Question 1

Bing Company owns 30% interest in the stock of Yeti Corporation. During the year, Yeti pays $75,000 in dividends to Bing, and reports $400,000 in net income. Bing Company's investment in Yeti will increase Bing net income by

Accepted Answer

The answer of Bing Company owns 30% interest in the...

Question 2

The receipt of dividends on an investment affects the Stock Investment account when which of the following methods is used?

Accepted Answer

The equity method is used when the investor has significant influence over the investee. Under this method, dividends received by the investor are recorded as a credit to the Stock Investment account, which increases the balance of the account.

Question 3

When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor

Accepted Answer

When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor has significant influence on the investee and that the equity method should be used to account for the investment. This is because owning such a significant portion of the common stock will allow the investor to have contractual or other means of exercising influence over the investee's operational decisions.

Question 4

Under the equity method, the Stock Investments account is increased when the

Accepted Answer

Under the equity method, the investor records its share of the investee company's net income as an increase to the Stock Investments account. Therefore, choice A is the correct answer as it reflects the situation where the investee company reports net income.

Question 5

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

Accepted Answer

When a company acquires a 40% common stock interest in another company, the equity method is usually applicable because the company has the ability to exert significant influence over the investee. The cost method is not usually applicable because the investment is more than 20% and the company has the ability to influence the investee. All influence is not classified as controlling, as the company does not have a majority ownership.

Question 6

Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company

Accepted Answer

The answer of Under the equity method of accounting for...

Question 7

Chopper Company owns 15% interest in the stock of Elton Corporation. During the year, Elton pays $10,000 in dividends to Chopper, and reports $400,000 in net income. Chopper Company's investment in Elton will increase Chopper net income by

Accepted Answer

The answer of Chopper Company owns 15% interest in the...

Question 8

If a stock investment is sold at a gain, the gain

Accepted Answer

The gain from a stock investment is considered a non-operating revenue and is reported in the Other Revenue and Gain section of the income statement.

Question 9

Jambon Company owns 10% interest in the stock of Fanth Corporation. During the year, Fanth pays $12,000 in dividends to Jambon, and reports $200,000 in net income. Jambon Company's investment in Fanth will increase Jambon net income by

Accepted Answer

The answer of Jambon Company owns 10% interest in the...

Question 10

Eglin Company owns 30% interest in the stock of Bosco Corporation. During the year, Bosco pays $10,000 in dividends to Eglin, and reports a net loss of $200,000. Eglin Company's investment in Bosco will affect Eglin net income by a

Accepted Answer

As Eglin Company owns 30% interest in Bosco Corporation, they will record their share of losses and gains of Bosco on their income statement. In this case, as Bosco Corporation had a net loss of $200,000, Eglin will record 30% of that loss, which is $60,000, as a decrease in their net income. The dividend payment of $10,000 from Bosco has no effect on Eglin's net income as it is just a distribution of earnings. Therefore, the correct answer is C) $60,000 decrease.

Question 11

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

Accepted Answer

The answer of Which of the following is the correct...

Question 12

On January 1, 2017, the Express Corporation purchased 30% of the common stock outstanding of the Bangor Corporation for $300,000. During 2017, the Bangor Corporation reported net income of $120,000 and paid cash dividends of $30,000. The balance of the Stock Investments-Bangor account on the books of Express Corporation at December 31, 2017, is

Accepted Answer

To find the balance of the Stock Investments - Bangor account on the books of Express Corporation at December 31, 2017, we need to follow the equity method of accounting for investments.

Under the equity method, the initial cost of the investment is increased or decreased by the investor's share of the earnings or losses, and decreased by dividends or distributions received. The investor's share of the earnings or losses is recognized in the investor's income statement.

So, in 2017, Express Corporation's share of the net income of Bangor Corporation is 30% x $120,000 = $36,000. This amount increases the balance of the Stock Investments - Bangor account, so it is now $336,000 ($300,000 + $36,000).

Also, Express Corporation received 30% x $30,000 = $9,000 as dividends from Bangor Corporation. This amount decreases the balance of the Stock Investments - Bangor account, so it is now $327,000 ($336,000 - $9,000).

Therefore, the answer is D) $327,000.

Question 13

Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company's investment in ABX will increase Barcelona net income by

Accepted Answer

Barcelona Company has a 40% ownership in ABX Corporation, which means it can claim 40% of ABX's net income of $300,000, which is $120,000 (0.4 x $300,000 = $120,000). In addition to this, ABX paid $40,000 in dividends to Barcelona, which increases their net income. Therefore, the total increase in Barcelona's net income from its investment in ABX is $120,000 + $40,000 = $160,000. However, the question asks for only the increase in Barcelona's net income from this investment, so we subtract Barcelona's initial investment in ABX (40% x $0) of $0 to get the final answer of $160,000 - $0 = $120,000. Therefore, the answer is B.

