Deck 10: Financial Statement Analysis

Question 1

Cooper Company has purchased equipment that requires annual payments of $18,000 to be paid at the end of each of the next 6 years. The discount rate is 8%. The present value of $1 for six periods at 8% is 0.630. The present value of an ordinary annuity of $1 for six periods at 8% is 4.623. What amount will be assigned to the equipment? (Round your final answer to the nearest dollar.)

A) $83,214
B) $108,000
C) $94,554
D) $3,894

Answer 1

A

Question 2

Investments accounted for using the equity method are initially recorded at:

A) cost
B) the total of the investee's equity accounts multiplied by the percentage of ownership acquired
C) the lower of the cost or fair market value as of the balance sheet date
D) fair market value of the investee company multiplied by the percentage of ownership acquired

Answer 2

A

Question 3

A non-controlling interest arises only when a parent company purchases:

A) more than 50% but less than 100% of the stock of a subsidiary company
B) between 20% and 50% of the stock of a subsidiary company
C) less than 20% of the stock of a subsidiary company
D) all of the stock of a subsidiary company

Answer 3

A

Question 4

Yukon Electrical Company owns all of the stock of Simmons Corporation and 80% of the stock ofI-Tek Corporation. In 2020, Yukon earned net income of $450,000, Simmons earned $120,000, and I-Tek earned $180,000. Yukon's consolidated income statement would report consolidated net income of:

A) $750,000
B) $450,000
C) $570,000
D) $714,000

Question 5

Retail Energy Corporation paid $1,300,000 on January 1, 2020, to purchase 32% of the outstanding shares of Natural Gas Limited. In 2020 Natural Gas Limited reported $450,000 of net income and paid $100,000 in dividends. If this investment is accounted for using the equity method of accounting, what will be the impact on the books of Retail Energy Corporation?

A) income of $32,000 will be recorded
B) the Investment account will be decreased by $144,000
C) income of $144,000 will be recorded
D) the Investment account will be increased by $144,000

Question 6

The sale of a long-term investment would appear on a cash flow statement as a:

A) cash outflow in the investing activities section
B) cash inflow in the investing activities section
C) cash inflow in the operating activities section
D) cash inflow in the financing activities section

Question 7

On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for
2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool
Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000. Assume on December
31, 2020, TXU Europe Corporation sells 50% of its investment in Alberta Power Pool Corporation
For $525,000. TXU Europe Corporation will report a:

A) gain on sale of investment of $107,000
B) loss on sale of investment of $152,000
C) loss on sale of investment of $321,000
D) gain on sale of investment of $80,000

Question 8

Suppose an investor purchases $100,000 of 5% Government of Canada bonds at a price of $95,735 on June 1, 2020. The bonds pay interest on June 1 and December 1. The investor intends to hold the bonds until their maturity on June 2, 2025. The bonds will be outstanding for five years (10 interest periods). The investor paid a discounted price for the bonds of $95,735 (an effective interest rate of 6%). How much total interest revenue will be recorded on December 1, 2020?

A) $2,500
B) $2,917
C) $2,872
D) $3,354

Question 9

The journal entry to record the sale of an investment includes a loss on sale of investment for $500.The income statement will reflect:

A) a decrease in shareholders' equity $500
B) other income/loss of $500
C) nothing, since the entry impacts only asset accounts
D) a decrease in net sales of $500

Question 10

A gain or loss on sale of a long-term investment using the equity method is determined by comparing the cash received with the:

A) cost of the long-term investment
B) cost of the long-term investment adjusted for the investor's share of the investee's net income and cash dividends while the investment was held by the investor company
C) lower-of-cost-or-market value of the long-term investment
D) market value of the long-term investment

Question 11

A controlling interest is normally one where the investor:

A) uses the market value method of accounting for the investment
B) owns more than 20% of the investee's voting stock
C) uses the equity method to account for the investment
D) owns more than 50% of the investee's voting stock

Question 12

When a parent-subsidiary relationship exists between two companies:

