Q: Which formula is used to calculate the rate of return on total assets?

$$\text{Rate of Return on Total Assets} = \frac{\text{Net Income} + \text{Interest Expense}}{\text{Average Total Assets}}$$

Question 1

Which of the following best describes a held-to-maturity (HTM) debt investment?

Accepted Answer

A debt security that the investor intends to hold and has the ability to hold until it matures.

Question 2

A company purchases $100,000 face value, 9%, five-year bonds on July 1, 2025, and plans to hold them until maturity. What is the correct journal entry to record the first interest payment received on December 31, 2025?

Accepted Answer

Debit Cash $$4,500; Credit Interest Revenue 4$$,500

Question 3

Which formula is used to calculate the rate of return on total assets?

Accepted Answer

$$	ext{Rate of Return on Total Assets} = \frac{	ext{Net Income} + 	ext{Interest Expense}}{	ext{Average Total Assets}}$$

Question 4

A company owns 40% of another company’s voting stock. Which accounting method should be used for this investment?

Accepted Answer

Equity method

Question 5

Which of the following is reported as a component of Other Comprehensive Income (OCI)?

Accepted Answer

Unrealized holding gains or losses on available-for-sale debt investments

Question 6

A company purchases 1,000 shares of stock at $$26.16 per share and later sells 800 shares for 25$$,000. What is the gain or loss on disposal?

Accepted Answer

$4,072 gain

Question 7

Which of the following statements about trading debt investments is correct?

Accepted Answer

They are adjusted for changes in fair value, with unrealized gains or losses reported in net income.

Question 8

If a company owns more than 50% of another company’s voting stock, how are the financial statements prepared?

Accepted Answer

The parent and subsidiary companies’ financial statements are consolidated.

Question 9

Which of the following is NOT a reason why companies invest in debt or equity securities?

Accepted Answer

To increase the company’s liabilities

Question 10

How are equity investments with no significant influence reported at year-end?

Accepted Answer

At fair value, with unrealized holding gains or losses reported in net income

Question 11

A company purchases a bond at a premium. How is the premium accounted for?

Accepted Answer

The premium is amortized over the life of the bond when interest revenue is earned.

Question 12

Which of the following best describes a trading debt investment?

Accepted Answer

A debt security that the investor plans to sell in the very near future.

Question 13

Which journal entry is correct when a company receives a cash dividend from an equity investment accounted for under the equity method?

Accepted Answer

Debit Cash; Credit Equity Investments

Question 14

Which of the following is true about available-for-sale (AFS) debt investments?

Accepted Answer

Unrealized holding gains or losses are reported in Other Comprehensive Income.

Question 15

A company owns 15% of another company’s voting stock. Which method should be used to account for this investment?

Accepted Answer

Cost (fair value) method

Question 16

Which of the following is included in comprehensive income but not in net income?

Accepted Answer

Unrealized holding gains on available-for-sale debt investments

Question 17

A company sells 10% of its investment in Kline, Inc. for $$40,000. The book value of the investment sold is 43$$,000. What is the gain or loss on disposal?

Accepted Answer

$3,000 loss

Question 18

Which of the following is NOT a characteristic of equity securities with significant influence?

Accepted Answer

Unrealized holding gains or losses are reported in net income.

Question 19

How are held-to-maturity (HTM) investments reported on the balance sheet?

Accepted Answer

At amortized cost, as either a current or long-term asset depending on the maturity date

Question 20

Which of the following best describes the parent company in a consolidation?

Accepted Answer

The corporation that controls another company by owning more than 50% of its voting stock

Chapter 10: Investments – Financial Accounting Study Notes

Study Guide - Practice Questions

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