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Student: ___________________________________________________________________________

1. The extent of influence and control over another company is a critical factor in determining the proper method of accounting for a long-term investment in the common stock of another company.

True False

2. Investments in bonds intended to be sold before they reach maturity should be reported under the market value method.

True False

3. Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

True False

4. If a bond is bought at a discount, then interest revenue will be less than the cash payment. True False

5. If a bond is bought at a premium, the amortized book value of the bond investment will decrease as the bond matures.

True False

6. Held-to-maturity bond investments have to be reported on the balance sheet at fair value. True False

7. Investments classified other than as held-to-maturity bond investments have to be reported on the balance sheet at fair value.

True False

8. A realized gain or loss is reported on the income statement when a fair value adjustment is made. True False

9. An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its cost.

True False

10. An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its cost.

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11. An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its cost.

True False

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

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

14. An increase in the fair value of the trading securities portfolio increases both assets and net income. True False

15. The sale of a stock from the available-for-sale portfolio creates a gain or loss on the income statement based on the difference between the stock's original cost and its selling price.

True False

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

True False

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

True False

18. Use of the equity method is required for investments between 20 and 50% of a company's common stock regardless of the investor's ability to influence the investee.

True False

19. The equity method requires the recognition of investment revenue for dividends received. True False

20. Ocean Corporation owns 30% of Woods Corp. for which they paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid a $100,000 dividend; the investment in Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend.

True False

21. An investment accounted for under the equity method would record a reduction in the investment account for the proportionate share of the investee's reported net loss.

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22. An investment accounted for under the equity method would record an increase in the investment account and create net income for an amount equal to the proportionate share of the investee's reported net income. True False

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

24. 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.

True False

25. Any unrealized gains or losses on trading securities would have to be added back to or deducted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

True False

26. Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million. Madison will report goodwill of $0.9 million.

True False

27. When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

True False

28. Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated income statement.

True False

29. Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger or acquisition.

True False

30. The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the consolidation process.

True False

31. 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 provides the investor significant influence over the investee, but not control over the investee.

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

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.

33. Which of the following is the best description of investments in available-for-sale 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 in securities that are accounted for under the market value method other than trading securities and held-to-maturity investments.

34. Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2010. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false? 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, 2010.

C. The bond investment must be accounted for using the fair value approach. D

.

Since they were classified as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.

35. Significant influence over the operating and financial policies of another company may be indicated by A. participation on its board of directors.

B. participation in its policy-making process.

C. evidence of material transactions between the two companies. D. all of the above responses.

36. 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

A. 20% or more. B. less than 20%.

C. between 20% and 50%. D. more than 50%.

37. Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false?

A. Since the bonds were issued at a premium, the cash interest will be greater than interest revenue. B. Since the bonds were issued at a premium, the book value of the bond investment will decrease. C. The bond investment must be accounted for using the held-to-maturity classification.

D. The company would recognize unrealized gains or losses on the bonds under the fair value approach within the income statement.

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38. Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?

A. Since the bonds were purchased at a premium, the cash interest will be less than interest revenue. B. Since the bonds were purchased at a discount, the book value of the bond investment will increase. C. The bond investment must be accounted for using the trading securities classification.

D. The company would not recognize unrealized gains or losses on the bonds.

39. 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?

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

40. Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 2010, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 2010:

At what amount should Gilman Company report the Burke investment on the December 31, 2010 balance sheet?

A. $4,218,000 B. $4,000,000 C. $4,124,000 D. $3,800,000

How much should Gilman Company report as investment income from the Burke investment during 2010? A. $230,000

B. $218,000 C. $12,000 D. $30,000

42. On January 1, 2010, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities. During 2010, Rocker Company

reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 2010 from the Rocker investment?

A. $225,000 B. $37,500 C. $187,500 D. $250,000

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43. Which of the following statements is correct?

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.

44. Lyrical Company purchased equity securities for $500,000 and classified them as trading securities on September 15, 2010. On December 31, 2010, the current market value of the securities was $481,000. How should the investment be reported within the 2010 financial statements?

