Question 1

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 fair value method. 
D) The investment would be accounted for under the amortized cost methoD.An investment of more than 50% of the outstanding voting stock requires the parent company to use the consolidation 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 fair value method. 
D) The investment would be accounted for under the amortized cost methoD.An investment of more than 50% of the outstanding voting stock requires the parent company to use the consolidation method.

Question 2

Which of the following statements regarding the accounting for a common stock investment using the equity method is incorrect?

Accepted Answer

A) The equity method is used for investments of ownership between 20% and 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 affiliate net income. 
C) The investment account is decreased by the proportionate share of affiliate dividends. 
D) Investment income equals the proportionate share of affiliate dividends. 
A) The equity method is used for investments of ownership between 20% and 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 affiliate net income. 
C) The investment account is decreased by the proportionate share of affiliate dividends. 
D) Investment income equals the proportionate share of affiliate dividends.

Question 3

On January 1, 2016, Red Company purchased Patriot Shop for $400,000 cash in a merger transaction. Red Company received the assets listed below and assumed accounts payable owed by Patriot to its suppliers in the amount of $30,000.   What amount of goodwill will be recorded in the transaction?

Accepted Answer

A) $35,000. 
B) $60,000. 
C) $50,000. 
D) $45,000. 
A) $35,000. 
B) $60,000. 
C) $50,000. 
D) $45,000.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

For all periods in which a security is held in the available-for-sale securities portfolio, the only income reported on the income statement is dividend revenue.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is true about a passive investment in common stock?

Accepted Answer

A) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment is reported on the balance sheet at cost. 
B) The investment must not have any voting rights. 
C) The fair value method requires unrealized gains and losses to be recognized on the income statement. 
D) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment must be reported at fair value on the balance sheet. 
A) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment is reported on the balance sheet at cost. 
B) The investment must not have any voting rights. 
C) The fair value method requires unrealized gains and losses to be recognized on the income statement. 
D) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment must be reported at fair value on the balance sheet.

Question 7

Subsequent to a merger, the assets and liabilities of the acquired company will continue to be accounted for within the acquired company's books.

Accepted Answer

A) True 
 B)False

Question 8

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

Accepted Answer

A) True 
 B)False

Question 9

Fun with Florals Corporation acquired all the voting common stock shares of Crafts-to-Go Corporation under the acquisition method. Crafts-to-Go remains a separate corporation. Which of the following statements about the financial statements is true?

Accepted Answer

A) The assets and liabilities of Crafts-to-Go Corporation would be not revalued and disclosed at fair value on the date of acquisition. 
B) Fun with Florals will use the equity method of accounting for this investment. 
C) Fun with Florals will prepare consolidated financial statements. 
D) Fun with Florals will use the fair value method of accounting for this investment. 
A) The assets and liabilities of Crafts-to-Go Corporation would be not revalued and disclosed at fair value on the date of acquisition. 
B) Fun with Florals will use the equity method of accounting for this investment. 
C) Fun with Florals will prepare consolidated financial statements. 
D) Fun with Florals will use the fair value method of accounting for this investment.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

Accepted Answer

A) Measuring the fair value of the long-term and short-term investment portfolios on the balance sheet. 
B) Determination of the acquisition cost. 
C) Reporting of the unrealized holding gain or loss on investments within the financial statements. 
D) Determination of the unrealized holding gain or loss. 
A) Measuring the fair value of the long-term and short-term investment portfolios on the balance sheet. 
B) Determination of the acquisition cost. 
C) Reporting of the unrealized holding gain or loss on investments within the financial statements. 
D) Determination of the unrealized holding gain or loss.

Question 12

A decline in the fair value of the available-for-sale securities portfolio reduces assets and net income.

Accepted Answer

A) True 
 B)False

Question 13

Required:
A.Discuss the criteria for applying the equity method of accounting for long-term investments.
B.Discuss the rationale for the equity method procedures of accounting for long-term investments.

Accepted Answer

A. The criteria for applying the equity

Question 14

Which of the following statements is correct?

