Deck 8: Investments in Equity Securities

Question 1

On November 10, 2011, Clark Inc. purchased shares of Landon Corp. for $100,000 and shares of Norris Incorporated for $50,000. At the end of 2011, the fair market value of the stock of Landon was $80,000 and for Norris Incorporated was $65,000. How should Clark Inc. recognize these changes in market price?

A) As a net unrealized loss of $20,000.
B) As a net unrealized gain of $15,000.
C) As a net unrealized loss of $5,000.
D) No adjustment is required since the total fair value is higher than the total original cost.

Answer 1

C

Question 2

Dewey Inc. owns 64% of Felicity Corporation's outstanding voting stock. Dewey should account for its investment in Felicity using the:

A) fair value method.
B) cost method.
C) consolidation procedure.
D) mark-to-market method

Answer 2

C

Question 3

Equity investments are:

A) investments in bonds of a corporation.
B) investments that pay dividends, not interest.
C) classified as long-term liabilities.
D) marketed by the SEC to any investor who wishes to buy bonds of a public company.

Answer 3

B

Question 4

Available-for-sale securities:

A) are reported on the balance sheet at original cost.
B) may have unrealized price increases or decreases, which increase or decrease shareholders' equity.
C) are reported in the shareholders' equity section of the balance sheet at fair value.
D) may have unrealized gains or losses on the income statement associated with price increases or decreases.

Question 5

Which one of the following correctly reflects the effects on the financial statements caused by the increase in the market price of long-term available-for-sale securities?

A) Current ratio is unchanged and earnings per share increases.
B) Current ratio and earnings per share increase.
C) Current ratio and earnings per share are unchanged.
D) Current ratio is unchanged and earnings per share decreases.

Question 6

During 2010, the market price of trading securities declined. Which one of the following correctly reflects the effects on the financial statements as a result?

A) Current ratio and earnings per share decrease.
B) Current ratio and earnings per share increase.
C) Current ratio is unchanged and earnings per share increases.
D) Current ratio increases and earnings per share are unchanged.

Question 7

Trading securities:

A) are recorded on the balance sheet at market value.
B) may have unrealized gains or losses on the balance sheet associated with price increases or decreases.
C) are listed as long-term assets.
D) Both a and b are correct.

Question 8

Trading securities are:

A) readily marketable investments that management intends to hold for extended periods.
B) always short-term investments.
C) current assets that require the equity method of accounting for investments.
D) actively 'traded' on the open market, but can't be sold until they mature.

Question 9

Which one of the following journal entries is appropriate for an investor who owns short-term equity securities when dividends of $500 have been declared on those equity securities?

Question 10

Which one of the following is true of the equity method?

A) The income recognized by the investor is based on the percentage of stock ownership and the amount of earnings reported by the investee.
B) Market value adjustments are made at yearend.
C) The receipt of dividends increases net income on the investor's financial statements.
D) The percent of ownership must be greater than 50% to apply this method.

Question 11

Benson Incorporated owns 32% of Denver Company's outstanding voting stock. Benson Incorporated should account for its investment in Denver using the:

A) fair value method.
B) cost method.
C) consolidation procedure.
D) equity method.

Question 12

When a company recognizes unrealized losses on trading securities, its earnings per share:

A) decreases.
B) increases.
C) is not affected.
D) may increase or decrease depending on the related market value.

Question 13

Investments in equity securities are current assets if:

A) they can be sold and converted into cash on demand and a ready market exists.
B) the fair market value can't be determined.
C) management intends to convert them into common stock within one year.
D) management owns less than 50% of the outstanding stock.

Question 14

Income from trading and available-for-sale equity securities is recognized when:

A) dividends are received from the investee due to the uncertainty of payment.
B) dividends are declared by the investee.
C) adjusting entries are made to record fair value adjustments.
D) the investee reports profits for the accounting period.

Question 15

Available-for-sale securities are:

A) actively 'traded' on the open market, but can't be sold until they mature.
B) readily marketable investments that management intends to sell for short-term profits.
C) always short-term investments in common stock.
D) adjusted to fair value at yearend.

Question 16

Torborg Corp. purchased available-for-sale securities from Hensley Company on December 23 for $3,000. On December 31, the market value of those securities is $3,600. Which one of the following journal entries is appropriate on December 31?

