Question 1

Consolidated financial statements are prepared when one company has:
A) Accounted for the investment using the equity method.
B) Accounted for the investment as available-for-sale securities.
C) Control over another company.
D) None of these is correct.

Accepted Answer

Consolidated financial statements are prepared when one company has control over another company. This means that the controlling company has the power to direct the activities of the other company and earns a majority of the economic benefits from its operations. The financial statements of the controlled company are then combined with the financial statements of the controlling company to create a single set of consolidated financial statements. Option A is incorrect as the equity method only requires the investor to record its share of the investee's results of operations. Option B is incorrect as available-for-sale securities are reported at fair value and any changes in fair value are recorded in other comprehensive income rather than the income statement. Option D is incorrect as there is a correct option, which is C.

Question 2

Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet?
A) Debt securities.
B) Equity securities.
C) Common stock.
D) All of these are correct.

Accepted Answer

Held-to-maturity securities are debt securities which the company intends to hold until maturity. Equity securities and common stock are not held-to-maturity securities as their value can fluctuate and the company may sell them at any time.

Question 3

Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly classified as a trading security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income?
A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.

Accepted Answer

The increase in stock price from $30 to $32 per share results in a gain of $2 per share for Sports Spectacular. Since they purchased 1,000 shares, the total gain is $2,000, which will increase their net income.

Question 4

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?
A) The investment in available-for-sale securities would be reported in the balance sheet at its $100,000 cost.
B) The investment in available-for sale securities would be reported in the balance sheet at its $105,000 market value.
C) An unrealized holding gain would be reported in other comprehensive income.
D) Both b and c are correct.

Accepted Answer

According to accounting standards, available-for-sale securities should be reported at fair value. Therefore, the investment in available-for-sale securities should be reported in the balance sheet at its $105,000 market value. Additionally, any unrealized holding gain or loss should be reported in other comprehensive income until the securities are sold or disposed of, as in this case, an unrealized holding gain of $5,000 should be reported in other comprehensive income. Hence, option B is correct. Option C is also correct as an unrealized holding gain should be reported in other comprehensive income. Therefore, option D is the best choice as it includes the correct answers to the question.

Question 5

On January 1, 2012, Gilman Company purchased 10,000 of the 40,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. Gilman can exercise significant influence over Burke and properly records the investment using the equity method. The records of Burke Corporation showed the following at December 31, 2012: $$\begin{array} { | l | l | } 
\hline \text { Net Income } & \$ 500,000 \
\hline \text { Dividends Paid } & \$ 200,000 \
\hline \text { Market Price per Share } & \$ 38 \
\hline
\end{array}$$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?
A) $380,000.
B) $400,000.
C) $475,000.
D) $425,000.

Accepted Answer

Under the equity method, the investment is initially recorded at cost, and then adjusted for the investor's share of the investee's net income and dividends. Gilman initially paid $400,000 (10,000 shares x $40). Gilman's share of Burke's net income is $125,000 (10,000/40,000 x $500,000), and its share of dividends is $50,000 (10,000/40,000 x $200,000). The investment balance is $400,000 + $125,000 - $50,000 = $475,000.

Question 6

On January 1, 2012, Gilman Company purchased 10,000 of the 200,000 shares of common stock of Burke Corporation at $40 per share as a long-term investment. The records of Burke Corporation showed the following at December 31, 2012: $$\begin{array} { | l | l | } 
\hline \text { Net Income } & \$ 500,000 \
\hline \text { Dividends Paid } & \$ 200,000 \
\hline \text { Market Price per Share } & \$ 38 \
\hline
\end{array}$$ What amount should Gilman Company report in its December 31, 2012, balance sheet for its investment in Burke?
A) $380,000.
B) $400,000.
C) $415,000.
D) $425,000.

Accepted Answer

Gilman Company should report $380,000 in its December 31, 2012, balance sheet for its investment in Burke. This is because Gilman Company uses the fair value method to account for its investment in Burke, and the fair value of the investment is equal to the market price per share multiplied by the number of shares owned.

Question 7

Sports Spectacular purchased 100,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly recorded using the equity method. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income under the equity method?
A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.

Accepted Answer

The answer of Sports Spectacular purchased 100,000 shares of stock...

Question 8

Libby Company purchased equity securities for $100,000 and classified them as trading securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?
A) The investment in trading securities would be reported in the balance sheet at its $100,000 cost.
B) The investment in trading securities would be reported in the balance sheet at its $105,000 fair value.
C) An unrealized holding gain would be reported in other comprehensive income.
D) Both b and c are correct.

Accepted Answer

According to the accounting standards for trading securities, they should be recorded at fair value on the balance sheet. Therefore, the investment in the trading securities should be reported at its fair value of $105,000. Since the gain is unrealized and the securities are held for trading purposes, it should be recognized in net income in the current period. Therefore, option C is not correct. Option D is partially correct, but only option B is the best choice as it reflects the accurate reporting of the investment in the financial statements.

Question 9

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:  GIC purchased the bonds for:
A) $200,000.
B) $194,758.
C) $242,000.
D) Cannot be determined from the given information.

Accepted Answer

The amortization schedule shows that the bond was purchased at a discount of $5,242 ($200,000 - $194,758), which means that GIC purchased the bonds for $194,758.

Question 10

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:  The investment in bonds has a maturity in:
A) Two years.
B) Three years.
C) Six years.
D) Cannot be determined from the given information.

