Deck 13: Accounting for Investments and Consolidated Financial Statements

Question 1

If the investor company owns 25 percent of the investee company's outstanding voting shares and uses the equity method, a $50,000 net loss by the investee company would result in:

A)A debit to the loss from investments account for $50,000
B)A credit to the investment in shares account for $12,500
C)A debit to the investment in shares account for $12,500
D)No entry on the investor's books

Answer 1

B

Question 2

Dividends received from the investee company cause an increase in the investor company's long-term investment account when using the equity method.

Answer 2

False

Question 3

Able Company owns 25 percent of Baker Co., but does not have a significant influence over Baker's operations.Able should use which method to account for their investment in Baker?

A)Cost method
B)Equity method
C)Share acquisition method
D)Purchase method

Answer 3

A

Question 4

The entry to record the acquisition of a long-term investment is the same under both the cost and the equity methods.

Question 5

A company may in engage in a strategic investment for a variety of reasons.These reasons include everything except for:

A)vertical integration
B)seasonality
C)portfolio investing
D)diversification

Question 6

Consolidation entries are not recorded in the accounting records of either the parent or the subsidiary.

Question 7

If a company purchases all of the shares of another company with cash it is recorded as an asset purchase and consolidated financial statements are not required.

Question 8

Under the purchase method, the assets and liabilities of the subsidiary are reflected on the consolidated statements at their book values.

Question 9

Use the following information to answer questions
Bubbly Beverages Inc.BBI) is a producer of carbonated drinks.In 2011 it purchased 2 million of the 3.5 million outstanding shares of Snack's Unlimited, a producer of potato chips and various other snack items.
From BBI's perspective this is an example of:

A)a passive investment.
B)horizontal integration.
C)vertical integration.
D)diversification.

Question 10

Receipt of dividends from the investee company affects the investor company's long-term investment account under which method?

A)Equity method
B)Cost method
C)Fair value method
D)Purchase method

Question 11

Palm Inc.owns 12 percent of Tree Co., 18 percent of Pine Inc., and 25 percent of Spruce Inc.Palm intends to classify all three investments as long-term.How should Palm account for each of these investments?

A)Cost method for all three
B)Cost method for Tree and equity method for the others
C)Equity method for all three
D)Cost method for Tree and Pine, and equity method for Spruce

Question 12

Use the following information to answer questions
Bubbly Beverages Inc.BBI) is a producer of carbonated drinks.In 2011 it purchased 2 million of the 3.5 million outstanding shares of Snack's Unlimited, a producer of potato chips and various other snack items.
What method should BBI use to account for their investment in Snack's Unlimited?

A)Fair value method
B)Cost method
C)Equity method
D)Consolidation method

Question 13

With passive investments, gains and losses are always recognized in net earnings when they occur.

Question 14

To obtain significant influence of an investee company, an investor must acquire more than 20% of the outstanding voting shares of the investee.

Question 15

A debt swap is a way to acquire control of another company.

Question 16

Goodwill arises when the fair market value paid in an acquisition is greater than the fair market value of the identifiable net assets.

Question 17

When consolidation is necessary, both the parent and the subsidiary companies prepare separate consolidated financial statements.

Question 18

If an investor owns less than 50 percent of an investee's voting shares, the equity method should always be used to account for the investment.

Question 19

Available for sale securities are adjusted to fair market value at the end of period and the unrealized gains or losses are reflected as other comprehensive income.

Question 20

Lead Inc.owns 15 percent of Charcoal Co., which gives Lead a significant influence over Charcoal's operations.Lead should use which method to account for their investment?

A)Cost method
B)Equity method
C)Fair value method
D)Purchase method

Question 21

Consolidation entries are recorded in the accounting records of:

A)the parent company but not the subsidiary.
B)the subsidiary company but not the parent.
C)the parent and the subsidiary.
D)neither the parent nor the subsidiary.