Question 17

The recognition of unrealized gains on available-for-sale investments

A) increases the current ratio.
B) decreases the current ratio.
C) does not affect the current ratio.
D) increases the current ratio if the investment is classified as current, otherwise it has no effect.

Question 18

An investor owns trading equity securities in Noah Company. Noah Company declared dividends of $300 during July. What entry is required in August when the dividends are received?

Question 19

When a company accounts for an investment under the purchase method of accounting,

A) the book value of the subsidiary's assets is added to the parent company's assets.
B) the book value of the subsidiary's liabilities is added to the parent company's liabilities.
C) the company obviously owns more than 50% of the stock of the investee.
D) a year-end adjustment is made to increase or decrease the carrying value of the investment to fair market value.

Question 20

Trading securities of Sanchez Inc. were purchased by Hayden Company on December 14 for $1,000. On December 31, the market value of those securities is $1,300. Which one of the following adjusting journal entries is appropriate at December 31?

Question 21

Walsh Company purchased 1,000 shares of Pierce Company for $20 per share and classified the investment as trading securities. At the end of the year, the fair market value of the investment was $23 per share. How should Walsh recognize this change?

A) Debit the investment account by $23,000.
B) Credit the investment account by $3,000.
C) Report an unrealized gain on the income statement.
D) Show an unrealized loss on the balance sheet.

Question 22

The consolidation procedure of accounting for long-term equity investments is typically used:

A) when less than 20% of the investee company is owned.
B) in situations when over 50% of the investee company is owned.
C) only when 100% of the investee company is owned.
D) when between 20% and 50% of the investee company is owned.

Question 23

The cost method of accounting for long-term equity investments is typically used when:

A) between 20% and 50% of the investee company is owned.
B) over 50% of the investee company is owned.
C) at least 20% of the investee company is owned.
D) None of the above is a consideration in choosing the cost method.

Question 24

Which one of the following correctly reflects the effects on the financial statements caused by dividends declared on trading securities owned by a firm?

A) Current ratio decreases.
B) Earnings per share increases.
C) Current ratio is unchanged.
D) Earnings per share is unchanged.

Question 25

Available-for-sale securities were purchased on May 2 for $1,000. On December 31, the market value of those securities is $1,100. Which of the following is part of the adjusting entry necessary on December 31?

A) Debit Unrealized Gain on Available-for-Sale Securities for $1,100
B) Debit Realized Gain on Available-for-Sale Securities for $100
C) Credit Available-for-Sale Securities for $100
D) Credit Unrealized Gain on Available-for-Sale Securities for $100

Question 26

All of the following statements are true regarding comprehensive income except:

A) Comprehensive income includes all nonowner-related changes in shareholders' equity that do not appear on the income statement and are not reflected in the balance of retained earnings.
B) Comprehensive income includes adjustments to shareholders' equity for holding gains associated with available-for-sale securities.
C) Comprehensive income includes adjustments to shareholders' equity for holding losses associated with available-for-sale securities..
D) Comprehensive income must be reported in a specific format established by the FASB.

Question 27

Which one of the following correctly reflects the effects on the financial statements of the investor caused by dividends declared on trading securities?

A) Current ratio increases
B) Working capital decreases
C) Revenue and assets decrease
D) Assets increase and shareholders' equity decreases

Question 28

Which one of the following must be met prior to classifying an investment as current?

A) It must be an equity security accounted for under the equity method.
B) The percentage of ownership must be greater than 50%.
C) The investment must be readily marketable.
D) Management must intend to hold the investment for an undetermined time period.

Question 29

Which one of the following is an area of subjectivity which opens the incentive of window dressing to management as it relates to investments?

A) The timing of when an investment is sold.
B) The proclamation of the intention to sell an investment within the next year.
C) The determination of the percentage of stock acquired.
D) Whether management has available cash to acquire investments.

Question 30

The recognition of unrealized gains on marketable securities:

A) depends on the classification of the securities.
B) causes net income to increase regardless of the securities' classification.
C) causes earnings per share to increase regardless of the securities' classification.
D) is a primary concern under the equity method.

