Question 1

Which of the following statements is correct with regard to investments and the statement of cash flows?

Accepted Answer

A)  When the equity method is used to account for an investment in a company's common stock, the reported share of affiliate net income must be added to net income in the operating activities section of the statement of cash flows. 
B)  When the equity method is used to account for an investment in a company's common stock, the cash dividends received are a cash inflow from investing activities. 
C) Any realized or unrealized gains or losses that were reported on the income statement under the fair value method of accounting for investments must be removed from net income in the operating activities section of the statement of cash flows. 
D) When the equity method is used to account for an investment in a company's common stock, the reported share of affiliate dividends must be deducted from net income in the operating activities section of the statement of cash flows.

Question 2

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 3

On January 1, 2014, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. Palmer uses the equity method of accounting for this investment is used. During 2014, Arnold Corporation reported $30,000 of net income and paid a total of $10,000 in cash dividends. At the end of 2014, the shares had a fair value of $150,000. What is the amount of Equity in Affiliate Earnings for 2014?

Accepted Answer

A)  $4,000. 
B)  $12,000. 
C) $13,000. 
D) $21,000.

Question 4

For an investment accounted for under the equity method, the investment account along with an investment income account would be increased for an amount equal to the investor's proportionate share of the affiliate's reported net income.

Accepted Answer

A) True 
 B)False

Question 5

On January 1, 2014, Turtle Inc. bought 30% of the outstanding shares of Shell Corporation common stock at a cost of $150,000. Turtle uses the equity method of accounting for this investment is used. During 2014, Shell Corporation reported $40,000 of net income and paid a total of $5,000 in cash dividends. At the end of 2014, the shares had a fair value of $160,000. What investment balance will be reported on Turtle's December 31, 2014 balance sheet?

Accepted Answer

A)  $150,000. 
B)  $162,000. 
C) $160,500. 
D) $170,500.

Question 6

The extent of influence and control over another company is a critical factor in determining the proper method of accounting for an investment in the common stock of another company.

Accepted Answer

A) True 
 B)False

Question 7

Any unrealized gains or losses on trading securities would have to be added back to or subtracted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

Accepted Answer

A) True 
 B)False

Question 8

The assets of a subsidiary are depreciated and amortized over their remaining useful lives as a part of the consolidation process.

Accepted Answer

A) True 
 B)False

Question 9

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2014. At December 31, 2014, the current fair value of the securities was $105,000. How should the investment be reported in the 2014 financial statements?

Accepted Answer

A)  The investment in available-for-sale securities would be reported on the balance sheet at its $100,000 cost. 
B)  The $5,000 unrealized gain is reported within the income statement. 
C) The $5,000 realized gain is reported within the income statement. 
D) The investment in available-for-sale securities would be reported in the balance sheet at its $105,000 fair value and an unrealized holding gain on available-for-sale securities would be reported in the stockholders' equity section of the balance sheet.

Question 10

Rye Company purchased 15% of Lena Company's common stock during 2014 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2014 and a $140,000 fair value at the end of 2015. Which of the following statements is incorrect if Rye classifies the investment as an available-for-sale security?

Accepted Answer

A)  The 2014 unrealized gain is $10,000, but is not included in Lena's 2014 net income. 
B)  The 2015 unrealized loss is $20,000, but is not included in Lena's 2015 net income. 
C) The 2015 unrealized loss is $10,000 and is included in Lena's 2015 net income. 
D) The 2014 unrealized gain is $10,000 and is reported on Lena's balance sheet as a component of stockholders' equity.

Question 11

Which of the following is true about a passive investment in common stock?

Accepted Answer

A)  The investing company usually owns less than 20% of the voting stock in the affiliate and the investment is reported on the balance sheet at cost. 
B)  The investment must not have any voting rights. 
C) The fair value method requires unrealized gains and losses to be recognized on the income statement. 
D) The investing company usually owns less than 20% of the voting stock in the affiliate and the investment must be reported at fair value on the balance sheet.

Question 12

Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

Accepted Answer

A)  Patents 
B)  Goodwill 
C) Acquisition expense 
D) Acquisition revenue

Question 13

An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its fair value reported in the prior period.

Accepted Answer

A) True 
 B)False

Question 14

Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of the following is true?

