Question 1

The Fair Value Adjustment account
A) is set up for each security in the company's portfolio.
B) relates to the entire portfolio of securities held by the company.
C) is closed at the end of each accounting period.
D) appears on the income statement as Other Expenses and Losses.

Accepted Answer

The Fair Value Adjustment account relates to the entire portfolio of securities held by the company and is not set up for each individual security. It is not closed at the end of each accounting period but is instead carried forward from period to period. And it appears on the income statement as a component of net income or loss, not as Other Expenses and Losses.

Question 2

At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show?
A) A reduction of an asset of $5,000 and a realized loss of $5,000.
B) A reduction of an asset of $5,000 and an unrealized loss of $5,000 in the stockholders' equity section.
C) A reduction of an asset of $5,000 in the current assets section and an unrealized loss of $5,000 under "Other expenses and losses."
D) A reduction of an asset of $5,000 in the current assets section and a realized loss of $75,000 under "Other expenses and losses."

Accepted Answer

Trading securities are reported at fair value, and unrealized losses are recognized in the income statement under "Other expenses and losses."

Question 3

If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?

Accepted Answer

The answer of If a parent company has two wholly...

Question 4

If the equity method is being used, the Revenue from Investment in Stock account is
A) just another name for a Dividend Revenue account.
B) credited when dividends are declared by the investee.
C) credited when net income is reported by the investee.
D) debited when dividends are declared by the investee.

Accepted Answer

Revenue from Investment in Stock account is credited when net income is reported by the investee because the equity method involves recognizing the investor's share of the investee's net income as revenue. It is not the same as Dividend Revenue account, which is used to record the receipt of dividends from the investee. The account is not debited when dividends are declared by the investee.

Question 5

In order to use the cost method of accounting for stock investments, how much stock must the investor own?
A) Less than 20%.
B) More than 50%.
C) Between 20% and 50%.
D) The cost method is always used for stock investments of any size.

Accepted Answer

The cost method is used for stock investments where the investor owns less than 20% of the total outstanding shares of the investee company.

Question 6

If the equity method is being used, cash dividends received
A) are credited to the Dividend Revenue account.
B) require no entry because investee net income has already been recorded at the proper proportion on the investor's books.
C) are credited to the Stock Investments account.
D) are credited to the Revenue from Investment in Stock account.

Accepted Answer

Under the equity method, cash dividends received are considered a return of investment and are credited to the Stock Investments account, reducing the carrying amount of the investment.

Question 7

Which of the following is not a method of accounting for stock investments?
A) Cost method.
B) Stock method.
C) Consolidated financial statements.
D) Equity method.

Accepted Answer

The answer of Which of the following is not a...

Question 8

When a company owns more than 50% of the common stock of another company
A) consolidated financial statements are usually prepared.
B) the cost method of accounting is used.
C) they are referred to as the subsidiary.
D) they recognize revenue when dividends are received.

Accepted Answer

When a company owns more than 50% of another company's common stock, it typically has control over that company, and consolidated financial statements are prepared to present the financial position and results of operations of the parent and its subsidiaries as a single entity.

Question 9

A company that owns more than 50% of the common stock of another company is known as the
A) charge company.
B) subsidiary company.
C) parent company.
D) management company.

Accepted Answer

A company that owns more than 50% of the common stock of another company is known as the parent company. The subsidiary company is the company that is owned by the parent company. The other choices (charge company and management company) are not used to describe this type of relationship between companies.

Question 10

If one company owns more than 50% of the common stock of another company
A) the cost method should be used to account for the investment.
B) a partnership exists.
C) a parent-subsidiary relationship exists.
D) the company whose stock is owned must be liquidated.

Accepted Answer

When one company owns more than 50% of the common stock of another company, a parent-subsidiary relationship exists. This means that the owning company (parent) has control over the operations and financial decisions of the subsidiary company. The investment should be accounted for using the equity method, not the cost method. Liquidation of the subsidiary company is not necessary or required in this situation.

Question 11

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. If Celdon declares and pays $120,000 in total dividends on February 14th, the journal entry would include a credit to
A) Dividend Revenue for $120,000.
B) Dividend Revenue for $36,000.
C) Stock Investments for $36,000.
D) No entry is necessary.

Accepted Answer

Oslo Corp. owns 30% of Celdon Corp., so it would receive 30% of the dividends, which is $36,000. The entry would include a credit to Stock Investments for $36,000, reducing the investment account.

Question 12

The company whose stock is owned by the parent company is called the
A) controlled company.
B) subsidiary company.
C) investor company.
D) sibling company.

Accepted Answer

When a company buys a controlling interest in another company, the acquired company becomes a subsidiary of the parent company. Therefore, the correct choice is B. Choice A (controlled company) is not accurate as it does not specify who is doing the controlling. Choice C (investor company) is too general and could apply to any company that invests in another. Choice D (sibling company) is inaccurate as it implies an equal relationship between two companies that are actually in a parent-subsidiary relationship.

Question 13

Under the equity method, the Stock Investments account is credited when the
A) investee reports net income.
B) investee reports a net loss.
C) investment is originally acquired.
D) investee reports net income and when the investment is originally acquired.

Accepted Answer

Under the equity method, the Stock Investments account is credited (decreased) when the investee reports a net loss, reflecting the investor's share of the loss.

