Question 1

Financial statements in which financial data for two or more companies are combined as a single entity are called

Accepted Answer

Consolidated statements combine the financial data of two or more companies as a single entity. This is typically done when one company owns a controlling interest in another, and the financial statements of both companies must be presented together. Conventional statements and audited statements are not specific to the combining of financial data from multiple companies, and there is no such thing as constitutional statements.

Question 2

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 a(n)

Accepted Answer

The difference between the proceeds and the carrying amount of the investment when shares of stock held as an investment are sold is recorded as a gain or loss. This gain or loss is reported on the income statement as a non-operating item.

Question 3

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

The equity method is used when the investor has the ability to exercise significant influence over the investee. In this case, Armando Company owns 24.3% (17,000/70,000) of Tito Company's common stock, which gives it the ability to exert significant influence over Tito's operating and financial policies. Therefore, the equity method should be used to account for this investment.

Question 4

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 requires the investor to record its share of the investee's periodic net income, making it the correct method for the given scenario. The cost method is used when the investment is held for trading or is classified as available for sale. The market method involves valuing the investment at its current market value. The income method is a general term that refers to any method that involves recording income from an investment.

Question 5

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 recognize its share of the investee's net income, which increases the investment account. However, dividends received from the investee decrease the investment account. Therefore, the balance in the investment account would be equal to the cost of the investment plus or minus 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. Choice (D) is the only option that reflects this calculation.

Question 6

The equity method of accounting for investments

Accepted Answer

The answer of The equity method of accounting for investments
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Question 7

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 8

What are the total proceeds from the February 1, 2015 sale?

Accepted Answer

The total proceeds from the February 1, 2015 sale can be calculated as follows:
$50,000 (sale price) + $2,000 (cost of repairs) = $52,000. Therefore, option D is the correct answer.

Question 9

The journal entry Stanton will record on February 1, 2015, will include:

Accepted Answer

The answer of The journal entry Stanton will record on...

Question 10

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 11

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

When using the equity method, the investor records its share of the investee's net income or net loss. In this case, Zach Company owns 45% of the voting stock of Tomas Corporation, so its share of the $20,000 net loss would be $9,000 (45% x $20,000). The entry to record this would be a credit to the investment account for $9,000. Option A is incorrect because there is no information given that Zach Company received or paid any cash related to this investment. Option B is incorrect because a debit to the investment account would increase the balance, but the investment experienced a loss, so the balance should decrease. Option D is incorrect because there is no separate account called a "loss account" in the equity method.

Question 12

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 13

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

Accepted Answer

Sustaining another company's stock price is not a common reason for a company to purchase another company's stock. The other options listed, earning a return on excess cash, gaining control of another company's operations, and developing/maintaining business relationships are all potential reasons for a company to purchase another company's stock.

Question 14

The cost method of accounting for stock

Accepted Answer

The answer of The cost method of accounting for stock
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Question 15

Gale Company owns 87% of the outstanding stock of Leonardo Company. Leonardo Company is referred to as the

Accepted Answer

Gale Company owning 87% of the outstanding stock of Leonardo Company indicates that Leonardo Company is a subsidiary of Gale Company. A subsidiary is a company that is controlled by another company, known as the parent company.

Question 16

Held to maturity securities

Accepted Answer

Held to maturity securities are debt securities that the company has the positive intent and ability to hold to maturity. They are reported at amortized cost, which is the original purchase price adjusted for any amortization of premiums or discounts. Held to maturity securities may be reported as current or noncurrent assets depending on their maturity dates. They do not include stocks, only bonds or other debt securities. Fair market value reporting is not applicable for held to maturity securities.

Question 17

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

Accepted Answer

The cost method is used when an investor owns less than 20% of the voting stock of the investee company, and therefore does not have significant influence over the company's operations. Investments between 20% and 50% are accounted for using the equity method, where the investor has significant influence over the investee company.

Question 18

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

When a company receives cash dividends from an investment in common stock, the journal entry is to debit Cash and credit Dividend Revenue. This recognizes the increase in cash and the revenue earned from the investment. Choice A is incorrect because it would reduce the carrying value of the investment without recognizing any revenue. Choice C is incorrect because it suggests recognizing income that has not yet been realized by Blanton Corporation. Choice D is incorrect because it suggests recognizing the increase in the value of the investment, but not the revenue earned from it.

Question 19

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 20

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

Accepted Answer

The answer of Which one of the following items below...

Quiz 13: Investments and Fair Value Accounting