Deck 14: Reporting and Interpreting Investments in Other Corporations

Question 1

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 showe the following on December 31, 2010: How much investment income should JDR report from the YRK investment during 2010

A) $116,000
B) $290,000
C) $12,000
D) $30,000

Answer 1

A

Question 2

During 2014, 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) $1,000,000
B) $0
C) $700,000
D) $2,200,000

Answer 2

C

Question 3

Which of the following statements is false?

A) Income from investments accounted for using the equity method doesn't create cash flows.
B) Dividends received from stock investments accounted for using the equity method don't create net income but do create cash flows.
C) Sale of stock investments is a cash inflow from investing activities.
D) Dividends received from stock investments increase cash flows from investing activities.

Answer 3

D

Question 4

On July 1, 2014, 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, 2014 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 valu amount of the investments at December 31, 2014 should be

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

Question 5

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

Question 6

McGinn Company purchased 10% of RJ Company's common stock during 2013 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2013 and a
$105,000 fair value at the end of 2014. Which of the following statements is incorrect if McGinn classifies the investment as available-for-sale security?

A) The 2013 unrealized loss is $10,000, but is not included in McGinn's 2013 net earnings.
B) The 2014 unrealized gain is $10,000 and is included in McGinn's 2014 net earnings.
C) The 2013 unrealized loss is $10,000 and is reported on McGinn's statement of financial position as a component of stockholders' equity.
D) The 2014 unrealized gain is $15,000, but is not included in McGinn's 2014 net earnings.

Question 7

On January 1, 2014, Red Company purchased Patriot Shop for $400,000 cash. Red Company received the assets listed below and assumed trade payables (owed by Patriot) amounting to $30,000. What amount of Goodwill will be recorded in the transaction?

A) $20,500
B) $45,000
C) $35,000
D) $50,000

Question 8

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 and significant influence can be achieved.
C) When the investment is between 20 - 50% of the voting stock and significant influence can be achieved.
D) When the investment is greater than 50% of the voting stock, regardless of whether or not significant influence can be achieved.

Question 9

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 statement of financial position?

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

Question 10

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 under the market value method.
B) The investment would be accounted for using the equity method.
C) The investment would be accounted for by consolidation.
D) The investment would be accounted for under the amortized cost method.

Question 11

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 2014 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2014, 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 2014 net income was $52 million. What investment value will be reflected on Phillips' balance sheet at December 31, 2014?

A) $46,800,000
B) $47,200,000
C) $42,000,000
D) $45,000,000

Question 12

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) Consolidation.
C) Fair value method.
D) Equity method.

Question 13

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

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

Question 14

The balance sheet of Mini Company was as follows immediately before it was acquired b 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 ar the same for Mini's remaining assets, what was the amount of goodwill purchased by Max Company?

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

Question 15

On January 1, 2014, Calas Company acquired 40% of the outstanding voting stock of Nick Company as a long-term investment. During 2014, Nick reported net earnings of $10,000 and declared and paid dividends of $4,000. During 2014, Calas Company should report "Income from investee earnings" of

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

Question 16

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 more than fifty percent of the voting stock of another company.
C) Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future.
D) Investments that provide the investor significant influence over the investee, but not control over the investee.

Question 17

Which of the following is the best description of investments in available-for-sale securities?

A) Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future.
B) Investments in securities that are accounted for under the market value method other than trading securities and held-to-maturity investments.
C) Investments in bonds that management intends to hold to maturity.
D) Investments in more than fifty percent of the voting stock of another company.

Question 18

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

A) $230,000
B) $30,000
C) $218,000
D) $12,000

Question 19

On July 1, 2014, 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, 2014 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 statement of financial position at December 31, 2014 would be which of the following?

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

Question 20

Which of the following is true about passive investments?

A) These investments must not have any voting rights.
B) 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.
C) 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.
D) The market value method requires realized gains and losses to be recognized on the income.

Question 21

Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. 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 2014 for $148,000?

A) The 2012 unrealized loss reported on the statement of earnings is $2,000.
B) The 2012 realized gain reported on the statement of earnings is $8,000.
C) The 2014 realized loss reported on the statement of earnings is $2,000.
D) The 2012 unrealized gain reported on the statement of earnings is $8,000.

Question 22

McGinn Company purchased 10% of RJ Company's common stock during 2012 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2012 and a
$105,000 fair value at the end of 2013. 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 2014 for $102,000?

