Question 1

Company B has 40,000 shares of its common stock outstanding.Company A owns 5,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Accepted Answer

A) market 
B) equity 
C) cost 
D) consolidated

Question 2

Below is the balance sheet for Scott Company: Scott Company 
Balance Sheet 
December 31 ,
\(\begin{array}{lrr}&20X6&20X5\
\text { Current assets: }\
\text { Cash } & \$ 380 & \$ 242 \
\text { Accounts receivable } & 430 & 194 \
\text { Inventory } & 238 & 388 \
\text { Prepaid insurance } & 32 & 76\\text { Total current assets }&\$1,080&\$900\\text { Long-term assets: }\\quad \text { Fixed assets } & \$ 406 & \$ 452 \
\quad \text { Less: Accumulated depreciation } & \underline{272)} & \underline{228)} \
\text { Total long-term assets } & \underline{\$ 134} & \$ 224 \
\text { Total assets } & \$ 1,214 & \$ 1,124\\text { Current liabilities: }\
\text { Accounts payable } & \$ 176 & \$ 152 \
\text { Wages payable } & \underline{38} & \underline{32} \
\text { total current liabilities } & \$ 214 & \$ 184\\text { Long-term liabilities: }\\text { Notes payable } & \underline{420} & \underline{420} \
\text { Total liabilities } & \underline{\$ 634} & \underline{604}\\text { Owners' equity: } & & \
\text { Common stock } & \$ 190 & \$ 160 \
\text { Retained income } & 390 & 360\\text { Total owners' equity } & \underline{\$ 580}&\$520 \
\text { Total liabilities and owners' equity } & \underline{\$ 1,214} & \underline{\$ 1,214}
\end{array}\) If a common-size balance sheet were prepared, _____ would be attributable to the 20X6 cash of Scott Company.

Accepted Answer

A) 31.3% 
B) 26.9% 
C) 35.2% 
D) 21.5%

Question 3

Brian Company purchased 40% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by_____.

Accepted Answer

A) increasing assets and stockholders' equity 
B) increasing stockholders' equity and investments 
C) increasing investments and cash 
D) having no effect

Question 4

The following are the income statements and balance sheets for Touchdown Company: $\begin{array}{lr}&20X2\
\text { Sales only credit sales)}&\$1,606.0\
\text {Less cost of goods sold }&1,062.0\
\text {Gross profit }&\$544.0\
\text {Less operating expenses }&322.0\
\text {Operating income }&\$222.0\
\text { Less other expense: Interest}&9.6\
\text {Income before tax }&\$212.4\
\text {Less income tax expense }&85.0\
\text { Net income}&\$127.4\
\end{array}$

\(\begin{array}{lrrlrr}&20X2&20X1&&20X2&20X1\
\text { Current assets: } &&&{\text { Current liabilities: }} \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \
\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\text { Long-term assets: } & & & \text { Total current } & & \
\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \
\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\&&&\text { Owners' equity: }\
&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\
&&&\text { Retained income } & 150 & 180\&&&\text { Total owners' equity }&\$230&\$260\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\
\end{array}\)
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The return on stockholders' equity for Touchdown Company in 20X2 is _____.

Accepted Answer

A) 52.0% 
B) 27.1% 
C) 55.4% 
D) 49.0%

Question 5

Goodwill is not considered to have a perpetual life.

Accepted Answer

A) True 
 B)False

Question 6

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.The _____ method should be used to account for the investment.

Accepted Answer

A) market 
B) equity 
C) consolidated 
D) cost

Question 7

The parent-subsidiary relationship requires special accounting treatment.

Accepted Answer

A) True 
 B)False

Question 8

Jeff Company purchased, as a long-term investment, common stock of Garcia Company.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's net income will affect Jeff Company by _____.

Accepted Answer

A) increasing cash and investments by $400,000 
B) increasing stockholders' equity and investments by $400,000 
C) increasing cash and stockholders' equity by $400,000 
D) none of these answers is correct

Question 9

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 30% of Gill Company.The dividend paid by Gill Company will affect Vince Company by _____.

Accepted Answer

A) increasing cash and stockholders' equity by $300,000 
B) increasing investments and stockholders' equity by $300,000 
C) increasing cash and decreasing investments by $300,000 
D) having no effect

Question 10

The following information has been extracted from the books of the Flanker Company: $\begin{array}{lllr}\text { Current assets: }&&\text { Current liabilities: }\\
\text { Cash } & \$ 86 & \text { Accts payable } & \$ 78 \
\text { Accounts receivable } & 130 & \text { Wages payable } & 68 \
\text { Inventory } & 140 & \text { Taxes payable } & 28\\
\text { Total }&\$356&\text { Total }&\$174
\end{array}$ The current ratio for Flanker Company is _____.