Question 22

Assume an investor company uses the equity method of accounting for its investment in an investee company's voting shares.During the year the investee declared and paid a cash dividend, which was recorded with the following entry by the investor company:
Cash A) xx
Equity in earnings of investment SE) xx
The effect of this entry would be to:

A)Have no effect on the investment account or retained earnings
B)Overstate the investment account and understate retained earnings
C)Understate the investment account and overstate net income
D)Overstate both net income and the investment account

Question 23

Use of the equity method results in the investment account approximating the:

A)cost of the investor's original investment.
B)investor's share of the investee's market value.
C)investor's share of the investee's equity.
D)investor's share of the investee's assets.

Question 24

Spade Co.owns 40 percent of Club Inc.During the current year, Spade received a $5,000 cash dividend from Club.What effect will this dividend most likely have on Spade's financial statements?

A)Increase net income
B)Increase total assets
C)Decrease total equity
D)Decrease the investment in shares account

Question 25

Which of the following would indicate the investor company's ability to exercise significant influence over an investee company?

A)Investor has six of the ten seats on the board of directors.
B)Investor has two of the ten seats on the board of directors.
C)Investee pays dividends to Investor.
D)Investee is a customer of Investor.

Question 26

Use the following information to answer questions
Heart Company has a total of 750,000 shares issued.Diamonds Inc.purchases 150,000 of Heart shares for $10 \ share on January 1, 2011.On December 31, 2011, Heart has a net income of $125,000 and Heart shares are trading for $9.50 \ share.
If this is a strategic investment, the balance in Diamond's investment in shares account on December 31, is:

A)$1,425,000
B)$1,450,000
C)$1,500,000
D)$1,525,000

Question 27

When a parent company and a subsidiary company prepare a set of consolidated financial statements, the intercompany transactions must be:

A)combined with the transactions involving entities outside the consolidated entity.
B)eliminated before consolidation.
C)reported separately on the consolidated statements.
D)explained in a footnote to the consolidated statements.

Question 28

Use the following information for questions
Hat Inc.purchased 10,000 shares of Cat Co.'s common shares for $10 a share on January 1.During the year, Cat paid a $50,000 cash dividend and earned $300,000 net income.On December 31, the market value of Cat's stock was $8 a share.The investment is to be held as a long-term investment and the decline in value is not considered permanent.
Assuming Hat owned 25 percent of Cat's outstanding shares; Hat would report the net carrying value of their investment as:

A)$100,000
B)$162,500
C)$175,000
D)$187,500

Question 29

If an investor company made the following entry to record receipt of a cash dividend, $\begin{array} { l } \text {Cash}&10,000\\& \text {Dividend Revenue }&10,000\\\end{array}$

Which accounting method must the investor company be using?

A)Cost method
B)Equity method
C)Fair value method
D)Purchase method

Question 30

Use the following information for questions
Hat Inc.purchased 10,000 shares of Cat Co.'s common shares for $10 a share on January 1.During the year, Cat paid a $50,000 cash dividend and earned $300,000 net income.On December 31, the market value of Cat's stock was $8 a share.The investment is to be held as a long-term investment and the decline in value is not considered permanent.
Assuming Hat owned 10 percent of Cat's outstanding voting shares; Hat would report the net carrying value of their investment account as:

A)$80,000
B)$100,000
C)$105,000
E)$125,000

Question 31

Use the following information for questions
Hat Inc.purchased 10,000 shares of Cat Co.'s common shares for $10 a share on January 1.During the year, Cat paid a $50,000 cash dividend and earned $300,000 net income.On December 31, the market value of Cat's stock was $8 a share.The investment is to be held as a long-term investment and the decline in value is not considered permanent.
Assuming Hat owned 25 percent of Cat's outstanding shares; Hat would report investment revenue of:

A)$7,500
B)$42,500
C)$62,500
D)$75,000

Question 32

In which of the following cases is it necessary to prepare consolidated financial statements?

A)Investor buys 100% of the assets of Investee for cash.
B)Investor buys 100% of the shares of Investee for cash.
C)Investor buys 40% of the assets of Investee by issuing shares.
D)Investor buys 40% of the shares of Investee by issuing shares.

