Question 1

Jerome Company purchased common stock in Gonzalez Company.Jerome Company treats the investment as available-for-sale securities.During the current year,Gonzalez Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jerome Company owns 10% of the outstanding shares of Gonzalez Company.Gonzalez Company's dividend will affect Jerome Company by ________.
A) increasing cash and investments by $100,000
B) increasing investments and investment revenue by $100,000
C) increasing cash and investment revenue by $100,000
D) increasing cash and decreasing investments by $100,000

Accepted Answer

Jerome Company will receive 10% of the dividends paid by Gonzalez Company, which amounts to $100,000. This will increase Jerome's cash and be recognized as investment revenue.

Question 2

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company buys only with the intent to resell them shortly are called ________.
A) available-for-sale securities
B) equity method securities
C) trading securities
D) options

Accepted Answer

Securities that are bought with the intent of reselling them shortly are called trading securities. The other options, available-for-sale securities and equity method securities, refer to longer-term investments in which the company does not intend to resell the securities in the near future. Options are a type of financial instrument that can be used for speculation or hedging purposes and are not necessarily related to the accounting treatment of investments.

Question 3

John Company purchased common stock in Garcia Company.John Company treats the investment as available-for-sale securities.During the current year,Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that John Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's net income will affect John Company in which of the following ways?
A) increasing cash and investments by $400,000
B) increasing stockholders' equity and investments by $400,000
C) increasing cash and stockholders' equity by $400,000
D) no effect

Accepted Answer

Available-for-sale securities are recorded at fair value, and dividends received are recognized as income, but the investee's net income does not affect the investor's income statement or balance sheet directly, except through realized gains or losses upon sale.

Question 4

An investor in available-for-sale securities has the following information available at December 31,2012:
Market value of trading securities $\quad \$8,000$
Acquisition cost of trading securities $\quad \$9,000$
How does the investor report the change in market value on the available-for-sale securities at December 31,2012?
A) unrealized loss of $1,000 on income statement
B) unrealized gain of $1,000 on income statement
C) $1,000 is added to accumulated other comprehensive income account on the balance sheet
D) $1,000 is subtracted from the accumulated other comprehensive income account on the balance sheet

Accepted Answer

The change in market value of available-for-sale securities is reported in other comprehensive income, not on the income statement. Since the market value decreased, it results in a decrease in the accumulated other comprehensive income account on the balance sheet.

Question 5

Randall Company acquired 40% of the voting stock of Boulder Company for $40 million.At the end of Year 1,Boulder Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Randall Company's investment in Boulder Company is $44 million.What accounts on Randall Company's books would be affected by the dividends of Boulder Company?
A) none
B) Cash increase $2 million and Investment Revenue increases $2 million
C) Cash increase $5 million and Investment Revenue increases $5 million
D) Cash increase $2 million and Investments decrease $2 million

Accepted Answer

The dividends received by Randall Company would increase its cash by $2 million (40% of $5 million). This is recorded as a reduction in the Investments account under the equity method, not as Investment Revenue.

Question 6

Bart Company acquired 10 percent of the voting stock of Ernie Company for $10 million.Bart Company plans to keep the investment for several years.At the end of Year 1,Ernie Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Bart Company's investment in Ernie Company is $11 million.What entry is necessary at the end of Year 1 to account for the change in market value of Bart Company's investment in Ernie Company?
A) No entry is needed.
B) Cash increases $11 million and Stockholders' equity increases $11 million.
C) Investments increase $11 million and Stockholders' equity increases $11 million.
D) Investments increase $1 million and Stockholders' equity increases $1 million.

Accepted Answer

The answer of Bart Company acquired 10 percent of the...

Question 7

Martin Company purchased 10% of the outstanding shares of Winn Company.Martin Company classifies the investments as trading securities.At the end of the year,the market value of the shares increased from the prior year.The increase in market value of Winn Company's shares will affect Martin Company by ________.
A) increasing cash and increasing investments
B) decreasing investments and increasing retained earnings
C) increasing investments and increasing retained earnings
D) increasing cash and increasing stockholders' equity

Accepted Answer

As Martin Company has classified the investment as trading security, any increase in the market value of Winn Company shares will result in an increase in Martin Company's investment account (increasing investments) and increase in the fair market value of the investment, which would result in an increase in the retained earnings account (increasing retained earnings). Therefore, choice C is the correct answer. Option A and D are incorrect as only the investments' account would increase, and Option B is incorrect as Retained earnings will increase.