Question 14

Which of the following statements is true about investments classified as trading securities?
A) The investor's intent and ability is to hold them to maturity.
B) They are valued on the balance sheet at cost.
C) They can consist of debt, but not equity, securities.
D) Changes in market value are reflected as part of net income.

Accepted Answer

Trading securities are bought and held primarily for the purpose of selling them in the short term to earn profits. Therefore, changes in market value are reflected as a part of net income in the income statement, making option D the correct answer. The investor's intent and ability to hold them to maturity are not relevant for trading securities. They are valued on the balance sheet at fair value, not necessarily at cost. Trading securities can consist of both debt and equity securities.

Question 15

Consolidated financial statements are useful to all of the following except
A) creditors of subsidiary companies.
B) management of the parent company.
C) stockholders of the parent company.
D) board of directors of the parent company.

Accepted Answer

Consolidated financial statements provide a comprehensive view of the financial performance and position of the parent company and its subsidiary companies. This information is primarily useful to the management of the parent company, its stockholders, and its board of directors. Creditors of the subsidiary companies, on the other hand, may be interested in the financial statements of each individual subsidiary rather than the consolidated statements.

Question 16

King Corporation purchased 2,000 shares of Cable common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were

Accepted Answer

The answer of King Corporation purchased 2,000 shares of Cable...

Question 17

When a company owns more than 50% of the common stock of another company
A) affiliated financial statements are prepared.
B) consolidated financial statements are prepared.
C) controlling financial statements are prepared.
D) significant financial statements are prepared.

Accepted Answer

When a company owns more than 50% of the common stock of another company, consolidated financial statements are prepared to show the financial performance of the parent company and its subsidiaries as a single entity. This is because the parent company has control over the subsidiary and its operations, and therefore must report their financial results together.

Question 18

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. The journal entry on Oslo's books assuming Celdon's net income for 2017 was $600,000 would include a debit to
A) No entry is necessary.
B) Cash for $600,000.
C) Cash for $180,000.
D) Stock Investments for $180,000.

Accepted Answer

When Oslo Corp. acquires 30% of Celdon Corp. for $360,000, it becomes a significant influence investor. Therefore, Oslo Corp. should use the equity method to account for its investment. Under the equity method, an investor records its share of the investee's net income as an increase in the Stock Investments account. Since Oslo owns 30% of Celdon, it should record 30% of Celdon's net income of $600,000, or $180,000, as an increase in Stock Investments. The entry on Oslo's books would be:
Debit Stock Investments  $180,000
Credit Equity in Celdon Corp's Net Income $180,000

Question 19

Mega Company receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a
A) loss of $6,000 under "Other expenses and losses."
B) loss of $6,000 under "Operating expenses."
C) gain of $6,000 under "Other revenues and gains."
D) gain of $6,000 under "Operating revenues."

Accepted Answer

Based on the information provided, Mega Company received net proceeds of $73,000 on the sale of stock investments that cost $79,000. This means that the company incurred a loss of $6,000 on this transaction. Since this loss is not part of the company's primary business operations, it would be reported as an "other expense and loss" in the income statement. Therefore, the correct answer is A) loss of $6,000 under "Other expenses and losses."

Question 20

In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because
A) management intends to realize this loss in the near future.
B) the securities have not been sold.
C) the stock market is volatile.
D) management cannot determine the exact amount of the loss in value.

Accepted Answer

The Unrealized Loss account is used to record a decline in the fair value of short-term stock investments that have not been sold. This account is used to reflect the reduction in value of the investment and is treated as a holding loss until the securities are sold. The other answer choices do not accurately describe why the Unrealized Loss account is debited.

Quiz 15: Specimen Financial Statements: Pepsico, Inc

The Fair Value Adjustment account

At the end of the first year of operations, the total cost of the trading securities portfolio is $179,000 and the total fair value is $174,000. What should the financial statements show?

If a parent company has two wholly owned subsidiaries, how many legal and economic entities are there from the viewpoint of the shareholders of the parent company?

If the equity method is being used, the Revenue from Investment in Stock account is

In order to use the cost method of accounting for stock investments, how much stock must the investor own?

If the equity method is being used, cash dividends received

Which of the following is not a method of accounting for stock investments?

When a company owns more than 50% of the common stock of another company

A company that owns more than 50% of the common stock of another company is known as the

If one company owns more than 50% of the common stock of another company

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. If Celdon declares and pays $120,000 in total dividends on February 14th, the journal entry would include a credit to

The company whose stock is owned by the parent company is called the

Under the equity method, the Stock Investments account is credited when the

Which of the following statements is true about investments classified as trading securities?

Consolidated financial statements are useful to all of the following except

King Corporation purchased 2,000 shares of Cable common stock ($50 par) at $73 per share as a short-term investment. The shares were subsequently sold at $77 per share. The cost of the securities purchased and gain or loss on the sale were

When a company owns more than 50% of the common stock of another company

Assume that Oslo Corp. acquires 30% of Celdon Corp. for $360,000 on January 1, 2017. The journal entry on Oslo's books assuming Celdon's net income for 2017 was $600,000 would include a debit to

Mega Company receives net proceeds of $73,000 on the sale of stock investments that cost $79,000. This transaction will result in reporting in the income statement a

In recognizing a decline in the fair value of short-term stock investments, an Unrealized Loss account is debited because