Deck 13: Measuring and Evaluating Financial Performance

Question 1

On its December 31, 20X1, statement of ?nancial position, Lumilite Co. reported its temporary investment in equity securities, under the fair value through net income method at $330,000. At December 31, 20X2, the fair value of the securities was $350,000. What should Lumilite report on its 20X2 statement of earnings because of the increase in fair value of the investments in 20X2?

A) $0
B) Unrealized gain of $20,000
C) Loss on investments of $10,000
D) Investment income of $20,000

Answer 1

Investment income of $20,000

Question 2

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:

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

Answer 2

be increased by $15,000

Question 3

Which of the following statements is correct?

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.

Answer 3

Any unrealized holding gain or loss on investments in trading securities is reported on the income statement.

Question 4

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?

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 classi?cation.
D) The company would recognize unrealized gains or losses on the bonds under the fair value approach within the income statement.

Question 5

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

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 market value method.
D) The investment would be accounted for under the amortized cost method.

Question 6

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

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 7

Comprehensive income is included as part of

A) retained earnings.
B) shareholders' equity.
C) unearned revenue.
D) net income.

Question 8

On January 1, 20X4, Entertainment Company acquired 15% of the outstanding voting stock of Rocker Company as a long-term investment and classified the shares as available-for-sale securities. During 20X4, Rocker Company reported net income of $1,500,000 and dividends declared and paid of $250,000. How much income will be reported during 20X4 from the Rocker investment?

A) $225,000
B) $37,500
C) $187,500
D) $250,000

Question 9

Miller Corp. purchased $1,000,000 of bonds at 96. The bonds pay interest at the rate of 10%. Miller intends to hold these bonds to maturity. Which of the following statements is correct?

A) Since the bonds were purchased at a premium, the cash interest will be less than interest revenue.
B) Since the bonds were purchased at a discount, the book value of the bond investment will increase.
C) The bond investment must be accounted for using the trading securities classi?cation.
D) The company would recognize unrealized gains or losses on the bonds.

Question 10

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 ?nancial position at December 31, 20X4 would be which of the following?

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

Question 11

Under the amortized cost model, holding gains are

A) recognized in net income.
B) the recognition depends on management's intention.
C) recognized in other comprehensive income.
D) are not recognized.

Question 12

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting) of Potato Corporation as a long-term investment. Which of the following classi?cations should be used by Idaho Company in accounting for the investment?

A) Trading securities.
B) Held-to-maturity.
C) Available-for-sale.
D) Consolidation.

Question 13

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

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 ?fty 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

Libby Company purchased equity securities for $100,000 and classi?ed them as available-for-sale securities on September 15, 20X4. At December 31, 20X4, the current market value of the securities was $105,000. How should the investment be reported in the 20X4 ?nancial statements?

A) The investment in available-for-sale securities would be reported on the statement of ?nancial position at its $100,000 cost.
B) The $5,000 unrealized gain is reported within the statement of earnings.
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 statement of ?nancial position 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 statement of ?nancial position.

Question 15

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?

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

Question 16

Lyrical Company purchased equity securities for $500,000 and classi?ed them as trading securities on September 15, 20X0. On December 31, 20X0, the current market value of the securities was $481,000. How should the investment be reported within the 20X0 ?nancial statements?

A) The investment in trading securities would be reported on the statement of ?nancial position at its $481,000 market value.
B) The investment in trading securities would be reported in the statement of ?nancial position at its $500,000 cost.
C) A realized holding loss on the trading securities would be reported on the statement of earnings.
D) The investment in trading securities would be reported in the balance sheet at its $481,000 market value and a realized holding loss on the trading securities would be reported on the statement of earnings.

Question 17

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

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 ?fty percent of the voting stock of another company.
D) Investments that provide the investor signi?cant in?uence over the investee, but not control over the investee.

