,000

d. Cash 15,900

Stock Investments 15,900

84. Corporation A invests in 200 shares of Corporation B's common stock. The stock is purchased for $52 a share. The entry for the purchase is

a. Debt Investments 10,400

Cash 10,400

b. Stock Investments 10,400

Cash 10,400

c. Stock Investments 10,000

Cash 10,000

d. Cash 10,400

Stock Investments 10,400

85. For accounting purposes, the method used to account for investments in common stock is determined by

a. the amount paid for the stock by the investor.

b. the extent of an investor's influence over the operating and financial affairs of the investee.

c. whether the stock has paid dividends in past years.

d. whether the acquisition of the stock by the investor was "friendly" or "hostile."

86. Suppose that Samsung sells 300 shares of common stock being held as an investment. The shares were acquired six months ago for $40 a share. Samsung sold the shares for $43 a share. The entry to record the sale is

a. Cash 12,000

Loss on Sale of Stock Investments 900

Stock Investments 8,600

b. Cash 12,900

Gain on Sale of Stock Investments 900

Stock Investments 12,000

c. Cash 12,900

Stock Investments 12,900

d. Stock Investments 12,000

Loss on Sale of Stock Investments 900

Cash 12,900

87. Suppose that adidas sells 150 shares of common stock being held as an investment. The shares were acquired six months ago for $30 per share. adidas sold the shares for $38 a share. The entry to record the sale is

a. Cash 4,500

Loss on Sale of Stock Investments 1,200

Stock Investments 5,700

b. Stock Investments 5,700

Cash 5,700

c. Cash 5,700

Gain on Sale of Stock Investments 1,200

Stock Investments 4,500

d. Cash 5,700

Stock Investments 5,700

88. Suppose that Netflix sells 400 shares of common stock being held as an investment. The shares were acquired six months ago for $50 per share. Netflix sold the shares for $46 a share. The entry to record the sale is:

a. Cash 18,400

Loss on Sale of Stock Investments 1,600

Stock Investments 20,000

b. Cash 20,000

Gain on Sale of Stock Investments 1,600

Stock Investments 18,400

c. Cash 18,400

Stock Investments 18,400

d. Stock Investments 18,400

Loss on Sale of Stock Investments 1,600

Cash 20,000

89. A purchase of common stock of Acme Corporation for $29,000 was sold three months later for $30,000. The entry to record the sale would include a

a. debit to Cash of $29,000.

b. credit to Gain on Sale of Stock Investments of $1,000.

c. credit to Stock Investments of $30,000.

d. credit to Interest Revenue of $1,000.

90. Company A had these transactions pertaining to stock investments

Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash.

June 1 Received cash dividends of $1 per share on Company B stock.

Oct. 1 Sold 2,000 shares of Company B stock for 39,000.

Dec. 1 Received cash dividends of $2 per share on Company B stock.

The entry to record the purchase of the Company B stock would include a

a. credit to the Stock Investments account for $89,000.

b. credit to the Cash account for $90,000

c. debit to the Stock Investments account for $89,000.

d. debit to the Investment Expense account for $1,000.

91. Company A had these transactions pertaining to stock investments

Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash.

June 1 Received cash dividends of $1 per share on Company B stock.

Oct. 1 Sold 2,000 shares of Company B stock for $39,000.

Dec. 1 Received cash dividends of $2 per share on Company B stock.

The entry to record the receipt of the dividends June 1 would include a

a. debit to Stock Investments of $5,000.

b. credit to Dividend Revenue of $5,000.

c. debit to Dividend Revenue of $5,000.

d. credit to the Stock Investments of $5,000.

92. Company A had these transactions pertaining to stock investments

Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash.

June 1 Received cash dividends of $1 per share on Company B stock.

Oct. 1 Sold 2,000 shares of Company B stock for $39,000.

Dec. 1 Received cash dividends of $2 per share on Company B stock.

The entry to record the sale of the stock would include a

a. debit to Cash for $35,600.

b. credit to Gain on Sale of Stock Investments for $1,360.

c. debit to Stock Investment for $35,600.

d. credit to Gain on Sale of Stock Investments of $3,400.

93. Company A had these transactions pertaining to stock investments

Feb. 1 Purchased 5,000 shares of Company B (10%) for $89,000 cash.

June 1 Received cash dividends of $1 per share on Company B stock.

Oct. 1 Sold 2,000 shares of Company B stock for $39,000.

Dec. 1 Received cash dividends of $2 per share on Company B stock.

The entry to record the receipt of the dividends Dec. 1 would include a

a. debit to Stock Investments of $6,000.

b. credit to Dividend Revenue of $6,000.

c. debit to Dividend Revenue of $6,000.

d. credit to the Stock Investments of $6,000.

94. If an investor owns less than 20% of the common stock of another corporation as an 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.

95. If the cost method is used to account for an investment in common stock, dividends received should be

a. credited to the Stock Investments account.

b. credited to the Dividend Revenue account.

c. debited to the Stock Investments account.

d. recorded only when 20% or more of the stock is owned.

96. Under the cost method of accounting for dividends,

a. a revenue account is credited when dividends are received.

b. the Investment account is credited when the investee reports a net income.

c. the Investment account is credited when dividends are received.

d. Investment Revenue is credited when the investee reports a net income.

97. If 10% of the common stock of an investee company is purchased as an 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 whoever owns the remaining 90% of the stock.

98. When the cost method is used to account for a stock investment the carrying value of the investment is affected by

a. the earnings of the investee.

b. the dividend distributions of the investee.

c. the earnings and dividend distributions of the investee.

d. neither the earnings nor the dividends of the investee.

99. The cost method of accounting for investments in stock should be employed when the

a. investor owns more than 50% of the investee's stock.

b. investor has a significant influence on the investee and the stock held by the investor are marketable equity securities.

c. market value of the shares held is greater than their historical cost.

d. investor's influence on the investee is insignificant.

100. The equity method should generally be used to account for a stock investment when the level of ownership is

a. less than 10%.

b. between 10% and 20%.

c. between 20% and 50%.

d. 10% or more.

101. When an investor owns between 20% and 50% of the common stock 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 a significant influence on the investee and that the equity method should be used to account for the investment.

102. The cost method of accounting for stock investments should be used when the investment is

a. influential and controlling.

b. influential and noncontrolling.

c. controlling.

d. non-influential and noncontrolling.

103. The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as

a. significant influence.

b. control.

c. a combination.

d. influence and control.

104. Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company

a. the Dividend Revenue account is credited.

b. the Stock Investments account is increased.

c. the Stock Investments account is decreased.

d. no entry is necessary.

105. The receipt of dividends on an investment affects the Stock Investment account when which of the following methods is used?

a. Cost method.

b. Equity method.

c. Combination method.

d. Market method.

106. Ace Company owns 30% interest in the stock of Acme Wholesale Corporation. During the year, Acme Wholesale pays $75,000 in dividends to Ace and reports $400,000 in net income. Ace Company’s investment in Acme Wholesale will increase Ace’s net income by

a. $120,000.

b. $97,500.

c. $75,000.

d. $22,500.

107. Company A owns 15% interest in the stock of Company B. During the year, Company B pays $10,000 in dividends to Company A and reports $400,000 in net income. Company A’s investment in Company B will increase Company A’s net income by

a. $10,000.

b. $50,000.

c. $60,000.

d. $1,500.

108. Ace Service Company owns 40% interest in the stock of A1 Supply Corporation. During the year, A1 Supply pays $40,000 in dividends to Ace Service and reports $300,000 in net income. Ace Service Company’s investment in A1 Supply will increase Ace Service’s net income by

a. $104,000.

b. $120,000.

c. $80,000.

d. $16,000.

109. Ace Service Company owns 40% interest in the stock of A1 Supply Corporation. During the year, A1 Supply pays $40,000 in dividends to Ace Service and reports $300,000 in net income. Ace Service Company’s investment in A1 Supply will increase by

a. $104,000.

b. $120,000.

c. $16,000.

d. $80,000.

110. Acme Supply Company owns 10% interest in the stock of A1 Corporation. During the year, A1 pays $12,000 in dividends to Acme Supply and reports $200,000 in net income. Acme Supply Company’s investment in A1 will increase Acme Supply’s net income by

a. $20,000.

b. $19,200.

c. $12,000.

d. $8,000.

