Deck 8: Investments in Equity Securities

Question 1

Equity investments are:

A)investments in bonds of a corporation.
B)investments that pay dividends, not interest.
C)classified as long-term liabilities.
D)marketed by the SEC to any investor who wishes to buy bonds of a public company.

Answer 1

B

Question 2

When a company accounts for an investment under the purchase method of accounting,

A)the book value of the subsidiary's assets is added to the parent company's assets.
B)the book value of the subsidiary's liabilities is added to the parent company's liabilities.
C)the company owns more than 50% of the stock of the investee.
D)a year-end adjustment is made to increase or decrease the carrying value of the investment to fair market value.

Answer 2

C

Question 3

Investments in equity securities are current assets if:

A)they are readily marketable and management plans to convert to cash within 1 year.
B)the fair market value can't be determined.
C)management intends to convert them into common stock within one year.
D)management owns less than 50% of the outstanding stock.

Answer 3

A

Question 4

An investor owns passive equity investments in Noah Company. Noah Company declared dividends of $300 during July. What entry is required in August when the dividends are received?
a.
$\begin{array}{lrr} \text { Cash } &300\\ \text { Dividends Receivable } &&300\\\end{array}$

b.
$\begin{array}{lrr} \text { Dividends Receivable } &300\\ \text { Short-term Equity Investments} &&300\\\end{array}$

c.
$\begin{array}{lrr} \text { Dividends Receivable} &300\\ \text { Dividend Revenue } &&300\\\end{array}$

d.
$\begin{array}{lrr} \text {Cash } &300\\ \text { Trading Securities } &&300\\\end{array}$

Question 5

During 2017, the market price of a short-trmpassive investment in equity securities declined. Which one of the following correctly reflects the effects on the financial statements as a result?

A)Current ratio and earnings per share decrease.
B)Current ratio and earnings per share increase.
C)Current ratio is unchanged and earnings per share increases.
D)Current ratio increases and earnings per share are unchanged.

Question 6

Passive investments in equity securities are:

A)readily marketable investments that management intends to hold for extended periods.
B)always long-term investments.
C)current assets that require the equity method of accounting for investments.
D)investments with no influence on the investee.

Question 7

Torborg Corp. purchased short-term passive investments in equity securities on December 23 for $3,000. On December 31, the market value of those securities is $3,600. Which one of the following journal entries is appropriate on December 31?
a.
$\begin{array}{lrr} \text { Short-term Equity Investments } &3,600\\ \text { Unrealized Gain} &&3,600\\\end{array}$

b.
$\begin{array}{lrr} \text { Short-term Equity Investments} &600\\ \text { Unrealized Gain } &&600\\\end{array}$


c.
$\begin{array}{lrr} \text { Short-term Equity Investments } &600\\ \text { Unrealized Price Increase } &&600\\\end{array}$


d. $\begin{array}{lrr} \text { No entry is required. } &\\\end{array}$

Question 8

Passive investments in equity securities

A)are reported on the balance sheet at market value.
B)may have unrealized gains or losses in other comprehensive income.
C)are always listed as long-term assets.
D)Both a and b are correct.

Question 9

Passive investments in equity securities are:

A)actively 'traded' on the open market, but can't be sold until they mature.
B)nonmarketable investments that management intends to sell for short-term profits.
C)always long-term investments in common stock.
D)adjusted to fair value at yearend.

Question 10

Equity securities of Sanchez Inc. were purchased as a short-term passive investment by Hayden Company on December 14 for $1,000. On December 31, the market value of those securities is $1,300. Which one of the following adjusting journal entries is appropriate at December 31?
a.
$\begin{array}{lrr} \text { Short-term Equity Investments } &1,300\\ \text { Unrealized Gain} &&300\\\text { Cash }&&1,000\end{array}$

b.
$\begin{array}{lrr} \text { Short-term Equity Investments} &300\\ \text { Unrealized Gain } &&300\\\end{array}$


c.
$\begin{array}{lrr} \text { Short-term Equity Investments } &300\\ \text { Unrealized Price Increase } &&300\\\end{array}$


d. $\begin{array}{lrr} \text { No entry is required. } &\\\end{array}$

Question 11

Passive investments in equity securities

A)are reported on the balance sheet at original cost.
B)may have unrealized price increases or decreases, which affect shareholders' equity but not the income statement.
C)are reported in the shareholders' equity section of the balance sheet at fair value.
D)may have unrealized gains or losses on the income statement associated with price increases or decreases.