Question 31

The recognition of realized losses on short-term available-for-sale securities

A) increases the current ratio.
B) decreases working capital.
C) decreases comprehensive income.
D) decreases the debt/equity ratio.

Question 32

The recognition of unrealized losses on trading securities:

A) decreases the quick and current ratios.
B) increases the quick and current ratios.
C) does not affect the quick ratio, but decreases the current ratio.
D) does not affect the current ratio, but decreases the quick ratio.

Question 33

An unrealized holding gain or loss that relates to trading securities represents:

A) an undervalued investment.
B) the profit or loss made when the trading securities were sold.
C) the total dividends received from the investee company during the year.
D) the extent to which an investor's wealth increased or decreased due to holding the investment.

Question 34

Trading securities were purchased on April 1 for $900. On December 31, the market value of those securities is $700. Which of the following is part of the adjusting entry necessary on December 31?

A) Debit Unrealized Loss on Trading Securities for $700
B) Debit Realized Loss on Trading Securities for $200
C) Credit Trading Securities for $200
D) Credit Unrealized Loss on Trading Securities for $200

Question 35

Trading securities are held primarily for the purpose of:

A) anticipated increases in value over extended time periods.
B) increasing the current ratio.
C) window dressing the balance sheet.
D) generating profits on short-term price increases.

Question 36

Which of the following correctly reflects the effects on the financial statements caused by the increase in market price of trading securities?

A) Current ratio and earnings per share decrease.
B) Current ratio and earnings per share increase.
C) Current ratio is unchanged but earnings per share decrease.
D) Current ratio decreases and earnings per share are unchanged.

Question 37

The equity method of accounting for long-term equity investments is typically used when:

A) less than 20% of the investee company is owned.
B) between 20% and 50% of the investee company is owned.
C) over 50% of the investee company is owned.
D) any amount over 20% is acquired.

Question 38

Which one of the following correctly reflects the effects on the financial statements caused by a decrease in the market price of long-term available-for-sale securities?

A) Current ratio decreases.
B) Earnings per share increases.
C) Current ratio increases.
D) Earnings per share remains unchanged.

Question 39

Which one of the following is evidence of a ready market?

A) The stock was purchased at a negotiated price from an outside party.
B) The security is actively traded on a public stock exchange.
C) A privately held corporation issued the stock.
D) The stock was purchased from an outside investor.

Question 40

Camber Corp. owns 10% of Nova Corp's outstanding voting stock. Camber should account for its long-term equity investment in Nova Corp. using the:

A) market value method if the stock is not traded on the market.
B) cost method if the stock is traded on the market.
C) cost method if the stock is not traded on the market.
D) equity method if the stock is traded on the market.

Question 41

On January 2, 2010, Pfizer Co. purchased 22% of Wiley Company's voting stock for $150,000. During 2010, Wiley recorded income of $102,000 and paid total dividends of $27,000. Pfizer uses the equity method to account for this investment. What is the December 31, 2010, balance sheet value of its long-term equity investment in Wiley?

A) $178,380
B) $225,000
C) $150,000
D) $166,500

Question 42

On December 31, 2010, available-for-sale securities with an original cost of $15,000 have a carrying value on the balance sheet equal to their market value of $20,000. On January 5, 2011, those securities are sold for $18,000. Which of the following would be part of the appropriate entry to record the sale of the available-for-sale securities?

A) A credit to Realized Gain on Available-for-Sale Securities for $5,000.
B) A debit to Unrealized Price Increase on Available-for Sale Securities for $3,000.
C) A debit to Unrealized Price Increase on Available-for Sale Securities for $5,000.
D) A credit to Available-for Sale Securities for $15,000.

Question 43

On January 2, 2010, Pfizer Co. purchased 22% of Wiley Company's voting stock for $150,000. During 2010, Wiley recorded income of $102,000 and paid total dividends of $27,000. Pfizer uses the equity method to account for this investment. What is Pfizer's income from the Wiley investment?

A) $27,000
B) $28,380
C) $22,440
D) $33,000

Question 44

James Corporation purchased 100% of the common stock of Rashaad Corporation for $50 million. James must account for this investment as:

A) an available-for-sale security.
B) an acquisition that requires consolidation accounting.
C) a trading security.
D) an equity security investment.

