Question 1

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 2

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1,2010,at $40 per share as a long-term investment.The records of Burke Corporation showed the following on December 31,2010:

$\begin{array}{lccc}
\text { 2010 net income} & \$ 575,000 \
 \text { Dividends declared and paid during December, 2010 } & \$ 30,000\
\text { Market price per share} & \$ 42 \
\end{array}$
 At what amount should Gilman Company report the Burke investment on the December 31,2010 balance sheet?

Accepted Answer

A) $4,218,000 
B) $4,000,000 
C) $4,124,000 
D) $3,800,000

Question 3

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

Accepted Answer

A) True 
 B)False

Question 4

Phillips Corporation purchased 1,000,000 shares of Martin Corporation's common stock which constitutes 10% of Martin's voting stock on June 30,2010 for $42 per share.Phillips' intent is to keep these shares beyond the current year.On December 20,2010,Martin paid a $4,000,000 cash dividend.On December 31,Martin's stock was trading at $45 per share and their reported 2010 net income was $52 million.What effect will the dividend have on Phillips' 2010 financial statements?

Accepted Answer

A) It would increase cash and increase investment income. 
B) It would increase cash and decrease investment in associated companies. 
C) It would increase cash and increase net unrealized gains/losses. 
D) It would increase cash and increase the allowance to value at market account.

Question 5

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 6

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 31,2010.On December 12,2010,Nutribar declared and paid a $1 million cash dividend and reported net income for the year ended 2010 of $10 million.On December 31,2010,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, 2010.
B.Record the cash dividend received by Kudos on December 12, 2010.
C.Record any end of year entries needed on Kudos' books.

Accepted Answer

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

Question 7

Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation under the purchase method.Which of the following statements about the consolidated statements is true?

Accepted Answer

A) The assets and liabilities of Crafts to Go Corporation would be not revalued and disclosed at their market values on the date of acquisition. 
B) Fun with Florals will use the equity method of accounting for this investment. 
C) Fun with Florals will report Crafts to Go Corporation's revenues and expenses on a consolidated income statement. 
D) Fun with Florals will use the market value method of accounting for this investment.

Question 8

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15,2010.At December 31,2010,the current market value of the securities was $105,000.How should the investment be reported in the 2010 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 market value and an unrealized holding gain on available-for-sale securities would be reported in the stockholders' equity section of the balance sheet.

Question 9

The balance sheet of Mini Company was as follows immediately before it was acquired by Maxi Company:

$\begin{array}{l}
\begin{array} { l } 
\text { Cash } &&&&&& \$ 90,000 \
\text { Accounts receivable (net) }&&&&&&50,000 \
\text { Inventory } &&&&&&150,000 \
\text { Plant and equipment (net) } &&&&&&100,000 \
\text { Total Assets } &&&&&&\$ 390,000
\end{array}\
\begin{array} { l } 
\text { Accounts payable } & \$ 40,000 \
\text { Notes payable } & 80,000 \
\text { Common stock } & 155,000 \
\text { Retained earnings } & 115,000 \
\text { Total Liabilities and Stockholders' Equity } & \$ 390,000
\end{array}
\end{array}$
 On January 1,2010,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 10

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

Question 11

During 2010,Manning Corporation purchased 100% of the outstanding voting shares of Brady Corporation for $4.0 million.Brady's assets had a book value of $5.0 million and fair market value of $6.5 million.The book value as well as fair market 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

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

On March 1,2011,Young Company purchased the following stock as long-term investments in available-for-sale securities:
Old Corporation common stock (par $5),2,000 shares at $5 per share (10% of outstanding shares)
ABC Corporation common stock (par $10),3,000 shares at $25 per share (15% of outstanding shares)
XYZ Corporation common stock (par $10),3,000 shares at $20 per share (10% of outstanding shares)
The market prices per share at December 31,end of the accounting period,were as follows:
 $$\begin{array} { l c c } 
\underline { \text { Stock } } & \underline { \text { Dec. } 31,2011 } & \underline { \text { Dec. 31, 2012 }} \
\text { Old common } & \$ 6 & \$ 7 \
\text { ABC common } & \$ 24 & \$ 25 \
\text { XYZ common } & \$ 21 & \$ 17
\end{array}$$ Prepare the required journal entries at the following dates:
 March 1,2011,December 31,2011 and December 31,2012

Accepted Answer

The answer of On March 1,2011,Young Company purchased the following...

Question 16

Ocean Corporation owns 30% of Woods Corp.for which they paid $5.5 million and uses the equity method to account for the investment.Woods Corp.paid a $100,000 dividend; the investment in Woods Corp.account will decrease by $30,000,which is Ocean's proportionate share of the dividend.

Accepted Answer

A) True 
 B)False

Question 17

Significant influence over the operating and financial policies of another company may be indicated by

Accepted Answer

A) participation on its board of directors. 
B) participation in its policy-making process. 
C) evidence of material transactions between the two companies. 
D) all of the above responses.

Question 18

Photo Finish Corporation bought a 40% interest in the voting stock of Click It Corporation's $1 par value common stock for $20 million (2 million shares at a $10 market price)on March 31,2011.On December 31,2011,Click It paid a $1 million cash dividend declared earlier in 2011 and reported net income for the year ended 2011 of $10 million.On December 31,2011,Click It's stock was trading at $11.50 per share. What effect will the dividend have on Photo Finish's financial statements?

Accepted Answer

A) It would increase cash and increase investment income. 
B) It would increase cash and decrease investment in Click It. 
C) It would increase cash and increase net unrealized gains/losses. 
D) It would increase cash and increase the allowance to value at market account.

Question 19

Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is

Accepted Answer

A) 20% or more. 
B) less than 20%. 
C) between 20% and 50%. 
D) more than 50%.

Question 20

On January 1,2010,as a long-term investment in available-for-sale securities,John Company purchased 1,000 of the 10,000 outstanding voting common shares of Wayne Corporation at $9 per share.Wayne reported 2010 net income of $30,000 and declared and paid cash dividends of $20,000.The market price of the Wayne stock at the end of 2010 was $10 per share.Calculate the carrying value of John's investment at the end of 2010.

Accepted Answer

The answer of On January 1,2010,as a long-term investment in...

Exam 12: Reporting and Interpreting Investments in Other Corporations

Which of the following statements is correct?

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

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

Fun with Florals Corporation acquired all the voting shares of Crafts to Go Corporation under the purchase method.Which of the following statements about the consolidated statements is true?

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15,2010.At December 31,2010,the current market value of the securities was $105,000.How should the investment be reported in the 2010 financial statements?

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

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

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

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

Ocean Corporation owns 30% of Woods Corp.for which they paid $5.5 million and uses the equity method to account for the investment.Woods Corp.paid a $100,000 dividend; the investment in Woods Corp.account will decrease by $30,000,which is Ocean's proportionate share of the dividend.

Significant influence over the operating and financial policies of another company may be indicated by

Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is