Deck 15: Investments

Question 1

The generally accepted accounting principles for trading securities include all of the following except

A)initially recording the investment at cost
B)subsequently valuing the investment at fair value
C)including unrealized holding gains and losses as a component of stockholders' equity
D)including interest and dividend revenue as part of income

Answer 1

C

Question 2

Investments that are typically held for short periods of time and sold by the company in the expectation of a profit on the short-term differences in price are classified as

A)available-for-sale securities
B)trading securities
C)held-to-maturity securities
D)marketable securities

Answer 2

B

Question 3

Unrealized holding gains and losses on debt securities affect net income when the securities are classified as $\begin{array}{llll}& \text { Trading}& \text { Available-for-Sale}& \text { Held-to-Maturity}\\\text { I. } & \text { Yes } & \text { No } & \text { No } \\\text { II. } & \text { Yes } & \text { Yes } & \text { No } \\\text { III. } & \text { No } & \text { Yes } & \text { Yes } \\\text { IV } & \text { No } & \text { No } & \text { Yes }\end{array}$

A)I
B)II
C)III
D)IV

Answer 3

I

Question 4

With consolidation, control generally occurs when the investor owns what percentage of the voting stock of the investee?

A)over 50%
B)between 20% and 50%
C)less than 20%
D)over 40%

Question 5

Investments in equity securities include all of the following except

A)common stocks
B)preferred stocks
C)convertible bonds
D)stock options

Question 6

Charlie Company purchased available-for-sale equity investments in 2010 at a cost of $200, 000.Their market values totaled $250, 000 and $230, 000 on December 31, 2010, and December 31, 2011, respectively.The entry required on December 31, 2011, would include a

A)debit to Allowance for Change in Value of Investment of $20, 000
B)credit to Allowance for Change in Value of Investment of $20, 000
C)credit to Unrealized Increase/Decrease in Value of Securities of $30, 000
D)debit to Unrealized Increase/Decrease in Value of Securities of $30, 000

Question 7

Which of the following regarding trading securities is correct?

A)Trading securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B)Trading securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C)Trading securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D)Trading securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

Question 8

Investments in debt securities include all of the following except

A)U.S.treasury securities
B)corporate bonds
C)preferred stocks that are redeemable at the option of the issuer
D)commercial paper

Question 9

Which of the following methods of accounting for investments is appropriate when the investor controls the investee?

A)equity method
B)consolidation
C)cost method
D)lower of cost or market method

Question 10

Which of the following regarding available-for-sale securities is correct?

A)Available-for-sale securities are reported at cost on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
B)Available-for-sale securities are reported at fair value on the balance sheet date, and unrealized holding gains and losses are included in income of the current period.
C)Available-for-sale securities are reported at fair value on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.
D)Available-for-sale securities are reported at cost on the balance sheet date, but unrealized holding gains and losses are not included in income of the current period.

Question 11

Which of the following securities are reported at their amortized cost on the balance sheet date?

A)held-to-maturity debt securities
B)marketable securities
C)available-for-sale securities
D)trading securities

Question 12

Investments in debt and equity securities that are held for current resale by banks and stockbrokerage firms are termed

A)available-for-sale securities
B)trading securities
C)held-to-maturity securities
D)marketable securities

Question 13

Which of the following methods of accounting for investments is appropriate when the investor has significant influence over the investee?

A)equity method
B)consolidation
C)cost method
D)lower of cost or market method

Question 14

Unrealized gains and losses on investments in trading securities are reported

A)as a current asset
B)on the income statement
C)on the balance sheet as part of stockholders' equity
D)as a contra asset

Question 15

When bonds are purchased between interest dates, the accrued interest should be

A)debited to Interest Receivable
B)debited to Interest Revenue
C)debited to Investment in Bonds
D)either a or b

Question 16

In its first year of operations, Rodolfo Company purchased available-for-sale securities at a total cost of $53, 000.On December 31, the end of Rodolfo's fiscal year, the fair market value of those investments totaled $57, 000.As a result of these investments, Rodolfo Company will report

A)Investment in Available-for-Sale Securities of $57, 000
B)Investment in Available-for-Sale Securities of $53, 000
C)Unrealized Increase in Value of Available-for-Sale Securities of $4, 000 on the income statement as ordinary income
D)a credit balance in the contra account to Investment in Available-for-Sale Securities of $4, 000

Question 17

Each of the three categories of investments in debt and equity securities has similar accounting for all of the following transactions except

A)initial recording of cost
B)recognition of dividend and interest income
C)recognition of realized gains or losses on sales
D)recognition of unrealized holding gains and losses

Question 18

Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of stockholders' equity?