111. Company A owns 30% interest in the stock of Company B. During the year, Company B pays $10,000 in dividends to Company A and reports a net loss of $200,000. Company A Company’s investment in Company B will affect Company A’s net income by a

a. $10,000 increase.

b. $60,000 increase.

c. $60,000 decrease.

d. $10,000 decrease.

112. Company A owns 10% interest in the stock of Company B. During the year, Company B pays $5,000 in dividends to Company A and reports a net loss of $100,000. Company A’s investment in Company B will affect its net income by a

a. $5,000 increase.

b. $10,000 increase.

c. $10,000 decrease.

d. $5,000 decrease.

113. On January 1, 2025, Ace Corporation purchased 25% of the common stock outstanding of A1 Corporation for $200,000. During 2025, A1 Corporation reported net income of $80,000 and paid cash dividends of $48,000. The balance of the Stock Investments—A1 account on the books of Ace Corporation at December 31, 2025, is

a. $200,000.

b. $208,000.

c. $220,000.

d. $192,000.

114. On January 1, 2025, the A1 Corporation purchased 30% of the common stock outstanding of the Ace Service Corporation for $300,000. In 2025, Ace reported net income of $120,000 and paid cash dividends of $30,000. The balance of the Stock Investments—Ace account on the books of A1 Corporation at December 31, 2025, is

a. $300,000.

b. $330,000.

c. $420,000.

d. $327,000.

115. Under the equity method, the Stock 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. stock investment is sold at a gain.

116. Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

% of Investor Ownership Presumed Influence

a. Less than 20% Short-term

b. Between 20%-50% Significant

c. More than 50% Long-term

d. Between 20%-50% Controlling

117. Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

% of Investor Ownership Accounting Guidelines

a. Less than 20% Cost method

b. Between 20%-50% Cost method

c. More than 50% Cost or equity method

d. Between 20%-50% Consolidated financial statements

118. If the cost method is used to account for an investment in common stock

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

b. the earning of net income by the investee is considered a proper basis for recognition of income by the investor.

c. net income of the investee is not considered earned by the investor until dividends are declared by the investee.

d. the investment account may be at times greater than the acquisition cost.

119. If a company acquires a 40% common stock 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.

120. If a stock 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 Revenues and Gains section of the income statement.

d. contributes to gross profit on the income statement.

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

a. are credited to the Dividend Revenue account.

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 Stock Investments account.

d. are credited to the Revenue from Investment in Stock account.

122. If the equity method is being used, the Revenue from Stock Investments account is

a. just another name for a Dividend Revenue account.

b. credited when dividends are declared by the investee.

c. credited when net income is reported by the investee.

d. debited when dividends are declared by the investee.

123. Under the equity method, the Stock Investments account is credited when the

a. investee reports net income.

b. investee reports a net loss.

c. investment is originally acquired.

d. investee reports net income and when the investment is originally acquired.

124. Suppose that Nike purchased 2,000 shares of a company’s common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were

Cost Gain or Loss

a. $100,000 $54,000 loss

b. $100,000 $54,000 gain

c. $146,000 $8,000 loss

d. $146,000 $8,000 gain

125. Which of the following is not a method of accounting for stock investments?

a. Cost method.

b. Stock method.

c. Consolidated financial statements.

d. Equity method.

126. To use the cost method of accounting for stock investments, what level of ownership interest must the investor own?

a. Less than 20%.

b. More than 50%.

c. Between 20% and 50%.

d. The cost method is always used for stock investments of any size.

127. Assume that Ace Corp. acquires 30% of Acme Service Corp. for $360,000 on January 1, 2025. If Acme Service declares and pays $120,000 in total dividends on February 14th, Ace’s journal entry would include a credit to

a. Dividend Revenue for $120,000.

b. Dividend Revenue for $36,000.

c. Stock Investments for $36,000.

d. No entry is necessary.