Question 8

Vanessa Company purchased common stock in Gilmore Company.During the current year,Gilmore Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vanessa Company owns 40 percent of the outstanding shares of Gilmore Company.Gilmore Company's net income will affect Vanessa Company by ________.
A) increasing investments by $1,600,000
B) increasing investments and cash by $2,000,000
C) increasing cash and stockholders' equity by $400,000
D) increasing cash and decreasing investments by $1,600,000

Accepted Answer

Since Vanessa Company owns 40 percent of Gilmore Company's outstanding shares, it has a 40 percent ownership interest. Gilmore Company's net income of $4,000,000 will increase Vanessa Company's investments by 40 percent of $4,000,000, which is $1,600,000. The payment of dividends does not affect Vanessa Company's investments in Gilmore Company.

Question 9

Arizona Company has 40,000 shares of its common stock outstanding.Mexico Company owns 5,000 shares of Arizona Company's stock.Which of the following methods should Mexico Company use to account for its investment in Arizona Company?
A) market-value
B) equity
C) consolidated
D) available-for-sale

Accepted Answer

Mexico Company owns 12.5% (5,000/40,000) of Arizona Company's stock, which is typically not enough to exert significant influence. Therefore, the market-value method is appropriate for accounting for this level of investment.

Question 10

Robert Company acquired 40% of the voting stock of Boulder Company for $40 million.At the end of Year 1,Boulder Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Robert Company's investment in Boulder Company is $44 million.What accounts on Robert Company's books would be affected by the net income of Boulder Company?
A) none
B) Investments increase $15 million and Investment Revenue increases $15 million
C) Cash increases $15 million and Investment Revenue increases $15 million
D) Investments increase $6 million and Investment Revenue increases $6 million

Accepted Answer

Robert Company's share of Boulder Company's net income would be 40% of $15 million, which is $6 million. This increases the Investments account and is recognized as Investment Revenue.

Question 11

Van Dover Company purchased common stock in Sanchez Company.During the current year,Sanchez Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Van Dover Company owns 30% of the outstanding shares of Sanchez Company.Sanchez Company's dividend will affect Van Dover Company by ________.
A) increasing cash and stockholders' equity by $300,000
B) increasing investments and stockholders' equity by $300,000
C) increasing cash and decreasing investments by $300,000
D) increasing cash and increasing investments by $300,000

Accepted Answer

Since Sanchez Company paid dividends to its shareholders, Van Dover Company, as a shareholder, will receive a portion of the dividends on the common stock it owns. Therefore, Van Dover Company's investment in Sanchez Company will decrease by the portion of dividends that it receives. This will result in decreasing investments by $300,000. However, there is no accompanying increase in cash, so choice (C) is the correct one.

Question 12

An investor in trading securities has the following information available at December 31,2012:
Market value of trading securities $\quad \$8,000$
Acquisition cost of trading securities $\quad \$9,000$
How does the investor report the change in market value on the trading securities at December 31,2012?
A) unrealized loss of $1,000 on income statement
B) unrealized gain of $1,000 on income statement
C) $1,000 is added to other comprehensive income account on the balance sheet
D) $1,000 is subtracted from the other comprehensive income account on the balance sheet

Accepted Answer

Trading securities are reported at fair market value, with unrealized gains and losses included in earnings. Since the market value is $1,000 less than the acquisition cost, it is reported as an unrealized loss of $1,000 on the income statement.

Question 13

An investor holds 5% of the outstanding stock of an investee.The investor plans to sell the stock in two months.The investor reports the dividends received from the stock as ________.
A) an increase in the investment account
B) a decrease in the investment account
C) dividend revenue on the income statement
D) equity in earnings of the investee on the income statement

Accepted Answer

Dividends received from the investee are reported as dividend revenue on the income statement. The investment account will not be affected until the stock is sold. Equity in earnings of the investee on the income statement is used to report the investor's share of the investee's net income, not dividends received.

Question 14

An investor holds 1% of the outstanding stock of an investee.The investor plans to hold the stock for a long time.The investor reports the dividends received from the stock as ________.
A) an increase in the investment account
B) a decrease in the investment account
C) dividend revenue on the income statement
D) equity in earnings of the investee on the income statement

Accepted Answer

Since the investor holds less than 20% of the outstanding stock, the investor is not considered to have significant influence over the investee. Therefore, the equity method of accounting is not used. Instead, dividends received from the investee are reported as dividend revenue on the income statement.

Question 15

Wyoming Company has 40,000 shares of its common stock outstanding.Dakota Company owns 35,000 shares of Wyoming Company's stock.Which of the following methods should Dakota Company use to account for its investment in Wyoming Company?
A) market-value
B) equity
C) consolidated financial statements
D) cost

Accepted Answer

Since Dakota Company owns 35,000 out of 40,000 shares of Wyoming Company's stock, this represents an ownership of 87.5% (35,000/40,000), which typically requires the use of consolidated financial statements due to the significant influence and control over the investee.