A)held-to-maturity debt securities
B)marketable securities
C)available-for-sale securities
D)trading securities

Question 19

Dividends that are declared at year-end but not received on investments in securities held for sale or trading should be recognized when

A)received as cash
B)the new year begins
C)declared
D)accrued

Question 20

The Rolla Company purchased 10%, $800, 000 bonds of the Batter Up Company at par plus accrued interest on April 1, 2010, as an investment in available-for-sale securities.The bonds pay interest on June 30 and December 31 each year.The entry by Rolla on April 1, 2010, would include a

A)debit to Investment in Available-for-Sale Securities of $820, 000
B)credit to Cash of $820, 000
C)credit to Interest Revenue of $20, 000
D)debit to Interest Expense of $20, 000

Question 21

The carrying value of available-for-sale debt and equity securities is

A)historical cost
B)the current market value
C)the lower of cost or current market value
D)the higher of cost or current market value

Question 22

On July 1, 2010, Richmond Company purchased 8% bonds of Commonwealth Corporation with a par value of $400, 000 for $350, 000 to yield 10%.The bonds are to be held to maturity and pay interest semiannually on June 30 and December 31.The market value of the bonds on December 31, 2010, was $380, 000.Richmond should report the bond investment at December 31, 2010, at

A)$350, 000
B)$351, 500
C)$364, 000
D)$380, 000

Question 23

On January 6, 2010, Miller Company acquired 4, 000 shares (or 10%)of Little Corporation's common stock at $28 per share.The securities are classified as available-for-sale investments.On October 24, 2010, Little declared and paid a cash dividend of $1 per share.On December 31, 2010, the market value of Little's common stock was $32 per share.Little also reported a net income of $200, 000 for 2010.At what value should Miller report the investment in Little's common stock on its December 31, 2010 balance sheet?

A)$112, 000
B)$128, 000
C)$133, 000
D)$153, 000

Question 24

On October 1, 2010, the Stu Company acquired 8% bonds of Jackson Company with a face value of $300, 000 for $312, 000 plus accrued interest.Interest is payable on June 30 and December 31.How would Stu record the initial bond investment to be held to maturity?

A)
$\begin{array} { l } \text { Investment in Held-to-Maturity Bonds }&312,000 \\\text { Interest Revenue }&6,240 \\\text { Cash }&318,240\end{array}$
B)
$\begin{array} { l } \text { Investment in Held-to-Maturity Bonds }&312,000 \\\text { Interest Revenue } &6,000\\\text { Cash }&318,000\end{array}$
C)
$\begin{array}{lc}\text { Investment in Held-to-Maturity Bonds }&318,000 \\\text { Cash } &318,000\end{array}$
D)
$\begin{array}{lc}\text { Investment in Held-to-Maturity Bonds }&318,000 \\\text { Cash } &318,000\end{array}$ .

Question 25

Which of the following statements regarding available-for-sale equity investments is true?

A)The realized gain on sale is determined by comparing the carrying value of the investment with its selling price.
B)Income is affected by temporary changes in market value.
C)All equity security investments are classified as noncurrent.
D)Permanent declines in value are reported on the income statement.