Question 33

Use the following information to answer questions
Heart Company has a total of 750,000 shares issued.Diamonds Inc.purchases 150,000 of Heart shares for $10 \ share on January 1, 2011.On December 31, 2011, Heart has a net income of $125,000 and Heart shares are trading for $9.50 \ share.
If this is an AFS investment, Diamond would:

A)record a decrease to the investment in shares account
B)record an unrealized loss to be recognized on the OCI
C)record an unrealized loss in net earnings
D)not be required to make any entries on December 31

Question 34

Use the following information for questions
Hat Inc.purchased 10,000 shares of Cat Co.'s common shares for $10 a share on January 1.During the year, Cat paid a $50,000 cash dividend and earned $300,000 net income.On December 31, the market value of Cat's stock was $8 a share.The investment is to be held as a long-term investment and the decline in value is not considered permanent.
Assuming Hat owned 10 percent of Cat's outstanding shares; Hat would report investment income of:

A)$20,000)
B)$5,000
C)$30,000
D)$50,000

Question 35

Which of the following statements about consolidated financial statements is true? Consolidated financial statements:

A)are useful to users because they provide information about the individual companies in the group.
B)must be prepared whenever an investor corporation owns shares in another company that they intend to hold for the long-term.
C)provide users with information about the whole entity but do not reflect a legal entity.
D)record all the assets and liabilities of all companies in the group at their book values.

Question 36

When the equity method of accounting for investments in another company's voting shares is used, the balance of the investment in shares account is affected by:

A)the excess market price of the shares over their cost.
B)only the dividends of the investee company.
C)only the earnings of the investee company.
D)both the earnings and dividends of the investee company.

Question 37

When the cost method of accounting for investments in another company's voting shares is used, the balance of the investment in shares account is affected by:

A)the net income or loss of the investee company.
B)the dividends of the investee company.
C)the purchase of additional shares of the investee company.
D)both the earnings and dividends of the investee company.

Question 38

Use the following information to answer questions
Heart Company has a total of 750,000 shares issued.Diamonds Inc.purchases 150,000 of Heart shares for $10 \ share on January 1, 2011.On December 31, 2011, Heart has a net income of $125,000 and Heart shares are trading for $9.50 \ share.
If this is a strategic investment, Diamond must making the following entry on December 31:

A)dr.Investment in shares, cr.OCI
B)dr.OCI, cr.Investment in shares
C)dr.Cash, cr.Investment in shares
D)dr.Investment in shares, cr.Equity in Earnings of Investee

Question 39

A major difference in accounting for AFS investments versus HFT investments is:

A)Dividends are only reported as investment income in AFS investments
B)Only AFS investments are carried at FMV on the statement of financial position
C)Gains and losses for AFS investments are recorded in net earnings only when the investment is sold
D)There are no major differences in the accounting between AFS and HTM investments.

Question 40

Brunswick Inc.owns 15 percent of Scotia Industries.During the current year, Brunswick received a $5,000 cash dividend from Scotia.What effect will this dividend most likely have on Brunswick's financial statements?

A)Increase total assets
B)Increase the investment account
C)Decrease the investment account
D)Decrease net income

Question 41

Use the following information for questions:
On January 1, 2011, Stinton Inc. purchased 60% of Halston Co. for $60,000. There was no difference between the book value and fair market value of Halston’s net assets. At year-end management determined there had been no impairment in Goodwill since the purchase. The equity sections of the two balance sheets at acquisition were as follows: $\begin{array}{lrr}&\text { Stinton Inc.}&\text { Halston Co. }\\\text { Common shares } & \$ 100,000 & \$ 40,000 \\\text { Retained earnings } & 40,000 & 8,000\end{array}$ During the year, Halston earned $10,000 and paid cash dividends of $2,000.

-Determine Stinton Inc.'s equity in Halston's earnings for 2011.