128. Assume that Ace Corp. acquires 30% of Acme Service Corp. for $360,000 on January 1, 2025. The journal entry on Ace’s books assuming Acme Service’s net income for 2025 was $600,000 would include a debit to

a. No entry is necessary.

b. Cash for $600,000.

c. Cash for $180,000.

d. Stock Investments for $180,000.

129. Suppose that Starbucks receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a

a. loss of $6,000 under “Other expenses and losses.”

b. loss of $6,000 under “Operating expenses.”

c. gain of $6,000 under “Other revenues and gains.”

d. gain of $6,000 under “Operating revenues.”

130. Consolidated financial statements are useful to all of the following except

a. creditors of subsidiary companies.

b. management of the parent company.

c. stockholders of the parent company.

d. board of directors of the parent company.

131. When a company owns more than 50% of the common stock of another company

a. consolidated financial statements are usually prepared.

b. the cost method of accounting is used.

c. they are referred to as the subsidiary.

d. they recognize revenue when dividends are received.

132. The company whose stock is owned by the parent company is called the

a. controlled company.

b. subsidiary company.

c. investee company.

d. sibling company.

133. A company that owns more than 50% of the common stock of another company is known as the

a. charge company.

b. subsidiary company.

c. parent company.

d. management company.

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

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

b. a partnership exists.

c. a parent-subsidiary relationship exists.

d. the company whose stock is owned must be liquidated.

135. If a parent company has two wholly-owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?

Legal Economic

a. 3 3

b. 1 2

c. 3 1

d. 2 1

136. When a company owns more than 50% of the common stock 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.

137. In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because

a. management intends to realize this loss in the near future.

b. the securities have not been sold.

c. the stock market is volatile.

d. management cannot determine the exact amount of the loss in value.

138. Which of the following statements is true about investments classified as trading securities?

a. The investor’s intent and ability is to hold them to maturity.

b. They are valued on the balance sheet at cost.

c. They can consist of equity, but not debt, securities.

d. Changes in market value are reflected as part of net income.

139. The Fair Value Adjustment account

a. is set up for each security in the company's portfolio.

b. relates to an entire portfolio of securities held by the company.

c. is closed at the end of each accounting period.

d. appears on the income statement as Other Expenses and Losses.

140. At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show?

a. A reduction of an asset of $5,000 and a realized loss of $5,000.

b. A reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders’ equity section.

c. A reduction of an asset of $5,000 in the current assets section and an unrealized loss of $5,000 under “Other expenses and losses.”

d. A reduction of an asset of $5,000 in the current assets section and a realized loss of $75,000 under “Other expenses and losses.”

141. Trading securities are reported on the balance sheet at

a. fair value.

b. cost.

c. cost, adjusted for the effects of interest.

d. lower of cost or market.

142. The Fair Value Adjustment account is a(n)

a. offset account.

b. adjustment account.

c. valuation allowance account.

d. opposite account.

143. Reporting investments at fair value is

a. applicable to equity securities only.

b. applicable to debt securities only.

c. applicable to both debt and equity securities.

d. a conservative approach because only losses are recognized.

144. Ace Corporation's portfolio of stock holdings of less than 20% at the end of the year is as follows:

Investment Cost Market Value

Common Stock A $16,000 $18,000

Common Stock B 13,000 7,000

$29,000 $25,000

At the end of the year, Ace Corporation should

a. set up a Fair Value Adjustment account for Common Stock B.

b. set up a Fair Value Adjustment account for the portfolio.

c. recognize an Unrealized Gain or Loss—Income for $6,000.

d. report a loss on the income statement for $6,000 under "Other Expenses and Losses."

145. Ace Corporation's portfolio of stock holdings of less than 20% at the end of the year is as follows:

Investment Cost Fair Value

Common Stock A $16,000 $18,000

Common Stock B 13,000 7,000

$29,000 $25,000

The year-end adjusting entry to reflect a decrease in the value of stock trading securities includes a

a. credit to Fair Value Adjustment—Stock.

b. debit to Fair Value Adjustment—Stock.

c. credit to Unrealized Gain or Loss—Income.

d. credit to Stock Investments.