Question 18

On January 1, 20X4, Short Company purchased as an available-for-sale investment, 20,000 shares (15% of the outstanding voting shares) of Daniel Corporation's $1 par value common stock at a cost of $50 per share. During November 20X4, Daniel declared and paid a cash dividend of $2 per share. At December 31, 20X4, end of the accounting period, Daniel's shares were selling at $48. The 20X4 financial statements for Short Company should report the following amounts: $$\begin{array} { | l | r | r | r | } \hline & \text { Long-Term Investment } & \begin{array} { r } \text { Unrealized Holding } \\\text { Gains/Losses }\end{array} & \text { Investment Revenue } \\\hline \text { A } & 1,000,000 & 40,000 & 40,000 \\\hline \text { B } & 960,000 & \text { Zero } & \text { Zero } \\\hline \text { C } & 1,000,000 & 80,000 & \text { Zero } \\\hline \text { D } & 960,000 & 40,000 & 40,000 \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 19

The premium or discount on bonds accounted for under the amortized cost method is

A) amortized over the expected holding period.
B) amortized over the life of the bond.
C) not amortized.
D) recognized in revenue.

Question 20

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?

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 classi?ed as held-to-maturity, the company would recognize no unrealized gains or losses on the bonds over their lifetime.

Question 21

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

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 ?nancial statements.
D) Determination of the unrealized holding gain or loss.

Question 22

Which of the following statements regarding the accounting for an investment using the equity method is incorrect?

A) It is used for investments between 20 - 50% of the outstanding voting stock when the investor has the ability to exert signi?cant in?uence.
B) The investment account is increased by the proportionate share of investee net income.
C) The investment account is decreased by the proportionate share of investee dividends.
D) Investment income equals the proportionate share of investee dividends.

Question 23

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 20X4.

-How much income should Heartfelt report during 20X4 from the Candle investment?

A) $200,000.
B) $40,000.
C) $4,000.
D) $10,000.

Question 24

Which of the following is true about passive investments?

A) The investing company usually owns less than 20% of the voting stock in the investee and they are reported on the balance sheet at cost.
B) These investments must not have any voting rights.
C) The market value method requires realized gains and losses to be recognized on the income.
D) The investing company must usually own less than 20% of the voting stock in the investee and these investments must be reported at market value on the balance sheet even though the historical cost principal is violated.

Question 25

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 incorrect if Rye classifies the investment as an available-for-sale security?

A) The 20X2 unrealized gain is $10,000, but is not 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 20X3 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.

Question 26

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?

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 27

Heartfelt Company owns a 40% interest in the voting common stock of Candle Corporation, accounted for using the equity method. During 20X4, Candle Corporation reported net earnings of $100,000 and declared and paid cash dividends of $10,000. The carrying value of the Candle investment was $500,000 on January 1, 20X4.

- At what amount is the Candle investment reported on the December 31, 20X4 statement of financial position?

A) $500,000.
B) $540,000.
C) $496,000.
D) $536,000.

Question 28

At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Manowar does not have signi?cant in?uence over Cortez. Manowar reports the investment using the FVTPL method. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?

A) $152,000
B) $150,150
C) $150,000
D) $172,500

Question 29

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?

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 30

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?

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

Question 31

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 classi?es the investment as an available-for-sale security and sold it at the beginning of 20X4 for $148,000?

A) The 20X4 realized loss reported on the statement of earnings is $2,000.
B) The 20X2 realized gain reported on the statement of earnings is $8,000.
C) The 20X2 unrealized gain reported on the statement of earnings is $8,000.
D) The 20X2 unrealized loss reported on the statement of earnings is $2,000.

Question 32

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?

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

Question 33

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 and sold it at the beginning of 20X4 for $148,000?

A) The 20X2 realized loss reported on the statement of earnings is $2,000.
B) The 20X4 realized gain reported on the statement of earnings is $8,000.
C) The 20X2 unrealized gain reported on the statement of earnings is $8,000.
D) The 20X2 unrealized loss reported on the statement of earnings is $2,000.

Question 34

At the beginning of 20X1, Manowar Ltd. acquired 20% of the voting shares of Cortez Co. for $150,000. Through this investment and by having two seats on their Board of Directors, Manowar has signi?cant in?uence over Cortez. In 20X1, Cortez earned net income of $70,000 and paid dividends of $40,000. In 20X2, Cortez earned net income of $80,000 and paid dividends of $100,000. At the end of 20X2, what is the balance of Manowar's "Investment in Cortez" account?

A) $152,000
B) $150,150
C) $150,000
D) $172,500

Question 35

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

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

Question 36

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

A) The 20X3 unrealized loss is $10,000, but is not included in McGinn's 20X3 net earnings.
B) The 20X4 unrealized gain is $15,000, but is not included in McGinn's 20X4 net earnings.
C) The 20X4 unrealized gain is $10,000 and is included in McGinn's 20X4 net earnings.
D) The 20X3 unrealized loss is $10,000 and is reported on McGinn's statement of ?nancial position as a component of stockholders' equity.