Question 12

Benson Incorporated owns 32% of Denver Company's outstanding voting stock. Benson Incorporated should account for its investment in Denver using the:

A)fair value method.
B)cost method.
C)consolidation procedure.
D)equity method.

Question 13

Dewey Inc. owns 64% of Felicity Corporation's outstanding voting stock. Dewey should account for its investment in Felicity using :

A)the fair value method.
B)the cost method.
C)consolidated financial statements.
D)the mark-to-market method

Question 14

The recognition of unrealized gains on passive equity investments

A)increases the current ratio.
B)decreases the current ratio.
C)does not affect the current ratio.
D)increases the current ratio if the investment is classified as current, otherwise it has no effect.

Question 15

Income from passive investments in equity securities is recognized when:

A)dividends are received from the investee due to the uncertainty of payment.
B)dividends are declared by the investee.
C)adjusting entries are made to record fair value adjustments.
D)the investee reports profits for the accounting period.

Question 16

When a company recognizes unrealized losses on short-term passive investments in equity securities, its earnings per share:

A)decreases.
B)increases.
C)is not affected.
D)may increase or decrease depending on the related market value.

Question 17

Which one of the following correctly reflects the effects on the financial statements caused by the increase in the market price of long-term passive equity investments?

A)Current ratio is unchanged and earnings per share increases.
B)Current ratio and earnings per share increase.
C)Current ratio and earnings per share are unchanged.
D)Current ratio is unchanged and earnings per share decreases.

Question 18

Which one of the following journal entries is appropriate for an investor who owns, as a passive investment, equity securities when dividends of $500 have been declared on those equity securities?
a.
$\begin{array}{lrr} \text { Cash } &500\\ \text { Dividends Receivable } &&500\\\end{array}$

b.
$\begin{array}{lrr} \text { Dividends Receivable } &500\\ \text { Short-term Equity Investments} &&500\\\end{array}$

c.
$\begin{array}{lrr} \text { Cash } &500\\ \text { Short-term Equity Investments } &&500\\\end{array}$

d.
$\begin{array}{lrr} \text { Dividends Receivable } &500\\ \text { Dividend Revenue } &&500\\\end{array}$

Question 19

Which one of the following is true of the equity method?

A)The income recognized by the investor is based on the percentage of stock ownership and the amount of earnings reported by the investee.
B)Market value adjustments are made at yearend.
C)The receipt of dividends increases net income on the investor's financial statements.
D)The percent of ownership must be greater than 50% to apply this method.

Question 20

On November 10, 2017, Clark Inc. purchased, as a short-term passive investment, shares of Landon Corp. for $100,000 and shares of Norris Incorporated for $50,000. At the end of 2017, the fair market value of the stock of Landon was $80,000 and for Norris Incorporated was $65,000. How should Clark Inc. recognize these changes in market price?

A)As a net unrealized loss of $20,000.
B)As a net unrealized gain of $15,000.
C)As a net unrealized loss of $5,000.
D)No adjustment required since the total fair value is higher than the total original cost.

Question 21

The recognition of realized losses on short-term equity securities

A)increases the current ratio.
B)decreases working capital.
C)decreases comprehensive income.
D)decreases the debt/equity ratio.

Question 22

A passive investment in equity securities was purchased on April 1 for $900. On December 31, the market value of those securities is $700. Which of the following is part of the adjusting entry necessary on December 31?

A)Debit Unrealized Loss for $700
B)Debit Realized Loss on for $200
C)Credit Short-term Equity Investments for $200
D)Credit Unrealized Loss for $200

Question 23

Which one of the following is evidence of a ready market?

A)The stock was purchased at a negotiated price from an outside party.
B)The security is actively traded on a public stock exchange.
C)A privately held corporation issued the stock.
D)The stock was purchased from an outside investor.