Accepted Answer

A) 0.76 
B) 1.48 
C) 2.05 
D) 2.51

Question 11

The following are the income statements and balance sheets for Huddle Company: $\begin{array}{lr}&20X2\
\text { Sales only credit sales)}&\$1,606.0\
\text {Less cost of goods sold }&1,062.0\
\text {Gross profit }&\$544.0\
\text {Less operating expenses }&322.0\
\text {Operating income }&\$222.0\
\text { Less other expense: Interest}&9.6\
\text {Income before tax }&\$212.4\
\text {Less income tax expense }&85.0\
\text { Net income}&\$127.4\
\end{array}$

\(\begin{array}{lrrlrr}&20X2&20X1&&20X2&20X1\
\text { Current assets: } &&&{\text { Current liabilities: }} \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \
\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\text { Long-term assets: } & & & \text { Total current } & & \
\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \
\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\&&&\text { Owners' equity: }\
&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\
&&&\text { Retained income } & 150 & 180\&&&\text { Total owners' equity }&\$230&\$260\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\
\end{array}\)
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The return on sales for Huddle Company in 20X2 is _____.

Accepted Answer

A) 7.9% 
B) 13.8% 
C) 33.9% 
D) 23.4%

Question 12

The following information pertains to Barnum Company: Balance Sheet 
At December $ 31,20 \mathrm{X} 2 $
$\begin{array}{lrlr}
\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \
\text { Long-term assets } & 29,700 & \text { Long-term liabilities } & 13,250\
&&\text { Stockholders' equity }&27,550\
\text { Total assets }&\$ 48,400& \text { Total assets }&\$ 48,400 
\end{array}$

Barnum Company
Income Statement
For the Year Ended December $ 31,20 \mathrm{X} 2 $
$\begin{array}{lr}
\text { Sales } & \$ 106,950 \
\text { Less: Cost of goods sold } & \underline{61,800)} \
\text { Gross profit } & \$ 45,150 \
\text { Less: Operating expenses } & \underline{31,700} \
\text { Operating income } & \$ 13,450 \
\text { Less other expenses: interest } & \underline{1,300)} \
\text { Income before taxes } & \$ 12,150 \
\text { Less: Income tax expense } & \underline{4,850)} \
\text { Net income } & \$ 7,300
\end{array}$ There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2.Dividends declared and paid was $5 per share.The earnings per share for 20X2 is _____.

Accepted Answer

A) $106.95 
B) $0.26 
C) $3.88 
D) $7.30

Question 13

Which of the following statements is incorrect with respect to creditors and equity investors?

Accepted Answer

A) Both creditors and equity investors are concerned about security prices. 
B) Creditors are concerned with assessing the short?term liquidity of a company. 
C) Creditors are concerned with assessing the long?term solvency of a company. 
D) Equity investors are concerned about dividend payments.

Question 14

Presented below are the balance sheets of Monty Company and Hall Company at January 1, 20X6: $\begin{array}{lrlr}\text { Hall Company } && \text { Monty Company } \
\text { Balance Sheet } && \text { Balance Sheet } \
\text { January } 1,20 \mathrm{X} 6 && \text { January } 1,20 \mathrm{X} 6\
\text { Cash } & \$ 100 & \text { Cash } & \$ 400 \
\text { Net fixed assets } & 400 & \text { Net fixed assets } & 380 \
\text { Total assets } & \$ 500 & \text { Total assets } & \$ 780\
\text { Accounts payable } & \$ 20 &\text { Accounts payable }&\$120\
\text { Long-term bonds }&&\text { Long-term bonds }\
\text { payable } & 220 & \text { payable } & 280 \
\text { Stockholders' equity } & \underline{260} & \text { Stockholders' equity } & \underline{380}\\text { Total liabilities and } & - & \text { Total liabilities and } & \
\text { stockholders' equity } & \$ 500 & \text { stockholders' equity } & \$ 780
\end{array}$ On January 1, 20X6, Monty Company acquired 100% of the outstanding common stock of Hall Company for $260 in cash.If Hall Company generated net income during 20X2 of $30, and none of the income resulted from intercompany sales, _____ would be the amount of the elimination entry at the end of 20X6.

Accepted Answer

A) $-0- 
B) $30 
C) $230 
D) $290

Question 15

Elway Company acquired 80% of the outstanding shares of Warner Company for $152 in cash.Elway Company's assets prior to the acquisition were $700.Warner Company's assets before the acquisition were $400.The total assets that would appear on the consolidated balance sheet prepared immediately after the acquisition of Warner Company's stock is: _____.

Accepted Answer

A) $400 
B) $1,100 
C) $700 
D) $948

Question 16

Suppose Rock Company acquires 40% of the voting stock of Hudson Company for $40 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million.What accounts would be affected on Rock Company's books to reflect the year-end market value and by how much?

Accepted Answer

A) There is no entry and no effect. 
B) Cash would increase by $44 million and Stockholders' Equity would increase by $44 million. 
C) Investments would increase by $44 million and Stockholders' Equity would increase by $44 million. 
D) Investments would increase by $4 million and Stockholders' Equity would increase by $4 million.

