Acc 557 week 9 quiz – strayer new

ACC 557 Week 9 Quiz – Strayer NEW
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Chapter 12
All possible questions with answers
TRUE-FALSE STATEMENTS
Corporations purchase investments in debt or stock securities generally for one of two
reasons.
Ans:LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:
Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem
Solving, IMA: Business Economics
A reason some companies purchase investments is because they generate a significant
portion of their earnings from investment income.
Ans:LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:
Resource Management, AICPA FN: Decision Modeling, AICPA PC: Problem
Solving, IMA: Business Economics
The accounting for short-term debt investments and for long-term debt investments is
similar.
Ans:LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: None,
AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA
When debt investments, are sold, the gain or loss is the difference between the net
proceeds from the sale and the fair value of the bonds.
Resource Management, AICPA FN: Measurement, AICPA PC: Problem Solving,
IMA: FSA

Debt investments are investments in government and corporation bonds.
Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA:
Business Economics
In accordance with the cost principle, brokerage fees should be added to the cost of an
investment.
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA:
FSA
In accordance with the cost principle, the cost of debt investments includes brokerage
fees and accrued interest.
FSA
In accounting for stock investments of less than 20%, the equity method is used.
Resource Management, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA:
Business Economics
Dividends received on stock investments of less than 20% should be credited to the
Stock Investments account.
Business Economics

If an investor owns between 20% and 50% of an investee's common stock, it is
presumed that the investor has significant influence on the investee.
Business Economics
The Stock Investments account is debited at acquisition under both the equity method
and cost method of accounting for investments in common stock.
FSA
Under the equity method, the investment in common stock is initially recorded at cost,
and the Stock Investments account is adjusted annually.
FSA
Under the equity method, the receipt of dividends from the investee company results
in an increase in the Stock Investments account.
FSA
Consolidated financial statements are appropriate when an investor controls an
investee by ownership of more than 50% of the investee's common stock.
Ans:LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA
BB: Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Reporting
Consolidated financial statements are prepared in place of the financial statements for
the parent and subsidiary companies.

Ans:LO: 4, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Communications, AICPA
Reporting
Consolidated financial statements should be prepared only when a subsidiary
company has a controlling interest in the parent company.
Reporting
The valuation of non-trading securities is similar to the procedures followed for
trading securities, except that changes in fair value are not recognized in current
income.
Reporting
An unrealized gain or loss on trading securities is reported as a separate component of
stockholders' equity.
Reporting
For non-trading securities, the unrealized gain or loss account is carried forward to
future periods.
Reporting

A decline in the fair value of a trading security is recorded by debiting an unrealized
loss account and crediting the Fair value Adjustment account.
Reporting
If the fair value of a non-trading security exceeds its cost, the security should be
written up to fair value and a realized gain should be recognized.
Reporting
The Fair Value Adjustment account can only have a credit balance or a zero balance.
Reporting
To be classified as a short-term investment, the investment must be readily
marketable and intended to be converted into cash within the next year or operating
cycle.
FSA
An investment is readily marketable if it is management's intent to sell the investment.
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Communication, IMA:
Reporting
Stocks traded on the New York Stock Exchange are considered readily marketable.

Legal/Regulatory, AICPA FN: Reporting, AICPA PC: Problem Solving, IMA:
Reporting
When a parent company acquires a wholly owned subsidiary for an amount in excess
of the book value of the net assets acquired, the excess is always allocated to good
will.
Resource Management, AICPA FN: Risk Analysis, AICPA PC: Problem Solving,
IMA: Business Economics
A consolidated income statement will reflect only revenue and expense transactions
between the consolidated entity and parties outside the affiliated group.
The process of excluding intercompany transactions in preparing consolidated
statements is referred to as intercompany eliminations.
One of the reasons a corporation may purchase investments is that it has excess cash.
When recording bond interest, Interest Receivable is reported as a long-term asset in
the balance sheet.

FSA
Under the cost method, the investment is recorded at cost and revenue is recognized
only when cash dividends are received.
Reporting
Consolidated financial statements present a condensed version of the financial
statements so investors will not experience information overload.
Reporting
Non-trading securities are securities bought and held primarily for sale in the near
term to generate income on short-term price differences.
Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business
Economics
"Intent to convert" does not include an investment used as a resource that will be used
whenever the need for cash arises.
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics

MULTIPLE CHOICE QUESTIONS
Corporations invest excess cash for short periods of time in each of the following
except
equity securities.
highly liquid securities.
low-risk securities.
government securities.
Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
Corporations invest in other companies for all of the following reasons except to
house excess cash until needed.
generate earnings.
meet strategic goals.
increase trading of the other companies’ stock.
Resource Management, AICPA FN: Reporting, AICPA PC: None, IMA: Business
Economics
A typical investment to house excess cash until needed is
stocks of companies in a related industry.
debt securities.
low-risk, highly liquid securities.
stock securities.
Resource Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business
Economics
A company may purchase a noncontrolling interest in another firm in a related
industry

to house excess cash until needed.
to generate earnings.
for strategic reasons.
for speculative reasons.
Economics
Pension funds and mutual funds regularly invest in debt and stock securities primarily
to
generate earnings.
house excess cash until needed.
meet strategic goals.
control the company in which they invest.
Economics
At the time of acquisition of a debt investment,
no journal entry is required.
the cost principle applies.
the Stock Investments account is debited when bonds are purchased.
the Investment account is credited for its cost plus brokerage fees.
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics
Which of the following is not a true statement regarding short-term debt investments?
The securities usually pay interest.
Investments are frequently government or corporate bonds.
This type of investment must be currently traded in the securities market.
Debt investments are recorded at the price paid less brokerage fees.
Economics