Question 24

The consolidation procedure of accounting for long-term equity investments is typically used:

A)when less than 20% of the investee company is owned.
B)in situations when over 50% of the investee company is owned.
C)only when 100% of the investee company is owned.
D)when between 20% and 50% of the investee company is owned.

Question 25

Walsh Company purchased, as a passive investment, 1,000 shares of Pierce Company for $20 per share. At the end of the year, the fair market value of the investment was $23 per share. How should Walsh recognize this change?

A)Debit the investment account by $23,000.
B)Credit the investment account by $3,000.
C)Report an unrealized gain on the income statement.
D)Show an unrealized loss on the balance sheet.

Question 26

The mark-to-market method of accounting for long-term equity investments is typically used when:

A)between 20% and 50% of the investee company is owned.
B)over 50% of the investee company is owned.
C)at least 20% of the investee company is owned.
D)less than 20% of the investee company is owned.

Question 27

Equity securities intended to be held for a short time period are held primarily for the purpose of:

A)anticipated increases in value over extended time periods.
B)increasing the current ratio.
C)window dressing the balance sheet.
D)generating profits on short-term price increases.

Question 28

Which one of the following correctly reflects the effects on the financial statements of the investor caused by dividends declared on securities held as a passive investment?

A)Current ratio increases
B)Working capital decreases
C)Revenue and assets decrease
D)Assets increase and shareholders' equity decreases

Question 29

The equity method of accounting for long-term equity investments is typically used when:

A)less than 20% of the investee company is owned.
B)between 20% and 50% of the investee company is owned.
C)over 50% of the investee company is owned.
D)any amount over 20% is acquired.

Question 30

The treatment of unrealized gains on equity securities:

A)depends on the ownership percentage in the investee.
B)causes net income to increase regardless of the situation.
C)causes earnings per share to increase regardless of the situation.
D)is a primary concern under the equity method.

Question 31

Which one of the following correctly reflects the effects on the financial statements caused by a decrease in the market price of a 30% interest long-term equity security investment?

A)Current ratio decreases.
B)Earnings per share increases.
C)Current ratio increases.
D)Earnings per share remains unaffected

Question 32

The recognition of unrealized losses on a current investment:

A)decreases the quick and current ratios.
B)increases the quick and current ratios.
C)does not affect the quick ratio, but decreases the current ratio.
D)does not affect the current ratio, but decreases the quick ratio.

Question 33

Which one of the following correctly reflects the effects on the financial statements caused by dividends declared on passive investments owned by a firm?

A)Current ratio decreases.
B)Earnings per share increases.
C)Current ratio is unchanged.
D)Earnings per share is unchanged.

Question 34

An unrealized gain or loss that relates to a passive investment represents:

A)an undervalued investment.
B)the profit or loss made when the trading securities were sold.
C)the total dividends received from the investee company during the year.
D)the extent to which an investor's wealth increased or decreased due to holding the investment.

Question 35

A controlling interest in another company:

A)exists whenever the relationship between the investor and investee gives the investor significant influence.
B)requires the parent to prepare consolidated financial statements.
C)is evidence that a merger will soon occur.
D)can be as low as 20 percent.

Question 36

Camber Corp. owns 10% of Nova Corp's outstanding voting stock. Camber should account for its long-term equity investment in Nova Corp. using:

A)the equity method.
B)consolidated financial statements.
C)mark-to-market method.
D)amortization method.

Question 37

Which of the following correctly reflects the effects on the financial statements caused by the increase in market price of a current investment in equity securities?

A)Current ratio and earnings per share decrease.
B)Current ratio and earnings per share increase.
C)Current ratio is unchanged but earnings per share decrease.
D)Current ratio decreases and earnings per share are unchanged.

Question 38

A small long-term investment in equity securities was purchased on May 2 for $1,000. On December 31, the market value of those securities is $1,100. Which of the following is part of the adjusting entry necessary on December 31?

A)Debit Unrealized Gain for $1,100
B)Debit Realized Gain for $100
C)Credit Short-term Equity Investments for $100
D)Credit Unrealized Gain for $100

Question 39

Which one of the following is an area of subjectivity which opens the incentive of window dressing to management as it relates to investments?

A)The timing of when an investment is sold.
B)The proclamation of the intention to sell an investment within the next year.
C)The determination of the percentage of stock acquired.
D)Whether management has available cash to acquire investments.

