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Financial Accounting Horngren 10th Edition Test Bank

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Financial Accounting, 10e (Harrison/Horngren/Thomas)
Chapter 8 Long-Term Investments & the Time Value of Money

8.1 Learning Objective 8-1

1) Investments are classified as available-for-sale securities, trading securities or held-to-maturity securities.
Diff: 1
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

2) An investment is a held-to-maturity investment in bonds if it is managements intent to sell the investment before the maturity date.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

3) If the stated rate of interest on a bond exceeds the market rate of interest, the bond will sell at a premium.
Diff: 1
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

4) The stated interest rate on a bond determines the amount of interest the issuer is expected to pay annually or semiannually.
Diff: 1
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) The market prices of bonds fluctuate inversely with market interest rates.
Diff: 1
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
6) If the market interest rate is greater than the coupon rate of interest on a bond, the bond will sell at a discount.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7) If bonds are issued at a premium, the carrying amount of the bonds will be greater than the face value of the bonds until the maturity date.
Diff: 3
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8) If \$100,000 face value bonds are issued at 103, the bonds are selling for \$103,000.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9) Bond investments are initially recorded at cost.
Diff: 3
LO: 8-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

10) The carrying amount of bonds at maturity should be equal to the face value of the bonds.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) On the balance sheet, Interest Receivable is reported as a long-term asset.
Diff: 1
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
12) Marathon Corporation owns 500 shares of Mini Companys common stock. Mini Company has 100,000 shares of common stock outstanding. Marathon Corporation is the ________ and Mini Company is the ________.
A) investee; investor
B) investor; investee
C) parent company; subsidiary company
D) controlling company; noncontrolling company
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

13) When an investment is readily convertible to cash and the investor plans to convert the investment to cash within one year, the investment is reported on the balance sheet as:
A) a current asset.
B) a long-term asset.
C) stockholders equity.
D) a cash equivalent.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

14) On January 1, 2015, Dodge Company purchases \$100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2025. Dodge Company intends to hold the bonds until their maturity date. Interest is paid semiannually, on January 1 and July 1. Dodge Company has a calendar year end. The entry to record the purchase of the bond investment on January 1, 2015, is:
A) debit Held-to-Maturity Investment in Bonds for \$100,000 and credit Cash for \$100,000.
B) debit Held-to-Maturity Investment in Bonds for \$90,400 and credit Cash for \$90,400.
C) debit Cash for \$100,000 and credit Bonds Payable for \$100,000.
D) debit Cash for \$90,400 and credit Investment in Bonds for \$90,400.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
15) On January 1, 2015, Dooley Company purchases \$100,000, 6% bonds at a price of 90.4 and a maturity date of January 1, 2025. Dooley Company intends to hold the bonds until their maturity date. Interest is paid semiannually, on January 1 and July 1. Dooley Company has a calendar year end. The entry for the receipt of interest on July 1, 2015 is:
A) debit Cash for \$3,000 and credit Interest Revenue for \$3,000.
B) debit Cash for \$6,000 and credit Interest Revenue for \$6,000.
C) debit Investment in Bonds for \$3,000 and credit Interest Revenue for \$3,000.
D) debit Investment in Bonds for \$6,000 and credit Interest Revenue for \$6,000.
Explanation: A) \$100,000 6% 1/2 = \$3,000
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) On January 1, 2015, Corbin Company purchases \$100,000, 5% bonds at a price of 99 and a maturity date of January 1, 2025. Corbin Company intends to hold the bonds until their maturity date. Interest is paid semiannually, on January 1 and July 1. Corbin Company has a calendar year end. The entry to amortize the bond investment on July 1, 2015 is:
A) debit Held-to-Maturity Investment in Bonds for \$50 and credit Interest Receivable for \$50.
B) debit Cash for \$100 and credit Interest Revenue for \$100.
C) debit Held-to-Maturity Investment in Bonds for \$50 and credit Interest Revenue for \$50.
D) debit Held-to-Maturity Investment in Bonds for \$100 and credit Interest Revenue for \$100.
Explanation: C) 1% \$100,000 = \$1,000
\$1,000 20 = \$50
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

17) On January 1, 2015, Benson Company purchases \$100,000, 6% bonds at a price of 95 and a maturity date of January 1, 2020. Benson Company plans to hold the bonds until their maturity date. Interest is paid semiannually, on January 1 and July 1. Benson Company has a calendar year end. The adjusting entry on December 31, 2015 is:
A) debit Cash \$3,000 and credit Interest Revenue \$3,000.
B) debit Cash \$6,000 and credit Interest Revenue \$6,000.
C) debit to Interest Receivable \$3,000, debit Held-to-Maturity Investment in Bonds for \$500 and credit Interest Revenue \$3,500.
D) debit to Interest Receivable \$6,000 and credit Interest Revenue \$6,000.
Explanation: C) \$100,000 6% 1/2 = \$3,000
5% \$100,000 = \$5,000 10 = \$500
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
18) On January 1, 2015, Brooklyn Company purchases \$100,000, 6% bonds at a price of 95 and a maturity date of January 1, 2025. Brooklyn Company intends to hold the bonds until maturity. Interest is paid semiannually, on January 1 and July 1. Brooklyn Company has a calendar year end. The adjusting entry to amortize the bond investment on December 31, 2015 is:
A) debit Interest Receivable \$3,000 and credit Interest Revenue \$3,000.
B) debit Interest Receivable \$6,000 and credit Interest Revenue \$6,000.
C) debit Held-to-Maturity Investment in Bonds \$250 and credit Interest Revenue \$250.
D) debit Held-to-Maturity Investment in Bonds \$500 and credit Interest Revenue \$500.
Explanation: C) Discount: 5% \$100,000 = \$5,000
Amortization of discount: \$5,000 20 = \$250
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

