Question 1

The cost method of accounting for stock

Accepted Answer

A)  recognizes dividends as income 
B)  is only appropriate as part of a consolidation 
C)  requires the investment to be increased by the reported net income of the investee 
D)  requires the investment to be decreased by the reported net income of the investee

Question 2

Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments.

Accepted Answer

A) True 
 B)False

Question 3

Match each of the definitions that follow with the appropriate investment term (a-j).
-A corporation owning all or the majority of the voting stock of another corporation

Accepted Answer

A) Equity method 
B) Parent company 
C) Subsidiary company 
D) Consolidated financial statements 
E) Fair value
F)Unrealized gain or loss on investments.
G)Valuation allowance for investments
H)Dividend yield
I)Amortized cost
J)Cost method

Question 4

If one company owns more than 50% of the common stock of another company,

Accepted Answer

A)  a partnership exists 
B)  a parent-subsidiary relationship exists 
C)  the company whose stock is owned must be liquidated 
D)  the cost method should be used to account for the investment

Question 5

When the cost method is used to account for an investment, the carrying value of the investment is affected by

Accepted Answer

A)  the dividend distributions of the investee 
B)  the periodic net income of the investee 
C)  the earnings and dividend distributions of the investee 
D)  neither the earnings nor the dividends of the investee

Question 6

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is

Accepted Answer

A)  5% 
B)  10% 
C)  25% 
D)  20%

Question 7

Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit.

Accepted Answer

A) True 
 B)False

Question 8

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

Accepted Answer

A)  investment only 
B)  investment plus Wendell's share of Porter's net income earned since the investment was purchased 
C)  investment plus the total amount of dividends Wendell has received from Porter since the investment was purchased 
D)  investment plus Wendell's share of Porter's net income earned since the investment was purchased minus the total amount of dividends Wendell has received from Porter since the investment was purchased

Question 9

Nicer Corporation reported net income of $50,000 in the current year. There are 10,000 shares of $100 par, 6% preferred stock and 50,000 shares of $2 par common stock outstanding. During the year, Nicer paid the preferred stockholders a $6-per-share dividend and also paid $30,000 to common shareholders. The market value of Nicer's stock is preferred stock, $95, and common stock, $5.​
(a) Calculate Nicer's dividend yield common stock.
(b) Why does the dividend yield vary widely across firms?

Accepted Answer

The answer of Nicer Corporation reported net income of $50,000...

Question 10

On September 1, Parsons Company purchased $84,000, 10-year, 7% government bonds at 100 plus accrued interest. The semiannual interest payment dates are June 30 and December 31. Interest calculations are done by the month.
(a)Journalize the entry to record the bond purchase.
(b)Journalize the receipt of interest on December 31 of the first year.
(c)Journalize the sale of the bonds on February 1 of the second year for $82,000 plus accrued interest.

Accepted Answer

The answer of On September 1, Parsons Company purchased $84,000,...

Question 11

GAAP requires trading and available-for-sale investments to be reported at their

Accepted Answer

A)  fair value 
B)  historical cost 
C)  market value 
D)  net realizable value

Question 12

On January 1, the valuation allowance for trading investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000.​Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments.

Accepted Answer

The answer of On January 1, the valuation allowance for...

Question 13

A company uses cash to pay all of the following except

Accepted Answer

A)  All of these choices 
B)  interest to creditors 
C)  current expenses 
D)  dividends to stockholders

Question 14

On February 12, Addison, Inc. purchased 6,000 shares of Lucas Company at $22 per share plus a $240 brokerage fee. On August 22, Lucas paid a dividend per share of $0.42. On November 10, 4,000 shares of Lucas stock were sold for $28 per share less a $160 brokerage fee. The journal entry for the sale would include a

Accepted Answer

A)  debit to Cash, $111,840 
B)  credit to Investments-Lucas Company Stock, $112,000 
C)  credit to Loss on Sale, $23,680 
D)  debit to Cash, $112,000

Question 15

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

Accepted Answer

A)  credit to cash for $9,000 
B)  debit to the investment account for $9,000 
C)  credit to the investment account for $9,000 
D)  credit to a loss account for $9,000

Question 16

An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale?

Accepted Answer

A)  $3,500 gain 
B)  $350 gain 
C)  $350 loss 
D)  $500 gain

Question 17

Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1. Roberts reported net income of $155,000 and declared dividends of $40,000 during the year. How would these events be reported by Sutton using the cost method?

Accepted Answer

The answer of Sutton Company purchased 10% of the outstanding...

Question 18

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

Accepted Answer

A)  $12,750 gain 
B)  $600 gain 
C)  $600 loss 
D)  $9,250 loss

Question 19

The financial statements resulting from combining parent and subsidiary statements are called consolidated statements.

Accepted Answer

A) True 
 B)False

Question 20

Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives?

Accepted Answer

A)  debit Investments-Worton Corporation; credit Cash 
B)  debit Cash; credit Dividend Revenue 
C)  debit Investments-Worton Corporation; credit Income of Worton Corporation 
D)  debit Cash; credit Investments-Worton Corporation

Exam 15: Investments and Fair Value Accounting

The cost method of accounting for stock

Accounting for the sale of stock is the same for both the cost and the equity methods of accounting for investments.

Match each of the definitions that follow with the appropriate investment term (a-j) . -A corporation owning all or the majority of the voting stock of another corporation

If one company owns more than 50% of the common stock of another company,

When the cost method is used to account for an investment, the carrying value of the investment is affected by

Edison Corporation paid a dividend of $10 per share on its $100 par preferred stock and $4 per share on its $20 par common stock. The market value of the common stock is $80 per share. Edison's dividend yield is

Available-for-sale securities are securities that management expects to sell in the future, but are not actively traded for profit.

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

GAAP requires trading and available-for-sale investments to be reported at their

On January 1, the valuation allowance for trading investments account has a zero balance. On December 31, the cost of trading securities portfolio was $64,200, and the fair value was $67,000.Prepare the December 31 adjusting journal entry to record the unrealized gain or loss on trading investments.

A company uses cash to pay all of the following except

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

An investor purchased 500 shares of common stock, $25 par, for $19,250. Subsequently, 100 shares were sold for $35 per share. What is the amount of gain or loss on the sale?

Sutton Company purchased 10% of the outstanding stock of Roberts Company on January 1. Roberts reported net income of $155,000 and declared dividends of $40,000 during the year. How would these events be reported by Sutton using the cost method?

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

The financial statements resulting from combining parent and subsidiary statements are called consolidated statements.