Question 45

Which one of the following investments would most likely be held the shortest period of time?

A) Available-for-sale debt securities
B) Available-for-sale equity securities
C) Trading securities
D) An investment as a result of a merger

Question 46

Decuzzi, Inc. paid $10,000 for a stock investment and classified it as available-for-sale. On December 31, 2011, the company appropriately recognized an unrealized increase of $3,000. The stock is reported on Decuzzi's balance sheet at December 31, 2011 at:

A) $10,000.
B) $13,000.
C) $7,000.
D) Not enough information to determine.

Question 47

Why might chief executives react very positively to current goodwill accounting?

A) Goodwill increases in value.
B) Goodwill is amortized creating expenses that reduce net income, enabling a company to pay less income tax.
C) Its amortization increases earnings per share.
D) Goodwill is no longer amortized so income is greater than prior accounting requirements.

Question 48

Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of yearend adjustments related to the investments. Included in current assets are trading securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at yearend. If Caldwell properly accounts for trading securities, what is Caldwell's current ratio before and after the investment adjustment?

A) 3.0 and 2.1
B) 3.0 and 3.3
C) 3.0 and 3.6
D) 3.0 and 2.4

Question 49

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, the company sold 50 shares of BBB for $26 per share. The journal entry to record the 50 shares of BBB stock sold in 2010 will include:

A) A credit to Trading Securities for $1,400.
B) A credit to Unrealized Loss on Trading Securities for $100.
C) A credit to Realized Loss on Sale of Trading Securities for $100.
D) A debit to Realized Gain on Sale of Trading Securities for $100.

Question 50

Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of yearend adjustments related to the investments. Included in current assets are trading securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at yearend. If Caldwell properly accounts for trading securities, what is Caldwell's earnings per share amount before and after the investment adjustment, respectively?

A) $3.25 and $3.00
B) $3.25 and $3.13
C) $3.25 and $3.37
D) $3.25 and $2.77

Question 51

On January 2, 2010, Dellgate Corp. purchased 27% of Galaxy Corporation's voting stock for $125,000. During 2010, Galaxy recorded income of $214,000 and paid total dividends of $17,000. Dellgate uses the cost method to account for this investment. What is the December 31, 2010, balance sheet value of Dellgate's long-term equity investment in Galaxy?

A) $125,000
B) $178,190
C) $187,370
D) $86,940

Question 52

A controlling interest in another company:

A) exists whenever the relationship between the investor and investee gives the investor significant influence.
B) requires the parent to prepare consolidated financial statements.
C) is evidence that a merger will soon occur.
D) can be as low as 20 percent.

Question 53

Multinational US companies usually have a number of foreign subsidiaries with financial statements expressed in foreign currency. When the consolidated financial statements are prepared, to combine the financial statements of the US parent and all of its subsidiaries, the consolidation process involves multiple steps. Which of the following statements about the combining process and the resultant consolidated financial statements is always true for multinational US companies?

A) The foreign subsidiaries are separated into three categories, each of which receives different treatment.
B) The foreign entity's financial statements are converted into dollars.
C) Foreign currency translation adjustments have no effect on cash flows.
D) The foreign currency translation adjustments are included in consolidated income.

Question 54

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, Solo sold all of its investment in AAA securities for $36 per share. The journal entry to record the 2009 revaluation of the AAA securities would be:

Question 55

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, Solo sold all of its investment in AAA securities for $36 per share. The journal entry to record the 100 shares of AAA stock sold in 2010 will include:

A) A debit to Trading Securities for $3,400.
B) A credit to Unrealized Loss on Trading Securities for $200.
C) A credit to Realized Loss on Sale of Trading Securities for $200.
D) A credit to Realized Gain on Sale of Trading Securities for $200.

Question 56

Carmen Corporation purchased a 40% interest in Sahara Inc. on January 1, 2010, paying $200,000 for 40% of the outstanding voting stock of Sahara Inc. For its year ended December 31, 2010, Sahara Inc. reported net income of $40,000. On December 31, 2010, Carmen received a dividend payment from Sahara in the amount of $1,000. As a result of its ownership interest in Sahara, the financial statements for Carmen Corporation for the year ended December 31, 2010 will reflect which of the following:

A) An asset in the amount of $200,000.
B) Revenue of $1,000.
C) Cash flows from operations of $1,000.
D) Revenue of $16,000.

