Question 1

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 30% of Gill Company.The dividend paid by Gill Company will affect Vince Company by _____.

Accepted Answer

Since Vince Company owns 30% of Gill Company, the dividend paid by Gill Company will decrease Vince Company's investment in Gill Company by $300,000 (30% of $1,000,000). Therefore, Vince Company's investments will decrease by $300,000 and its cash will increase by $300,000 due to the receipt of the dividend. Consequently, the net effect of the dividend on Vince Company will be an increase in cash and a decrease in investments of $300,000.

Question 2

_____ are investments that the company buys only with the intent to resell them shortly.

Accepted Answer

Trading securities are investments that a company buys with the intention of selling them in the near future, typically within a few days or weeks. These securities are carried at fair value on the company's balance sheet, and any changes in their value are recognized as gains or losses on the income statement. Bonds, available-for-sale securities, and options are not necessarily intended for short-term resale and may be held for longer periods of time.

Question 3

Company B has 40,000 shares of its common stock outstanding.Company A owns 15,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Accepted Answer

Company A owns 15,000 out of 40,000 shares of Company B, which is 37.5% of the company. Typically, the equity method is used when an investing company owns 20% to 50% of another company, indicating significant influence over the invested company.

Question 4

Rock Company acquired 10% of the voting stock of Hudson Company for $10 million.In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million.At the end of the year the market value of Rock Company's investment in Hudson Company is $11 million.What accounts would be affected on Rock Company's books to reflect the year-end market value and by how much?

Accepted Answer

Rock Company would adjust the investment to its fair value at year-end. The investment increased from $10 million to $11 million, so Investments and Stockholders' Equity would both increase by $1 million.

Question 5

Jeff Company purchased, as a long-term investment, common stock of Garcia Company.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's net income will affect Jeff Company by _____.

Accepted Answer

Jeff Company's share of Garcia Company's net income would not directly increase Jeff Company's cash, investments, or stockholders' equity by $400,000. Instead, Jeff Company would recognize its share of Garcia's dividends ($100,000, which is 10% of $1,000,000) as income, affecting its cash and potentially its stockholders' equity, but not by $400,000.

Question 6

Historical cost/nominal dollars is the traditional method of measuring income.

Accepted Answer

Historical cost/nominal dollars is the traditional accounting method of measuring income, which records transactions at their original cost without adjusting for inflation.

Question 7

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 40% of Gill Company.Gill Company's net income will affect Vince Company by _____.

Accepted Answer

BVince Company owns 40% of Gill Company, so it would recognize 40% of Gill's earnings as an increase in the investment account, which is $1,600,000 (40% of $4,000,000). Additionally, Vince would recognize its share of dividends received ($400,000, which is 40% of $1,000,000) as an increase in cash and a decrease in the investment account, not affecting stockholders' equity directly.

Question 8

Company B has 40,000 shares of its common stock outstanding.Company A owns 35,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Accepted Answer

Company A owns 35,000 out of 40,000 shares of Company B, which gives it an 87.5% ownership stake. This level of ownership typically requires the use of the consolidated method for accounting, as it indicates significant control over the other company.

Question 9

Consolidated statements combine two or more _____ in a single presentation.

Accepted Answer

Consolidated statements combine the financial information of multiple legal entities into a single presentation. This is often necessary for companies with subsidiaries or a complex ownership structure. The other choices (accounting periods, financial statements, and accounts) do not accurately describe the purpose of consolidated statements.

Question 10

_____ are investments that are not intended for resale in the near future.

Accepted Answer

Available-for-sale securities are investments that are not intended for resale in the near future but rather for long-term holding. Bonds and options can be classified as trading or available-for-sale securities depending on their purpose of holding. Trading securities are investments intended for resale in the near future.

Question 11

The financial maintenance concept focuses on recovering the investor's original capital.

Accepted Answer

The financial maintenance concept aims to maintain the investor's original capital by focusing on low-risk investment strategies and avoiding losses. This allows the investor to recover their original investment and potentially earn a return on their investment without taking unnecessary risks.

Question 12

The effects of price changes in marketable securities are reported _____.

