Deck 12: Investments

Question 1

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

Answer 1

equity

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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

Question 6

Minority (or noncontrolling)interest is any voting stock not held by the parent.

Question 7

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

Question 8

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

Question 9

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 10

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

Question 11

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

Question 12

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 13

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

Question 14

____________________ investments only consist of investments in common shares.

Question 15

When a company has excess cash not needed for operations in the short-term,they may make strategic investments to earn investment income which is greater than that earned in a regular bank account.

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

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

Question 18

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

Question 19

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 accounting principles.

Question 20

____________________ investments can be classified as debt or equity.

Question 21

Consolidation is required when a parent acquires more than 50% percent of the subsidiary's shares.Any portion of voting shares not held by the parent is called the ____________________.

Question 22

Match the following terms to their correct definition:

-any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 23

Match the following terms to their correct definition:

-exists when another entity owes the security holder some combination of interest and principal

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 24

Match the following terms to their correct definition:

-method of accounting for investments where the investor possesses significant influence (20-50% common shares ownership)over the operating and financial policies of the investee

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 25

If the investor holds more than 50% of the common shares 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 26

Match the following terms to their correct definition:

-situation where the investor owns more than 50% of the outstanding common shares and is therefore deemed to own the investee

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 27

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 28

Match the following terms to their correct definition:

-situation where the investor owns 20-50%of the outstanding common shares of the investee and is therefore assumed to possess significant influence over the operating and financial policies of the investee

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

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:

-name given to an investor who owns more than 50 percent of the outstanding common shares of the investee

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 31

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 32

Match the following terms to their correct definition:

-any voting shares not held by the parent in situations where consolidation is required because the investor acquires between 50-100% of the investee's shares

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 33

Match the following terms to their correct definition:

-name given to the investee when an investor owns more than 50% of the investee's outstanding common shares

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 34

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

Question 35

Match the following terms to their correct definition:

-an intangible asset arising from attributes that are not separable from the business-such as customer satisfaction,product quality,skilled employees,and business location

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 36

Match the following terms to their correct definition:

-situation where the investor owns less than 20 percent of the common shares of another company and therefore is not attempting to exert influence over the operating and financial policies of the investee

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 37

Match the following terms to their correct definition:

-represents an ownership interest in a corporation,usually common shares

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 38

Match the following terms to their correct definition:

-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"

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 39

Match the following terms to their correct definition:

-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

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 40

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

Question 41

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

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

Question 42

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

A) Assets and shareholders' equity decrease.
B) There are no effects; unrealized gains and losses should not be recorded.
C) Assets and liabilities decrease.
D) Shareholders' equity decreases and liabilities increase.

Question 43

When a company purchases less than 50% of the equity securities of another company,what is the appropriate treatment?

A) Both companies' financial statements must be combined in consolidation.
B) The equity method of accounting will be required if the purchasing 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 the companies are trading securities.

Question 44

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

A) Assets and shareholders' equity increase.
B) There are no effects; assets increase and decrease by the same amount.
C) Assets and liabilities decrease.
D) Shareholders' equity increases and liabilities decrease.

Question 45

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

A)Which method of accounting for investments should be used for the Fluff n' Stuff shares?
B)Record all of the necessary journal entries for this investment during Year 1.
C)What will be the balance in the investment account at December 31,Year 1?

Question 46

What is included in the journal entry required to record the receipt of dividends under the fair value method of accounting for investments?

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

Question 47

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 48

Match the following terms to their correct definition:

-device that facilitates combining the financial statements of the investor and investee companies

A)equity security
B)debt security
C)passive
D)significant influence
E)control
F)parent
G)subsidiary
H)goodwill
I)business combination
J)minority interest
K)fair value method
L)unrealized gains and losses
M)equity method
N)consolidation worksheet

Question 49

Trattoria,Inc.engaged in the following investment transactions during Year 1:

At December 31,Year 1,the market value of Tarbet's shares was $54.

Question 50

On January 1,Year 1,P Company purchased all of the outstanding common shares of S Company.What kind of adjustment is required for the consolidation of the two balance sheets?

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 51

When is the equity method of accounting used for an investment?

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

Question 52

What is a passive investment?

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

Question 53

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

A) a shares acquisition
B) a debt acquisition
C) an asset acquisition
D) a business acquisition

Question 54

How can business combinations occur?

