Question 1

If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

Accepted Answer

A) True 
 B)False

Question 2

If an investor owns less than 20% of the common stock of another corporation as a long-term investment,

Accepted Answer

A)  the equity method of accounting for the investment should be employed.
B)  no dividends can be expected.
C)  it is presumed that the investor has relatively little influence on the investee.
D)  it is presumed that the investor has significant influence on the investee.E) A) and B)
F) A) and C)

Question 3

When bonds are sold, the gain or loss on sale is the difference between the

Accepted Answer

A)  sales price and the cost of the bonds.
B)  net proceeds and the cost of the bonds.
C)  sales price and the market value of the bonds.
D)  net proceeds and the market value of the bonds.E) A) and D)
F) None of the above

Question 4

If the cost method is used to account for a long-term investment in common stock, dividends received should be

Accepted Answer

A)  credited to the Stock Investments account.
B)  credited to the Dividend Revenue account.
C)  debited to the Stock Investments account.
D)  recorded only when 20% or more of the stock is owned.E) All of the above
F) B) and D)

Question 5

Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

Accepted Answer

A) True 
 B)False

Question 6

Under the equity method, the investor records dividends received by crediting

Accepted Answer

A)  Dividend Revenue.
B)  Investment Income.
C)  Revenue from Investment.
D)  Stock Investments.E) A) and B)
F) A) and C)

Question 7

Which of the following would not be considered a motive for making a stock investment in another corporation?

Accepted Answer

A)  Appreciation in the market value of the stock investment
B)  Use of the investment for expanding its own operations
C)  Use of the investment to diversify its own operations
D)  An increase in the amount of interest revenue from the stock investmentE) B) and D)
F) B) and C)

Question 8

Consolidated financial statements present all of the following except the

Accepted Answer

A)  individual assets and liabilities of the parent company
B)  individual assets and liabilities of the subsidiary.
C)  total revenues and expenses of the subsidiary.
D)  All of these are presented in consolidated financial statements.E) B) and D)
F) C) and D)

Question 9

Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

Accepted Answer

A) True 
 B)False

Question 10

If a company acquires a 40% common stock interest in another company,

Accepted Answer

A)  the equity method is usually applicable.
B)  all influence is classified as controlling.
C)  the cost method is usually applicable.
D)  the ability to exert significant influence over the activities of the investee does not exist.E) A) and C)
F) A) and B)

Question 11

Changes from cost are reported as part of net income for

Accepted Answer

A)  available-for-sale securities.
B)  held-to-maturity securities.
C)  debt securities.
D)  trading securities.E) C) and D)
F) B) and D)

Question 12

A company that owns more than 50% of the common stock of another company is known as the

Accepted Answer

A)  charge company.
B)  subsidiary company.
C)  parent company.
D)  management company.E) A) and B)
F) None of the above

Question 13

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

Accepted Answer

A)  $210,000.
B)  $120,000.
C)  $90,000.
D)  $0.E) B) and C)
F) A) and D)

Question 14

Short-term investments are securities held by a company that are

Accepted Answer

A)  readily marketable.
B)  intended to be converted into cash within the next year.
C)  readily marketable and intended to be converted into cash within the next year or operating cycle, whichever is longer.
D)  readily marketable and intended to be held until maturity.E) A) and C)
F) None of the above

Question 15

Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000. The journal entry to record this investment includes a debit to

Accepted Answer

A)  Debt Investments for $64,800.
B)  Debt Investments for $60,000.
C)  Cash for $60,000.
D)  Stock Investments for $60,000.E) C) and D)
F) B) and D)

Question 16

At December 31, 2014, the trading securities for Saddle, Inc. are as follows:  Saddle should report the following amount related to the securities in its 2014 income statement:

Accepted Answer

A)  $4,000 gain
B)  $7,000 realized loss.
C)  $7,000 unrealized loss.
D)  $11,000 unrealized loss.E) All of the above
F) B) and D)

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

All of the following statements about short-term investments are true except:

Accepted Answer

A)  Short-term investments are also called marketable securities
B)  Trading securities are always classified as short-term investments.
C)  Short-term investments are listed below accounts receivable in the current asset section of the balance sheet.
D)  Short-term assets must be readily marketable.E) A) and B)
F) C) and D)

Question 19

When preparing a consolidated income statement,

Accepted Answer

A)  only the revenues and expenses of the parent company are presented.
B)  the income from partially owned subsidiaries is excluded.
C)  all revenue and expense transactions between the parent and subsidiaries must be eliminated.
D)  intercompany transactions between affiliated companies do not have to be eliminated.E) All of the above
F) A) and B)

Question 20

The process of excluding intercompany transactions in preparing consolidated statements is referred to as intercompany eliminations.

Accepted Answer

A) True 
 B)False

Exam 12: Investments

The process of excluding intercompany transactions in preparing consolidated statements is referred to as intercompany eliminations.

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If an investor owns less than 20% of the common stock of another corporation as a long-term investment,

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If the cost method is used to account for a long-term investment in common stock, dividends received should be

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When preparing a consolidated income statement,

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When bonds are sold, the gain or loss on sale is the difference between the

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Bay Company acquires 60, 8%, 5 year, $1,000 Community bonds on January 1, 2014 for $60,000. The journal entry to record this investment includes a debit to

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Consolidated financial statements are prepared in place of the financial statements for the parent and subsidiary companies.

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Changes from cost are reported as part of net income for

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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

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Under the equity method, the investor records dividends received by crediting

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Dividends received on stock investments of less than 20% should be credited to the Stock Investments account.

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Short-term investments are securities held by a company that are

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If the fair value of an available-for-sale security exceeds its cost, the security should be written up to fair value and a realized gain should be recognized.

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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.

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Which of the following would not be considered a motive for making a stock investment in another corporation?

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Consolidated financial statements present all of the following except the

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A company that owns more than 50% of the common stock of another company is known as the

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If a company acquires a 40% common stock interest in another company,

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All of the following statements about short-term investments are true except:

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At December 31, 2014, the trading securities for Saddle, Inc. are as follows: Saddle should report the following amount related to the securities in its 2014 income statement:

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