Question 40

Which one of the following must be met prior to classifying an investment as current?

A)It must be an equity security accounted for under the equity method.
B)The percentage of ownership must be greater than 50%.
C)The investment must be readily marketable.
D)Management must intend to hold the investment for an undetermined time period.

Question 41

Under GAAP, market values based on quoted prices in active markets for identical securities are called:

A)Level 1 measurements
B)Level 2 measurements
C)Level 3 measurements
D)None of the above

Question 42

Which of the following statements about Special Purpose Entities (SPEs) is not true?

A)SPEs cannot take on various legal forms.
B)It can be difficult to determine who actually controls an SPE.
C)Management can structure a transaction using an SPE in such a manner that the accounting treatment fails to reflect the economic substance of the transaction.
D)SPEs have been used to mislead investors.

Question 43

The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2016, are described in the table below.
$\begin{array}{|r|r|r|r|r|r|}\hline\text { Securities } &\text { No. of }& \text { Cost/Share } &\text { Total } & \text { Value/Share } &\text { Total Market } \\&\text { Shares }&&\text { Cost }&&\text { Value }\\\hline\text { AAA } & 100 & \$ 29 & \$ 2,900 & \$ 34 & \$ 3,400 \\\hline \text { BBB } & 250 & 30 & 7,500 & 28 & 7,000 \\\hline \text { CCC } & 150 & 16 & 2,400 & 20 & 3,000 \\\hline&&&\$12,800&&\$13,400\\\hline\end{array}$
Early in 2017, Solo sold all of its investment in AAA securities for $36 per share.
The journal entry to record the sale in 2017 will include:

A)A debit to Short-term Equity Investments for $3,400.
B)A credit to Unrealized Loss for $200.
C)A credit to Loss on Sale of Investments for $200.
D)A credit to Gain on Sale of Investments for $200.

Question 44

The following information is related to the marketable security investments of Solo Company. Securities held on December 31, 2016 are described in the table below.
$\begin{array}{|l|r|r|r|r|r|}\hline\text { Securities } &\text { No. of } & \text { Cost/Share } &\text { Total }& \text { ValuelShare }&\text { Total Market } \\&\text { Shares }&&\text { Cost }&&\text { Value }\\\hline \text { AAA } & 100 & \$ 29 & \$ 2,900 & \$ 34 & \$ 3,400 \\\hline \text { BBB } & 250 & 30 & 7,500 & 28 & 7,000 \\\hline \text { CCC } & 150 & 16 &2,400 & 20 & 3,000 \\\hline&&&\$12,800&&\$13,400\\\hline\end{array}$
During 2017, Solo received word that dividends of $$2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market value of CCC on December 31, 2017, was $18. During 2018, Solo sold 150 shares of CCC for $22 per share.
The journal entry to record the sale of 150 shares of CCC stock in 2018 would include:

A)A debit to Cash for $3,000.
B)A debit to Unrealized Gain for $300.
C)A debit to Unrealized Gain for $900.
D)A credit to Gain on Sale of Investments for $600.

Question 45

The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2016 are described in the table below.
$\begin{array}{|r|r|r|r|r|r|}\hline\text { Securities } &\text { No. of }& \text { Cost/Share } &\text { Total } & \text { Value/Share } &\text { Total Market } \\&\text { Shares }&&\text { Cost }&&\text { Value }\\\hline\text { AAA } & 100 & \$ 29 & \$ 2,900 & \$ 34 & \$ 3,400 \\\hline \text { BBB } & 250 & 30 & 7,500 & 28 & 7,000 \\\hline \text { CCC } & 150 & 16 & 2,400 & 20 & 3,000 \\\hline&&&\$12,800&&\$13,400\\\hline\end{array}$
Early in 2017, the company sold 50 shares of BBB for $26 per share.
The journal entry to record the sale in 2017 will include:

A)A credit to Short-term Equity Investments for $1,400.
B)A credit to Unrealized Loss for $100.
C)A credit to Loss on Sale of Investments for $100.
D)A debit to Gain on Sale of Investments for $100.

