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Exam 14: Investments

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Question 21

Multiple Choice

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General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: Recording the bond purchase would have what effect on the financial statements?

A) Increase assets.
B) Increase liabilities.
C) Increase assets and liabilities.
D) No effect on total assets and total liabilities.

E) B) and C)
F) All of the above

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Question 22

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Under the equity method, the investor includes in net income its portion of the investee's net income.

A) True
B) False

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Question 23

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On January 1, 2012, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. The records of Burke Corporation showed the following at December 31, 2012: $\begin{array} { | l | l | } \hline \text { Net Income } & \$ 500,000 \\\hline \text { Dividends Paid } & \$ 200,000 \\\hline \text { Market Price per Share } & \$ 38 \\\hline\end{array}$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?

When the investor has significant influence, the receipt of cash dividends is recorded as dividend revenue.

Companies with large expansion plans, called growth companies, prefer to reinvest earnings in the growth of the company rather than distribute earnings back to investors in the form of cash dividends.

Unrealized gains and losses from changes in the fair value of available-for-sale securities are reported as part of current net income.

The statement of comprehensive income is a statement that includes net income plus investment by stockholders less payment of dividends.

Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly classified as an available-for-sale security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income?

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: The investment in bonds has a maturity in:

The statement of comprehensive income is a statement in which we report all changes in stockholders' equity other than investment by stockholders and payment of dividends.

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:

When insignificant influence exists, the investment should be accounted for by the equity method.

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC sells the bonds for $196,000 immediately after the interest payment on 12/31/12. What gain or loss, if any, would GIC record on this date?

Investments are reported at fair value when a company has a significant influence over another company in which it invests.

The cash received from interest equals the face value of the investment in bonds times the stated interest rate.

One of the primary reasons for investing in equity securities includes:

Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income under the equity method?

Libby Company purchased equity securities for $100,000 and classified them as trading securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?

Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $21,488 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 6%. Interest is received semi-annually on June 30 and December 31. 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2012.

Sandy Sensations purchases twenty, $1,000, 7%, 10-year bonds issued by Pizza Pier for $20,000 on January 1, 2012. The market interest rate for bonds of similar risk and maturity is 7%. Interest is received semiannually on June 30 and December 31. 1. Record the investment in bonds. 2. Record receipt of the first interest payment on June 30, 2012.