1.The Equity method of accounting for investments in stock is used if the investor owns 20% of the stock of the investee company and is able to exercise significant influence over the investee company

a. True

b. False

2.The present value is a value today of an amount to be paid or received at a specific date in the future.

a. True

b. False

3.Investments in stock may be classified as current assets or long term investments on the balance sheet depending on management intent with the investment.

a. true

b. False

4.If you plan to invest $10,000 and want to determine how much will be accumulated in six years during which you can earn 7%per year, you would calculate the amount as a future value of an annuity.

a. True

b. False

5.A subsidiary is a separate corporation that must be 100% owned by another company.

a. True

b. False

6.Accounting for the sale of investments in stock is the same for both trading securities and available-for-sale security investments.

a. True

b. False

7.The carrying amount of a bond investment should include the cost paid for broker fees.

a. True

b. False

8.Convertible bonds may be ____.

a. Retired early at the option of the issuer

b. Retired early at the option of the investor

c. Converted into common stock

d. Called in by either the issuer or investor if market rates decline

e. Converted into convertible preferred stock

9.If a bond is issued at 97, the market rate of interest was ____.

a. Lower than the contract rate

b. Higher than the contract rate

c. Equal to the market rate

d. Cannot be determined from the facts given

10.Using the future value table, a student found that the future value amount of $1 for 5 years at an annual interest rate of 10% is 1.611. The student also observed that the future value of $1 for 5 years at 10% compounded semi-annually is 1.629 This means that

a. compounding increases the amount of interest so the future value will be lower.

b. compounding will cause a higher future value for the investment.

c. when interest is compounded semi-annually, more money must be deposited at the start to have the desired ending value.

d. the student was looking in the wrong column, the second amount would correctly come up lower than the 1.611.

11.The interest rate used to calculate the interest payments to be made on bonds is the:

a. Discount rate

b. Contract rate

c. Effective rate

d. Yield rate

12.If a company purchased $500,000 of bonds at 98 plus accrued interest of $2,500 and pays broker's commissions of $200, the amount debited to Investment in Bonds would be ____.

a. $492,700

b. $500,200

c. $490,200

d. $490,000

13.If a company issues $500,000, 6% bonds for $490,000, the entry will include a ____.

a. Debit to cash for $490,000

b. Credit to bonds payable for $490,000

c. Debit to interest expense for $10,000

d. Credit to discount on bonds payable for $10,000

14.If a company fails to amortize a discount on bonds payable ____.

a. Interest expense will be overstated

b. Interest expense will be understated

c. Liabilities will be understated

d. Both b and c

15.If a company issues bonds payable with a face value of $2 million, face rate of 8%, for $2,056,000, the entry will include a ____.

a. Debit to cash for $2,000,000

b. Credit to bonds payable for $2,000,000

c. Credit to a discount on bonds payable for $56,000

d. Debit to a premium on bonds payable for $56,000

16.A company called a $1,000,000, 9% bond issue at 101. If the unamortized discount is $7,000, the entry will include a ____.

a. Credit to gain on bond redemption for $17,000

b. Debit to loss on bond redemption for $17,000

c. Credit to gain on bond redemption for $10,000

d. Debit to loss on bond redemption for $7,000

17.Discount on bonds payable is usually classified in the financial statements under ____.

a. Current liabilities

b. Interest expense

c. Long-term liabilities

d. Only in the notes to the financial statements

18.If the contract rate is lower than the market rate, the bonds will sell at ____.

a. A discount

b. premium

c. Face amount

d. Cannot be determined from facts given

19.A company issues $500,000 10% bonds due in 10 years for $480,000. The entry to record semiannual interest will include a ____.

a. Debit to premium on bonds payable

b. Debit to discount on bonds payable

c. Debit to interest expense for more than $25,000

d. Debit to interest expense for less than $25,000

20.A company issues $800,000, 10% bonds due in 15 years for $809,000, the company uses the effective interest method of amortization of the premium. The entry to record the semi-annual interest will include a ____.

a. Debit to premium on bonds payable for $300

b. Debit to interest expense for $80,000

c. Debit to interest expense for $40,000

d. Credit to cash for $40,000

21.Amortizing a premium on bonds payable ____.

a. Has no effect on cash flows

b. Increases cash flows

c. Decreases cash flows

d. Can increase or decrease cash flows depending upon interest rates

22.If a company fails to amortize a premium on bonds payable ____.

a. Net income and liabilities will be understated

b. Net income and liabilities will be overstated

c. Net income will be understated and liabilities will be overstated

d. Net income will be overstated and liabilities will be understated

23.If the carrying amount of bonds is greater than the redemption price when bonds are called, the company would record a ____.

a. Gain

b. Loss

c. Gain or loss depending upon interest rates

d. Cannot be determined from the facts given

24.To determine whether a lottery winner would be better off receiving the money in a single lump-sum immediately or receiving an equal annual payment over 20 years, you would use which time value of money calculation?

a. The future value of a single amount.

b. The present value of a single amount.

c. The future value of an annuity.

d. The present value of an annuity.

25.A method used for long-term investments in stocks where the investor has significant influence over the operating activities of the investee is called ____.

a. Available-for sale

b. Equity method

c. Stockholders' equity

d. Common stock method

26.Assume that the carrying value of Drei, Inc. stock is $25,000 when it is sold. If the proceeds of the sale are $22,000, record the journal entry for this transaction.

a. Loss on sale of investment 3,000

Cash 22,000

Investment in Drei stock 25,000

b. Cash 25,000

Investment in Drei stock 25,000

c. Cash 22,000

Investment in Drei stock 22,000

d. Loss on sale of investment 3,000

Investment in Drei stock 3,000

27.A corporation owning a majority of the voting stock of another corporation is called the ____.

a. Affiliate

b. Parent

c. Equity

d. Top corporation

28.At the end of the fiscal year, parent and subsidiary corporations are combined and reported as a single company. This combination is called a:

a. Mega-Combination

b. Investment

c. Primary/Secondary combination

d. Consolidation

29.If a company has investments in available-for-sale securities and has received a cash dividend the journal entry would record

a. Debit Cash and Credit Unearned Gain

b. Debit Cash and Credit Dividend Revenue

c. Debit Cash and Credit Stock Investment

d. Debit Stock Investment and Credit Unrealized gain