19) On January 1, 2015, Centre Company purchases \$100,000, 6% bonds at a price of 95 and a maturity date of January 1, 2025. Centre Company intends to hold the bonds until the maturity date. Interest is paid semiannually, on January 1 and July 1. Centre Company has a calendar year end. The journal entry on January 1, 2016 is:
A) debit Cash \$6,000 and credit Interest Revenue \$6,000.
B) debit Cash \$6,000 and credit Interest Receivable \$6,000.
C) debit Cash \$3,000 and credit Interest Revenue \$3,000.
D) debit Cash \$3,000 and credit Interest Receivable \$3,000.
Explanation: D) \$100,000 6% 1/2 = \$3,000
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

20) On January 1, 2014, Winston Company purchased 6% bonds with a face value of \$50,000 for par. Winston Company intends to hold the bonds until maturity. Interest is payable semiannually on July 1 and January 1. The companys fiscal year ends on December 31. The journal entry on July 1, 2014 is:
A) debit Cash \$3,000 and credit Interest Revenue \$3,000.
B) debit Cash \$1,500 and credit Interest Revenue for \$1,500.
C) debit Cash \$1,500 and credit Interest Receivable for \$3,000.
D) debit Cash \$3,000 and credit Interest Receivable for \$3,000.
Explanation: B) \$50,000 6% 1/2 = \$1,500
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
21) On January 1, 2014, Winston Company purchased 6% bonds with a face value of \$50,000 for par. Winston Company intends to hold the bonds until maturity. Interest is payable semiannually on July 1 and January 1. The companys fiscal year ends on December 31. The journal entry on December 31, 2014 is:
A) debit Interest Receivable for \$1,500 and credit Held-to-Maturity Investment in Bonds \$1,500.
B) debit Cash for \$1,500 and credit Interest Revenue for \$1,500.
C) debit Interest Receivable for \$1,500 and credit Interest Revenue for \$1,500.
D) debit Interest Receivable for \$3,000 and credit Held-to-Maturity Investment in Bonds \$3,000.
Explanation: C) \$50,000 6% 1/2 = \$1,500
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

22) On January 1, 2014, Bucket Company purchased as an investment a \$1,000, 7% bond for \$980. Bucket plans to hold the bond until the maturity date of January 1, 2024. The bond pays interest on January 1 and July 1. The companys fiscal year ends on December 31. The journal entry on December 31, 2014 is:
A) debit Interest Receivable for \$35, debit Held-to-Maturity Investment in Bond for \$1 and credit Interest Revenue for \$36.
B) debit Cash for \$35 and credit Interest Revenue for \$35.
C) debit Interest Receivable for \$36, credit Held-to-Maturity Investment in Bonds for \$1 and credit Interest Revenue for \$35.
D) debit Held-to-Maturity Investment in Bonds for \$35 and credit Interest Revenue for \$35.
Explanation: A) Interest: \$1,000 7% 1/2 = \$35
Discount: \$1,000 \$980 = \$20
Discount amortized: \$20 20 = \$1
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
23) On January 1, 2014, Pale Company purchased as an investment a \$1,000, 7% bond for \$760. Pale plans to hold the bond until the maturity date on January 1, 2024. The bond pays interest on January 1 and July 1. The companys fiscal year ends on December 31. The entries on December 31, 2014 would include a:
A) debit Interest Receivable for \$35.
B) debit Held-to-Maturity Investment in Bonds for \$35.
C) debit Interest Receivable for \$10.
D) debit Held-to-Maturity Investment in Bonds for \$10.
Explanation: A) \$1,000 7% 1/2 = \$35
Discount: \$1,000 \$760 = \$240
Discount amortized: \$240 20 = \$12
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

24) Held-to-maturity investments in bonds are initially reported at ________ on the purchase date. On a subsequent balance sheet date, the bonds are reported at ________.
A) cost; fair value.
B) amortized cost; fair value.
C) cost; amortized cost.
D) cost; lower of cost or market.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

25) On January 1, 2015, Carmody Corporation purchased 5% bonds with a face value of \$40,000 for \$42,000. Carmody Corporation intends to hold the bonds until the maturity date. Interest is paid semiannually on January 1 and July 1. The journal entry on January 1, 2015 is:
A) debit Held-to-Maturity Investment in Bonds for \$40,000, debit Premium on Bonds for \$2,000 and credit Cash for \$42,000.
B) debit Held-to-Maturity Investment in Bonds for \$42,000 and credit Cash for \$42,000.
C) debit Investment in Bonds for \$42,000 and credit Interest Revenue for \$42,000.
D) debit Investment in Bonds for \$40,000, debit Premium on Bonds for \$2,000 and credit Interest Revenue \$42,000.
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