On January 1, 2013, Danner Company purchased at face value, a $1,000, 8% bond
that pays interest on January 1 and July 1. Danner Company has a calendar year end.
The entry for the receipt of interest on July 1, 2013, is
Cash....................................................................................... 40
Interest Revenue........................................................... 40
Cash....................................................................................... 80
Interest Receivable................................................................ 40
Ans:LO: 2, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
FSA
On January 1, 2013, Danner Company purchased at face value, a $1,000, 10% bond
that pays interest on January 1 and July 1. Danner Company has a calendar year end.
The adjusting entry on December 31, 2013, is
not required.
Cash....................................................................................... 50
Debt Investments.......................................................... 50
Ans:LO: 2, Bloom: AN, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
FSA
On January 1, 2013, Milton Company purchased at face value, a $1,000, 4% bond that
pays interest on January 1 and July 1. Milton Company has a calendar year end.
The entry for the receipt of interest on January 1, 2014 is

Cash....................................................................................... 40
Cash....................................................................................... 40
Interest Receivable....................................................... 40
Cash....................................................................................... 20
Cash....................................................................................... 20
Interest Receivable....................................................... 20
FSA
On January 1, Talent Company purchased as a short-term investment a $1,000, 8%
bond for $1,050. The bond pays interest on January 1 and July 1. The bond is sold on
October 1 for $1,200 plus accrued interest. Interest has not been accrued since the last
interest payment date. What is the entry to record the cash proceeds at the time the
bond is sold?
Cash....................................................................................... 1,200
Debt Investments ......................................................... 1,200
Cash....................................................................................... 1,220
Debt Investments.......................................................... 1,050
Gain on Sale of Debt Investments................................. 150
Cash....................................................................................... 1,220
Cash....................................................................................... 1,200
Gain on Sale of Debt Investments................................. 150
FSA

Which of the following is not a true statement about the accounting for debt
investments?
At acquisition, the cost principle applies.
The cost includes any brokerage fees.
Debt investments include investments in government and corporation bonds.
The cost includes any accrued interest.
Ans:LO: 2, Bloom: AN, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:
FSA
The cost of debt investments includes each of the following except
brokerage fees.
commissions.
accrued interest.
the price paid.
Legal/Regulatory, AICPA FN: Measurement, AICPA PC: None, IMA: FSA
If a short-term debt investment is sold, the Investment account is
credited for the face value of the bonds at the sale date.
credited for the cost of the bonds at the sale date.
credited for the fair value of the bonds at the sale date.
debited for the cost of the bonds at the sale date.
In accounting for debt investments, entries are made to recordeach of the following
except the
acquisition.
interest revenue.
amortization of any discount or premium.
sale.

Key Company acquires 60, 10%, 5 year, $1,000 Community bonds on January 1,
2013 for $61,250. This includes a brokerage commission of $1,250.
The journal entry to record this investment includes a debit to
Debt Investments for $60,000.
Debt Investments for $61,250.
Cash for $61,250.
Stock Investments for $60,000.
Ans:LO: 2, Bloom: AP, Difficulty: Hard, Min: 2, AACSB: None, AICPA BB:
FSA
2013 for $61,250. This includes a brokerage commission of $1,250.
Assume Community pays interest on January 1 and July 1, and the July 1 entry was
made correctly. The journal entry at December 31, 2013 would include a credit to
Interest Receivable for $3,000.
Interest Revenue for $6,000.
Accrued Expense for $6,000.
Interest Revenue for $3,000.
FSA
2013 for $61,250. This includes a brokerage commission of $1,250. If Key sells all of
its Community bonds for $62,500 and pays $1,500 in brokerage commissions, what
gain or loss is recognized?
Gain of $2,500
Loss of $250
Gain of $250
Gain of $1,250

FSA
Locke Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus
brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The
entry to record the July 1 semiannual interest payment would include a
debit to Interest Receivable for $1,500.
credit to Interest Revenue for $1,500.
credit to Debt Investments for $1,515.
Ans:LO: 2, Bloom: K, Difficulty: Medium, Min: 2, AACSB: None, AICPA BB:
FSA
Locke Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus
brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The
entry to record the December 31 interest accrual would include a
debit to Interest Receivable for $1,500.
debit to Interest Revenue for $1,500.
debit to Debt Investments for $1,500.
FSA
Temper Co. purchased 60, 6% Irick Company bonds for $60,000 cash plus brokerage
fees of $600. Interest is payable semiannually on July 1 and January 1. If 30 of the
securities are sold on July 1 for $32,000 less $300 brokerage fees, the entry would
include a credit to Gain on Sale of Debt Investments for
$2,000.
$1,700.
$2,300.
$1,400.
FSA

