Question 1

A purchased company must be recorded at the value of the cash and other consideration given by the acquiring company.

Accepted Answer

In accounting, when a company is purchased, the acquisition is recorded at the purchase consideration, which includes the value of cash, securities, or other assets given by the acquiring company to obtain the target company. This follows the acquisition method of accounting.

Question 2

The amount to which an account will grow when interest is compounded is the ______________ value.

Accepted Answer

The answer of The amount to which an account will...

Question 3

Cash flows are described as either single cash flows or _______________.

Accepted Answer

The answer of Cash flows are described as either single...

Question 4

Held-to-maturity securities are equity and debt investments that management intends to sell in the future, but not necessarily in the near term.

Accepted Answer

Held-to-maturity securities are investments that a company intends to hold until maturity and not sell in the near future.

Question 5

A debt security exists when another entity owes the security holder some combination of interest and principal.

Accepted Answer

A debt security is a type of financial instrument that represents a loan made by an investor to the borrower, usually a corporation or government entity, with the expectation of receiving interest and principal payments over time. Examples of debt securities include bonds, notes, and debentures.

Question 6

If the investor holds 50% or more of the investee's outstanding common stock, then the investor is referred to as the parent and the investee is called the subsidiary.

Accepted Answer

This statement is true. Holding 50% or more of an investee's outstanding common stock gives the investor control over the investee, making them the parent company and the investee the subsidiary.

Question 7

The _______________ treats the present value as a liability that will be paid through a series of equal payments.

Accepted Answer

The answer of The _______________ treats the present value as...

Question 8

If the investor holds enough common stock to control the investee (50% or more common stock ownership), then the two corporations are no longer separate accounting entities and therefore they no longer may maintain separate accounting records.

Accepted Answer

Even if an investor holds enough common stock to control the investee, both corporations can still maintain separate accounting records. The consolidation for reporting purposes does not eliminate the requirement for each entity to maintain its own accounting records.

Question 9

Beach Catering sold its business for $75,000 under an asset purchase agreement. Under the agreement, the buyer made an initial payment of $35,000 which Beach Catering invested at 6% compounded semiannually. At the beginning of the fourth year, the balance of the purchase price was paid by the buyer. Beach Catering places this $40,000 in the same investment with interest compounded semiannually at 6%. At the end of 6 years, how much does Beach Catering have in its investment account?

Accepted Answer

The answer of Beach Catering sold its business for $75,000...

Question 10

In present value problems, the interest rate is also called the __________________.

Accepted Answer

The answer of In present value problems, the interest rate...

Question 11

The equity method of accounting is used if the investor owns between 20-50% of another company and the investor is able to exert influence over the other company.

Accepted Answer

The statement is true. The equity method of accounting is used when the investor owns between 20-50% of another company and has significant influence over the other company.

Question 12

Wanda Ward makes an investment of $11,800, which pays 8% interest that is compounded quarterly. How much interest will have accrued at the end of 48 months?

Accepted Answer

The answer of Wanda Ward makes an investment of $11,800,...

Question 13

If the parent owns 90% of the subsidiary's stock, then 90% of the subsidiary's assets and liabilities are included in the consolidated balance sheet.

Accepted Answer

In a consolidated balance sheet, 100% of the subsidiary's assets and liabilities are included, regardless of the parent company's ownership percentage, as long as control is established.

Question 14

If the investor owns over 50% of the outstanding common stock, the investor is deemed to have control over the operating and financial policies of the investee.

Accepted Answer

According to the Financial Accounting Standards Board (FASB), if an investor owns over 50% of the outstanding common stock of an investee, the investor is deemed to have control over the operating and financial policies of the investee. This is known as the consolidation method of accounting.

Question 15

Securities issued by a corporation as a form of ownership in the business, such as common stock and preferred stock, are called equity securities.

Accepted Answer

This statement is true. Equity securities represent an ownership interest in a corporation and include common stock and preferred stock.

Question 16

The fair value method should be used to account for stock investments of less than 20% of the outstanding shares.

Accepted Answer

For stock investments of less than 20% of the outstanding shares, the fair value method (also known as the market value method) is typically used, as the investor does not have significant influence over the investee.

Question 17

An advantage of the equity method over the fair value method is that it prevents an investor from manipulating its own income by exerting influence over the amount and timing of investee dividends.

Accepted Answer

The equity method takes into account the investor's share of the investee's earnings and dividends, whereas the fair value method only considers changes in the investee's fair value. Therefore, with the equity method, an investor cannot manipulate its own income by influencing the timing or amount of dividends from the investee.

Question 18

Marvin's Manufacturing can invest in a new process, but will need to purchase new equipment. The cost of the equipment is $75,000 and needs to be in place in 8 years. The company invests the money at 8% interest compounded semiannually. How much will they need to invest in order to have $75,000 in 8 years?

Accepted Answer

The answer of Marvin's Manufacturing can invest in a new...

Question 19

The excess of acquisition cost over the current value of the investee's identifiable net assets, referred to as goodwill, may not be recorded by the investor under current generally accepted accounting principles.

Accepted Answer

Under current generally accepted accounting principles (GAAP), the excess of acquisition cost over the current value of the investee's identifiable net assets, referred to as goodwill, is recorded by the investor and is not amortized but tested for impairment at least annually.

Question 20

Any transaction or set of transactions that brings together two or more previously separate entities to form a single accounting entity is called a business combination.

Accepted Answer

This statement is true. A business combination involves the joining of two or more separate entities into one accounting entity.

Quiz 13: Finance and Stock Market Equilibrium