Question 46

On January 2, 2017, Pfizer Co. purchased 22% of Wiley Company's voting stock for $150,000. During 2017, Wiley recorded income of $102,000 and paid total dividends of $27,000. Pfizer uses the equity method to account for this investment. What is Pfizer's income from the Wiley investment?

A)$27,000
B)$28,380
C)$22,440
D)$33,000

Question 47

Carmen Corporation purchased a 40% interest in Sahara Inc. on January 1, 2017, paying $200,000 for 40% of the outstanding voting stock of Sahara Inc. For its year ended December 31, 2017, Sahara Inc. reported net income of $40,000. On December 31, 2017, Carmen received a dividend payment from Sahara in the amount of $1,000. As a result of its ownership interest in Sahara, the financial statements for Carmen Corporation for the year ended December 31, 2017 will reflect which of the following:

A)An asset in the amount of $200,000.
B)Revenue of $1,000.
C)Cash flows from operations of $1,000.
D)Revenue of $16,000.

Question 48

James Corporation purchased 100% of the common stock of Rashaad Corporation for $50 million. James must account for this investment as:

A)a passive investment.
B)an acquisition that requires consolidation accounting.
C)a "mark-to-market" investment.
D)an equity method investment with no consolidation.

Question 49

Decuzzi, Inc. paid $10,000 for a passive stock investment. On December 31, 2017, the company appropriately recognized an unrealized gain of $3,000. The stock is reported on Decuzzi's balance sheet at December 31, 2017 at:

A)$10,000.
B)$13,000.
C)$7,000.
D)Not enough information to determine.

Question 50

Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of yearend adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at yearend. If Caldwell properly accounts for equity securities, what is Caldwell's current ratio before and after the investment adjustment?

A)3.0 and 2.1
B)3.0 and 3.3
C)3.0 and 3.6
D)3.0 and 2.4

Question 51

Multinational US companies usually have a number of foreign subsidiaries with financial statements expressed in foreign currency. When the consolidated financial statements are prepared, to combine the financial statements of the US parent and all of its subsidiaries, the consolidation process involves multiple steps. Which of the following statements about the combining process and the resultant consolidated financial statements is always true for multinational US companies?

A)The foreign subsidiaries are separated into three categories, each of which receives different treatment.
B)The foreign entity's financial statements are converted into dollars.
C)Foreign currency translation adjustments have no effect on cash flows.
D)The foreign currency translation adjustments are included in consolidated income.

Question 52

The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2016 are described in the table below.
$\begin{array}{|r|r|r|r|r|r|}\hline\text { Securities } &\text { No. of }& \text { Cost/Share } &\text { Total } & \text { Value/Share } &\text { Total Market } \\&\text { Shares }&&\text { Cost }&&\text { Value }\\\hline\text { AAA } & 100 & \$ 29 & \$ 2,900 & \$ 34 & \$ 3,400 \\\hline \text { BBB } & 250 & 30 & 7,500 & 28 & 7,000 \\\hline \text { CCC } & 150 & 16 & 2,400 & 20 & 3,000 \\\hline&&&\$12,800&&\$13,400\\\hline\end{array}$
Early in 2017, the company sold 50 shares of BBB for $26 per share. During 2017, Solo received dividends of $3 per share on the remaining 200 shares of BBB, and dividends of $2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market values of BBB and CCC on December 31, 2017, were $24 and $18, respectively. During 2018, Solo sold the remaining 200 shares of BBB stock for $26 per share and the 150 shares of CCC for $22 per share.
The journal entries to record the dividends received on the BBB securities and the dividends declared on the CCC stock in 2017 will include:

A)A credit to Dividend Revenue for $975.
B)A credit to Dividend Payable for $375.
C)A credit to Cash for $600.
D)A debit to Dividend Expense for $375.

Question 53

Why might chief executives react very positively to current goodwill accounting?

A)Goodwill increases in value.
B)Goodwill is amortized creating expenses that reduce net income, enabling a company to pay less income tax.
C)Its amortization increases earnings per share.
D)Goodwill is no longer amortized so income is greater than prior accounting requirements.

