Question 1

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

Accepted Answer

A) It is used for investments between 20 - 50% of the outstanding voting stock when the investor has the ability to exert significant influence. 
B) The investment account is increased by the proportionate share of investee net income. 
C) The investment account is decreased by the proportionate share of investee dividends. 
D) Investment income equals the proportionate share of investee dividends. 
A) It is used for investments between 20 - 50% of the outstanding voting stock when the investor has the ability to exert significant influence. 
B) The investment account is increased by the proportionate share of investee net income. 
C) The investment account is decreased by the proportionate share of investee dividends. 
D) Investment income equals the proportionate share of investee dividends.

Question 2

Which of the following is true about passive investments?

Accepted Answer

A) The investing company usually owns less than 20% of the voting stock in the investee and they are reported on the balance sheet at cost. 
B) These investments must not have any voting rights. 
C) The market value method requires realized gains and losses to be recognized on the income. 
D) The investing company must usually own less than 20% of the voting stock in the investee and these investments must be reported at market value on the balance sheet even though the historical cost principal is violated. 
A) The investing company usually owns less than 20% of the voting stock in the investee and they are reported on the balance sheet at cost. 
B) These investments must not have any voting rights. 
C) The market value method requires realized gains and losses to be recognized on the income. 
D) The investing company must usually own less than 20% of the voting stock in the investee and these investments must be reported at market value on the balance sheet even though the historical cost principal is violated.

Question 3

McGinn Company purchased 10% of RJ Company's common stock during 2010 for $100,000.The 10% investment in RJ had a $90,000 fair value at the end of 2010 and a $105,000 fair value at the end of 2011.Which of the following statements is correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 2012 for $102,000?

Accepted Answer

A) The 2012 realized loss reported on the income statement is $3,000. 
B) The 2012 realized gain reported on the income statement is $2,000. 
C) The 2012 unrealized gain reported on the income statement is $2,000. 
D) The 2012 unrealized loss reported on the income statement is $3,000. 
A) The 2012 realized loss reported on the income statement is $3,000. 
B) The 2012 realized gain reported on the income statement is $2,000. 
C) The 2012 unrealized gain reported on the income statement is $2,000. 
D) The 2012 unrealized loss reported on the income statement is $3,000.

Question 4

Which of the following is the primary justification for reporting the acquisition of a controlling interest on a consolidated basis?

Accepted Answer

A) The companies are legally and in economic substance separate. 
B) The companies are legally and in economic substance one entity. 
C) The companies are legally one entity but they are separate in economic substance. 
D) The companies are legally separate but they are one entity in economic substance. 
A) The companies are legally and in economic substance separate. 
B) The companies are legally and in economic substance one entity. 
C) The companies are legally one entity but they are separate in economic substance. 
D) The companies are legally separate but they are one entity in economic substance.

Question 5

On January 1,2010,Alden Company acquired 15,000 shares of the nonvoting common stock of Maxim Corporation as a long-term investment.Maxim reported a 2010 net income of $35,000.On January 2,2011,Maxim declared and paid a $10,000 cash dividend.The market value of the Maxim stock held by Alden on December 31,2010,was $224,000.Alden Company has recorded only the following journal entries:

$\begin{array}{lccc}
\text { January 1, 2010:} \
 \text { Long-term investment, Maxim stock (15,000 shares)  } & 225,000 & \
\text {Cash}&&225,000\
\
 \text { December 31,2010 (end of the accounting period):  } && \
\text {No entry}&&\
\
\text { January 2, 2010:} \
\text {Cash}&400&\
 \text {  Investment income  } && 400\
\end{array}$
 Based on the above information,answer the following questions:
A.What method did Alden use to account for the investment?
B.Did Alden fail to make an adjusting entry on December 31,2010?
C.What condition,if changed,would require that the equity method be used?
D.Assuming the market value method is used; calculate the valuation of the net investment on January 3,2011.

Accepted Answer

The answer of On January 1,2010,Alden Company acquired 15,000 shares...

Question 6

The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue.

Accepted Answer

A) True 
 B)False

Question 7

The equity method is required to be used when an investor has the ability to exert significant influence over the investee.

Accepted Answer

A) True 
 B)False

Question 8

On January 2,2010,Parent Company purchased 100% of Sub Company's stock for $900,000 cash.At this date,the book value of Sub Company's net assets (i.e.,assets less liabilities)was $800,000 which included property,plant and equipment that have a book value of $400,000 and a market value of $440,000.
Requirements:
A.Prepare the journal entry that would appear on the books of each company at the acquisition date.
B.How much goodwill should Parent Company recognize on the consolidated financial statements at the date of acquisition?