146. Ace Corporation's portfolio of stock holdings of less than 20% at the end of the year is as follows:

Investment Cost Fair Value

Common Stock A $16,000 $18,000

Common Stock B 13,000 7,000

$29,000 $25,000

Ace subsequently sells Common Stock B for $15,000. What entry is made to record the sale?

a. Cash 15,000

Stock Investments 15,000

b. Cash 15,000

Fair Value Adjustment—Stock 2,000

Stock Investments 13,000

c. Cash 15,000

Stock Investments 13,000

Gain on Sale of Stock Investments 2,000

d. Cash 15,000

Stock Investments 7,000

Gain on Sale of Stock Investments 8,000

147. A stock investment (less than 20% ownership) is purchased for $73,500. At year-end, when the market value of the stock is $65,000, the adjusting entry includes a

a. credit to Stock Investments.

b. debit to Loss on Sale of Stock Investment.

c. credit to Fair Value-Adjustment—Stock.

d. credit to Unrealized Gain or Loss—Income.

148. Which of the following would not be reported under "Other Revenues and Gains" on the income statement?

a. Unrealized gain on available-for-sale securities.

b. Dividend revenue.

c. Interest revenue.

d. Gain on sale of debt investments.

149. If the cost of an available-for-sale security exceeds its fair value by $29,000, the entry to recognize the loss

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

b. will show a debit to an expense account.

c. will show a credit to a valuation allowance account that appears in the stockholders’ equity section of the balance sheet.

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

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

a. be deducted from the Investments account on the balance sheet as a contra asset.

b. appear on the income statement under Other Expenses and Losses.

c. be reflected in the Accumulated Other Comprehensive Income section of stockholders' equity.

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

151. Assume that A1 Inc.’s trading securities have a total cost of $185,000 and a total fair value of $215,000 at year-end. The related adjusting entry would include a debit to

a. Unrealized Gain or Loss – Income for $30,000.

b. Fair Value Adjustment – Trading for $30,000.

c. No adjustment since only realized gains are recorded.

d. Fair Value Adjustment – Trading for $215,000.

152. Which of the following is not a category used for valuing and reporting debt investments?

a. Securities held for investing purposes.

b. Trading securities.

c. Held-to-maturity securities.

d. Available-for-sale securities.

153. Unrealized gains or losses on available-for-sale debt securities are reported where in the financial statements?

a. Nowhere since only realized gains are reported.

b. In the “Other revenues and gains” or “Other expenses and losses” sections of the income statement.

c. Below unusual items in the income statement.

d. In Comprehensive Income.

154. At the end of its first year, the securities portfolio consisted of the following common stocks, all of which represent less than 20% ownership.

Cost Fair value

Company A $ 46,400 $ 50,000

Company B 60,000 55,800

Company C 80,000 76,000

$186,400 $181,800

The unrealized loss to be recognized under the fair value method is

a. $4,200.

b. $8,200.

c. $4,600.

d. $4,000.

155. At the end of its first year, the securities portfolio consisted of the following common stocks, all of which represent less than 20% ownership.

Cost Fair Value

Company A $ 46,400 $ 50,000

Company B 60,000 55,800

Company C 80,000 76,000

$186,400 $181,800

In the following year, the Company B common stock is sold for cash proceeds of $57,000. The gain or loss to be recognized on the sale is a

a. gain of $1,200.

b. loss of $3,000.

c. gain of $10,600.

d. loss of $1,200.

156. At the end of the first year of operations, the total cost of the trading securities portfolio is $245,000. The total fair value is $250,000. The financial statements should show

a. an addition to an asset of $5,000 and a realized gain of $5,000.

b. an addition to an asset of $5,000 and an unrealized gain of $5,000 in the stockholders’ equity section.

c. an addition to an asset of $5,000 in the current assets section and an unrealized gain of $5,000 in “Other revenues and gains.”

d. an addition to an asset of $5,000 in the current assets section and a realized gain of $5,000 in “Other revenues and gains.”

157. At the end of its first year of operations, a company has common stock of $3,500,000, Retained Earnings of $1,800,000, unrealized gains on trading securities of $60,000, and unrealized losses on available-for-sale securities of $110,000. What is the total amount of the company’s stockholders’ equity?

a. $5,190,000.

b. $5,300,000.

c. $5,240,000.

d. $5,130,000.