A) The 2012 unrealized loss reported on the statement of earnings is $3,000.
B) The 2012 unrealized gain reported on the statement of earnings is $2,000.
C) The 2014 realized loss reported on the statement of earnings is $3,000.
D) The 2014 realized gain reported on the statement of earnings is $2,000.

Question 23

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) Fun with Florals will report Crafts to Go Corporation's revenues and expenses on a consolidated income statement.
B) Fun with Florals will use the market value method of accounting for this investment.
C) The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at their market values on the date of acquisition.
D) Fun with Florals will use the equity method of accounting for this investment.

Question 24

How is goodwill accounted for subsequent to acquisition?

A) It is amortized over its estimated useful life.
B) It should be written off as soon as possible against retained earnings.
C) It should be written off as soon as possible as an expense.
D) It should not be amortized because it has an indefinite life.

Question 25

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) The bond investment must be accounted for using the held-to-maturity classification.
B) Since the bonds were issued at a premium, the book value of the bond investment will decrease.
C) The company would recognize unrealized gains or losses on the bonds under the fair value approach within the income statement.
D) Since the bonds were issued at a premium, the cash interest will be greater than interest revenue.

Question 26

The balance sheet of Mini Company was as follows immediately before it was acquired b 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 ar the same for Mini's remaining assets, what is the net increase in Maxi's assets as a result o the merger with Mini?

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

Question 27

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 they were classified as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.
B) The bond investment must be accounted for using the fair value approach.
C) The bonds will earn $75,000 of interest by December 31, 2010.
D) Since the bonds were issued at par value, the cash interest will be the same as interest revenue.

Question 28

On January 1, 2014, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment in available-for-sale securities. During 2014, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 2014 from the Rocker investment?

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

Question 29

Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security?

A) The 2013 unrealized loss is $10,000 and is included in Rye's 2013 net earnings.
B) The 2012 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity.
C) The 2012 unrealized gain is $10,000, but is not included in Rye's 2012 net earnings.
D) The 2013 unrealized loss is $20,000, but is not included in Rye's 2013 net earnings.

Question 30

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) between 20% and 50%.
B) 20% or more.
C) less than 20%.
D) more than 50%.

Question 31

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, 2014. On December 31, 2014, Click It paid a $1 million cash dividend declared earlier in 2014 and reported net earnings for the year ended 2014 of $10 million. On December 31, 2014, Click Its 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 the allowance to value at market account.
B) It would increase cash and increase investment income.
C) It would increase cash and increase net unrealized gains/losses.
D) It would increase cash and decrease investment in Click It.

Question 32

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2014. At December 31, 2014, the current market value of the securities was $105,000. How should the investment be reported in the 2014 financial statements?

A) The $5,000 unrealized gain is reported within the income statement.
B) The $5,000 realized gain is reported within the income statement.
C) 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.
D) The investment in available-for-sale securities would be reported on the balance sheet at its $100,000 cost.

Question 33

On January 1, 2014, 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 2014, Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 2014, the shares had a market value of
$150,000. At what amount should the Arnold investment be reported at on the December 31, 2014 statement of financial position?

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

Question 34

On January 1, 2014, 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 2014, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 2014, the shares had a market value of $160,000. How much investment income will Turtle report from the Shell investment during 2014?

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

Question 35

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) Where the unrealized holding loss or gain on investments is reported within the financial statements.
B) Determination of the acquisition cost.
C) Determination of the unrealized holding gain or loss.
D) Measuring the market value of the long-term and short-term investment portfolios on the balance sheet.

Question 36

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

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

Question 37

Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. Which of the following statements is correct if Rye classifies the investment as a trading security and sold it at the beginning of 2014 for
$148,000?

A) The 2012 realized loss reported on the statement of earnings is $2,000.
B) The 2012 unrealized gain reported on the statement of earnings is $8,000.
C) The 2012 unrealized loss reported on the statement of earnings is $2,000.
D) The 2014 realized gain reported on the statement of earnings is $8,000.

Question 38

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) A realized holding loss on the trading securities would be reported on the income statement.
B) The investment in trading securities would be reported in the balance sheet at its $500,000 cost.
C) 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.
D) The investment in trading securities would be reported in the balance sheet at its $481,000 market value.

Question 39

On January 1, 2014, 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) $270,000
D) $480,000

Question 40

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 2014, Candle Corporation reported net earnings 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, 2014. At what amount is the Candle investment reported on the December 31, 2014 statement of financial position?