A)$1,200
B)$4,800
C)$6,000
D)$8,000

Question 42

Use the following information for questions:
Chocolate Inc. and Toffee Co. agreed to merge. Chocolate Inc. issued 10,000 shares with a market value of $120,000 for all of Toffee’s shares. Fixed assets were undervalued by $40,000. Straight-line amortization over 10 years was used for all fair market value differences. Summary balance sheet data as of the date of merger and net income after the first year is shown below: $\begin{array}{lrr}&\text { Chocolate Inc.}&\text { Toffee Co. }\\\hline\text { Total assets } & \$ 270,000 & \$ 75,000 \\\text { Common shares } & 140,000 & 40,000 \\\text { Retained earnings } & 20,000 & 5,000 \\\text { Net income after the first year } & \$ 90,000 & \$ 30,000\end{array}$

-The amount of retained earnings on the consolidated balance sheet as of the acquisition date would be:

A)$0
B)$5,000
C)$20,000
D)$25,000

Question 43

If goodwill is recognized as a separate account on the consolidated balance sheet, which method must be in use?

A)Cost method
B)Purchase method
C)Market method
D)Equity method

Question 44

Assume an investor company is using the equity method to record their investment in a wholly-owned subsidiary.What would be the effect on the ROA and Net profit margin ratios after consolidation? In the consolidated statements the:

Question 45

Use the following information for questions:
On January 1, 2011, Stinton Inc. purchased 60% of Halston Co. for $60,000. There was no difference between the book value and fair market value of Halston’s net assets. At year-end management determined there had been no impairment in Goodwill since the purchase. The equity sections of the two balance sheets at acquisition were as follows: $\begin{array}{lrr}&\text { Stinton Inc.}&\text { Halston Co. }\\\text { Common shares } & \$ 100,000 & \$ 40,000 \\\text { Retained earnings } & 40,000 & 8,000\end{array}$ During the year, Halston earned $10,000 and paid cash dividends of $2,000.

-The amount of non-controlling interest that would appear on the consolidated balance sheet at January 1, 2011 would be:

A)$ 3,200
B)$16,000
C)$19,200
D)$40,000

Question 46

Use the following information for questions:
Chocolate Inc. and Toffee Co. agreed to merge. Chocolate Inc. issued 10,000 shares with a market value of $120,000 for all of Toffee’s shares. Fixed assets were undervalued by $40,000. Straight-line amortization over 10 years was used for all fair market value differences. Summary balance sheet data as of the date of merger and net income after the first year is shown below: $\begin{array}{lrr}&\text { Chocolate Inc.}&\text { Toffee Co. }\\\hline\text { Total assets } & \$ 270,000 & \$ 75,000 \\\text { Common shares } & 140,000 & 40,000 \\\text { Retained earnings } & 20,000 & 5,000 \\\text { Net income after the first year } & \$ 90,000 & \$ 30,000\end{array}$

-The amount of the investment in the Chocolate Co.account on Toffee's books on the date of acquisition would be:

A)$ 40,000
B)$ 45,000
C)$115,000
D)$120,000

Question 47

On January 1, 2011, Blass Inc.purchased 75% of Glass Co.'s voting shares for $270,000.The book value of Glass Co.'s net assets equalled their fair market value of $300,000.The amount of goodwill, if any, to appear on the consolidated balance sheet as of the acquisition date would be:

A)$0
B)$22,500
C)$45,000
D)$75,000

Question 48

The entry that establishes goodwill upon consolidation is an):

A)adjusting entry.
B)elimination entry.
C)consolidation entry.
D)journal entry.

Question 49

On the balance sheet, the non-controlling interest account is located:

A)at the end of the long-term assets section.
B)at the end of the long-term liability section.
C)in the shareholders' equity section.
D)the non-controlling interest is not recorded on the balance sheet.

Question 50

Melody Inc.purchased 75% of Tune Time Co.'s voting shares for $375,000.The book value of the net assets acquired was $150,000 and they were undervalued by $90,000.The amount of non-controlling interest that would be shown on the consolidated balance sheet at the date of acquisition would be:

A)$37,500
B)$60,000
C)$93,750
D)$125,000

Question 51

Use the following information for questions
On January 1, 2011, Global Inc.acquired 100% of National Co.'s voting shares for $900,000.The fair market value of National's net assets was $825,000 which equaled their book value.During 2011, National earned $275,000 and paid out cash dividends of $125,000.Goodwill resulting from the acquisition was reviewed by management who determined that no impairment in value had occurred.Global earned net income, excluding National, of $1,200,000 and paid dividends of $200,000.
The consolidated net income for the year would be:

A)$1,200,000
B)$1,350,000
C)$1,400,000
D)$1,475,000

Question 52

Use the following information for questions
On January 1, 2011, Global Inc.acquired 100% of National Co.'s voting shares for $900,000.The fair market value of National's net assets was $825,000 which equaled their book value.During 2011, National earned $275,000 and paid out cash dividends of $125,000.Goodwill resulting from the acquisition was reviewed by management who determined that no impairment in value had occurred.Global earned net income, excluding National, of $1,200,000 and paid dividends of $200,000.
The consolidated goodwill reflected on the balance sheet at December 31, 2011 was:

A)$0
B)$67,500
C)$75,000
D)$150,000

Question 53

Use the following information for questions:
On January 1, 2011, Stinton Inc. purchased 60% of Halston Co. for $60,000. There was no difference between the book value and fair market value of Halston’s net assets. At year-end management determined there had been no impairment in Goodwill since the purchase. The equity sections of the two balance sheets at acquisition were as follows: $\begin{array}{lrr}&\text { Stinton Inc.}&\text { Halston Co. }\\\text { Common shares } & \$ 100,000 & \$ 40,000 \\\text { Retained earnings } & 40,000 & 8,000\end{array}$ During the year, Halston earned $10,000 and paid cash dividends of $2,000.

-The balance in Stinton's investment in Halston Co.account at December 31, 2011 was:

A)$60,000
B)$64,800
C)$66,000
D)$70,000

Question 54

Use the following information for questions:
Chocolate Inc. and Toffee Co. agreed to merge. Chocolate Inc. issued 10,000 shares with a market value of $120,000 for all of Toffee’s shares. Fixed assets were undervalued by $40,000. Straight-line amortization over 10 years was used for all fair market value differences. Summary balance sheet data as of the date of merger and net income after the first year is shown below: $\begin{array}{lrr}&\text { Chocolate Inc.}&\text { Toffee Co. }\\\hline\text { Total assets } & \$ 270,000 & \$ 75,000 \\\text { Common shares } & 140,000 & 40,000 \\\text { Retained earnings } & 20,000 & 5,000 \\\text { Net income after the first year } & \$ 90,000 & \$ 30,000\end{array}$

-The amount of consolidated net income at the end of the first year would be:

A)$ 86,000
B)$ 90,000
C)$116,000
D)$120,000

Question 55

Under the purchase method of consolidation, if the investor owns 100% of the investee, the net assets of the investee company are reported on the consolidated balance sheet on the acquisition date at their:

A)book value.
B)fair market value.
C)net realizable value.
D)present value.

Question 56

Moon Company purchased 80% of Star Ltd on January 1, 2011.At that time the values for the inventory for each company were as follows: $\begin{array}{lrr}&\text { Moon } & {\text { Star }} \\\text { Book value } & \$ 400,000 & \$ 200,000 \\\text { Market value } & 450,000 & 240,000\end{array}$
The value of inventory on the consolidated balance sheet as at the date of acquisition would be:

A)$600,000
B)$632,000
C)$640,000
D)$690,000

Question 57

Use the following information for questions:
Chocolate Inc. and Toffee Co. agreed to merge. Chocolate Inc. issued 10,000 shares with a market value of $120,000 for all of Toffee’s shares. Fixed assets were undervalued by $40,000. Straight-line amortization over 10 years was used for all fair market value differences. Summary balance sheet data as of the date of merger and net income after the first year is shown below: $\begin{array}{lrr}&\text { Chocolate Inc.}&\text { Toffee Co. }\\\hline\text { Total assets } & \$ 270,000 & \$ 75,000 \\\text { Common shares } & 140,000 & 40,000 \\\text { Retained earnings } & 20,000 & 5,000 \\\text { Net income after the first year } & \$ 90,000 & \$ 30,000\end{array}$

-The amount of consolidated retained earnings after the first year would be:

A)$110,000
B)$136,000
C)$140,000
D)$145,000