Question 54

If Howard Company's balance sheet amount of goodwill is $20,000 and the fair market value of the goodwill is estimated to be $25,000, which of the following entries would be recorded in Howard's books?
A.
$\begin{array}{lrr} \text { GOODWILL} &5,000\\ \text { GOODWLL GAIN } &&5,000\\\end{array}$

B.
$\begin{array}{lrr} \text { GOODWILL GAIN } &5,000\\ \text { GOODWIL } &&5,000\\\end{array}$


C.
$\begin{array}{lrr} \text { IMPAIRMENT LOSS } &5,000\\ \text {GOODWLL } &&5,000\\\end{array}$


D. $\begin{array}{lrr} \text { NO FNTRY WIII BE MADE. } &\\\end{array}$

Question 55

On January 2, 2017, Pfizer Co. purchased 22% of Wiley Company's voting stock for $150,000. During 2017, Wiley recorded income of $102,000 and paid total dividends of $27,000. Pfizer uses the equity method to account for this investment. What is the December 31, 2017, balance sheet value of its long-term equity investment in Wiley?

A)$178,380
B)$225,000
C)$150,000
D)$166,500

Question 56

On December 31, 2017, short-term equity securities with an original cost of $15,000 have a carrying value on the balance sheet equal to their market value of $20,000. On January 5, 2018, those securities are sold for $18,000. Which of the following would be part of the appropriate entry to record the sale of the securities?

A)A debit to Loss on Sale of Investments for $2,000.
B)A debit to Unrealized Gain for $3,000.
C)A debit to Unrealized Gain for $5,000.
D)A credit to Short-term Equity Investments for $15,000.

Question 57

On January 2, 2017, Dellgate Corp. purchased 27% of Galaxy Corporation's voting stock for $125,000. During 2017, Galaxy recorded income of $214,000 and paid total dividends of $17,000. What is the December 31, 2017, balance sheet value of Dellgate's long-term equity investment in Galaxy?

A)$125,000
B)$178,190
C)$187,370
D)$86,940

Question 58

Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of yearend adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at yearend. If Caldwell properly accounts for equity securities, what is Caldwell's earnings per share amount before and after the investment adjustment, respectively?

A)$3.25 and $3.00
B)$3.25 and $3.13
C)$3.25 and $3.37
D)$3.25 and $2.77

Question 59

Under GAAP, market values based on less reliable, unobservable inputs for securities are
Called:

A)Level 1 measurements
B)Level 2 measurements
C)Level 3 measurements
D)None of the above

Question 60

The following information is related to the short-term passive investments of Solo Company. Securities held on December 31, 2016 are described in the table below.
$\begin{array}{|r|r|r|r|r|r|}\hline\text { Securities } &\text { No. of }& \text { Cost/Share } &\text { Total } & \text { Value/Share } &\text { Total Market } \\&\text { Shares }&&\text { Cost }&&\text { Value }\\\hline\text { AAA } & 100 & \$ 29 & \$ 2,900 & \$ 34 & \$ 3,400 \\\hline \text { BBB } & 250 & 30 & 7,500 & 28 & 7,000 \\\hline \text { CCC } & 150 & 16 & 2,400 & 20 & 3,000 \\\hline&&&\$12,800&&\$13,400\\\hline\end{array}$
Early in 2017, the company sold 50 shares of BBB for $26 per share. During 2017, Solo received dividends of $3 per share on the remaining 200 shares of BBB. The per-share market value of BBB on December 31, 2017, was $24. During 2018, Solo sold the remaining 200 shares of BBB stock for $26 per share.
The journal entry to record the sale of 200 shares of BBB stock in 2018 is:
a.
$\begin{array}{lrr} \text { Cash } &5,200\\ \text { Short-term Equity Investments } &&4,800\\ \text { Unrealized Gain } &&400\\\end{array}$

b.
$\begin{array}{lrr} \text { Cash } &5,200\\ \text { Unrealized Loss } &&400\\ \text { Trading Securities} &&4,800\\\end{array}$

c.
$\begin{array}{lrr} \text { Cash} &5,200\\ \text {Short-term Equity Investments } &&4,800\\ \text { Gain on Sale of Investments } &400\\\end{array}$

d.
$\begin{array}{lrr} \text { Short-term Equity Investments} &6,000\\ \text { Gain on Sale of Investements } &&800\\ \text { Cash } &5,200\\\end{array}$

Question 61

On January 2, 2017, NIU purchased 100% of Huskie Corp. for $128,000. The book value of the Huskie's assets is $120,000, and the book value of its liabilities is $60,000. The fair market value of the net assets is $80,000. Inventory is recorded in Huskie's financial statements at $20,000, but has a fair market value of $30,000. NIU should report inventory at

A)$20,000.
B)$25,000.
C)$30,000.
D)cannot determine from information given.

