If a company purchased 15% of the outstanding voting shares of stock of another company as a long-term investment in available-for-sale securities, the investor company should use the fo
Trang 14 An investor who owns more than 50% of the outstanding bonds of another corporation has
"significant influence" over that corporation
Trang 25 Objectives of a long-term investment in the common stock of another corporation include earning a return on idle cash or obtaining influence or control over the other corporation
6 When we sell an investment in available-for-sale securities, an entry needs to be recorded
to offset the allowance to value at market account against the net unrealized gains/losses account prior to recording the removal of the investment account
Trang 312-3
9 When using the term investments in associated or affiliated companies on a balance sheet,
it implies a company has significant influence by owning between 20 and 50 percent of the voting stock of that company
statement of cash flows under the indirect method to remove the effects of investment
activities out of the operating activities section
Trang 413 In a 100% acquisition, the stockholders of the acquired company receive cash for their shares of stock in the acquired company The stockholders are no longer owners of either the parent or the subsidiary
Trang 6Multiple Choice Questions
21 Which of the following is the best description of investments in trading securities?
A Investments in bonds that management intends to hold to maturity
B Investments in stocks or bonds that are held primarily for the purpose of selling them in the
near future
C Investments in more than fifty percent of the voting stock of another company
D Investments that grant the investor significant influence, but not control over the investee company
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 Investments in bonds that management intends to hold to maturity
B Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future
C Investments in more than fifty percent of the voting stock of another company
D Investments in securities that are accounted for under the market value method other than
trading securities and held-to-maturity debt investments
Trang 712-7
24 Subsequent to acquisition, measurement of a long-term investment in another corporation and the related investment revenue depends upon the extent to which the investing company can exercise
A significant control over the operating and financing policies of the other company
B significant influence or control over the operating and financing policies of the other
company
C significant influence or control over the operating policies of the other company
D significant influence or control over the financing policies of the other company
A Since the bonds were issued at par value, the cash interest will be the same as interest revenue
B The bonds will earn $75,000 of interest by December 31, 2009
C If sold before maturity, any gain or loss would be reported as an extraordinary item
D Since they were classified as held to maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime
A participation on its board of directors
B participation in its policy-making process
C material transactions between the two companies
D All of the answers are correct
Trang 827 Global Company owns 30% of the outstanding voting stock of Local Corporation Global should use the following method to account for the investment
A market value method
B equity method
C consolidated financial statement method
D Either the market value or equity method is acceptable
AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1
28 If a company purchased 15% of the outstanding voting shares of stock of another
company as a long-term investment in available-for-sale securities, the investor company should use the following method:
29 Use of the consolidated financial statement method of accounting for a long-term
investment in common stock of another company is required when the ownership of its voting stock is
Trang 912-9
30 The equity method causes the investment account to approximate
A original cost of the investment
B market value of the investment
C original cost of the investment minus any dividends received
D original cost of the investment plus a proportionate share of subsequent undistributed
earnings of the investee
A Market value method
Trang 1032 Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2009, at $40 per share as a long-term investment The records of Burke Corporation showed the following on December 31, 2009
Company should report "Investment income" amounting to
Trang 1112-11
34 Which of the following statements is correct?
A Any unrealized holding gain or loss on investments in trading securities is reported in the
income statement
B Any unrealized holding gain or loss on investments in available-for-sale securities is reported in the income statement
C Investments in available-for-sale securities are reported in the income statement
D Any unrealized holding gain or loss on investments in trading securities or in sale securities is reported in the income statement
A The investment in trading securities would be reported in the balance sheet at its $481,000
Trang 1236 Libby Company purchased equity securities for $100,000 and classified them as for-sale securities on September 15, 2009 At December 31, 2009, the current market value of the securities was $105,000 How should the investment be reported in the December 31,
D The investment in available for sale securities would be reported in the balance sheet at its
$105,000 market value and an unrealized holding gain on available-for-sale securities of
$5,000 would be reported in the stockholders' equity section of the balance sheet
declared and paid a cash dividend of $2 per share At December 31, 2009, end of the
accounting period, Daniel Corporation's shares were selling at $48 At December 31, 2009, the financial statements for Short Company should report the following amounts:
Trang 1312-13
38 Which of the following statements is true?
A Investments in bonds are always passive investments
B Investments in stock can be passive investments if the investor owns less than 20% of the voting stock
C Investments in stock that are classified as either trading securities or available-for-sale will record unrealized gains or losses on the income statement under the market value method
D Investments in bonds are always passive investments and investments in stock can be
passive investments if the investor owns less than 20% of the voting stock
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2
39 Which of the following statements is false?
A Out of all the assets on the balance sheet, only passive investments in marketable securities are reported using their market value
B Accountants can justify the use of the market value method because it is important to know the cash value of these passive investments and because their market value is objectively verifiable since they are actively traded
C Unrealized gains and losses recognized under the market value method are recorded in
stockholders' equity and do not affect net income
D Out of all the assets on the balance sheet, only passive investments in marketable securities are reported using their market value and unrealized gains and losses recognized under the market value method are recorded in stockholders' equity and do not affect net income
Trang 1440 On July 1, 2009, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 shares of the preferred stock (nonvoting) of Nature Company for $30 per share (18,000 shares outstanding) The records of Nature Company reflect the following on December 31, 2009
The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2009, would be
Blue Corporation common stock (par $5) 2,000 shares at $16 per share
Black Company preferred stock (par $20) 1,500 shares at $30 per share
The quoted market prices per share on December 31, 2009, were:
Blue Corporation stock, $15 per share
Black Company stock, $30 per share
Each of the long-term investments represents 10% of the total shares outstanding The combined carrying value of the long-term investments reported in the balance sheet of Surf Company at December 31, 2009, should be
Trang 1512-15
42 When accounting for investments in trading securities, any decline in market value below cost of the investments is reported on the
A income statement as a realized loss
B income statement as an unrealized holding loss
C balance sheet as a realized loss
D balance sheet as an unrealized holding loss in the stockholders' equity section
A measuring the market value of the long-term and short-term portfolios of stock
B computing the cost at acquisition
C where the unrealized holding loss or gain on investments is reported in the financial
Trang 1644 On July 1, 2009, Carter Company purchased trading securities as follows:
Dark Corporation common stock (par $1) 10,000 shares at $25 per share
Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share
The quoted market prices per share on December 31, 2009 were:
Dark Corporation stock, $27 per share
Janvrin Corporation stock, $104 per share
Each of the investments represented 5% of the total shares outstanding The carrying value amount of the investments at December 31, 2009 should be
45 Which of the following is true about passive investments?
A The investing company must own less than 20% of the voting stock in the investee
B These investments must be reported at market value on the balance sheet even though the historical cost principal is violated
C The market value method requires realized gains and losses to be recognized on the income statement
D The investing company must 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
Trang 1712-17
46 Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per share Phillips Corporation's intent is to keep these shares beyond the current year On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their reported 2009 net income was $52 million
What method of accounting will Phillips use to account for this investment?
A Amortized cost method
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their reported 2009 net income was $52 million
What effect will the dividend have on Phillips' books?
A It would increase cash and increase investment revenue
B It would increase cash and decrease investment in associated companies
C It would increase cash and increase net unrealized gains/losses
D It would increase cash and increase the allowance to value at market account
Trang 1848 Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin Corporations' voting stock on June 30, 2009 for $42 per share Phillips Corporation's intent is to keep these shares beyond the current year On
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their reported 2009 net income was $52 million
What value will be reflected on Phillips' balance sheet at December 31, 2009?
December 20, 2009, Martin Corporation paid a previously declared $4,000,000 cash dividend
On December 31, 2009, Martin Corporation's stock was trading at $45 per share and their reported 2009 net income was $52 million
What amount will be reflected on Phillips' income statement for the year in connection with their investment in Martin?
Trang 1912-19
50 Passive investments require use of the market value method for reporting them on the balance sheet Which of the following statements is false?
A The market value is a more relevant value since the intent in purchasing these investments
is to generate cash inflow when it is needed and market value best reflects the expected cash inflow from the sale of the investments
B It is very easy to determine the market value of passive investments since their market value is quoted daily on the stock exchanges on which they trade
C The market value method allows gains and losses to be recognized immediately on all
