Question 1

Michael Company's investment in equity securities with insignificant influence had a fair value of $31,700 at the end of the prior year.Management decided to sell the investment.The investment was purchased for $27,800.If Michael Company sold this investment for $50,200,Michael will have a(n):

Accepted Answer

A) Gain on Sale of Equity Securities for $22,400. 
B) Gain on Sale of Equity Securities for $18,500. 
C) Unrealized Loss on Equity Securities of $18,500. 
D) Unrealized Gain on Equity Securities of $22,400.

Question 2

Consolidated financial statements combine the financial statements of the parent company and its subsidiaries.

Accepted Answer

A) True 
 B)False

Question 3

The Investment in Equity Securities account when the investor has insignificant influence is reported on the:

Accepted Answer

A) income statement using the equity method. 
B) income statement using the fair value method. 
C) balance sheet using the equity method. 
D) balance sheet using the fair value method.

Question 4

Held-to-maturity investments in bonds are initially reported at ________ on the purchase date.On a subsequent balance sheet date,the bonds are reported at ________.

Accepted Answer

A) cost;fair value. 
B) amortized cost;fair value. 
C) cost;amortized cost. 
D) cost;lower of cost or market.

Question 5

Both trading and available-for-sale investments in debt securities are accounted for using the fair value method in a way that is similar to how investments in equity securities with insignificant influence are accounted for.

Accepted Answer

A) True 
 B)False

Question 6

Under the equity method,the investor applies his percentage of ownership in recording his share of the investee's net income,but not dividends.

Accepted Answer

A) True 
 B)False

Question 7

Under the equity method,when the investee reports net income,the Equity-method Investment account increases.

Accepted Answer

A) True 
 B)False

Question 8

All investments in debt securities NOT classified as trading securities or held-to-maturity securities are classified as:

Accepted Answer

A) debt securities. 
B) equity securities. 
C) marketable securities. 
D) available-for-sale securities.

Question 9

If the equity method is used to account for a long-term investment in common stock,cash dividends received from the investee are recorded by the investor as:

Accepted Answer

A) a debit to Equity-method Investment and a credit to Equity-method Investment Revenue. 
B) a debit to Cash and a credit to Dividend Revenue. 
C) a debit to Dividend Receivable and a credit to Dividend Revenue. 
D) a debit to Cash and a credit to Equity-method Investment

Question 10

Investments with insignificant influence are reported on the:

Accepted Answer

A) income statement using fair value method. 
B) balance sheet at cost. 
C) balance sheet using fair value method. 
D) income statement at cost.

Question 11

In consolidation accounting,a year-end elimination entry is required to add the subsidiary company's stockholders' equity accounts to those of the parent company.

Accepted Answer

A) True 
 B)False

Question 12

Daniel Company purchased 34% of the outstanding shares of Clooney Corporation on January 1 at a cost of $620,000.Clooney Corporation reported net income of $93,000 and declared and paid total dividends of $20,000 for the year.At the end of the year,Clooney shares had a current fair value of $614,000.After all necessary adjusting entries are made for the year,the balance in Daniel Company's Equity-method Investment account will be:

Accepted Answer

A) $614,000. 
B) $644,820. 
C) $693,000. 
D) $687,000.

Question 13

After the work sheet is complete,the consolidated amount for each account represents the total asset,liability,and equity amounts controlled by the parent corporation.

Accepted Answer

A) True 
 B)False

Question 14

A controlling interest enables the investor to elect a majority of the members of the investee's board of directors and thus control the investee's policies.

Accepted Answer

A) True 
 B)False

Question 15

At maturity,the carrying amount of a bond should be equal to its face value.

Accepted Answer

A) True 
 B)False

Question 16

Marathon Corporation owns 500 shares of Mini Company's common stock.Mini Company has 100,000 shares of common stock outstanding.Marathon Corporation is the ________ and Mini Company is the ________.

Accepted Answer

A) investee;investor 
B) investor;investee 
C) parent company;subsidiary company 
D) controlling company;noncontrolling company

Question 17

At the beginning of the year,an investment in equity securities with insignificant influence was purchased for $400,000,and it has a fair value of $420,000 at the end of the year.The year-end journal entry will have a credit to:

Accepted Answer

A) Retained Earnings. 
B) Unrealized Gain on Equity Securities. 
C) Investment in Equity Securities. 
D) Gain on Sale of Equity Securities.

Question 18

The market prices of bonds fluctuate inversely with market interest rates.

Accepted Answer

A) True 
 B)False

Question 19

Jones Corporation purchases $500,000 of Basic Corporation's stock on October 1,2020 at cost.Jones owns less than 2% of Basic's outstanding shares,and thus has insignificant influence.On December 1,2020 Jones Corporation received a cash dividend of $15,000 on the Basic Corporation's stock.On December 31,2020,Jones Corporation's investment in Basic Corporation has a fair value of $550,000.
Required:
Prepare the necessary journal entries.Explanations are not required.

Accepted Answer

The answer of Jones Corporation purchases $500,000 of Basic Corporation's...

Question 20

Under the equity method,the Equity-method Investment account is debited when the:

Accepted Answer

A) investee reports net income. 
B) investee reports net loss. 
C) investor receives a cash dividend. 
D) investment is sold.

Exam 13: Investments

Michael Company's investment in equity securities with insignificant influence had a fair value of $31,700 at the end of the prior year.Management decided to sell the investment.The investment was purchased for $27,800.If Michael Company sold this investment for $50,200,Michael will have a(n) :

Consolidated financial statements combine the financial statements of the parent company and its subsidiaries.

The Investment in Equity Securities account when the investor has insignificant influence is reported on the:

Held-to-maturity investments in bonds are initially reported at on the purchase date.On a subsequent balance sheet date,the bonds are reported at .

Both trading and available-for-sale investments in debt securities are accounted for using the fair value method in a way that is similar to how investments in equity securities with insignificant influence are accounted for.

Under the equity method,the investor applies his percentage of ownership in recording his share of the investee's net income,but not dividends.

Under the equity method,when the investee reports net income,the Equity-method Investment account increases.

All investments in debt securities NOT classified as trading securities or held-to-maturity securities are classified as:

If the equity method is used to account for a long-term investment in common stock,cash dividends received from the investee are recorded by the investor as:

Investments with insignificant influence are reported on the:

In consolidation accounting,a year-end elimination entry is required to add the subsidiary company's stockholders' equity accounts to those of the parent company.

After the work sheet is complete,the consolidated amount for each account represents the total asset,liability,and equity amounts controlled by the parent corporation.

A controlling interest enables the investor to elect a majority of the members of the investee's board of directors and thus control the investee's policies.

At maturity,the carrying amount of a bond should be equal to its face value.

Marathon Corporation owns 500 shares of Mini Company's common stock.Mini Company has 100,000 shares of common stock outstanding.Marathon Corporation is the and Mini Company is the .

At the beginning of the year,an investment in equity securities with insignificant influence was purchased for $400,000,and it has a fair value of $420,000 at the end of the year.The year-end journal entry will have a credit to:

The market prices of bonds fluctuate inversely with market interest rates.

Under the equity method,the Equity-method Investment account is debited when the: