Deck 7: Investments and the Time Value of Money

Question 1

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

Answer 1

B

Question 2

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

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

Answer 2

D

Question 3

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

Answer 3

True

Question 4

Short-term investments:

A) are equity securities
B) are debt securities
C) may be classified as either debt or equity securities
D) represents Accounts Receivable and notes receivable on the balance sheet

Question 5

Short term investment purchases are initially recorded at their cost.

Question 6

An investment in common shares at fair value through other comprehensive income acquired during 2014 at a cost of $46,000 has a market value on December 31,2014,of $46,721.The adjusting entry requires a debit to long term investments (at fair value through other comprehensive income)for $721.

Question 7

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

Question 8

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

Question 9

A short-term investment is not:

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

Question 10

With an investment in a subsidiary,under Accounting Standards for Private Enterprise,the investment can be accounted for using consolidation,or the equity or cost method.

Question 11

Corporations invest in a short-term investment:

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

Question 12

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

Question 13

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

Question 14

A long-term investment in common shares acquired during 2014 at a cost of $45,000 has a market value on December 31,2014,of $45,725.The year-end adjusting entry requires a:

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

Question 15

Zeep Company purchased shares of Zoop Inc on June 30,2016 for $7,500.At the end of August these shares are now worth $6,500.Zeep has an unrealized loss on this investment.

Question 16

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

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

Question 17

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

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

Question 18

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

Question 19

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

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

Question 20

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

Question 21

The investor should generally use the equity method of accounting for the investee if the investor owns what percentage of the outstanding stock of the investee?

A) 0%-15%
B) 20%-50%
C) any percentage greater than 50%
D) any percentage greater than 60%

Question 22

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

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

Question 23

January 1,2016 Orange Tree Spa invests in $100,000 worth of Apple Spa shares to hold as a short term investment.On December 31,2016,this investment now has a market value of $105,000.
On May 1,2017 Orange Tree Spa sells their Apple Spa shares for $95,000.Prepare the required entries for Orange Tree Spa.

Question 24

Retail Energy Corporation paid $1,300,000 on January 1,2017,to purchase 32% of the outstanding shares of Natural Gas Limited.In 2017 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) income of $144,000 will be recorded
C) the Investment account will be increased by $144,000
D) the Investment account will be decreased by $144,000

Question 25

On January 1,2013 Blue Cat Corporation purchased 1,000 shares (5%)of Mike Mouse Co.for $10,000 as a long term investment.On March 31,2014 Mike Mouse pays Blue Cat a $5,000 dividend.At year end December 31,2014 Mike Mouse shares are trading at $12 per share.Blue Cat then sells their investment in Mike Mouse Co for $11,500 on February 4,2015.Prepare Blue Cat's journal entries for 2013,2014 and 2015.

Question 26

Companies with investments accounted for by the equity method often refer to the investee as a(n):

A) affiliated company
B) wholly-owned company
C) subsidiary company
D) trading partner

Question 27

Vance Corporation purchases UXB shares on May 10 for $120,000.On October 15^th Vance receives a cash dividend of $1,200 from UXB.On December 31^st the value of Vance Corporation's investment in UXB has increased in value to $150,000.
Prepare journal entries needed on May 10,October 15,and December 31,2014.

Question 28

Prepare journal entries for the following transactions.Note that each item falls under the at fair value through other comprehensive income classification.
(Yellow-Snow Corporation had no prior investments to the investment in Dog-Dish Corporation)

Question 29

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

Question 30

Why is understanding the extent to which ATCO Ltd.influences another company important for accounting purposes? What impact does the degree of influence ATCO Ltd.has over another company have on accounting?

Question 31

Olive Corporation purchases Branch Inc shares on June 21 for $220,000.On October 1 Olive receives a cash dividend of $2,500 from Branch Inc.On December 31^st the value of Olive Corporation's investment in Branch has decreased in value to $210,000.
Prepare journal entries needed on June 21,October 1,and December 31,2014.

Question 32

Barking Power Company accounts for its 35% investment in Pipeline Corporation under the equity method of accounting.The investment was made on January 1,2017,at a cost of $625,000.Pipeline Corporation reported net income of $85,000 for the year ended December 31,2017,and paid total dividends of $20,000 during 2017.On December 31,2017,after making all appropriate entries,the balance in Barking Power Company's Long-Term Investment account will equal:

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

Question 33

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) increase the Investment account to record dividends and income of the investee
C) reduce 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 34

On January 1,2015 Blue Cat Corporation purchased 1,000 shares (5%)of Mike Mouse Co.for $14,000 as a long term investment.On May 31,2016 Mike Mouse pays a $0.70 dividend.At year end December 31,2014 Mike Mouse shares are trading at $15 per share.Blue Cat then sells their investment in Mike Mouse Co for $13,500 on February 20,2017.Prepare Blue Cat's journal entries for 2015,2016 and 2017.

Question 35

Prepare journal entries to record the following transactions associated with at fair value through other comprehensive income investments purchased by Spark Spread Corporation during 2015 Spark Spread Corporation had no investments prior to 2015.
a.Purchased 1,500 shares of Mercury Coal Corporation common shares for $27.50 per share.
b.Mercury Coal Corporation pays a $1.25 per share dividend to all common shareholders.
c.On December 31,2015,the market price of Mercury Coal Corporation stock is $28.00 per share.

