Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

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.

Accepted Answer

A) True 
 B)False  True

Question 3

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

Accepted Answer

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

Question 4

On January 1, 20X4, 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?

Accepted Answer

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

Question 5

During 20X4, 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?

Accepted Answer

A)  $0 
B)  $2,200,000 
C)  $700,000 
D)  $1,000,000 
A)  $0 
B)  $2,200,000 
C)  $700,000 
D)  $1,000,000

Question 6

JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0: $$\begin{array} { | l | r | } 
\hline 20 X 0 \text { net income } & \$ 290,000 \
\hline \text { Dividends declared and paid during December 20X0 } & \$ 20,000 \
\hline
\end{array}$$ At what amount should JDR report the YRK investment on the December 31, 20X0 statement of financial position?

Accepted Answer

A)  $2,116,000 
B)  $2,000,000 
C)  $4,124,000 
D)  $2,108,000 
A)  $2,116,000 
B)  $2,000,000 
C)  $4,124,000 
D)  $2,108,000

Question 7

McGinn Company purchased 10% of RJ Company's common stock during 20X3 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X3 and a $105,000 fair value at the end of 20X4. Which of the following statements is incorrect if McGinn classiﬁes the investment as available-for-sale security?

Accepted Answer

A)  The 20X3 unrealized loss is $10,000, but is not included in McGinn's 20X3 net earnings. 
B)  The 20X4 unrealized gain is $15,000, but is not included in McGinn's 20X4 net earnings. 
C)  The 20X4 unrealized gain is $10,000 and is included in McGinn's 20X4 net earnings. 
D)  The 20X3 unrealized loss is $10,000 and is reported on McGinn's statement of ﬁnancial position as a component of stockholders' equity. 
A)  The 20X3 unrealized loss is $10,000, but is not included in McGinn's 20X3 net earnings. 
B)  The 20X4 unrealized gain is $15,000, but is not included in McGinn's 20X4 net earnings. 
C)  The 20X4 unrealized gain is $10,000 and is included in McGinn's 20X4 net earnings. 
D)  The 20X3 unrealized loss is $10,000 and is reported on McGinn's statement of ﬁnancial position as a component of stockholders' equity.

Question 8

Held-to-maturity bond investments should be reported on the statement of ﬁnancial position at fair value.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

On January 1, 20X4, 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 20X4, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. How much income will Palmer report from the Arnold investment during 20X4?

Accepted Answer

A)  $12,000 
B)  $30,000 
C)  $10,000 
D)  $4,000 
A)  $12,000 
B)  $30,000 
C)  $10,000 
D)  $4,000

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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?

Accepted Answer

A)  On the statement of earnings as a realized loss. 
B)  On the statement of earnings as an unrealized holding loss. 
C)  On the statement of ﬁnancial position as a realized loss. 
D)  On the statement of ﬁnancial position as an unrealized holding loss in the stockholders' equity section. 
A)  On the statement of earnings as a realized loss. 
B)  On the statement of earnings as an unrealized holding loss. 
C)  On the statement of ﬁnancial position as a realized loss. 
D)  On the statement of ﬁnancial position as an unrealized holding loss in the stockholders' equity section.

Question 13

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?

Accepted Answer

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 statement of earnings. 
D)  Fun with Florals will use the market value method of accounting for this investment. 
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 statement of earnings. 
D)  Fun with Florals will use the market value method of accounting for this investment.

Question 14

On 1 August 20X4, Baker Sindall LLC, a public company, purchased $50,000 face amount of Shandlie Company 6% coupon bonds for $43,200. The market interest rate was 8% on this date. The bond pays interest semi-annually on 31 July and 31 January. At the fiscal year-end for Baker Sindall, the Shandlie bonds have a market value of $45,000. Required: Prepare the journal entries to record the investment, the investment income and any other needed adjustments at 31 December. The investment is classified as held to maturity and accounted for using amortized cost.

Accepted Answer

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Question 15

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

Accepted Answer

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

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

On January 1, 20X1, Castleton Co. purchased $100,000 of eight percent bonds for $108,530. The bonds were purchased to yield six percent. Interest is paid on July 1 and January 1 and the bonds mature on January 1, 20X6. Castleton Co. uses the effective interest method to amortize the premium and applies the amortized cost method. Required: 1. Prepare the journal entry on January 1, 20X1. 2. Prepare the journal entries for the receipt of interest and amortization of the premium for the remainder of 20X1. 3. What is the carrying value of the investment at the end of 20X1?

Accepted Answer

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Question 18

On January 1, 20X4, 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 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. 
-What investment balance will be reported on Turtle's December 31, 20X4 statement of financial position?

Accepted Answer

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

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer

A) True 
 B)False

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

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.

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

Held-to-maturity bond investments should be reported on the statement of ﬁnancial position at fair value.

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

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

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?

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?

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

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.

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

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

Business Decisions and Financial Accounting

The Balance Sheet

The Income Statement

Adjustments, Financial Statements, and Financial Results

Fraud, Internal Control, and Cash

Merchandising Operations and the Multistep Income Statement

Inventory and Cost of Goods Sold

Receivables, Bad Debt Expense, and Interest Revenue

Long-Lived Tangible and Intangible Assets

Liabilities

Stockholders Equity

Statement Cash Flows

Filters

Exam 13: Measuring and Evaluating Financial Performance

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

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.

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

Held-to-maturity bond investments should be reported on the statement of ﬁnancial position at fair value.

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

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

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?

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?

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

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.

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

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

Business Decisions and Financial Accounting

The Balance Sheet

The Income Statement

Adjustments, Financial Statements, and Financial Results

Fraud, Internal Control, and Cash

Merchandising Operations and the Multistep Income Statement

Inventory and Cost of Goods Sold

Receivables, Bad Debt Expense, and Interest Revenue

Long-Lived Tangible and Intangible Assets

Liabilities

Stockholders Equity

Statement Cash Flows

Filters