Managerial Accounting

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TEST BANK
CHAPTER 1
Intercorporate Investments: An Overview

MULTIPLE CHOICE

Use the following information on a company’s investments in equity securities to answer questions 1- 4 below. The company’s accounting year ends December 31.

| |Date of acquisition|Cost |Fair value |Date sold |Selling price | |Investment | | |12/31/10 | | | |Ajax Company stock |6/20/10 |$40,000 |$36,000 |2/10/11 |$34,000 | |Bril Corporation stock |5/1/10 | 20,000 |N/A |11/15/10 | 23,000 | |Coy Company stock |8/2/10 | 16,000 | 19,500 |1/17/11 | 21,000 |

1.Topic: Accounting for trading securities
LO 2
If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2010 income statement?

a.$3,000 gain
b.$2,500 gain
c.$4,000 loss
d.No gain or loss

ANS:b

2.Topic: Accounting for trading securities
LO 2
If the above investments are categorized as trading securities, what amount is reported for gain or loss on securities, on the 2011 income statement?

a.$1,000 loss
b.$2,000 gain
c.$3,000 gain
d.$500 loss

ANS:d

3.Topic: Accounting for AFS securities
LO 2
If the above investments are categorized as available-for-sale securities, what amount is reported for gain or loss on securities, on the 2010 income statement?

a.$3,000 gain
b.$2,500 gain
c.$4,000 loss
d.No gain or loss

ANS:a

4.Topic: Accounting for AFS securities
LO 2
If the above investments are categorized as available-for-sale securities, what amount is reported as gain or loss on securities, on the 2011 income statement?

a.$1,000 loss
b.$2,000 gain
c.$3,000 gain
d.$500 loss

ANS:a

Use the following information to answer questions 5-7 below:

A company holds a $100,000 face value corporate bond, bought January 1, 2011, paying 4% annually on December 31, and maturing December 31, 2014. The company paid $93,070 for the bond, to yield 6%. The company categorizes the bond as a held-to-maturity investment, and its accounting year ends December 31.

5.Topic: Accounting for HTM securities
LO 2
What amount will the company report as interest revenue on the bond for 2012?

a.$4,000
b.$5,584
c.$5,679
d.$6,000

ANS:c

6.Topic: Accounting for HTM securities
LO 2
What is the entry to record receipt of interest and principal on December 31, 2014, assuming no impairment on the bond throughout its life?

a.Cash104,000
Interest revenue 5,887
Investment in bond98,113

b.Cash104,000
Interest revenue 4,000
Investment in bond100,000

c.Cash106,000
Interest revenue 6,000
Investment in bond100,000

d.Cash104,000
Interest revenue 5,584
Investment in bond 98,416

ANS:a

7.Topic: Accounting for HTM securities
LO 2
Assume the market value of the bond on December 31, 2011 is $80,000, and no previous impairment has been reported. The decline in value is considered to be other than temporary. What impairment loss is reported on the company’s 2011 income statement?

a.$20,000
b.$13,070
c.$14,654
d.$24,000

ANS:c

Use the following information to answer questions 8-11 below:

Eagle Company acquires 25% of the voting stock of Frank Corporation for $4,000,000 on January 1, 2010. At the time, the book value of the company was $16,000,000. During 2010 Frank reported net income of $1,500,000...
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