Accepted Answer

A) Any unrealized holding gain or loss on investments in trading securities is reported on the income statement. 
B) Any unrealized holding gain or loss on investments in available-for-sale securities is reported on the income statement. 
C) All unrealized gains and losses are reported on the income statement regardless of the method used to account for the investment. 
D) Any unrealized holding gain or loss on investments in trading securities or in available-for-sale securities is reported on the income statement. 
A) Any unrealized holding gain or loss on investments in trading securities is reported on the income statement. 
B) Any unrealized holding gain or loss on investments in available-for-sale securities is reported on the income statement. 
C) All unrealized gains and losses are reported on the income statement regardless of the method used to account for the investment. 
D) Any unrealized holding gain or loss on investments in trading securities or in available-for-sale securities is reported on the income statement.

Question 15

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, and Heartfelt accounts for the investment using the equity method. During 2016, Candle Corporation reported net income of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 2016. How much investment income should Heartfelt report during 2016 from the Candle investment?

Accepted Answer

A) $36,000. 
B) $40,000. 
C) $4,000. 
D) $10,000. 
A) $36,000. 
B) $40,000. 
C) $4,000. 
D) $10,000.

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

Which of the following statements regarding the accounting for a common stock investment using the equity method is incorrect?

On January 1, 2016, Red Company purchased Patriot Shop for $400,000 cash in a merger transaction. Red Company received the assets listed below and assumed accounts payable owed by Patriot to its suppliers in the amount of $30,000. What amount of goodwill will be recorded in the transaction?

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

For all periods in which a security is held in the available-for-sale securities portfolio, the only income reported on the income statement is dividend revenue.

Which of the following is true about a passive investment in common stock?

Subsequent to a merger, the assets and liabilities of the acquired company will continue to be accounted for within the acquired company's books.

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

Fun with Florals Corporation acquired all the voting common stock shares of Crafts-to-Go Corporation under the acquisition method. Crafts-to-Go remains a separate corporation. Which of the following statements about the financial statements is true?

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

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

A decline in the fair value of the available-for-sale securities portfolio reduces assets and net income.

Required: A.Discuss the criteria for applying the equity method of accounting for long-term investments. B.Discuss the rationale for the equity method procedures of accounting for long-term investments.

Which of the following statements is correct?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Accounting System

Operating Decisions and the Accounting System

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; Intangibles; and Natural Resources

Reporting and Interpreting Liabilities

Reporting and Interpreting Bond Securities

Reporting and Interpreting Stockholders Equity

Statement of Cash Flows

Analyzing Financial Statements

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Exam 14: PPA: Reporting and Interpreting Investments in Other Corporations

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

Which of the following statements regarding the accounting for a common stock investment using the equity method is incorrect?

On January 1, 2016, Red Company purchased Patriot Shop for $400,000 cash in a merger transaction. Red Company received the assets listed below and assumed accounts payable owed by Patriot to its suppliers in the amount of $30,000. What amount of goodwill will be recorded in the transaction?

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

For all periods in which a security is held in the available-for-sale securities portfolio, the only income reported on the income statement is dividend revenue.

Which of the following is true about a passive investment in common stock?

Subsequent to a merger, the assets and liabilities of the acquired company will continue to be accounted for within the acquired company's books.

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

Fun with Florals Corporation acquired all the voting common stock shares of Crafts-to-Go Corporation under the acquisition method. Crafts-to-Go remains a separate corporation. Which of the following statements about the financial statements is true?

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

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

A decline in the fair value of the available-for-sale securities portfolio reduces assets and net income.

Required: A.Discuss the criteria for applying the equity method of accounting for long-term investments. B.Discuss the rationale for the equity method procedures of accounting for long-term investments.

Which of the following statements is correct?

Financial Statements and Business Decisions

Investing and Financing Decisions and the Accounting System

Operating Decisions and the Accounting System

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; Intangibles; and Natural Resources

Reporting and Interpreting Liabilities

Reporting and Interpreting Bond Securities

Reporting and Interpreting Stockholders Equity

Statement of Cash Flows

Analyzing Financial Statements

Filters