26) On January 1, 2015, Carmello Corporation purchased 5% bonds with a face value of \$50,000 for \$42,000. Carmello Corporation intends to hold the bonds until the maturity date of January 1, 2025. Interest is paid semiannually on January 1 and July 1. What journal entry(ies) is(are) prepared on July 1, 2015?
A) debit Cash \$1,250 and credit Interest Receivable \$1,250
B) debit Cash \$2,500 and credit Interest Revenue \$2,500
C) debit Interest Receivable \$1,250 and credit Interest Revenue \$1,250; debit Held-to-Maturity Investment in Bonds \$400 and credit Interest Revenue \$400
D) debit Cash \$1,250 and credit Interest Revenue \$1,250; debit Held-to-Maturity Investment in Bonds \$400 and credit Interest Revenue \$400
Explanation: D) Interest: \$50,000 5% 1/2 = \$1,250
Discount: \$50,000 \$42,000 = \$8,000
Discount amortized: \$8,000 20 = \$400
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

27) Long-term investments include:
A) stocks and bonds.
B) securities that the investor expects to hold longer than one year.
C) securities reported in the noncurrent asset section of the balance sheet.
D) all of the above.
Diff: 2
LO: 8-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

28) An investor purchased bonds and intends to hold them until the maturity date which is 10 years into the future. The bonds were purchased at a discount. One year after purchase, this Held-to-Maturity Investment in Bonds will be reported at ________ on the balance sheet.
A) fair value
B) historical cost
C) lower of cost or market
D) amortized cost
Diff: 2
LO: 8-1
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

29) An investor purchased bonds and intends to hold them until the maturity date which is 10 years into the future. The bonds were purchased at a discount and pay interest semiannually. Which journal entry or entries is(are) needed at each interest date?
A) receipt of interest revenue only
B) amortization of bond discount only
C) amortization of bond premium only
D) A and B
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

30) On January 1, 2014, Exclusive Company purchases \$10,000 of 6% bonds in Smiley Company at a price of 95. Exclusive Company intends to hold the bonds until the maturity date on January 1, 2024. The interest dates are January 1 and July 1. Exclusive Company amortizes any discount or premium using the straight-line method. The fiscal year end of Exclusive Company is December 31.

Required:
Prepare the journal entries on:
1. January 1, 2014
2. July 1, 2014
3. December 31, 2014
4. January 1, 2015
Explanations are not required.

Date Accounts Debit Credit
1/1/2014 Held-to-Maturity Investment in Bonds 9,500
Cash 9,500

7/1/2014 Cash(\$10,000 3%) 300
Interest Revenue 300

7/1/2014 Held-to-Maturity Investment in Bonds 25
Interest Revenue 25
(\$10,000 0.05 1/20)

12/31/2014 Interest Receivable 300
Interest Revenue 300

12/31/2014 Held-to-Maturity Investment in Bonds 25
Interest Revenue 25

1/1/2015 Cash 300
Interest Receivable 300
Diff: 2
LO: 8-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8.2 Learning Objective 8-2

1) An investor has a long-term available-for-sale stock investment. The investor receives a stock dividend on the stock investment. No journal entry is necessary for the stock dividend.
Diff: 1
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
2) Unrealized Gain on Investment in Available-for-Sale Securities is reported as other comprehensive income on a Statement of Comprehensive Income.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

3) Long-term available-for-sale investments in stock are reported on the balance sheet at cost.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

4) Long-term available-for-sale investments are adjusted to fair value at the end of each accounting period.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) The Allowance to Adjust Investment in Available-for-Sale Securities to Market account is a liability account.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

6) Unrealized gains on investments in available-for-sale securities result from sales of the securities.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

7) The Allowance to Adjust Investment in Available-for-Sale Securities to Market account will always have a debit balance.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
8) Realized gains on the sale of long-term available-for-sale securities are reported as other comprehensive income on the Statement of Comprehensive Income.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

9) An investor should report securities that he or she intends to sell in the next 12 months, and that are liquid, as a current asset.
Diff: 1
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

10) Cash dividends received on stock investments with less than 20% ownership of the investee should be credited to the Investment in Available-for-Sale Securities account.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) A company purchased a long-term available-for-sale security at a cost of \$50,000. At year end, the fair value is \$50,290. The adjusting entry requires a credit to Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$290.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

12) On the purchase date, long-term available-for-sale equity securities are reported on the balance sheet at:
A) cost.
B) the lower-of-cost-or-market.
C) amortized cost.
D) fair value.
Diff: 1
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
13) On each balance sheet after the purchase date, long-term available-for-sale investments in stock are reported at:
A) cost.
B) the lower-of-cost-or-market.
C) amortized cost.
D) fair value.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

14) Purdue Company had the following transactions pertaining to stock investments:
a. February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of \$17 per share. Purdue Company intends to keep the stock for more than one year and classifies the stock as available-for-sale.
b. June 1, Received cash dividends of \$6,000 on Hudson Company stock.
c. October 1, Sold 3,000 shares of Hudson stock for \$54,000.

The journal entry to record the purchase of the Hudson stock is:
A) debit Equity-Method Investment for \$51,000 and credit Cash for \$51,000.
B) debit Investment in Available-for-Sale Securities for \$51,000 and credit Cash for \$51,000.
C) debit Cash for \$51,000 and credit Common Stock for \$51,000.
D) debit Common Stock for \$51,000 and credit Cash for \$51,000.
Explanation: B) 3,000 \$17 = \$51,000
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

15) Poultry Company had the following transactions pertaining to stock investments:
a. February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of \$17 per share. Poultry Company intends to keep the stock for more than one year and classifies the stock as available-for-sale.
b. June 1, Received cash dividends of \$0.50 per share on Hudson Company stock.
c. October 1, Sold 3,000 shares of Hudson stock for \$54,000.