A) the parent company will keep one set of accounting records covering both companies
B) the subsidiary company will keep one set of accounting records covering both companies
C) the parent company must use the cost method to account for the subsidiary
D) both the parent and the subsidiary will continue to keep their own separate accounting records as if the parent-subsidiary relationship does not exist

Question 13

If 100% of a subsidiary's voting stock is acquired in the purchase of the subsidiary, goodwill is defined as the amount by which the purchase price paid by the parent company exceeds the:

A) carrying amount of the net assets of the subsidiary
B) balance in the investment in subsidiary account
C) total shareholders' equity of the subsidiary
D) fair value of the net assets of the subsidiary

Question 14

Barking Power Company accounts for its 35% investment in Pipeline Corporation under the equity method of accounting. The investment was made on January 1, 2020, at a cost of $625,000. Pipeline Corporation reported net income of $85,000 for the year ended December 31, 2020, and paid total dividends of $20,000 during 2020. On December 31, 2020, after making all appropriate entries, the balance in Barking Power Company's Long-Term Investment account will equal:

A) $647,750
B) $583,000
C) $690,000
D) $602,250

Question 15

When a premium on a bond investment is amortized by the company holding the investment:

A) the amount of cash received as an interest payment will be reduced
B) companies normally credit a separate account called Premium on Investments
C) the amount of cash received as an interest payment will be increased
D) Interest Revenue will be debited

Question 16

All of the following are necessary to compute the future value of a single amount except
the:

A) amount of initial payment or receipt
B) interest rate
C) length of time between investment and future payment or receipt
D) maturity value

Question 17

Investments with a cost of $12,000 have a current market value of $11,612. The adjusting entry willrequire a:

A) credit to Unrealized Loss on Investment for $388
B) credit to Investments for $388
C) debit to Investments for $388
D) no entry required

Question 18

The future value of 1 will always be:

A) equal to 1
B) equal to the interest rate
C) greater than 1
D) less than 1

Question 19

When preparing a consolidated balance sheet:

A) investment in subsidiary will be presented but the shareholders' equity of the subsidiary will be eliminated
B) both investment in subsidiary and the shareholders' equity of the parent will be eliminated
C) neither investment in subsidiary nor the subsidiary's shareholders' equity will be presented
D) the shareholders' equity of the parent will be eliminated but investment in subsidiary will be presented

Question 20

If a parent company and its subsidiary have accounts receivable from mutually exclusive external sources in the amounts of $35,000 and $20,000, respectively, the consolidated balance sheet for the parent and its subsidiary will show:

A) one accounts receivable balance of $55,000
B) net accounts receivable of $15,000
C) only the parent's accounts receivable balance
D) both amounts, but it will list them in two separate accounts

Question 21

The receipt of a cash dividend arising from an investment (5% ownership) held by a company requires a:

A) debit to Retained Earnings
B) credit to Cash
C) credit to Retained Earnings
D) credit to Dividend Revenue

Question 22

The purchase of long-term investments would appear on a cash flow statement in the:

A) would not appear on a cash flow statement
B) financing activities section
C) investing activities section
D) operating activities section

Question 23

Goodwill arises when a parent company:

A) pays less to acquire a subsidiary company than the carrying amount of the subsidiary's net assets
B) pays less to acquire a subsidiary company than the fair value of the subsidiary's net assets
C) pays more to acquire a subsidiary company than the fair value of the subsidiary's net assets
D) pays more to acquire a subsidiary company than the carrying amount of the subsidiary's net assets

Question 24

Under the equity method of accounting, the investor will:

A) reduce the Investment account for investee dividends and increase the Investment account to record investee income
B) reduce the Investment account to record dividends and income of the investee
C) increase the Investment account to record dividends and income of the investee
D) increase the Investment account for investee dividends, and reduce the Investment account to record investee income

Question 25

On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for
2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000. The long-term investment will appear on TXU Europe Corporation's December 31, 2020, balance sheet at:

A) $864,000
B) $836,000
C) $890,000
D) $746,000

Question 26

In present value calculations, the process of determining the present value of a single sum of money is called:

A) pricing
B) discounting
C) allocating
D) negotiating

Question 27

Amortizing a discount on a bond investment will cause the Investment account and interest revenue to respectively:

A) decrease and increase
B) increase and decrease
C) decrease and decrease
D) increase and increase

Question 28

Unrealized gains or losses on short-term investments are reported using:

A) an expense account
B) a revenue account
C) a liability account
D) an asset account

Question 29

Long-term bond investments are reported on the balance sheet at their:

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

Question 30

A long-term investment in common shares acquired during 2020 at a cost of $45,000 has a market value on December 31, 2020, of $45,725. The year-end adjusting entry requires a:

A) debit to Long-Term Investment for $725
B) credit to Allowance to Adjust Investment to Market for $725
C) debit to Unrealized Gain on Investment for $725
D) no entry required

Question 31

Goodwill is a(n) _ on the _.

A) intangible asset; subsidiary's balance sheet
B) long-term investment; consolidated balance sheet
C) current asset; subsidiary's balance sheet
D) intangible asset; consolidated balance sheet

Question 32

Amortizing a premium on a bond investment will cause the Investment account and interest revenue to respectively:

A) increase and decrease
B) increase and increase
C) decrease and decrease
D) decrease and increase

Question 33

Investments at fair value through other comprehensive income with a cost of $22,000 have a current market value of $22,600. The adjusting entry will require a:

A) credit to other comprehensive income for $600
B) credit to Investments for $600
C) credit to Gain on Investment for $600
D) debit to Investments for $22,600

Question 34

If an investor company owns between 20% and 50% of the common shares of another business, cash dividends received from the investee company are generally recorded by the investor company by:

A) increasing the value of the investor's Investment account
B) decreasing the investor company's Common Shares account
C) increasing the Dividend Revenue account
D) decreasing the value of the investor's Investment account

Question 35

On January 1, 2020, bonds with a face value of $72,000 were sold. The bonds mature on January 1, 2030. The face interest rate is 6%. The bonds pay interest semiannually on July 1 and January
1) The market rate of interest is 10%. What is the market price of the bonds? The present value of
$1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at
5% is 12.462. The present value of $1 for 20 periods at 3% is 0.554. The present value of an
Ordinary annuity of $1 for 20 periods at 3% is 14.878. (Round your final answer to the nearest
Dollar.)

A) $72,000
B) $72,024
C) $54,062
D) $74,160

Question 36

A single amount of $4,700 is to be received in 3 years. If the single amount is discounted at 6% for 3 periods, the present value is

A) $12,563
B) $4,700
C) $3,948
D) $4,418

Question 37

Suppose an investor purchases $100,000 of 5% Government of Canada bonds at a price of $95,735 on June 1, 2020. The bonds pay interest on June 1 and December 1. The investor intends to hold the bonds until their maturity on June 2, 2025. The bonds will be outstanding for five years (10 interest periods). The investor paid a discounted price for the bonds of $95,735 (an effective interest rate of 6%). What amount will be reported for the long-term investment in bonds on the balance sheet on December 31, 2020?

A) $100,000
B) $96,172
C) $95,735
D) $96,108

Question 38

The adjusting entry for investments at fair value through other comprehensive income contains a credit to Investments for $651. The income statement will reflect:

A) investment of $651
B) revenue of $651
C) other comprehensive income/loss of $651
D) nothing, because gain/loss is not reported on the income statement

Question 39

An investor company with a 40% interest in an investee properly used the equity method to account for the investment. If the entries to the Investment account for the current year showed a debit of $45,000 and a credit of $22,000, the investee must have paid total dividends of:

A) $45,000
B) $55,000
C) $22,000
D) $100,000

Question 40

Corporations invest in a short-term investment:

A) to invest excess cash temporarily and to increase income
B) to generate a higher profile
C) to sell it for more than its cost
D) to park cash temporarily

Question 41

When a parent acquires 100% of the voting stock of a subsidiary, that subsidiary:

A) lives on as a separate legal entity
B) continues to exist as an accounting entity, but it ceases to exist in any legal form
C) ceases to exist as a separate legal entity, but it is still accounted for as a separate accounting entity
D) automatically becomes part of one large legal entity that consists of the parent and the subsidiary together

Question 42

Brighton Beach Limited owns 40% of Alberta Based Inc. Total cash dividends paid by Alberta Based Inc. for the year ending December 31, 2020, amount to $47,919. The journal entry prepared by Brighton Beach Limited on December 31, 2020, includes a:

A) debit to Long-Term Investment for $19,168
B) credit to Dividend Revenue for $19,168
C) credit to Long-Term Investment for $19,168
D) debit to Cash for $47,918

Question 43

On the cash flow statement, the purchase and sale of bonds of other companies to be held for an extended time are reported as:

A) investing activities
B) operating activities
C) financing activities
D) would not appear on a cash flow statement

Question 44

All marketable securities are considered to be short-term investments.

Question 45

Goodwill arises when a parent company must pay more to acquire a subsidiary company than the fair value of the subsidiary's net assets.

Question 46

Power Generation Corp. owns 38% of Electric Limited. Net income for Electric Limited for the year ending December 31, 2020, is $450,000. The journal entry prepared by Power Generation Corp. on December 31, 2020, includes a:

A) credit to Long-Term Investment for $171,000
B) debit to Cash for $171,000
C) debit to Long-Term Investment for $171,000
D) debit to Long-Term Investment for $450,000

Question 47

The amortization of a discount on a long-term bond investment:

A) increases the investor's interest expense
B) increases the investor's interest revenue
C) decreases the investor's interest revenue
D) decreases the investor's Long-Term Investment account

Question 48

A short-term investment is not:

A) referred to as a marketable security
B) referred to as a temporary investment
C) a current asset
D) intended to be converted to cash in more than one year

Question 49

Zeep Company purchased shares of Zoop Inc on June 30, 2020 for $7,500. At the end of August these shares are now worth $6,500. Zeep has an unrealized loss on this investment.

Question 50

For a company that prepares its financial results in accordance with IFRS, a held to maturity bond investment must use the effective rate interest method.

Question 51

On January 1, 2020, bonds with a face value of $94,000 were sold. The bonds mature on January 1, 2030. The face interest rate is 8% annually. The bonds pay interest semiannually on July 1 and
January 1. The market rate of interest is 10% annually. What is the market price of the bonds? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of
$1 for 20 periods at 5% is 12.462. The present value of $1 for 10 periods at 10% is 0.463. The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145. (Round your final
Answer to the nearest dollar.)

A) $94,000
B) $66,627
C) $82,295
D) $97,760

Question 52

Investments in long-term bonds are shown on the balance sheet at their current market value.

Question 53

The equity method of accounting for a stock investment should generally be used when the investor owns 20%-50% of the investee's stock, because that level of stock ownership:

A) means the investor has a controlling interest in the investee company
B) gives the investor significant influence over the investee company
C) requires the investor to notify the government of any plans to acquire a controlling interest in the investee company
D) usually indicates a plan to acquire a controlling interest of the investee company

Question 54

Long-term investments include which of the following?