On January 1, Bacon Company purchased as an investment a $1,000, 7% bond for
$1,020. The bond pays interest on January 1 and July 1. What is the entry to record
the interest accrual on December 31?
Interest Revenue .......................................................... 35
Debt Investments .................................................................. 35
Debt Investments .................................................................. 70
FSA
Eck Corporation sells 250 shares of common stock being held as an investment. The
shares were acquired six months ago at a cost of $25 a share. Eck sold the shares for
$40 a share. The entry to record the sale is
Cash....................................................................................... 6,250
Loss on Sale of Stock Investments ...................................... 3,750
Stock Investments ........................................................ 10,000
Stock Investments ................................................................. 10,000
Cash ............................................................................. 10,000
Cash....................................................................................... 10,000
Gain on Sale of Stock Investments .............................. 3,750
Cash....................................................................................... 10,000
FSA

White Corporation sells 300 shares of common stock being held as an investment.
The shares were acquired six months ago at a cost of $60 a share. White sold the
shares for $40 a share. The entry to record the sale is
Cash....................................................................................... 12,000
Cash....................................................................................... 18,000
Gain on Sale of Stock Investments .............................. 6,000
Cash....................................................................................... 12,000
Stock Investments ................................................................. 12,000
Cash.............................................................................. 18,000
FSA
Tan Company had these transactions pertaining to stock investments:
Feb. 1 Purchased 3,000 shares of Norton Company (10%) for $48,800 cash plus
brokerage fees of $1,400.
June 1 Received cash dividends of $2 per share on Norton stock.
Oct. 1 Sold 1,200 shares of Norton stock for $24,000 less brokerage fees of $600.
The entry to record the purchase of the Norton stock would include a
debit to Stock Investments for $48,800.
credit to Cash for $48,800.
debit to Investment Expense for $1,400.
FSA

The entry to record the receipt of the dividends on June 1 would include a
credit to Dividend Revenue for $9,000.
debit to Dividend Revenue for $9,000.
credit to Stock Investments for $9,000.
FSA
The entry to record the sale of the stock would include a
debit to Cash for $24,000.
credit to Gain on Sale of Stock Investments for $1,200.
credit to Gain on Sale of Stock Investments for $3,000.
FSA
Wise Company owns 30% interest in the stock of Dark Corporation. During the year,
Dark pays $20,000 in dividends to Wise, and reports $200,000 in net income. Wise
Company’s investment in Dark will increase Wise’s net income by

$6,000.
$60,000.
$66,000.
$80,000.
Reporting
Nickel Company owns 30% interest in the stock of Finn Corporation. During the year,
Finn pays $25,000 in dividends, and reports $200,000 in net income. Nickel
Company’s investment in Finn will increase by
$25,000.
$60,000.
$67,500.
$52,500.
FSA
On January 1, 2013, Great Corporation purchased 25% of the common stock
outstanding of Long Corporation for $250,000. During 2013, Long Corporation
reported net income of $80,000 and paid cash dividends of $40,000. The balance of
the Stock Investments—Long account on the books of Great Corporation at
December 31, 2013 is
$250,000.
$290,000.
$330,000.
$260,000.
Reporting
Dayton Corporation purchased 1,000 shares of Kart common stock at $77 per share
plus $2,000 brokerage fees as a short-term investment. The shares were subsequently
sold at $80 per share less $3,400 brokerage fees. The cost of the securities purchased
and gain or loss on the sale were
Cost Gain or Loss
$77,000 $3,000 gain
$77,000 $1,400 loss

$79,000 $2,000 gain
$79,000 $2,400 loss
Reporting
In accounting for stock investments between 20% and 50%, the _______ method is
used.
consolidated statements
controlling interest
cost
equity
When a company holds stock of several different corporations, the group of securities
is identified as a(n)
affiliated investment.
consolidated portfolio.
investment portfolio.
controlling interest.
Legal/Regulatory, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting
Jerome Corporation makes a short-term investment in 160 shares of Singer
Company's common stock. The stock is purchased for $50 a share plus brokerage fees
of $550. The entry for the purchase is
Debt Investments................................................................... 8,000
Cash.............................................................................. 8,000
Stock Investments.................................................................. 8,550
Cash.............................................................................. 8,550
Brokerage Fee Expense........................................................ 550
Cash.............................................................................. 8,550

Cash.............................................................................. 8,000
FSA
Cooke Corporation sells 400 shares of common stock being held as a short-term
investment. The shares were acquired six months ago at a cost of $55 a share. Cooke
sold the shares for $40 a share. The entry to record the sale is
Cash....................................................................................... 16,000
Loss on Sale of Stock Investments....................................... 6,000
Stock Investments......................................................... 22,000
Cash....................................................................................... 22,000
Gain on Sale of Stock Investments............................... 6,000
MC 69. (cont.)
Cash....................................................................................... 16,000
Loss on Sale of Stock Investments....................................... 6,000
Cash.............................................................................. 22,000
FSA
For accounting purposes, the method used to account for long-term investments in
common stock is determined by
the amount paid for the stock by the investor.
the extent of an investor's influence on the operating and financial affairs of the
investee.
whether the stock has paid dividends in past years.

