MGMT 120C – Practice Midterm Examination
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
Ans: C
2.A correct valuation for debt securities is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. None of these answers are correct.
Ans: B
3.Unrealized holding gains or losses which are recognized in income are from debt securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. None of these answers are correct.
Ans: C
4. Santo Corporation declares and distributes a cash dividend that is a result of current earnings.
How will the receipt of those dividends affect the investment account of the investor under
each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
Ans: A,
5. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2021, Cosby had net
earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity method of accounting. What
effect would this have on the investment account, net income, and retained earnings,
respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
Ans: D
, 6. On August 1, 2021, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued
interest. The bonds were dated May 1, 2018, and mature on April 30, 2027, with interest
paid each October 31 and April 30. The bonds will be added to Dambro’s available-for-sale
portfolio. The preferred entry to record the purchase of the bonds on
August 1, 2021 is
a. Debt Investments.................................................................. 1,191,000
Cash.......................................................................... 1,191,000
b. Debt Investments.................................................................. 1,164,000
Interest Receivable............................................................... 27,000
Cash.......................................................................... 1,191,000
c. Debt Investments.................................................................. 1,164,000
Interest Revenue.................................................................. 27,000
Cash.......................................................................... 1,191,000
d. Debt Investments.................................................................. 1,200,000
Interest Revenue.................................................................. 27,000
Discount on Debt Investments.................................. 36,000
Cash ......................................................................... 1,191,000
Ans: C
Dr. Debt Investments: 1,200 × $1,000 × .97 = $1,164,000; Dr. Interest Revenue: $1,200,000 × .09/2 × 3/6 = $27,000; Cr. Cash: $1,164,000 +
$27,000 = $1,191,000.
7. Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021,
paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and
January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the
effective-interest method and plans to hold these bonds to maturity.
On July 1, 2021, Patton Company should increase its Debt Investments account for the
Scott Company bonds by
a. $8,970.
b. $5,140.
c. $4,485.
d. $2,571.
Ans: D
($1,410,375 × .11/2) – ($1,500,000 × .10/2) = $2,571.
8. At December 31, 2021, Atlanta Company has an equity portfolio valued at $160,000. Its cost
was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000,
which of the following journal entries is required at December 31, 2021?
a. Fair Value Adjustment 28,000
Unrealized Holding Gain or Loss-Income 28,000
b. Fair Value Adjustment 20,000
Unrealized Holding Gain or Loss-Income 20,000
c. Unrealized Holding Gain or Loss-Income 28,000
Fair Value Adjustment 28,000
d. Unrealized Holding Gain or Loss-Income 20,000
Fair Value Adjustment 20,000
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not a debt security?
a. Convertible bonds
b. Commercial paper
c. Loans receivable
d. All of these are debt securities.
Ans: C
2.A correct valuation for debt securities is
a. available-for-sale at amortized cost.
b. held-to-maturity at amortized cost.
c. held-to-maturity at fair value.
d. None of these answers are correct.
Ans: B
3.Unrealized holding gains or losses which are recognized in income are from debt securities
classified as
a. held-to-maturity.
b. available-for-sale.
c. trading.
d. None of these answers are correct.
Ans: C
4. Santo Corporation declares and distributes a cash dividend that is a result of current earnings.
How will the receipt of those dividends affect the investment account of the investor under
each of the following accounting methods?
Fair Value Method Equity Method
a. No Effect Decrease
b. Increase Decrease
c. No Effect No Effect
d. Decrease No Effect
Ans: A,
5. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2021, Cosby had net
earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these
transactions using the fair value method rather than the equity method of accounting. What
effect would this have on the investment account, net income, and retained earnings,
respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
Ans: D
, 6. On August 1, 2021, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued
interest. The bonds were dated May 1, 2018, and mature on April 30, 2027, with interest
paid each October 31 and April 30. The bonds will be added to Dambro’s available-for-sale
portfolio. The preferred entry to record the purchase of the bonds on
August 1, 2021 is
a. Debt Investments.................................................................. 1,191,000
Cash.......................................................................... 1,191,000
b. Debt Investments.................................................................. 1,164,000
Interest Receivable............................................................... 27,000
Cash.......................................................................... 1,191,000
c. Debt Investments.................................................................. 1,164,000
Interest Revenue.................................................................. 27,000
Cash.......................................................................... 1,191,000
d. Debt Investments.................................................................. 1,200,000
Interest Revenue.................................................................. 27,000
Discount on Debt Investments.................................. 36,000
Cash ......................................................................... 1,191,000
Ans: C
Dr. Debt Investments: 1,200 × $1,000 × .97 = $1,164,000; Dr. Interest Revenue: $1,200,000 × .09/2 × 3/6 = $27,000; Cr. Cash: $1,164,000 +
$27,000 = $1,191,000.
7. Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021,
paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and
January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the
effective-interest method and plans to hold these bonds to maturity.
On July 1, 2021, Patton Company should increase its Debt Investments account for the
Scott Company bonds by
a. $8,970.
b. $5,140.
c. $4,485.
d. $2,571.
Ans: D
($1,410,375 × .11/2) – ($1,500,000 × .10/2) = $2,571.
8. At December 31, 2021, Atlanta Company has an equity portfolio valued at $160,000. Its cost
was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000,
which of the following journal entries is required at December 31, 2021?
a. Fair Value Adjustment 28,000
Unrealized Holding Gain or Loss-Income 28,000
b. Fair Value Adjustment 20,000
Unrealized Holding Gain or Loss-Income 20,000
c. Unrealized Holding Gain or Loss-Income 28,000
Fair Value Adjustment 28,000
d. Unrealized Holding Gain or Loss-Income 20,000
Fair Value Adjustment 20,000