Question 62

For each transaction numbered 1 through 4 below, identify which effect (a through g) would most likely occur as a result of the transaction.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Effects
a. Increase in current ratio and earnings per share
b. Decreases current ratio; increases earnings per share
c. Increases current ratio; does NOT change earnings per share
d. Decrease in current ratio and earnings per share
e. Decreases current ratio; does NOT change earnings per share
f. Does not change the current ratio or earnings per share
g. Can't determine the direction of changes in the current ratio

_____ 1. A passive investment in equity securities are purchased for $1,000 cash.
_____ 2. The securities that cost $1,000 have a yearend market value of $800.
_____ 3. The securities that cost $1,000 have a yearend market value of $1,200.
_____ 4. The securities that cost $1,000 and have a current balance sheet value of $800 are sold for $900.

Question 63

On December 31, 2017, short-term equity securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 5, 2018, those securities are sold for $11,000. Give the appropriate entry to record the sale of the securities.

Question 64

Equity securities were purchased as a short-term passive investment at a cost of $5,000. Their current market value is $4,000. Prepare the December 31 adjusting journal entry.

Question 65

On December 31, 2017, short-term equity securities held as a passive investment, with an original cost of $100,000, have a market value of $110,000. On January 11, 2018, the securities are sold for $130,000. Determine the gains or losses in 2017 and 2018 associated with these securities that must be reported on the income statements. Indicate whether the gains or losses are realized or unrealized.

Question 66

On December 31, 2017, short-term equity securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 5, 2018, those securities are sold for $10,000. Give the appropriate entry to record the sale of the securities.

Question 67

On December 31, 2017, short-term equity securities with an original cost of $45,000 have a market value of $47,000. On January 11, 2018, those securities are sold for $51,000. Determine the gains or losses in 2017 and 2018 associated with these securities, which are held as a passive investment. Clearly label whether the gains or losses are realized or unrealized. Name the financial statement on which each is reported.

Question 68

For each transaction numbered 1 through 4 below, identify which effect (a through f) the transaction is most likely to cause. You may use each letter more than once or not at all.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Effects }$
a. Increase in current ratio and earnings per share
b. Decrease in current ratio and earnings per share
c. Does NOT change the current ratio; increases earnings per share
d. Increasesthe current ratio; does NOT change earnings per share
e. Does not change the current ratio or earnings per share
f. Can't determine the effert
_____ 1. The mark-to-market method is used for an investment in long-term equity securities, and the investee company declares a cash dividend.
_____ 2. The equity method is used for an investment in long-term equity securities and the investee company declares a cash dividend.
_____ 3. The mark-to-market method is used for an investment in long-term equity securities and the investee company recognizes net income.
_____ 4. The equity method is used for an investment in long-term equity securities and the investee company recognizes net income.

Question 69

On January 2, 2017, NIU purchased 80% of Huskie Corp. for $128,000. The book value of the Huskie's assets is $120,000, and the book value of its liabilities is $60,000. The fair market value of the net assets is $80,000. Inventory is recorded in Huskie's financial statements at $20,000, but has a fair market value of $30,000. NIU should report inventory at

A)$20,000.
B)$25,000.
C)$30,000.
D)cannot determine from information given.

Question 70

Each transaction listed in 1 through 4 below relates to a long-term investment in equity securities. Select the letters of the accounting effects (a through h) and place them in the space provided. Transactions may have more than one answer.
$\quad$ $\quad$ $\quad$ $\quad$$\text { Accounting Terms }$
a. Increase assets
b. Increase shareholders' equity (Contributed Capital)
c. Increase shareholders' equity (Retained Earnings)
d. Decrease liabilities
e. Decrease shareholders' equity (Retained Earnings)
f. Decrease assets
g. Increase liabilities
h.The event is not communicated nn financial statements
_____ 1. Using the equity method, the market price of the investment increases above its cost.
_____ 2. Using the mark-to-market method, the market price of the investment increases above its cost.
_____ 3. Using the equity method, the investee company recognizes a net loss for the year.
_____ 4. An investment in a 40%-owned subsidiary is sold for more than its carrying value.