Question 57

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. During 2010, Solo received word that dividends of $2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market value of CCC on December 31, 2010, was $18. During 2011, Solo sold 150 shares of CCC for $22 per share. The journal entry to record the 2009 revaluation of the CCC securities would be:

Question 58

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, the company sold 50 shares of BBB for $26 per share. During 2010, Solo received dividends of $3 per share on the remaining 200 shares of BBB. The per-share market value of BBB on December 31, 2010 was $24. During 2011, Solo sold the remaining 200 shares of BBB stock for $26 per share.
The journal entry to record the 2009 revaluation of the BBB securities would be:

Question 59

If Howard Company's balance sheet amount of goodwill is $20,000 and the fair market value of the goodwill is estimated to be $25,000, which of the following entries would be recorded in Howard's books?

Question 60

Which of the following statements about Special Purpose Entities (SPEs) is not true?

A) SPEs can take on various legal forms, like corporations or partnerships.
B) It can be difficult to determine who actually controls an SPE.
C) Management can structure a transaction using an SPE in such a manner that the accounting treatment fails to reflect the economic substance of the transaction.
D) SPEs have been used to mislead investors.

Question 61

On December 31, the cost and market price of trading securities are $5,000 and $9,000, respectively. Give the appropriate adjusting entry on December 31.

Question 62

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. During 2010, Solo received word that dividends of $$2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market value of CCC on December 31, 2010, was $18. During 2011, Solo sold 150 shares of CCC for $22 per share. The journal entry to record the sale of 150 shares of CCC stock in 2011 would include:

A) A debit to Cash for $2,700.
B) A debit to Unrealized Price Increase on Available-for-Sale Securities for $300.
C) A debit to Unrealized Gain on Available-for-Sale Securities for $900.
D) A debit to Available-for-Sale Securities for $3,300.

Question 63

Prepare the December 31 journal entry that adjusts available-for-sale securities that were purchased at a cost of $5,000 when current market value is $4,000.

Question 64

On December 31, the cost and market price of available-for-sale securities are $5,000 and $9,000, respectively. Give the appropriate adjusting entry on December 31.

Question 65

For each transaction numbered 1 through 4 below, identify which effect (a through g) would most likely occur as a result of the transaction. You may use each letter more than once or not at all.
_____ 1. Trading equity securities are purchased for $1,000 cash.
_____ 2. Trading securities that cost $1,000 have a yearend market value of $800.
_____ 3. Trading securities that cost $1,000 have a yearend market value of $1,200.
_____ 4. Trading securities that cost $1,000 that have a current balance sheet value of $800 are sold for $900.

Question 66

For each transaction numbered 1 through 4 below, identify which effect (a through f) the transaction is most likely to cause. You may use each letter more than once or not at all.
_____ 1. The cost method is used for an investment in long-term equity securities, and the investee company declares a cash dividend.
_____ 2. The equity method is used for an investment in long-term equity securities and the investee company declares a cash dividend.
_____ 3. The cost method is used for an investment in long-term equity securities and the investee company recognizes net income.
_____ 4. The equity method is used for an investment in long-term equity securities and the investee company recognizes net income.

Question 67

For each transaction listed in 1 through 9, place the letter (a through g) of the best effect in the space provided. You may use each letter more than once or not at all.

Question 68

On December 31, 2010, available-for-sale securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 5, 2011, those securities are sold for $11,000. Give the appropriate entry to record the sale of the available-for-sale securities.

Question 69

On December 31, 2010, trading securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 5, 2011, those trading securities are sold for $10,000. Give the appropriate entry to record the sale of the trading securities.

Question 70

On December 31, 2010, available-for-sale securities with an original cost of $14,000 have a carrying value on the balance sheet equal to their market value of $16,000. On January 11, 2011, those securities are sold for $18,000. Give the appropriate entry to record the sale of the available-for-sale securities.