Accepted Answer

The answer of On January 2,2010,Parent Company purchased 100% of...

Question 9

A.Discuss the similarities of accounting for available-for-sale and trading securities portfolios.
B.Discuss the differences encountered in accounting for available-for-sale and trading securities portfolios.

Accepted Answer

The answer of A.Discuss the similarities of accounting for available-for-sale...

Question 10

Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000.The 15% investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of 2011.Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security?

Accepted Answer

A) The 2010 unrealized gain is $10,000, but is not included in Lena's 2010 net income. 
B) The 2011 unrealized loss is $20,000, but is not included in Lena's 2011 net income. 
C) The 2011 unrealized loss is $10,000 and is included in Lena's 2011 net income. 
D) The 2010 unrealized gain is $10,000 and is reported on Lena's balance sheet as a component of stockholders' equity. 
A) The 2010 unrealized gain is $10,000, but is not included in Lena's 2010 net income. 
B) The 2011 unrealized loss is $20,000, but is not included in Lena's 2011 net income. 
C) The 2011 unrealized loss is $10,000 and is included in Lena's 2011 net income. 
D) The 2010 unrealized gain is $10,000 and is reported on Lena's balance sheet as a component of stockholders' equity.

Question 11

When an investment accounted for under the equity method is sold,the gain or loss reported on the income statement is the difference between the selling price and its original cost.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is false?

Accepted Answer

A) Dividends received from stock investments increase cash flows from investing activities. 
B) Income from investments accounted for using the equity method doesn't create cash flows. 
C) Sale of stock investments is a cash inflow from investing activities. 
D) Dividends received from stock investments accounted for using the equity method don't create net income but do create cash flows. 
A) Dividends received from stock investments increase cash flows from investing activities. 
B) Income from investments accounted for using the equity method doesn't create cash flows. 
C) Sale of stock investments is a cash inflow from investing activities. 
D) Dividends received from stock investments accounted for using the equity method don't create net income but do create cash flows.

Question 13

Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

Accepted Answer

A) Patents 
B) Goodwill 
C) Acquisition expense 
D) Acquisition revenue 
A) Patents 
B) Goodwill 
C) Acquisition expense 
D) Acquisition revenue

Question 14

On January 1,2010,Short Company purchased as an available-for-sale investment,20,000 shares (15% of the outstanding voting shares)of Daniel Corporation's $1 par value common stock at a cost of $50 per share.During November 2010,Daniel declared and paid a cash dividend of $2 per share.At December 31,2010,end of the accounting period,Daniel's shares were selling at $48.The 2010 financial statements for Short Company should report the following amounts: $$\begin{array} { l c c c } 
& \underline { \text { Long-Term } } & \underline { \text { Unrealized Holding } } & \underline { \text { Investment } } \
& \underline { \text { Investment } } & \underline { \text { Gains/Losses } } & \underline { \text { Revenue } } \
\text { A. }  & 1,000,000 & 40,000 & 40,000 \
\text { B. } & 960,000 & \text { Zero } & \text { Zero } \
\text { C. } & 1,000,000 & 80,000 & \text { Zero } \
\text { D. }& 960,000 & 40,000 & 40,000
\end{array}$$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 15

A realized gain or loss is reported on the income statement when a trading security is sold.

Accepted Answer

A) True 
 B)False

Question 16

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30,2010 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2010,Martin paid a previously declared $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and their reported 2010 net income was $52 million.What investment value will be reflected on Phillips' balance sheet at December 31,2010?

Accepted Answer

A) $42,000,000 
B) $45,000,000 
C) $46,800,000 
D) $47,200,000 
A) $42,000,000 
B) $45,000,000 
C) $46,800,000 
D) $47,200,000

Question 17

Piano Company owns 55% of the voting common stock shares of Keys Corporation.Which of the following is true?

Accepted Answer

A) The investment would be accounted for using the equity method. 
B) The investment would be accounted for by consolidation. 
C) The investment would be accounted for under the market value method. 
D) The investment would be accounted for under the amortized cost method. 
A) The investment would be accounted for using the equity method. 
B) The investment would be accounted for by consolidation. 
C) The investment would be accounted for under the market value method. 
D) The investment would be accounted for under the amortized cost method.

Question 18

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting)of Potato Corporation as a long-term investment.Which of the following classifications should be used by Idaho Company in accounting for the investment?