A. The investment in trading securities would be reported in the balance sheet at its $481,000 market value. B. The investment in trading securities would be reported in the balance sheet at its $500,000 cost.

C. A realized holding loss on the trading securities would be reported on the income statement. D

.

The investment in trading securities would be reported in the balance sheet at its $481,000 market value and a realized holding loss on the trading securities would be reported on the income statement.

45. Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2010. At December 31, 2010, the current market value of the securities was $105,000. How should the investment be reported in the 2010 financial statements?

A. The investment in available-for-sale securities would be reported on the balance sheet at its $100,000 cost.

B. The $5,000 unrealized gain is reported within the income statement. C. The $5,000 realized gain is reported within the income statement. 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 would be reported in the stockholders' equity section of the balance sheet.

46. 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:

A. Option A

B. Option B C. Option C D. Option D

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47. JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2010, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 2010:

At what amount should JDR report the YRK investment on the December 31, 2010 balance sheet? A. $2,116,000

B. $2,000,000 C. $4,124,000 D. $2,108,000

48. JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 2010, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 2010:

How much investment income should JDR report from the YRK investment during 2010? A. $290,000

B. $30,000 C. $116,000 D. $12,000

49. On July 1, 2010, 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:

The amount reported on the balance sheet by Wildlife Company for its investment at December 31, 2010 would be which of the following?

A. $160,000 B. $162,000 C. $182,000 D. $200,000

50. On July 1, 2010, Surf Company purchased long-term investments in available-for-sale securities as follows: 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, 2010 were as follows: 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 at December 31, 2010 would be which of the following?

A. $77,000 B. $73,500 C. $71,500 D. $75,000

(8)

51. When accounting for investments in trading securities, any decline in market value below cost of the investments is reported in which of the following ways?

A. On the income statement as a realized loss.

B. On the income statement as an unrealized holding loss. C. On the balance sheet as a realized loss.

D. On the balance sheet as an unrealized holding loss in the stockholders' equity section.

52. 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. Measuring the market value of the long-term and short-term investment portfolios on the balance sheet. B. Determination of the acquisition cost.

C. Where the unrealized holding loss or gain on investments is reported within the financial statements. D. Determination of the unrealized holding gain or loss.

53. On July 1, 2010, 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, 2010 were as follows: 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, 2010 should be

A. $478,000 B. $460,000 C. $458,000 D. $480,000

54. Which of the following is true about passive investments? 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.

55. 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 $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 method of accounting will Phillips use to account for this investment?

A. Amortized cost method. B. Equity method.

C. Fair value method. D. Consolidation.

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56. 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 $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 effect will the dividend have on Phillips' 2010 financial statements?

A. It would increase cash and increase investment income.

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.

57. 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? A. $42,000,000

B. $45,000,000 C. $46,800,000 D. $47,200,000

58. When is the equity method used to account for long-term investments in stocks?

A. When the investment is between 20 - 50% of the voting stock, regardless of whether or not significant influence can be achieved.

B. When the investment is greater than 50% of the voting stock, regardless of whether or not significant influence can be achieved.

C. When the investment is greater than 50% of the voting stock and significant influence can be achieved. D. When the investment is between 20 - 50% of the voting stock and significant influence can be achieved. 59. Which of the following statements regarding the accounting for an investment using the equity method is

incorrect? 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.

60. Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 2010, 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, 2010. How much income should Heartfelt report during 2010 from the Candle investment?

A. $200,000. B. $40,000. C. $4,000. D. $10,000.

(10)

61. Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 2010, 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, 2010. At what amount is the Candle investment reported on the December 31, 2010 balance sheet? A. $500,000.

B. $540,000. C. $496,000. D. $536,000.

62. On January 1, 2010, 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. During 2010, Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 2010, the shares had a market value of $150,000. At what amount should the Arnold investment be reported at on the December 31, 2010 balance sheet?