Question 26

For available-for-sale equity securities, the receipt of a cash dividend would be reported as

A)a reduction from retained earnings
B)an increase in investment in available-for-sale securities
C)a reduction in investments in available-for-sale securities
D)dividend revenue

Question 27

Premiums or discounts associated with available-for-sale debt securities are

A)usually not amortized because the effect of the amortization would usually be immaterial
B)amortized to interest revenue over the life of the investment
C)usually recorded in separate accounts at the time the bonds are acquired
D)not treated like premiums or discounts on bonds held to maturity

Question 28

The entry to record a sale of available-for-sale securities for $65, 000 on January 3, 2011, that were purchased for $52, 000 on November 21, 2010, and had a fair value on December 31, 2010, of $57, 000 would include a

A)credit to Unrealized Increase/Decrease in Value of Available-for-Sale Securities of $8, 000
B)debit to Unrealized Increase/Decrease in Value of Available-for-Sale Securities of $5, 000
C)debit to Allowance for Change in Value of Investment of $5, 000
D)credit to Gain on Disposal of Securities Available for Sale of $8, 000

Question 29

Ling Company purchased several investments in December 2010.Costs and market values of those investments on December 31, 2010, are presented below: $\begin{array}{lll}& \text {Cost}& \text {Market Value}\\X Y Z \text { stock } & \$ 200,000 & \$ 180,000 \\\text { ABC stock } & 400,000 & 420,000 \\D E F \text { stock } & 600,000 & 540,000\end{array}$
Assuming all of the securities are classified as available for sale, the journal entry required on December 31, 2010, the end of Ling's fiscal year, would include a

A)debit to Unrealized Increase/Decrease in Value of $60, 000
B)credit to Unrealized Increase/Decrease in Value of $60, 000
C)credit to Unrealized Increase/Decrease in Value of $80, 000
D)debit to Investment in Available-for-Sale Securities of $60, 000

Question 30

Barchak Corporation began operations on January 1, 2010.At December 31, 2010, Barchak appropriately had a credit balance in Allowance for Change in Value of Investments of $30.No transactions related to these investments occurred during 2011, and the cost and market values on December 31, 2011, are as follows: $\begin{array}{lcc}\text { Investment }&\text { Cost }&\text { Market Value }\\ \text { A Company } & \$ 650&\$680 \\ \text { B Company } & 115&110 \\ \text { C Company } & 445&420 \\ \text { D Company } & 80&100 \\\end{array}$ In the December 31, 2011 adjusting entry, there will be a

A)credit of $20 to Unrealized Increase/Decrease in Value
B)debit of $50 to Unrealized Increase/Decrease in Value
C)debit of $20 to Allowance for Change in Value of Investment
D)debit of $50 to Allowance for Change in Value of Investment

Question 31

On July 1, 2010, Iris Company purchased 800 bonds having $1, 000 face value and an 8% interest rate.Interest is paid on June 30 and December 31.The purchase price was 97.The bonds are classified by Iris as available for sale.The market value of the bonds on December 31, 2010, was $789, 000.Ignoring amortization, the income statement for the year ended December 31, 2010, would report income (loss)related to this investment in the amount of

A)$13, 000 loss
B)$19, 000 income
C)$45, 000 income
D)$32, 000 income

Question 32

A realized gain or loss on the sale of an available-for-sale security is determined by comparing

A)the carrying value of the security with the proceeds from the sale
B)the original cost of the security with the proceeds from the sale
C)the market value at the latest balance sheet date with the proceeds from the sale
D)the original cost with the security's carrying value

Question 33

All of the following statements regarding available-for-sale debt securities are true except

A)premiums and discounts are amortized
B)interest revenue may be debited at the time of acquisition
C)the securities will be valued using the lower of cost or market method
D)realized gain or loss is the difference between the amortized cost of the bonds and the proceeds from their sale

Question 34

When the market value of a company's available-for-sale investments is lower than its cost, the difference should be

A)reported as a liability
B)reported in the footnotes to financial statements
C)deducted from the investment in available-for-sale securities account
D)added to the investment in available-for-sale securities account

Question 35

Nixon Company purchased 10, 000 shares of Kostas Company as an available-for-sale security at $45 per share.Brokerage fees amounted to $1, 000 and transfer taxes were $750.The investment should be recorded at

A)$450, 000
B)$450, 750
C)$451, 000
D)$451, 750

Question 36

On January 1, 2010, the Timber Company acquired a 5% interest in the Twig Corporation through the purchase of 100, 000 shares of Twig's common stock for $540, 000.During 2010, Twig paid $40, 000 in dividends and reported net income of $100, 000.The market price of Twig's common stock was $5.20 per share on December 31, 2010.Timber should report the investment in the Twig Corporation on its December 31, 2010, balance sheet at

A)$520, 000
B)$527, 000
C)$540, 000
D)$545, 000

Question 37

Withers Company has available-for-sale debt and equity securities that on December 31, 2010, had a cost of $105, 000 and a market value of $102, 000.The market value rose to $117, 000 by December 31, 2011.What accounting action is required on December 31, 2011?