passive investments by deducting them on the income statement
D None of the other answers is false
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2
51 Which of the following statements is true?
A Passive investments can be either short-term or long-term investments
B. To qualify as a passive investment, the investor cannot own more than 25% of the voting
stock in the investee
C All unrealized gains and losses on passive investments must be reported on the income statement for the year in which their fair market value rises or falls
D All of the answers are true
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2
52 When the equity method is used in accounting for long-term investments in equity
securities, an increase or decrease in the investment should be recognized
A when the investee company reports income
B when the investee company declares and pays a cash dividend
C when the investee company declares and pays (or issues) either a cash dividend or a stock dividend
D on the basis of stock market fluctuations
Trang 2053 Under the equity method, the investor's proportionate share of the income (or losses) of the investee corporation impacts the
A long-term investment account
B investment revenue account
54 Heartfelt Company owns a 40% interest in the voting common stock of Candle
Corporation as a long-term investment For 2009, Candle Corporation reported net income of
$100,000 and declared and paid cash dividends of $10,000 The carrying value of the Candle Corporation investment was $500,000 on January 1, 2009 Heartfelt should recognize income from investee earnings for the year ended December 31, 2009 of
55 On January 1, 2009, Palmer, Inc bought 40% of the outstanding shares of Arnold
Corporation at a cost of $137,000 The equity method of accounting for this investment is used At December 31, 2009, Arnold Corporation reported $30,000 net income and paid
$10,000 cash dividends At December 31, 2009, the shares had a market value of $150,000 This investment should be reported on the balance sheet of Palmer, Inc., on December 31,
Trang 2112-21
56 On January 1, 2009, Calas Company acquired 40% of the outstanding voting stock of Nick Company as a long-term investment On December 31, 2009, Nick Company reported net income of $10,000 and dividends declared and paid of $4,000 For the year ended
December 31, 2009, Calas Company should report "Income from investee earnings" of
57 Which of the following statements is false?
A When an investment in another company is purchased, it is a cash outflow under investing activities
B When investment assets are sold, it is a cash inflow under investing activities
C Any gains or losses in connection with investment assets are reported as an inflow or
outflow of cash connected to operating activities
D None of the other answers is false
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3
58 Which of the following statements is false?
A Dividends received from investment assets increase cash flow from investing activities
B Only realized gains and losses increase or decrease cash flow from operating activities Unrealized gains and losses have no effect on cash flow from operating activities
C Sale of investment assets is cash inflow from investing activities
D None of the other answers is false
Trang 2259 Lopez Corporation's 2009 statement of cash flows reported the following information Proceeds from disposals of investments were $161 million; purchases of investments were
$46 million, and depreciation and amortization of $5 million
How much will be reported as net cash inflow or outflow from investing activities as a result
of these items for the year ended December 31, 2009?
A Net cash outflow from investing activities $207 million
B Net cash outflow from investing activities $115 million
C Net cash inflow from investing activities $115 million
D Net cash inflow from investing activities $207 million
AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3
60 In 2009, Morelli, Inc reported the following items in their statement of cash flows
Purchases of property, plant, and equipment $1,336 million, proceeds from the sale of
marketable securities $13,079 million, and cash paid for investment acquisitions $115 million How much will be reported as cash inflow or outflow from investing activities related to these items?
A $11,628 million in net cash inflow
B $11,628 million in net cash outflow
C $14,530 million in net cash inflow
D $14,530 million in net cash outflow
Trang 2312-23
61 Which of the following statements is true?
A When the equity method is used to account for an investment in an investee, the reported share of investee income must be added to net income on the statement of cash flows
B When the equity method is used to account for an investment in an investee, the cash dividends received are cash inflow from investing activities
C Any realized or unrealized gains or losses that were reported on the income statement
under the market value method must be removed from net income in the operating activities section of the statement of cash flows
D All of the statements are true
AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3
62 Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2009 On December 12, 2009, Click It Corporation paid a $1 million cash dividend and reported net income for the year ended December 31, 2009 of $10 million On December 31, 2009, Click It Corporation's stock was trading at $11.50 per share
What method of accounting will Photo finish use to account for this investment?
A Amortized cost method
Trang 2463 Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2009 On December 12, 2009, Click It Corporation paid a $1 million cash dividend and reported net income for the year ended December 31, 2009 of $10 million On December 31, 2009, Click It Corporation's stock was trading at $11.50 per share
What effect will the dividend have on Photo Finish's books?
A It would increase cash and increase investment revenue
B It would increase cash and decrease investment in associated companies
C It would increase cash and increase net unrealized gains/losses
D It would increase cash and increase the allowance to value at market account
AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3
64 Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2009 On December 12, 2009, Click It Corporation paid a $1 million cash dividend and reported net income for the year ended December 31, 2009 of $10 million On December 31, 2009, Click It Corporation's stock was trading at $11.50 per share
What value will be reflected on Photo Finish's balance sheet at December 31, 2009?
Trang 2512-25
65 Photo Finish Corporation bought a 40% interest in the voting stock of Click It
Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2009 On December 12, 2009, Click It Corporation paid a $1 million cash dividend and reported net income for the year ended December 31, 2009 of $10 million On December 31, 2009, Click It Corporation's stock was trading at $11.50 per share
What amount will be reflected on Photo Finish's income statement for the year ended
December 31, 2009 in connection with their investment in Click It Corporation?
A The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed
at their fair market values on the date of acquisition
B Fun with Florals Corporation will use the equity method of accounting for this investment
C Fun with Florals Corporation will report Crafts to Go Corporation's revenues and expenses
on a consolidated income statement
D Fun with Florals will use the market value method of accounting for this investment