Accepted Answer

A)  The investment would be accounted for using the equity method. 
B)  The investment would be accounted for by consolidation. 
C) The investment would be accounted for under the fair value method. 
D) The investment would be accounted for under the amortized cost methoD.An investment of more than 50% of the outstanding voting stock requires the parent company to use the consolidation method.

Question 15

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 fair value of the long-term and short-term investment portfolios on the balance sheet. 
B)  Determination of the acquisition cost. 
C) Reporting of the unrealized holding gain or loss on investments within the financial statements. 
D) Determination of the unrealized holding gain or loss.

Question 16

Photo Finish Corporation bought a 40% interest in Click-It Corporation's $1 par value voting common stock on March 31, 2015. On that date, Click-It paid $20 million for 2 million shares at a $10 market price per share. On December 31, 2015, Click-It paid a $1 million cash dividend declared earlier in 2015, and reported net income for the year ended 2015 of $10 million. On December 31, 2015, Click-It's stock was trading at $11.50 per share. What effect will the dividend have on the Photo Finish financial statements?

Accepted Answer

A)  It would increase cash and increase equity in affiliate earnings. 
B)  It would increase cash and decrease the investment account. 
C) It would increase cash and increase net unrealized gains/losses. 
D) It would increase cash and increase the investment account.

Question 17

On January 1, 2014, Fall Corporation acquired 100% of the outstanding voting shares of Foliage Corporation for $600,000. The book and fair values of Foliage's assets and liabilities as of January 1, 2014 are listed below: $$\begin{array} { l r r } 
\text { Item } & \text { Book Value } & \text { Fair value } \
\text { Equipment } & \$ 60,000 & \$ 80,000 \
\text { Trucks } & \$ 40,000 & \$ 55,000 \
\text { Factory } & \$ 300,000 & \$ 320,000 \
\text { Other assets } & \$ 130,000 & \$ 100,000 \
\text { Liabilities } & \$ 100,000 & \$ 105,000
\end{array}$$ Required:
Calculate the amount of goodwill resulting from the acquisition.

Accepted Answer

The answer of On January 1, 2014, Fall Corporation acquired...

Question 18

Trent Corp. purchased $1,000,000 of bonds at 96 when the market yield was 8%. The bonds pay interest at the rate of 6%. Miller intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is correct?

Accepted Answer

A)  Since the bonds were purchased at a discount, the cash interest will be more than interest revenue. 
B)  Since the bonds were purchased at a discount, the book value of the bond investment will increase toward its maturity value. 
C) The bond investment will be classified as available-for-sale. 
D) The company will recognize unrealized gains or losses on the bonds.

Question 19

If a bond is bought at a discount, then interest revenue will be less than the cash payment.

Accepted Answer

A) True 
 B)False

Question 20

During 2014, Manning Corporation purchased 100% of the outstanding voting common stock shares of Brady Corporation for $4.0 million. Brady's assets had a book value of $5.0 million and fair value of $6.5 million. The book value as well as fair value of Brady's liabilities equaled $3.2 million. How much was paid for goodwill?

Accepted Answer

A)  $0. 
B)  $2,200,000. 
C) $700,000. 
D) $1,000,000.

Exam 14: Reporting and Interpreting Investments in Other Corporations

Which of the following statements is correct with regard to investments and the statement of cash flows?

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.

For an investment accounted for under the equity method, the investment account along with an investment income account would be increased for an amount equal to the investor's proportionate share of the affiliate's reported net income.

The extent of influence and control over another company is a critical factor in determining the proper method of accounting for an investment in the common stock of another company.

Any unrealized gains or losses on trading securities would have to be added back to or subtracted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

The assets of a subsidiary are depreciated and amortized over their remaining useful lives as a part of the consolidation process.

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2014. At December 31, 2014, the current fair value of the securities was $105,000. How should the investment be reported in the 2014 financial statements?

Which of the following is true about a passive investment in common stock?

Which of the following accounts is only created as the result of acquiring a controlling interest in another company?

An unrealized holding gain is reported within other comprehensive income when the fair value of a trading security exceeds its fair value reported in the prior period.

Piano Company owns 55% of the voting common stock shares of Keys Corporation. Which of the following is true?

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

Trent Corp. purchased $1,000,000 of bonds at 96 when the market yield was 8%. The bonds pay interest at the rate of 6%. Miller intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is correct?

If a bond is bought at a discount, then interest revenue will be less than the cash payment.