A)Allowance for Change in Value should be credited for $15, 000.
B)Unrealized Increase/Decrease in Value should be debited for $12, 000.
C)Allowance for Change in Value should be debited for $15, 000.
D)Unrealized Increase/Decrease in Value should be credited for $12, 000.

Question 38

Realized gains and losses on investments available for sale are reported

A)as a current asset
B)on the income statement
C)on the balance sheet as part of stockholders' equity
D)as a contra asset

Question 39

On January 1, 2010, Martin Company purchased Jetson Company's 9% bonds with a face amount of $200, 000 for $213, 420 to yield 8%.The bonds mature on January 1, 2020, and Martin has both the intent and ability to hold these bonds to maturity.The bonds pay interest annually on December 31.Assuming Martin uses the effective interest method of amortizing the bond premium, interest revenue reported on the December 31, 2010, balance sheet would be

A)$16, 000
B)$17, 074
C)$18, 000
D)$18, 926

Question 40

How is the premium or discount on held-to-maturity bond investments presented on the balance sheet?

A)as a part of the cost of the investment and amortized over a period not to exceed five years
B)as a part of the cost of the investment and amortized over the remaining life of the bonds
C)in a separate account that is reported separately from the bonds and amortized over the remaining life of the bonds
D)in a separate account that is reported separately from the investment account and not amortized

Question 41

Which of the following disclosures is not required for investments in securities by current GAAP?

A)the proceeds from sales and the gross realized gains and losses from the sale of available-for-sale securities
B)the circumstances leading to the decision to sell or transfer a trading security
C)the contractual maturities of held-to-maturity debt securities
D)the aggregate fair value of available-for-sale securities by major security type

Question 42

The carrying value of held-to-maturity debt securities is the

A)original purchase amount
B)amortized cost
C)market value
D)lower of amortized cost or market value

Question 43

Unrealized holding gains and losses occur because a company

A)actively trades securities
B)holds securities until maturity
C)holds securities through the end of the reporting period
D)records a change in fair value of the securities held even if they are not sold

Question 44

The fair value method of accounting for investments was proposed to overcome which issues associated with the prior use of lower of cost or market?

A)reliability and liquidity
B)relevance and liquidity
C)reliability and financial flexibility
D)relevance and financial flexibility

Question 45

Permanent value declines in available-for-sale securities should be

A)recorded in the allowance account
B)included in income as a realized loss
C)amortized over the remaining life of the security
D)recorded similarly to temporary declines in value

Question 46

On July 1, 2010, Mark Company purchased Robert Company's six-year 9% bonds with a face value of $200, 000 for $196, 000, which included $6, 000 of accrued interest.The bonds, which mature on March 1, 2016, are to be held to maturity and pay interest semiannually on March 1 and September 1.Mark uses the straight-line method of amortization.The amount of income Mark should report for the calendar year 2010 as a result of this investment would be

A)$8, 823.52
B)$9, 882.36
C)$9, 529.40
D)$8, 117.64

Question 47

On July 1, 2010, Triangle, Inc.purchased Circle Company's five-year 12% bonds with a face value of $500, 000 for $569, 000, which included $25, 000 of accrued interest.The bonds, which mature on February 1, 2015, are to be held to maturity and pay interest on February 1 and August 1.Triangle uses the straight-line method of amortization.The amount of income that Triangle would report for the calendar year 2010 as a result of this long-term investment would be

A)$20, 400
B)$25, 200
C)$30, 000
D)$34, 800

Question 48

Acquisition of greater than 20% of the outstanding stock of a company normally suggests the use of the

A)consolidation method
B)equity method
C)fair-value method
D)straight-line method

Question 49

Investment securities are classified based upon management's intent.This may present difficulties to readers of financial statements because

A)management's judgment of intent and ability may lack comparability
B)management's judgment may lack relevance
C)gain trading may result in not producing sufficient gains
D)gain trading may result in not producing sufficient reliability

Question 50

On January 1, 2010, New Company purchased $200, 000 of ten-year 10% bonds of Old Company for $226, 840.Interest is payable annually.The effective yield on the investment is 8%.What is the balance in New's investment in held-to-maturity bonds account (rounded to the nearest dollar, if necessary)at December 31, 2011?

