Question 1

Under the fair value through other comprehensive income model, investments are reported as long term assets

Accepted Answer

A)  depending on the value and risk of the investment. 
B)  depending on the balance in the accumulated comprehensive income account. 
C)  only if the intent is to sell before maturity. 
D)  depending on management intent.

Question 2

Kudos Corporation bought a 40% interest in the voting stock of Nutribar Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price) on March 31, 20X4. On December 12, 20X4, Nutribar declared and paid a $1 million cash dividend and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Nutribar's stock was trading at $11.50 per share. Requirements:
A. Record the journal entry on Kudos' book for the acquisition of Nutribar on March 31, 20X0.
B. Record the cash dividend received by Kudos on December 12, 20X4.
C. Record any end of year entries needed on Kudos' books.

Accepted Answer

The answer of Kudos Corporation bought a 40% interest in...

Question 3

When is the equity method used to account for long-term investments in stocks?

Accepted Answer

A)  When the investment is between 20 - 50% of the voting stock, whether or not signiﬁcant inﬂuence can be achieved. 
B)  When the investment is greater than 50% of the voting stock, whether or not signiﬁcant inﬂuence can be achieved. 
C)  When the investment is greater than 50% of the voting stock and signiﬁcant inﬂuence can be achieved. 
D)  When the investment is between 20 - 50% of the voting stock and signiﬁcant inﬂuence can be achieved.

Question 4

On January 1, 20X4, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation at a cost of $150,000. The equity method of accounting for this investment is used. During 20X4, Shell Corporation reported $40,000 of net earnings and paid $5,000 in cash dividends. At the end of 20X4, the shares had a market value of $160,000. 
-How much investment income will Turtle report from the Shell investment during 20X4?

Accepted Answer

A)  $12,000 
B)  $40,000 
C)  $5,000 
D)  $1,500

Question 5

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X4 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X4, Martin paid a previously declared $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X4 net income was $52 million. What investment value will be reflected on Phillips' statement of financial position at December 31, 20X4?

Accepted Answer

A)  $42,000,000 
B)  $45,000,000 
C)  $46,800,000 
D)  $47,200,000

Question 6

An increase in the fair value of the trading securities portfolio increases both assets and net income.

Accepted Answer

A) True 
 B)False

Question 7

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

Accepted Answer

A)  Measuring the market value of the long-term and short-term investment portfolios on the balance sheet. 
B)  Determination of the acquisition cost. 
C)  Where the unrealized holding loss or gain on investments is reported within the ﬁnancial statements. 
D)  Determination of the unrealized holding gain or loss.

Question 8

When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

Accepted Answer

A) True 
 B)False

Question 9

Hampton Developments had the following transactions pertaining to its short-term equity investments. Hampton does not use an allowance account to record unrealized gains and losses, but $$\begin{array} { | l | l | } 
\hline \text { Jan. 1 } & \begin{array} { l } 
\text { Purchased 1,000 shares of Chapman Foods Ltd. for } \$ 50,000 \text { cash, plus brokerage } \
\text { fees of } \$ 550 . \text { The shares were classified as trading securities. }
\end{array} \
\hline \text { June 1 } & \text { Received cash dividends of } \$ 3 \text { per share on the Chapman shares. } \
\hline \text { Sept. 15 } & \text { Sold } 500 \text { Chapman shares for } \$ 24,900 , \text { less brokerage fees of } \$ 100 . \
\hline \text { Dec. } 31 & \text { The fair value of the Chapman shares was } \$ 25,400 . \
\hline
\end{array}$$ Required: 1. Prepare all the journal entries required for these transactions. 2. How will these transactions be reported on the statement of earnings ending on December 31?

Accepted Answer

The answer of Hampton Developments had the following transactions pertaining...

Question 10

Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated ﬁnancial statements immediately after the acquisition?

Accepted Answer

A)  Nominal estimated values determined by the parent company. 
B)  Market values on the date of the acquisition. 
C)  The previously reported book values. 
D)  Market values on the date of the acquisition less accumulated depreciation.

Question 11

Tansent Finance Ltd. acquired 30% of Morton Corp.'s common shares on January 1, 20X1 for $240,000. During 20X1, Morton earned $100,000 and paid dividends of $60,000. Tansent's 30% interest in Morton gives Tansent the ability to exercise significant influence over Morton 's operating and financial policies. During 20X2, Morton earned $120,000 and declared dividends of $40,000 on April 1 and $40,000 on October 1. On July 1, 20X2, Tansent sold half of its shares in Morton for $158,000 cash.

-What amount should Tansent include in its 20X1 statement of earnings as a result of the investment?

Accepted Answer

A)  $30,000 
B)  $100,000 
C)  $60,000 
D)  $18,000

Question 12

Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classiﬁcation is used relative to use of the available-for-sale classiﬁcation.

Accepted Answer

The answer of Describe the difference in the calculation of...

Question 13

When is the equity method not used to account for long-term investments in stocks?

Accepted Answer

A)  When the investment is 30% of the voting stock and signiﬁcant inﬂuence can be achieved. 
B)  When the investment is 15% and signiﬁcant inﬂuence can be achieved. 
C)  When the investment is greater than 50% of the voting stock and control is achieved. 
D)  When the investment is 40% of the voting stock and signiﬁcant inﬂuence can be achieved.

Question 14

Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 20X0. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?

Accepted Answer

A)  Since the bonds were issued at par value, the cash interest will be the same as interest revenue. 
B)  The bonds will earn $75,000 of interest by December 31, 20X0. 
C)  The bond investment must be accounted for using the fair value approach. 
D)  Since they were classiﬁed as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.

Question 15

On January 1, 20X4, Calas Company acquired 40% of the outstanding voting stock of Nick Company as a long-term investment. During 20X4, Nick reported net earnings of $10,000 and declared and paid dividends of $4,000. During 20X4, Calas Company should report "Income from investee earnings" of

Accepted Answer

A)  $3,000. 
B)  $4,000. 
C)  $2,400. 
D)  $10,000.

Question 16

At December 31, 20X1, Prescott Corp. has the following equity securities (no significant influence) that were purchased earlier this year, its first year of operation: 
$$\begin{array} { | l | r | r | } 
\hline & \text { Cost } & \text { Market } \
\hline \text { Security A } & \$ 80,000 & \$ 83,000 \
\hline \text { Security B } & \$ 112,000 & \$ 124,000 \
\hline
\end{array}$$ If the investments are accounted for under the fair value through net income method the aggregate book value of the investment accounts should:

Accepted Answer

A)  be increased by $15,000 
B)  be decreased by $15,000 
C)  Be decreased by $32,000 
D)  Remain unchanged

Question 17

Rye Company purchased 15% of Lena Company's common stock during 20X2 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 20X2 and a $140,000 fair value at the end of 20X3.
- Which of the following statements is correct if Rye classifies the investment as a trading security?

Accepted Answer

A)  The 20X2 unrealized gain is $10,000 and is included in Rye's 20X2 net earnings. 
B)  The 20X3 unrealized loss is $20,000, but is not included in Rye's 20X3 net earnings. 
C)  The 20X3 unrealized loss is $10,000 and is included in Rye's 20X1 net earnings. 
D)  The 20X2 unrealized gain is $10,000 and is reported on Rye's statement of financial position as a component of stockholders' equity and is not reported within the statement of earnings.

Question 18

An investment accounted for under the equity method would record an increase in the investment account and create net earnings in an amount equal to the proportionate share of the investee's reported net earnings.

Accepted Answer

A) True 
 B)False

Question 19

On July 1, 20X4, Carter Company purchased trading securities as follows: Dark Corporation common stock (par $1) 10,000 shares at $25 per share. Janvrin Corporation preferred stock (par $100) 2,000 shares at $105 per share . The quoted market prices per share on December 31, 20X4 were as follows: Dark Corporation stock, $27 per share Janvrin Corporation stock, $104 per share Each of the investments represented 5% of the total shares outstanding. The carrying value amount of the investments at December 31, 20X4 should be

Accepted Answer

A)  $478,000 
B)  $460,000 
C)  $458,000 
D)  $480,000

Question 20

On July 1, 20X4, Surf Company purchased long-term investments in available-for-sale securities as follows: Blue Corporation common stock (par $5) 2,000 shares at $16 per share. Black Company preferred stock (par $20) 1,500 shares at $30 per share . The quoted market prices per share on December 31, 20X4 were as follows: Blue Corporation stock, $15 per share Black Company stock, $30 per share Each of the long-term investments represents 10% of the total shares outstanding. The combined carrying value of the long-term investments reported in the statement of ﬁnancial position at December 31, 20X4 would be which of the following?

Accepted Answer

A)  $77,000 
B)  $73,500 
C)  $71,500 
D)  $75,000

Exam 13: Measuring and Evaluating Financial Performance

Under the fair value through other comprehensive income model, investments are reported as long term assets

When is the equity method used to account for long-term investments in stocks?

An increase in the fair value of the trading securities portfolio increases both assets and net income.

The primary difference in accounting for available-for-sale investments in stock and accounting for trading investments in stock is which of the following?

When the acquiring company purchases 100% of the investee's stock, the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

Paxton Corporation acquired all of the outstanding voting stock of Stanley Company. How should the assets and liabilities of the acquired company be reported on the consolidated ﬁnancial statements immediately after the acquisition?

Describe the difference in the calculation of the realized gain or loss on the sale of an investment when the trading security classiﬁcation is used relative to use of the available-for-sale classiﬁcation.

When is the equity method not used to account for long-term investments in stocks?

Chang Corp. purchased $1,000,000 of bonds at par value on April 1, 20X0. The bonds pay interest at the rate of 10%. Chang intends to hold these bonds to maturity. Which of the following statements is false?

On January 1, 20X4, Calas Company acquired 40% of the outstanding voting stock of Nick Company as a long-term investment. During 20X4, Nick reported net earnings of $10,000 and declared and paid dividends of $4,000. During 20X4, Calas Company should report "Income from investee earnings" of

An investment accounted for under the equity method would record an increase in the investment account and create net earnings in an amount equal to the proportionate share of the investee's reported net earnings.