Question 37

When accounting for investments in trading securities, any decline in market value below cost of the investments is reported in which of the following ways?

A) On the statement of earnings as a realized loss.
B) On the statement of earnings as an unrealized holding loss.
C) On the statement of ?nancial position as a realized loss.
D) On the statement of ?nancial position as an unrealized holding loss in the stockholders' equity section.

Question 38

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 $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 effect will the dividend have on Phillips' 20X0 ?nancial statements?

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 39

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?

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 40

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

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

Question 41

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: $$\begin{array} { | l | r | } \hline \text { Net income } & \$ 575,000 \\\hline \text { Dividends declared and paid during December 20X0 } & \$ 30,000 \\\hline \text { Market price per share } & \$ 42.00 \\\hline\end{array}$$

-At what amount should Gilman Company report the Burke investment on the December 31, 20X0 statement of financial position?

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

Question 42

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?

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

Question 43

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

A) investor sells the investment.
B) investee declares a dividend.
C) investee pays a dividend.
D) earnings are reported by the investee in its ?nancial statements.

Question 44

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.


-The carrying amount of this investment in Tansent's December 31, 20X1 statement of financial position should be

A) $240,000
B) $252,000
C) $270,000
D) $275,000

Question 45

On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 20X4, Arnold Corporation reported $30,000 of net income and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. At what amount should the Arnold investment be reported at on the December 31, 20X4 statement of financial position?

A) $150,000
B) $158,000
C) $145,000
D) $148,000

Question 46

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, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share.

-What effect will the dividend have on Photo Finish's financial statements?

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 47

On January 1, 20X4, Palmer, Inc. bought 40% of the outstanding shares of Arnold Corporation at a cost of $137,000. The equity method of accounting for this investment is used. During 20X4, Arnold Corporation reported $30,000 of net earnings and paid $10,000 in cash dividends. At the end of 20X4, the shares had a market value of $150,000. How much income will Palmer report from the Arnold investment during 20X4?

A) $12,000
B) $30,000
C) $10,000
D) $4,000

Question 48

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

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

Question 49

Chapman Inc., owns 35% of Dawson Corporation. During the calendar year 20X1, Dawson had net earnings of $300,000 and paid dividends of $30,000. Chapman mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings? $$\begin{array} { | l | l | l | l | } \hline & \text { Investment Account } & \text { Net Income } & \text { Retained Earnings } \\\hline \text { A } & \text { Understate } & \text { Overstate } & \text { Overstate } \\\hline \text { B } & \text { Overstate } & \text { Understate } & \text { Understate } \\\hline \text { C } & \text { Overstate } & \text { Overstate } & \text { Overstate } \\\hline \text { D } & \text { Understate } & \text { Understate } & \text { Understate } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 50

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.

-What investment balance will be reported on Turtle's December 31, 20X4 statement of financial position?

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

Question 51

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?

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

Question 52

Which of the following statements is correct?

A) When the equity method is used to account for an investment in an investee, the reported share of investee income must be added to net income on the statement of cash fiows.
B) When the equity method is used to account for an investment in an investee, the cash dividends received are cash inflow from investing activities.
C) Any realized or unrealized gains or losses that were reported on the statement of earnings under the market value method 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 an investee, the reported share of investee dividends must be deducted from net income on the statement of cash flows.

Question 53

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?

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

Question 54

Which of the following statements is false?

A) Dividends received from stock investments increase cash flows from investing activities.
B) Income from investments accounted for using the equity method doesn't create cash flows.
C) Sale of stock investments is a cash inflow from investing activities.
D) Dividends received from stock investments accounted for using the equity method don't create net income but do create cash flows.

Question 55

Allen Corporation accounts for its investment in the common shares of Burns Company under the equity method. Allen Corporation should ordinarily record a cash dividend received from Young as

A) an addition to the carrying value of the investment.
B) dividend income.
C) a reduction of the carrying value of the investment.
D) contributed surplus.

Question 56

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?

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

Question 57

Cannalli Landscape Architecture has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Cannalli's ?nancial statements?