A)$228, 693
B)$226, 840
C)$224, 987
D)$222, 986

Question 51

On July 1, 2010, Tom Company purchased $60, 000 of ten-year 6% bonds of Sawyer, Inc., for $51, 850, to be held to maturity.Interest is payable semiannually on June 30 and December 31.The effective yield on the investment is 8%.What amount of interest revenue should Tom record for the six-month period ended December 31, 2010?

A)$2, 063.04
B)$2, 084.96
C)$2, 074.00
D)$2, 400.00

Question 52

For available-for-sale securities, a decline in value due to a temporary decline in market value below cost is

A)disclosed in the financial statements by means of a footnote
B)disclosed as a reduction from stockholders' equity on the balance sheet
C)disclosed as a loss on the income statement
D)not disclosed because the decline in value is only temporary

Question 53

When transferring investments between categories, unrealized holding gains for securities transferred from trading to available-for-sale must be

A)realized on the income statement
B)recognized on the income statement
C)realized and reported in comprehensive income
D)recognized and reported in comprehensive income

Question 54

A major controversy surrounding fair value accounting for investments is that

A)fair value is required for trading securities and available-for-sale securities but is only suggested for held-to-maturity securities
B)fair value is required for trading securities and available-for-sale securities but is not required for held-to-maturity securities
C)fair value is required for trading securities but is only suggested for available-for-sale and held-to-maturity securities.
D)fair value is required for trading securities but is only suggested for available-for-sale securities, and is not required for held-to-maturity securities.

Question 55

A transfer of a security between categories is accounted for at the

A)investment's carrying value
B)fair value
C)original investment cost
D)lower of the original cost or fair value

Question 56

Which type of investment in securities must always be classified as a current asset?

A)held-to-maturity debt securities
B)available-for-sale securities
C)trading securities
D)none of the these, they may all be classified as current or long-term assets

Question 57

The use of the effective interest method to amortize a discount associated with the acquisition of an investment in bonds results in

A)the recognition of more interest revenue over the life of the investment than would result from the use of the straight-line method
B)the recognition of a constant amount of interest revenue each period
C)the recognition of less interest revenue over the life of the investment than would result from the use of the straight-line method
D)the recognition of a varying amount of interest revenue each period

Question 58

The Copper Company has a bond investment classified as held to maturity, which has a carrying value of $62, 000 and a fair value of $24, 000.The decline in value is considered as other than temporary.Copper should record the decline as

A)
$\begin{array}{ll}\text { Unrealized Loss on Value Decline } & 38,000 \\\text { Allowance for Change in } & \\\text { Value of Investment } & 38,000\end{array}$

B)
$\begin{array} { l } \text { Investment in Held-to-Maturity } \\\text { Debt Securities } \quad 38,000 \\\text { Realized Loss on Decline in Value } \quad 38,000 \\\end{array}$
C)
$\begin{array}{ll}\text { Realized Loss on Decline in Value } & 38,000 \\\text { Investment in Held-to-Maturity } & \\\text { Debt Securities } & 38,000\end{array}$
D)
$\begin{array} { l r } \text { Unrealized Loss on Value Decline } & 38,000 \\\text { Investment in Held-to-Maturity } & \\\quad \text { Debt Securities } & 38,000\end{array}$

Question 59

All of the following statements regarding held-to-maturity debt securities are true except

A)premiums and discounts must be amortized over the remaining life of the bonds
B)the debt securities should be valued at market value
C)the realized gain or loss is the difference between the original cost and the proceeds from their sale
D)interest revenue may be debited at the time of acquisition

Question 60

When selecting the appropriate accounting for held-to-maturity securities, the company must

A)never sell the equity instrument before maturity
B)never sell the debt instrument before maturity
C)have the intent and ability to hold the equity investment to maturity
D)have the intent and ability to hold the debt instrument to maturity

Question 61

Which of the following is not a derivative?