Question 71

On December 31, 2017, short-term equity securities with an original cost of $14,000 have a carrying value on the balance sheet equal to their market value of $16,000. On January 11, 2018, those securities are sold for $18,000. Give the appropriate entry to record the sale of the securities.

Question 72

On December 31, 2017, short-term equity securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 11, 2018, those securities are sold for $15,000. Prepare the appropriate entry to record the sale of the securities.

Question 73

Each transaction listed in 1 through 4 relates to an investment in a long-term equity security. Place the letter that corresponds to the effect (a through h) the transaction has on the accounting equation in the space provided. You may use each letter more than once or not at all.
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ Accounting Effects
a. $+A$ and $+L$
b. $+\mathrm{A}$ and $+\mathrm{SE}$ (Contributed Capital)
c. $+\mathrm{A}$ and $+\mathrm{SE}$ (Retained Earnings)
d. $-A$ and $-L$
e. $-\mathrm{A}$ and $-\mathrm{SE}$ (Contributed Capital)
f. $-A$ and - SE (Retained Earnings)
g. $+\mathrm{A}$ and $-\mathrm{A}$
$\mathrm{h}$ . The event is not reported on financial statements.
____ 1. Under the mark-to-market method, the investee company declares a cash dividend.
____ 2. Under the equity method, the investee company declares a cash dividend.
____ 3. Under the mark-to-market method, the investee company recognizes net income.
____ 4. Under the equity method, the investee company recognizes net income.

Question 74

On December 31, 2017, short-term equity securities with an original cost of $45,000 have a market value of $47,000. On January 5, 2018, those securities are sold for $41,000. Determine the gains or losses in 2017 and 2018 associated with these securities, which are held as a passive investment. Clearly label whether the gains or losses are realized or unrealized. Name the financial statement on which each is reported.

Question 75

Each transaction numbered 1 through 5 below involves an equity security originally acquired at a cost of $1,000. Identify the effect each transaction has on the current ratio and earnings per share by selecting from the effects listed in a through f.You may use each letter more than once or not at all. $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Effects }$
a. Increase in current ratio and earnings per share.
b. Does NOT change earnings per share or the current ratio.
c. Does NOT change earnings per share; may impact the current ratio under certain conditions.
d. Decrease in current ratio and earnings per share.
e. Increases earnings per share.
f. Can't determine the direction of changes in at least one ratio from the event qiven.
____ 1.Passive investment with a current balance sheet value of $1,200 is sold for $1,100.
____ 2.Passive investment with a current balance sheet value of $800 is sold for $800.
____ 3.Passive investment with a current balance sheet value of $1,200 is sold for $1,300.
____ 4.Passive investment has a market value of $800 at yearend.
____ 5.Passive investment has a market value of $1,200 at yearend.

Question 76

Prepare the December 31 journal entry that adjusts equity securities that were purchased as a long-term passive investment at a cost of $5,000 when current market value is $4,200.

Question 77

On January 2, 2017, NIU purchased 100% of Huskie Corp. for $128,000. The book value of the Huskie's assets is $120,000, and the book value of its liabilities is $60,000. The fair market value of the net assets is $80,000. Goodwill should be reported at

A)$20,000.
B)$40,000.
C)$48,000.
D)$60,000.

Question 78

On December 31, the cost and market price of equity securities purchased as a long-term passive investment are $5,000 and $8,000, respectively. Give the appropriate adjusting entry on December 31.

Question 79

On December 31, the cost and market price of a short-term passive investment in equity securites are $5,000 and $9,000, respectively. Give the appropriate adjusting entry on December 31.

Question 80

For each transaction listed in 1 through 9, place the letter (a through g) of the best effect in the space provided. You may use each letter more than once or not at all. All transactions involve a passive investment in equity securities unless otherwise specified.