Question 1

Consolidation accounting is the way to combine the financial statements of two or more companies that have the same owners.

Accepted Answer

Consolidation accounting is the process of combining financial statements of multiple companies under common ownership into a single set of financial statements.

Question 2

Green Services Inc.invests its excess cash in Creative Technologies Inc.and acquires 1,000 shares for $53.25 per share.Green Services Inc.owns less than 1% of Creative's voting stock and plans to hold the stock for two years.While preparing the journal entry to record this transaction,________.

Accepted Answer

Since Green Services Inc. plans to hold the stock for two years, it will be classified as a long-term investment that is available-for-sale. Therefore, the journal entry should debit Long-term Investments-Available-for-Sale for the cost of the investment, which is 1,000 shares x $53.25 per share = $53,250.

Question 3

Aurum Services Inc.acquired 100,000 shares of Gamma Metals Inc.on January 1,2015.Gamma pays a cash dividend of $0.25 per share on March 2,2015.With the current investment,Aurum Services Inc.holds 8% of Gamma.In the journal entry on March 2,2015,________.

Accepted Answer

When a company invests in another company and receives a dividend payment, the proper account to credit is Dividend Revenue. Therefore, in the journal entry on March 2, 2015, Dividend Revenue will be credited. The other options listed are not applicable. Long-term Investments-Available-for-Sale and Long-term Investments-Held-to-Maturity are balance sheet accounts that are adjusted for changes in fair value and not affected by dividend payments.

Question 4

When a company receives a cash dividend on its equity investments,which represents 2% of the investee,its total equity will remain unaffected.

Accepted Answer

When a company receives a cash dividend on its equity investments, its total equity will decrease by an amount equal to the dividend received. Thus, the statement that the equity will remain unaffected is false.

Question 5

Green Services Inc.invests its excess cash in Creative Technologies Inc.and acquires 1,300 shares for $22.50 per share.Green Services Inc.owns less than 1% of Creative's voting stock and plans to hold the stock for two years.Which of the following is the correct journal entry for the transaction?

Accepted Answer

The journal entry for the acquisition of 1,300 shares of Creative Technologies Inc. by Green Services Inc. for $22.50 per share would be as follows:

Investment in Creative Technologies Inc. (1300 shares @ $22.50 per share)  = $29,250
  Cash  = $29,250

Option D is the correct entry as it shows the acquisition of shares using cash. Option A shows the acquisition of shares using accounts receivable, which is incorrect. Option B and C show the acquisition of shares at a different price, which is also incorrect.

Question 6

Aurum Services Inc.acquired 100,000 shares of Gamma Metals Inc.on January 1,2015.Gamma declares a cash dividend of $0.25 per share on February 15,2015 and pays the cash dividend on March 2,2015.With the current investment,Aurum Services Inc.holds 8% of Gamma's voting stock.Which of the following will be the correct journal entry for the day when the dividend payment is made (March 2,2015)?

Accepted Answer

The answer of Aurum Services Inc.acquired 100,000 shares of Gamma...

Question 7

Equity securities in which the investor owns less than 20% ownership in the voting stock of the investee can be ________.

Accepted Answer

Equity securities in which the investor owns less than 20% ownership in the voting stock of the investee can either be trading investments or available-for-sale investments. This is because the investor does not hold a significant interest and therefore cannot exercise control over the investee. The investor may choose to hold the securities for trading purposes or as a long-term investment, classified as available for sale.

Question 8

Gray Financial Services Inc.invested $15,000 to acquire 3,750 shares of Mitt Investments Inc.on March 15,2012.This investment represents less than 20% of the investee's voting stock.On May 7,2016,Greg Financial Services Inc.sells 1,750 shares for $12,250.When the transaction is recorded in a journal entry,________.

Accepted Answer

When a portion of the investment in a company is sold, the gain or loss on disposal is recorded. The gain in this case is the selling price of $12,250 minus the carrying value of the 1,750 shares ($7,500, which is 2,000 shares x $15 per share), which is $4,750. Therefore, Gain on Disposal will be credited for $4,750. Cash will also be debited for the selling price of $12,250. There is no need to record any adjustment to the long-term investments account since the shares sold represent less than 20% of the investee's voting stock.

Question 9

Maurice Corporation invested $100,000 to acquire 20,000 shares of Delta Technologies Inc.on March 1,2015.On July 2,2015,Delta pays a cash dividend of $0.25 per share.The investment is classified as an available-for-sale investment.Which of the following is the correct journal entry to record the transaction on July 2,2015?

Accepted Answer

The answer of Maurice Corporation invested $100,000 to acquire 20,000...

Question 10

The Long-term Investments account is debited for the receipt of a dividend on an equity-method investment because the dividend increases the investee's equity.

Accepted Answer

The answer of The Long-term Investments account is debited for...

Question 11

When a company invests in equity securities with 20% or more,but less than 50%,ownership in the investee's voting stock,the investor can significantly influence the investee's decisions.

Accepted Answer

According to US GAAP accounting rules, when an investor holds between 20% and 50% of the voting shares of an investee, it is considered significant influence and the investor can exert significant influence over the investee's operating and financial policies. Therefore, the statement is true.

Question 12

Investments accounted for by the equity method are recorded at cost at the time of purchase.

Accepted Answer

Investments accounted for by the equity method are initially recorded at cost at the time of purchase, and subsequently adjusted for the investor's share of the investee's profits or losses and dividends received.

Question 13

Which of the following is the major difference between the accounting for equity securities and debt securities?

Accepted Answer

The major difference between accounting for equity securities and debt securities is that debt securities earn interest revenue while equity securities earn dividend revenue. Debt securities represent loans made by the investor to the issuer and hence earn interest, while equity securities represent ownership in the issuing company and hence earn dividends when profits are distributed.

Question 14

A company that is controlled by another corporation is called a parent company.

Accepted Answer

The answer of A company that is controlled by another...

Question 15

When a company receives a dividend payment for available-for-sale investments,________.

Accepted Answer

The answer of When a company receives a dividend payment...

Question 16

Consolidated statements combine the balance sheets,income statements,and cash flow statements of the parent company with those of its controlling interest affiliates.

Accepted Answer

Consolidated statements do indeed combine the financial statements of the parent company with its controlling interest affiliates.

Question 17

Which of the following is true of the comparison between equity securities and debt securities?

Accepted Answer

Equity securities represent ownership in a company and earn dividend revenue, while debt securities represent a credit relationship with a company and earn interest revenue. Both debt securities and equity securities do not have a specific maturity date, but debt securities pay interest while equity securities pay dividends. Therefore, option B is the correct answer.

Question 18

Gain on Disposal of a trading investment is an equity account and is reported in the Other Revenues and (Expenses)section of the income statement.

Accepted Answer

Gain on Disposal of a trading investment is an equity account and is reported in the Other Revenues and (Expenses) section of the income statement.

Question 19

Joan Steel Inc.purchases 10,000 shares of Smith Metals Inc.for $34,000 in exchange for cash and now holds 3.2% voting stock of Smith Metals Inc.Assuming no other transaction happened during the year,the ________ in the balance sheet will increase.

Accepted Answer

Since Joan Steel Inc. purchased 10,000 shares of Smith Metals Inc. as a long-term investment, the balance sheet item that will increase is the long-term investments. This is because the shares purchased are expected to be held for more than one year and therefore qualify as a long-term investment. The cash used to purchase the shares will decrease, but this will not impact the balance sheet directly. Total assets may increase, but this will depend on whether the change in long-term investments is offset by any other changes in assets or liabilities. Current assets, however, are not impacted by this transaction since this investment is expected to be held for more than one year.

Question 20

Maurice Corporation invested $100,000 to acquire 20,000 shares of Delta Technologies Inc.on March 1,2015.Delta pays a cash dividend of $0.25 per share on July 2,2015.The investment is classified as an available-for-sale investment.Based on the information provided,which of the following is true of the balance sheet as of July 2,2015?

Accepted Answer

The investment is classified as an available-for-sale investment, which means that any unrealized gains or losses on the investment are reported in other comprehensive income and not in the income statement. Therefore, the balance sheet will not be affected by the dividend payment. However, the equity section of the balance sheet will increase by the amount of the dividend received, which is $5,000 (20,000 shares x $0.25 per share).

Quiz 10: Investments