Question 36

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

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

Question 37

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

Question 38

Power Generation Corp.owns 38% of Electric Limited.Net income for Electric Limited for the year ending December 31,2017,is $450,000.The journal entry prepared by Power Generation Corp.on December 31,2017,includes a:

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

Question 39

Brighton Beach Limited owns 40% of Alberta Based Inc.Total cash dividends paid by Alberta Based Inc.for the year ending December 31,2017,amount to $47,919.The journal entry prepared by Brighton Beach Limited on December 31,2017,includes a:

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

Question 40

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) market value of the long-term investment
C) 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
D) lower-of-cost-or-market value of the long-term investment

Question 41

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

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

Question 42

When preparing a consolidated balance sheet:

A) the shareholders' equity of the parent will be eliminated but investment in subsidiary will be presented
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) investment in subsidiary will be presented but the shareholders' equity of the subsidiary will be eliminated

Question 43

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 44

When a parent-subsidiary relationship exists between two companies:

A) the parent company must use the cost method to account for the subsidiary
B) the parent company will keep one set of accounting records covering both companies
C) the subsidiary company will keep one set of accounting records covering both companies
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 45

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

Question 46

Goodwill arises when a parent company:

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

Question 47

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 48

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

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

Question 49

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) market value of the net assets of the subsidiary
B) book value of the net assets of the subsidiary
C) total shareholders' equity of the subsidiary
D) balance in the investment in subsidiary account

Question 50

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

Question 51

On January 1,2016,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 2016 and 2017 was,respectively,$100,000 and $125,000.Dividends paid by Alberta Power Pool Corporation during 2016 and 2017 were,respectively,$60,000 and $75,000.Assume on December 31,2017,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) gain on sale of investment of $80,000
C) loss on sale of investment of $152,000
D) loss on sale of investment of $321,000

Question 52

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

Question 53

A controlling interest is normally one where the investor:

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

Question 54

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

Question 55

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

Question 56

Goodwill is a(n)________ on the ________.

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

Question 57

On January 1,2016,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 2016 and 2017 was,respectively,$100,000 and $125,000.Dividends paid by Alberta Power Pool Corporation during 2016 and 2017 were,respectively,$60,000 and $75,000.The long-term investment will appear on TXU Europe Corporation's December 31,2016,balance sheet at:

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

Question 58

Yukon Electrical Company owns all of the stock of Simmons Corporation and 80% of the stock of I-Tek Corporation.In 2017,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) $450,000
B) $570,000
C) $750,000
D) $714,000

Question 59

On January 1,2016,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 2016 and 2017 was,respectively,$100,000 and $125,000.Dividends paid by Alberta Power Pool Corporation during 2016 and 2017 were,respectively,$60,000 and $75,000.The long-term investment will appear on TXU Europe Corporation's December 31,2017,balance sheet at:

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

Question 60

In 2017,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 2017,the net effect of the entries made by Gigajoule Corporation in 2017 will be to:

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

Question 61

How does a company such as ATCO Ltd.report the results of its diverse worldwide lines of business?

Question 62

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

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

Question 63

Energy Direct Corp.acquired 32% of Edmonton Limited for $2,000,000 on January 1,2017.During 2017,Edmonton Limited earned $480,000 and paid dividends of $225,000.
a.Prepare the journal entries required to record the acquisition,and the transactions during 2017.
b.Determine the carrying value on Energy Direct Corp.of the investment in Edmonton Limited as at December 31,2017.

Question 64

The DEML Corporation reported the following transactions for the year 2016:
This is a long-term investment giving DEML significant influence over the operations of Utilities Board.
Prepare journal entries to record all the above events for the DEML Corporation.

Question 65

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

Question 66

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) increase and increase
D) decrease and decrease

Question 67

An investor owns 40% of the voting common shares in an investee and has the ability to exercise significant influence over the investee.How should the investor account for the investment?

Question 68

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 69

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

Question 70

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

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

Question 71

What are consolidated financial statements? What are some of the benefits and limitations of them for ATCO Ltd.?

Question 72

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

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

Question 73

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

Question 74

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

Question 75

On January 1,2016,Red Deer Corporation paid $360,000 to purchase 32% of the outstanding voting stock of English Court Corporation.The equity method is used to account for the investment.The following data relate to this investment.
2016
Prepare all journal entries for 2016 and 2017 relating to Red Deer Corporation's investment in English Court Corporation.

Question 76

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

Question 77

PET Corporation purchased 225,000 shares of SOX Corporation on January 1,2017,for $540,000.SOX Corporation has 600,000 shares outstanding.SOX Corporation earned net income of $360,000 and paid dividends of $106,000 during 2017.
Required:
a.What method should be used to account for the SOX Corporation investment?
b.How much revenue will be recorded by PET Corporation in 2015 from its investment in SOX Corporation?
c.What is the balance in PET's investment account at the end of 2015?
d.Assume all of the above facts except that on January 1,2015,PET Corporation purchased 90,000 shares of SOX Corporation.How much revenue will be recorded by PET Corporation in 2015 from its investment in SOX Corporation?

Question 78

Barking Power Corporation acquired 80% of the voting common shares of Brighton Beach Corporation on December 31,2016.During the year ended December 31,2017,Barking Power Corporation and Brighton Beach Corporation reported net income of $110,000 and $75,000 from their own operations,respectively.
a.How much income attributable to the equity holders of the parent corporation will be reported on the consolidated income statement for the year ended December 31,2017?
b.Discuss the way in which non-controlling interests in the subsidiary might be presented on consolidated financial statements.What exactly does non-controlling interest represent?

Question 79

When the equity method is used to account for a stock investment,dividends received are recorded as a reduction to the Investment account and the investor's share of income reported by the investee is treated as an increase in the Investment account.Explain why the investment is accounted for in this fashion.

Question 80

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

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