Question 1

When shares of stock held as an investment are sold, the difference between the proceeds and the carrying amount of the investment is recorded as an)

Accepted Answer

The difference between the proceeds and the carrying amount of an investment is called a gain or loss. This gain or loss is recognized in the income statement as a non-operating item. Therefore, choice D is the correct answer.

Question 2

Under the equity method, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is accounted for as a debit to Cash and a credit to

Accepted Answer

Under the equity method, dividends received from an investee are accounted for as a return on the investment and decrease the carrying value of the investment. Therefore, the receipt of cash dividends on an investment in common stock of Vallerio Corporation is recorded as a debit to Cash and a credit to Investment in Vallerio to reduce the carrying amount of the investment.

Question 3

Wendell Company owns 28% of the common stock of Porter Company and accounts for the investment using the equity method. Assuming that Wendell Company purchased the stock several years ago, the balance in the investment account would be equal to the cost of the

Accepted Answer

The equity method requires the investor to account for its share of the investee's net income and dividends received. Therefore, the investment account balance would be equal to the cost of the investment plus Wendell's share of Porter's net income earned since the investment was purchased, minus the total amount of dividends Wendell has received from Porter since the investment was purchased.

Question 4

Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method in recording this investment. Tomas Corporation reported a $20,000 net loss. Zach Company's entry would include a

Accepted Answer

Since Zach Company uses the equity method, they need to record their share of Tomas Corporation's net loss. The investment account is credited for $9,000 (45% of the $20,000 net loss). Therefore, choice C is the correct answer.

Question 5

Armando Company owns 17,000 of the 70,000 shares of common stock outstanding of Tito Company and exercises a significant influence over its operating and financial policies. The investment should be accounted for by the

Accepted Answer

According to the information given, Armando Company exercises a significant influence over Tito Company's operating and financial policies. This indicates that the equity method of accounting should be used to account for the investment. Under the equity method, the investor records its share of the investee's profits or losses on the income statement and adjusts the carrying value of the investment on the balance sheet to reflect changes in the investee's net assets. Therefore, choice A is the most appropriate accounting method for this situation.

Question 6

An investor purchased 500 shares of common stock, $25 par, for $21,750. Subsequently, 100 shares were sold for $49.50 per share. What is the amount of gain or loss on the sale?

Accepted Answer

The investor's cost per share is $21,750 / 500 = $43.50. Selling 100 shares at $49.50 each results in $4,950. The cost of these 100 shares is 100 * $43.50 = $4,350. The gain is $4,950 - $4,350 = $600.

Question 7

The journal entry Pierce will record on February 1 will include a

Accepted Answer

Pierce sold investments for $51,000 ($50,000 cost and $1,000 gain) and would credit Gain on Sale of Investments for $1,500 ($1,000 gain plus $500 of accumulated gain previously recognized). No other options fit the scenario described.

Question 8

Which of the following stock investments should be accounted for using the cost method?

Accepted Answer

Investments of less than 20% should be accounted for using the cost method as they are considered to be passive investments and do not grant significant influence over the investee company.

Question 9

Which of the following statements is not a reason a company may purchase another company's stock?

Accepted Answer

Sustaining another company's stock price is not a valid reason for a company to purchase another company's stock. The other options may be valid reasons for purchasing another company's stock, such as earning a return on excess cash, gaining control of operations, or developing/maintaining business relationships.

Question 10

The equity method of accounting for investments

Accepted Answer

The answer of The equity method of accounting for investments
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Question 11

Blanton Corporation purchased 35% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives from Worton Corporation?

Accepted Answer

The answer of Blanton Corporation purchased 35% of the outstanding...

Question 12

Blanton Corporation purchased 15% of the outstanding shares of common stock of Worton Corporation as a long-term investment. Subsequently, Worton Corporation reported net income and declared and paid cash dividends. What journal entry would Blanton Corporation use to record the dividends it receives?

Accepted Answer

Blanton Corporation would record the dividends it receives by debiting Cash and crediting Dividend Revenue. This is because the investment in Worton Corporation is accounted for using the equity method, meaning that any earnings and dividends received are recognized as revenue. So, the correct journal entry to record the dividends received is to debit Cash (as there is an increase in cash) and credit Dividend Revenue (as there is an increase in revenue).

Question 13

The cost method of accounting for stock

Accepted Answer

The answer of The cost method of accounting for stock
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Question 14

Jarvis Corporation makes an investment in 100 shares of Saxton Company's common stock. The stock is purchased for $45 a share plus brokerage fees of $280. The entry for the purchase is

Accepted Answer

The cost of the investment includes both the price per share and brokerage fees, so both amounts should be recorded in the entry. Choice A only records the cost of the shares, while choice C separates the brokerage fees as an expense rather than including it in the cost of the investment. Choice D only records the cost of the shares and doesn't account for the brokerage fees. Therefore, choice B is the best option as it correctly records the total cost of the investment.

Question 15

Interest revenue on bonds is reported

Accepted Answer

The answer of Interest revenue on bonds is reported
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Question 16

Parker Company owns 83% of the outstanding stock of Tadeo Company. Parker Company is referred to as the

Accepted Answer

Parker Company, owning 83% of Tadeo Company, is referred to as the parent company because it holds a controlling interest in Tadeo Company.

Question 17

Which of the following items would not affect the investor's income for the period?

Accepted Answer

Dividends received on a long-term investment in stock where the investor owns 30% of the investee's stock typically imply significant influence over the investee. In such cases, the equity method of accounting is used, where dividends received are not recognized as income but instead reduce the carrying amount of the investment on the investor's balance sheet.

Question 18

What are the total proceeds from the February 1 sale?

Accepted Answer

The answer of What are the total proceeds from the...

Question 19

The method of accounting for investments in equity securities in which the investor records its share of periodic net income of the investee is the

Accepted Answer

The equity method is the appropriate choice as it requires the investor to record its share of periodic net income of the investee, as well as adjustments for changes in the investee's equity. Both the cost and market methods do not involve recording the investee's income, and the income method is not a recognized method of accounting for equity investments.

Question 20

Alan Company purchased $400,000 of ABC Co. 5% bonds at 100 plus accrued interest of $4,500. Alan later sold $250,000 of bonds at 97. The journal entry for the purchase would include a

Accepted Answer

When purchasing bonds at a premium (which is the case here because the purchase price was $100 plus accrued interest), the premium amount is recorded as a debit to the Investment in Bonds account. The accrued interest is also recorded as a debit, to be later recorded as interest revenue as it accrues. Therefore, the journal entry for the purchase would include a debit to Investment in Bonds for $404,500 ($400,000 + $4,500) and a debit to Interest Receivable for $4,500. There would be no credit to either Interest Receivable or Interest Revenue at this point.

Quiz 13: Investments and Fair Value Accounting