What journal entry is prepared on June 1?
A) debit Cash \$1,500 and credit Interest Revenue \$1,500.
B) debit Cash \$3,000 and credit Long-Term Investment for \$3,000.
C) debit Interest Receivable for \$1,500 and credit Interest Revenue for \$1,500.
D) debit Cash \$1,500 and credit Dividend Revenue for \$1,500.
Explanation: D) 3,000 \$0.50 = \$1,500
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) Pansee Company had the following transactions pertaining to stock investments:
a. February 1, Purchased 3,000 shares of Hudson Company (10% ownership) at the market price of \$17 per share. Pansee Company intends to keep the stock for more than one year and classifies the stock as available-for-sale.
b. June 1, Received cash dividends of \$6,000 on Hudson Company stock.
c. June 30, End of accounting period. Fair value of Hudson Company stock is \$50,000. The company uses an allowance account to adjust the investment.

What journal entry is prepared on June 30?
A) debit Unrealized Loss on Investment in Available-for-Sale Securities for \$1,000 and credit Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$1,000
B) debit Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$1,000 and credit Unrealized Loss on Investment in Available-for-Sale Securities for \$1,000
C) debit Unrealized Loss on Investment in Available-for-Sale Securities for \$1,000 and credit Investment in Available-for-Sale Securities for \$1,000
D) debit Investment in Available-for-Sale Securities for \$1,000 and credit Unrealized Gain on Investment in Available-for-Sale Securities for \$1,000
Explanation: A) \$51,000 \$50,000 = \$1,000
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

17) If an investor owns less than 20% of the common stock of another company as a long-term investment:
A) the equity method of accounting should be used for the investment.
B) the investor has a controlling interest in the investee.
C) the investor usually has little or no influence on the investee.
D) the investor has significant influence on the investee.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

18) For accounting purposes, the method used to account for long-term investments in common stock is determined by:
A) the size of the investor.
B) the size of the investor when compared to the size of the investee.
C) vote by the Board of Directors of the investor.
D) the investors percentage ownership of the investees stock.
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
19) If 15% of the common stock of an investee company is purchased as a long-term investment, the appropriate method of accounting for the investment is:
A) the equity method.
B) the consolidation method.
C) the available-for-sale(fair value) method.
D) the lower of cost or market method.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

20) The available-for-sale(fair value) method of accounting for long-term investments in stock should be used when the:
A) investor owns less than 20% of the outstanding stock of the investee.
B) investor has significant influence over the investees operating decisions and policies.
C) investor has little or no influence on the investee.
D) A and C.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

21) The fair value of a long-term available-for-sale security has decreased from the last carrying value. The journal entry to record this decrease will include:
A) a debit to the Allowance to Adjust Investment in Available-for-Sale Securities to Market.
B) a credit to the Allowance to Adjust Investment in Available-for-Sale Securities to Market.
C) a credit to the Unrealized Loss on Investment in Available-for-Sale Securities.
D) a debit to the Unrealized Gain on Investment in Available-for-Sale Securities.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
22) The Allowance to Adjust Investment in Available-for-Sale Securities to Market has a debit balance. Therefore:
A) the Allowance account is subtracted from the carrying amount of the Investment in Available-for-Sale Securities.
B) the Allowance account is added to the carrying amount of the Investment in Available-for-Sale Securities.
C) the Allowance account is neither added nor subtracted from the carrying amount of the Investment in Available-for-Sale Securities.
D) the Allowance account is added to Unrealized Gain or Loss on Investment in Available-for-Sale Securities.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

23) The fair value of a long-term available-for-sale security has increased from the last carrying value. The company uses an allowance account to adjust the investment. The journal entry to record this increase will include:
A) a debit to the Allowance to Adjust Investment in Available-for-Sale Securities to Market.
B) a credit to the Allowance to Adjust Investment in Available-for-Sale Securities to Market.
C) a debit to the Unrealized Gain on Investment in Available-for-Sale Securities.
D) a credit to the Unrealized Loss on Investment in Available-for-Sale Securities.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

24) Unrealized gains and losses from long-term available-for-sale investments arise from:
A) the purchase of an investment.
B) the sale of the investment.
C) changes in the fair value of the investment.
D) investors share of investees net income or net loss.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
25) Realized gains and losses from long-term available-for-sale investments arise from:
A) the purchase of an investment.
B) the sale of the investment.
C) changes in the fair value of the investment.
D) investors share of investees net income or net loss.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

26) The balance in the Unrealized Gain on Investment in Available-for-Sale Securities account is reported on the ________. The investments are classified as long-term.
A) balance sheet as a contra asset account
B) income statement under Other Expenses and Losses
C) balance sheet, as part of the stockholders equity section
D) balance sheet, as part of Long-Term Investments
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

27) The Unrealized Gain on Investment in Available-for-Sale Securities is reported in:
A) Other Revenues and Gains on the income statement.
B) Other Comprehensive Income on the Statement of Comprehensive Income.
C) Accumulated Other Comprehensive Income on the balance sheet.
D) B and C.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