Question 16

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company does not intend to sell in the near future are called ________.
A) trading securities
B) options
C) available-for-sale securities
D) equity method securities

Accepted Answer

Available-for-sale securities are investments that are not intended to be sold in the near future, which matches the description given in the question. Trading securities refer to investments that are actively bought and sold for profit. Options refer to the right to buy or sell a security at a specified price in the future. Equity method securities are investments in which the investor has significant influence over the investee and accounts for the investment using the equity method.

Question 17

Rambo Company acquired 40% of the voting stock of Boulder Company for $40 million.At the end of Year 1,Boulder Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Rambo Company's investment in Boulder Company is $44 million.At the time of the acquisition,what accounts would be affected on the books of Rambo Company?
A) Cash decreases $40 million and Investments increase $40 million
B) Cash decreases $40 million and Stockholders' Equity increase $40 million
C) Investments increase $40 million and Accounts Payable increase $40 million
D) No entry

Accepted Answer

When Rambo Company acquired 40% of the voting stock of Boulder Company for $40 million, it would have recorded the following journal entry:
Investments in Boulder Company   $40 million
Cash                                            $40 million
At the time of the acquisition, the investments account would have increased by $40 million, and the cash account would have decreased by $40 million.

Question 18

California Company has 40,000 shares of its common stock outstanding.Utah Company owns 15,000 shares of California Company's stock.Which of the following methods should Utah Company use to account for its investment in California Company?
A) market-value
B) equity
C) consolidated
D) available-for-sale

Accepted Answer

Utah Company should use the equity method to account for its investment in California Company. The equity method is used when the investor has significant influence over the investee, but not control (which would require consolidating the financial statements). Utah Company owns 15,000 out of 40,000 shares, which represents 37.5% ownership and is substantial enough to give Utah Company significant influence. Therefore, Utah Company should use the equity method to record its share of California Company's income or losses on its own financial statements.

Question 19

Randy Company acquired 40% of the voting stock of Biel Company for $40 million.At the end of Year 1,Biel Company reports net income of $15 million and pays cash dividends of $5 million.At the end of Year 1,the market value of Randy Company's investment in Biel Company is $44 million.The ________ method should be used by Randy Company to account for the investment.
A) market-value
B) consolidated
C) cost
D) equity

Accepted Answer

The best choice is the equity method. The equity method is used by an investor when it has significant influence over the investee (between 20% to 50% ownership in voting stock). Under the equity method, the investor records its initial investment at cost and subsequently adjusts the investment account for its share of the investee's net income or loss and dividends declared. As Randy Company acquired 40% of the voting stock of Biel Company, it has significant influence over Biel Company and, therefore, should use the equity method.

Question 20

Branson Company purchased 40% of the outstanding shares of Missouri Company as a long-term investment.At the end of the year,the market value of the shares increased.The increase in market value of Missouri Company's shares will affect Branson Company in which of the following ways?
A) increasing assets and increasing stockholders' equity
B) decreasing investments and increasing cash
C) increasing investments and increasing stockholders' equity
D) no effect

Accepted Answer

Since Branson Company owns 40% of Missouri Company, it uses the equity method for accounting. Under this method, changes in market value do not affect the financial statements; only the share of Missouri's earnings and dividends received are recognized.

Quiz 17: Understanding and Analyzing Consolidated Financial Statements

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company buys only with the intent to resell them shortly are called ________.

Arizona Company has 40,000 shares of its common stock outstanding.Mexico Company owns 5,000 shares of Arizona Company's stock.Which of the following methods should Mexico Company use to account for its investment in Arizona Company?

An investor holds 5% of the outstanding stock of an investee.The investor plans to sell the stock in two months.The investor reports the dividends received from the stock as ________.

An investor holds 1% of the outstanding stock of an investee.The investor plans to hold the stock for a long time.The investor reports the dividends received from the stock as ________.

Wyoming Company has 40,000 shares of its common stock outstanding.Dakota Company owns 35,000 shares of Wyoming Company's stock.Which of the following methods should Dakota Company use to account for its investment in Wyoming Company?

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company does not intend to sell in the near future are called ________.

California Company has 40,000 shares of its common stock outstanding.Utah Company owns 15,000 shares of California Company's stock.Which of the following methods should Utah Company use to account for its investment in California Company?

Branson Company purchased 40% of the outstanding shares of Missouri Company as a long-term investment.At the end of the year,the market value of the shares increased.The increase in market value of Missouri Company's shares will affect Branson Company in which of the following ways?