A. $150,000 B. $158,000 C. $145,000 D. $148,000

63. On January 1, 2010, 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. During 2010, Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 2010, the shares had a market value of $150,000. How much income will Palmer report from the Arnold investment during 2010? A. $12,000

B. $30,000 C. $10,000 D. $4,000

64. On January 1, 2010, Calas Company acquired 40% of the outstanding voting stock of Nick Company as a long-term investment. During 2010, Nick reported net income of $10,000 and declared and paid dividends of $4,000. During 2010, Calas Company should report "Income from investee earnings" of

A. $3,000. B. $4,000. C. $2,400. D. $10,000.

65. On January 1, 2010, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 2010, Shell Corporation reported $40,000 of net income and paid $5,000 in cash dividends. At the end of 2010, the shares had a market value of $160,000. How much investment income will Turtle report from the Shell investment during 2010?

A. $12,000 B. $40,000 C. $5,000 D. $1,500

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66. On January 1, 2010, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 2010, Shell Corporation reported $40,000 of net income and paid $5,000 in cash dividends. At the end of 2010, the shares had a market value of $160,000. What investment balance will be reported on Turtle's December 31, 2010 balance sheet?

A. $150,000 B. $160,000 C. $160,500 D. $162,000

67. When is the equity method not used to account for long-term investments in stocks?

A. When the investment is 30% of the voting stock and significant influence can be achieved. B. When the investment is 15% and significant influence can be achieved.

C. When the investment is greater than 50% of the voting stock and control is achieved. D. When the investment is 40% of the voting stock and significant influence can be achieved. 68. Which of the following statements is false?

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.

69. Which of the following statements is correct? 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 .

When the equity method is used to account for an investment in an investee, the reported share of investee dividends must be deducted from net income on the statement of cash flows.

70. 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, 2011. On December 31, 2011, Click It paid a $1 million cash dividend declared earlier in 2011 and reported net income for the year ended 2011 of $10 million. On December 31, 2011, Click It's stock was trading at $11.50 per share. What effect will the dividend have on Photo Finish's financial statements?

A. It would increase cash and increase investment income. B. It would increase cash and decrease investment in Click It. C. It would increase cash and increase net unrealized gains/losses.

(12)

71. 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, 2011. On December 31, 2011, Click It paid a $1 million cash dividend declared earlier in 2011 and reported net income for the year ended 2011 of $10 million. On December 31, 2011, Click It's stock was trading at $11.50 per share. At what amount will the Click It investment be reported on Photo Finish's December 31, 2011 balance sheet? A. $20,000,000

B. $23,000,000 C. $23,600,000 D. $24,000,000

72. Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation under the purchase method. Which of the following statements about the consolidated statements is true?

A .

The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at their market values on the date of acquisition.

B. Fun with Florals will use the equity method of accounting for this investment.

C. Fun with Florals 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.

73. The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company:

On January 1, 2010, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the market value and book value are the same for Mini's remaining assets, what was the amount of goodwill purchased by Maxi Company?

A. $20,000 B. $40,000 C. $50,000 D. $60,000

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74. On January 1, 2010, Shelley Company paid $650,000 cash for 100% of the outstanding common stock of SCD Company; SCD's stockholders equity on the date of acquisition was $500,000. The current market value of SCD's plant and equipment was $100,000 in excess of the equipment's book value. If the market value and book value are the same for SCD's remaining assets, what was the amount of goodwill purchased by Shelley Company?

A. $150,000 B. $40,000 C. $50,000 D. $250,000

75. On January 1, 2010, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's stockholders equity on the date of acquisition was $550,000. The current market value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill purchased by Sheldon Company?

A. $200,000 B. $130,000 C. $480,000 D. $270,000

76. The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company:

On January 1, 2010, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the market value and book value are the same for Mini's remaining assets, what is the net increase in Maxi's assets as a result of the merger with Mini?

A. $430,000 B. $470,000 C. $120,000 D. $390,000

77. Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated financial statements immediately after the acquisition?

A. Nominal estimated values determined by the parent company. B. Market values on the date of the acquisition.

C. The previously reported book values.

(14)

78. During 2010, Manning Corporation purchased 100% of the outstanding voting shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair market value of $6.5 million. The book value as well as fair market value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill?