A)equity contracts
B)futures contracts
C)option contracts
D)swap contracts

Question 62

Exhibit 15-2 On January 1, 2010, the Clumzee Company purchased 30% of the 1, 000, 000 shares of Nimble's common stock for $15, 000, 000 when 30% of Nimble's net assets totaled $12, 000, 000.The excess purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years.Nimble reported net income of $8, 000, 000 and paid cash dividends of $2, 000, 000 during 2010.

-
Refer to Exhibit 15-2.The income reported by Clumzee during 2010 from its investment in the Nimble Company should be

A)$ 600, 000
B)$2, 100, 000
C)$2, 400, 000
D)$2, 900, 000

Question 63

On January 1, 2010, Pinnacle, Inc.purchased 40% of the common stock of Valley Company for $61, 000.At the date of acquisition, the following information for Valley Company was available: In 2010, Valley earned $18, 000 of net income and distributed $12, 500 of dividends.How much investment income would Pinnacle record in 2010?

A)$6, 700
B)$7, 000
C)$7, 200
D)$7, 400

Question 64

The method of accounting for long-term investments in equity securities that most closely fits the requirements of accrual accounting is the

A)market method
B)fair value method
C)equity method
D)straight-line method

Question 65

Under the equity method, dividends received by the investor should be recorded as

A)a reduction in the carrying value of the investment
B)an addition to the carrying value of the investment
C)dividend revenue
D)investment revenue

Question 66

Under the equity method, a receipt of cash dividends by the investor would

A)increase total assets and stockholders' equity
B)increase total assets and liabilities
C)decrease the investment account
D)increase the investment account

Question 67

When an investor currently using the fair market value method acquires significant influence over the investee at mid-year, the investor should

A)restate its investment in the investee by debiting the investment account and crediting Retained Earnings for its previous percentage of investee earnings (less dividends)for the period from the original date of acquisition to the date significant influence was obtained
B)begin using the equity method from the date of acquiring significant influence and make no retroactive adjustments
C)restate its investment in the investee by debiting the investment account and crediting Investment Income for its percentage of investee earnings for the period from the last financial statement until the date significant influence was obtained
D)continue to use the fair value method until the end of the accounting period and then switch to the equity method in order to comply with the accounting conventions of consistency and conservatism

Question 68

An interest rate swap in which a company has a fixed rate of interest and pays a variable rate is called a

A)cash flow hedge
B)fair value hedge
C)deferred hedge
D)hedge of foreign currency exposure of a net investment in foreign operations

Question 69

David Company owns 30% of Ralph Company.During 2010, Ralph reported earnings of $500, 000 and paid cash dividends of 320, 000.What effect would this have on David's investment account and net income? $\begin{array}{rrr}&\text {Investment Account}&\text {Net Income}\\ \text { I. } & +\$ 150,000 & +\$ 96,000 \\\text { II. } & --- & +\$ 96,000 \\\text { III. } & +\$ 54,000 & +\$ 96,000 \\\text { IV. } & +\$ 54,000 & +\$ 150,000\end{array}$

A)I
B)II
C)III
D)IV

Question 70

Exhibit 15-1 On January 1, 2010, Circle Corporation paid $900, 000 for 80, 000 shares of Birch Company's common stock, which represents 40% of Birch's outstanding common stock.Birch reported income of $300, 000 and paid a cash dividend of $100, 000 during 2010.

