Question 1

The company whose stock is owned by the parent company is called the

Accepted Answer

A subsidiary company is a company that is owned and controlled by another company, known as the parent company. Therefore, B is the correct answer. Controlled company is not the right term as it doesn't specify the ownership structure. Investee company refers to the company in which an investor owns shares, but not necessarily the parent company. Sibling company does not accurately describe the ownership relationship between the companies.

Question 2

In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because

Accepted Answer

The Unrealized Loss account is debited when there is a decline in fair value of short-term stock investments that have not been sold. This account is used to reflect the decrease in value of the investments, but not the actual loss until the securities are sold. Management's intention to realize the loss, market volatility or difficulty in determining the exact amount of the loss do not impact the initial accounting treatment of recognizing the unrealized loss.

Question 3

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $300,000 on January 1, 2014. The journal entry on Oslo's books assuming Celdon's net income for 2014 was $500,000 would include a debit to

Accepted Answer

Oslo Corp. would record its share of Celdon Corp.'s net income, which is 30% of $500,000, as an increase in its investment account. Therefore, it would debit Stock Investments for $150,000.

Question 4

If the equity method is being used, cash dividends received

Accepted Answer

When the equity method is being used, cash dividends received are credited to the Stock Investments account because they represent a return of the investor's investment in the investee's stock. The investor's share of the investee's net income has already been recorded at the proper proportion on the investor's books. Dividend revenue is not recorded separately because it is already included in the investor's share of the investee's net income. Revenue from Investment in Stock account is not a proper account in this scenario.

Question 5

Mega Company receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a

Accepted Answer

Since the net proceeds of the sale are less than the cost, a loss of $6,000 is incurred. This loss would be reported under "Other expenses and losses" in the income statement.

Question 6

When a company owns more than 50% of the common stock of another company

Accepted Answer

The answer of When a company owns more than 50%...

Question 7

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

Accepted Answer

Under the equity method, the Stock Investments account is credited (decreased) when the investee reports a net loss, reflecting the investor's share of the loss.

Question 8

If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company? $\begin{array}{lll}&\text { Legal } & \text { Economic } \
\text { a. } & 3 & 3 \
\text { b. } & 1 & 2 \
\text { c. } & 3 & 1 \
\text { d. } & 2 & 1
\end{array}$

Accepted Answer

The answer of If a parent company has two wholly...

Question 9

Consolidated financial statements are useful to all of the following except

Accepted Answer

Consolidated financial statements are meant to provide a comprehensive view of the financial position, performance, and cash flows of a group of companies that are under common control. Therefore, they are primarily useful to internal stakeholders such as the management of the parent company, board of directors, and stockholders of the parent company. Creditors of subsidiary companies may not necessarily benefit from consolidated financial statements as they are only concerned with the financial health of the specific subsidiary they are dealing with.

Question 10

In order to use the cost method of accounting for stock investments, how much stock must the investor own?

Accepted Answer

The cost method is used for stock investments where the investor owns less than 20% of the company's stock.

Question 11

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

Accepted Answer

A parent company is a company that holds more than 50% of the common stock of another company, giving it control of that company's operations and decision-making. A subsidiary company is a company owned by another company, but typically refers to a company in which the parent company owns less than 50% of the stock. A charge company and management company are not commonly used terms in the context of company ownership.

Question 12

When a company owns more than 50% of the common stock of another company

Accepted Answer

When a company owns more than 50% of the common stock of another company, it has a controlling interest and must prepare consolidated financial statements that combine the financial information of both companies. This is done to provide a more accurate and complete picture of the financial performance of the group as a whole. The consolidated financial statements will include all of the assets, liabilities, revenues, and expenses of the subsidiaries, as well as any intercompany transactions that occurred during the accounting period.

Question 13

At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show?

Accepted Answer

The total fair value of the trading securities portfolio is less than the total cost, indicating an unrealized loss of $5,000 ($179,000 - $174,000 = $5,000). Therefore, there should be a reduction of an asset of $5,000 under the current assets section and an unrealized loss of $5,000 under "Other expenses and losses." Realized gains or losses would only be recognized if the securities were sold, which is not indicated in the scenario. Option A and B are incorrect because there is no indication of a realized loss. Option D is incorrect because it includes a realized loss of $75,000, which is not supported by the information provided.

Question 14

If one company owns more than 50% of the common stock of another company

Accepted Answer

If one company owns more than 50% of the common stock of another company, a parent-subsidiary relationship exists. This means that the owning company (the parent) has control over the other company (the subsidiary) and consolidates its financial statements with its own. The cost method is not appropriate because the parent has significant influence over the subsidiary, and liquidation is not necessary or practical in most cases. A partnership exists when two or more parties share ownership and control of a business, which is not the case when one company owns more than 50% of another company's stock.

Question 15

Which of the following is not a method of accounting for stock investments?

Accepted Answer

The answer of Which of the following is not a...

Question 16

The Fair Value Adjustment account

Accepted Answer

The Fair Value Adjustment account relates to the entire portfolio of securities held by the company, not to each security individually. It is not closed at the end of each accounting period but is adjusted based on changes in the fair value of the securities. It appears on the income statement as either Other Comprehensive Income or Other Comprehensive Loss, depending on the direction of the fair value adjustment.

Question 17

If the equity method is being used, the Revenue from Investment in Stock account is

Accepted Answer

When using the equity method, the investor records its share of the investee's net income as Revenue from Investment in Stock. Therefore, choice C is the correct answer as Revenue from Investment in Stock is credited when net income is reported by the investee.

Question 18

King Corporation purchased 1,000 shares of Cable common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were

Accepted Answer

The answer of King Corporation purchased 1,000 shares of Cable...

Question 19

Which of the following statements is true about investments classified as trading securities?

Accepted Answer

Investments classified as trading securities are bought and held for the purpose of selling them in the near term to generate profits from short-term price fluctuations. As a result, changes in their market value are recognized as a part of net income. Trading securities can consist of both debt and equity securities, and they are valued at fair market value on the balance sheet. Therefore, option D is the correct answer.

Question 20

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $300,000 on January 1, 2014. If Celdon declares and pays $100,000 in total dividends on February 14th, the journal entry would include a credit to

Accepted Answer

Oslo Corp. owns 30% of Celdon Corp., so it would recognize 30% of the dividends as a reduction in the investment account, not as dividend revenue. Therefore, the entry would include a credit to Stock Investments for $30,000 (30% of $100,000).

Quiz 14: Understanding Investments and Acquisitions in Accounting

The company whose stock is owned by the parent company is called the

In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $300,000 on January 1, 2014. The journal entry on Oslo's books assuming Celdon's net income for 2014 was $500,000 would include a debit to

If the equity method is being used, cash dividends received

Mega Company receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a

When a company owns more than 50% of the common stock of another company

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

Consolidated financial statements are useful to all of the following except

In order to use the cost method of accounting for stock investments, how much stock must the investor own?

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

When a company owns more than 50% of the common stock of another company

At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show?

If one company owns more than 50% of the common stock of another company

Which of the following is not a method of accounting for stock investments?

The Fair Value Adjustment account

If the equity method is being used, the Revenue from Investment in Stock account is

King Corporation purchased 1,000 shares of Cable common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were

Which of the following statements is true about investments classified as trading securities?

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $300,000 on January 1, 2014. If Celdon declares and pays $100,000 in total dividends on February 14th, the journal entry would include a credit to