A) asset acquisition or stock acquisition
B) asset acquisition or debt acquisition
C) stock acquisition or debt acquisition
D) stock acquisition or equity acquisition

Question 55

Company B purchased 30% of Company A's shares for $1,000,000.During the year,Company A had net income of $150,000 and declared a dividend of $24,000.What would the carrying value of Company A be at the end of the year?

A) $976,000
B) $1,037,800
C) $1,045,600
D) $1,060,000

Question 56

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

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

Question 57

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 58

What is a parent company?

A) a company that has at least 33% of the debt securities of another company
B) a company that has 100% of the debt securities of another company
C) a company that has 15-25% of the shares of another company
D) a company that has more than 50% of the shares of another company

Question 59

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

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

Question 60

Which statement is characteristic of a consolidation worksheet?

A) Consolidation worksheet adjustments are not entered on the accounting records of either the parent or the 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 61

Tusk Company acquired all of the assets of Tinsel Company for $1,000,000.With the approval of Tinsel's shareholders and creditors,Tinsel transferred all of its assets and liabilities to Tusk Company and distributed the cash to Tinsel's shareholders.On the acquisition date,Tinsel's shareholders' equity was $500,000.Tusk Company determined that Tinsel's liabilities of $500,000 are correctly valued,but its identifiable assets are worth $300,000 more than their book value of $1,000,000.
Determine the amount of goodwill to be recognized by Tusk Company as a result of its acquisition of Tinsel Company.

Question 62

On January 1,Year 1,Parent,Inc.purchases all the outstanding common shares 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,Year 1.

Question 63

You are the owner of a company that produces an energy drink that has unique properties.Its primary ingredient,a berry found only in the South American rain forest,causes a significant prolonged increase in the drinker's metabolic rate.You have found only a single supplier of this berry,Tropical Supplies,Inc.,a publicly traded company.
What are some things you can do to ensure your company has access to this important raw material?

Question 64

Tipper Company acquires Tacoma Company for $1,000,000.On the acquisition date,Tacoma has the following balances:
Assets
$$\begin{array} { |l | r| } \hline\text { Assets } & \$ 1,500,000 \\\hline \text { Liabilities } & 600,000\\\hline\end{array}$$

A)Record the entry Tipper Company will make to acquire Tacoma Company under each of the following assumptions:
1.Tacoma Company sells Tipper Company its net assets and goes out of existence as a corporation.
2.Tacoma Company sells Tipper Company its shares but continues as a legal entity.
B)Explain the difference in the consolidated financial statements for the two companies.

Question 65

On January 1,Year 1,Parent,Inc.purchased 80% of the outstanding common shares 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,Year 1.

Question 66

You are the accounting manager for a mid-sized electronics retailer.Your accounting intern is having trouble understanding how your company accounts for its investments in the shares of other companies.You just spent the better part of the morning reviewing in detail all of the recording and reporting requirements but the intern is still fuzzy.
Complete the following table to compare and contrast,for your intern,the requirements for the different types of shares investments that your company might make.Be sure to use the legend provided.
Investments in Equity Securities
$$\begin{array} { | l | l | l | l | } \hline{ \begin{array} { c } \text { Investmentsin } \\\text { Equity Securities }\end{array} } & \begin{array} { c } \text { Accounting } \\\text { Method }\end{array} & \begin{array} { c } \text { Impact of Dividend } \\\text { Receipts }\end{array} & \begin{array} { l } \text { Reporting of } \\\text { Unrealized Gains } \\\text { and Losses }\end{array} \\\hline \begin{array} { l } \text { Passive Investment -Trading } \\\text { (own } < 20 \% \text { of the shares) }\end{array} & & & \\\hline \begin{array} { l } \text { Passive } \\\text { Investment -Available-for-Sale } \\\text { (own } < 20 \% \text { of the shares) }\end{array} & & & \\\hline \begin{array} { l } \text { Significant Influence } \\\text { (own } 20 \% \text { to } 50 \% \text { of the shares) }\end{array} & & & \\\hline \begin{array} { l } \text { Control } \\\text { (own } > 50 \% \text { of the shares) }\end{array} & & & \\\hline\end{array}$$
Legend:
Accounting Method: Equity method,Equity method + Consolidation,or Fair value method
Impact of Dividend Receipts: Decrease investment,Eliminated,or Increase income
Reporting of Unrealized Gains and Losses: Balance sheet,Income statement,or Not recognized