A) $496,000.
B) $536,000.
C) $500,000.
D) $540,000.

Question 41

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

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

Question 42

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 showe the following on December 31, 2010: At what amount should JDR report the YRK investment on the December 31, 2010 statement of financial position?

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

Question 43

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) The bond investment must be accounted for using the trading securities classification.
C) Since the bonds were purchased at a discount, the book value of the bond investment will increase.
D) The company would recognize unrealized gains or losses on the bonds.

Question 44

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 trading securities or 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 available-for-sale securities is reported on the income statement.

Question 45

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) 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.
D) 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.

Question 46

Rye Company purchased 15% of Lena Company's common stock during 2012 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2012 and a $140,000 fair value at the end of 2013. Which of the following statements is correct if Rye classifies the investment as a trading security?

A) The 2013 unrealized loss is $10,000 and is included in Rye's 2011 net earnings.
B) The 2012 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity and is not reported within the statement of earnings.
C) The 2012 unrealized gain is $10,000 and is included in Rye's 2012 net earnings.
D) The 2013 unrealized loss is $20,000, but is not included in Rye's 2013 net earnings.

Question 47

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

Question 48

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

Question 49

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 2014 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 2014, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 2014 net income was $52 million. What effect will the dividend have on Phillips' 2010 financial statements?

A) It would increase cash and decrease investment in associated companies.
B) It would increase cash and increase net unrealized gains/losses.
C) It would increase cash and increase the allowance to value at market account.
D) It would increase cash and increase investment income.

Question 50

On January 1, 2014, 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 2014, Daniel declared and paid a cash dividend of $2 per share. At December 31, 2014, end of the accounting period, Daniel's shares were selling at $48. The 2014 financial statements for Short Company should report the following amounts:

A) Option A
B) Option B
C) Option C
D) Option D

Question 51

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 2014, Candle Corporation reported net earnings 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, 2014. How much income should Heartfelt report during 2014 from the Candle investment?

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

Question 52

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

Question 53

On July 1, 2010, as a long-term investment in available-for-sale securities, Wildlife Supp 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) $182,000
B) $162,000
C) $160,000
D) $200,000

Question 54

McGinn Company purchased 10% of RJ Company's common stock during 2012 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 2012 and a
$105,000 fair value at the end of 2013. Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 2014 for $102,000?

A) The 2014 unrealized gain reported on the statement of earnings is $2,000.
B) The 2014 realized gain reported on the statement of earnings is $2,000.
C) The 2014 unrealized loss reported on the statement of earnings is $3,000.
D) The 2014 realized loss reported on the statement of earnings is $3,000.

Question 55

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, 2014. On December 31, 2014, Click It paid a $1 million cash dividend declared earlier in 2014 and reported net earnings for the year ended 2014 of $10 million. On December 31, 2014, Click Its stock was trading at $11.50 per share. At what amount will the Click It investment be reported on Photo Finish's December 31, 2014 statement of financial position?

A) $23,600,000
B) $20,000,000
C) $23,000,000
D) $24,000,000

Question 56

Significant influence over the operating and financial policies of another company may be indicated by the following except:

A) evidence of material transactions between the two companies.
B) have significant influence only on income earned by the other company.
C) participation on its board of directors.
D) participation in its policy-making process.

Question 57

On January 1, 2014, 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 2014, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 2014, the shares had a market value of $160,000. What investment balance will be reported on Turtle's December 31, 2014 statement of financial position?

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

Question 58

On January 1, 2014, 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 2014, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 2014, the shares had a market value of
$150,000. How much income will Palmer report from the Arnold investment during 2014?

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

Question 59

On January 1, 2014, 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) $250,000
B) $40,000
C) $50,000
D) $150,000

Question 60

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) Market values on the date of the acquisition.
B) The previously reported book values.
C) Market values on the date of the acquisition less accumulated depreciation.
D) Nominal estimated values determined by the parent company.

Question 61

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.

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

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

Question 67

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.

Question 68

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

Question 69

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

Question 70

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

Question 71

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

Question 72

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.

Question 73

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.

Question 74

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

Question 75

Goodwill is reported on a consolidated statement of financial position only if it was acquired in the merger or acquisition.

Question 76

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

Question 77

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.

Question 78

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

Question 79

An investment accounted for under the equity method is always reported on the statement of financial position fair value.

Question 80

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