Accepted Answer

The effects of price changes in marketable securities can either be reported as a gain or loss on the income statement, or as an increase or decrease in stockholders' equity, depending on the classification of the securities. This is because the accounting treatment for marketable securities depends on whether they are classified as held-for-trading, available-for-sale, or held-to-maturity. For held-for-trading securities, changes in fair value are reported on the income statement as gains or losses, while for available-for-sale and held-to-maturity securities, changes in fair value are reported as a component of stockholders' equity. Therefore, the answer is C.

Question 13

Jeff Company purchased common stock of Garcia Company as a long-term investment.During the current year, Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.Garcia Company's dividend will affect Jeff Company by _____.

Accepted Answer

Jeff Company owns 10% of Garcia Company and would receive 10% of the dividends paid, which is $100,000 ($1,000,000 * 10%). This increases Jeff Company's cash and stockholders' equity by $100,000.

Question 14

Brian Company purchased 40% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by_____.

Accepted Answer

Since Brian Company owns 40% of Wilson Company, it likely uses the equity method for accounting. Under the equity method, changes in market value do not affect the financial statements; instead, the investment is adjusted for Brian's share of Wilson's earnings and dividends.

Question 15

When prices of resources do not change, financial capital maintenance and physical capital maintenance give identical measures of income.

Accepted Answer

When prices of resources do not change, financial capital maintenance and physical capital maintenance give identical measures of income.

Question 16

Marketable securities can be further classified as _____.

Accepted Answer

Marketable securities can be further classified into two categories: trading securities and available-for-sale securities. Debt securities and equity securities are types of securities while current securities and long-term securities are categories based on their maturity. Available-for-sale securities can also be either current or long-term. Unavailable securities is not a recognized classification.

Question 17

Under the equity method, the investor recognizes as income _____.

Accepted Answer

Under the equity method, the investor recognizes as income a portion of the income earned by the investee company, based on its ownership percentage. Dividends paid by the investee company are recognized as a reduction of the investment account, and the change in market value of investee company stock has no effect on the investor's income. Therefore, option A is the correct choice.

Question 18

There is general agreement among most accountants that restatements in constant dollars would overcome the disadvantages of using an unstable measuring unit.

Accepted Answer

Restating financial statements in constant dollars adjusts for inflation and provides a more accurate representation of financial performance over time, overcoming the disadvantage of using an unstable measuring unit.

Question 19

Company B has 40,000 shares of its common stock outstanding.Company A owns 5,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Accepted Answer

Company A should use the equity method to account for its investment in Company B because it has significant influence over Company B.

Question 20

Brian Company purchased 10% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by _____.

Accepted Answer

The increase in market value of the shares will result in a gain in the value of the investment. This gain will be reported as an increase in assets and stockholders' equity on Brian Company's balance sheet.

Quiz 17: Understanding and Analyzing Consolidated Financial Statements

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 30% of Gill Company.The dividend paid by Gill Company will affect Vince Company by _____.

_____ are investments that the company buys only with the intent to resell them shortly.

Company B has 40,000 shares of its common stock outstanding.Company A owns 15,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Historical cost/nominal dollars is the traditional method of measuring income.

Vince Company purchased common stock of Gill Company as a long-term investment.During the current year, Gill Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Vince Company owns 40% of Gill Company.Gill Company's net income will affect Vince Company by _____.

Company B has 40,000 shares of its common stock outstanding.Company A owns 35,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Consolidated statements combine two or more _____ in a single presentation.

_____ are investments that are not intended for resale in the near future.

The financial maintenance concept focuses on recovering the investor's original capital.

The effects of price changes in marketable securities are reported _____.

Brian Company purchased 40% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by_____.

When prices of resources do not change, financial capital maintenance and physical capital maintenance give identical measures of income.

Marketable securities can be further classified as _____.

Under the equity method, the investor recognizes as income _____.

There is general agreement among most accountants that restatements in constant dollars would overcome the disadvantages of using an unstable measuring unit.

Company B has 40,000 shares of its common stock outstanding.Company A owns 5,000 shares of Company B stock.Company A should use the _____ method to account for its investment in Company B.

Brian Company purchased 10% of the outstanding shares of Wilson Company as a long-term investment.At the end of the year the market value of the shares had increased. The increase in market value of Wilson Company shares will affect Brian Company by _____.