A. $0

B. $2,200,000 C. $700,000 D. $1,000,000

79. How is goodwill accounted for subsequent to acquisition?

A. It should be written off as soon as possible against retained earnings. B. It should not be amortized because it has an indefinite life.

C. It should be written off as soon as possible as an expense. D. It is amortized over its estimated useful life.

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

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.

81. On January 1, 2010, Red Company purchased Patriot Shop for $400,000 cash. Red Company received the assets listed below and assumed accounts payable (owed by Patriot) amounting to $30,000.

What amount of Goodwill will be recorded in the transaction? A. $35,000

B. $20,500 C. $50,000 D. $45,000

82. 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 incorrect if McGinn classifies the investment as available-for-sale security?

A. The 2010 unrealized loss is $10,000, but is not included in McGinn's 2010 net income. B. The 2011 unrealized gain is $15,000, but is not included in McGinn's 2011 net income. C. The 2011 unrealized gain is $10,000 and is included in McGinn's 2011 net income.

D. The 2010 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component of stockholders' equity.

(15)

83. 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 classifies the investment as a trading security? A. The 2010 unrealized loss is $10,000, but is not included in McGinn's 2010 net income.

B. The 2011 unrealized gain is $15,000, but is not included in McGinn's 2011 net income. C. The 2011 unrealized gain is $15,000 and is included in McGinn's 2011 net income. D

.

The 2010 unrealized loss is $10,000 and is reported on McGinn's balance sheet as a component of stockholders' equity and is not reported on the income statement.

84. 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 a trading security and sold it at the beginning of 2012 for $102,000?

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.

85. 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?

86. 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?

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.

87. 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 correct if Rye classifies the investment as a trading security? A. The 2010 unrealized gain is $10,000 and is 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 and is not reported within the income statement.

(16)

88. 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 correct if Rye classifies the investment as a trading security and sold it at the beginning of 2012 for $148,000?

89. 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 correct if Rye classifies the investment as an available-for-sale security and sold it at the beginning of 2012 for $148,000?

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

A. Patents B. Goodwill

C. Acquisition expense D. Acquisition revenue

91. Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments.

(17)

92. 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.

93. On January 1, 2010, Heitzman Company purchased the following shares as a long-term investment in available-for-sale securities:

94. On January 1, 2010, as a long-term investment in available-for-sale securities, John Company purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per share. Wayne reported 2010 net income of $30,000 and declared and paid cash dividends of $20,000. The market price of the Wayne stock at the end of 2010 was $10 per share. Calculate the carrying value of John's investment at the end of 2010.

(18)

95. On January 31, 2010, McBurger Corporation purchased the following shares of voting common stock as long-term investments in available-for-sale securities. None of these holdings amounted to more than 5% of the respective company's outstanding voting shares. The accounting period ends December 31.

All of the Bailey Corporation stock was sold for $13,500 on January 12, 2012. Prepare the required journal entries at the following dates: January 31, 2010, December 31, 2010, December 31, 2011 and January 12, 2012.

96. On March 1, 2011, Young Company purchased the following stock as long-term investments in available-for-sale securities:

Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares) ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares) XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares) The market prices per share at December 31, end of the accounting period, were as follows:

(19)

97. On January 1, 2010, Presto Corporation purchased, as a long-term investment, 5,000 shares of the outstanding common stock of Shazam Corporation at $30 per share. During 2010, the following events occurred at Shazam Corporation:

98. 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:

(20)

99. Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock which constitutes 10% of Creole's voting stock on June 30, 2010 for $42 per share. Orleans' intent is to keep these shares beyond the current year. On December 20, 2010, Creole paid a $4,000,000 cash dividend. On December 31, 2010, Creole's stock was trading at $45 per share and their reported 2010 net income was $52 million. A. Record the transaction to record the acquisition of Creole Corporation on June 30, 2010.

B. Record the transaction for the dividend received by Orleans on December 20, 2010. C. Record any year-end entries needed by Orleans Corporation.