whether the acquisition of the stock by the investor was "friendly" or "hostile."
If an investor owns less than 20% of the common stock of another corporation as a
long-term investment,
the equity method of accounting for the investment should be employed.
no dividends can be expected.
it is presumed that the investor has relatively little influence on the investee.
it is presumed that the investor has significant influence on the investee.
If the cost method is used to account for a long-term investment in common stock,
dividends received should be
credited to the Stock Investments account.
credited to the Dividend Revenue account.
debited to the Stock Investments account.
recorded only when 20% or more of the stock is owned.
If 10% of the common stock of an investee company is purchased as a long-term
investment, the appropriate method of accounting for the investment is
the cost method.
the equity method.
the preparation of consolidated financial statements.
determined by agreement with whomever owns the remaining 90% of the stock.
The cost method of accounting for long-term investments in stock should be
employed when the
investor owns more than 50% of the investee's stock.

investor has significant influence on the investee and the stock held by the investor
are marketable equity securities.
market value of the shares held is greater than their historical cost.
investor's influence on the investee is insignificant.
When an investor owns between 20% and 50% of the common stock of a corporation,
it is generally presumed that the investor
has insignificant influence on the investee and that the cost method should be used to
account for the investment.
should apply the cost method in accounting for the investment.
will prepare consolidated financial statements.
has significant influence on the investee and that the equity method should be used to
account for the investment.
Under the equity method of accounting for long-term investments in common stock,
when a dividend is received from the investee company,
the Dividend Revenue account is credited.
the Stock Investments account is increased.
the Stock Investments account is decreased.
no entry is necessary.
On January 1, 2013, Dart Corporation purchased 30% of the common stock
outstanding of Run Corporation for $700,000. During 2013, Run Corporation reported
net income of $200,000 and paid cash dividends of $100,000. The balance of the
Stock Investments—Run account on the books of Dart Corporation at December 31,
2013 is
$700,000.
$730,000.
$760,000.
$670,000.

Reporting
Under the equity method, the Stock Investments account is increased when the
investee company reports net income.
investee company pays a dividend.
investee company reports a loss.
stock investment is sold at a gain.
The account, Stock Investments, is
a subsidiary ledger account.
a long-term liability account.
a general ledger control account.
another name for Debt Investments.
Which of the following would not be considered a motive for making a stock
investment in another corporation?
Appreciation in the market value of the stock investment
Use of the investment for expanding its own operations
Use of the investment to diversify its own operations
An increase in the amount of interest revenue from the stock investment
Economics
Revenue is recognized when cash dividends are received under
the controlling interest method.
the cost method.
the equity method.
both the cost and equity methods.

Which of the following is the correct matching concerning an investor's influence on
the operations and financial affairs of an investee?
% of Investor Ownership Presumed Influence
Less than 20% Short-term
Between 20%-50% Significant
More than 50% Long-term
Between 20%-50% Controlling
Which of the following is the correct matching concerning the appropriate accounting
for long-term stock investments?
% of Investor Ownership Accounting Guidelines
Less than 20% Cost method
Between 20%–50% Cost method
More than 50% Cost or equity method
Between 20%–50% Consolidated financial statements
If the cost method is used to account for a long-term investment in common stock,
it is presumed that the investor has significant influence on the investee.
the earning of net income by the investee is considered a proper basis for recognition
of income by the investor.
net income of the investee is not considered earned by the investor until dividends are
declared by the investee.
the Investment account may be, at times, greater than the acquisition cost.
If a company acquires a 40% common stock interest in another company,
the equity method is usually applicable.

all influence is classified as controlling.
the cost method is usually applicable.
the ability to exert significant influence over the activities of the investee does not
exist.
If a common stock investment is sold at a gain, the gain
is reported as operating revenue.
is reported under a special section, "Discontinued investments," on the income
statement.
is reported in the Other revenues and gains section of the income statement.
contributes to gross profit on the income statement.
If the equity method is being used, cash dividends received
are credited to Dividend Revenue.
require no entry because investee net income has already been recorded at the proper
proportion on the investor's books.
are credited to the Stock Investments account.
are credited to the Revenue from Stock Investments account.
If the equity method is being used, the Revenue from Stock Investments account is
just another name for a Dividend Revenue account.
credited when dividends are declared by the investee.
credited when net income is reported by the investee.
debited when dividends are declared by the investee.

Under the equity method, the Stock Investments account is credited when the
investee reports net income.
investee reports a net loss.
investment is originally acquired.
investee reports net income and when the investment is originally acquired.
On August 1, Mistery Company buys 2,000 shares of ABC common stock for
$70,000 cash plus brokerage fees of $2,200. On December 1, the stock investments
are sold for $76,000 in cash. Which of the following are the correct journal entries to
record for the purchase and sale of the common stock?
Aug. 1 Cash........................................................ 72,200
Stock Investments............................. 72,200
Dec. 1 Cash........................................................ 76,000
Gain on Sale of Stock Investments 3,800
Aug. 1 Stock Investments................................... 72,200
Cash.................................................. 72,200
Dec. 1 Cash........................................................ 76,000
Aug. 1 Stock Investments................................... 72,200
Cash.................................................. 72,200
Dec. 1 Stock Investments................................... 76,000
Cash.................................................. 72,200

Aug. 1 Cash........................................................ 72,200
Cash.................................................. 72,200
FSA
Laramie industries owns 45% of McCook Company. For the current year, McCook
reports net income of $250,000 and declares and pays a $60,000 cash dividend.
Which of the following correctly presents the journal entries to record Laramie's
equity in McCook's net income and the receipt of dividends from McCook?
Revenue from Stock Investments …. 112,500
Dec. 31 Cash......................................................... 27,000
Stock Investments............................... 27,000
MC 91. (cont.)
Dec. 31 Stock Investments.................................... 112,500
Revenue from Stock Investments …. 112,500
Dec. 31 Cash.......................................................... 60,000
Stock Investments................................ 60,000
Revenue from Stock Investments … 85,500
Dec. 31 Revenue from Stock Investments ………. 112,500
Stock Investments........................... 112,500
Dec. 31 Stock Investments.................................... 27,000
Cash.................................................. 27,000

FSA
On January 1, 2013, Audrey Corp. paid $800,000 for 100,000 shares of Off
Company's common stock, which represents 40% of Off's outstanding common stock.
Off reported net income of $200,000 and paid cash dividends of $60,000 during 2013.
Audrey should report the investment in Off Company on its December 31, 2013,
balance sheet at:
$800,000
$744,000
$824,000
$856,000
Reporting
Mission Inc. earns $600,000 and pays cash dividends of $150,000 during 2013. Cox
Corporation owns 70,000 of the 210,000 outstanding shares of Mission.
What amount should Cox show in the investment account at December 31, 2013 if the
beginning of the year balance in the account was $40,000?
$190,000
$200,000
$175,000
$180,000
Reporting
Mission Inc. earns $450,000 and pays cash dividends of $150,000 during 2013. Cox
Corporation owns 70,000 of the 210,000 outstanding shares of Mission.
How much revenue from investment should Cox report in 2013?
$50,000
$100,000
$150,000

$200,000
Reporting
On January 1, 2013, Dumar Industries acquired a 15% interest in Virginia
Corporation through the purchase of 12,000 shares of Virginia Corporation common
stock for $240,000. During 2013, Virginia Corp. paid $60,000 in dividends and
reported a net loss of $90,000. Dumar is able to exert significant influence on
Virginia. However, Dumar mistakenly records these transactions using the cost
method rather than the equity method of accounting. Which of the following would
show the correct presentation for Dumar's investment using the equity method?
Investment Net
Account Earnings (loss)
$90,000 ($30,000)
$217,500 ($13,500)
$226,500 ($13,500)
$226,500 ($4,500)
Reporting
Consolidated financial statements are prepared when a company owns _________ of
the common stock of another company.
less than 20%
between 20% and 50%
less than 50%
more than 50%
Consolidated financial statements present all of the following except the
individual assets and liabilities of the parent company
individual assets and liabilities of the subsidiary.
total revenues and expenses of the subsidiary.
All of these are presented in consolidated financial statements.

The company whose stock is owned by the parent company is called the
controlled company.
subsidiary company.
investee company.
sibling company.
A company that owns more than 50% of the common stock of another company is
known as the
charge company.
subsidiary company.
parent company.
management company.
If one company owns more than 50% of the common stock of another company,
the cost method should be used to account for the investment.
a partnership exists.
a parent-subsidiary relationship exists.
the company whose stock is owned must be liquidated.
If a parent company has two wholly owned subsidiaries, how many legal and
economic entities are there from the viewpoint of the shareholders of the parent
company?
Legal Economic
3 3

1 2
3 1
2 1
When a company owns more than 50% of the common stock of another company,
affiliated financial statements are prepared.
consolidated financial statements are prepared.
controlling financial statements are prepared.
significant financial statements are prepared.
Changes from cost are reported as part of net income for
non-trading securities.
held-for-collection securities.
debt securities.
trading securities.
Short-term investments are listed on the balance sheet immediately below
cash.
inventory.
accounts receivable.
prepaid expenses.
Short-term stock investments should be valued on the balance sheet at
the lower of cost or fair value.
the higher of cost or fair value.
cost.
fair value.

In recognizing a decline in the fair value of short-term stock investments, an
unrealized loss account is debited because
management intends to realize this loss in the near future.
the securities have not been sold.
the stock market is volatile.
management cannot determine the exact amount of the loss in value.
The Fair Value Adjustment account
is set up for each security in the company's portfolio.
relates to the entire portfolio of securities held by the company.
is closed at the end of each accounting period.
appears on the income statement as Other Expenses and Losses.
The contra-account, Fair Value Adjustment, is also called a(n)
offset account.
adjustment account.
valuation account.
opposite account.
Reporting investments at fair value is
applicable to stock securities only.
applicable to debt securities only.
applicable to both debt and stock securities.
a conservative approach because only losses are recognized.