Question 17

Since research indicates that investors are apparently not fooled by the format of the information, accounting regulators should focus on disclosure issues.

Accepted Answer

A) True 
 B)False

Question 18

On January 1, 20X6, Jane Company acquired 80% of the outstanding shares of Tarzan Company for $152 in cash.Tarzan Company's total assets and total liabilities were $450 and $260, respectively.The balance of the minority interest on the consolidated balance sheet immediately after the acquisition of Tarzan Company's stock is _____.

Accepted Answer

A) $38 
B) $152 
C) $190 
D) $114

Question 19

The following are the income statements and balance sheets for Thomas Company: $\begin{array}{lr}&20X9\
\text { Sales only credit sales) } & \$ 1,606.0 \
\text { Less cost of goods sold } & \underline{1,062.0}\\text { Gross profit } & \$ 544.0 \
\text { Less operating expenses } & 322.0\\text { Operating income } & \$ 222.0 \
\text { Less other expense: Interest } & 9.6\\text { Income before tax } & \$ \overline{212.4} \
\text { Lessincome tax expense } & {85.0} \
\text { Net income } & \$ {127.4}
\end{array}$ \(\begin{array}{lrrlrr}&20X9&20X8&&20X9&20X8\
\text { Current assets: } &&&{\text { Current liabilities: }} \
\text { Cash } & \$ 36 & \$ 38 & \text { Accts payable } & \$ 98 & \$ 64 \
\text { Accts receivable } & 180 & 144 & \text { Wages payable } & 18 & 16 \
\text { Inventory } & 120 & 100 & \text { Taxes payable } & 28 & 4 \
\text { Prepaid rent } & 20 & 24 & \text { Current portion } & &\\text { Total current assets }&\$356&\$306&\text { of long-term debt }&30&6\\text { Long-term assets: } & & & \text { Total current } & & \
\text { Fixed assets } & \$ 320 & \$ 316 & \text { liabilities } & \$ 174 & \$ 90 \
\text { Accum. deprec. } & \underline{206}) & \underline{180}) & \text { Long-term liabilities } & \underline{66} & \underline{92}\\text { Total long-term assets }&\$114&\$136&\text { Total liabilities }&\$240&\$182\&&&\text { Owners' equity: }\
&&&\text { Common stock, } \$ 5 \text { par }&\$80&\$80\
&&&\text { Retained income } & 150 & 180\&&&\text { Total owners' equity }&\$230&\$260\\text { Total assets }&\$470&\$442&\text { Total liab. and own. equity }&\$470&\$442\\
\end{array}\)
$\text {December 31 market price per share:}\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$120\quad\quad\$106$ The dividend?payout ratio for Thomas Company in 20X9 is _____.

Accepted Answer

A) 24.1% 
B) 103.7% 
C) 105.0% 
D) 123.5%

Question 20

The following information pertains to Barnum Company: Balance Sheet 
At December $ 31,20 \mathrm{X} 2 $
$\begin{array}{lrlr}
\text { Current assets } & \$ 18,700 & \text { Current liabilities } & \$ 7,600 \
\text { Long-term assets } & 29,700 & \text { Long-term liabilities } & 13,250\
&&\text { Stockholders' equity }&27,550\
\text { Total assets }&\$ 48,400& \text { Total assets }&\$ 48,400 
\end{array}$

Barnum Company
Income Statement
For the Year Ended December $ 31,20 \mathrm{X} 2 $
$\begin{array}{lr}
\text { Sales } & \$ 106,950 \
\text { Less: Cost of goods sold } & \underline{61,800)} \
\text { Gross profit } & \$ 45,150 \
\text { Less: Operating expenses } & \underline{31,700} \
\text { Operating income } & \$ 13,450 \
\text { Less other expenses: interest } & \underline{1,300)} \
\text { Income before taxes } & \$ 12,150 \
\text { Less: Income tax expense } & \underline{4,850)} \
\text { Net income } & \$ 7,300
\end{array}$ There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2.Dividends declared and paid was $5 per share.The current-debt-to-equity ratio for 20X2 is _____.

Accepted Answer

A) 75.7% 
B) 27.6% 
C) 15.7% 
D) 43.1%

Exam 17: Understanding and Analyzing Consolidated Financial Statements

Company B has 40,000 shares of its common stock outstanding.Company A owns 5,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Brian Company purchased 40% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by_____.

Goodwill is not considered to have a perpetual life.

The parent-subsidiary relationship requires special accounting treatment.

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 30% of Gill Company.The dividend paid by Gill Company will affect Vince Company by _____.

Which of the following statements is incorrect with respect to creditors and equity investors?

Since research indicates that investors are apparently not fooled by the format of the information, accounting regulators should focus on disclosure issues.