28) When accounting for long-term investments in available-for-sale securities, which of the following is used to compute net income?
A) Unrealized Gains on Investments in Available-for-Sale Securities
B) Realized Gains on Investments in Available-for-Sale Securities
C) Dividend Revenue
D) B and C
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
29) An investor receives a stock dividend from a long-term available-for-sale investment. Which journal entry is required?
A) a debit to Cash and a credit to Dividend Revenue
B) a debit to Cash and a credit to Unrealized Gain on Investments
C) a debit to Investment in Available-for-Sale Securities and a credit to Dividend Revenue
D) a memorandum entry only
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

30) An investor receives a cash dividend from a long-term available-for-sale investment. Which journal entry is required?
A) a debit to Cash and a credit to Dividend Revenue
B) a debit to Cash and a credit to Interest Revenue
C) a debit to Cash and credit to Investment in Available-for-Sale Securities
D) a debit to Cash and credit to Interest Receivable
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

31) How does the receipt of a cash dividend on a long-term Investment in Available-for-Sale Securities affect the balance sheet?
A) Increases assets and increases paid-in-capital
B) Increases assets and decreases stockholders equity
C) Increases assets and increases retained earnings
D) Has no effect on assets or total stockholders equity
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

32) How does the receipt of a stock dividend on long-term Investment in Available-for-Sale Securities affect the balance sheet?
A) Increases assets and increases paid-in-capital
B) Increases assets and decreases stockholders equity
C) Increases assets and increases retained earnings
D) Has no effect on assets or total stockholders equity
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

33) An investor receives a stock dividend on a long-term Investment in Available-for-Sale Securities. What journal entry is required?
A) debit Cash and credit Investment in Available-for-Sale Securities
B) debit Cash and credit Dividend Revenue
C) debit Investment in Available-for-Sale Securities and credit Investment Revenue
D) No journal entry is required.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

34) The gain or loss on the sale of an investment classified as a long-term available-for-sale-security is calculated by comparing the ________ of the investment with the ________ of the investment.
A) carrying value; selling price
B) fair value at last balance sheet date; selling price
C) cost; selling price
D) fair value at date of sale; selling price
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

35) Seider Company receives a stock dividend of 100 shares from Dolhun Company. Seider previously owned 750 shares of Dolhun stock that had a cost of \$4,800. After the stock dividend, the cost per share of Dolhun stock is now:
A) \$5.40.
B) \$5.65.
C) \$5.76.
D) \$6.40.
Explanation: B) \$4,800 (100 + 750) = \$5.65
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

36) A long-term investment in available-for-sale securities was acquired at a cost of \$40,000. At year-end, the fair value of the securities is \$42,250. The year-end adjusting entry requires a:
A) credit Investment in Available-for-Sale Securities for \$2,250.
B) debit Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$2,250.
C) credit Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$2,250.
D) debit Unrealized Loss on Investment in Available-for-Sale Securities for \$2,250.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

37) The journal entry to record the sale of a long-term available-for-sale investment includes a Gain on Sale of Investment in Available-for-Sale Securities for \$500. The income statement will report:
A) other comprehensive income of \$500.
B) other income and gains of \$500.
C) an extraordinary gain of \$500.
D) accumulated other comprehensive income of \$500.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

38) Other comprehensive income:
A) is a separate section of stockholders equity on the balance sheet.
B) is reported in the liability section of the balance sheet.
C) is reported on the statement of comprehensive income.
D) is reported in the long-term investments section of the balance sheet.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

39) The Allowance to Adjust Investment in Available-for-Sale Securities to Market account has a current credit balance of \$1,000 after the adjustment at year-end. Available-for-sale investments have a fair value of \$20,000. The original cost of the investments was \$21,000. The carrying value of the investments is:
A) \$18,000.
B) \$19,000.
C) \$20,000.
D) \$21,000.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

40) The Allowance to Adjust Investment in Available-for-Sale Securities to Market account has a current credit balance of \$892. Long-term available-for-sale investments with a cost of \$17,000 have a current fair value of \$18,500. The adjusting entry will require a:
A) credit to Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$608.
B) credit to Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$2,392.
C) debit to Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$608.
D) debit to Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$2,392.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

41) Which method is used when one company owns less than 20% of the shares of another company?
A) consolidation method
B) fair value method
C) equity method
D) amortized cost
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

42) On January 1, 2014, Imagine Corporation purchases bonds in Berkeley Company. The bonds mature on January 1, 2024. Imagine Corporation intends to hold the bonds longer than one year but not until the maturity date. How should Imagine Corporation classify these bonds?
B) held-to-maturity investment in bonds
C) equity method investment
D) investment in available-for-sale securities
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

43) On January 1, 2014, Jude Corporation purchases stock in Gelco Company. Jude Corporation owns 1% of the outstanding stock of Gelco Company. Jude Corporation intends to hold the stock for longer than one year. How should Jude Corporation classify this stock?
B) held-to-maturity investment in bonds
C) equity-method investment
D) investment in available-for-sale securities
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

44) Long-term available-for-sale securities can be:
A) bonds held to maturity.
B) bonds not held to maturity, but held for more than one year.
C) stocks other than trading securities and equity-method securities.
D) B and C.
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