Accepted Answer

A) Trading securities. 
B) Held-to-maturity. 
C) Available-for-sale. 
D) Consolidation. 
A) Trading securities. 
B) Held-to-maturity. 
C) Available-for-sale. 
D) Consolidation.

Question 19

On January 1,2010,Fall Corporation purchased 100% of the outstanding voting shares of Foliage Corporation for $600,000.The book and market values of Foliage's assets and liabilities as of January 1,2010 are listed below:
 $$\begin{array} { l r r } 
\text { Item } & \text { Book Value } & \text { Market Value } \
\text { Equipment } & \$ 60,000 & \$ 80,000 \
\text { Trucks } & \$ 40,000 & \$ 55,000 \
\text { Factory } & \$ 300,000 & \$ 320,000 \
\text { Remaining assets } & \$ 130,000 & \$ 130,000 \
\text { Liabilities } & \$ 100,000 & \$ 100,000
\end{array}$$ Calculate the amount of goodwill that should be recognized.

Accepted Answer

The answer of On January 1,2010,Fall Corporation purchased 100% of...

Question 20

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments. $$\begin{array} { l l l l } 
& & \underline { \text { Outstanding } } & \underline { \text { Level of Ownership: } } \
  &\underline {\text { Measurement and} } & \underline {\text { Common Stock} } & \underline { \text { Degrees of Influence } } \

& \underline { \text { Reporting Method Stock }  } & \underline {  \text { Owned } ( \% ) } & \underline { \text { or Contro } } \
\text { A. } \text { Market value }\ \
\text { B. Equet value } & \underline { } & \underline { \text { l } } \
\text { C. Consolidated statements } & &
\end{array}$$

Accepted Answer

The answer of Complete the following matrix by writing a...

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

Which of the following is true about passive investments?

Which of the following is the primary justification for reporting the acquisition of a controlling interest on a consolidated basis?

The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue.

The equity method is required to be used when an investor has the ability to exert significant influence over the investee.

A.Discuss the similarities of accounting for available-for-sale and trading securities portfolios. B.Discuss the differences encountered in accounting for available-for-sale and trading securities portfolios.

When an investment accounted for under the equity method is sold,the gain or loss reported on the income statement is the difference between the selling price and its original cost.

Which of the following statements is false?

Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

A realized gain or loss is reported on the income statement when a trading security is sold.

Piano Company owns 55% of the voting common stock shares of Keys Corporation.Which of the following is true?

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting)of Potato Corporation as a long-term investment.Which of the following classifications should be used by Idaho Company in accounting for the investment?

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments. A. Market value \ B. Equet value C. Consolidated statements

Financial Statements and Business Decisions

Investing and Financing Decisions and the Balance Sheet

Operating Decisions and the Income Statement

Adjustments,Financial Statements,and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Reporting and Interpreting Liabilities

Reporting and Interpreting Bonds

Reporting and Interpreting Owners Equity

Statement of Cash Flows

Analyzing Financial Statements

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Exam 12: Reporting and Interpreting Investments in Other Corporations

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

Which of the following is true about passive investments?

Which of the following is the primary justification for reporting the acquisition of a controlling interest on a consolidated basis?

The only income reported on the income statement for a stock from the available-for-sale portfolio prior to its sale is dividend revenue.

The equity method is required to be used when an investor has the ability to exert significant influence over the investee.

A.Discuss the similarities of accounting for available-for-sale and trading securities portfolios. B.Discuss the differences encountered in accounting for available-for-sale and trading securities portfolios.

When an investment accounted for under the equity method is sold,the gain or loss reported on the income statement is the difference between the selling price and its original cost.

Which of the following statements is false?

Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

A realized gain or loss is reported on the income statement when a trading security is sold.

Piano Company owns 55% of the voting common stock shares of Keys Corporation.Which of the following is true?

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting)of Potato Corporation as a long-term investment.Which of the following classifications should be used by Idaho Company in accounting for the investment?

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments. A. Market value \ B. Equet value C. Consolidated statements

Financial Statements and Business Decisions

Investing and Financing Decisions and the Balance Sheet

Operating Decisions and the Income Statement

Adjustments,Financial Statements,and the Quality of Earnings

Communicating and Interpreting Accounting Information

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Reporting and Interpreting Cost of Goods Sold and Inventory

Reporting and Interpreting Property, Plant, and Equipment; Natural Resources; and Intangibles

Reporting and Interpreting Liabilities

Reporting and Interpreting Bonds

Reporting and Interpreting Owners Equity

Statement of Cash Flows

Analyzing Financial Statements

Filters