Randy Corporation's trading portfolio at the end of the year is as follows:
Security Cost Fair Value
Common Stock A $10,000 $12,000
Common Stock B 8,000 5,000
$18,000 $17,000
At the end of the year, Randy Corporation should
set up a Fair Value Adjustment account for Stock B.
set up a Fair Value Adjustment account for the portfolio.
recognize an Unrealized Gain or Loss—Income for $3,000.
report a loss on the income statement for $3,000 under "Other expenses and losses."
Reporting
Randy Corporation's trading portfolio at the end of the year is as follows:
Common Stock A $10,000 $12,000
Common Stock B 9,000 5,000
$19,000 $17,000
Randy subsequently sells Stock B for $10,000. What entry is made to record the sale?
Cash....................................................................................... 10,000

Cash....................................................................................... 10,000
Market Adjustment........................................................ 1,000
Cash....................................................................................... 10,000
Cash....................................................................................... 10,000
Reporting
Which of the following would not be reported under "Other Revenues and Gains" on
the income statement?
Unrealized gain on non-trading securities
Dividend revenue
Interest revenue
Gain on sale of short-term debt investments
The balance in the Unrealized Loss—Equity account will
appear on the balance sheet as a contra asset.
appear on the income statement under Other Expenses and Losses.
appear as a deduction in the stockholders' equity section.
not be shown on the financial statements until the securities are sold.
If the cost of a non-trading security exceeds its fair value by $40,000, the entry to
recognize the loss
is not required since the share prices will likely rebound in the long run.
will show a debit to an expense account.

will show a credit to a contra-asset account that appears in the stockholders' equity
section of the balance sheet.
will show a debit to an unrealized loss account that is deducted in the stockholders'
equity section of the balance sheet.
Ans:LO: 5, Bloom: C, Difficulty: Medium, Min: 1, AACSB: None, AICPA BB:
FSA
The balance sheet presentation of an unrealized loss on a non-trading security is
similar to the statement presentation of
treasury stock.
discount on bonds payable.
allowance for doubtful accounts.
prepaid expenses.
At the end of its first year, the trading securities portfolio consisted of the following
common stocks.
Cost Fair Value
Atrium Corporation $ 46,400 $ 50,000
Barnes Inc. 60,000 57,000
Cantor Corporation 80,000 76,000
$186,400 $183,000
The unrealized loss to be recognized under the fair value method is
$3,000.
$6,000.
$3,400.
$4,000.
Ans:LO: 5, Bloom: K, Difficulty: Hard, Min: 5, AACSB: None, AICPA BB:
FSA

At the end of its first year, the trading securities portfolio consisted of the following
common stocks.
Cost Fair Value
Atrium Corporation $ 46,400 $ 50,000
Barnes Inc. 60,000 55,800
Cantor Corporation 80,000 76,000
$186,400 $181,800
In the following year, the Barnes common stock is sold for cash proceeds of $56,000.
The gain or loss to be recognized on the sale is a
gain of $1,200.
loss of $4,000.
gain of $200.
loss of $4,200.
FSA
At the end of the first year of operations, the total cost of the trading securities
portfolio is $244,000. Total fair value is $250,000. The financial statements should
show
an addition to an asset of $6,000 and a realized gain of $6,000.
an addition to an asset of $6,000 and an unrealized gain of $6,000 in the stockholders’
equity section.
an addition to an asset of $6,000 in the current assets section and an unrealized gain of
$6,000 in “Other revenues and gains.”
an addition to an asset of $6,000 in the current assets section and a realized gain of
$6,000 in “Other revenues and gains.”
Ans:LO: 5, Bloom: K, Difficulty: Hard, Min: 3, AACSB: None, AICPA BB:
Reporting

Nadia Corp. has common stock of $5,500,000, retained earnings of $3,000,000,
unrealized gains on trading securities of $100,000 and unrealized losses on non-
trading securities of $200,000. What is the total amount of its stockholders’ equity?
$8,300,000
$8,500,000
$8,400,000
$8,600,000
Reporting
Cost and fair value data for the trading securities of Carson Company at December
31, 2013, are $115,000 and $85,000, respectively. Which of the following correctly
presents the adjusting journal entry to record the securities at fair value?
Dec. 31 Unrealized Loss¾Income..................... 30,000
Trading Securities........................... 30,000
Dec. 31 Unrealized Gain¾Income....................... 30,000
Trading Securities............................ 30,000
Dec. 31 Unrealized Loss¾Income...................... 30,000
Fair Value Adjustment¾Trading...... 30,000
Dec. 31 Fair Value Adjustment -Trading............. 30,000
Unrealized Gain-Income................... 30,000
FSA
At December 31, 2013, the trading securities for Settle, Inc. are as follows:
Security Cost Fair Value 12/31/13
X $90,000 $93,000
Y 150,000 141,000
Z 32,000 29,000