-
Refer to Exhibit 15-1.Circle should report income from the investment in Birch Company for 2010 of

A)$ 40, 000
B)$ 80, 000
C)$120, 000
D)$160, 000

Question 71

The cash surrender value of the insurance policy on the corporation's president would be presented on the balance sheet as

A)cash
B)marketable securities
C)long-term investment
D)prepaid expense

Question 72

The Waco Company acquired an 18% interest in the outstanding common stock of the Springfield Company.The Waco Company can exercise significant influence over the operating and financial policies of the Springfield Company.The Waco Company should account for its investment in the Springfield Company by using the

A)equity method
B)cost method
C)securities held to maturity method
D)lower of cost or market method

Question 73

Park has life insurance policies on its officers' lives.Annual premiums amount to $5, 000.At the end of 2010, cash surrender value of the policies totaled $18, 200.Dividends received by Park from the insurance company amounted to $500 in 2010.The insurance expense recognized by Park in 2010 was $3, 500.What was the amount of cash surrender value of these policies on January 1, 2010?

A)$17, 200
B)$14, 200
C)$16, 200
D)$10, 200

Question 74

Exhibit 15-1 On January 1, 2010, Circle Corporation paid $900, 000 for 80, 000 shares of Birch Company's common stock, which represents 40% of Birch's outstanding common stock.Birch reported income of $300, 000 and paid a cash dividend of $100, 000 during 2010.

-
Refer to Exhibit 15-1.Circle should report the investment in Birch Company on its December 31, 2010, balance sheet at

A)$ 900, 000
B)$ 980, 000
C)$ 940, 000
D)$1, 020, 000

Question 75

On January 1, 2010, Danforth Company purchased 30% of the common stock of Farley Company for $80, 000.The purchase was made at book value.Additional information for Farley Company follows: $\begin{array}{rrr}\text { Year } & \text { Net Income } & \text { Dividends Paic }\\2010 & \$ 20,000 & \$ 24,000 \\2011 & 60,000 & 42,000\end{array}$
On Danforth's books, what would be the balance of Investment in Farley Company at December 31, 2011?

A)$104, 000
B)$ 63, 400
C)$ 84, 200
D)$ 60, 200

Question 76

The Mason Company acquired a 30% interest in the Dixon Company on January 2, 2010, for $1, 000, 000.Mason Company recorded $80, 000 of purchased goodwill on the transaction.During 2010, Dixon Company paid $100, 000 in dividends and reported net income of $170, 000.At the end of 2010, the balance in Investment in Dixon Company should be

A)$1, 000, 000
B)$1, 021, 000
C)$1, 030, 000
D)$1, 051, 000

Question 77

Doug, Inc.used the equity method of accounting for its investment in Russ Company.At December 31, 2010, the investment balance was $4, 500 after all adjustments were recorded.The following is additional information: $\begin{array}{ll}\text { Doug's share of Russ' } 2010 \text { net income } & \$ 2,300 \\\text { Doug's share of } 2010 \text { depreciation of Russ equipment } & 100 \\\text { Doug's dividends received from Russ in } 2010 & 700\end{array}$
What was the January 1, 2010 balance in Investment in Russ Company?

A)$3, 800
B)$3, 000
C)$2, 900
D)$2, 300

Question 78

With the equity method, the investor recognizes its share of the earnings of the subsidiary when the

A)investor sells the investment
B)investee pays a cash dividend
C)investee declares a cash dividend
D)investee reports earnings on its income statement

Question 79

William, Inc.purchased a $400, 000 life insurance policy on the company president on January 1, 2010.The premium that was paid on January 1 amounted to $11, 600.In the first year, cash surrender value increased by $900 and dividends received by William from the insurance company for the year amounted to $300.What was William's insurance expense for 2010?

A)$10, 400
B)$11, 000
C)$12, 500
D)$12, 800

Question 80

Exhibit 15-2 On January 1, 2010, the Clumzee Company purchased 30% of the 1, 000, 000 shares of Nimble's common stock for $15, 000, 000 when 30% of Nimble's net assets totaled $12, 000, 000.The excess purchase price over the underlying assets was attributable to undervalued depreciable plant assets with a remaining useful life of ten years.Nimble reported net income of $8, 000, 000 and paid cash dividends of $2, 000, 000 during 2010.

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Refer to Exhibit 15-2.The investment in Nimble Company stock should be reported on Clumzee's December 31, 2010, balance sheet at

A)$15, 000, 000
B)$15, 600, 000
C)$16, 800, 000
D)$17, 400, 000