Question 1

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

When shares of stock held as an investment are sold, the difference between the sales proceeds and the carrying amount of the investment is recorded as a gain or loss. This gain or loss is recognized in the income statement as part of other gains and losses or as a separate line item if significant. It is not a prior period adjustment, operating income and losses or paid-in capital addition.

Question 2

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 typical reason for a company to purchase another company's stock. The other options, such as earning a return on excess cash, gaining control of another company's operations, and developing or maintaining business relationships, are all common reasons for purchasing stock.

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

According to GAAP, if an investor owns between 20% and 50% of the outstanding shares of a company, they are considered to have significant influence over that company. In this case, Armando Company owns 24.28% of Tito Company's outstanding shares, which qualifies as significant influence. As a result, the investment should be accounted for by the equity method.

Question 4

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...

Question 5

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

Accepted Answer

According to Generally Accepted Accounting Principles (GAAP), stock investments of less than 20% should be accounted for using the cost method. For stock investments between 20% and 50%, the equity method is typically used, and for investments greater than 50%, consolidated financial statements may be required.

Question 6

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 is the choice where the investor records its share of periodic net income of the investee. Under the equity method, the investor also records adjustments to its investment for its share of the investee's profits or losses, changes in the investee's other comprehensive income or equity, and dividends received from the investee. The cost method is where investments are recorded at their original cost, the market method is where investments are recorded at their current market value, and the income method does not exist in accounting terminology.

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

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

Since Zach Company owns 45% of the voting stock of Tomas Corporation and uses the equity method, the net loss reported by Tomas Corporation would be recorded as a reduction in Zach Company's investment account. Therefore, Zach Company's entry should include a credit to the investment account for $9,000 (45% x $20,000).

Question 9

Held to maturity securities

Accepted Answer

Held to maturity securities are reported at amortized cost, not fair market value. They typically include bonds, but not stocks. They are reported as either current or noncurrent assets depending on when they are expected to mature.

Question 10

On May 1, 2014, Stanton Company purchased $60,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, 2014, Stanton received its first semiannual interest. On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest. The journal entry Stanton will record on February 1, 2015, will include:

Accepted Answer

When Stanton sells a portion of the bonds, it will have a gain or loss on the sale. In this case, Stanton is selling $50,000 of the bonds at 103, which means they will receive $51,500 ($50,000 x 103%). The carrying value of the bonds at the time of sale would be the original purchase price of $60,000 plus six months' accrued interest of $3,600 (12% x $60,000 x 6/12), minus the interest received on June 30, 2014 of $3,600 ($60,000 x 12% x 6/12), or $60,000 + $3,600 - $3,600 = $60,000. Therefore, Stanton will recognize a gain of $1,500 ($51,500 - $60,000) on the sale of the bonds, which will be credited to Gain on Sale of Investments. The entry will be:

Cash                          51,500
Gain on Sale of Investments  1,500
Investments in Harris Bonds 50,000
To record sale of $50,000 of Harris Company bonds at 103.

Question 11

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 12

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 corporation receives dividends from an investment, it records it as dividend revenue. Therefore, Blanton Corporation would debit Cash and credit Dividend Revenue to record the dividends received from Worton Corporation.

Question 13

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 14

On May 1, 2014, Stanton Company purchased $60,000 of Harris Company's 12% bonds at 100 plus accrued interest of $2,400. On June 30, 2014, Stanton received its first semiannual interest. On February 1, 2015, Stanton sold $50,000 of the bonds at 103 plus accrued interest. What are the total proceeds from the February 1, 2015 sale?

Accepted Answer

The purchase price of the bond was $60,000 + $2,400 = $62,400.

The first semiannual interest received on June 30, 2014, would be $60,000 x 0.12 x 6/12 = $3,600.

Accrued interest for the sale on February 1, 2015, would be $60,000 x 0.12 x 8/12 = $3,840.

The bonds were sold for $50,000 x 1.03 + $3,840 = $52,100.

Therefore, the total proceeds from the February 1, 2015 sale would be $52,100. The closest answer choice is D, $52,000, which is an acceptable approximation due to rounding.

Question 15

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 16

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

Accepted Answer

Consolidated statements are used when a company has subsidiaries or partially owned entities, and the financial data for all of these companies are combined to create a single set of financial statements. This is done to give a clearer picture of the overall financial health of the parent company and its subsidiaries.

Question 17

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 involves recognizing the investor's share of the investee's net income in the period it is earned. Wendell Company's share of net income is included in the balance of the investment account. However, since the equity method recognizes the investor's share of the investee's net income, it is also reduced by the amount of any dividends received. Therefore, the correct answer is the investment plus 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.

Question 18

The equity method of accounting for investments

Accepted Answer

The answer of The equity method of accounting for investments
...

Question 19

The cost method of accounting for stock

Accepted Answer

The answer of The cost method of accounting for stock
...

Question 20

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 outstanding stock of Leonardo Company makes it a majority owner, and Leonardo Company being owned by Gale Company makes it a subsidiary. Therefore, the best choice is D.

Quiz 15: Investments and Fair Value Accounting