Deck 13: Investments

Question 1

The excess of acquisition cost over the current value of the investee's identifiable net assets, referred to as goodwill, may not be recorded by the investor under current generally accepted accounting principles.

Answer 1

False

Question 2

____________________ securities, such as bonds, exist when another entity owes the security holder some combination of principal and interest.

Answer 2

Debt

Question 3

If the investor holds enough common stock to control the investee (50% or more common stock ownership), then the two corporations are no longer separate accounting entities and therefore they no longer may maintain separate accounting records.

Answer 3

False

Question 4

____________________ securities are debt investments that are accounted for on an amortized cost basis because management intends to hold the investment until the debt contract requires the borrower to completely repay the debt.

Question 5

Securities issued by a corporation as a form of ownership in the business, such as common stock and preferred stock, are called equity securities.

Question 6

A purchased company must be recorded at the value of the cash and other consideration given by the acquiring company.

Question 7

____________________ securities are equity or debt investments that are bought and sold frequently and are typically owned for less than one month.

Question 8

If the investor owns over 50% of the outstanding common stock, the investor is deemed to have control over the operating and financial policies of the investee.

Question 9

The equity method of accounting is used if the investor owns between 20-50% of another company and the investor is able to exert influence over the other company.

Question 10

An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own income by exerting influence over the amount and timing of investee dividends.

Question 11

The fair value method should be used to account for stock investments of less than 20% of the outstanding shares.

Question 12

When an investor is able to exert significant influence over another company, the ____________________ method of accounting is used for the investment.

Question 13

If the parent owns 90% of the subsidiary's stock, then 90% of the subsidiary's assets and liabilities are included in the consolidated balance sheet.

Question 14

A debt security exists when another entity owes the security holder some combination of interest and principal.

Question 15

Ownership in a corporation is represented by shares of common or preferred stock called ____________________ securities.

Question 16

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a business combination.

Question 17

Held-to-maturity securities are equity and debt investments that management intends to sell in the future, but not necessarily in the near term.

Question 18

If the acquisition cost exceeds the current value of the net assets (assets minus liabilities)acquired, the investor must also be purchasing an intangible asset arising from attributes that are not separable from the business-such as customer satisfaction, product quality, skilled employees, and business location.

Question 19

Minority (or noncontrolling)interest is disclosed when the parent owns more than 50%, but less than 100% of the outstanding common stock.

Question 20

If the investor holds 50% or more of the investee's outstanding common stock, then the investor is referred to as the parent and the investee is called the subsidiary.

Question 21

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Method of accounting for all investments in debt securities that are classified as held-to-maturity securities

Question 22

Business combinations can occur through either an asset or ____________________ acquisition.

Question 23

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Situation where the investor owns less than 20% of the common stock of another company and therefore is not attempting to exert influence over the operating and financial policies of the investee

Question 24

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Situation where the investor owns 20% to 50% of the outstanding common stock of the investee and is therefore assumed to possess significant influence over the operating and financial policies of the investee

Question 25

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a ____________________.

Question 26

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity

Question 27

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Represents an ownership interest in a corporation, usually common stock

Question 28

If the investor holds 50% or more of the common stock of the investee, then the investor is referred to as the ____________________ and the investee is referred to as the ____________________.

Question 29

A business combination is recorded at the cost of acquisition, without regard to the seller's ____________________ value.

Question 30

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Name given to the investee when an investor owns over 50% of the investee's outstanding common stock

Question 31

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Exists when another entity owes the security holder some combination of interest and principal

Question 32

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Equity and debt investments that management intends to sell in the future, but not necessarily in the near term

Question 33

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Any voting stock not held by the parent in situations where consolidation is required because the investor acquires between 50% and 100% of the investee's stock

Question 34

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Equity or debt investments that management intends to sell in the near term, typically within a single month

Question 35

If the investor holds 50% or more of the common stock of the investee, then the two corporations are no longer separate accounting entities and therefore must prepare ____________________ financial statements, which combine information about the two corporations as if they were a single company.

Question 36

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
An intangible asset arising from attributes that are not separable from the business-such as customer satisfaction, product quality, skilled employees, and business location

Question 37

Consolidation is required when a parent acquires between 50% and 100% of the subsidiary's stock. Any voting stock not held by the parent is called the ____________________.

Question 38

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Method of accounting required for all passive investments in which the investment is valued at the price for which the investor could sell the asset in an orderly transaction between market participants

Question 39

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Debt investments that management intends to hold until the debt contract requires the borrower to repay the debt in its entirety

Question 40

The excess of the investor's acquisition cost over the current value of the investee's identifiable net assets is recorded as an intangible asset called ____________________.