100.On December 31, 2010, Jean World Corporation recorded the following journal entry relating to its investment in 9,000 shares of common stock of Soda Corporation.

At the end of 2010, Soda Corporation reported net income of $120,000. Earlier in the year, Soda declared and paid dividends of $18,000.

A. What method is being used to account for this investment?

B. What is the total number of shares outstanding of Soda's common stock?

101.As a long-term investment, Martha Company purchased 5,000 of the 12,500 outstanding voting shares of Stewart Corporation at $20 per share on January 1, 2010. At the end of 2010, Stewart reported net income of $100,000 and declared and paid dividends of $10,000. The market price of the Stewart stock at the end of 2010 was $23 per share. Calculate the net balance in Martha's investment account at the end of 2010.

(21)

102.Donald Corporation purchased 3,000 shares of the outstanding common voting stock of Apprentice Corporation on January 2, 2010, for $80 per share. At the date of purchase Apprentice Corporation had outstanding 10,000 shares of common stock (par $50). During 2010, Apprentice reported net income of $60,000 and declared and paid a $5,000 cash dividend. The December 31, 2010, market value of

Apprentice's stock was $84. Prepare the journal entries required for Donald Corporation on January 2, 2010 and December 31, 2010.

103.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.

104.Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 2010. On December 12, 2010, Nutribar declared and paid a $1 million cash dividend and reported net income for the year ended 2010 of $10 million. On December 31, 2010, Nutribar's stock was trading at $11.50 per share.

Requirements:

A. Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31, 2010. B. Record the cash dividend received by Kudos on December 12, 2010.

(22)

105.During 2010, the following items were reported on ShoeCo's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows statement (added or deducted).

106.During 2010, the following items were reported on The Mickey Company's statement of cash flows in millions of dollars. For each item, identify the type of activity it is (operating, investing, financing) and the effect it would have on cash flows (added or deducted).

107.Discuss how the equity method prevents managers of the investor corporation from manipulating income related to dividends from the investee.

(23)

108.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:

Calculate the amount of goodwill that should be recognized.

109.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?

110.Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classification is used relative to use of the available-for-sale classification.

(24)

ch12

Key

1. The extent of influence and control over another company is a critical factor in determining the proper method of accounting for a long-term investment in the common stock of another company.

TRUE

The percentage of ownership has significant influence on the method chosen to account for the investment.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Easy Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #1 Topic Area: Types Of Investments And Accounting Methods

2. Investments in bonds intended to be sold before they reach maturity should be reported under the market value method.

TRUE

Bonds intended to be sold are reported on the balance sheet at market value.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #2 Topic Area: Debt Held to Maturity: Amortized Cost Method

3. Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

TRUE

Management must demonstrate the intent and ability in order to use the held-to-maturity classification.

(25)

4. If a bond is bought at a discount, then interest revenue will be less than the cash payment. FALSE

Amortizing investment bond discount increases interest revenue relative to the cash payment.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #4 Topic Area: Debt Held to Maturity: Amortized Cost Method

5. If a bond is bought at a premium, the amortized book value of the bond investment will decrease as the bond matures.

FALSE

Amortizing investment bond premium reduces the book value of the bond investment.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Understand Difficulty: Medium Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #5 Topic Area: Debt Held to Maturity: Amortized Cost Method

6. Held-to-maturity bond investments have to be reported on the balance sheet at fair value. FALSE

They are reported on the balance sheet at amortized cost or fair value if the election is made.

7. Investments classified other than as held-to-maturity bond investments have to be reported on the balance sheet at fair value.

TRUE

They are reported on the balance sheet at fair value.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 12-02 Analyze and report passive investments in securities using the fair value method. Libby - Chapter 12 #7 Topic Area: Passive Investments: The Fair Value Method

(26)

8. A realized gain or loss is reported on the income statement when a fair value adjustment is made. FALSE

Fair value adjustments create unrealized holding gains or losses.

9. An unrealized holding gain is reported on the income statement when the fair value of an available-for-sale security exceeds its cost.

FALSE

The unrealized holding gains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet, not the income statement.