158. Cost and fair value data for the trading securities of A1 Service Company at December 31, 2025, are $100,000 and $88,000, respectively. Which of the following correctly presents the adjusting journal entry to record the securities at fair value?

a. Dec. 31 Unrealized Gain or Loss⎯Income 12,000

Trading Securities 12,000

b. Dec. 31 Unrealized Gain or Loss⎯Income 12,000

Trading Securities 12,000

c. Dec. 31 Unrealized Gain or Loss⎯Income 12,000

Fair Value Adjustment⎯Trading 12,000

d. Dec. 31 Fair Value Adjustment—Trading 12,000

Unrealized Gain or Loss—Income 12,000

159. At December 31, 2025, the trading securities for Acme, Inc. are as follows:

Fair Value

Security Cost 12/31/25

Company A bonds $ 90,000 $ 92,000

Company B bonds 150,000 144,000

Company C bonds 30,000 28,000

Acme should report the following amount related to the securities transactions in its 2025 income statement

a. $2,000 gain.

b. $6,000 realized loss.

c. $6,000 unrealized loss.

d. $8,000 unrealized loss.

160. At December 31, 2025, A1 Marine Supply Inc. has these data on its security investments

Fair Value

Security Cost 12/31/25

Trading $140,000 $172,000

Available-for-sale 137,000 127,000

If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value?

a. Debt Securities 22,000

Unrealized Gain or Loss⎯Income 22,000

b. Unrealized Gain or Loss⎯Income 10,000

Debt Securities 22,000

Unrealized Gain or Loss⎯Income 32,000

c. Fair Value Adjustment⎯Trading 32,000

Unrealized Gain or Loss⎯Income 32,000

Unrealized Gain or Loss⎯Equity 10,000

Fair Value Adjustment⎯Available-for-sale 10,000

d. Unrealized Gain or Loss—Income 32,000

Fair Value Adjustment⎯Trading 32,000

Fair Value Adjustment—Available-for-sale 10,000

Unrealized Gain or Loss⎯Equity 10,000

161. All of the following statements about financial statement gains and losses on investments are true except

a. the account "Fair Value Adjustment—Available-For-Sale" is reported on the balance sheet.

b. unrealized losses on trading securities are reported on the income statement.

c. unrealized losses on available-for-sale securities are reported on the income statement.

d. the account "Fair Value Adjustment—Trading" is reported on the balance sheet.

162. Company A owns stock in Company B which it intends to hold indefinitely because of some negative tax consequences if sold. Which of the following statements is true regarding Company A’s reporting of the investment?

a. The stock would be classified as trading securities.

b. The stock would be reported at fair value if the ownership level is less than 20%.

c. The stock requires no market adjustments since there are no plans to sell it.

d. Any losses on the stock are recorded in stockholders’ equity.

163. All of the following statements about short-term investments are true except

a. short-term investments are also called marketable securities.

b. trading securities are always classified as short-term investments.

c. short-term investments are listed below accounts receivable in the current asset section of the balance sheet.

d. short-term assets must be readily marketable.

164. Short-term investments are listed on the balance sheet immediately below

a. cash.

b. inventory.

c. accounts receivable.

d. prepaid expenses.

165. Short-term investments should be valued on the balance sheet at

a. the lower of cost or fair value.

b. the higher of cost or fair value.

c. cost.

d. fair value.

166. Which one of the following would not be classified as a short-term investment?

a. Marketable equity securities.

b. Marketable merchandise.

c. Marketable debt securities.

d. Short-term paper.

167. 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.

168. Which of the following would not be classified as a short-term investment?

a. Short-term commercial paper.

b. Idle cash in a bank checking account.

c. Marketable equity securities.

d. Marketable debt securities.

BRIEF Exercises

Be. 169

Company A had the following transactions pertaining to debt securities held as an investment.

Jan. 1 Purchased 80, 6%, $1,000 Company B bonds for $80,000 cash. Interest is payable annually on January 1.

Dec. 31 Accrued $4,800 annual interest on Company B bonds.

Instructions

Journalize the purchase and the receipt of interest. Assume no interest has been accrued.