Settle should report the following amount related to the securities in its 2013 income
statement:
$3,000 gain
$9,000 realized loss.
$9,000 unrealized loss.
$12,000 unrealized loss.
Reporting
At December 31, 2013, Gammon Inc. has these data on its security investments:
Security Cost Fair Value 12/31/13
Trading $ 140,000 $192,000
Non-trading 137,000 125,000
MC 122. (cont.)
If the non-trading securities are held as long-term investments, which of the following
will be recorded to adjust the securities to fair value?
Securities.......................................................... 40,000
Unrealized Gain¾Income........................... 40,000
Unrealized Loss¾Income.................................. 12,000
Securities........................................................... 40,000

Fair Value Adjustment¾Trading........................ 52,000
Unrealized Gain or Loss¾Equity....................... 12,000
Fair Value Adjustment¾Non-Trading........ 12,000
Unrealized Gain¾Income................................... 52,000
Fair Value Adjustment¾Trading................ 52,000
Fair Value Adjustment¾Non-Trading................. 12,000
Unrealized Gain or Loss¾Equity................ 12,000
FSA
On September 19, 2013, Fowler Corporation invested $800,000 in common stock of
Norton Industries as short-term trading securities. The fair value of this investment
was $775,000 at December 31, 2013. In financial statements and records prepared on
December 31, 2013, Fowler Corporation reports Stock Investments
at $800,000 cost, with footnote disclosure of the fair value of $775,000.
under current assets at $775,000 fair value in the balance sheet, and a $25,000
Unrealized Loss reported under Other Expenses and losses in the income statement.
at $800,000 cost in the balance sheet, and a $25,000 debit to Fair Value Adjustment–
Trading in the adjusting entry.
at $800,000 cost, and a $25,000 Unrealized Loss included in the balance sheet as part
of stockholders’ equity
FSA
On September 30, 2013, Fowler Corporation invested $800,000 in common stock of
Mallard Industries as short-term non-trading securities. The market value of this
investment was $830,000 at December 31, 2013, but had slipped to $825,000 by
December 31, 2014. Assuming Fowler does not sell this investment and last adjusted
the investment when preparing the financial statements on December 31, 2013, the
adjustment necessary at December 31, 2014, includes a(an)
$5,000 debit to Unrealized Gain or Loss-Equity.

$25,000 credit to Unrealized Gain or Loss-Equity.
$5,000 debit to Stock Investments.
$825,000 debit to Fair Value Adjustment-Non-Trading
FSA
Gorman Corporation has the following trading portfolio of stock investments as of
December 31, 2013.
A $21,000 $19,000
B 19,000 25,000
C 37,000 31,000
$77,000 $75,000
On January 22, 2014, Gorman Corporation sold security C for $32,000. Assuming
that Gorman made the proper adjustments when closing its books on December 31,
2013, the journal entry for the 2014 sale would include a
debit to Loss on Sale of Stock Investments for $5,000.
credit to Unrealized Gain–Income for $1,000.
debit to Unrealized Loss–Income for $5,000.
credit to Fair Value Adjustment–Trading for $32,000.
FSA
Cosmic Company has the following data at December 31, 2013 for its securities:
Securities Cost Fair Value
Non-trading $46,000 $48,000
Trading 65,000 61,000
Based on this information, the adjusting entry to report the securities at fair value at
December 31, 2013 will include a

debit to Unrealized Gain or Loss–Equity for $4,000.
credit to Unrealized Gain or Loss–Equity for $2,000.
credit to Fair Value Adjustment–Non-Trading for $4,000.
debit to Fair Value Adjustment–Trading for $4,000.
FSA
Benton Company has the following data at December 31, 2013 for its securities:
Securities Cost Fair Value
Trading $80,000 $82,000
Non-trading 94,000 91,000
On the financial statements, which of the following correctly explains the presentation
of the related unrealized gain (loss) for these securities?
An unrealized gain of $2,000 will be reported on the income statement under other
revenues and gain.
An unrealized loss of $3,000 will be reported on the income statement under other
revenues and gain.
An netted unrealized loss of $1,000 will be reported on the income statement under
other revenues and gain.
An unrealized gain of $2,000 will be reported on the balance sheet as part of
stockholders’ equity.
FSA
All of the following statements about short-term investments are true except:
Short-term investments are also called marketable securities
Trading securities are always classified as short-term investments.
Short-term investments are listed below accounts receivable in the current asset
section of the balance sheet.
Short-term assets must be readily marketable.