Accepted Answer

The amortization schedule provided shows that the investment in bonds will reach its maturity on December 31, 2014. This means that the bonds have a maturity of three years, as they were purchased on January 1, 2012. Therefore, the best choice is option B.

Question 11

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:  GIC purchased the bonds:
A) At par.
B) At a discount.
C) At a premium.
D) Cannot be determined from the given information.

Accepted Answer

The answer of General Investment Co. (GIC) purchased bonds on...

Question 12

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:  What is the annual market interest rate on the bonds?
A) 4%.
B) 3.5%.
C) 7%.
D) 8%.

Accepted Answer

($7,790/$194,758) F1F1F1S1F1F1F10 2 payments per year = 8%.

Question 13

One of the primary reasons for investing in debt securities includes:
A) Receiving dividend payments.
B) Acquiring significant influence.
C) Earning interest revenue.
D) Deducting interest payments for tax purposes.

Accepted Answer

Investing in debt securities allows investors to earn interest revenue on their investment. This interest is typically paid out regularly throughout the term of the debt security, providing a steady stream of income to the investor.

Question 14

Sports Spectacular purchased 1,000 shares of stock in The Athletic Warehouse for $30 per share. The investment is properly classified as an available-for-sale security. By the end of the year, the stock price has increased to $32 per share. How would the change in stock price affect Sports Spectacular's net income?
A) Increase net income by $32,000.
B) Increase net income by $30,000.
C) Increase net income by $2,000.
D) No effect.

Accepted Answer

The answer of Sports Spectacular purchased 1,000 shares of stock...

Question 15

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity:  Recording the bond purchase would have what effect on the financial statements?
A) Increase assets.
B) Increase liabilities.
C) Increase assets and liabilities.
D) No effect on total assets and total liabilities.

Accepted Answer

The answer of General Investment Co. (GIC) purchased bonds on...

Question 16

When the equity method of accounting for investments is used by the investor, the Investments account increases when:
A) A cash dividend is received from the investee.
B) The investee reports a net income for the year.
C) The investor records additional depreciation related to the investment.
D) The investee reports a net loss for the year.

Accepted Answer

When the equity method of accounting is used, the investor records its share of the investee's net income as an increase to its Investments account. The other options (A, C, and D) may affect the investor's financial statements in some way, but they do not directly result in an increase to the Investments account.

Question 17

The primary difference in accounting for available-for-sale securities and accounting for trading securities is:
A) Measuring the fair value of the long-term and short-term stock portfolios.
B) Computing the cost at acquisition.
C) Determining where the unrealized holding gain or loss on investments is reported in the financial statements; in current net income or in comprehensive income.
D) Accounting for dividends received.

Accepted Answer

The primary difference in accounting for available-for-sale securities and trading securities is determining where the unrealized holding gain or loss on investments is reported in the financial statements; in current net income for trading securities or in comprehensive income for available-for-sale securities. The other options may also be part of the accounting process but do not differentiate between the two types of securities.

Question 18

The equity method of accounting for investments in voting common stock is appropriate when:
A) The investor can significantly influence the investee.
B) The investor has voting control over the investee.
C) The investor intends to hold the common stock indefinitely.
D) The investor is assured of a continued supply of a valuable raw material.

Accepted Answer

The equity method of accounting is appropriate when the investor can significantly influence the investee. This means that the investor has the ability to participate in the financial and operating policy decisions of the investee. The other choices (B, C, and D) do not necessarily apply to the use of the equity method.

Question 19

One of the primary reasons for investing in equity securities includes:
A) Acquiring debt of competing companies.
B) Appreciation in the value of the stock.
C) Earning interest revenue.
D) Deducting dividend payments for tax purposes.

Accepted Answer

Investing in equity securities allows for the potential of the stock's value increasing over time, resulting in capital gains for the investor. Acquiring debt of competing companies (A) does not apply to investing in equity securities, as equity represents ownership in a company rather than debt. Earning interest revenue (C) refers to investing in debt securities, such as bonds, rather than equity securities. Deducting dividend payments for tax purposes (D) may be a benefit of investing in equity securities, but it is not a primary reason for doing so.

Question 20

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded:
A) As a reduction in the Investments account.
B) As an increase in the Investments account.
C) As dividend income.
D) As a contra item to stockholders' equity.

Accepted Answer

The answer of When using the equity method to account...

Quiz 14: Investments

Consolidated financial statements are prepared when one company has:

Which of the following investment securities held by Zoogle Inc. may be classified as held-to-maturity securities in its balance sheet?

Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?

Libby Company purchased equity securities for $100,000 and classified them as trading securities. At the end of the year, the fair value of the securities was $105,000. How should the investment be reported in the year-end financial statements?

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds for:

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: The investment in bonds has a maturity in:

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: GIC purchased the bonds:

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: What is the annual market interest rate on the bonds?

One of the primary reasons for investing in debt securities includes:

General Investment Co. (GIC) purchased bonds on January 1, 2012. GIC's accountant has projected the following amortization schedule from purchase until maturity: Recording the bond purchase would have what effect on the financial statements?

When the equity method of accounting for investments is used by the investor, the Investments account increases when:

The primary difference in accounting for available-for-sale securities and accounting for trading securities is:

The equity method of accounting for investments in voting common stock is appropriate when:

One of the primary reasons for investing in equity securities includes:

When using the equity method to account for an investment, cash dividends received by the investor from the investee should be recorded: