Question 1

The assets of the subsidiary are depreciated and amortized over their useful lives as a part of the consolidation process.

Accepted Answer

The subsidiary's assets are depreciated and amortized within the consolidated financial statements.

Question 2

Miller Corp.purchased $1,000,000 of bonds at 105.The bonds pay interest at the rate of 10%.Miller intends to hold these bonds to maturity.Which of the following statements is false?

Accepted Answer

The bond is reported at amortized cost unless the fair value approach is used, unrealized gains/losses associated with use of the fair value approach are not reported within the income statement for held-to-maturity securities.

Question 3

Piano Company owns 55% of the voting common stock shares of Keys Corporation.Which of the following is true?

Accepted Answer

An investment of more than 50% of the outstanding voting stock requires the parent company to use the consolidation method.

Question 4

An investment accounted for under the equity method is always reported on the balance sheet at fair value.

Accepted Answer

Equity method investments are not reported at fair value unless the investment value is permanently impaired.

Question 5

Use of the consolidated financial statement method of accounting for a long-term investment in common stock of another company is required when the ownership of its voting stock is

Accepted Answer

An investment of more than 50% of the outstanding voting stock results in consolidation accounting.

Question 6

Goodwill is reported on a consolidated balance sheet only if it was acquired in the merger or acquisition.

Accepted Answer

Goodwill is only recognized if it is acquired and paid for at the time of merger or acquisition.

Question 7

Significant influence over the operating and financial policies of another company may be indicated by

Accepted Answer

Each of the situations may create significant influence over the investee.

Question 8

An investment accounted for under the equity method would record an increase in the investment account and create net income for an amount equal to the proportionate share of the investee's reported net income.

Accepted Answer

The investor's share of investee net income is reported as investor net income and as an adjustment to the investment account.

Question 9

An investment accounted for under the equity method would record a reduction in the investment account for the proportionate share of the investee's reported net loss.

Accepted Answer

The investor's share of investee net income is reported as investor net income and as an adjustment to the investment account.

Question 10

Idaho Company purchased 30% of the outstanding preferred stock (nonvoting)of Potato Corporation as a long-term investment.Which of the following classifications should be used by Idaho Company in accounting for the investment?

Accepted Answer

If the investment can't be classified as either trading or held-to-maturity, the available-for-sale classification is used.

Question 11

Any unrealized gains or losses on trading securities would have to be added back to or deducted from net income on the statement of cash flows under the indirect method of determining cash flows from operating activities.

Accepted Answer

The unrealized gain or loss doesn't involve a cash flow and as a result net income must be adjusted.

Question 12

Miller Corp.purchased $1,000,000 of bonds at 96.The bonds pay interest at the rate of 10%.Miller intends to hold these bonds to maturity.Which of the following statements is correct?

Accepted Answer

A bond investment's book value increases as the bond investment discount is amortized.

Question 13

Which of the following is the best description of investments in available-for-sale securities?

Accepted Answer

Available-for-sale securities are passive investments other than trading securities and held-to-maturity debt.

Question 14

Madison Inc.acquires 100% of the voting stock of Allison Corp.for $10.0 million.Allison's total assets at fair value equaled $12.5 million and Allison had liabilities at fair value equal to $3.4 million.Madison will report goodwill of $0.9 million.

Accepted Answer

Goodwill ($.9 million) is the excess of the amount paid ($10 million) over the fair value of the net assets ($12.5 million - $3.4 million).

Question 15

When the acquiring company purchases 100% of the investee's stock,the investee's assets and liabilities will be consolidated with those of the acquiring company at their book values.

Accepted Answer

The acquired assets and liabilities are recorded at their market values.

Question 16

Gilman Company purchased 100,000 of the 250,000 shares of common stock of Burke Corporation on January 1,2010,at $40 per share as a long-term investment.The records of Burke Corporation showed the following on December 31,2010:

$\begin{array}{lccc}
\text { 2010 net income} & \$ 575,000 \
 \text { Dividends declared and paid during December, 2010 } & \$ 30,000\
\text { Market price per share} & \$ 42 \
\end{array}$
 At what amount should Gilman Company report the Burke investment on the December 31,2010 balance sheet?

Accepted Answer

The answer of Gilman Company purchased 100,000 of the 250,000...

Question 17

Chang Corp.purchased $1,000,000 of bonds at par value on April 1,2010.The bonds pay interest at the rate of 10%.Chang intends to hold these bonds to maturity.Which of the following statements is false?

Accepted Answer

The fair value approach is optional when accounting for held-to-maturity investments.

Question 18

When an investment accounted for under the equity method is sold,the gain or loss reported on the income statement is the difference between the selling price and its original cost.

Accepted Answer

The gain or loss is the difference between the selling price and book value.

Question 19

Which of the following is the best description of investments in trading securities?

Accepted Answer

The trading securities classification is used for those investments intended to be sold in the short-run.

Question 20

Subsequent to a merger,any revenues and expenses of the subsidiary would be combined with those of the parent company on the consolidated income statement.

Accepted Answer

The income statements of the parent company and subsidiary are reported as one, they are consolidated.

Quiz 12: Reporting and Interpreting Investments in Other Corporations