45) The Allowance to Adjust Investment in Available-for-Sale Securities to Market is:
A) a required account used with Investment in Available-for-Sale Securities.
B) an optional account to Investment in Available-for-Sale Securities.
C) always added to the Investment in Available-for-Sale Securities.
D) always subtracted from the Investment in Available-for-Sale Securities.
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
46) U.S. Generally Accepted Accounting Principles require that a company adjust ________ of available-for-sale securities to ________ at the end of each accounting period.
A) each security; amortized cost
B) each security; lower of cost or market
C) the portfolio; current replacement cost
D) the portfolio; fair value
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

47) Following U.S. Generally Accepted Accounting Principles, the fair value of a stock investment should be determined using ________. Assume the stock is listed on a publicly-traded securities exchange.
A) quoted prices in active markets for identical stocks
B) quoted prices for similar stocks
C) the investors own estimates based on certain assumptions
D) the investors educated guesses
Diff: 2
LO: 8-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement

48) A company has a long-term Investment in Available-for-Sale Securities. The intent is to hold the stock investment for many years, but not until maturity. The investors percentage ownership is 5%. On January 1, 2014, the purchase date, the cost of the stock investment was \$100,000. On December 31, 2014, the fair value of the investment is \$99,000. An allowance account is used to write-down the investment. On January 10, 2015, the investor sold the stock for \$95,000. What journal entries are required on January 10, 2015?
A) debit Allowance to Adjust Investment in Available-for-Sale Securities to Market for \$1,000 and credit Unrealized Loss on Investment in Available-for-Sale Securities for \$1,000
B) debit Cash for \$95,000, debit Loss on Sale of Investment in Available-for-Sale Securities for \$5,000 and credit Investment in Available-for-Sale Securities for \$100,000
C) debit Cash for \$95,000, debit Loss on Sale of Investment of Available-for-Sale Securities for \$4,000 and credit Investment in Available-for-Sale Securities for \$99,000
D) A and B
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
49) A company has a long-term investment in available-for-sale securities. The Unrealized Gain on (long-term) Investment in Available-for-Sale Securities is reported as:
A) Other Comprehensive Income in the Statement of Comprehensive Income.
B) Other Gains on the income statement.
C) Accumulated Other Comprehensive Income on the balance sheet.
D) A and C.
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

50) On January 1, 2014, a company purchased long-term available-for-sale securities in one company. The cost was \$100,000 and the investor owns 5% of the outstanding common stock of the investee. The investor does not use an allowance account to adjust the investment. At December 31, 2014, the fair value of the investment is \$97,000. What journal entry is needed on December 31, 2014?
A) debit Unrealized Loss on Investment in Available-for-Sale Securities for \$3,000 and credit Investment in Available-for-Sale Securities for \$3,000
B) debit Investment in Available-for-Sale Securities for \$2,000 and credit Unrealized Gain on Investment in Available-for-Sale Securities for \$2,000
C) debit Investment in Available-for-Sale Securities for \$5,000 and credit Unrealized Gain on Investment in Available-for-Sale Securities for \$5,000
D) debit Investment in Available-for-Sale Securities for \$3,000 and credit Unrealized Gain on Investment in Available-for-Sale Securities for \$3,000
Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

51) On January 1, 2014, Innocente Company purchases 1,000 shares of Intel common stock at \$40 per share. Innocente intends to hold this investment for longer than one year. On June 1, 2014, Intel declares and distributes a cash dividend of \$0.50 per share. On December 31, 2014, the market price of Intels stock is \$44 per share. On December 31, 2015, the market price of Intels stock is \$56 per share. On December 31, 2016, the market price of Intels stock is \$50 per share. Innocente Company uses a separate Allowance account to adjust the investment.

Prepare the journal entries on:
1. January 1, 2014
2. June 1, 2014
3. December 31, 2014
4. December 31, 2015
5. December 31, 2016
Explanations are not required.
Date Accounts Debit Credit
1/1/2014 Investment in Available-for-Sale Securities 40,000
Cash(1,000 \$40 = \$40,000) 40,000

6/1/2014 Cash (1,000 \$0.5) 500
Dividend Revenue 500

12/31/2014 Allowance to Adjust Investment in AFSS to Market 4,000
Unrealized Gain on Investment in AFSS 4,000
(1,000 (\$44 \$40))

12/31/2015 Allowance to Adjust Investment in AFSS to Market 12,000
Unrealized Gain on Investment in AFSS 12,000
(1,000 (\$56 \$44))

12/31/2016 Unrealized Gain on Investment in AFSS 6,000
Allowance to Adjust Investment in AFSS to Market 6,000
(1,000 (\$56 \$50))

Diff: 2
LO: 8-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8.3 Learning Objective 8-3

1) When an investor owns 35% of the stock of another business, cash dividends received from the investee company are recorded by decreasing the Equity-Method Investment account.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
2) The equity method is used to account for stock investments in which the investor company owns less than 20% of the outstanding stock of the investee.
Diff: 1
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

3) Investments accounted for by the equity method are initially recorded at cost.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

4) If an investor owns between 20% and 50% of an investees voting stock, it is assumed that the investor has significant influence over the investee.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) Under the equity method, when the investee reports net income, the Equity-Method Investment account increases.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

6) When the equity method is used to account for stock investments, the carrying value of an investment is the fair value as of the balance sheet date.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

7) Under the equity method, the investor applies his percentage of ownership in recording his share of the investees net income, but not dividends.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
8) When an investor owns between 20% and 50% of the outstanding stock of another company, the ________ method is used to account for the stock investment.
A) fair value
B) equity
C) consolidated
D) available-for-sale
Diff: 1
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

