Question

19. What etfect did the borrowing transaction have on Reed Company current ratio? a The ratio remained unchanged. b. The change in the current ratio cannot be determined The ratio decreased d The ratio Increased On January 1, 2002, Sanders s1.000, 9, bond that pays interest on January1 and July 1 Sande Company has a calendar year end company purchased at tace value.ュ 20. The entry for the receipt of interest on aly1, a002, is a. Cash Interest Revenue b Cash 90 Interest Revenue 90 Interest Receivable 45 Interest Revenue dInterest Receivable _.. .. Interest Revenue 90 22. The adjusting entry on December 31, 2002, is a. not required b. Cash c. interest Receivable d. Interest Receivable 45 Interest Revenue -. - Interest Revenue Debt Investments .. 45 45 45 . -... 4 5 - 45 22. Jacobs Corporation makes a short-term investment in 300 shar Starr Company's common stock. The stock is purchased for $30 a share plus brokerage fees of $900. The entry for the purchase is a. Debt Investments . . 9,000 9,900 9,000 9,000 Cash ..._.. b. Stock Investments 9,900 Cash c. Stock Investments 900 Brokerage Fee Expense 9,900 Cash d. Stock Investments 9,000 Cash 23. Under the equity method of accounting for long-term investments in common stock, when a dividend is received from the investee company, a. the Dividend Revenue account is credited b. the Stock Investments account is increased c. the Stock Investments account is decreased d. no entry is necessary

Answer 1

19. c. The ratio decreased.

If borrowing transaction is a current liability i.e. payable within 12 months, the denominator will increase the total of current liability. If denominator of current ratio increases, the current ratio would decrease.

20.a. Cash Account 45

Interest revenue 45

Calculation of interest = 1000 * 9% * 6/12 = $45

The interest are received on July 1 and hence the journal entry should be cash received being debited and interest recognized as revenue as they are received.

21. c. Interest receivable 45

Interest revenue 45

Calculation of interest = 1000 * 9% * 6/12 = $45

The interest would be received on next day. The adjusting entry needs to be made for the interest accrued yet not received. When the cash would be received.cash will be debited and interest receivable be credited to reverse the effect.

22.b. Stock Investments 9900

To Cash 9900

When brokerage is paid for investment, it becomes part of the purchase cost. It is added to cost of stock investment as 300*30 + 900 = $9900 .

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