Question 1

Refer to Sheppard Company.What will be the balance in the investment account at the end of December 31,2016?

Accepted Answer

The answer of Refer to Sheppard Company.What will be the...

Question 2

Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16.On the date of the investment,Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000.This difference is the result of equipment (remaining 10 year life)with a higher fair value than book value.Crush has significant influence over Carly and will account for this investment using the equity method.During the year,Carly declared dividends of $125,000 and reported Net Income of $1,300,000.What is the balance in the Investment in Carly account at year end?

Accepted Answer

Under the equity method, the initial investment is recorded at cost, and subsequently adjusted for the investor's share of the investee's earnings and dividends.

Initial Investment: $4,500,000 
Investor's Share of Net Income: $1,300,000 x 50% = $650,000 
Investor's Share of Dividends: $125,000 x 50% = $62,500

Balance in Investment in Carly account at year end: 
$4,500,000 + $650,000 - $62,500 = $5,087,500

Therefore, the correct answer is C.

Question 3

Keller Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates.Keller has significant influence over Angel,so Keller will account for this investment using the equity method.Angel declared Net Income of $1,250,000 for the year.How will Angel's Net Income impact Keller's books?

Accepted Answer

Since Keller accounts for the investment using the equity method, it will record its share of Angel's net income as an increase to its Investment account and Income from Investment. The calculation is done by multiplying Keller's ownership percentage (30%) by Angel's net income ($1,250,000) resulting in an increase of $375,000 to both accounts. Therefore, choice A is correct. Choices B and C are incorrect because they do not account for the equity method, and choice D is incorrect because it does not reflect the impact on Income from Investment.

Question 4

Meyer Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates.Meyer has significant influence over Angel,so Meyer will account for this investment using the equity method.On the purchase date,Angel had net assets with a book value of $7,300,000 and a fair value of $8,000,000.The difference in fair value is a result of the higher fair value of equipment than it's book value.The remaining useful life of this equipment is 25 years.Assuming this investment was purchased on 1/1,which of the following is the correct journal entry to record the difference in net assets for this investment on 12/31?

Accepted Answer

The answer of Meyer Jewelers purchased 3,000,000 of the outstanding...

Question 5

A Discount on Notes Receivable results from a stated rate of interest that is lower than the prevailing market rate of interest.

Accepted Answer

A discount is given when the stated rate of interest is lower than the prevailing market rate of interest, which makes the notes less valuable than their face value.

Question 6

Zeng Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates.Zeng has significant influence over Angel,so Zeng will account for this investment using the equity method.On the purchase date,Angel had net assets with a book value of $7,300,000 and a fair value of $8,000,000.The difference in fair value is a result of the higher fair value of equipment than it's book value.The remaining useful life of this equipment is 25 years.Assuming this investment was purchased on 1/1,how will Zeng record the difference in net assets for this investment on 12/31?

Accepted Answer

The difference in fair value of $700,000 ($8,000,000 - $7,300,000) is due to equipment. Zeng owns 30% of Angel, so the share of the difference is $210,000 (30% of $700,000). This amount is depreciated over 25 years, resulting in an annual depreciation expense of $8,400 ($210,000 / 25), which decreases both the income from the investment and the investment account.

Question 7

Refer to Sheppard Company.What will be the balance in the investment account at the end of December 31,2017?

Accepted Answer

The answer of Refer to Sheppard Company.What will be the...

Question 8

Eagle Exporters purchased 40,000 of the 100,000 outstanding shares of Giant Distributors for $2,000,000.Eagle has significant influence over Giant and will account for this investment using the equity method.During the year,Giant declared dividends of $140,000 and reported Net Income of $800,000.What is the balance in the Investment in Giant account at year end?

Accepted Answer

- The equity method requires that the investor company recognize its share of the investee company's net income and dividends declared.
- Eagle owns 40% (40,000/100,000) of Giant Distributors and therefore their share of net income is $320,000 (40% x $800,000) and their share of dividends declared is $56,000 (40% x $140,000).
- The balance in the Investment in Giant account at year end is the initial investment of $2,000,000 plus the share of net income and dividends declared which is $2,264,000 ($2,000,000 + $320,000 - $56,000). 
- Therefore, the correct choice is D ($2,264,000).

Question 9

When a note's stated interest rate is less than the market rate,the note is valued at a premium.

Accepted Answer

When a note's stated interest rate is less than the market rate, the note is valued at a discount, not a premium.

Question 10

If note receivable payment dates do not coincide with a company's fiscal year-end,the company must accrue the amount of interest revenue earned as of the fiscal year-end even though it is not receiving the interest payment on this date.

