Question 1

The equity method requires the recognition of investment revenue for dividends received.

Accepted Answer

A) True 
 B)False

Question 2

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1, 20X0, at $40 per share as a long-term investment. The records of Burke Corporation showed the following on December 31, 20X0: $$\begin{array} { | l | r | } 
\hline \text { Net income } & \$ 575,000 \
\hline \text { Dividends declared and paid during December 20X0 } & \$ 30,000 \
\hline \text { Market price per share } & \$ 42.00 \
\hline
\end{array}$$ 
-How much should Gilman Company report as investment income from the Burke investment during 20X0?

Accepted Answer

A)  $230,000 
B)  $218,000 
C)  $12,000 
D)  $30,000

Question 3

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30, 20X0 for $42 per share. Phillips' intent is to keep these shares beyond the current year. On December 20, 20X0, Martin paid a $4,000,000 cash dividend. On December 31, Martin's stock was trading at $45 per share and their reported 20X0 net income was $52 million. What method of accounting will Phillips use to account for this investment?

Accepted Answer

A)  Amortized cost method. 
B)  Equity method. 
C)  Fair value method. 
D)  Consolidation.

Question 4

Which of the following statements is correct?

Accepted Answer

A)  Any unrealized holding gain or loss on investments in trading securities is reported on the income statement. 
B)  Any unrealized holding gain or loss on investments in available-for-sale securities is reported on the income statement. 
C)  All unrealized gains and losses are reported on the income statement regardless of the method used to account for the investment. 
D)  Any unrealized holding gain or loss on investments in trading securities or in available-for- sale securities is reported on the income statement.

Question 5

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 should be the gain on sale of this investment in Tansent's 20X2 statement of earnings?

Accepted Answer

A)  $38,000 
B)  $29,000 
C)  $23,000 
D)  $35,000

Question 6

Complete the following matrix by writing a brief explanation in each cell to indicate the appropriate approach for long-term investments. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Measurement and Reporting } & \text { Outstanding Common Stock } & \text { Level of Ownership: } \
 & \text { Method } & \text { Owned (\%) } & \text { Degrees of Influence or } \
 & & &\text {Contrl} \
\hline \text { A } & \text { Market value } & & \
\hline \text { B } & \text { Equity } & & \
\hline \text { C } & \text { Consolidated statements } & & \
\hline
\end{array}$$

Accepted Answer

The answer of Complete the following matrix by writing a...

Question 7

JDR Company purchased 40% of the common stock of YRK Corporation on January 1, 20X0, for $2,000,000 as a long-term investment. The records of YRK Corporation showed the following on December 31, 20X0: $$\begin{array} { | l | r | } 
\hline 20 X 0 \text { net income } & \$ 290,000 \
\hline \text { Dividends declared and paid during December, 20X0 } & \$ 20,000 \
\hline
\end{array}$$ How much investment income should JDR report from the YRK investment during 20X0?

Accepted Answer

A)  $290,000 
B)  $30,000 
C)  $116,000 
D)  $12,000

Question 8

On July 1, 20X0, as a long-term investment in available-for-sale securities, Wildlife Supply Company purchased 6,000 shares of the preferred stock (non-voting) of Nature Company for $30 per share (18,000 shares outstanding). The records of Nature Company reflect the following: $$\begin{array} { | l | r | } 
\hline 20X0 \text { net income } & \$ 60,000 \
\hline \text { Dividends declared and paid during December, 20X0 } & \$ 6,500 \
\hline \text { December 31, 20X0 market price per share } & \$ 27.00 \
\hline
\end{array}$$ The amount reported on the statement of financial position by Wildlife Company for its investment at December 31, 20X0 would be which of the following?

Accepted Answer

A)  $160,000 
B)  $162,000 
C)  $182,000 
D)  $200,000

Question 9

On January 1, 20X4, Shelley Company paid $650,000 cash for 100% of the outstanding common stock of SCD Company; SCD's stockholders equity on the date of acquisition was $500,000. The current market value of SCD's plant and equipment was $100,000 in excess of the equipment's book value. If the market value and book value are the same for SCD's remaining assets, what was the amount of goodwill purchased by Shelley Company?

Accepted Answer

A)  $150,000 
B)  $40,000 
C)  $50,000 
D)  $250,000

Question 10

McGinn Company purchased 10% of RJ Company's common stock during 20X2 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X2 and a $105,000 fair value at the end of 20X3. 
-Which of the following statements is correct if McGinn classified the investment as a trading security and sold it at the beginning of 20X4 for $102,000?