A) 3,000 shares of the 10,000 outstanding preferred shares of Fallow Co
B) 15,000 shares of the 50,000 outstanding common shares of Zeta Fertilizers Co
C) 5,000 shares of the 60,000 outstanding common shares of Denman's Greenhouses Corp
D) 20,000 shares of the 25,000 outstanding common shares of Just Pure Water Co

Question 58

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, 20X4. On December 31, 20X4, Click It paid a $1 million cash dividend declared earlier in 20X4 and reported net earnings for the year ended 20X4 of $10 million. On December 31, 20X4, Click Its stock was trading at $11.50 per share.

- At what amount will the Click It investment be reported on Photo Finish's December 31, 20X4 statement of financial position?

A) $20,000,000
B) $23,000,000
C) $23,600,000
D) $24,000,000

Question 59

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: $$\begin{array} { | l | r | } \hline 20 X 0 \text { net income } & \$ 290,000 \\\hline \text { Dividends declared and paid during December 20X0 } & \$ 20,000 \\\hline\end{array}$$ At what amount should JDR report the YRK investment on the December 31, 20X0 statement of financial position?

A) $2,116,000
B) $2,000,000
C) $4,124,000
D) $2,108,000

Question 60

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

A) When the investment is 30% of the voting stock and signi?cant in?uence can be achieved.
B) When the investment is 15% and signi?cant in?uence 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 signi?cant in?uence can be achieved.

Question 61

During 20X4, 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?

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

Question 62

If a bond is bought at a premium, the amortized book value of the bond investment will decrease as the bond matures.

Question 63

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 was the amount of goodwill purchased by Maxi Company?

A) $20,000
B) $40,000
C) $50,000
D) $60,000

Question 64

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?

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

Question 65

On January 1, 20X4, Sheldon Company paid $750,000 cash for 100% of the outstanding common stock of Mullen Company; Mullen's stockholders equity on the date of acquisition was $550,000. The current market value of Mullen's net assets was $70,000 in excess of their book value. What was the amount of goodwill purchased by Sheldon Company?

A) $200,000
B) $130,000
C) $480,000
D) $270,000

Question 66

Use of the consolidated ?nancial 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

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

Question 67

Signi?cant in?uence over the operating and ?nancial policies of another company may be indicated by the following except:

A) participation on its board of directors.
B) participation in its policy-making process.
C) evidence of material transactions between the two companies.
D) have signi?cant in?uence only on income earned by the other company. 13.

Question 68

Which of the following is the primary justi?cation for reporting the acquisition of a controlling interest on a consolidated basis?

A) The companies are legally and in economic substance separate.
B) The companies are legally and in economic substance one entity.
C) The companies are legally one entity but they are separate in economic substance.
D) The companies are legally separate but they are one entity in economic substance.

Question 69

On January 1, 20X4, Red Company purchased Patriot Shop for $400,000 cash. Red Company received the assets listed below and assumed trade payables (owed by Patriot) amounting to $30,000. $$\begin{array} { | l | r | r | } \hline & \text { Book Value per Patriot's } & \text { Appraised Market Value } \\& \text { Books }\\\hline \text { Inventory } & \$ 300,000 &\$280,000\\\hline \text { Furniture and fixtures } & 60,000 & \$73,000 \\\hline \text { Other assets } & 10,000 & 32,000 \\\hline\end{array}$$ What amount of Goodwill will be recorded in the transaction?

A) $35,000
B) $20,500
C) $50,000
D) $45,000

Question 70

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 ?nancial statements immediately after the acquisition?

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 71

Management must have the intent and ability to hold a bond investment until maturity if it is to be classified as a held-to-maturity security.

Question 72

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

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

Question 73

From RBB's perspective, this is an example of

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

Question 74

Investments in bonds intended to be sold before they reach maturity should be reported under the market value method.

Question 75

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

Question 76

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?

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

Question 77

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?

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

Question 78

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?

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 statement of earnings.
D) Fun with Florals will use the market value method of accounting for this investment.

Question 79

How is goodwill accounted for subsequent to acquisition?

A) It should be written off as soon as possible against retained earnings.
B) It should not be amortized because it has an indefinite life.
C) It should be written off as soon as possible as an expense.
D) It is amortized over its estimated useful life.

Question 80

What method should RBB use to account for their investment in Torritos Tacos Emporium?

A) Consolidation method
B) Fair value method
C) Cost method
D) Equity method