Question 14

FTX Company owns 10% interest in the stock of Zip Corporation. During the year, Zip pays $5,000 in dividends to FTX, and reports a net loss of $100,000. FTX Company's investment in Zip will affect FTX net income by a

Accepted Answer

The answer of FTX Company owns 10% interest in the...

Question 15

If the cost method is used to account for an investment in common stock

Accepted Answer

The answer of If the cost method is used to...

Question 16

The cost method of accounting for investments in stock should be used when the investment is

Accepted Answer

The cost method of accounting for investments in stock is used when the investor owns less than 20% of the outstanding stock and has no significant influence over the investee's operations. Therefore, the best choice is D, non-influential and noncontrolling.

Question 17

Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company's investment in ABX will increase by

Accepted Answer

Barcelona owns 40% of ABX's stock and receives $40,000 in dividends, which represents 40% of the total dividends paid by ABX. Therefore, the total dividends paid by ABX are $100,000 ($40,000/0.4). ABX's net income is $300,000, of which 40% belongs to Barcelona, or $120,000. Adding the $100,000 in dividends to the $120,000 share of ABX's net income gives a total increase in Barcelona's investment of $220,000. Therefore, the answer is D, $80,000 (40% of $200,000).

Question 18

Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

Accepted Answer

The answer of Which of the following is the correct...

Question 19

The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as

Accepted Answer

Significant influence refers to the ability of an investor to have an impact on the decisions made by another company, even if they do not have a controlling interest (i.e. less than 50% ownership). This influence can come from having a seat on the board of directors or through other means of communication and collaboration with the management team of the invested company. Choice B, control, refers to having more than 50% ownership and thus having the power to make decisions for the company. Choice C, a combination, is not a specific term in this context. Choice D, influence and control, is not accurate as these two terms refer to different levels of ownership and power.

Question 20

On January 1, 2017, Valentine Corporation purchased 25% of the common stock outstanding of Betz Corporation for $200,000. During 2017, Betz Corporation reported net income of $80,000 and paid cash dividends of $48,000. The balance of the Stock Investments-Betz account on the books of Valentine Corporation at December 31, 2017, is

Accepted Answer

Since Valentine Corporation purchased 25% of the common stock outstanding of Betz Corporation on January 1, 2017, it would be classified as a long-term investment and accounted for using the equity method. Under the equity method, the initial investment is recorded at cost, and subsequently adjusted for the investor's share of the investee's earnings or losses, as well as dividends received.

Valentine Corporation's initial investment was $200,000, and it owns 25% of Betz Corporation's common stock, which means that it can influence Betz Corporation's operating and financial policies.

Valentine Corporation's share of Betz Corporation's net income for 2017 would be $20,000 (25% × $80,000). Since Betz Corporation paid cash dividends of $48,000, Valentine Corporation's share of the dividends would be $12,000 (25% × $48,000).

Therefore, Valentine Corporation's balance in the Stock Investments-Betz account at December 31, 2017, would be $208,000 ($200,000 + $20,000 - $12,000).

Quiz 27: Investments

Bing Company owns 30% interest in the stock of Yeti Corporation. During the year, Yeti pays $75,000 in dividends to Bing, and reports $400,000 in net income. Bing Company's investment in Yeti will increase Bing net income by

The receipt of dividends on an investment affects the Stock Investment account when which of the following methods is used?

When an investor owns between 20% and 50% of the common stock of a corporation, it is generally presumed that the investor

Under the equity method, the Stock Investments account is increased when the

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

Under the equity method of accounting for investments in common stock, when a dividend is received from the investee company

Chopper Company owns 15% interest in the stock of Elton Corporation. During the year, Elton pays $10,000 in dividends to Chopper, and reports $400,000 in net income. Chopper Company's investment in Elton will increase Chopper net income by

If a stock investment is sold at a gain, the gain

Jambon Company owns 10% interest in the stock of Fanth Corporation. During the year, Fanth pays $12,000 in dividends to Jambon, and reports $200,000 in net income. Jambon Company's investment in Fanth will increase Jambon net income by

Eglin Company owns 30% interest in the stock of Bosco Corporation. During the year, Bosco pays $10,000 in dividends to Eglin, and reports a net loss of $200,000. Eglin Company's investment in Bosco will affect Eglin net income by a

Which of the following is the correct matching concerning an investor's influence on the operations and financial affairs of an investee?

Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company's investment in ABX will increase Barcelona net income by

FTX Company owns 10% interest in the stock of Zip Corporation. During the year, Zip pays $5,000 in dividends to FTX, and reports a net loss of $100,000. FTX Company's investment in Zip will affect FTX net income by a

If the cost method is used to account for an investment in common stock

The cost method of accounting for investments in stock should be used when the investment is

Barcelona Company owns 40% interest in the stock of ABX Corporation. During the year, ABX pays $40,000 in dividends to Barcelona, and reports $300,000 in net income. Barcelona Company's investment in ABX will increase by

Which of the following is the correct matching concerning the appropriate accounting for long-term stock investments?

The ability of an investing company to affect the operating and financial activities of another company, even though the investor holds less than 50% of the stock, is known as