Non-trading securities are classified as
short-term investments only.
long-term investments only.
either short-term or long-term investments.
current assets only.
Which one of the following would not be classified as a short-term investment?
Marketable stock securities
Equity method investments
Marketable debt securities
Short-term paper
Short-term investments are securities that are readily marketable and intended to be
converted into cash within the next
year.
two years.
year or operating cycle, whichever is shorter.
year or operating cycle, whichever is longer.
Resource Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business
Economics
Which of the following would not be classified as a short-term investment?
Short-term commercial paper
Idle cash in a bank checking account
Marketable stock securities
Marketable debt securities

If a parent company acquires wholly owned subsidiary at an amount greater than the
book value, the excess should be
allocated to expense on the date of acquisition.
allocated to identifiable assets to the extent of their fair values, with any remainder
allocated to goodwill.
allocated to goodwill, with any remainder allocated to the identifiable assets.
set up as a liability to the controlling interest.
The consolidated worksheet shows Excess of Cost Over Book Value of Subsidiary of
$210,000. Management of the parent company determines that the market values for
subsidiary company plant assets are $90,000 higher than book values. In the
consolidated balance sheet, goodwill will be reported at
$210,000.
$120,000.
$90,000.
$0.
Daniel Corporation acquired 100% of the common stock of Tysen Company for
$1,100,000. On the date of acquisition, Tysen Company’s stockholders’ equity
consisted of: Common Stock, $530,000; Retained Earnings, $410,000. The
intercompany elimination to be made on a worksheet to prepare a consolidated
balance sheet is
a... Common Stock–Tysen...................................................... 530,000
..... Retained Earnings–Tysen................................................ 410,000
Investment in Tysen Stock......................................... 940,000
b... Investment in Tysen Stock............................................... 1,100,000
Cash........................................................................... 1,100,000
c... Common Stock–Daniel...................................................... 530,000

..... Retained Earnings–Daniel................................................. 410,000
..... Goodwill........................................................................... 160,000
Investment in Tysen Stock......................................... 1,100,000
d... Common Stock–Tysen...................................................... 530,000
..... Retained Earnings–Tysen................................................ 410,000
..... Excess of Cost Over Book Value of Subsidiary.............. 160,000
Investment in Tysen Stock......................................... 1,100,000
A consolidated income statement will show
revenue and expense transactions between the consolidated entity and parties outside
the affiliated group.
only the parent company’s net income.
only the income of partially owned subsidiaries.
only the income of wholly owned subsidiaries.
Ans:LO: 7, Bloom: k, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:
When preparing a consolidated income statement,
only the revenues and expenses of the parent company are presented.
the income from partially owned subsidiaries is excluded.
all revenue and expense transactions between the parent and subsidiaries must be
eliminated.
intercompany transactions between affiliated companies do not have to be eliminated.
Ans:LO: 7, Bloom: k, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB:
Which of the following reasons best explains why a company that experiences
seasonal fluctuations in sales may purchase investments in debt or stock securities?

The company may have excess cash.
The company may generate a significant portion of its earnings from investment
income.
The company may invest for the strategic reason of establishing a presence in a
related industry.
The company may invest for speculative reasons to increase the value in pension
funds.
Legal/Regulatory, AICPA FN: Risk Analysis, AICPA PC: Problem Solving, IMA:
Business Economics
When bonds are sold, the gain or loss on sale is the difference between the
sales price and the cost of the bonds.
net proceeds and the cost of the bonds.
sales price and the fair value of the bonds.
net proceeds and the fair value of the bonds.
Debt investments are recorded at the
face value of the bonds purchased.
face value of the bonds purchased plus interest.
price paid for the bonds plus interest.
price paid for the bonds plus brokerage fees.
Under the equity method, the investor records dividends received by crediting
Dividend Revenue.
Investment Income.
Revenue from Investment.
Stock Investments.

A company that acquires less than 20% ownership interest in another company should
account for the stock investment in that company using
the cost method.
the equity method.
the significant method.
consolidated financial statements.
The equity method of accounting for an investment in the common stock of another
company should be used by the investor when the investment
is composed of common stock and it is the investor's intent to vote the common stock.
ensures a source of supply of raw materials for the investor.
enables the investor to exercise significant influence over the investee.
is obtained by an exchange of stock for stock.
On January 2, Dickson Corporation acquired 30% of the outstanding common stock
of Crane Company for $550,000. For the year ended December 31, Crane reported net
income of $90,000 and paid cash dividends of $30,000 on its common stock. At
December 31, the carrying value of Dickson's investment in Crane under the equity
method is
$541,000.
$550,000.
$577,000.
$568,000.
Reporting
An unrealized loss on non-trading securities is
reported under Other Expenses and Losses in the income statement.
closed-out at the end of the accounting period.
reported as a separate component of stockholders' equity.
deducted from the cost of the investment.

Securities bought and held primarily for sale in the near term to generate income on
short-term price differences are
trading securities.
non-trading securities.
never-sell securities.
held-for-collection securities.
Short-term investments are
(1) readily marketable and (2) intended to be converted into cash after the current year
or operating cycle, whichever is shorter.
(1) readily marketable and (2) intended to be converted into cash within the current
year or operating cycle, whichever is longer.
(1) readily marketable and (2) intended to be converted into cash after the current year
or operating cycle, whichever is longer.
(1) readily marketable and (2) intended to be converted into cash within the current
year or operating cycle, whichever is shorter.
Economics
Short-term investments are securities held by a company that are
readily marketable.
intended to be converted into cash within the next year.
readily marketable and intended to be converted into cash within the next year or
operating cycle, whichever is longer.
readily marketable and intended to be held until maturity.
Economics

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