Question 71

On December 31, 2010, trading securities with an original cost of $45,000 have a market value of $47,000. On January 11, 2011, those trading securities are sold for $51,000. Determine the gains or losses in 2009 and 2010 associated with these trading securities. Clearly label whether the gains or losses are realized or unrealized. Name the financial statement on which each is reported.

Question 72

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, the company sold 50 shares of BBB for $26 per share. During 2010, Solo received dividends of $3 per share on the remaining 200 shares of BBB, and dividends of $2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market values of BBB and CCC on December 31, 2010, were $24 and $18, respectively. During 2011, Solo sold the remaining 200 shares of BBB stock for $26 per share and the 150 shares of CCC for $22 per share. The journal entry to record the revaluation of BBB shares in 2010 is:

Question 73

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. During 2010, Solo received word that dividends of $2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market value of CCC on December 31, 2010, was $18. During 2011, Solo sold 150 shares of CCC for $22 per share. The journal entry to record the revaluation of CCC shares in 2010 is:

Question 74

Each transaction listed in 1 through 4 below relates to a long-term investment is equity securities. Select the letters of the accounting effects (a through h) and place them in the space provided. Transactions may have more than one answer.
_____ 1. Using the equity method the market price of the investment increases above its cost.
_____ 2. Using the cost method the market price of the investment increases above its cost.
_____ 3. Using the equity method, the investee company recognizes a net loss for the year.
_____ 4. An investment in a 40%-owned subsidiary is sold for more than its carrying value.

Question 75

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, the company sold 50 shares of BBB for $26 per share. During 2010, Solo received dividends of $3 per share on the remaining 200 shares of BBB, and dividends of $2.50 per share were declared, but not yet received on the 150 shares of CCC stock. The per-share market values of BBB and CCC on December 31, 2010, were $24 and $18, respectively. During 2011, Solo sold the remaining 200 shares of BBB stock for $26 per share and the 150 shares of CCC for $22 per share. The journal entry to record the dividends received on the BBB securities and the dividends declared on the CCC stock in 2010 will include:

A) A credit to Dividend Revenue for $975.
B) A credit to Dividend Payable for $375.
C) A credit to Cash for $600.
D) A debit to Dividend Expense for $375.

Question 76

On December 31, 2010, trading securities with an original cost of $10,000 have a carrying value on the balance sheet equal to their market value of $12,000. On January 11, 2011, those trading securities are sold for $15,000. Prepare the appropriate entry to record the sale of the trading securities.

Question 77

Each transaction listed in 1 through 4 relates to an investment in a long-term equity security. Place the letter that corresponds to the effect (a through h) the transaction has on the accounting equation in the space provided. You may use each letter more than once or not at all.
____ 1. Under the cost method, the investee company declares a cash dividend.
____ 2. Under the equity method, the investee company declares a cash dividend.
____ 3. Under the cost method, the investee company recognizes net income.
____ 4. Under the equity method, the investee company recognizes net income.

Question 78

The following information related to the marketable security investments of Solo Company. Securities held on December 31, 2009, as described in the table below. AAA and BBB are classified as trading securities and CCC is classified as an available-for-sale security. Early in 2010, the company sold 50 shares of BBB for $26 per share. During 2010, Solo received dividends of $3 per share on the remaining 200 shares of BBB. The per-share market value of BBB on December 31, 2010, was $24. During 2011, Solo sold the remaining 200 shares of BBB stock for $26 per share. The journal entry to record the sale of 200 shares of BBB stock in 2011 is:

Question 79

Matching Questions
Each transaction numbered 1 through 5 below involves an equity security originally acquired at a cost of $1,000. Identify the effect each transaction has on the current ratio and earnings per share by selecting from the effects listed in a through f. You may use each letter more than once or not at all.

____ 1. Trading securities with a current balance sheet value of $1,200 are sold for $1,100.
____ 2. Trading securities with a current balance sheet value of $800 are sold for $800.
____ 3. Trading securities with a current balance sheet value of $1,200 are sold for $1,300.
____ 4. Available-for-sale securities have a market value of $800 at yearend.
____ 5. Available-for-sale securities have a market value of $1,200 at yearend.

Question 80

Trading securities were purchased at a cost of $5,000. Their current market value is $4,000. Prepare the December 31 adjusting journal entry.