Accepted Answer

A)  The 20X4 realized loss reported on the statement of earnings is $3,000. 
B)  The 20X4 realized gain reported on the statement of earnings is $2,000. 
C)  The 20X4 unrealized gain reported on the statement of earnings is $2,000. 
D)  The 20X4 unrealized loss reported on the statement of earnings is $3,000.

Question 11

McGinn Company purchased 10% of RJ Company's common stock during 20X2 for $100,000. The 10% investment in RJ had a $90,000 fair value at the end of 20X2 and a $105,000 fair value at the end of 20X3.
- Which of the following statements is correct if McGinn classified the investment as an available-for-sale security and sold it at the beginning of 20X4 for $102,000?

Accepted Answer

A)  The 20X4 realized loss reported on the statement of earnings is $3,000. 
B)  The 20X4 realized gain reported on the statement of earnings is $2,000. 
C)  The 20X2 unrealized gain reported on the statement of earnings is $2,000. 
D)  The 20X2 unrealized loss reported on the statement of earnings is $3,000.

Question 12

Investments classiﬁed other than as held-to-maturity bond investments should be reported on the statement of ﬁnancial position at fair value.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is the best description of investments in available-for-sale securities?

Accepted Answer

A)  Investments in bonds that management intends to hold to maturity. 
B)  Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future. 
C)  Investments in more than ﬁfty percent of the voting stock of another company. 
D)  Investments in securities that are accounted for under the market value method other than trading securities and held-to-maturity investments.

Question 14

Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false?

Accepted Answer

A)  Since the bonds were issued at a premium, the cash interest will be greater than interest revenue. 
B)  Since the bonds were issued at a premium, the book value of the bond investment will decrease. 
C)  The bond investment must be accounted for using the held-to-maturity classiﬁcation. 
D)  The company would recognize unrealized gains or losses on the bonds under the fair value approach within the income statement.

Question 15

An unrealized holding gain is reported on the income statement when the fair value of an available- for-sale security exceeds its cost.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is the best description of investments in trading securities?

Accepted Answer

A)  Investments in bonds that management intends to hold to maturity. 
B)  Investments in stocks or bonds that are held primarily for the purpose of selling them in the near future. 
C)  Investments in more than ﬁfty percent of the voting stock of another company. 
D)  Investments that provide the investor signiﬁcant inﬂuence over the investee, but not control over the investee.

Question 17

The equity method is required to be used when an investor has the ability to exert signiﬁcant inﬂuence over the investee.

Accepted Answer

A) True 
 B)False

Question 18

From RBB's perspective, this is an example of

Accepted Answer

A)  a passive investment. 
B)  vertical integration. 
C)  horizontal growth. 
D)  Diversification.

Question 19

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company: Mini Company Statement of Financial P osition January 1, 20X0 $$\begin{array} { | l | r | } 
\hline \text { Cash } & \$ 90,000 \
\hline \text { Accounts receivable (net) } & 50,000 \
\hline \text { Inventory } & 150,000 \
\hline \text { Plant and equipment (net) } & 100,000 \
\hline \text { Total assets } & \$ 390,000 \
\hline & \
\hline \text { Accounts payable } & \$ 40,000 \
\hline \text { Notes payable } & 80,000 \
\hline \text { Common stock } & 155,000 \
\hline \text { Retained earnings } & \underline { 115,000 } \
\hline \text { Total Liabilities and Stockholders' Equity } & \$ 390,000 \
\hline
\end{array}$$ On January 1, 20X0, Maxi Company paid $350,000 in cash for 100% of the outstanding common stock of Mini Company. The current market value of Mini Company's plant and equipment was $140,000 on the date of acquisition. If the market value and book value are the same for Mini's remaining assets, what is the net increase in Maxi's assets as a result of the merger with Mini?

Accepted Answer

A)  $430,000 
B)  $470,000 
C)  $120,000 
D)  $390,000

Question 20

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its cost.

Accepted Answer

A) True 
 B)False

Exam 13: Measuring and Evaluating Financial Performance

The equity method requires the recognition of investment revenue for dividends received.

Which of the following statements is correct?

Investments classiﬁed other than as held-to-maturity bond investments should be reported on the statement of ﬁnancial position at fair value.

Which of the following is the best description of investments in available-for-sale securities?

Miller Corp. purchased $1,000,000 of bonds at 105. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is false?

An unrealized holding gain is reported on the income statement when the fair value of an available- for-sale security exceeds its cost.

Which of the following is the best description of investments in trading securities?

The equity method is required to be used when an investor has the ability to exert signiﬁcant inﬂuence over the investee.

From RBB's perspective, this is an example of

An unrealized holding loss is reported on the income statement when the fair value of a trading security is less than its cost.