Ex. 175

Company A had the following transactions pertaining to debt investments.

Jan. 1 Purchased 80, 6%, $1,000 Company B bonds for $80,000 cash.

July 1 Sold 40 Company B bonds for $42,400.

Instructions

Journalize the entries for the purchase and sale of the Company B bonds.

Ex. 176

Company A had the following transactions pertaining to debt investments.

2025

Jan. 1 Purchased 60, 6%, $1,000 Company B bonds for $60,000 cash. Interest is payable annually on January 1.

Dec. 31 Accrued interest on Company B bonds.

2026

Jan. 1 Received interest from Company B bonds.

Jan. 1 Sold 30 Company B bonds for $32,000.

Instructions

Journalize the transactions for 2025 and 2026.

Ex. 177

The following transactions were made by Company A. Assume all investments are short-term.

June 2 Purchased 600 shares of Company B common stock for $45 per share.

July 1 Purchased 210 Company C bonds for $210,000.

30 Received a cash dividend of $2.25 per share from Company B.

Sept. 15 Sold 120 shares of Company B stock for $50 per share.

Dec. 31 Received semiannual interest check for $9,240 from Company C.

31 Received a cash dividend of $2.25 per share from Company B.

Instructions

Journalize the transactions on the books of Company A.

Ex. 178

Company A had the following transactions pertaining to its short-term stock investments.

Jan. 1 Purchased 900 shares of Company B stock for $11,880 cash.

June 1 Received cash dividends of $0.60 per share on the Company B stock.

Sept. 15 Sold 450 shares of the Company B stock for $5,200.

Dec. 1 Received cash dividends of $0.60 per share on the Company B stock.

Instructions

(a) Journalize the transactions.

(b) Indicate the income statement effects of the transactions.

Ex. 179

Company A had the following transactions pertaining to its short-term stock investments.

Jan. 1 Purchased 2,000 shares of Company B stock for $101,100 cash.

June 1 Received cash dividends of $2.70 per share on the Company B stock.

Sept. 15 Sold 1,000 shares of the Company B stock for $49,600.

Dec. 31 The fair values of the securities totaled $50,800. Prepare the adjusting entry to report the portfolio at fair value.

Instructions

(a) Journalize the transactions.

(b) Indicate the income statement effects of the transactions.

Ex. 180

Acme Company purchased 42,000 shares of common stock of the A1 Corporation as an investment for $1,000,000. During the year, A1 Corporation reported net income of $400,000 and paid dividends of $100,000.

Instructions

(a) Assuming that the 42,000 shares represent a 15% interest in A1 Corporation:

1. Prepare the journal entry to record the investment in A1 stock.

2. Prepare any entries that Acme Company should make in accounting for its investment in A1 stock during the year.

3. What is the balance of the Stock Investments account on Acme Company's books at the end of the year?

(b) Repeat requirement (a) above except assume that the 42,000 shares represent a 25% interest in A1 Corporation.

Ex. 181

Information pertaining to stock investments in 2025 by Company A follows:

Acquired 15% of the 200,000 shares of common stock of Company B at a total cost of $9 per share on January 1, 2025. On July 1, Company B declared and paid a cash dividend of $1.90 per share. On December 31, Company B reported net income was $675,000 for the year.

Obtained significant influence over Company C by buying 30% of Company C's 120,000 outstanding shares of common stock at a total cost of $25 per share on January 1, 2025. On June 15, Company C declared and paid a cash dividend of $2.50 per share. On December 31, Company C's reported net income was $330,000.

Instructions

Prepare all necessary journal entries for 2025 for Company A.

Ex. 182

Acme Company had these transactions pertaining to stock investments:

Feb 1 Purchased 2,400 shares of A1 Company’s common stock (2% of outstanding shares) for $16,500 cash.

July 1 Received cash dividends of $0.80 per share on A1 common stock.

Sept. 1 Sold 800 shares of A1 common stock for $7,900

Dec. 1 Received cash dividends of $.80 per share on A1 common stock.

Instructions

Journalize the transactions.

Ex. 183

A1 Inc. had these transactions pertaining to investments in common stock:

Jan 1 Purchased 2,000 shares of Acme Marine Supply Corporation common stock (5% of outstanding shares) for $96,500 cash.

July 1 Received a cash dividend of $1.70 per share on the investment in Acme Marine Supply common stock.

Dec. 1 Sold 800 shares of Acme Marine Supply Corporation common stock for $40,200.

31 Received a cash dividend of $1.70 per share on the investment in Acme Marine Supply common stock.

Instructions

Journalize the transactions.

Ex. 184

Acme Marine Supply Inc. acquired 10% of the 200,000 shares of common stock of Ace Company at a total cost of $14 per share on March 18, 2025. On June 30 Ace declared and paid a $96,000 dividend. On December 31, Ace reported net income of $244,000 for the year. At December 31 the market price of Ace Company was $16 per share.

Instructions

Prepare all the necessary entries for 2025 for Acme Marine Supply Inc.

Ex. 185

Company A obtained significant influence over Company B by buying 40% of Company B’s 30,000 outstanding shares common stock at a total cost of $11 per share on January 1, 2025. On June 15, Company B declared and paid a cash dividend of $32,000. On December 31 Company B reported net income of $120,000 for the year.

Instructions

Prepare all the necessary journal entries for 2025 for Company A.

Ex. 186

Company A's balance sheet at December 31, 2024, showed the following:

Short-term investments, at fair value $46,500

Company A's portfolio of stock investments (less than 20% ownership) consisted of the following at December 31, 2024:

Investment Number of Shares Cost

Company B Common Stock 200 $30,000

Company C Preferred Stock 400 6,000

Company D Common Stock 300 9,000

$45,000

During 2025, the following transactions took place:

Feb. 5 Sold 50 shares of Company B common stock for $7,900.

Mar. 30 Purchased 25 shares of Company D common stock for $850.

Sept. 9 Purchased 50 shares of Company D common stock for $2,000.

At year end on December 31, 2025, the fair values per share were:

Fair Value Per Share

Company B Common Stock $151.00

Company C Preferred Stock $ 13.00

Company D Common Stock $ 33.00

Instructions

(a) Prepare the journal entries to record the 2025 stock transactions.

(b) On December 31, 2025, prepare any adjusting entry that might be necessary relative to the portfolio.

(c) Show how the stock investments will appear on Company A's balance sheet at December 31, 2025.

Ex. 187

On January 5, 2025, Company A purchased the following long-term stock investments:

300 shares Company B common stock for $4,800.

500 shares Company C common stock for $10,000.

600 shares Company D common stock for $18,000.

Assume that Company A cannot exercise significant influence over the activities of the investee companies and that the cost method is used to account for the investments.

On June 30, 2025, Company A received the following cash dividends:

Company B $2.00 per share

Company C $3.00 per share

Company D $1.50 per share

On November 15, 2025, Company A sold 100 shares of Company D common stock for $3,600.

On December 31, 2025, the fair value of the securities held by Company A is as follows:

Per Share

Company B common stock $12

Company C common stock 16

Company D common stock 33

Instructions

Prepare the appropriate journal entries that Company A should make on the following dates:

January 5, 2025

June 30, 2025

November 15, 2025

December 31, 2025

Ex. 188

Acme Corporation has the following portfolio of short-term stock investments (holdings less than 20% as of December 31, 2025.

Security Cost Fair Value

A $17,000 $16,000

B 23,000 25,000

C 32,000 28,000

$72,000 $69,000

On January 22, 2026, Acme Corporation sold Security C for $30,000.

Instructions

(a) Prepare the adjusting entry for Acme Corporation on December 31, 2025, to report the portfolio at fair value.

(b) Indicate the balance sheet and income statement presentation of the fair value data for Acme Corporation at December 31, 2025.

(c) Prepare the journal entry for the 2026 sale.

Ex. 189

Acme Beauty Supply Company has these data at December 31, 2025:

Securities Cost Fair Value

Trading $110,000 $119,000

Available-for-sale 100,000 95,000

The available-for-sale securities are held as a long-term investment.

Instructions

(a) Prepare the adjusting entries to report each class of securities at fair value.

(b) Indicate the statement presentation of each class of securities and the related unrealized gain (loss) accounts.