Question 41

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Result when the value of securities must be written up or down to fair market value at the balance sheet date, a process referred to as "marking to market"

Question 42

On January 1, 2011, P Company purchased all of the outstanding common stock of S Company. The consolidation of the two balance sheets requires a

A)credit adjustment to eliminate P Company's "Investment in S Company" account.
B)debit adjustment to eliminate S Company's "Investment in P Company" account
C)debit adjustment to eliminate P Company's "Investment in S Company" account
D)credit adjustment to eliminate S Company's "Investment in P Company" account

Question 43

A company is referred to as a parent if it owns

A)33% of the debt securities of another company.
B)100% of the debt securities of another company.
C)15% of the stock of another company.
D)more than 50% of the stock of another company.

Question 44

The equity method of accounting for an investment is used when a company purchases

A)more than 20% of the debt securities of another company.
B)100% of the debt securities of another company.
C)15% of the equity securities of another company.
D)between 20-50% of the equity securities of another company.

Question 45

A transaction that brings together two or more previously separate entities to form a single legal entity is called

A)stock acquisition.
B)debt acquisition.
C)asset acquisition.
D)business acquisition.

Question 46

On January 1, 2011, P Company purchased all of the outstanding common stock of S Company. Which of the following represents the worksheet entry needed to consolidate the balance sheets of the two companies?

A)Investment in S XXX Common stock XXX
Retained earnings XXX
B)Investment in S XXX Retained earnings XXX
C)Common stock XXX Retained earnings XXX
Investment in S XXX
D)Retained earnings XXX Investment in S XXX

Question 47

A passive investment is one in which the owner

A)is not attempting to exert influence over the company.
B)owns between 15-25% of the company's outstanding stock.
C)uses the equity method of accounting for the investment.
D)is gradually attempting to gain control over the company.

Question 48

When a company purchases less than 50% of the equity securities of another company, which of the following statements is true?

A)Both companies' financial statements must be combined in consolidation.
B)The equity method of accounting will be required if the company's investment is at least 20%.
C)The fair value method of accounting will be used only if the securities are classified as available-for-sale.
D)The fair value method of accounting will be used only if they are trading securities.

Question 49

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Device that facilitates combining the financial statements of the investor and investee companies

Question 50

P Company paid $500,000 for 100% of the net assets (assets less liabilities)of S Company. The current value of S Company's net assets was only $475,000. As a result of this acquisition, P Company must recognize

A)negative goodwill.
B)goodwill.
C)gain.
D)loss.

Question 51

Select the incorrect statement from the following:

A)The financial statements for a 100% asset acquisition will be different from the consolidated financial statements for a 100% stock acquisition.
B)Business combinations usually, but not always, transfer ownership of the acquired business entity from one stockholder group to another.
C)Purchased assets are recorded at their current value to the purchaser, without regard to their recorded value to the seller.
D)The excess of acquisition cost over the current value of the investee's identifiable net assets is recorded as goodwill.

Question 52

Select the incorrect statement from the following:

A)Adjustments are required to eliminate any transactions between Parent and Sub (e.g., selling or other transfer of assets).
B)Even when the parent owns less than 100% of the subsidiary's stock, 100% of the subsidiary's assets and liabilities are included in the consolidated balance sheet.
C)Any consolidated net income attributable to minority interest must be clearly identified and shown on the consolidated income statement.
D)Consolidated net income is equal to the sum of the parent's net income and the sub's net income.

Question 53

What are the effects on the accounting equation from the purchase of a short-term investment?

A)Assets and stockholders' equity increase.
B)No effects; assets increase and decrease by the same amount.
C)Assets and liabilities decrease.
D)Stockholders' equity increases and liabilities decrease.

Question 54

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Situation where the investor owns over 50% of the outstanding common stock and is therefore deemed to own the investee

Question 55

The practice of adjusting the market value of securities that are accounted for using the fair value method is referred to as

A)consolidation.
B)marking-to-market.
C)passive investing.
D)segregation of investments.

Question 56

What are the effects on the accounting equation from the recognition of an unrealized loss on trading securities?

A)Assets and stockholders' equity decrease.
B)No effects; unrealized gains and losses should not be recorded.
C)Assets and liabilities decrease.
D)Stockholders' equity decreases and liabilities increase.

Question 57

Select the correct statement from the following:

A)Consolidation worksheet adjustments are not entered on the accounting records of either Parent or Sub.
B)Consolidation worksheet adjustments are entered on the accounting records of the Parent but not the Sub.
C)Consolidation worksheet adjustments are entered on the accounting records of the Sub but not the Parent.
D)Consolidation worksheet adjustments are entered on the accounting records of both the Parent and the Sub.

Question 58

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a

A)business plan.
B)business combination.
C)corporation.
D)joint venture.

Question 59

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Method of accounting for investments where the investor possesses significant influence (20% to 50% common stock ownership)over the operating and financial policies of the investee

Question 60

Match the following terms to their correct definition:
a.equity security
j.held-to-maturity securities
b.debt security
k.amortized cost method
c.passive
l.fair value method
d.significant influence
m.unrealized gains and losses
e.control
n.equity method
f.parent
o.consolidation worksheet
g.subsidiary
p.minority interest
h.trading securities
q.business combination
i.available-for-sale securities
r.goodwill
Name given to an investor who owns over 50% of the outstanding common stock of the investee

Question 61

Which method of accounting for investments recognizes income when income is earned by the investee?

A)fair value method
B)amortized cost method
C)trading method
D)equity method

Question 62

On January 1, 2012, Parent, Inc., purchased 80% of the outstanding common stock of Sub Corporation for $750,000. Since Parent has control over Sub, a consolidated balance sheet must be prepared from the individual balance sheets of both companies. Complete the following worksheet to prepare the consolidated balance sheet on January 1, 2012.

Question 63

On January 1, 2012, Teddy Bear Company purchased 25% of the common stock of one of its major suppliers-Fluff n' Stuff, for $1,000,000 cash. On November 1, 2012, Fluff n' Stuff declared and paid a cash dividend of $50,000. Further, for the year ended December 31, 2012, Fluff n' Stuff reported net income of $200,000.

A)Which method of accounting for investments should be used for the Fluff n' Stuff stock?
B)Record all of the necessary journal entries for this investment during 2012.
C)What will be the balance in the investment account at December 31, 2012?

Question 64

Trattoria, Inc. engaged in the following investment transactions during 2013:
At December 31, 2013, the market value of Tarbet's stock was $54.

Question 65

The journal entry required to record the receipt of dividends under the fair value method of accounting for investments includes a

A)credit to the investment account.
B)debit to the investment account.
C)credit to dividend income.
D)debit to retained earnings.

Question 66

The Allowance to Adjust Trading Securities to Market account is

A)an asset account.
B)a contra asset account.
C)a liability account.
D)an unrealized gain or loss account.

Question 67

Tail Winds Corporation acquired the following equity securities during 2013:
The company's investment in these two companies is passive and classified as available-for-sale. During 2013, TICO paid a dividend of $1.10 per share and Thankful paid a dividend of $1.75 per share. At December 31, 2013, the market value of these securities was $79 per share for TICO and $23 per share for Thankful.

Question 68

Which method of accounting for investments results in unrealized gains and losses because the investments must be marked to market?

A)equity method
B)amortized cost method
C)fair value method
D)trading method

Question 69

Tidewater Management, Inc. had no investments in short-term marketable securities prior to 2013. During 2013, the company engaged in the following investment transactions:
At the end of 2013, the Toucan Taxi stock had a market value of $15 per share.

Question 70

On January 1, 2012, Parent, Inc., purchases all the outstanding common stock of Sub Corporation for $750,000. Since Parent has control over Sub, a consolidated balance sheet must be prepared from the individual balance sheets of both companies. Complete the following worksheet to prepare the consolidated balance sheet on January 1, 2012.

Question 71

Thomkin Enterprises purchased several investment securities on November 1, 2013. Various transactions and market activities occurred regarding these investments between acquisition and December 31st (the company's year-end), as shown below:
Additional information:
Prepare journal entries to record the purchase of the securities, the receipt of dividends and interest, the sale of the TRL stock, and the end-of-year mark-to-market adjustments. For the end-of-year entries, indicate how the resulting gains or losses should be recognized in Thomkin's year-end financial statements.

Question 72

Treasure Distributors, Inc. had no investments in short-term marketable securities prior to 2012. During 2012, the company engaged in the following investment transactions:
At the end of 2012, the Toledo Company stock had a market value of $18 per share.

Question 73

An investor's available-for-sale securities had increased in market value from $50,000 to $55,000 as of the balance sheet date. Which of the following journal entries would be required?

A)Realized gain on investments 5,000 Allowance to adjust investments to market 5,000
B)Allowance to adjust investments to market 5,000 Realized gain on investments 5,000
C)Unrealized gain on investments 5,000 Allowance to adjust investments to market 5,000
D)Allowance to adjust investments to market 5,000 Unrealized gain on investments 5,000