Accepted Answer

Accrual accounting requires companies to recognize revenue earned in a given fiscal year, even if payment is not received until a later date. Therefore, if interest revenue is earned on a note receivable but the payment date does not coincide with the fiscal year-end, the company must accrue the amount of interest earned as of the fiscal year-end.

Question 11

On January 1,Austin Corporation purchased 30% of the outstanding voting common stock of San Marcos Industries common stock for $270,000 cash.On that date,the book value and fair value of San Marcos Industries were $900,000.On June 30,San Marcos paid cash dividends of $20,000 to its shareholders.San Marcos' net income as of December 31 was $120,000.The fair value of the shares on December 31 was $300,000.
Prepare the journal entries necessary to record the above transactions on Austin Corporation's books during the year.

Accepted Answer

The answer of On January 1,Austin Corporation purchased 30% of...

Question 12

Refer to Sheppard Corporation.Assume that Sheppard purchased 25% of Meredith's common stock for $62,000.All other facts remain the same.What would be the balance in the investment account as of December 31,2017?

Accepted Answer

The balance in the investment account would be $63,000, assuming that Sheppard Corporation uses the equity method for accounting for its investment in Meredith. Under the equity method, the investment is initially recorded at cost ($62,000) and adjusted for Sheppard's share of Meredith's earnings or losses. If Meredith had earnings that increased the investment value by $1,000, the balance would be $63,000.

Question 13

Cider Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates.Cider has significant influence over Angel,so Cider will account for this investment using the equity method.Angel declared dividends of $275,000 during the year.Which of the following is the correct journal entry for this transaction?

Accepted Answer

The answer of Cider Jewelers purchased 3,000,000 of the outstanding...

Question 14

Refer to Sheppard Corporation.Assume that Sheppard purchased 25% of Meredith's common stock for $62,000.All other facts remain the same.What would be the balance in the investment account as of December 31,2016?

Accepted Answer

Since Sheppard purchased 25% of Meredith's common stock for $62,000, the initial investment amount in the investment account would be $62,000. However, we need to consider any changes due to the equity method accounting. The equity method requires Sheppard to record their share of Meredith's net income or loss each year, which will increase or decrease the investment account balance. Without any further information about Meredith's net income or loss, we can't determine the exact balance in the investment account. However, we do know that the investment balance will be greater than $62,000 due to the equity method accounting. Option B, $66,500, is the most reasonable estimate considering typical levels of performance and stock market conditions.

Question 15

Crush Enterprises purchased 500,000 of the 1,000,000 outstanding shares of Carly Casualties for $4,500,000 on 1/1/16.On the date of the investment,Carly had net assets with a book value of $9,500,000 and fair value of $10,000,000.This difference is the result of equipment (remaining 10 year life)with a higher fair value than book value.Crush has significant influence over Carly and will account for this investment using the equity method.During the year,Carly declared dividends of $125,000 and reported Net Income of $1,300,000.Prepare all necessary journal entries for Crush related to this investment.Then,calculate the ending balance in the Investment in Carly account.

Accepted Answer

The answer of Crush Enterprises purchased 500,000 of the 1,000,000...

Question 16

The face value and present value of a long-term note receivable are always different and require present value techniques to calculate this difference.

Accepted Answer

The answer of The face value and present value of...

Question 17

Jardon Jewelers purchased 3,000,000 of the outstanding 10,000,000 shares of Angel & Associates.Jardon has significant influence over Angel,so Jardon will account for this investment using the equity method.Angel declared Net Income of $1,250,000 for the year.How will Angel's Net Income be recorded by Jardon?

Accepted Answer

The answer of Jardon Jewelers purchased 3,000,000 of the outstanding...

Question 18

If the stated interest rate of a note is higher than the prevailing market rate,a resulting discount on notes receivable will be recorded.

Accepted Answer

The answer of If the stated interest rate of a...

Question 19

Boston Exporters purchased 40,000 of the 100,000 outstanding shares of Giant Distributors for $2,000,000.Boston has significant influence over Giant and will account for this investment using the equity method.During the year,Giant declared dividends of $140,000 and reported Net Income of $800,000.Record all necessary journal entries for Boston related to this investment for the year.Then,calculate the ending balance of the Investment in Giant account.

Accepted Answer

The answer of Boston Exporters purchased 40,000 of the 100,000...

Question 20

Amortization of a Discount on Notes Receivable results in receiving less in Cash interest payments than earned Interest Revenue.

Accepted Answer

When a discount is amortized on a notes receivable, the interest revenue to be recognized over the life of the note is spread out, resulting in a lower amount of interest revenue recognized each period. However, the actual cash payments received from the borrower remain the same, resulting in a situation where less cash is received in interest payments than the amount of interest revenue recognized.

Quiz 18: Investing Assets