9) An investor who owns 25% of the outstanding stock of another company should report the investment using the:
A) fair value method.
B) consolidated method.
C) equity method.
D) available-for-sale method.
Diff: 1
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

10) The equity method of accounting for a stock investment should generally be used when the investor owns a level of stock ownership that:
A) gives the investor minor influence over the investee.
B) usually indicates a plan to acquire a controlling interest in the investee company.
C) requires the investor to prepare consolidated financial statements.
D) gives the investor significant influence over the investee company.
Diff: 1
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

11) Under the equity method, the Equity-Method Investment account is debited when the:
A) investee reports net income.
B) investee reports net loss.
C) investor receives a cash dividend.
D) investment is sold.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
12) A company that owns 40% of the common stock of another business recognizes revenue from the investment when:
A) the investor sells the shares in the investee company.
B) the investee issues a cash dividend.
C) the investee recognizes net income.
D) the investee issues a stock dividend.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

13) Wolverine Corporation owns 29% of Buckeye Corporation. Net income for Buckeye for the year is \$250,000. The journal entry prepared by Wolverine Corporation is:
A) debit Equity-Method Investment for \$72,500 and credit Cash for \$72,500.
B) debit Equity-Method Investment for \$72,500 and credit Equity-Method Investment Revenue for \$72,500.
C) debit Cash for \$72,500 and credit Equity-Method Investment for \$72,500.
D) debit Equity-Method Investment for \$250,000 and credit Equity-Method Investment Revenue for \$250,000.
Explanation: B) 29% \$250,000 = \$72,500
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

14) If an investor company owns 35% of the common stock of another business, income received from the investee company are generally recorded by the investor company by:
A) decreasing the investor companys Common Stock account.
B) increasing the value of the investors Equity-Method Investment account.
C) increasing the Dividend Revenue account.
D) decreasing the value of the investors Equity-Method Investment account.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
15) Under the equity method of accounting for long-term investments in common stock, when a cash dividend is received from the investee company:
A) the investors Equity-Method Investment account is increased.
B) the Dividend Revenue account is increased.
C) the investors Equity-Method Investment account is decreased.
D) no entry is necessary.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

16) If the equity method is used to account for a long-term investment in common stock, cash dividends received from the investee are recorded by the investor as:
A) a debit to Equity-Method Investment and a credit to Equity-Method Investment Revenue.
B) a debit to Cash and a credit to Dividend Revenue.
C) a debit to Dividend Receivable and a credit to Dividend Revenue.
D) a debit to Cash and a credit to Equity-Method Investment
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

17) Acme Company owns 35% of Superior Company. Superior Company paid \$35,000 cash dividends for the year. Acme Companys journal entry to record the dividends includes a:
A) credit to Equity-Method Investments for \$12,250.
B) credit to Equity-Method Investments for \$35,000.
C) credit to Dividend Revenue for \$12,250.
D) credit to Dividend Revenue for \$35,000.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

18) A gain or loss on the sale of a long-term investment using the equity method is calculated by taking the difference between the cash received and:
A) fair value of the investment.
B) lower-of-cost-or-market value of the investment.
C) cost of the investment.
D) carrying value of the investment.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

19) Under the equity method, if an Equity-Method Investment is sold at a gain, the gain is:
A) reported as operating revenue on the income statement.
B) reported on the balance sheet as an adjustment to Accumulated Other Comprehensive Income.
C) reported in the Other Revenue and Gain section of the income statement.
D) reported as Other Comprehensive Income on the Statement of Comprehensive Income.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

20) Under the equity method, if the investee company has a net loss, then the investor company will:
A) debit the Equity-Method Investment account for their share of the net loss.
B) credit the Unrealized Loss on Equity-Method Investment account for their share of the net loss.
C) credit the Equity-Method Investment account for their share of the net loss.
D) debit the Unrealized Loss on Equity-Method Investment.
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

21) On January 1, 2015, Barry Corporation paid \$800,000 for 100,000 shares of Oak Companys common stock, which represents 40% of Oaks outstanding common stock. For the year ending December 31, 2015, Oak reported net income of \$200,000 and paid cash dividends of \$60,000. Barry should report the investment in Oak Company on its balance sheet at December 31, 2015 at:
A) \$800,000.
B) \$744,000.
C) \$824,000.
D) \$856,000.
Explanation: D) \$800,000 + (\$200,000 40%) (\$60,000 40%) = \$856,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

22) On January 1, 2014, Benson Corporation paid \$800,000 to purchase 40% of the outstanding stock of Kroger Company. Kroger Company reported net income of \$200,000 for the year ending December 31, 2014 and paid cash dividends of \$60,000 during 2014. On January 1, 2015, Benson Corporation sells its entire investment in Kroger Company for \$1,100,000. Benson Corporation will report a(n):
A) realized gain on the sale of \$300,000.
B) unrealized gain on the sale of \$300,000.
C) realized gain on the sale of \$244,000.
D) unrealized gain on the sale of \$244,000.
Explanation: C) \$800,000 + (\$200,000 40%) (\$60,000 40%) = \$856,000
\$1,100,000 \$856,000 = \$244,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