10. An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its cost.

FALSE

The unrealized holding gains and losses pertaining to the trading security portfolio are reported on the income statement, not the balance sheet.

11. An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its cost.

TRUE

The unrealized holding gains and losses pertaining to the trading security portfolio are reported on the income statement.

(27)

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

Gains and losses are realized and reported on the income statement when the investment is sold.

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

Gains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet, not the income statement.

14. An increase in the fair value of the trading securities portfolio increases both assets and net income. TRUE

Trading security portfolio gains increase the investment account and net income; trading security portfolio gains are reported on the income statement.

15. The sale of a stock from the available-for-sale portfolio creates a gain or loss on the income statement based on the difference between the stock's original cost and its selling price.

TRUE

Gains and losses pertaining to the available-for-sale portfolio are reported on the income statement at the time of sale and are based on the difference between the selling price and original cost.

(28)

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

TRUE

Gains and losses pertaining to the available-for-sale portfolio are reported on the balance sheet prior to the time of sale; dividend revenue is the only income source for the available-for-sale portfolio while it is being held.

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

TRUE

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

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 12-03 Analyze and report investments involving significant influence using the equity method. Libby - Chapter 12 #17 Topic Area: Investments For Significant Influence: The Equity Method

18. Use of the equity method is required for investments between 20 and 50% of a company's common stock regardless of the investor's ability to influence the investee.

FALSE

The equity method is required to be used only when an investor has the ability to exert significant influence over the investee, a 20 to 50% investment doesn't guarantee significant influence.

(29)

19. The equity method requires the recognition of investment revenue for dividends received. FALSE

Dividend receipts result in a decrease in the investment account when the equity method is used.

20. Ocean Corporation owns 30% of Woods Corp. for which they paid $5.5 million and uses the equity method to account for the investment. Woods Corp. paid a $100,000 dividend; the investment in Woods Corp. account will decrease by $30,000, which is Ocean's proportionate share of the dividend.

TRUE

Dividend receipts result in a decrease in the investment account when the equity method is used.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 12-03 Analyze and report investments involving significant influence using the equity method. Libby - Chapter 12 #20 Topic Area: Investments For Significant Influence: The Equity Method

21. An investment accounted for under the equity method would record a reduction in the investment account for the proportionate share of the investee's reported net loss.

TRUE

The investor's share of investee net income is reported as investor net income and as an adjustment to the investment account.

(30)

22. An investment accounted for under the equity method would record an increase in the investment account and create net income for an amount equal to the proportionate share of the investee's reported net income.

TRUE

The investor's share of investee net income is reported as investor net income and as an adjustment to the investment account.

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

FALSE

Equity method investments are not reported at fair value unless the investment value is permanently impaired.

24. 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.

FALSE

The gain or loss is the difference between the selling price and book value.

(31)

25. Any unrealized gains or losses on trading securities would have to be added back to or deducted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

TRUE

The unrealized gain or loss doesn't involve a cash flow and as a result net income must be adjusted.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 12-03 Analyze and report investments involving significant influence using the equity method. Libby - Chapter 12 #25 Topic Area: Investments For Significant Influence: The Equity Method

26. Madison Inc. acquires 100% of the voting stock of Allison Corp. for $10.0 million. Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million. Madison will report goodwill of $0.9 million.

TRUE

Goodwill ($.9 million) is the excess of the amount paid ($10 million) over the fair value of the net assets ($12.5 million - $3.4 million).

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Bloom's: Apply Difficulty: Medium Learning Objective: 12-04 Analyze and report investments in controlling interests. Libby - Chapter 12 #26 Topic Area: Controlling Interests: Mergers And Acquisitions

27. When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

FALSE

The acquired assets and liabilities are recorded at their market values.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Remember Difficulty: Medium Learning Objective: 12-04 Analyze and report investments in controlling interests. Libby - Chapter 12 #27 Topic Area: Controlling Interests: Mergers And Acquisitions

(32)

28. Subsequent to a merger, any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated income statement.

TRUE

The income statements of the parent company and subsidiary are reported as one, they are consolidated.

29. Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger or acquisition.

TRUE

Goodwill is only recognized if it is acquired and paid for at the time of merger or acquisition.

30. The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the consolidation process.

TRUE

The subsidiary's assets are depreciated and amortized within the consolidated financial statements.

(33)

31. 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 provides the investor significant influence over the investee, but not control over the investee.

The trading securities classification is used for those investments intended to be sold in the short-run.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #31 Topic Area: Types Of Investments And Accounting Methods

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

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.

An investment of more than 50% of the outstanding voting stock requires the parent company to use the consolidation method.

(34)

33. Which of the following is the best description of investments in available-for-sale 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 in securities that are accounted for under the market value method other than trading securities and held-to-maturity investments.

Available-for-sale securities are passive investments other than trading securities and held-to-maturity debt.

34. Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 2010. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?

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, 2010.

C. The bond investment must be accounted for using the fair value approach.

D .

Since they were classified as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.

The fair value approach is optional when accounting for held-to-maturity investments.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #34 Topic Area: Debt Held to Maturity: Amortized Cost Method

35. Significant influence over the operating and financial policies of another company may be indicated by

A. participation on its board of directors.

B. participation in its policy-making process.

C. evidence of material transactions between the two companies. D. all of the above responses.

Each of the situations may create significant influence over the investee..

(35)

36. 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

A. 20% or more.

B. less than 20%.

C. between 20% and 50%. D. more than 50%.

An investment of more than 50% of the outstanding voting stock results in consolidation accounting.

37. Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false?

A. Since the bonds were issued at a premium, the cash interest will be greater than interest revenue.

B. Since the bonds were issued at a premium, the book value of the bond investment will decrease.

C. The bond investment must be accounted for using the held-to-maturity classification.

D. The company would recognize unrealized gains or losses on the bonds under the fair value approach within the income statement.

The bond is reported at amortized cost unless the fair value approach is used, unrealized gains/losses associated with use of the fair value approach are not reported within the income statement for held-to-maturity securities.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 12-02 Analyze and report passive investments in securities using the fair value method. Libby - Chapter 12 #37 Topic Area: Debt Held to Maturity: Amortized Cost Method

(36)

38. Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?

A. Since the bonds were purchased at a premium, the cash interest will be less than interest revenue. B. Since the bonds were purchased at a discount, the book value of the bond investment will increase.

C. The bond investment must be accounted for using the trading securities classification.

D. The company would not recognize unrealized gains or losses on the bonds.

A bond investment's book value increases as the bond investment discount is amortized.

AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Understand Difficulty: Medium Learning Objective: 12-01 Analyze and report investments in debt securities held to maturity. Libby - Chapter 12 #38 Topic Area: Debt Held to Maturity: Amortized Cost Method

39. 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?

A. Trading securities.

B. Held-to-maturity. C. Available-for-sale.

D. Consolidation.

If the investment can't be classified as either trading or held-to-maturity, the available-for-sale classification is used.

(37)

At what amount should Gilman Company report the Burke investment on the December 31, 2010 balance sheet?

A. $4,218,000

B. $4,000,000

C. $4,124,000

D. $3,800,000

Investment in Burke ($4,218,000) = Initial cost ($4,000,000) + Proportionate share of Burke's net income ($575,000 × 100,000/250,000) - Proportionate share of Burke's dividends ($30,000 × 100,000/ 250,000).

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Apply Difficulty: Medium Learning Objective: 12-03 Analyze and report investments involving significant influence using the equity method. Libby - Chapter 12 #40 Topic Area: Investments For Significant Influence: Equity Method

How much should Gilman Company report as investment income from the Burke investment during 2010?

A. $230,000

B. $218,000

C. $12,000

D. $30,000

2010 investment income ($230,000) = Proportionate share of Burke's net income ($575,000 × 100,000/ 250,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Bloom's: Apply Difficulty: Medium Learning Objective: 12-03 Analyze and report investments involving significant influence using the equity method. Libby - Chapter 12 #41 Topic Area: Investments For Significant Influence: Equity Method