A) represent accounts receivable and notes receivable on the balance sheet
B) shares and bonds that the investor expects to hold for longer than one year
C) shares and bonds that the investor expects to convert to cash within one year
D) marketable securities

Question 55

On January 1, 2019, TXU Europe Corporation purchased 40% of the outstanding stock of Alberta Power Pool Corporation for $800,000. Net income reported by Alberta Power Pool Corporation for
2019 and 2020 was, respectively, $100,000 and $125,000. Dividends paid by Alberta Power Pool Corporation during 2019 and 2020 were, respectively, $60,000 and $75,000. The long-term investment will appear on TXU Europe Corporation's December 31, 2019, balance sheet at:

A) $800,000
B) $776,000
C) $816,000
D) $840,000

Question 56

Amortization of a discount or premium on the bond affects all of the following except
:

A) the amount of cash received when interest payments are made
B) the carrying value of the bonds on the investor's books
C) retained earnings of the investor
D) interest revenue of the investor

Question 57

Amortizing a discount on a long-term bond investment will cause:

A) the cash received by the investor to exceed the interest revenue reported on the income statement
B) the interest revenue reported is not related to the cash received by the investor
C) the interest revenue reported on the income statement to exceed the cash received by the investor
D) the interest revenue reported on the income statement to equal the cash received by the investor

Question 58

In 2020, Gigajoule Corporation used the equity method to account for a 25% ownership interest in Megawatt Corporation. If Megawatt Corporation reports $400,000 of income and pays $80,000 of dividends in 2020, the net effect of the entries made by Gigajoule Corporation in 2020 will be to:

A) reduce the Investment account by $320,000
B) increase the Investment account by $320,000
C) increase the Investment account by $80,000
D) reduce the Investment account by $80,000

Question 59

The unrealized Gain/Loss on Investment account may appear on which financial statement?

A) the balance sheet under the "liabilities" section
B) the income statement under the "other income" section
C) the balance sheet as part of the shareholders' equity
D) the balance sheet under the "assets" section as a contra asset

Question 60

Under the equity method of accounting for investments, dividends paid by the investee are recorded by the investor as:

A) no entry is made to record dividends in this accounting situation
B) a credit to Dividend Revenue of the investor company
C) a debit to the Investment account of the investor company
D) a credit to the Investment account of the investor company

Question 61

The parent and subsidiary relationship that is established in consolidation accounting is an example of the entity concept.

Question 62

Under ASPE a reporting an organization can use either the effective interest rate method or straight line to account for the amortization of their bond investment.

Question 63

A non controlling interest will appear on the consolidated balance sheet when the parent company owns more than 40% but less than 100% of the subsidiary's stock.

Question 64

If a company owns 49% of the stock of another business, cash dividends received from the investee company are generally recorded by decreasing the value of the Investment account.

Question 65

With an investment in a subsidiary the financial statements of the investee are consolidated with those of the investor.

Question 66

The amount paid to purchase all the outstanding shares of a subsidiary company is added to the existing assets of that subsidiary.

Question 67

Non-controlling interest occurs when a company owns only 90% of a company they control.

Question 68

Purchases of bonds of other companies are reported as financing activities on the cash-flow statement.

Question 69

Smart-T Corporation purchased an investment in April for $10,000. If Smart-T Corporation sold this investment on May 30th for $12,000. They would have a realized gain.

Question 70

The journal entry to record the receipt of a cash dividend will include a credit to Retained
Earnings.

Question 71

An investment in common shares at fair value through other comprehensive income acquired during 2020 at a cost of $46,000 has a market value on December 31, 2020, of $46,721. The adjusting entry requires a debit to long term investments (at fair value through other comprehensive income) for $721.

Question 72

If a company owns between 20 and 50% of the voting share of an investee it must normally use the equity method to account for its investment.

Question 73

Under the equity method, the investor's share of dividends is treated as an increase in its investment.

Question 74

Under the equity method the investor's share of dividends is treated as a return of investment.

Question 75

A company that owns less than 20% of another company's stock must use the consolidation method of accounting.

Question 76

Investment in subsidiaries involves purchasing 25% of the organization's shares.

Question 77

Short term investment purchases are initially recorded at their cost.

Question 78

From the buyer's perspective, a discount on a long-term investment in bonds means additional interest revenue while a premium means less interest revenue.

Question 79

Non-strategic investments are recorded at market value and are reported on the balance sheet at cost.

Question 80

Amortization of a discount on a long-term bond investment will decrease the amount of interest revenue recorded by the investor.