23) Daniel Company purchased 30% of the outstanding shares of Clooney Corporation on January 1 at a cost of \$600,000. Clooney Corporation reported net income of \$95,000 and paid total dividends of \$25,000 for the year. At the end of the year, Clooney shares had a current fair value of \$590,000. After all necessary adjusting entries are made for the year, the balance in Daniel Companys Equity-Method Investment account will be:
A) \$590,000.
B) \$621,000.
C) \$628,500.
D) \$638,500.
Explanation: B) \$600,000 + (\$95,000 30%) (\$25,000 30%) = \$621,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

24) On January 1, 2014, Conner Corporation purchased 70,000 of the 210,000 shares of outstanding stock of JJ Company for \$600,000. Net income reported by JJ Company for 2014 was \$600,000. Dividends paid by JJ Company during 2014 were \$150,000. The Equity-Method Investment will be reported on Conner Corporations December 31, 2014 balance sheet in the amount of:
A) \$600,000.
B) \$650,000.
C) \$750,000.
D) \$960,000.
Explanation: C) \$600,000 + (\$600,000 1/3) (\$150,000 1/3) = \$750,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
25) On January 1, 2014, Rod Corporation purchased 35% of the outstanding stock of Alamo Corporation for \$500,000. Net income reported by Alamo for 2014 was \$200,000. Dividends paid by Alamo during 2014 were \$40,000. The amount of investment revenue that Rod should recognize for 2014 is:
A) \$14,000.
B) \$56,000.
C) \$70,000.
D) \$84,000.
Explanation: C) \$200,000 35% = \$70,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

26) On January 1, 2014, Gardner Corporation purchased 25% of the common stock outstanding of Lance Corporation for \$260,000. During 2014, Lance Corporation reported net income of \$80,000 and paid cash dividends of \$40,000. The balance of the Equity-Method Investment account at December 31, 2014 is:
A) \$260,000.
B) \$270,000.
C) \$280,000.
D) \$290,000.
Explanation: B) \$260,000 + (\$80,000 25%) (\$40,000 25%) = \$270,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

27) Milton Company owns 30% interest in the stock of Darcy Corporation. During the year, Darcy pays \$20,000 in dividends to Milton, and reports \$100,000 in net income. Milton Company will report Equity-Method Investment Revenue of:
A) \$6,000.
B) \$24,000.
C) \$30,000.
D) \$36,000.
Explanation: C) \$100,000 30% = \$30,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
28) An investor owns 25% of the outstanding common stock of Stokes Corporation. Stokes Corporation declares and pays a \$100,000 dividend. What journal entry should the investor prepare?
A) debit Equity-Method Investment for \$25,000 and credit Cash for \$25,000
B) debit Cash for \$25,000 and credit Equity-Method Investment for \$25,000
C) debit Cash for \$25,000 and credit Dividend Revenue for \$25,000
D) debit Dividend Receivable for \$25,000 and credit Dividend Revenue for \$25,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

29) An investor owns 30% of the outstanding common stock of Leshan Company. Leshan Company reports net income of \$100,000 for the current year. What journal entry should the investor prepare?
A) debit Cash for \$30,000 and credit Dividend Revenue for \$30,000
B) debit Cash for \$30,000 and credit Equity-Method Investment for \$30,000
C) debit Equity-Method Investment for \$30,000 and credit Equity-Method Investment Revenue for \$30,000
D) debit Equity-Method Investment Revenue for \$30,000 and credit Equity-Method Investment for \$30,000
Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

30) On January 1, 2014, Walker Company pays \$10 million for 40% of the outstanding common stock of a supplier called Dorglass, Inc. On December 1, 2014, Dorglass, Inc., declared and paid cash dividends of \$100,000. For the year ending December 31, 2014, Dorglass, Inc. also reported net income of \$1,000,000. At December 31, 2014, the fair value of 40% of Dorglass, Inc.s stock was \$9 million. On January 1, 2015, all the Dorglass, Inc.s stock was sold for \$9 million.

Required:
Prepare journal entries on the following dates:
1. January 1, 2014
2. December 1, 2014
3. December 31, 2014
4. January 1, 2015
Explanations are not required.

1/1/2014 Equity-Method Investment 10,000,000
Cash 10,000,000

12/1/2014 Cash(\$100,000 40%) 40,000
Equity-Method Investment 40,000

12/31/2014 Equity-Method Investment 400,000
Equity-Method Investment Revenue 400,000
(\$1,000,000 40%)

1/1/2015 Cash 9,000,000
Loss on Sale of Equity-Method Investment 1,360,000
Equity-Method Investment 10,360,000
(\$10,000,000 + \$400,000 \$40,000)

Diff: 2
LO: 8-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

8.4 Learning Objective 8-4

1) The consolidation method of accounting is appropriate when an investor controls an investee by ownership of more than 50% of the investees common stock.
Diff: 1
LO: 8-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
2) Consolidated financial statements combine the financial statements of the parent company and its subsidiaries.
Diff: 1
LO: 8-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting

3) In consolidation accounting, a year-end elimination entry is required to remove the subsidiary companys stockholders equity accounts and the parent companys Investment in Subsidiary account.
Diff: 2
LO: 8-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

4) A company that owns less than 20% of another companys stock may not use the consolidation method of accounting.
Diff: 1
LO: 8-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

5) Goodwill arises when a parent company must pay more to acquire a subsidiary company than the fair value of the subsidiarys net assets.
Diff: 1
LO: 8-4
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement

6) When a U.S. company owns a foreign subsidiary, a foreign-currency translation adjustment is calculated using the subsidiarys

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