Question 1

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the

Accepted Answer

According to the information provided, Armando Company exercises a significant influence over Tito Company. This indicates that the equity method should be used to account for the investment. Under the equity method, the investment is initially recorded at cost and subsequently adjusted for the investor's share of the investee's earnings or losses.

Question 2

When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as a (n)

Accepted Answer

The difference between the proceeds (selling price) and the carrying amount (book value) of an investment is known as a gain or loss. This is because it represents either a profit or a loss on the sale of an investment. Therefore, choice D is the correct answer. The other options (A, B, and C) do not accurately describe this transaction.

Question 3

The journal entry Pierce will record on February 1 will include a

Accepted Answer

The answer of The journal entry Pierce will record on...

Question 4

Which of the following items would not affect the investor's income for the period?

Accepted Answer

Dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock typically imply significant influence over the investee. In such cases, the equity method of accounting is used, where dividends received are not recognized as income but instead reduce the carrying amount of the investment on the investor's balance sheet.

Question 5

Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the

Accepted Answer

Parker Company, owning 83% of Tadeo Company, is referred to as the parent company because it holds a controlling interest in Tadeo Company.

Question 6

Which of the following stock investments should be accounted for using the cost method?

Accepted Answer

According to accounting standards, investments of less than 20% should be accounted for using the cost method. Therefore, option A is the best choice.

Question 7

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to

Accepted Answer

Under the equity method, dividends received from an investee are accounted for as a return on the investment and decrease the carrying value of the investment. Therefore, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is recorded as a debit to Cash and a credit to Investment in Vallerio to reduce the carrying amount of the investment.

Question 8

Interest revenue on bonds is reported as

Accepted Answer

Interest revenue on bonds is typically reported as part of other income on the income statement, reflecting the earnings generated from these investments separate from the core operating activities of a business.

Question 9

The cost method of accounting for stock

Accepted Answer

The cost method of accounting for stock recognizes dividends received from the investment as income. This method is used when the investor has little to no influence over the investee, typically indicated by an ownership interest of less than 20%.

Question 10

What are the total proceeds from the February 1 sale?

Accepted Answer

The answer of What are the total proceeds from the...

Question 11

Which of the following statements is not a reason a company may purchase another company's stock?

Accepted Answer

Sustaining the other company's stock price is not a typical reason for a company to purchase another company's stock. The other three options - earning a return on excess cash, gaining control of another company's operations, and developing or maintaining business relationships - are all common reasons for companies to purchase the stock of other companies.

Question 12

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is​

Accepted Answer

The answer of Jarvis Corporation makes an investment in 100...

Question 13

Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of the bonds at 97. The journal entry for the purchase would include a

Accepted Answer

The correct answer is C) debit to Interest Receivable for $4,500 because when Alan Company purchases the bonds, the accrued interest of $4,500 is an amount that Alan is entitled to receive at the next interest payment date. Therefore, it is recorded as a debit to Interest Receivable, indicating an asset or amount owed to Alan Company.

Question 14

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

Accepted Answer

Since Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment, it means that Zach Company has significant influence over Tomas Corporation. With a net loss reported by Tomas Corporation, Zach Company would need to record its portion of that loss in its financial statements. The entry should include a credit to the investment account for $9,000 (45% of the $20,000 net loss).

Question 15

Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives?

Accepted Answer

When a company receives dividends from an investment in another company's stock, it records the receipt of cash by debiting Cash and credits Dividend Revenue, reflecting the income earned from the investment.

Question 16

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

Accepted Answer

According to the equity method of accounting, the investment account includes the original cost of the investment plus or minus the investor's share of changes in the investee's net assets since the investment date. This means that Wendell's investment account would include its share of Porter's net income earned since the investment was made, but would also need to be reduced by the amount of dividends Wendell has received from Porter. Therefore, option D is the best choice as it includes both the share of net income and the dividends received.

Question 17

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

Accepted Answer

The investor's cost per share is $21,750 / 500 = $43.50. Selling 100 shares at $49.50 each results in $4,950. The cost of these 100 shares is 100 * $43.50 = $4,350. The gain is $4,950 - $4,350 = $600.

Question 18

The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the

Accepted Answer

The equity method is the method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee. It is appropriate when the investor has significant influence over the investee, but does not have control over its operations. The cost method records investments at their original cost and makes no adjustments to reflect changes in the fair value of the investments, while the market method records investments at their fair value and recognizes any changes in value in the investor's income statement. The income method is not a recognized method of accounting for investments in equity securities.

Question 19

Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

Accepted Answer

When a company owns 20% to 50% of another company's stock, it typically uses the equity method. Under this method, dividends received are recorded as a reduction in the investment account, not as dividend revenue.

Question 20

The equity method of accounting for investments requires

Accepted Answer

The equity method of accounting for investments requires the investor to increase the carrying amount of the investment by its share of the investee's reported net income. This reflects the investor's share of the earnings of the investee.

Quiz 15: Investments and Fair Value Accounting